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

                                    FORM 10-K/A No. 2

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

                      For the year ended September 30, 1998

                         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/A No. 2 or any amendment
to this Form 10-K/A No. 2 [X]

As of January 8, 1999,  29,474,447  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 8, 1999 (on the closing
sales  price)  held  by  non-affiliates  of the  Registrant,  was  approximately
$27,447,919.

                       Documents Incorporated by Reference

Location in Form 10-K/A No. 2              Incorporated Document
Part III-Items 10, 11, & 12                Definitive Proxy Statement in
                                           connection with its Annual
                                           Meeting of Stockholders
                                           to be held on September 22, 1999

<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. Its current primary business is the assembly,  marketing and sale of
the  On-Site  Oil  Analyzer  ("OSA-II"),  a second  generation  proprietary  oil
analysis instrument that combines two spectrometers in order to analyze both new
or used oil in  approximately  five minutes at the end-user's  site. The Company
also  assembles its OHSS through its  subsidiary,  Top Source  Automotive,  Inc.
("TSA"),  which  the  Company  reached  agreement  to sell in  fiscal  1998  (as
described in this Report).

As of January 5, 1999, the Company had four  subsidiaries:  TSA located in Troy,
Michigan, Top Source Instruments, Inc. ("TSI") located in Atlanta, Georgia; ARCS
Safety Seat, Inc. ("ARCS, Inc.") located in Palm Beach Gardens, Florida, and Top
Source Oil Analysis Inc.  ("TSOA")  formerly named UTG Inc. which is an inactive
subsidiary. In fiscal 1998, the Company derived substantially all of its revenue
from sales of its OHSS at TSA.

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 16, Segment Information.)

C.  Narrative Description of Business

General
The Company  markets one  product,  the OHSS,  and  provides  one  service,  oil
analysis.  The  Company  has three  proprietary  technologies:  its  On-Site Oil
Analyzer ("OSA"),  which generated  approximately 3.5% of the Company"s revenues
in fiscal  1998;  OHSS  which  generated  approximately  96.5% of the  Company's
revenue in fiscal 1998 and ARCS, which is non-revenue generating.

Products and Technologies

Oil Analysis
Oil  analysis  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.

Oil  analysis is now widely used for  diagnostic  and  preventative  maintenance
programs for  equipment in many  different  industries  including  those markets
where the Company is concentrating its marketing  efforts for the OSA-II.  These
markets are the truck market which includes truck stops,  the automotive  market
which  includes auto power train  development,  motorcycle  engine  development,
automobile  dealerships  and  automobile  auctions,  the  consumer  market which
includes retail automobile service outlets, the government market which includes
the United  States  military and  municipalities,  the  industrial  and refinery
markets and the heavy equipment market which includes railroads.
<PAGE>

ITEM 1.  BUSINESS

Oil Analysis (Continued)

OSA Development
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  technology.  The Company also believes
that advances in oil analysis  technology owned by the Company will increase oil
analysis utilization in new and existing markets.

In 1992,  the Company  recognized a potential  business  opportunity if it could
develop an on-site oil analyzer  which,  would eliminate the use of a laboratory
and provide near instant results to the end-user. Over the next three years, the
Company in conjunction with a third party developed the first generation on-site
analyzer ("OSA" or "OSA-I"),  which was based upon a proprietary database of oil
analysis samples, which the Company acquired and further developed.

The Company  organized TSI in 1993 as a  wholly-owned  subsidiary to develop and
later  market the first  generation  OSA-Is and now the  OSA-IIs,  TSI's  second
generation  instrument.  The  Company  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.

The  concept  behind  the OSA was  that 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 short
turn around time. 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.

In calendar 1993, TSI developed alpha and beta prototypes and ultimately  placed
orders with an independent manufacturer to deliver beta OSA units. Concurrently,
TSI placed an order with the  manufacturer  for 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.  The initial thrust of the Company's OSA development and marketing
program  was to  develop  an OSA unit  that  was  capable  of being  used in the
petroleum processing industry.  As a result, the Company placed three units with
the Exxon Corporation  ("Exxon") in 1994, two of which were designed for process
control and one for equipment maintenance.  All three were initially operated to
evaluate their  ability,  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. Development of the
process control OSA units was much more difficult. Through mid-1997, the Company
dedicated  significant  resources to modify and enhance the two process  control
units in order to meet Exxon stringent highly technical  requirements.  Although
progress was made and certain milestones were achieved,  the process control OSA
units did not receive  production  approval from Exxon.  The  reliability of the
process control OSA unit was determined to be acceptable;  however, accuracy had
not reached  required  levels in all areas.  No revenue was generated from these
units. In order to achieve  refinery  production  acceptance,  all critical test
areas must generate accepted levels of accuracy.

<PAGE>

ITEM 1.  BUSINESS
OSA Development  (Continued)

In December 1997,  the Company  removed the two Exxon refinery units and 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.  In addition,  one of the Exxon refinery units was
sent to MCEC. The purpose of the agreement was to review the  application of the
OSA unit for the process control industry.  The Company  contributed  $84,000 to
MCEC during  calendar 1998. The Company is currently  awaiting a report from the
MCEC as to the results of its study. The Company  anticipates that study will be
renewed  for an  additional  year  and as a  result  of  MCEC's  efforts,  a new
prototype refinery unit will be developed during calendar 1999. The Company does
not anticipate  receiving any revenues or purchase  orders during  calendar 1999
from this unit and development project.  There can be no assurances that the new
prototype  unit will be  developed or that the Company will receive any purchase
orders from Exxon or other oil refineries after calendar 1999.

At the same time as TSI was  concentrating  its efforts on developing a refinery
OSA unit,  it  continued to refine and modify the beta units.  After  completing
development of the OSA-I units, the Company began between 1995 and 1997 to place
them in various test market locations in diverse  industries and has generated a
minimal  amount of revenue.  Between 1997 and 1998,  the Company sold five OSA-I
units including four to automotive  Original Equipment  Manufacturers  ("OEMs").
Currently,  21 OSA-I units are being leased and  generating a minimal  amount of
revenue in a variety of industries.  These include a major  national  automobile
dealer, a second  automobile  dealer, a municipality,  five units at truck stops
including four at Speedco,  Inc.  ("Speedco"),  one OSA at an engine development
company, five OSAs at a large truck engine manufacturer's  maintenance facility,
one unit at a powertrain  development  facility,  one at an  automobile  auction
facility and two, which are being used in a prototype mini lab capacity offering
services to the retail public.


Based upon its initial  development  and experience with the OSA-Is between 1994
and 1997,  and input from  end-users in a variety of  industries,  the Company's
management  recognized  that it needed to develop a second  generation OSA which
was  technology  enhanced,   less  expensive,   modular,   less  environmentally
sensitive,  faster  and  smaller.  At the end of  fiscal  1997,  TSI  began  the
development of the second  generation OSA-II unit. By August 1998, TSI completed
the first  production  run of seven  OSA-II  units and shipped them for use in a
revenue-generating  trial,  which  commenced  at a  Jacksonville,  Florida  tire
retailer in September 1998. Due to inconsistent levels of interest from store to
store in March 1999,  all seven OSA-II units were  returned to the Company.  The
Company intends to eventually replace the OSA-I units under lease and previously
purchased  with OSA-II  units.  Except for  Speedco,  the timing and terms under
which OSA-Is will be replaced are not currently  ascertainable.  In August 1998,
the Company  announced that it had entered into an agreement with Speedco,  Inc.
("Speedco")  to lease  OSA-IIs to be placed at various  Speedco truck oil change
service centers.  Previously, the Company had leased four OSA-Is to Speedco on a
test basis.  To date, the Company has delivered 14 OSA-IIs to Speedco  including
three,  which replaced OSA-Is.  The remaining OSA-I will be replaced in the near
future. On November 13, 1998, the Company entered into a strategic alliance with
Flying  J,  Inc.   ("Flying  J"),  a  company   engaged  in  various  facets  of
highway-related  products and services  including  the  operation of large truck
stops.  Flying J agreed to  purchase  and  market  OSA-IIs in up to 100 of their
truck stop  service  centers.  The initial  purchase  order was for the outright
purchase of 10 OSA-II units. The agreement covers a potential  purchase of up to
100 OSA-IIs and joint  development  and  marketing  of product  enhancements  to
assist in the further  commercialization  of the  OSA-IIs  within the truck stop
industry.  After  receipt of the initial 10 OSA-IIs,  Flying J may terminate the
agreement without any liability.

<PAGE>

ITEM 1.  BUSINESS
Formation of Strategic Alliance with Flying J  (Continued)

This purchase order for the 10 units for approximately  $700,000  represents the
largest  single OSA-I or OSA-II order  received by TSI since its  inception.  In
addition to the purchase price of the OSA-II units, Flying J is obligated to pay
the Company a per sample licensing fee which is reduced at such time as Flying J
has 36 OSA-II  units  operating.  As part of Flying  J's  efforts  to assist the
Company in  commercializing  the OSA-IIs  within the truck stop, it will receive
financial  incentives  subject in part to its having at least 36 OSA-II units in
operation.


The Company believes that the enhanced OSA-II is more  commercially  viable than
the OSA-I.  During  fiscal 1997 and 1998,  the Company  generated  $403,853  and
$392,653 in OSA-I  revenue.  As noted  above,  the revenue  generation  from the
Flying J purchase will exceed $700,000.


The Company believes during fiscal 1999 that it can  significantly  increase OSA
revenues over  historical  levels  although there can be no assurances  that the
Company will receive  additional  purchase orders from Flying J and Speedco,  or
other orders of this size or greater from other customers.


Overhead  Speaker  Systems  The  OHSS is  marketed  and  sold to OEMs and in the
automotive  aftermarket  for  installation  in sport utility  vehicles and light
trucks.  The Company  holds five  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  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  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.  The OHSS unit can be  installed in
less than 30 minutes and retails for around $300.


Since 1992,  TSA has been selling its OHSS to Daimler  Chrysler AG  ("Chrysler")
for installation on various models of its Jeep vehicles. OHSS revenue reached a
high of $16,580,270  in fiscal 1997. In August 1997, TSA started  shipping units
for one high-end  model of the Grand  Cherokee.  During  fiscal  1997,  the Jeep
Cherokee  contract,  which accounted for  approximately 44% of TSA's fiscal 1997
revenues,  expired.  Sales to Chrysler for the one  high-end  model of the Grand
Cherokee  expired in October 1998 when  Chrysler  discontinued  that model.  The
Company  continues  to ship its OHSS to Chrysler for  installation  in the Jeep
Wrangler vehicles.

At its Troy,  Michigan  facility,  TSA has  developed a  state-of-the-art  sound
laboratory,  which it uses to  develop  prototypes  for  OEMs  and  after-market
applications.  As a regular part of its  business,  TSA has sought to expand the
market for OHSS and  reduce  its  reliance  upon  Chrysler.  The goal of the new
designs is to open up a wider  target  market  range of vehicles  than the sport
utility and light truck markets.

<PAGE>

ITEM 1.  BUSINESS
Overhead Speaker Systems (Continued)

In addition to the new product  concepts  described  above, the Company has been
seeking   strategic   alliances  with  several  major  automobile   after-market
retailers.  In fiscal 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.  In addition,  during fiscal 1998, the
Company  entered into a purchase  agreement  with Kenwood and sold custom design
OHSS units to  Kenwood.  Sales have not been  material  to date.  The Company is
continuing to develop prototypes for potential after-market applications.

During 1998, TSA obtained  QS-9000  certification,  which is required for future
sales to OEMs to Detroit and other OEMs.

Sale of TSA
As described below,  the Company's Board of Directors made a strategic  decision
in  fiscal  1998 to sell TSA and  concentrate  the  Company's  resources  on the
roll-out of its new second  generation  OSA-II.  On August 14, 1998, the Company
entered into an agreement to sell TSA for a minimum of $10,000,000. The proposed
transaction is scheduled to close on or before March 31, 1999. If, however,  TSA
is not sold, the Company  believes that it will be in a position to expand TSA's
business  and current OEM and  after-market  initiatives,  which could result in
additional revenues.

As part of the agreement to sell TSA, as described in detail below,  the Company
may receive an earn-out of up to $6,000,000 in the two years  following the sale
of TSA.  Accordingly,  in order to maximize the  possibility  of  achieving  the
earn-out,  if the TSA transaction  closes and being in a position to operate TSA
profitably,  if the  transaction  does not close,  TSA has  continued  to expend
resources toward the development of new opportunities.


During the period  from  October 1, 1998  through the date of the filing of this
Report, the Company's  management and TSA personnel continued to actively pursue
opportunities  to generate  new OEM and  after-market  revenues.  As a result of
these efforts in April 1999, the Company received an aftermarket  purchase order
from a Detroit OEM for approximately $800,000 annually, commencing in the fourth
calendar quarter of 1999. In addition, TSA has received non-binding  commitments
from  another  Detroit  OEM  and two  aftermarket  retailers  for  approximately
$700,000  annually in new business  commencing in the fourth calendar quarter of
1999 and the first quarter of 2000. The Company  anticipates  receiving purchase
orders  for all of these  new  programs  by May 1999,  although  there can be no
assurances.


On  August  14,  1998,  the  Company   executed  a  Asset   Purchase   Agreement
("Agreement") with NCT Audio Products Inc., (the "Buyer" or "NCT"), a subsidiary
of the NCT Group,  Inc. of Stamford,  Connecticut  (NASDAQ:  "NCTI") to purchase
substantially all of the assets and liabilities of TSA.


Under the terms and subject to the conditions of the  Agreement,  on the closing
date (the "Closing" or the "Closing Date"), the Buyer agreed to purchase 100% of
the assets (the "Assets") and assume substantially all of the liabilities of TSA
for a minimum of $10,000,000. The purchase consideration of $10,000,000 consists
of a non-  refundable  $1,450,000  paid  to TSA on June  10,  1998  ("Step  I"),
$2,050,000,  which was paid into  escrow on July 30,  1998 and  released  to the
Company  (and  became  non-refundable)  on  December  15, 1998 as a result of an
affirmative  stockholder  approval ("Step II") and the balance of $6,500,000 due
at the Closing,  which must occur by March 31, 1999 ("Step III").  Additionally,
under  the  terms  of the  Agreement,  TSA  could  receive  up to an  additional
$6,000,000  payable to the Company in cash based  expressly  contingent upon the
future earnings of the

ITEM 1.  BUSINESS
Sale of TSA (Continued)

Buyer's  subsidiary  ("New  TSA")  acquiring  the Assets  for a two-year  period
following the Closing (the "Earn-Out").  If earned, for the first year following
the Closing ("Year One"),  the Buyer shall pay TSA in cash an Earn- Out of up to
$3,000,000  and a  cumulative  amount of up to  $6,000,000  for Year One and the
12-month  period  subsequent to Year One ("Year Two").  The Earn-Out in Year One
shall be equal to the  amount by which the  product of four and  one-half  times
EBITDA, as defined,  for Year One exceeds $8,000,000.  As used in the Agreement,
"EBITDA" means income before interest,  taxes,  depreciation and amortization of
New TSA. The Agreement  further  provides that EBITDA shall be based solely upon
the operations of New TSA based upon  operations  consistent with the historical
operations of TSA and excluding items of income or expense such as non-recurring
items,  extraordinary  items,  inter-company items and other items of income and
expense, which are not consistent with such past practice.

In effect,  to the  extent  that in Year One the cash flow of New TSA times four
and  one-half  exceeds  $8,000,000,  the Buyer shall pay the  Earn-Out up to the
maximum of  $3,000,000.  The Year Two  Earn-Out  shall be equal to the amount by
which the  product of four and  one-half  times  EBITDA for Year Two exceeds the
greater of : (i) Year One EBITDA times four and  one-half,  or (ii)  $8,000,000.
The maximum Year Two Earn-Out  calculated using this formula is $6,000,000 minus
the Year One Earn-Out.

The  consummation of the proposed  transaction is subject to the satisfaction or
waiver of  certain  conditions  including  the  Buyer  obtaining  the  necessary
financing.  As a result of the completion of Steps I and II of the  transaction,
the Buyer became a 20% owner of the Common  Stock of TSA.  Since Step III of the
transaction  failed  to close by  December  31,  1998,  the Buyer had a one week
option  to cancel  its  exclusive  right to  purchase  the  Assets of TSA and as
consideration for such cancellation would have received an additional 15% of TSA
Common  Stock.  On January 7, 1999,  the Buyer of TSA's  Assets by virtue of not
exercising  its  right to  receive  an  additional  15%  minority  stake in TSA,
maintained its exclusive  right to complete the remainder of the  transaction by
March 31, 1999.

On March 30, 1999, the Company granted the Buyer an extension until May 28, 1999
to complete  the  purchase  of TSA. As  consideration  for this  extension,  TSA
received a  non-refundable  fee from the Buyer of $350,000.  This  extension fee
consisted of $20,685 in cash,  $125,000 of the Buyer's minority  interest in TSA
earnings and a $204,315 note payable due on April 16, 1999 (the "Note") from the
Buyer to TSA. Additionally,  due to the Buyer's failure to close the transaction
by March 31,  1999,  the Company  received a penalty  premium of $100,000 of the
Buyer's convertible preferred stock. Under the terms of the extension, the Buyer
was required to pay the Note no later than April 30, 1999. The Note was not paid
on April  30,  1999,  and  remains  unpaid.  As a result,  none of the  $350,000
extension fee can be applied  against the $6,500,000 due to be paid by the Buyer
to TSA at closing. Therefore, in order to close the transaction,  the Buyer must
now pay TSA,  $6,500,000  plus the Note  balance of $204,315  along with accrued
interest  on the Note since  April 16,  1999 at the rate of  approximately  17%.
Additionally,  if the  closing  does not occur by May 28,  1999,  the Buyer will
forfeit all  minority  earnings in TSA from June 1999  through May 2000.  If the
transaction  fails to close by May 28, 1999, the Company will be free to attempt
to find another purchaser of TSA and the Buyer will be obligated to sell its TSA
shares to any such  purchaser  on the same terms and  conditions  as the Company
receives for its TSA Common  Stock.  See Item 7.  "Management's  Discussion  and
Analysis of Financial Condition and Results of Operations."
<PAGE>

ITEM 1.  BUSINESS
Sale of TSA (Continued)

The  Buyer  is  a  subsidiary  of  a  public   company,   which  trades  on  the
over-the-counter  bulletin  board having been delisted from the NASDAQ Small Cap
Market. The Buyer's parent company's unaudited financial statements for the nine
months  ended  September  30,  1998  report a net loss  attributable  to  common
shareholders   of   approximately   $11,436,000  on  reported  net  revenues  of
approximately  $2,275,000.  Based upon the review of these public filings by the
Company,  and due to the Buyer being newly  organized and having minimal working
capital,  management of the Company believes there is substantial doubt that the
Buyer will be able to complete a financing  of at least  $6,500,000  to complete
the acquisition of TSA. This belief is reinforced by the events that occurred in
1999 as described in the above paragraph.  If the transaction  fails to close by
May 28, 1999,  the Company will be free to attempt to find another  purchaser of
TSA and the Buyer will be obligated to sell its TSA shares to any such purchaser
on the same terms and  conditions  as the  Company  receives  for its TSA Common
Stock. If Step III is not completed it is unlikely that the Company will be able
to secure  another  purchaser.  This may have an adverse effect on the Company's
ability to finance  OSA-IIs as well as have an adverse  effect on the short-term
financial  condition of the Company.  If Step III is ultimately  completed,  TSA
will be accounted for as a  discontinued  operation.  Pending  completion of the
proposed transaction, the Company is actively seeking to improve TSA's business.


If the  transaction  had closed on December 31, 1998, and assuming no changes to
TSA's revenues and expenses after the Closing, no Earn-Out payment if calculated
on a pro-forma basis would have been earned by the Company. The Company believes
that current  after-market  and other OEM production line initiatives in process
for OHSS,  will result in  additional  revenues  that will enable the Company to
achieve the full  $6,000,000  Earn-Out  over a two-year  period  after  Closing.
However, no assurances can be given.

ARCS  (Acceleration  Restraint  Curve Safety Seat) Over the past eight years the
Company worked on developing 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  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.

Significant Customer Information During 1998, approximately 95% of the Company's
revenue  was  derived  from OHSS sales to  Chrysler  Corporation.  (See Item 8 -
Financial Statements and Supplementary Data, Note 18 - Discontinued Operations.)
For  significant  customer  information  see Item 8. - Financial  Statements and
Supplementary Data, Note 15 - Concentration of Credit Risk.

<PAGE>

ITEM 1.  BUSINESS

Government Regulation The Company is subject to government regulations generally
affecting all businesses. The Company believes that it is in material compliance
with all such regulations.

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  administrative  office in Palm
Beach Gardens, Florida. The Company's automotive subsidiary, TSA, is housed in a
45,000 square foot facility in Troy,  Michigan,  which includes  administrative,
engineering and assembly operations.  TSI has a facility in Atlanta, Georgia. As
of January 7, 1999, the Company employs approximately 52 full-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 2002
TSA                     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 HOLDERS

No  matters  were  submitted  to a vote of  security  holders  during the fourth
quarter of the fiscal year ended September 30, 1998.


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>                      <C>                <C>

                                                          Fiscal 1998                                  Fiscal 1997
                                                     High            Low                         High              Low
First Quarter  (December 31)                         2-1/16            1                         5-5/16            2-3/16
Second Quarter (March 31)                            1-1/2             1                         3-5/16            1-3/4
Third Quarter  (June 30)                             1-1/8          11/16                        2-7/8             1-3/16
Fourth Quarter (September 30)                        1-1/4            3/4                        2-1/4             1-1/8
</TABLE>
0
Holders
As of January 6, 1999, there were  approximately  1,222 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.


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, 1998,  1997,  1996,  1995 and 1994.  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>
ITEM 6.  SELECTED FINANCIAL DATA (Continued)
<TABLE>

AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997, 1996, 1995  AND 1994

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

Balance Sheet Data                           1998            1997            1996             1995            1994

Total Assets                                $7,273,095     $ 11,355,030    $ 16,012,716     $ 19,109,250    $ 17,855,313
Long-term Debt                               3,020,000        3,020,000       3,020,000        2,060,000       ---
Total Liabilities                            6,451,967        6,870,577       7,095,991        4,704,152       2,351,143
Stockholders' Equity                           456,971        4,484,453       8,916,725       14,405,098      15,504,170

Statement of Operations Data

Net Sales                                  $11,207,858      $16,984,123     $16,146,524     $ 13,907,354   $   9,259,581
Income (Loss) from Continuing
     Operations                            (5,529,562)      (3,304,057)     (4,831,786)      (2,820,492)       1,840,366
Net Income (Loss)                          (5,852,382)      (3,235,316)     (6,698,787)      (3,399,796)       2,014,577
Income (loss) per Basic and
     Diluted Common Share (1)
     From Continuing Operations                 (0.21)           (0.12)          (0.17)           (0.10)            0.06
Net Income ( Loss) per Basic and
     Diluted Weighted Average
     Common Share                               (0.21)           (0.12)          (0.24)           (0.12)            0.07

</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.

(1) Includes  the  retroactive  implementation  of SFAS No. 128  ("Earnings  per
Share"), which had no impact for all periods presented.)

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

Results of Operations
1998 Compared to 1997

Total revenue for the year ended September 30, 1998 was $11,207,858  compared to
$16,984,123  for the year ended  September  30,  1997 a decrease  of 34.0%.  The
decrease is  primarily  attributable  to the loss of the OHSS sales for the Jeep
Cherokee  contract which ended on June 30, 1997 partially  offset by an increase
in OHSS sales for the Grand Cherokee vehicle,  which commenced production during
the first  quarter  of fiscal  1998.  There was a nominal  decrease  in  service
revenue from 1997 to 1998 due to a decrease in the  outright  sales of OSA units
offset by a larger number of ongoing leases.

As of January 1, 1999, TSI had  approximately 21 OSA I units and 14 OSA II units
generating  various levels of revenue through lease and revenue generating tests
in a variety of industries including automobile dealerships, truck lube centers,
truck stops and motorcycle development laboratories. 
<PAGE>

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

1998 Compared to 1997 (Continued)

The Company's strategy is to divest  substantially all of TSA's assets and focus
its resources on the commercialization of OSA-IIs to seven specific markets. The
Company  believes that this can be best  accomplished  with potential  strategic
partners  who are  interested  in  licensing  the OSA  technology  for  specific
industry applications both domestically and internationally.

The  Buyer  is  a  subsidiary  of  a  public   company,   which  trades  on  the
over-the-counter  bulletin  board having been delisted from the NASDAQ Small Cap
Market. The Buyer's parent company's unaudited financial statements for the nine
months  ended  September  30,  1998  report a net loss  attributable  to  common
shareholders   of   approximately   $11,436,000  on  reported  net  revenues  of
approximately  $2,275,000.  Based upon the review of these public filings by the
Company,  and due to the Buyer being newly  organized and having minimal working
capital,  management of the Company believes there is substantial doubt that the
Buyer will be able to complete a financing  of at least  $6,500,000  to complete
the acquisition of TSA. This belief is reinforced by the events that occurred in
1999 as  described  in  Item 1.  Business  - Sale  of  TSA.  If Step  III is not
completed  it is  unlikely  that  the  Company  will be able to  secure  another
purchaser.  This may have an adverse effect on the Company's  ability to finance
OSA-IIs as discussed  above, as well as have an adverse effect on the short-term
financial  condition of the Company.  If Step III is ultimately  completed,  TSA
will be accounted for as a  discontinued  operation.  Pending  completion of the
proposed transaction, the Company is actively seeking to improve TSA's business.

The Company  believes that their OSA-II  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.

General and  administrative  expenses  decreased  $1,157,610  for the year ended
September 30, 1998 compared to the year ended  September 30, 1997.  The decrease
is primarily attributable to the Company's restructuring which took place in the
fourth quarter of fiscal 1997 and continued efforts to contain costs.

Selling and marketing  decreased  $127,210 for the year ended September 30, 1998
compared to September 30, 1997.  This decrease is primarily  attributable to the
closing of the TSI Farmington Hills, Michigan location related to the OSA group.

Write down of fixed assets is comprised of $880,911  related to the original OSA
I machines  which were deemed to be impaired and were written off.  (See Item 8.
Financial  Statements  and  Supplementary  Data,  Note 2. Oil  Analysis  Service
Segment.)

Severance  expense of  $1,085,587  is  attributable  to the  resignation  of the
Company's  former  Chairman  and CEO.  (See  Item 8.  Financial  Statements  and
Supplementary Data, Note 13. Related Party Transactions)

Depreciation  and amortization  decreased  $188,651 for the year ended September
30, 1998  compared to September  30, 1997.  This  decrease is due to a decreased
asset base as a result of sales and write down of the  original  OSA-I  machines
and a 56% decrease in purchases of fixed assets for the year ended September 30,
1998 compared to September 30, 1997.

Research and  development  increased  $264,492 for the year ended  September 30,
1998 compared to the year ended  September 30, 1997. This increase is due to the
development of the new OSA II units which were designed by the Company.

Interest income decreased $44,670 for the year ended September 30, 1998 compared
September  30, 1997.  This  decrease is due to a decline in cash balances due to
operating losses.

<PAGE>

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

1998 Compared to 1997 (Continued)

Interest  expense  increased  $222,633  for the  year  ended  September  30,1998
compared to September 30, 1997.  This increase is due to the borrowings and loan
fees on its credit facility,  which was only in place for three months in fiscal
1997.  The  Company did not borrow any funds  during  fiscal 1997 on their prior
First Union credit facility.

The gain on the sale of the minority  interest in TSA represents the gain on the
sale of 14.5% equity  interest in TSA.  (See Item 8.  Financial  Statements  and
Supplementary Data, Note 3. Sale of Top Source Automotive, Inc.)

Other income (expense)  decreased  $49,775 for the year ended September 30, 1998
compared to September 30, 1997 due to the decrease of $43,833 in royalty  income
on the EFECS  ignition  technology,  which was sold to  Adrenaline,  Inc. in May
1995.

Net Loss Analysis

In order to avoid current,  material,  ongoing operating losses, and an increase
in this  operating  loss after the projected sale of the TSA assets (see Item 1.
Business), the Company must generate new, material ongoing OSA or other revenues
in future months. The Company believes that the recent OSA activity described in
this MD&A section,  and the completion of  development  of the new OSA-II,  will
improve OSA  visibility in the  marketplace  that which will lead to significant
increase in future OSA revenues. However, there can be no assurances.


1997 Compared to 1996

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 18. Discontinued Operations.  Therefore, the operations
of UTG for 1996 are excluded from the analysis below.

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.

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  $756,940  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. Also included in general and administrative expenses are
restructuring expenses of $415,830


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

1997 Compared to 1996 (Continued)

and $725,000 for the periods  ended  September  30, 1997 and 1996 related to the
Company-wide restructuring,  which took place in fiscal 1997 and 1996. (See Item
8 - Financial Statements and Supplementary Data, Note 17. Restructuring.)

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.

Interest  expense  increased  59.6% to $441,509 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 9.
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 $98,573 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.

Liquidity and Capital Resources
Net cash flows  used in  operations  during  the  current  fiscal  year  totaled
($2,804,509).  The usage of cash is primarily  attributable  to a net  operating
loss excluding depreciation and amortization,  of ($4,291,962),  which is offset
by a decrease in  accounts  receivable  of  $598,986.  The  decrease in accounts
receivable is primarily  attributable  to the loss of the patented OHSS contract
for the Jeep Cherokee, which ended June 30, 1997. Inventory increased $1,021,951
and was partially  offset by the write off of $413,134  OSA-I  inventory.  Other
assets decreased  $755,484  primarily due to the refund of a deposit relating to
the OSA-I machines.

Net cash provided by investing activities was $597,500,  which was attributed to
the proceeds from the sale of the minority interest in TSA. This use of cash was
attributable  to $637,602  expended  for  capital  assets and $52,996 for patent
costs.

<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (continued)
Liquidity and Capital Resources (Continued)

Net cash  provided by  financing  activities  was  $592,229  which  included the
exercise  of stock  Options and  warrants  (exercise  prices  ranged from $.53 -
$1.50) that generated approximately $388,341 in net proceeds and $881,394 in net
proceeds from the issuance of Preferred Stock. Also, the Company repaid $677,506
from Credit  Facility with  NationsCredit  Commercial  Corporation.  (See Item 8
Financial Statements and Supplementary Data, Note 9. Debt).

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 potentially borrow a sum
based upon certain  percentages of accounts  receivable and inventory  balances.
The Credit Facility allows for borrowing of up to 85% of all accounts receivable
and 50% of  inventory  for TSA.  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, 1998 factoring the interest  earned on used drawn
funds was 12.1%.  As of September  30, 1998 and  December  31, 1998,  the unused
available  borrowings  on  this  Credit  Facility  were  $200,000  and  $85,000,
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, 1998,  the covenant  requiring  the
Company's fiscal year pre-tax  operating loss, not to exceed certain levels,  as
defined in the Agreement  was not been met by the Company.  Nations later agreed
to waive this  covenant  precluding  the Company from having a loss of more than
$2,000,000 in a fiscal year. In conjunction  with such waiver,  the Company paid
Nations  a  fee  of  $25,000  and  agreed  to  collaterally  assign  a  $250,000
certificate  of deposit to Nations.  The Company is required to repay the Credit
Facility in full upon the  ultimate  sale of TSA (see Note 3. Sale of Top Source
Automotive, Inc.). Upon payment of the Credit Facility, Nations will release the
lien,  which it holds on all of the assets of the Company  including  Top Source
Automotive Common Stock and assets.

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  nine
percent (9%) convertible  notes (The "Notes")  maturing in June 2000. After June
9, 1996,  the Notes could be prepaid by the Company  without  penalty and can be
converted by the holders into fully  registered  shares of the Company's  common
stock at a  conversion  price of $10 per  share..  The Notes are  subject  to an
Indebtedness  to Equity ratio that cannot exceed 1.5 to 1.0. As of September 30,
1998, the Company was not in compliance with the ratio. Subsequent, to September
30, 1998, the Company  restructured  substantially  all of the $3,020,000 notes,
which included a waiver of the debt to equity ratio for fiscal 1999 (see Item 8.
Financial  Statements and Supplementary  Data, Note 20. Events Subsequent to the
Date of the Auditor's Report).

In December 1998, a number of events occurred,  which resulted in an improvement
to the Company's  liquidity and financial  condition.  The most  significant act
resulted from the sale of Series B Preferred Stock ("Series B") to two trusts of
which Mr. Mennen is a co-trustee  and sole trustee,  respectively.  The proceeds
were used in part to prepay and  restructure  $2,313,000 of the Mellon Notes and
redeem  one-half  of the  Company's  outstanding  Series A  Preferred  Stock for
details   concerning  these  events  (see  Item  8.  Financial   Statements  and
Supplementary  Data,  Note 20.  Events  Subsequent  to the Date of the Auditor's
Report).

As of January 8, 1999, the Company had approximately $2,000,000 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. <PAGE>


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

Forward-Looking Statements
The  forward  looking  statements  discussed  in the Report  under the  Business
Section,  (Item 1.) and above in Liquidity and Capital  Resources  include those
relating  to the  Company's  expectations  that it  anticipates  (1)  generating
revenue  from OSA-II units at current test sites,  (2) entering  into  strategic
relationships, (3) renewal of the MCEC refinery OSA study and from other sources
and completion of a development prototype,  (4) the increase in the usage of oil
analysis as a preventative  maintenance in new and existing markets, (5) receipt
of additional purchase orders from Flying J , and further  commercialization  of
OSA-II usage resulting in additional revenue, (6) receipt of purchase orders and
material  revenue from a Detroit OEM and two  aftermarket  retailers  for dealer
installation of OHSS units, (7) closing of the TSA Asset sale, (8) achieving the
Earn-Out and  additional  OHSS revenues,  (9) adequacy of the Company's  working
capital and liquidity and (10) reducing net operating losses are forward-looking
statements within the meaning of the Reform Act.

Some or all of these forward-looking  statements may not occur. These statements
are subject to risks and uncertainties that could cause actual results to differ
materially from those  contemplated  in such  forward-looking  statements.  Such
risks and uncertainties include the following:  (1) the continued reliability of
the OSA technology over an extended period of time, (2) the Company's ability to
market OSAs, (3) the acceptance of the OSA  technology by the  marketplace,  (4)
the  general  tendency  of  large  corporations  to  slowly  change  from  known
technology to emerging new technology,  (5) 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,  (6)  unanticipated  internal  problems  at  the
University  of  Tennessee's  MCEC,  (7) the  ability  of the  Buyer to close its
Financing,  (8) decline in production levels at Chrysler for vehicles installing
OHSS, and (9) the Company's  ability to attract  strategic  partners for OSA-II,
and (10) the ability to attract  strategic  partners  for TSA, if the Company is
unable to sell it.

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  June  1997,  the  Financial  Accounting  Standards  Board  ("FASB")"  issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments  of an  Enterprise  and Related  Information",  which is required to be
adopted in fiscal  years  beginning  after  December 15,  1997.  This  statement
establishes standards for the way public business enterprises report information
about products, services, geographic areas and major customers. The Company will
adopt SFAS No. 131 or for fiscal year ended  September 30, 1999. The adoption of
SFAS No.  131 will not have a  material  impact  on its  financial  position  or
results of operations.

Year 2000
The Company is assessing  the  potential  impact of the Year 2000 ("Y2K") on the
Company's  internal  business  systems,   products,   assembly   procedures  and
operations.  The  Company's  Y2K  initiatives  include (i) testing and upgrading
internal business systems and facilities; (ii) contacting key suppliers, vendors
and customers to determine  their Y2K  compliance  state;  and (iii)  developing
contingency plans.

To date,  the  Company has been  evaluating  all of its  information  technology
systems which relate to its corporate offices including its accounting  systems;
these systems must be replaced  because they are not Y2K compliant.  The Company
has  received  one  proposal  and  plans to  implement  the  replacement  of its
corporate  information  technology  systems during the second and third calendar
quarters of 1999.  The  Company  estimates  that the cost will be  approximately
$40,000.


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

Year 2000 (Continued)
At TSA, the Company  intends to replace its management  reporting and accounting
software modules. The management reporting system is used by TSA in its assembly
of OHSS. The Company  anticipates  the cost of new hardware and software to make
TSA Y2K  compliant  will be  approximately  $40,000.  The Company has  appointed
representatives  at TSA to coordinate TSA's information  technology systems with
Chrysler, TSA's major customer. This process has continued for approximately six
months. At TSI, the Company believes OSA-IIs are Y2K compliant. While the OSA-Is
are not Y2K compliant,  as discussed above in Item 1 - "Business" the OSA-Is are
being replaced by OSA-IIs during 1999. TSI is currently  communicating with four
key  suppliers,   which  make  proprietary  parts,  which  may  not  be  readily
replaceable. Presently, the Company does not know whether these suppliers are or
will be Y2K  compliant  and, if not,  what  Options are  available  to TSI.  The
Company  intends to  aggressively  assess  this issue  during the balance of the
current  calendar  quarter and develop a contingency  plan that will allow TSI's
business operations to continue despite potential disruptions due to Y2K issues.
The plan will focus on identifying  and securing  alternative  suppliers  and/or
assisting any current  suppliers in achieving Y2K compliance in a timely manner.
The Company cannot  presently  estimate what, if any,  additional  costs it will
incur if one or more of these suppliers are not Y2K compliant.


As the Company  continues to evaluate the Y2K readiness of its business systems,
suppliers,  vendors and  customers,  it will  modify and adjust its  contingency
plans  as may be  required.  However,  due to the  complexity  of the  Company's
technologies  and reliance  upon third  parties to produce  certain  components,
there can be no assurances that the Company has identified all of the Y2K issues
that could  arise.  While the Company is  attempting  to minimize  any  negative
consequences  arising from Y2K  non-compliance,  there can be no assurances that
Y2K issues will not have a material  adverse  impact on the Company's  business,
operations or financial  condition.  If any of the Company's material suppliers,
vendors or customers  experience  business  disruptions  due to Y2K issues,  the
Company might also be materially  adversely  affected.  Any unexpected  costs or
delays  arising  from Y2K issues  could have a  material  adverse  impact on the
Company's business, operations and financial condition.



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

Year 2000 (Continued)
be Y2K compliant.  However, due to the complexity of the Company's  technologies
and the reliance upon third parties to produce  certain  components that are not
under the Company's  control,  there can be no  assurances  that the Company has
identified  all  of  the  Y2K  issues  that  could  arise.   Based  on  existing
information,  the Company believes that anticipated spending necessary to become
Year 2000 compliant will not have a material  effect on the financial  position,
cash flows or  results  of  operations  of the  Company,  nor will the Year 2000
issues cause any material  adverse effect on the future  business  operations of
the  Company.  However,  due  to the  uncertainties  involved,  there  can be no
assurances that the Company will not incur material costs or delays, which could
have a significant  adverse  impact on the  Company's  business  operations  and
financial condition.



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
 <S>                                                                                                               <C>
----------------------------------------------------------------------------------------------------------------- ----------
                                                     INDEX                                                        PAGE
----------------------------------------------------------------------------------------------------------------- ----------
----------------------------------------------------------------------------------------------------------------- ----------
<S>

----------------------------------------------------------------------------------------------------------------- ----------
----------------------------------------------------------------------------------------------------------------- ----------
Report of Independent Certified Public Accountants                                                                   17
----------------------------------------------------------------------------------------------------------------- ----------
----------------------------------------------------------------------------------------------------------------- ----------
Consolidated Balance Sheets as of September 30, 1998 and 1997                                                        18
----------------------------------------------------------------------------------------------------------------- ----------
----------------------------------------------------------------------------------------------------------------- ----------
Consolidated Statements of Operations for the Years Ended September 30, 1998, 1997 and 1996                          19
----------------------------------------------------------------------------------------------------------------- ----------
----------------------------------------------------------------------------------------------------------------- ----------
Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1998, 1997 and 1996                20
----------------------------------------------------------------------------------------------------------------- ----------
----------------------------------------------------------------------------------------------------------------- ----------
Consolidated Statements of Cash Flows for the Years Ended September 30, 1998, 1997 and 1996                          21
----------------------------------------------------------------------------------------------------------------- ----------
----------------------------------------------------------------------------------------------------------------- ----------
Notes to Consolidated Financial Statements                                                                           22
----------------------------------------------------------------------------------------------------------------- ----------
</TABLE>

<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,  1998 and 1997,  and the  related  consolidated  statements  of  operations,
stockholders'  equity and cash  flows for each of the three  years in the period
ended September 30, 1998. 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,  1998 and 1997 and the results of their
operations  and their cash flows for each of the three years in the period ended
September 30, 1998 in conformity with generally accepted accounting principles.

Our  audits  were  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,
December 15, 1998,  (except with respect to the matter  discussed in Note 20, as
to which the date is January 7, 1999).






<PAGE>

<TABLE>
                                              TOP SOURCE TECHNOLOGIES, INC.
                                             ANNUAL REPORT ON FORM 10-K/A No. 2

                                               CONSOLIDATED BALANCE SHEETS
                                             AS OF SEPTEMBER 30, 1998 and 1997
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                               <C>

ASSETS                                                                          1998                                1997
                                                                          ------------------                  -----------------
Current Assets:
  Cash and cash equivalents                                                       $ 488,899                        $ 2,103,679
  Accounts receivable trade                                                       1,656,317                          2,255,303
  Inventories                                                                     1,489,840                            881,023
  Advances to officers                                                                    -                             57,919
  Prepaid expenses                                                                  194,482                            219,446
  Other                                                                             152,349                            155,448
                                                                          ------------------                  -----------------
Total current assets                                                              3,981,887                          5,672,818
Property and equipment, net                                                         786,438                          2,147,403
Manufacturing and distribution rights and patents, net                              271,502                            284,562
Capitalized database, net                                                         2,073,194                          2,284,027
Note receivable from officer                                                         26,260                             76,002
Other assets, net                                                                   133,814                            890,218
                                                                          ==================                  =================
TOTAL ASSETS                                                                    $ 7,273,095                       $ 11,355,030
                                                                          ==================                  =================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Line of credit                                                                $ 1,318,835                        $ 1,996,341
  Accounts payable                                                                  842,903                            672,836
  Accrued liabilities                                                               840,705                          1,181,400
                                                                          ------------------                  -----------------
Total current liabilities                                                         3,002,443                          3,850,577
  Senior subordinated convertible notes                                           3,020,000                          3,020,000
  Other liabilities                                                                 429,524                                  -
                                                                          ------------------                  -----------------
Total liabilities                                                                 6,451,967                          6,870,577

Minority interest                                                                   364,157                                  -

Commitments and contingencies (Note 10)

Stockholders' equity:
  Preferred stock - $.10 par value, 5,000,000 shares
   authorized; 1,000 outstanding                                                    943,807                                  -
  Common Stock-$.001 par value, 50,000,000 shares
   authorized; 29,053,803 and 28,461,477 shares issued and
   outstanding in 1998 and 1997, respectively                                        29,054                             28,461
  Additional paid-in capital                                                     29,624,951                         28,744,451
  Accumulated deficit                                                           (28,791,487)                       (22,939,105)
  Treasury stock-at cost; 466,234  shares in 1998
    and 1997, respectively                                                       (1,349,354)                        (1,349,354)
                                                                          ------------------                  -----------------
Total stockholders' equity                                                          456,971                          4,484,453
                                                                          ------------------                  -----------------
                                                                          ==================                  =================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                      $ 7,273,095                       $ 11,355,030
                                                                          ==================                  =================




  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/A No. 2

                      CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>                 <C>              <C>

                                                                                1998              1997              1996
                                                                          -----------------------------------------------------
Product sales                                                                   $10,815,205       $16,580,270      $16,102,523
Service revenue                                                                     392,653           403,853           44,001
                                                                          -----------------------------------------------------
    Net sales                                                                    11,207,858        16,984,123       16,146,524
                                                                          -----------------------------------------------------
                                                                          -----------------------------------------------------
 Cost of product sales                                                            7,417,402        11,197,664       10,749,431
                                                                          -----------------------------------------------------
   Cost of services                                                                 195,954           107,044           26,772
   Write down of inventory - services                                               413,134                 -                -
                                                                          -----------------------------------------------------
 Cost of services - total                                                           609,088           107,044           26,772
                                                                          -----------------------------------------------------
    Cost of sales                                                                 8,026,490        11,304,708       10,776,203
                                                                          -----------------------------------------------------
Gross profit                                                                      3,181,368         5,679,415        5,370,321
                                                                          -----------------------------------------------------
Expenses:
  General and administrative                                                      4,562,183         5,719,793        6,476,733
  Selling and marketing                                                           1,258,681         1,385,891          989,450
  Write down of fixed assets                                                        880,911                 -                -
  Severance expense to former CEO                                                 1,085,587                 -                -
  Depreciation and amortization                                                     922,820         1,111,471          931,563
  Research and development                                                          325,212            60,720           28,794
                                                                          -----------------------------------------------------
Total expenses                                                                    9,035,394         8,277,875        8,426,540
                                                                          -----------------------------------------------------
Loss from operations                                                             (5,854,026)       (2,598,460)      (3,056,219)
Other income (expense):
  Interest income                                                                    74,669           119,339          112,398
  Interest expense                                                                 (664,142)         (441,509)        (276,566)
  Gain on sale of minority interest in subsidiary                                   962,760                 -                -
  Minority interest                                                                 (38,820)                -                -
  Other income (expense), net                                                        48,798            98,573          (68,099)
                                                                          -----------------------------------------------------
Net other income (expense)                                                          383,265          (223,597)        (232,267)
                                                                          -----------------------------------------------------
Loss before income taxes                                                         (5,470,761)       (2,822,057)      (3,288,486)
Income tax expense                                                                  (58,801)         (482,000)      (1,543,300)
                                                                          -----------------------------------------------------
Loss from continuing operations                                                  (5,529,562)       (3,304,057)      (4,831,786)
Discontinued operations:
   Income (loss) from discontinued operations                                             -            68,741          (62,210)
   Loss on disposal of discontinued operations                                            -                 -       (1,804,791)
                                                                          -----------------------------------------------------
Net loss                                                                         (5,529,562)       (3,235,316)      (6,698,787)
Embedded dividend on preferred stock                                               (193,807)                -                -
Preferred dividends                                                                 (20,034)                -                -
Value of warrants issued with preferred stock                                      (108,979)                -                -
                                                                          =====================================================
Net loss available to Common Stockholders                                       ($5,852,382)      ($3,235,316)     ($6,698,787)
                                                                          =====================================================
Basic  and  diluted  net  income  (loss)  per  weighted   average  common  share
   outstanding:
   Continuing operations                                                                 (0.21)            (0.12)           (0.17)
   Discontinued operations:
     Income (loss) from operations                                                        0.00              0.00             0.00
     Loss on disposal                                                                     0.00              0.00            (0.07)
                                                                          =====================================================
     Total                                                                               (0.21)            (0.12)           (0.24)
                                                                          =====================================================
Basic and diluted weighted average common shares outstanding                     28,242,005        28,065,563       28,027,959
                                                                          =====================================================
</TABLE>

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

                                                                            20

<PAGE>

<TABLE>
<S>                                     <C>             <C>     <C>           <C>         <C>            <C>         <C>
                                                                       TOP SOURCE TECHNOLOGIES, INC.
                                                                    ANNUAL REPORT ON FORM 10-K/A No. 2

                                                              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                                            FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996

                                                                               ADDITIONAL                             TOTAL
                                              Common Stock        PREFERRED     PAID-IN    ACCUMULATED   TREASURY  STOCKHOLDERS'
                                      ---------------------------
                                          SHARES         AMOUNT     STOCK       CAPITAL     DEFICIT       STOCK       EQUITY
                                      --------------------------------------------------------------------------------------------

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) (1,349,354)    4,484,453

Exercise of stock Options
   ($.53 to $1.50 per share)               549,700          550        -          387,791       -              -          388,341
Issuance of convertible
  preferred stock - Series A                   -            -    1,000,000            -         -              -        1,000,000
Preferred stock issuance costs
  and fees                                     -            -          -         (118,606)      -              -         (118,606)
Issuance of Common Stock for
  payment of dividend
  on preferred stock                        42,626           43        -           19,991       (20,034)       -              -
Intrinsic value of preferred
  stock conversion feature                     -            -     (250,000)       250,000       -              -              -
Preferred stock embedded dividend              -            -      193,807            -        (193,807)       -              -
Value of warrants issued with
  preferred stock                              -            -          -          108,979      (108,979)       -              -
Options and warrants issued for
  services                                     -            -          -          232,345        -             -          232,345
Net loss                                       -            -          -              -      (5,529,562)       -       (5,529,562)
                                        ==========================================================================================
BALANCE, SEPTEMBER 30, 1998             29,053,803     $ 29,054  $ 943,807    $29,624,951  $(28,791,487)  $(1,349,354) $  456,971
                                        ==========================================================================================

</TABLE>

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

                                 21


<PAGE>

<TABLE>
                                        TOP SOURCE TECHNOLOGIES, INC.
                                         ANNUAL REPORT ON FORM 10-K/A No. 2

                                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                            FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
--------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                <C>                   <C>

                                                                 1998              1997                  1996
                                                                 ----------------------------------------------------
OPERATING ACTIVITIES:
    Net loss                                                  $ (5,529,562)     $ (3,235,316)            $(6,698,787)
    Adjustments to reconcile net loss to
       net cash used in operating activities:
    Gain on sale of minority interest in subsidiary              (962,760)                -                        -
    Loss (income) from discontinued operations                           -           (68,741)              1,867,001
    Depreciation                                                   956,693         1,152,627                 963,302
    Amortization                                                   280,907           278,168                 275,634
    Write down of fixed assets and inventory                     1,294,045                 -                       -
    Loss on disposal of equipment                                  160,963           284,212                 151,411
    Non cash value of services                                     232,345                 -                       -
    Minority interest                                               38,820                 -                       -
    Deferred income taxes                                                -                 -                (970,000)
    Decrease in deferred income tax assets, net                          -           355,000               2,335,000
    Repayments (advances) in notes from officers                   107,661          (133,921)                      -
    Decrease (increase) in accounts receivable, net                598,986         1,845,369                (610,881)
    Increase in inventories                                     (1,021,951)         (369,065)                (43,789)
    Decrease (increase) in prepaid expenses                         24,964           106,500                 (25,397)
    Decrease (increase) in other assets                            755,484          (153,798)                 (8,561)
    Increase (decrease) in accounts payable                        170,067        (1,163,559)                556,634
    Increase (decrease) in accrued liabilities                      88,829          (691,566)                749,456
                                                                -----------------------------------------------------
Net cash used in operating activities                           (2,804,509)       (1,794,090)             (1,458,977)
                                                                -----------------------------------------------------

INVESTING ACTIVITIES:
    Purchases of property and equipment, net                      (637,602)       (1,442,265)             (1,857,004)
    Proceeds from sale of minority interest in subsidiary        1,450,000                 -                       -
    Costs incurred in sale of minority interest in subsidiay      (161,903)                -                       -
    Reimbursement of tooling costs                                       -           361,056                 456,222
    Additions to patent costs, net                                 (52,995)          (14,115)                (42,510)
    Discontinued operations - change in net assets                       -         3,540,579                 221,847
                                                                -----------------------------------------------------
Net cash provided by (used in) investing activities                597,500         2,445,255              (1,212,445)
                                                                -----------------------------------------------------

FINANCING ACTIVITIES:
    Proceeds from exercises of stock Options and warrants          388,341            20,613               1,210,414
    Preferred stock issuance, net                                  881,394                 -                       -
    Repurchases of treasury stock                                        -        (1,217,569)                      -
    Proceeds from borrowings                                             -         1,996,341                 960,000
    Repayments of borrowings                                      (677,506)                -                       -
                                                                 ----------------------------------------------------
Net cash provided by financing activities                          592,229           799,385               2,170,414
                                                                 ----------------------------------------------------
Net increase (decrease) in cash and cash equivalents            (1,614,780)        1,450,550                (501,008)
Cash and cash equivalents at beginning of period                 2,103,679           653,129               1,154,137
                                                                 ====================================================
Cash and cash equivalents at end of period                        $488,899        $2,103,679                $653,129
                                                                 ====================================================
</TABLE>


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

                                                                            22

<PAGE>
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 numerous other  markets.  The Company has three
wholly-owned  subsidiaries: Top Source  Automotive, Inc. ("TSA"),  Top Source
Instruments, Inc. ("TSI"), and ARCS Safety Seat, Inc. ("ARCS, Inc."). Top Source
Oil Analysis, Inc. ("TSOI"),  formerly named 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")  which  is  now  in  its  second
generation, ("OSA-II"). The OSA-II is a proprietary oil analysis instrument that
combines  two  spectrometers  in  order  to  analyze  both  new or  used  oil in
approximately five minutes at the end-user's site. The original on-site analyzer
("OSA-I") will be gradually replaced by the OSA-II during fiscal 1999. (See Note
2. Oil Analysis Service Segment)

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. (See Note 3. Sale of Top Source Automotive, Inc.)

Basis of Presentation - Certain 1997 and 1996 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 and leases of OSA units at the time
the products are shipped.  Revenue from leased OSA units are recognized  ratably
over the lease term.

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 liabilities 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 seven  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.

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 10 to 13 years.

Capitalized Database - The capitalized database relates to a portion of the cost
in excess of the fair value related to the UTG  acquisition,  which was retained
by TSI to  support  their OSA  technology.  The  capitalized  database  is being
amortized over 15 years using the straight-line method (see Note 8.). Subsequent
to its  acquisition,  the  Company  continually  evaluates  factors,  events and
circumstances  which  include,  but are  not  limited  to,  the  historical  and
projected operating  performance,  specific industry trends and general economic
conditions  to  assess  whether  the  remaining  estimated  useful  life  of the
capitalized  database may warrant revision or that the remaining  balance of the
capitalized  database  may not be  recoverable.  When  such  factors,  events or
circumstances  indicate that the  capitalized  database  should be evaluated for
possible  impairment,  the Company  uses an estimate of  undiscounted  cash flow
generated from the TSI subsidiary  over the remaining  lives of the  capitalized
database in measuring its  recoverability.  See Note 8 for further discussion of
recoverability of the capitalized database.

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.

Comprehensive  Income - For the years ended  September 30, 1998,  1997 and 1996,
there were no differences between net income and comprehensive income.

New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 131,  "Disclosures about Segments
of an Enterprise  and Related  Information",  which is required to be adopted in
fiscal years  beginning  after  December 15, 1997.  This  statement  establishes
standards  for the way public  business  enterprises  report  information  about
products, services, geographic areas and major customers. The Company will adopt
SFAS No. 131 for fiscal year ending September 30, 1999. The adoption of SFAS No.
131 will not have a  material  impact on its  financial  position  or results of
operations.

Quarterly  Information - The Company recorded an additional  valuation allowance
to reduce the  deferred  tax assets in the  amounts of $355,000  and  $1,365,000
during the fourth  quarters  of the fiscal  years ended  September  30, 1997 and
1996, respectively. (See Note 12. Income Taxes)

Stock-Based  Compensation - Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS No. 123") 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.

<PAGE>

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


2.    OIL ANALYSIS SERVICE SEGMENT

During 1998,  revenues of the oil analysis  service  segment were  approximately
$393,000  (See Note 16. for  further  information  on the oil  analysis  service
segment). As of September 30, 1998, identifiable assets relating to this segment
were approximately as follows:

                   Capitalized database, net             $2,073,000
                   Inventories                            1,141,000
                   Property and equipment, net              500,000
                   Accounts receivable                       57,000
                   Other assets                             173,000
                                                            -------
                                                         $3,944,000
                                                         ==========


During  fiscal  1998 and as a result of the  introduction  of the  OSA-IIs,  the
original  OSA-I units and  related  inventory  were  deemed to be  impaired  and
written off,  although the OSA-Is will continue to generate  minimal  revenue in
fiscal 1999.  An impairment  loss, in the amounts of $880,911 and $413,134,  has
been charged to  operations  and is included in "Write down of fixed assets" and
"Cost of services", respectively, in the accompanying Consolidated Statements of
Operations for the Year Ended September 30, 1998.

In fiscal 1997, the Company completed the restructuring of top management in the
corporate and oil analysis  service  segments (see Note 17.). New management has
devised a strategy to concentrate  marketing activities to sell or lease OSA-IIs
to approximately seven specific markets. Additionally, the Company has continued
to have  discussions  with  potential  strategic  partners who are interested in
licensing  the  OSA-II  technology  for  specific  industry  applications,  both
domestically and internationally.

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

3.  SALE OF TOP SOURCE AUTOMOTIVE, INC.

On August 14, 1998, the Company executed a Definitive  Asset Purchase  Agreement
("Agreement") with NCT Audio Products Inc., (the "Buyer" or "NCT"), a subsidiary
of the NCT Group,  Inc. of Stamford,  Connecticut  (NASDAQ:  "NCTI") to purchase
substantially all of the assets and liabilities of TSA.

Under the terms and subject to the conditions of the  Agreement,  on the closing
date (the "Closing" or the "Closing Date"), the Buyer agreed to purchase 100% of
the assets (the "Assets") and assume substantially all of the liabilities of TSA
for a minimum of $10,000,000. The purchase consideration of $10,000,000 consists
of a  non-refundable  deposit of $1,450,000  paid to TSA on June 10, 1998 ("Step
I"), $2,050,000, which was paid into escrow on July 30, 1998 and released to the
Company  (and  became  non-refundable)  on  December  15, 1998 as a result of an
affirmative  shareholder  approval ("Step II") and the balance of $6,500,000 due
at the Closing, which must occur by March 31, 1999 ("Step III"). Upon completion
of Step III, the TSA sale will be  accounted  for as a  discontinued  operation.
Additionally,  under the terms of the  Agreement,  TSA  could  receive  up to an
aggregate of an additional  $6,000,000  payable to the Company in cash expressly
contingent upon the future  earnings of the Buyer's  subsidiary as defined under
the Agreement, for the two-year period following the Closing.

<PAGE>


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


3.    SALE OF TOP SOURCE AUTOMOTIVE, INC.  (Continued)

The  consummation of the proposed  transaction is subject to the satisfaction or
waiver of  certain  conditions  including  the  Buyer  obtaining  the  necessary
financing.  As a result of the completion of Steps I and II of the  transaction,
the Buyer  became a 20%  owner of the  Common  Stock of TSA.  If Step III of the
transaction fails to close by December 31, 1998, the Buyer has a one week option
to cancel its exclusive right to purchase the Assets of TSA and as consideration
for such cancellation will receive an additional 15% of TSA Common Stock. If the
transaction  fails to  close by March  31,  1999,  the  Company  will be free to
attempt to find another purchaser of TSA and the Buyer will be obligated to sell
its TSA shares to any such  purchaser  on the same terms and  conditions  as the
Company receives for its TSA Common Stock. The Buyer failed to complete Step III
of the Transaction by December 31, 1998. (See Note 20. for Events  Subsequent To
The Date Of The Auditor's Report.)

The  Buyer  is  a  subsidiary  of  a  public   company,   which  trades  on  the
over-the-counter  bulletin  board having been delisted from the NASDAQ Small Cap
Market. The Buyer's parent company's unaudited financial statements for the nine
months  ended  September  30,  1998  report a net loss  attributable  to  common
shareholders   of   approximately   $11,436,000  on  reported  net  revenues  of
approximately  $2,275,000.  Based upon the review of these public filings by the
Company,  and due to the Buyer being newly  organized and having minimal working
capital,  management of the Company believes there is substantial doubt that the
Buyer will be able to complete a financing  of at least  $6,500,000  to complete
the  acquisition  of TSA.If Step III is not  completed  it is unlikely  that the
Company  will be able to  secure  another  purchaser.  This may have an  adverse
effect on the Company's  ability to finance OSA-IIs,  as well as have an adverse
effect on the  short-term  financial  condition of the  Company.  If Step III is
ultimately  completed,  TSA will be accounted for as a  discontinued  operation.
Pending completion of the proposed transaction,  the Company is actively seeking
to improve TSA's business.

In order to consummate  the proposed  transaction,  the Company must pay in full
its Credit  Facility  as  defined,  with  NationsCredit  Commercial  Corporation
("Nations").  As of  December  1,  1998,  approximately  $1,000,000  was owed to
Nations.  Upon  payment of its Credit  Facility,  Nations will release the lien,
which it holds on all of the assets of the Company,  and thus effectively cancel
the Credit Facility. (See Note 3.)


4. STATEMENTS OF CASH FLOWS

There were no  significant  non-cash  investing or financing  activities for the
years ended September 30, 1998, 1997 and 1996.


5. INVENTORIES

Inventories consisted of the following at September 30, 1998 and 1997:

                                    1998                     1997

Raw materials                      $1,388,058              $820,821
Finished goods                        101,782                60,202
                                      -------                ------
                                   $1,489,840              $881,023
                                   ==========              ========


<PAGE>

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


6.  PROPERTY AND EQUIPMENT

Property  and  equipment  consisted of the  following at September  30, 1998 and
1997:
<TABLE>
<S>                                      <C>                                <C>                   <C>

                                            Useful                                1998               1997
                                            Life (Years)
Equipment                                        2-7                         $   305,814        $   296,028
Computer equipment                               3-4                           1,318,684          1,141,000
On-Site Analyzers                                4-5                             316,214          2,184,464
Tooling                                          2                               288,307            305,273
Furniture and fixtures                           3-5                             315,199            309,694
Vehicles and delivery equipment                  3                                47,124            131,124
Leasehold improvements                           2-5                             172,411            155,924
                                                 - -                             -------            -------
                                                                               2,763,753          4,523,507
Less:  accumulated depreciation                                               (1,977,315)        (2,376,104)
                                                                              ----------         ----------
                                                                              $  786,438         $2,147,403
                                                                              ==========         ==========
</TABLE>

Depreciation of tooling and production  equipment incurred in manufacturing OHSS
in the amount of $314,780 and $319,324  for the years ended  September  30, 1998
and  1997,  respectively,  has been  allocated  to cost of sales as it  directly
relates  to the  products  sold.  During  fiscal  1998  and as a  result  of the
introduction  of the OSA-IIs,  the OSA-Is  property and  equipment  were written
down. (See Note 2. Oil Analysis Service Segment).


<PAGE>
7. MANUFACTURING AND DISTRIBUTION RIGHTS AND PATENTS

Manufacturing and distribution  rights and patents consisted of the following at
 September 30, 1998 and 1997:
<TABLE>
<S>                                                    <C>                  <C>             <C>

                                                           Useful
                                                         Life (Years)          1998          1997

Manufacturing rights                                          13           $   58,438       $58,438
Distribution rights                                           13              437,501       437,501
Patents                                                       10              311,205       258,209
                                                              --              -------       -------
                                                                              807,144       754,148
Less: accumulated amortization                                               (535,642)     (469,586)
                                                                             --------      --------
                                                                             $271,502      $284,562
                                                                             ========      ========
</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 $13,211 at September 30, 1998. <PAGE>

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

7. MANUFACTURING AND DISTRIBUTION RIGHTS AND PATENTS


The Company has  distribution  rights  acquired from B&R  International  Imports
Corp.  related to its OHSS. The net book value of these rights,  which are being
amortized  over thirteen  years,  is $51,864 at September 30, 1998.  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 $82,801 at September 30, 1998.

OSA  (On-Site Analyzer)
TSI  has  been  granted  five  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  $64,917  at
September 30, 1998.

ARCS (Acceleration Restraint Curve Safety Seat)
Over the past  eight  years the  Company  worked  on  developing  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 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 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
$58,709 at September 30, 1998.


8.  CAPITALIZED DATABASE

Capitalized database consisted of the following at September 30, 1998 and 1997:

                                         Useful
                                       Life (Years)    1998             1997

Capitalized database                       15       $3,162,500      $3,162,500
Less:  accumulated amortization                     (1,089,306)       (878,473)
                                                    ----------        --------
                                                    $2,073,194      $2,284,027
                                                    ==========      ==========


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.

<PAGE>


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

9.  DEBT

Notes payable at September 30, 1998 and 1997 are as follows:

                                               1998                  1997
Senior Subordinated convertible
notes, due June 2000,
bearing interest at 9%                    $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  nine  percent  (9%)  Senior
Subordinated  convertible  notes (the "Notes") from the Company maturing in June
2000.  After June 9, 1996,  the Notes  could be prepaid by the  Company  without
penalty and could be converted by the holders  into fully  registered  shares of
the Company's  Common Stock at a conversion price of $10.00 per share. The Notes
are subject to an Indebtedness to Equity ratio that cannot exceed 1.5 to 1.0. As
of  September  30,  1998,  the  Company  was not in  compliance  with the ratio.
Subsequent to September 30, 1998, the Company restructured  substantially all of
the  $3,020,000  Notes,  which included a waiver of the debt to equity ratio for
fiscal  1999  (See  Note 20.  Events  Subsequent  to the  Date of The  Auditor's
Report).

On July 1, 1997, the Company  entered into a three-year  $5,000,000  asset-based
financing   agreement   ("Credit   Facility")  with  Nations  Credit  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 TSA. 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,
1998 factoring the interest earned on unused drawn funds was 12.1%.  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.  The  outstanding  balance on this Credit  Facility was $1,318,835 at
September 30, 1998. The unused available borrowings on this Credit Facility were
$200,000 at the same date.

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,  which was 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% on July 1, 2000 and may be converted to stock appreciation rights after the
third year upon the occurrence of an adverse event as defined in the Agreement.
(See Note 14. Stock and Stock Option Plans.)

The Credit Facility calls for certain financial  covenants that if not met would
cause a default  under the  Agreement.  As of September  30,  1998,  the Company
failed to meet the annual financial  covenant  relating to the amount of pre-tax
operating loss for fiscal 1998, which states the Company's operating loss cannot
exceed  $2,000,000  in a fiscal  year.  Nations  agreed to waive  this  covenant
through the end of fiscal 1999, in return for the Company  agreeing to pay a fee
of $25,000 and agreeing to collaterally assign a $250,000 certificate of deposit
to Nations.  The Company must repay the Credit  Facility in full upon completion
of Step III of the sale TSA (See Note 3. Sale of Top Source  Automotive,  Inc.).
Upon payment of the Credit  Facility,  Nations  will release the lien,  which it
holds on all of the assets of the Company including TSA Common Stock and assets.
Cash paid for interest on all debt for the years ended  September 30, 1998, 1997
and 1996 was $664,142, $441,509, and $276,566, respectively.


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


10. COMMITMENTS AND CONTINGENCIES

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

         Fiscal Year Ending September 30:

         1999                385,222
         2000                343,224
         2001                202,149
         2002                 42,209


Total rental expense for continuing  operations amounted to $371,869,  $492,011,
and $479,135 for the years ended September 30, 1998, 1997, and 1996,
 respectively.

The Company has commitments  under certain  employment  agreements  entered into
with  individuals in management  positions.  The base salary  payments due under
these agreements aggregate $450,000 and are payable during fiscal 1999.

The Company  established a Retirement  Salary Savings Plan (401(k)) (the "Plan")
effective  October  1,  1993.  All  employees  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 1998, 1997 and
1996 was $28,442, $41,637, and $55,521, respectively.

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.

11. LOSS PER SHARE

The Company adopted SFAS No. 128,  "Earnings Per Share" during fiscal 1998. SFAS
No. 128  establishes  standards for computing and  presenting  basic and diluted
earnings per share.  Basic  earnings per share is calculated by dividing  income
(loss) available to Common Stockholders by the weighted average number of shares
of Common Stock  outstanding  during each period.  Diluted earnings per share is
calculated by dividing income  available to common  shareholders by the weighted
average number of shares of Common Stock and dilutive  Common Stock  equivalents
outstanding.  Convertible  securities and common share equivalents have not been
included  in the  computation  of  diluted  loss per  share in the  accompanying
statements of operations  for fiscal l998,  1997, and 1996 as their impact would
have been antidilutive.

For the years ended  September 30, 1998,  1997 and 1996, the dilutive  effect of
equivalent  shares related to stock Options was 264,378,  554,802 and 1,465,253,
respectively  and  was  not  included  in the  dilutive  average  common  shares
outstanding, as the effect would have been antidilutive.


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------
11. LOSS PER SHARE (Continued)

As  discussed in Notes 14 and 20, the Company  issued  300,000  warrants  during
fiscal 1998 and 675,000  warrants  subsequent to year end at prices ranging from
$.84 to $2.00.  Additionally,  subsequent  to  September  30, 1998 as  discussed
further  in Note 20, a portion  of the  Company's  Convertible  Preferred  Stock
Series A was converted into 412,970 of the Company's Common Stock.

12. INCOME TAXES

The income tax expense for the years ended  September 30, 1998, 1997 and 1996 of
$58,801,  $482,000,  and $1,543,300 consists of state income taxes for the years
1998, 1997 and 1996 and the reversal of previously  recorded deferred tax assets
in 1997 and 1996.

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, 1998 will not be realized  before the expiration of the underlying
net  operating   loss  carry   forwards  which  will  begin  expiring  in  2002.
Accordingly,  a full valuation  allowance has been recorded on the potential tax
benefit generated from the operating loss carryforwards.

At September  30, 1998,  the Company has net tax basis  Federal  operating  loss
carryforwards of approximately  $37,000,000,  which may be used to offset future
taxable income,  if any. The Company's net operating loss  carryforwards  expire
between 2002 and 2018.

Cash paid for state income taxes for the years ended  September  30, 1998,  1997
and 1996 was approximately $109,000, $124,000 and $140,000,
 respectively.

13.  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 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 CEO up to $30,000  evidenced  by a  three-year  promissory
note to the Company  bearing  interest of 9% . At September  30, 1998,  the note
receivable from officer balance with interest was $26,260.  The accrued interest
was paid in October 1998.

<PAGE>

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


13. RELATED PARTY TRANSACTIONS

The  Earnings  Per Share  targets  and five  performance-based  targets for each
succeeding fourth-quarter period during the Employment Period shall be reset and
established  annually by the  Compensation  Committee  at its sole and  absolute
discretion.  The Compensation Committee shall notify the 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 CEO,  outside of the stock option plan as described in
Note 14. 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 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.

By meeting certain performance targets for the period May 1997 through May 1998,
the CEO was entitled to a $127,500  bonus  through May 1998. In lieu of the cash
bonus,  the  Compensation  Committee  agreed  to issue the CEO  100,000  Options
exercisable at $.875 per share, which was the fair market value of the Company's
Common Stock at that time. Compensation expense of $6,759 for the vested Options
as of  September  30,  1998 has been  recorded  in  general  and  administrative
expenses in the accompanying statement of operations utilizing the Black-Scholes
Option Pricing Model in accordance with SFAS No. 123.

In fiscal 1993,  Stuart Landow,  the former  Chairman of the Board of Directors,
President and Chief Executive  Officer of the Company entered into an employment
agreement  ("Employment  Agreement") with provided a base salary of $200,000 per
year.  Additionally,  the Employment Agreement called 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 was between  $6.25 million to $12.5
million  and .5% of  quarterly  revenue,  if  quarterly  revenue  was over $12.5
million),  and (2)  profitability  (at the rate of 50% of the  incentive  amount
based on revenue  if net  income was 8% of net sales,  up to a rate of twice the
incentive  amount  based on revenue if net  income  was 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 Employment  Agreement.
The  incentive  cash  compensation  expense for fiscal  1998,  1997 and 1996 was
$92,760, $178,406 and $206,965, respectively.

In the event of termination  without cause,  or if Mr. Landow resigned for "Good
Reason",  as defined in the  Employment  Agreement,  the Company was required to
make  36  consecutive   monthly   payments  equal  to  his  base  and  incentive
compensation.  In  addition,  Mr.  Landow was  entitled  to  continue to receive
medical, life and disability insurance coverage during the 36-month term.

As a result of the hiring of a new CEO, who  replaced  Mr.  Landow as CEO in May
1997, a breach in the terms of the original Employment Agreement occurred, thus,
Mr. Landow could have requested that the "Good Reason" clause of his contract be
triggered  effective  July 1, 1997.  Mr.  Landow  waived  this  clause  with the
approval  of the  Board  of  Directors  as it was  determined  to be in the best
interest  of the  Company  to retain Mr.  Landow for a period of one year.  This
waiver was effective until June 30, 1998 or earlier, if elected by Mr. Landow at
which time the terms of the original  Employment  Agreement  remained in effect,
with the exception of the incentive  payments which would be calculated based on
the previous sales for the period from July 1, 1996 through June 30, 1997.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------
13.  RELATED PARTY TRANSACTIONS (Continued)


In June  1998,  Mr.  Landow  and the  Company's  Board of  Directors  reached an
agreement  to modify his  Employment  Agreement  which  resulted  in Mr.  Landow
triggering  the Good Reason clause of his contract and resigning as Chairman and
as a director of the Company, effective June 30, 1998.

In order to lessen the cash impact of the Employment  Agreement,  Mr. Landow and
the  Company  agreed  to a  reduction  of  approximately  $195,000  of the total
compensation  Mr. Landow was entitled to receive  during the  three-year  period
ending  June 30, 2001 by  reducing  the  36-month  term of the  severance  to 30
months.  Mr. Landow agreed to raise the exercise price on 200,000 of his 600,000
Options  (all of which remain  vested) from $2.06 to $3.56.  In return for these
modifications  to the  Employment  Agreement,  the Company  agreed to extend the
exercise period for all of Mr. Landow's 600,000 vested Options from the original
expiration date of July 1, 1999 to the new date of July 1, 2001.

Additionally,  the modified Employment  Agreement provides that Mr. Landow shall
repay the Company approximately  $105,000 he previously borrowed,  together with
9% per annum  interest  over the 30-month  term.  The Company is  deducting  the
monthly installments from Mr. Landow's monthly severance compensation payments.

As a result  of the  triggering  of the Good  Reason  clause  of the  Employment
Agreement and the modifications,  the Company recorded a one-time charge against
earnings of $1,085,587,  which is included in "Severance  expense to former CEO"
in the  accompanying  Consolidated  Statement of  Operations  for the Year Ended
September  30, 1998.  This  one-time  charge was comprised of $918,507 in future
severance  payments  and a non-cash  charge of  $167,080  which the  Company was
required to record due to the change in the stock option  measurement date under
SFAS No. 123 and the Black-Scholes Option Pricing Model.

<PAGE>

14. 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
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  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 awards of stock in the Company ("Awards"); (d) directors,  officers,
employees and consultants of the Company  opportunities to make direct purchases
of stock in the Company ("Purchases");  and (e) directors of the Company who are
not employees of the Company with Non-Discretionary Options.

A committee of non-employee  directors administers the 1993 Plan. 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.



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

14. STOCK AND STOCK OPTION PLANS  (Continued)

The Company's 1993 Stock Option Plan (the "1993 Plan") covers  1,500,000  shares
of Common Stock. The 1993 Plan provides: (a) officers and other employees of the
Company  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  opportunities  to purchase stock in the Company
pursuant to Non-Qualified Options.

A committee of non-employee  directors  administer the 1993 Plan. The committee,
subject  to certain  restrictions  in the 1993 Plan,  has the  authority  to (i)
determine  the  employees  of the  Company  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 June 30 and December 31,
provided that they are still serving as a director at that time. 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 1998,  1997 and 1996.  All of the
following Options and warrants issued to employees,  directors and officers were
issued at the fair market  value of the  underlying  stock at the date of grant;
therefore,  no  compensation  expense has been  recognized.  Options or warrants
issued  to   consultants   were  charged  to   operations,   determined  by  the
Black-Scholes Option Pricing Model in accordance with SFAS No. 123.


<PAGE>


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


14. STOCK AND STOCK OPTION PLANS  (Continued)
<TABLE>
<S>                      <C>             <C>                 <C>           <C>                  <C>             <C>

                                   1998                                   1997                        1996

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


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

Granted                     1,683,727        $1.79            1,148,257       $2.12                514,572      $6.66

Expiration Dates    01/12/2002-09/01/2008                 11/11/2006-9/25/2007            10/24/2005-6/30/2006

Exercised                   (549,700)        $.71              (15,000)       $1.37              (715,000)      $1.77

Expired or
Canceled                  (1,028,735)        $3.33            (653,991)       $5.50              (197,708)      $6.78
                          ----------                           --------                           --------

Outstanding,   end
of year:                    3,265,872        $2.34            3,160,580       $2.66              2,681,314      $3.57
                            =========                         =========                          =========

Exercisable,   end
of year:                    1,802,234        $2.94            2,089,163       $2.85              1,969,226      $2.76
                            =========                         =========                          =========

Weighted-average
fair value of
Options granted
during the year                  $.98                             $1.46                              $5.49
                                 ====                             =====                              =====


Available for
grant, end of                 114,369
                              =======
year:
</TABLE>

Included  in the above  table at  September  30,  1998 are  675,000  outstanding
Options which were granted  outside of the Stock Option Plans during fiscal 1998
and 1997 with a weighted average price of $1.86, and $1.95, respectively.  Also,
included in the above  table are 300,000  warrants,  which were  granted  during
fiscal 1998 at prices ranging from $1.10 - $2.00.

Subsequent  to  September  30,  1998,  the Company  issued  675,000  warrants to
purchase the Company's Common Stock. The warrants were granted at prices ranging
from $.84 - $1.94.  (See Note 20. Events Subsequent To The Date of The Auditor's
Report.)

<PAGE>

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

14. STOCK AND STOCK OPTION PLANS  (Continued)


Information  about stock  Options in various  price ranges at September 30, 1998
follows:
<TABLE>

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


                                Options OUTSTANDING                                             Options EXERCISABLE
-----------------------------------------------------------------------------   ---------------------------------------------
                                                Weighted-Average
                                                    Remaining
                                                Contractual Life       Weighted-Average
                                 Outstanding           (Years)              Exercise         Exercisable     Weighted-Average
         Range of                   as of                                     Price              as of         Exercise Price
      Exercise Prices              09/30/98                                                 09/30/98

        $0.00  -     $1.00            500,800          6.3                     $0.79            100,300             $0.53
        $1.01  -     $2.00          1,591,138          8.8                     $1.65            577,167             $1.72
        $2.01  -     $3.00            574,820          5.5                     $2.23            530,653             $2.18
        $3.01  -     $5.00            295,000          8.0                     $3.47            295,000             $3.47
        $5.01  -     $8.00            274,114          6.4                     $6.71            269,114             $6.71
        $8.01  -    $10.00             30,000          5.4                     $8.75             30,000             $8.75
                                      ------                                                    ------
                                    3,265,872          7.4                     $2.34          1,802,234             $2.94
                                    =========                                                 =========
</TABLE>

The  Company  has  adopted  the  disclosure  only  provisions  of SFAS 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 SFAS 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:
<TABLE>
<S>                                                     <C>                 <C>                     <C>
                                                          1998                  1997                    1996
Pro forma net                                        $(6,577,819)           $(3,619,598)           $(6,839,341)
loss
Pro forma basic and diluted net loss per share           (.23)                  (.13)                  (.24)
Expected life (years)                                      7                      7                      7
Risk-Free interest rate                                  5.67%                  6.51%                  6.08%
Expected volatility                                       86%                    81%                    81%
Quarterly dividend                                        none                   none                   none
</TABLE>

Because  SFAS 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 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 NationsCredit Agreement. (See Note 9. Debt) <PAGE>

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

15.  CONCENTRATION OF CREDIT RISK

In fiscal 1998, the majority of the Company's overall revenue was derived in the
automotive technology segment from one customer, an OEM, which accounted for 95%
of the total business activity.  That same customer accounted for 97% and 99% of
net  sales in both  1997 and 1996.  As of  September  30,  1998,  the  Company's
receivable  balance  from this OEM customer was  approximately  $1,598,611.  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
1998, 1997 and 1996 were insignificant.

16. SEGMENT INFORMATION

The Company currently classifies its operations into the following segments: (1)
Automotive Technology which primarily consists of the OHSS, 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
1998,  1997 and 1996,  corporate  expenses  (salaries,  benefits and general and
administrative  expenses)  have  been  allocated  to  the  segments.   Financial
information  about the  Company's  operations  by  segments  for the years ended
September 30, 1998, 1997 and 1996 is as follows:
<TABLE>
<S>                             <C>            <C>               <C>              <C>

                                  Automotive     Oil Analysis      Corporate
                                  Technology        Service        and Other       Consolidated
     Revenue:
              1998                  $10,815,205   $     392,653        $ -           $  11,207,858

              1997                  $16,580,270   $     403,853        $ -           $  16,984,123

              1996                  $16,102,523   $      44,001        $ -           $  16,146,524


Operating Income
(Loss):
              1998                 $  1,071,657   $ (5,571,947)    $ (1,353,736)   $  (5,854,026)
              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)

Depreciation and
Amortization:
              1998                $      68,850   $     727,812    $     126,158    $     922,820
              1997                $      76,573   $     917,820    $     117,078    $   1,111,471
              1996                $      94,080   $     701,510    $     135,973    $     931,563

Identifiable
Assets:
              1998                $   2,432,786    $  3,943,553    $     896,756    $   7,273,095
              1997                $   3,679,544    $  4,783,365    $   2,892,121    $  11,355,030
              1996                $   4,952,795    $  2,555,431    $   4,666,022    $  12,174,248

Capital
Expenditures:
              1998                $      62,385    $    560,408    $      14,809    $     637,602
              1997                $     357,940    $  1,055,572    $      28,753    $   1,442,265
              1996                $     516,968    $  1,190,629    $     149,407    $   1,857,004
</TABLE>


<PAGE>

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

17.  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  recorded  $725,000 of
restructuring  charges in fiscal 1996,  which  consisted  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 had been paid.

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
consisted of severance of $350,000 and  facilities  of $66,000.  As of September
30, 1998, substantially all of these restructuring costs have been paid.

18.   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 loss of UTG for the year ended  September  30,  1996 is  included in the
consolidated  statement of operations under "discontinued  operations."  Revenue
from such  operations  for the year ended  September 30, 1996 was $4,549,944 and
was not included in service revenue in the accompanying  consolidated statements
of operations.

19.  PRIVATE PLACEMENT OF SERIES A CONVERTIBLE PREFERRED STOCK

In May 1998, the Company completed the sale in a private offering to two foreign
investors of 1,000 shares of Series A  Convertible  Preferred  Stock  ("Series A
Preferred  ") with a  liquidation  value of $1,000  per share and a par value of
$.10 per share.  This funding was comprised of $1,000,000 in Series A Preferred,
less placement and legal fees, yielding $881,394 in net proceeds to the Company.
This Series A Preferred  pays an annual  dividend of 5% in cash or Common Stock.
The Company  issued an aggregate of 42,626 shares of Common Stock for payment of
the dividend due on the Series A Preferred through September 30, 1998.

The holders of Series A Preferred  had the right to convert each share of Series
A  Preferred  into a  number  of  shares  of  common  stock  in whole or in part
cumulatively as follows: 25% on August 8, 1998, 25% on September 8, 1998, 25% on
October 8, 1998 and 25%  November  8, 1998.  The  conversion  price would be the
lesser of $1.10 or 85% of the five-day  average  closing bid price of the shares
of the Company prior to conversion,  decreasing to 83% for conversion  after 120
days and 80% for conversion  after 150 days. The Company can redeem the Series A
Preferred, at any time, in whole or in part at 120% of the purchase price of the
Series A Preferred plus all accrued and unpaid dividends. The intrinsic value of
the  above  described  beneficial  conversion  feature  of  ($250,000)  has been
recognized as an increase in additional paid-in-capital and a decrease in Series
A  Preferred.  This  beneficial  conversion  feature  is being  amortized  as an
embedded Series A Preferred dividend through November 8, 1998 (the date on which
all the stock may be converted into Common Stock ).

<PAGE>

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

19.  PRIVATE PLACEMENT OF SERIES A CONVERTIBLE PREFERRED STOCK   (continued)

As part of the  transaction,  the  foreign  investors  and the  placement  agent
received a total of 250,000 three-year  warrants  exercisable at $1.10, of which
100,000  warrants  were fully  vested  upon  funding and the  remaining  150,000
warrants  vested upon the redemption on November 13, 1998.  100,000 fully vested
warrants have been valued at $108,979 utilizing the Black-Scholes Option Pricing
Model in accordance with SFAS No. 123 as of September 30, 1998 and the remaining
warrants will be valued in the first quarter of fiscal 1999.  The value of these
warrants have been deducted from amounts  available to common  stockholders  for
the purposes of calculating loss per share. As a requirement of the Subscription
Agreement,  the Company has filed a  Registration  Statement with the Securities
and Exchange  Commission covering the future sale of Common Stock underlying the
Series A Preferred and warrants.  (See Note 20. Events Subsequent To The Date Of
The Auditor's Report, regarding subsequent redemption of Preferred Stock.)


20. EVENTS SUBSEQUENT TO THE DATE OF THE AUDITOR'S REPORT

On November 17, 1998,  the Company sold  $3,500,000  of its Series B Convertible
Preferred  Stock  ("Series  B  Preferred")  to two  trusts  in which Mr. G. Jeff
Mennen,  a director of the Company,  is one of the co-trustees and sole trustee,
respectively, and the beneficiaries are members of Mr. Mennen's immediate family
(the  "Mennen  Trusts").  The  Series B  Preferred  is  convertible  on or after
November  1, 1999 into a number of shares of common  stock  computed by dividing
the stated value of $1,000 per share (the "Stated  Value") by 85% of the closing
bid price of the  common  stock on the  previous  trading  day (the  "Conversion
Price").  The Company has the option to redeem the Series B Preferred at 110% of
Stated  Value plus accrued  dividends  at any time before May 1, 1999,  and at a
price of 115% of Stated Value plus accrued  dividends  commencing on May 1, 1999
and expiring on October 27, 1999.  The Series B Preferred  pays a dividend of 9%
per annum in cash or, if the Company is unable to pay cash,  in shares of Common
Stock.  The number of shares of Common  Stock to be issued in such  event  shall
equal to the sum of: (A) the amount of the  dividend  divided by the  Conversion
Price  plus  (B)  25% of the  amount  obtained  in  clause  (A).  As  additional
consideration,  the  Company  issued to the Mennen  Trust  350,000  warrants  to
purchase the Company's Common Stock exercisable over a 10-year period at a price
of $1.94 per share (which is  equivalent to $1.00 above the closing price on the
day of consummation of the Series B Preferred sale  transaction).  Additionally,
if the Series B Preferred has not been  redeemed or converted  into Common Stock
on or before May 1, 1999 (which conversion requires the Company's consent),  the
Company shall issue to the Mennen Trust an additional  50,000  10-year  warrants
exercisable  at a price  of $.50  per  share  above  the  closing  price  of the
Company's  Common Stock on April 30, 1999. Not later than November 30, 1999, the
Company has agreed to file a registration  statement to cover the public sale of
the shares of Common Stock  issuable on conversion of the Series B Preferred and
exercise  of the  warrants.  The  Company  consummated  this  transaction  after
diligently and actively  seeking  alternative  financing  sources and concluding
that  the  proposal  was  superior  to  competing  offers  available  in  strict
arms-length  transactions.  The Board of Directors voted  unanimously to approve
the sale of the Series B Preferred with Mr. Mennen abstaining.

On November 8, 1998, the Company  redeemed  one-half or $500,000 Stated Value of
the  existing  Series A Preferred  by paying the holders an  aggregate  purchase
price of $600,000.  The holders also agreed not to convert $350,000 Stated Value
of Series A Preferred  until after March 31, 1999 (and the Company  retained the
right to  redeem  $350,000  Stated  Value of Series A  Preferred  Stock at a 20%
premium  above  Stated  Value at any time on or  before  March  31,  1999).  The
remaining  $150,000  Stated Value of Series A Preferred  was  converted  into an
aggregate of 412,970  shares of Common Stock  (including  accrued  dividends) in
accordance with the terms of the Series A Preferred.  As  consideration  for the
delay in converting $350,000 Stated Value of the Series A Preferred, the Company
issued to the two holders thereof,  five-year  warrants to purchase an aggregate
of 25,000 share of Common Stock  exercisable  at $.8937 per share  commencing in
April 1999.

<PAGE>


20. EVENTS SUBSEQUENT TO THE DATE OF THE AUDITOR'S REPORT (Continued)

During  December  1998,  the  Company  restructured  substantially  all  of  its
outstanding  $3,020,000 of Senior Subordinated  Convertible Notes (the "Notes").
With a portion of the proceeds from the Series B Preferred,  the Company prepaid
an aggregate of $745,000  principal amount of Notes for $496,617  resulting in a
savings of  $248,383 in  principal  amount (not  including  future debt  service
costs). In connection with the discounting of these Notes, the Company issued to
the  noteholders  warrants  to purchase an  aggregate  of 248,383  shares of the
Company's  Common Stock  exercisable over a five-year period at $1.78 per share.
The Company  has agreed to register  the shares of common  stock  issuable  upon
exercise of the warrants.  In addition, on December 15, 1998 concurrent with the
approval of the sale of TSA Assets by the Company's stockholders,  the remaining
$2,275,000 of noteholders  agreed to redeem  $1,568,000  principal amount of the
notes (at the rate of .70 per $1,000), which was paid with a portion of Series B
Preferred,   leaving  $707,000  of  principal  outstanding  due  June  2000.  In
connection with this redemption,  the noteholders  agreed to reduce the interest
rate from 9% to 5% and reduce the  conversion  price on the  remaining  30% Note
balance  from  $10.00  per  share to $2.00 per  share.  In  connection  with the
repayment of the Notes, a waiver of certain  restrictive  provisions of the Note
Purchase Agreement, including the requirement that the Company maintain a 1.5 to
1 debt to equity ratio, was received (through and including September 30, 1999).

As  discussed  above,  the  issuance of the Series B  Preferred,  redemption  of
one-half  of the  Series A  Preferred,  and the  restructuring  of the Notes all
include  the  issuance of common  stock  warrants.  The value of these  warrants
utilizing the Black-Scholes Option Pricing Model in accordance with SFAS No. 123
is  approximately  $286,000 and will be recorded by the Company during the first
quarter of fiscal year 1999.

Additionally,  in connection with the issuance of the Series B Preferred  Stock,
the  conversion  feature  calls for a 15% discount.  The intrinsic  value of the
conversion feature of the Series B Preferred is approximately  $618,000 and will
be amortized as a reduction of income to common shareholders in the statement of
operations in fiscal 1999 over the earliest  conversion  date of the Series B or
(November 1, 1999).

On January 7, 1999, as further  discussed in Note 3., the Buyer of TSA's Assets,
by virtue of not  exercising  its right to receive an  additional  15%  minority
stake in TSA  maintained  its  exclusive  right to complete the remainder of the
transaction  by March 31,  1999.  As a result,  the Buyer  will  remain as a 20%
minority owner of TSA unless Step III of the transaction is completed.


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


         None

<PAGE>

                                    PART III




ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

                               BOARD OF DIRECTORS

The  business  of the  Company is managed  under the  direction  of the Board of
Directors  ("Board").  It has  responsibility  for establishing  broad corporate
policies and for the overall  performance  of the Company.  It is not,  however,
involved  in the  operating  details on a  day-to-day  basis.  The Board is kept
advised of the Company's  business  through regular written  communications  and
discussions with management.

The Company has a classified Board, which provides
for three classes of directors each of which serves a three-year term. One class
is elected each year.  Two directors were elected at the 1998 Annual Meeting and
the persons  elected  will hold office until their terms expire in the year 2001
and until their successors have been elected and qualified. Two directors are up
for election at the 1999 Annual Meeting.  The Company's by-laws provide that the
Board shall  consist of no less than three and no more than nine  members,  with
the actual number to be  established  by  resolution  of the Board.  The current
Board has by resolution  established the number of directors at seven. There are
currently two  vacancies on the Board.  The Company does not intend to fill them
at this time.

<TABLE>

                                                Current Board of Directors
<S>        <C>                  <C>                <C>                           <C>          <C>        <C>         <C>

------------------------------- -------- ---------------------------------------- --------- ---------- ------------- ---------
             NAME                 AGE             POSITION WITH COMPANY            SINCE      TERM        ENDING      CLASS
             ----                 ---             ---------------------            -----      ----        ------      -----
------------------------------- -------- ---------------------------------------- --------- ---------- ------------- ---------
William C. Willis, Jr.(1)(2)      47     President, Chief Executive Officer and     1997      Three        2001         A
                                         Chairman of the Board of Directors                   Year
------------------------------- -------- ---------------------------------------- --------- ---------- ------------- ---------
David Natan                       45     Vice President, Chief Financial            1995      Three        1999         B
                                         Officer, Secretary and Director                      Years
------------------------------- -------- ---------------------------------------- --------- ---------- ------------- ---------
Ronald P. Burd(3)                 52     Director                                   1992      Three        1999         B
                                                                                              Years
------------------------------- -------- ---------------------------------------- --------- ---------- ------------- ---------
G. Jeff Mennen(1)(2)              59     Director                                   1997       Two         2000         C
                                                                                              Years
------------------------------- -------- ---------------------------------------- --------- ---------- ------------- ---------
L. Kerry Vickar(1)(2)(3)          42     Director                                   1998      Three        2001         A
                                                                                              Year
------------------------------- -------- ---------------------------------------- --------- ---------- ------------- ---------
</TABLE>

(1)      Member of the Nominating Committee
(2)      Member of the Compensation Committee.
(3)      Member of the Audit Committee.

WILLIAM C. WILLIS, JR. - Mr. Willis has been President,  Chief Executive Officer
and a member of the Board  since May 1997.  Since July 1, 1998,  Mr.  Willis has
served as Chairman of the Board. As President and Chief Executive Officer of the
Company,  Mr. Willis is responsible for the overall  management of the business,
with an emphasis on business  strategy and long-term  planning.  Mr. Willis also
actively  supervised the marketing of the Company's OSAs and currently  actively
supervises the marketing of the Company's OSA-IIs. Prior to joining the Company,
Mr. Willis was Chairman of Willis &  Associates,  a management  consulting  firm
assisting small and medium sized  technology,  health care and consumer products
companies.  From 1994 to 1995,  Mr.  Willis was  President  and Chief  Operating
Officer of MBf USA,  Inc., a marketer and  distributor  of latex  products whose
Common Stock is traded on NASDAQ.  From 1990 to 1994,  Mr.  Willis was President
and Chief Executive Officer of Insituform Technologies, Inc., a state of the art
provider of technologies for the reconstruction of pipelines and infrastructure.
From 1985 to 1990,  Mr. Willis was  President of The Paper Art Company,  Inc., a
subsidiary of The Mennen Company.

<PAGE>


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY - (Continued)

DAVID NATAN - Was appointed a director of the Company on April 16, 1998 in order
to fill a vacancy.  Currently,  Mr.  Natan,  a CPA, has been Vice  President and
Chief Financial Officer of the Company since June 1995 and Secretary from August
1997.  Mr.  Natan  previously  served on the  Company's  Board from June 1995 to
January  1997.  Mr. Natan brings nearly 20 years of  management  and  analytical
experience to his responsibilities.  Prior to joining the Company, from November
1992 through June 1995, Mr. Natan was Chief Financial  Officer of MBf USA, Inc.,
which is a NASDAQ listed  subsidiary of MBf Holdings  Berhad,  a  multi-national
conglomerate. From August 1987 through October 1992, Mr. Natan was Treasurer and
Controller for Jewelmasters,  Inc., an AMEX listed company.  Since January 1996,
Mr. Natan has been a director of IMX Corporation,  a distributor  pharmaceutical
products who's Common Stock trades on the Bulletin Board.

Greg  Brown - Mr.  Brown  has been Vice  President  Marketing  and  Sales  since
September 1998 and is responsible for all direct sales of the Company's patented
technologies as well as for the development of corporate  partnership  programs.
Prior to joining the Company,  from September 1996 to September  1998, Mr. Brown
was Vice President of Marketing and Sales for Boston Advanced Technologies where
he developed the Latin American,  European and Far Eastern  markets.  From March
1993 to August 1996,  Mr. Brown was Sales and Service  Manager for  Perkin-Elmer
Corporation.  From June 1992 to March 1993,  Mr.  Brown was the  National  Sales
Manager at UOP Guided Wave,  where he  established  national  account status for
DuPont,  Dow, and Ashland Chemical,  assisted in market  development for Plastic
Extrusions, Polymers and Refineries and introduced the sale of value added model
calibrations with analyzer packages.  From July 1990 to June 1992, Mr. Brown was
Sales  Manager at LT  Industries  where he hired and  directed  field  sales and
representatives  for laboratory and process analyzers,  including NIR and UV/VIS
products.   He  received   his  Bachelor  of  Science  at  the   University   of
Massachusetts.



Other Board Members

RONALD P. BURD - Mr. Burd has been a director  of the Company  since March 1992.
From 1984 through the present,  Mr. Burd has been President and Chief  Executive
Officer of the Devereux Foundation.  Devereux, founded in 1912, is a nationwide,
private,  not-for-profit  organization  that treats  individuals of all ages who
have a wide range of  emotional  disorders  and/or  developmental  disabilities.
Headquartered in Devon,  Pennsylvania,  Devereux operates  residential,  day and
community-based  treatment  programs  located in 13 states and the  District  of
Columbia.


G. JEFF MENNEN - Mr.  Mennen was  appointed a director of the Company in October
1997. Currently,  Mr. Mennen is President of Peak Management,  a consulting firm
which he  founded  in 1989.  Also,  Mr.  Mennen  is a  Managing  Partner  of TMF
Investment  Holdings, a family investment firm. From 1981 until 1992, Mr. Mennen
was Vice  Chairman of The Mennen  Company where he served until that company was
sold to  Colgate-Palmolive.  From 1977 until 1981,  Mr.  Mennen was President of
Mennen International. Mr. Mennen is a director of Corbin, Ltd. and MBf USA, Inc.


L. KERRY VICKAR - Mr.  Vickar was appointed a director of the Company in January
1998.  Mr.  Vickar has a Bachelor of Law degree from the  University of Manitoba
and has extensive  experience with  divestitures,  acquisitions,  operations and
financial re-structuring.  Currently, Mr. Vickar is Chairman and Chief Executive
Officer  of  Vickar   Industries  LLC,  which  recently  acquired  two  printing
companies.  In 1994,  Mr. Vickar  negotiated  the sale of Gravure  International
Corp. to ACX Technologies,  Inc., where he remained until 1995 as Executive Vice
President and Chief Operating  Officer of Flexible Division of Graphic Packaging
(a subsidiary of ACX  Technologies,  Inc.).  From 1983 through 1994,  Mr. Vickar
held various  positions,  including  President and Chief Operating  Officer with
Gravure International Corp.

<PAGE>


ITEM 11.  EXECUTIVE COMPENSATION

Executive Officer Compensation

The  following  table sets forth  certain  summary  information  concerning  the
compensation  awarded to, earned by, or paid to the Chief Executive  Officer and
the other most  highly  compensated  current  executive  officers of the Company
whose  combined  salary and bonus for the fiscal year ended  September  30, 1998
exceeded $100,000  (collectively,  the "Named Executive Officers") for the years
indicated. <TABLE>

                                                SUMMARY COMPENSATION TABLE
<S>     <C>              <C>       <C>             <C>        <C>              <C>             <C>            <C>

------------------------- --------------------------------------------------- ----------------------------- ------------------
                                         Annual Compensation                     Long-Term Compensation
                                                                                         Awards
------------------------- ------- -------------- ----------- ---------------- ------------ ---------------- ------------------
          (a)              (b)         (c)          (d)            (e)            (f)            (g)               (i)
------------------------- ------- -------------- ----------- ---------------- ------------ ---------------- ------------------
                                                                                             Securities
                                                                              Restricted     Underlying
   Name and Principal                                         Other Annual       Stock       Option/SARs        All Other
        Position           Year      Salary        Bonus      Compensation     Award(s)          (#)          Compensation
                                       ($)          ($)          ($) (1)          ($)                            ($) (2)
------------------------------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS
------------------------- ------- -------------- ----------- ---------------- ------------ ---------------- ------------------
William C. Willis, Jr.     1998   $303,750           $0          $12,000          $0           100,000           $11,543
Chairman of the Board,     1997   $109,231(3)        $0           $4,369          $0           500,000              $569
President                  1996      N/A            N/A            N/A            N/A            N/A                 N/A
and Chief Executive
Officer
------------------------- ------- -------------- ----------- ---------------- ------------ ---------------- ------------------
David Natan
Vice President and         1998     $126,667         $0          $12,000          $0           100,000           $6,117
Chief Financial            1997     $125,000      $25,000        $11,298          $0             7,000           $3,511
Officer, Secretary and     1996     $125,000      $25,000        $10,914          $0            10,000           $5,448
Director
------------------------- ------- -------------- ----------- ---------------- ------------ ---------------- ------------------
</TABLE>

(1)  Amounts consist  principally of automobile  allowances paid by the Company.
     The Company's  policy is to provide  executive  officers with an automobile
     allowance of $600 per month and a maintenance allowance of $400 intended to
     cover the cost of all other  expenses  of  operating  the  vehicle  such as
     insurance, maintenance, repairs and gasoline costs.


(2)  These amounts,  as follows,  represent  group term life insurance  premiums
     paid by the Company,  the Company's  match of the Retirement  Salary Saving
     Plan -  401(k)  and  reimbursement  of  out-of-pocket  medical  and  dental
     expenses not covered by the Company's insurance:

(a)  The 1998 group term life  insurance  premiums  were as follows:  Mr. Willis
     $4,460 and Mr. Natan $2,300.

(b)  The 1998 employer match of the Retirement
     Salary  Savings  Plan - 401(K) was as follows:  Mr.  Willis  $2,625 and Mr.
     Natan  $1,958.

(c)  The 1998  reimbursement  of out-of  pocket  medical and
     dental expenses not covered by the Company's insurance was as follows:  Mr.
     Willis $4,458 and Mr. Natan $1,859.


(3)  Mr.  Willis'  salary is only for the partial year from May 21, 1997 through
     September 30, 1997.
<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION - (Continued)

Executive Officer Compensation - (Continued)


Effective June 30, 1998, Mr. Stuart Landow  resigned as Chairman of the Board of
Directors  and as an  employee.  During  fiscal  1998,  Mr.  Landow  was  not an
executive  officer of the  Company.  His total  compensation  including  salary,
bonus, 401(K) match and reimbursement of medical and dental expenses not covered
by the Company's insurance was $258,686.
<TABLE>


                                        Options/SAR GRANTS DURING THE FISCAL YEAR
                                                 ENDED SEPTEMBER 30, 1998

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

                                                                                        Potential Realizable Value at
                                                                                        Assumed Annual Rates of Stock
                                                                                        Price Appreciation for Option
                                  Individual Grants                                                Term(1)
--------------------- ------------------ ---------------- ------------- -------------- ------------- ------------------
        (a)                  (b)               (c)            (d)            (e)           (f)              (g)
--------------------- ------------------ ---------------- ------------- -------------- ------------- ------------------

                          Number of
                         securities        % of Total
                         Underlying       Options/SARs    Exercise or
        Name            Options/SARs       Granted to         Base       Expiration         5%              10%
                           granted          employees        Price          Date           ($)              ($)
                             (#)         in Fiscal Year    ($/Share)
-----------------------------------------------------------------------------------------------------------------------
EXECUTIVE
OFFICERS
--------------------- ------------------ ---------------- ------------- -------------- ------------- ------------------
William C. Willis,         100,000            9.2%           $ .875       6/15/2008     55,028(2)       139,452(3)
Jr.
--------------------- ------------------ ---------------- ------------- -------------- ------------- ------------------
David Natan                50,000             4.6%           $1.38        1/28/2008     43,237(6)       109,570(7)
--------------------- ------------------ ---------------- ------------- -------------- ------------- ------------------
--------------------- ------------------ ---------------- ------------- -------------- ------------- ------------------
David Natan                50,000             4.6%           $1.00        7/20/2008     31,445(4)        79,687(5)
--------------------- ------------------ ---------------- ------------- -------------- ------------- ------------------
</TABLE>


(1)  The  values  shown  are  based  on  indicated   assumed   annual  rates  of
     appreciation  compounded  annually through the applicable  expiration date.
     Actual gains realized,  if any, on stock option  exercises and Common Stock
     holdings are  dependent on the future  performance  of the Common Stock and
     overall market conditions. There can be no assurances that the values shown
     on this table will be achieved.


(2)  Represents an assumed market price per share of Common Stock of $1.43.

(3)  Represents an assumed market price per share of Common Stock of $2.27.


(4)  Represents an assumed market price per share of Common Stock of $1.63.

(5)  Represents an assumed market price per share of Common Stock of $2.59.

(6)  Represents an assumed market price per share of Common Stock of $2.24.

(7)  Represents an assumed market price per share of Common Stock of $3.57.



<PAGE>

TEM 11.  EXECUTIVE COMPENSATION - (Continued)

The following table sets forth certain  information with respect to the exercise
of Options  to  purchase  Common  Stock and SARs  during  the fiscal  year ended
September 30, 1998,  and the  unexercised  Options held and the value thereof at
that date, by each of the Named Executive Officers.  <TABLE> <S> <C> <C> <C> <C>
<C>

                                   AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                                          AND FISCAL YEAR-END OPTION/SAR VALUES

------------------- ------------- --------------- ---------------------------------- -----------------------------------
       (a)              (b)            (c)                       (d)                                (e)
------------------- ------------- --------------- ---------------------------------- -----------------------------------
                         Number of Securities Underlying
                                                     Unexercised Options/SARs at     Value of Unexercised In-the-Money
                                                         Fiscal Year End (#)                    Options/SARs
                                                                                         at Fiscal Year End ($) (1)
------------------- ------------- --------------- --------------- ------------------ ---------------- ------------------
                       Shares
                      Acquired
                    On Exercise   Value Realized
       Name             (#)            ($)         Exercisable      Unexercisable      Exercisable      Unexercisable
------------------------------------------------------------------------------------------------------------------------
EXECUTIVE
 OFFICERS
------------------- ------------- --------------- --------------- ------------------ ---------------- ------------------
William C.               0             N/A           200,000           400,000             $0                $0
Willis, Jr.
------------------- ------------- --------------- --------------- ------------------ ---------------- ------------------
David Natan              0             N/A            52,833           129,167             $0                $0
------------------- ------------- --------------- --------------- ------------------ ---------------- ------------------
</TABLE>


(1)  Based on the  difference  between the closing market price of the Company's
     Common  Stock on the AMEX at  September  30,  1998 of $.8125 and the Option
     exercise price.


Executive Compensation Agreements

WILLIAM C.  WILLIS, JR.

In May 1997,  the Company  entered into an employment  agreement with William C.
Willis,  Jr., its then new President and Chief Executive Officer of the Company.
The term of this  employment  agreement  is three  years  through  May 21,  2000
("Employment  Period").  The employment  agreement provides for a base salary of
$300,000 ("Annual Base Salary").  Effective July 1, 1998 Mr. Willis' Annual Base
Salary  increased to $315,000.  Mr. Willis  receives an automobile  allowance of
$600 per month and an automobile  maintenance and gasoline allowance of $400 per
month.  Mr. Willis 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  employment  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 annual
     earnings  per share  targets  of  between  $.01 and $.05 as  defined in the
     employment agreement.

<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION - (Continued)

Executive Compensation Agreements - (Continued)


(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 five
     annual  performance  based targets for each period of four fiscal  quarters
     during the Employment  Period. As of September 30, 1997, Mr. Willis had not
     earned any Bonuses.  In June 1998,  the Company  granted Mr. Willis 100,000
     Options initially  exercisable over a three-year term at $.875 per share in
     exchange  for his waiving  his earned  Performance  Bonus of  approximately
     $127,500.

The  earnings  per share  targets and five  performance  based  targets for each
succeeding  four quarter period during the Employment  Period shall be reset and
established annually by the Compensation Committee.

In addition to the payments  provided above,  on May 21, 1997, the  Compensation
Committee  granted to Mr.  Willis  Options  to  purchase  500,000  shares of the
Company's Common Stock  exercisable at $2.00 per share vesting annually in equal
increments  of 100,000  Options over a three-year  term  commencing in May 1998.
Additionally,  100,000 Options will become  exercisable if the closing price for
the  Company's  Common  Stock is $7.00 per share or  higher  for 30  consecutive
trading days and 100,000  Options will become  exercisable  if the closing price
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.

In the event Mr. Willis'  employment is terminated by the Company for other than
cause,  death or disability or Mr. Willis  terminates  his  employment  for good
reason, all as defined in his employment agreement,  the Company is obligated to
pay Mr.  Willis (1) his annual  base  salary for 12 months,  (2) a lump cash sum
paid  within 30 days equal to  accrued  obligations  consisting  of any owed but
unpaid  Performance  Bonus,  vacation pay and other monetary payments Mr. Willis
was  entitled  to on the  date of his  termination,  and (3)  continued  medical
coverage for Mr. Willis and his dependents for 12 months following termination.

Effective  in August  1997,  the  Company  began  providing  Mr.  Willis  with a
$1,000,000 life insurance policy.


Executive Compensation Agreements

DAVID NATAN

Mr. David Natan, Vice President and Chief Financial Officer,  joined the Company
on June 30, 1995 at an annual salary of $125,000.  In August 1998,  Mr.  Natan's
salary was  increased to $135,000.  He also  receives  pursuant to an employment
agreement,  a car allowance of $600 per month and an automobile  maintenance and
gasoline  allowance of $400 per month.  In January 1997, Mr. Natan's  employment
agreement  provides for 12 months of severance  benefits  which include  salary,
medical and dental  benefits  in the event of a  qualifying  termination  of Mr.
Natan,  defined  as  (1) a  material  adverse  change  to  his  job  duties  and
responsibilities;  (2) a  material  reduction  in his  salary,  compensation  or
eligibility  to  participate in Company  benefit  programs;  or (3) an unwilling
relocation  to a  location  greater  than 50 miles  away from his  current  work
location. In January 1998, in order to compensate Mr. Natan, the Company granted
him new Options in exchange for  cancellation  of higher  priced  mostly  vested
Options as follows:



<PAGE>

TEM 11.  EXECUTIVE COMPENSATION - (Continued)

Executive Compensation Agreements - (Continued)



<TABLE>

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


                                 Number of       Exercise Price
                                  Options                                Number Vested
       --------------------- ------------------- ---------------- ----------------------------
       Cancelled Options           93,750             $6.94                 78,175
                                   10,000             $7.75                 10,000
       --------------------- ------------------- ---------------- ----------------------------
       New Grant                   75,000             $3.00                 37,500(1)
       --------------------- ------------------- ---------------- ----------------------------
</TABLE>


(1)  The balance vest January 28, 1999. 


In January 1998, Mr. Natan was granted 50,000 Options  exercisable at $1.375 per
share. In July 1998, concurrent with his salary increase,  Mr. Natan was granted
50,000 Options exercisable at of $1.00 per share. The Options vest in accordance
with  the  Company's  standard  policy  of  equal  semi-annual  vesting  over  a
three-year period. Effective in December 1997, the Company began providing Mr.
Natan with a $1,000,000 life insurance policy.


Termination/Resignation Executive Compensation

Effective June 30, 1998, Mr. Stuart Landow resigned as Chairman of the Board and
as an employee.  Pursuant to a 1993  employment  agreement,  as modified,  he is
receiving Severance, as defined, of 30 months compensation. He waived six months
of  Severance  or  approximately  $195,000.  In exchange for this waiver and Mr.
Landow agreeing to increase the exercise price of 200,000  Options,  the Company
extended the term of all 600,000  Options held by Mr. Landow for two years.  See
Item 13. Certain Relationships and Related Transactions.


Repricing of Options

Repricing of Options held by a named  executive  officer  during the fiscal year
ended  September 30, 1998 and information on all repricing of Options held by an
executive  officer  during the last 10 fiscal years is provided in the following
table:

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

       (a)             (b)             (c)               (d)               (e)            (f)                (g)

                                    Number of
                                   Securities      Market Price of    Exercise Price
                                   Underlying       Stock at Time       at Time of                    Length of Original
                                  Options/SARs       Repricing or      Repricing or    New          Option Term Remaining
                                   Repriced or        Amendment         Amendment      Exercise    at Date of Repricing or
                                     Amended             ($)               ($)           Price            Amendment
      Name            Date             (#)                                                ($)
------------------ ------------ ------------------ ----------------- ----------------- ----------- -------------------------
------------------ ------------ ------------------ ----------------- ----------------- ----------- -------------------------

------------------ ------------ ------------------ ----------------- ----------------- ----------- -------------------------
------------------ ------------ ------------------ ----------------- ----------------- ----------- -------------------------
   David Natan       1/28/98        75,000(1)           $1.375            $6.94          $3.00     7 years and 5 months
------------------ ------------ ------------------ ----------------- ----------------- ----------- -------------------------
</TABLE>

(1)  The repricing was in consideration  of cancellation of 103,750 Options.  At
     September 30, 1998, 37,500 Options shares were vested.  The balance vest on
     January 28, 1999.

<PAGE>

Mr. David Natan was hired as Vice President and Chief  Financial  Officer of the
Company in June 1995.  During 1995, Mr. Natan was granted  103,750  Options.  At
that time, the Company's stock was trading at prices  substantially  higher than
current  levels.  Between  1995  and  1998,  the  Company  reported  significant
operating losses. During this time period,  except for Mr. Natan,  substantially
the entire executive-management group and Board of Directors were replaced.

The Compensation  Committee,  consisting of Messrs. William C. Willis, Ronald P.
Burd,  G. Jeff Mennen and L. Kerry  Vickar,  believes that despite these losses,
Mr. Natan's quality  performance in maintaining the Company's  liquidity  during
this  period,   arranging  for  difficult   financings  and  continuing  current
performance,  justified a repricing.  In order to incentivize Mr. Natan,  reduce
Company share dilution, and to encourage Mr. Natan's ongoing employment with the
Company,  his Options were  repriced.  As a precondition  of the repricing,  the
Compensation  Committee  requested  that Mr. Natan  forfeit  28,750  Options and
re-vest the new Options over a one-year period. On January 28, 1998, the Company
cancelled  103,750  Options  above  fair  market  value held by Mr.  Natan,  and
regranted to Mr. Natan 75,000 new option shares  exercisable at $3.00 per share,
which was $1.625 above market value on January 28, 1998.



ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership of Certain Beneficial Owners

The  following  table sets forth the  number of shares of the  Company's  Common
Stock  beneficially  owned as of December 31, 1998 by (i) owners of more than 5%
of the Company's  Common Stock,  (ii) by each director,  and (iii) all directors
and named executive officers of the Company as a group.

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

                                                                                Amount and Nature
                                                                                  of Beneficial         Percent
        Title of                                                                    Ownership              Of
         Class                   Name and Address of Beneficial Owner                                    Class
------------------------- ---------------------------------------------------- --------------------- ---------------
Common Stock and          WILLIAM C. WILLIS, JR.(1)                                         291,666        *
Vested Options            Top Source Technologies, Inc.
                          7108 Fairway Drive, Suite 200
                          Palm Beach Gardens, FL  33418

------------------------- ---------------------------------------------------- --------------------- ---------------
Common Stock              DAVID NATAN(2)                                                    119,549        *
and Vested                Top Source Technologies, Inc.
Options                   7108 Fairway Drive, Suite 200
                          Palm Beach Gardens, FL  33418
------------------------- ---------------------------------------------------- --------------------- ---------------
Common Stock              RONALD P. BURD(3),(4)                                             201,750        *
and Vested                251 Linden Lane
Options                   Merion Station, PA  19066

------------------------- ---------------------------------------------------- --------------------- ---------------
Common Stock              G. JEFF MENNEN(5)                                                 538,332       1.8%
                          TMF Investments
                          25B Hanover Road
                          Florham Park, NJ  07932
------------------------- ---------------------------------------------------- --------------------- ---------------
Common Stock              L. KERRY VICKAR(6)                                                 23,541        *
                          19010 Mary Ardrey Circle
                          Cornelios, NC  28031
</TABLE>
<PAGE>



ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -
                (Continued)
<TABLE>


Security Ownership of Certain Beneficial Owners - (Continued)
<S>     <C>              <C>                                                    <C>                    <C>

------------------------- ---------------------------------------------------- --------------------- ---------------
                                                                                Amount and Nature
                                                                                  of Beneficial         Percent
        Title of                                                                    Ownership              Of
         Class                   Name and Address of Beneficial Owner                                    Class
------------------------- ---------------------------------------------------- --------------------- ---------------
Common Stock              GREG BROWN(7)                                                      11,112        *
                          Top Source Technologies, Inc.
                          7108 Fairway Drive, Suite 200
                          Palm Beach Gardens, FL  33418
------------------------- ---------------------------------------------------- --------------------- ---------------
Common Stock              MELLON BANK CORPORATION(8)                                      2,079,700        7.1%
and Vested                2875 N.E. 191st Street, Penthouse I
Options                   N. Miami Beach, FL  33130
------------------------------------------------------------------------------ --------------------- ---------------
All Directors and Named Executive Officers of the Company as a group (5                   1,185,950       3.9%
persons)(1)(2)(3)(4)(5)(6)
*Less than 1% of class
------------------------------------------------------------------------------ --------------------- ---------------
</TABLE>


(1)  Includes 200,000 vested Options held by Mr. Willis at  approximately  $2.00
     per share and 75,000 shares held by Mr. Willis.

(2)  Includes   75,000  vested   Options  held  by  Mr.  Natan   exercisable  at
     approximately   $3.00  per  share,  7,000  vested  Options  exercisable  at
     approximately $1.56 per share, 16,666 vested Options at approximately $1.38
     per share, and 8,333 exercisable at $1.00 per share,  11,550 shares held by
     Mr. Natan and 1,000 shares held by Mr. Natan's wife.

(3)  Includes  25,000 vested  Options  exercisable  at  approximately  $3.38 per
     share,  40,000 vested Options  exercisable at approximately $1.78 per share
     and 30,000 vested Options exercisable at approximately  $6.25, 6,250 vested
     Options  exercisable at approximately  $1.75 and 10,000 Options exercisable
     at approximately $1.31 per share held by Mr. Burd.

(4)  Includes  87,000  shares  held  jointly by Mr.  Burd and his wife and 3,500
     shares gifted by Mr. Burd to the Devereux Foundation,  of which Mr. Burd is
     President and Chief Executive Officer.

(5)  Includes 10,000 vested Options  exercisable at approximately  $1.38,  1,666
     vested  Options  exercisable  at  approximately  $2.00 per share and 16,666
     vested Options  exercisable at  approximately  $1.19 per share, and 110,000
     shares  held  indirectly  by Mr.  Mennen  in the name of  Wilmington  Trust
     Company and George Jeff Mennen  co-trustee for Christina M. Andrea and John
     Henry Mennen.  Also, on January 12, 1998,  the Company issued to Mr. Mennen
     50,000  warrants at an  exercise  price of $2.00 per share.  Mr.  Mennen is
     co-trustee  and  sole  trustee  of the  two  trusts,  which  purchased  the
     Preferred  Stock  and  his  family  members  are the  beneficiaries.  Also,
     includes  shares of Common Stock  reserved for exercise of 350,000  10-year
     warrants  issued to the trusts  exercisable  at $1.94 per  share.  Does not
     include  shares  of  Common  Stock  into  which   $3,500,000  of  Series  B
     Convertible Preferred Stock may convert on or after November 1, 1999.


<PAGE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -
                (Continued)

Security Ownership of Certain Beneficial Owners - (Continued)


(6)  Includes  12,500  shares  held by Mr.  Vickar  and  11,041  vested  Options
     exercisable at approximately $1.13 per share.

(7)  Includes   6,112  shares  held  by  Mr.  Brown  and  5,000  vested  Options
     exercisable at approximately $1.13 per share.

(8)  Mellon Bank Corporation formerly Ganz Capital Management, Inc. beneficially
     owned  2,079,700  shares of Common  Stock of the  Company as of January 23,
     1998.  This  represents  beneficial  ownership  of  7.1%  of the  Company's
     outstanding shares.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
     See Item 8. Financial  Statements and Supplementary  Data, Note 13. Related
     Party Transactions.

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
                                                                          
                                                                          Page
   (a)    (1)  Financial Statements. (See Item 8. of Form 10-K/A No.2..... 16
   (a)    (2)  Financial Statement Schedules required to be filed.
                  Schedule II - Valuation and Qualifying Accounts......... 52

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. <PAGE>

TERM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
                       (Continued)

(a)       (3)  Exhibits
<TABLE>
<S>        <C>                                                                                                        <C>
                                                                                                                      Footnote

--------- ------------------------------------------------------------------------------------------------------------ -------
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                                             6
--------- ------------------------------------------------------------------------------------------------------------ -------
--------- ------------------------------------------------------------------------------------------------------------ -------
4.0       1990 Stock Plan                                                                                                3
--------- ------------------------------------------------------------------------------------------------------------ -------
--------- ------------------------------------------------------------------------------------------------------------ -------
4.1       1993 Stock Option Plan                                                                                         6
--------- ------------------------------------------------------------------------------------------------------------ -------
--------- ------------------------------------------------------------------------------------------------------------ -------
10.1      First Amendment to Lease of On-Site Analysis, Inc., Atlanta, Georgia                                           6
--------- ------------------------------------------------------------------------------------------------------------ -------
--------- ------------------------------------------------------------------------------------------------------------ -------
10.2      Shareholder Rights Plan                                                                                        5
--------- ------------------------------------------------------------------------------------------------------------ -------
--------- ------------------------------------------------------------------------------------------------------------ -------
10.3      Note Purchase  Agreement dated as of June 9, 1995 Regarding 9% Senior  Subordinated  Convertible  Notes Due    7
          June 9, 2000 by and among Top Source Technologies, Inc. Purchasers and Ganz Capital Management, Inc.
--------- ------------------------------------------------------------------------------------------------------------ -------
--------- ------------------------------------------------------------------------------------------------------------ -------
10.4      First Amendment to Shareholder Rights Plan                                                                     8
--------- ------------------------------------------------------------------------------------------------------------ -------
--------- ------------------------------------------------------------------------------------------------------------ -------
10.5      Second Amendment to Shareholder Rights Plan                                                                    9
--------- ------------------------------------------------------------------------------------------------------------ -------
--------- ------------------------------------------------------------------------------------------------------------ -------
10.6      Lease Agreement dated February 10, 1995 for Michigan facility, Troy, MI                                        10
--------- ------------------------------------------------------------------------------------------------------------ -------
--------- ------------------------------------------------------------------------------------------------------------ -------
10.7      Employment Agreement of David Natan                                                                            11
--------- ------------------------------------------------------------------------------------------------------------ -------
--------- ------------------------------------------------------------------------------------------------------------ -------
10.8      Lease of Office Space dated December 20, 1995 of Top Source Technologies, Inc., Palm Beach Gardens, FL         12
--------- ------------------------------------------------------------------------------------------------------------ -------
--------- ------------------------------------------------------------------------------------------------------------ -------
10.9      Asset Purchase Agreement between Top Source Technologies,  Inc., Conam Inspection,  Inc. and United Testing    13
          Group, Inc. dated  October 30, 1996
--------- ------------------------------------------------------------------------------------------------------------ -------
--------- ------------------------------------------------------------------------------------------------------------ -------
10.10     NationsCredit Agreement dated July 1, 1997                                                                     15
--------- ------------------------------------------------------------------------------------------------------------ -------
--------- ------------------------------------------------------------------------------------------------------------ -------
10.11     Employment Agreement of William C. Willis, Jr.                                                                 16
--------- ------------------------------------------------------------------------------------------------------------ -------
--------- ------------------------------------------------------------------------------------------------------------ -------
10.12      Series A 5% Convertible Preferred Stock and Warrants of Top Source Technologies, Inc.                         17
--------- ------------------------------------------------------------------------------------------------------------ -------
--------- ------------------------------------------------------------------------------------------------------------ -------
10.13     Thermo Jarrell Ash Corporation Agreement                                                                       17
--------- ------------------------------------------------------------------------------------------------------------ -------
--------- ------------------------------------------------------------------------------------------------------------ -------
10.14     Asset  Purchase  Agreement by and among Top Source  Technologies,  Inc., Top Source  Automotive,  Inc., NCT    18
          Audio Products, Inc. and Noise Cancellation Technologies, Inc.
--------- ------------------------------------------------------------------------------------------------------------ -------
--------- ------------------------------------------------------------------------------------------------------------ -------
10.15     Amendment to Stuart Landow's Employment  Agreement                                                             18
--------- ------------------------------------------------------------------------------------------------------------ -------
--------- ------------------------------------------------------------------------------------------------------------ -------
10.16     Amendment to Asset Purchase  Agreement by and among Top Source  Technologies,  Inc., Top Source Automotive,    19
          Inc., NCT Audio Products,  Inc. and Noise Cancellation  Technologies,  Inc. - Appendix A-I dated October 7,
          1998
--------- ------------------------------------------------------------------------------------------------------------ -------
--------- ------------------------------------------------------------------------------------------------------------ -------
10.17     Amendment to NationsCredit Agreement dated November 11, 1998                                                   20
--------- ------------------------------------------------------------------------------------------------------------ -------
--------- ------------------------------------------------------------------------------------------------------------ -------
10.18     Amendment to Series A 5% Convertible  Preferred Stock issued to Excalibur  Limited  Partnership and Gundyco    20
          in Trust
--------- ------------------------------------------------------------------------------------------------------------ -------
--------- ------------------------------------------------------------------------------------------------------------ -------
10.19     Amendment to Second  Certificate  of  Designation  of Rights and  Preferences  of the Series A  Convertible    20
          Preferred Stock of Top Source Technologies, Inc.
--------- ------------------------------------------------------------------------------------------------------------ -------
--------- ------------------------------------------------------------------------------------------------------------ -------
10.20     Third  Certificate  of  Designation  of Top Source  Technologies,  Inc.  Series B  Convertible,  Redeemable    20
          Preferred Stock
--------- ------------------------------------------------------------------------------------------------------------ -------
--------- ------------------------------------------------------------------------------------------------------------ -------
10.21     Amendment  to  Note  Purchase  Agreement  dated  as of June  9,m  1995  regarding  9%  Senior  Subordinated    20
          Convertible Notes Due June 9, 2000
--------- ------------------------------------------------------------------------------------------------------------ -------
--------- ------------------------------------------------------------------------------------------------------------ -------
10.22     Amended Stock Purchase  Agreement  dated December 23, 1998, by and among Top Source  Technologies,  Inc. G.    20
          Jeff Mennen and Wilmington Trust Co.
--------- ------------------------------------------------------------------------------------------------------------ -------
--------- ------------------------------------------------------------------------------------------------------------ -------
10.23     Second  Certificate of  Designation  of Top Source  Technologies,  Inc.  Series B  Convertible,  Redeemable    20
          Preferred Stock
--------- ------------------------------------------------------------------------------------------------------------ -------
--------- ------------------------------------------------------------------------------------------------------------ -------
27.0      Financial Data Schedule                                                                                        20
--------- ------------------------------------------------------------------------------------------------------------ -------
</TABLE>




ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
              (Continued)



(b)      Reports on Form 8-K
     There were no reports filed on Form 8-K for the quarter ended September 30,
     1998.
<PAGE>

Exhibit Index
<TABLE>
<S>     <C>

  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 Form 8-K dated January 5, 1995.
------- ---------------------------------------------------------------------------------------------------------------
------- ---------------------------------------------------------------------------------------------------------------
  6     Contained in the documents filed with the Securities and Exchange  Commission in conjunction  with the 9/30/94
        Form 10-K.
------- ---------------------------------------------------------------------------------------------------------------
------- ---------------------------------------------------------------------------------------------------------------
  7     Contained in documents filed with the Securities and Exchange Commission
        in conjunction with the 6/30/95 Form 10-Q.
------- ---------------------------------------------------------------------------------------------------------------
------- ---------------------------------------------------------------------------------------------------------------
  8     Contained in the Form 8-A/A No. 1 dated July 17, 1995.
------- ---------------------------------------------------------------------------------------------------------------
------- ---------------------------------------------------------------------------------------------------------------
  9     Contained in the Form 8-A/A No. 2 dated December 5, 1995.
------- ---------------------------------------------------------------------------------------------------------------
------- ---------------------------------------------------------------------------------------------------------------
  10    Contained in Amendment No. 1 to the Registration Statement on Form S-3 filed May 4, 1995.
------- ---------------------------------------------------------------------------------------------------------------
------- ---------------------------------------------------------------------------------------------------------------
  11    Contained in Amendment No. 3 to the Registration Statement on Form S-3 filed September 27, 1995.
------- ---------------------------------------------------------------------------------------------------------------
------- ---------------------------------------------------------------------------------------------------------------
  12    Contained in documents filed with the Securities and Exchange Commission
        in conjunction with The September 30, 1995 Form 10-K.
------- ---------------------------------------------------------------------------------------------------------------
------- ---------------------------------------------------------------------------------------------------------------
  13 Contained in the Form 8-K dated November 12, 1996.
------- ---------------------------------------------------------------------------------------------------------------
------- ---------------------------------------------------------------------------------------------------------------
  14    Contained in documents filed with the Securities and Exchange Commission
        in conjunction with September 30, 1996 Form 10-K/A No. 1.
------- ---------------------------------------------------------------------------------------------------------------
------- ---------------------------------------------------------------------------------------------------------------
  15    Contained in documents filed with the Securities and Exchange Commission
        in conjunction with the June 30, 1997 Form 10-Q.
------- ---------------------------------------------------------------------------------------------------------------
------- ---------------------------------------------------------------------------------------------------------------
  16    Contained in documents filed with the Securities and Exchange Commission
        in conjunction with September 30, 1997 Form 10-K/A No. 3.
------- ---------------------------------------------------------------------------------------------------------------
------- ---------------------------------------------------------------------------------------------------------------
  17    Contained in documents filed with the Securities and Exchange Commission
        in conjunction with The March 31, 1998 Form 10Q/A No. 1.
------- ---------------------------------------------------------------------------------------------------------------
------- ---------------------------------------------------------------------------------------------------------------
  18    Contained in documents filed with the Securities and Exchange Commission
        in conjunction with The June 30, 1998 Form 10-Q.
------- ---------------------------------------------------------------------------------------------------------------
------- ---------------------------------------------------------------------------------------------------------------
  19    Contained as an exhibit to the November 6, 1998 Proxy Statement.
------- ---------------------------------------------------------------------------------------------------------------
------- ---------------------------------------------------------------------------------------------------------------
  20 Contained in Form 10-K for the year ended September 30, 1998.
------- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>


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

                                     SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                  FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996

================================= ----------------- ------------- ---------------------- ---------------- ===============
                                  Balance at        Charged to                                              Balance at
                                  Beginning of      Costs and     Additions  Charged     Deductions       End of Period
          Description             Period            Expenses      to Other Accounts

================================= ----------------- ------------- ---------------------- ---------------- ===============
Deducted from Accounts
Receivable - Allowance for
Doubtful Accounts
================================= ----------------- ------------- ---------------------- ---------------- ===============
Year Ended Sept. 30, 1998              $     -          $ -                $ -                  $              $ -
                                                                                         -
================================= ----------------- ------------- ---------------------- ---------------- ===============
Year Ended Sept. 30, 1997             $ 83,650          $ -                $ -                                 $ -
                                                                                            ($83,650)
--------------------------------- ----------------- ------------- ---------------------- ---------------- ===============
Year Ended Sept. 30, 1996             $145,703          $ -                $ -             ( $62,053)        $ 83,650
--------------------------------- ----------------- ------------- ---------------------- ---------------- ===============


</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/A  No. 1 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., Chairman,
                                       President and Chief Executive Officer
Dated:   January 28, 1999