U.S. Securities and Exchange Commission
                             Washington, D.C. 20549

                                   FORM 10-KSB

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES AND EXCHANGE ACT
     OF 1934 (Fee required)

     For the fiscal year ended December 31, 1997

[ ]  TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
     ACT OF 1934 (No Fee Required)

     For the transition period from ______ to _______.

Commission File Number 000-21627

                 Safe Alternatives Corporation of America, Inc.
--------------------------------------------------------------------------------
                 (Name of small business issuer in its charter)

      Florida                                               06-1413994
      ------------------------------                        -------------------
      (State or other jurisdiction of                       (I.R.S. Employer
      incorporation or organization)                        Identification No.)


       27 Governor Street, Ridgefield, Connecticut             06877
--------------------------------------------------------------------------------
         (Address of Principal Executive Offices)             (Zip Code)

Issuer's Telephone Number: (203) 438-8144
Securities  registered  under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:

                          $.0001 Par Value Common Stock

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the Registrant was required to file such report(s), and (2) has been
subject to such filing requirements for the past 90 days.          Yes     No X

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the  best  of  Registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB.                                               [ ]

State issuer's revenues for its most recent fiscal year.                $134,464

State the  aggregate  market  value of the voting  stock held by  non-affiliates
computed by reference  to the price at which the stock sold,  or the average bid
and asked prices of such stock,  as of a specified  date within the past 60 days
(see  definition of affiliate in Rule 12b-2 of the Exchange Act): As of July 31,
1998, the aggregate  market value of the 11,327,797  shares of Common Stock held
by non-affiliates of the Registrant was $2,378,837.

As of June 30,  1998,  there were  13,495,960  shares of Common Stock issued and
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None.

Transitional Small Business Disclosure Format (check one):  Yes        No X
                                                                ---      ---


<PAGE>



                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

THE COMPANY

     Safe  Alternatives   Corporation  of  America,  Inc.  (the  "Company")  was
organized  in 1976,  under  the name  Knight  Airlines,  Inc.,  to engage in the
commuter airline business.  In October,  1978, the Company engaged in an initial
public  offering of its Common Stock in Florida,  pursuant to an exemption  from
registration under Regulation A promulgated under the Securities Act of 1933, as
amended (the  "Securities  Act"). To the Company's best knowledge,  there was no
market for trading of the Common  Stock  until the  Company's  Common  Stock was
included for trading on the NASD's Electronic Bulletin Board in March, 1997. The
Company operated as a commuter airline from its inception  through April,  1983,
when it ceased  operations  and all of the  assets of the  Company  were sold to
satisfy all outstanding indebtedness. From April, 1983, through September, 1995,
the Company was dormant.  In May,  1994,  the name of the Company was changed to
Portsmouth Corporation.

     On September 15, 1995, pursuant to the terms of an Asset Purchase Agreement
and Plan of Reorganization dated as of August 21, 1995 (the "Agreement") between
Safe  Alternatives   Corporation  of  America,   Inc.,  a  Delaware  corporation
("SAC-Delaware")  and the  Company,  the Company  purchased  the  business  (the
"Business"),  including,  without limitation, all of the assets of SAC-Delaware,
and assumed all of the liabilities of SAC-Delaware (the  "Reorganization"),  and
commenced   operations   under  its  present   business   plan.   Prior  to  the
Reorganization,  the Company had no meaningful operations. On March 4, 1996, the
Company changed its name to Safe  Alternatives  Corporation of America,  Inc. (a
Florida corporation).

     In connection with the  Reorganization,  SAC-Delaware  was liquidated,  and
SAC-Delaware  distributed  to each  stockholder  0.2736  shares of the Company's
Common Stock for each share of SAC-Delaware that was owned. Consequently, all of
the share and per-share figures included herein reflect the Reorganization.  The
Agreement provided for the Company's purchase of all of SAC-Delaware's assets in
consideration   for,   among  other  things,   (i)  the  assumption  of  all  of
SAC-Delaware's  liabilities,  (ii) the issuance and delivery to  SAC-Delaware of
8,000,000 shares of the Common Stock, representing approximately 94% of the then
issued and outstanding shares of Common Stock as of the date of the Closing; and
(iii) a six percent royalty (the "Royalty") on the gross revenues of the Company
attributable to the assets acquired by the Company  pursuant to the terms of the
Agreement, payable on a pro rata basis to the stockholders of SAC-Delaware.  The
Royalty is payable on a  quarterly  basis  during the sixty  months  immediately
following the closing of the  Reorganization,  and the  cumulative  total of all
Royalty  payments is limited to a maximum of  $8,500,000.  The Royalty  does not
apply to any revenues  generated by the sale of the  Company's  paint  stripping
product, AmeriStrip(TM), or its NaturalCool(TM) product, which technologies were
acquired after the  Reorganization.  The Company does not anticipate  paying any
royalties as described  above, as the Company's  current and  anticipated  sales
efforts are focused on products not subject to the Royalty.

     Since the  Reorganization,  the  Company has changed its focus from being a
"public shell,"  without assets or a business,  to a company  concentrating  its
resources on the research,  development  and commercial  exploitation of certain
technologies (the "Technologies") which it either owns,  exclusively licenses or
licenses  non-exclusively,  or in which it has exclusive  marketing rights.  See
"Technologies."  The products which the Company has developed  and/or intends to
develop,  as the  case  may be,  from  the  Technologies  are  primarily  in the
following areas:

     1. AmeriStrip(TM) - Paint Stripping Chemicals  (world-wide  license).  This
product is currently being marketed and sold in limited sample  quantities.  The
Company's paint stripping  product is used to remove lead-based  paints,  latex,
alkyd, varnish, polyurethane, and epoxy resin coatings from structural

<PAGE>


metal, cement, fiberglass, wood, mica and plaster. The Company's paint stripping
product is applied using an airless spray gun, paint brush or spatula.  For most
applications,  the Company believes, based on its research and in-house testing,
that the stripper will remove substantially all of the paint,  exposing the bare
surface  within a 24-hour  period.  The  Company's  line of paint  strippers  is
biodegradable,  water washable,  non-caustic,  and methylene chloride-free.  See
"Technologies."

     2. Water-Based  Foams for Insulation  Material  (continental  United States
license).  This product is in the final stages of development and the Company is
currently  evaluating the  appropriate  mechanism for application of the product
onto its intended surface.  Subject to the successful completion of its research
and the  ability of the  Company to obtain  additional  financing,  the  Company
expects, although there can be no assurances,  that it will begin to market this
product in 1998. See "Technologies."

     3. NaturalCool(TM) Systems - Ambient Air Exchanger (worldwide marketing and
manufacturing  rights). The NaturalCool system is a patented,  energy-saving air
circulation system,  designed to supplement existing  refrigeration  systems for
commercial refrigeration units such as walk-in and reach-in coolers. The systems
operate by taking in relatively cold ambient air from outside, filtering the air
to remove particulates, and introducing the cooler air into an operating cooler,
and  exhausting  mild air from within the cooler back out to the outdoors.  Each
system consists of a modular unit fabricated of  non-corrosive  stainless steel,
operates totally  independently of the cooler's  existing  compressor,  operates
without freon or other environmental pollutants, meets all applicable electrical
codes,  and  has  received  UL  (Underwriters'   Laboratories)   approval.   See
"Technologies."

     The marks, NaturalCool(TM) and AmeriStrip(TM),  are trademarks owned by the
Company.

     Although the Company is currently  actively  marketing its  paint-stripping
product,  only nominal  revenues have been generated from the sale of samples to
date.  The  Company  is not  currently  marketing  any of  its  products  except
NaturalCool and AmeriStrip. The Company's timetable for research and development
of new products and other forward-looking  statements contained herein include a
number of risks and uncertainties,  and consequently, the Company cannot provide
any assurances with respect  thereto.  These statements are only predictions and
actual events or results may differ materially as a result of factors beyond the
Company's  control.  The time frames which the Company has indicated  above with
respect to the dates when such  products,  if any,  may be brought to market are
based  upon  management's  best  reasonable   estimates  given  the  information
available to them.  In part,  the time  estimates  are based upon the review and
analysis of the products (e.g., the foam product) by certain customers that have
sampled such product and provided the Company with their analyses.

     In  November  and  December,  1996,  the Company  entered  into a series of
agreements with SSC Marketing, Inc. ("SSC"), a California-based  marketing firm,
for the purpose of outsourcing  the Company's sales and marketing  efforts.  See
"Marketing  Agreement."  SSC  represented to the Company that it had substantial
experience   in  sales  and   marketing   of   similar   products.   Based  upon
representations  of SSC, the Company  believed that  products  which the Company
would develop from the  Technologies  could be brought to market in a relatively
short time frame by SSC.  Through  December 31,  1997,  however,  SSC's  efforts
produced  only  nominal  sales  of  products.  The  Company  terminated  the SSC
agreements,  and has brought in-house all of its sales and marketing efforts. On
May 29,  1998,  SSC filed an action  against  the  Company,  and the Company has
responded  to this suit and brought  counterclaims  against  SSC.  See "Item 3 -
Legal Proceedings."

     Certain of the Technologies are unpatented proprietary  technologies and in
certain cases, because (i) the Company's financial resources are insufficient to
adequately protect and/or prosecute such patents,  and (ii) the Company believes
that  information  which may become  available to competitors  during the patent
process  could put the  Company's  products  at  competitive  risk,  neither the
inventor nor the Company believes that seeking patent protection is prudent. The
Company does not currently  manufacture its paint stripping product. In the case
of the paint stripping product, the Company contracts


<PAGE>


with private blenders to manufacture it. In the case of NaturalCool, the Company
manufactures the units at its Newport,  Vermont facility. The Company intends to
contract with outside  manufacturers  to  manufacture  any  additional  products
derived  from the  Technologies,  as they are  brought to market.  Although  the
Company has identified certain companies that it would consider engaging for the
purpose  of  manufacturing  some of the  Company's  intended  products,  no such
agreements have been entered into.

     As of  December  31,  1997,  the  Company  did not  possess  the  financial
resources to operate its business,  continue  research and development or market
its  products.  The Company was at that time seeking  additional  capital from a
variety  of  potential  sources.  Since that time,  the  Company  has relied for
working  capital  upon the  proceeds  of loans  from  shareholders  and upon the
proceeds of a private  placement of convertible notes consummated in April 1998.
See "Item 5. Market For Common Equity And Related  Stockholder  Matters - Recent
Sales Of Unregistered Securities."

     The  Company  has  and  continues  to  provide  information  regarding  its
Technologies  to  venture  capital  firms and other  funding  sources  and is in
discussions with some of them, although there can be no assurances that any such
discussions will result in the Company obtaining any additional capital. Even if
the Company is able to obtain additional capital there can be no assurances that
the structure or terms of such proposed  financing will be on acceptable  terms.
See "Item 6. Management's Discussion and Analysis or Plan of Operation."

     The  Company's  principal  executive  offices  are  located at 27  Governor
Street, Ridgefield, CT 06877, and its telephone number is (203) 438-8144.

RESEARCH AND DEVELOPMENT

     During the years  ended  December  31,  1997 and 1996,  the  Company  spent
approximately  $265,000  and  $275,000,  respectively,  in  connection  with its
research and development efforts. The Company has not completed its research and
development on any potential  products,  other than the paint stripping product,
derived from the  Technologies,  and therefore,  there can be no assurances that
such potential products will be developed or that they will perform as intended.
Management  believes that the next marketable  product to follow NaturalCool and
AmeriStrip  will be a fire retardant  foam  insulation  product.  During the two
years ended December 31, 1997,  approximately  $500,000,  in the aggregate,  has
been devoted to research and  development  with respect to the foam  technology.
The Company is in the final stages of its research and development  with respect
to the foam product, and is currently  evaluating the appropriate  mechanism for
delivery of the product onto its  intended  surface.  Subject to the  successful
completion  of its research and the ability of the Company to obtain  additional
financing,  management  believes,  although  there  can be no  assurances,  that
sometime in 1998 the Company will be in a position to bring the  Company's  foam
product to market.  The Company  believes  that this  product  will be ready for
market in this time frame, based in part upon the test results which it has been
achieving  in its  laboratory  but also from the  positive  response it has been
receiving  from certain  customers  which have been  requested to analyze it for
themselves.  The  Company  continues  to conduct  research  with  respect to the
Technologies in order to develop marketable products. There can be no assurances
however,  that the Company's research and development efforts will result in any
commercially viable products.

     All of the Company's  research and development  efforts have been conducted
at the Company's  laboratory facility in Brookfield,  Connecticut.  See "Item 2.
Properties."  In February,  1998,  the Company  closed its research  facility in
Brookfield,  CT. The closing of the facility may have a material  adverse effect
on the Company's  ability to perform  research and development on products other
than the paint stripper, NaturalCool and the foams. The Company is investigating
alternative research and development arrangements.


<PAGE>


TECHNOLOGIES

     NATURALCOOL

     In  February,  1997,  the Company  entered  into a License  Agreement  with
Natural Cool, Inc.,  providing the Company exclusive  worldwide marketing rights
for  NaturalCool(TM)  Air  Circulation  Systems.  The  NaturalCool  system  is a
patented,  energy-saving air circulation system, designed to supplement existing
refrigeration  systems for  commercial  refrigeration  units such as walk-in and
reach-in  coolers.  The systems operate by taking in relatively cold ambient air
from outside,  filtering the air to remove  particulates,  and  introducing  the
cooler air into an operating  cooler,  and  exhausting  mild air from within the
cooler  back  out to the  outdoors.  Each  system  consists  of a  modular  unit
fabricated of non-corrosive  stainless steel,  operates totally independently of
the cooler's existing compressor,  operates without freon or other environmental
pollutants,   meets  all  applicable  electrical  codes,  and  has  received  UL
(Underwriters'  Laboratories)  approval.  The Company  believes  that in certain
climates in the northern part of the United States,  the NaturalCool  system can
save the user up to 50% on its energy costs  associated  with operating  walk-in
and reach-in coolers.  NaturalCool  units are marketed  primarily to convenience
and liquor stores, grocery chains, florists and the walk-in cooler industry. The
Company  believes the systems not only reduce power  consumption,  but also will
prolong the life of existing compressors.

     In  November,  1997,  the  Company  announced  that  it had  discovered  an
overstatement of income relating to its Natural Cool Division promptly following
the  termination  for cause of Mr.  Clement  Royer,  formerly  President  of the
Company's Natural Cool Division.  Following Mr. Royer's termination, the Company
was able to secure  the  marketing  and  manufacturing  rights  for  NaturalCool
directly from the original inventors and patent holders of NaturalCool. Prior to
this new  arrangement,  the Company  possessed only the marketing  rights to the
products  through  Mr.  Royer.  The  Company's  Board of  Directors  appointed a
committee to investigate Mr. Royer's  activities,  and put into place additional
internal  controls to decrease the  likelihood  that this type of activity  will
occur in the future.  The Company also brought a legal action against Mr. Royer,
which has been settled. See "Item 3. Legal Proceedings."

     PAINT STRIPPING CHEMICALS - AMERISTRIP

     The Company has obtained worldwide  marketing rights to a proprietary paint
stripping compound. The proprietary compound is not patented but is protected by
trade secrets. Based upon the Company's research, in-house testing, and customer
feed-back,  the Company  believes  its paint  stripping  product is effective in
removing lead-based paints, latex, alkyd, varnish, polyurethane, and epoxy resin
coatings from structural metal, cement, fiberglass,  wood, mica and plaster. The
Company's paint  stripping  product is applied using an airless spray gun, paint
brush or spatula.  For most  applications,  the Company  believes,  based on its
research, in-house testing and customer feed-back, that the stripper will remove
substantially  all of the  paint,  exposing  the bare  surface  within a 24-hour
period.  The Company's  paint  stripping  product line is  biodegradable,  water
washable, non-caustic, and methylene chloride free. The product has been sold to
contractors  for the New York  City  Housing  Authority,  to the New  York  Port
Authority, to Sherwin Williams retail stores, and to contractors working for the
school  construction  authority  in New York City to remove  lead paint from the
City's  public  schools,  as well as to other  customers.  The  Company's  sales
efforts to place its paint stripping  product with contractors using the product
to de-lead New York City public  schools  accounts  for more than fifty  percent
(50%) of the Company's 1997 revenues. The Company believes that the sales effort
of the Company has been severely  curtailed by the insufficient  working capital
position of the Company.

     FOAM

     The Company has a license to commercially  exploit the foam Technologies in
the continental United States.  Additionally,  the Company has developed its own
foam formulation  which the Company  believes is patentable,  although no patent
has been applied for at present. The licensed foam Technologies


<PAGE>


are protected by a patent,  which patent is valid through  December 4, 1999. The
Company believes that with its foam  technologies it will be able to manufacture
or have  manufactured  foam insulation  products for the  construction  industry
containing no chlorofluorocarbons ("CFCs").  Additionally, the foam technologies
are  water-based,  unlike most foam  products  currently  on the  market.  As of
January 1, 1996, federal law prohibits the sale of products  containing CFCs due
to their damaging effect on the earth's ozone layer. The Company is in the final
stages of its research and  development  with respect to the foam products.  The
only remaining research for the Company's own proprietary foam product, which is
currently  being  conducted,  concerns  testing and evaluating  the  appropriate
mechanism  for  delivery  of the product  onto its  intended  surface.  The foam
products will be water-based,  and therefore,  management believes,  comply with
the  government's  mandate.  Management  also expects these  products to be less
expensive to produce than  comparable  products  containing  CFCs or HCFCs.  The
Company  bases  this  belief on the fact that the major  ingredient  in its foam
product  is corn  syrup  rather  than  petroleum  products,  which are the major
ingredients  for  many of its  competitors'  products.  Because  corn  syrup  is
substantially less expensive than petroleum products, the Company's foam product
should,  upon  achieving  economies of scale in the  manufacturing  process,  be
cheaper to produce than many comparable products.  The Company believes that its
foam products will conform to substantially  the same  performance  standards as
other foam products.  In addition to its  application as an insulation  product,
the Company believes,  based on its independent tests, that the foam may be sold
as either Class I or Class II flame  retardant  foam. The Company's foam product
is in the final stages of  development.  Assuming that the Company  successfully
completes its research with respect to the foam  technology,  and subject to the
Company's ability to obtain additional financing, the Company expects,  although
there can be no  assurances,  that it will begin to market  this  product in the
fourth quarter of 1998.

PROPRIETARY RIGHTS

     Some of the Technologies  which the Company has licensed are protected by a
patent or have a patent pending.  Most of the Technologies involve trade secrets
that are considered proprietary to the respective licensors of the Technologies.
The Company takes all reasonable measures to protect the Technologies, including
the timely update of patent related innovations to the respective processes.

LICENSES

     NATURALCOOL

     In February,  1997, the Company  sublicensed  from Mr. Clement Royer,  on a
worldwide basis, the right to market the NaturalCool system products,  Mr. Royer
having previously  received a license to market such products from Natural Cool,
Inc., a Vermont corporation.  Natural Cool, Inc. holds a master license from the
inventors  to market and  manufacture  the  NaturalCool  products on a worldwide
basis.  In May,  1998,  following the Company's  termination  of Mr. Royer,  the
Company  obtained a license to market and  manufacture  products  covered by the
NaturalCool  patent  directly  from the  inventors  and  holders of the  patent.
Subsequent to the  termination  of Royer,  and prior to May,  1998,  the license
required  the  Company  to pay a  royalty  of $200 per  unit,  as each  unit was
manufactured,  and the Company was obligated to  manufacture  at least 500 units
per year. A payment of $20,000 was made to the licensor to initiate the license.
In May, 1998, the Company purchased the NaturalCool name,  inventory and related
assets,  and entered  into a new  license on the  technology  directly  with the
inventors.  Under the new license the Company is  obligated  to pay a royalty of
$100 for each  NaturalCool  unit sold,  subject to a minimum  annual  payment of
$30,000, to be applied against royalties. The minimum royalty of $30,000 for the
period May, 1998 through April 30, 1999 has been prepaid by the Company.

     The  following is a summary of certain of the Company's  material  licenses
with Mrs.  Kathleen  Kennedy,  the  successor-in-interest  to the  estate of Mr.
Richard B.  Kennedy.  Each such  license  has  substantially  the same terms and
conditions  and each is valid until April 17, 2050,  unless the Company fails to
pay a  royalty  of four  percent  (4%)  of the  gross  sales  derived  from  the
exploitation of the

<PAGE>



respective   Technology,   with  certain  limitations  for  sales  derived  from
inter-company transfers or transactions with subsidiaries.  The Company has also
agreed to pay all maintenance  fees and fees for filing and  prosecuting  patent
applications  pending at the time the licenses were  executed.  All rights under
the licenses are freely assignable by the Company.  The licenses were amended on
August 23, 1993 to collectively  provide for a required  minimum monthly payment
of $5,000,  in the  aggregate,  and a required  weekly payment of $1,200 to Mrs.
Kathleen  Kennedy during her lifetime in lieu of progressive  sales minimums due
beginning in 1993. The royalty  payments  described above  nonetheless  survive.
Failure by the Company to pay the minimum  weekly and/or  monthly  payments when
due may  result in the loss of  exclusivity  of such  licenses.  Failure  to pay
royalties due under any license may result in the termination of the exclusivity
of such license.  Currently,  the Company is out of compliance  with the minimum
payment provisions and has a non-exclusive  license. Mrs. Kennedy has threatened
legal action to obtain minimum  payments which were not made. See "Item 3. Legal
Proceedings."  The Company  believes that should such a suit be brought it would
not have a material  effect on the  operations  or  financial  condition  of the
Company.

     PAINT STRIPPING

     The Company's  paint  stripping  products are  proprietary  in nature.  The
Company has developed a paint stripping compound which it believes better serves
its  purposes  than  the  product  which  it  had   previously   been  supplied.
Consequently, the Company does not intend to avail itself of that certain supply
agreement with Samax Enterprises, Inc., due also to product inconsistencies. The
paint stripping products are not patented,  but are covered by trade secrets. It
has been  determined by the Company and the  manufacturer  that it is preferable
not to seek patent  protection,  but rather to protect this  Technology  through
trade secrets.  The compound has been sold,  primarily in sample quantities,  to
contractors  for the New York  City  Housing  Authority,  to the New  York  Port
Authority,  to Sherwin Williams retail stores, and to other customers.  In 1997,
the majority of the Company's  sales of this product were to  contractors in the
lead abatement  field. The Company believes that the sales effort of the Company
has been severely  limited by the  insufficient  working capital position of the
Company.

     FOAMS

     The Company entered into a license agreement,  dated December 9, 1992, with
Richard B. Kennedy (Mr. Kennedy has since deceased and his wife has succeeded in
interest),  Richard J. Fricke and Patrick J. Crehan (collectively,  "Licensor"),
whereby the  Licensor  granted the Company:  (i) an  exclusive  right to exploit
within the continental United States certain  inventions,  technology,  know-how
and patent rights  relating to fire  retardant  urethane foam with reduced smoke
toxicity,  and  improvements  thereto,  excluding those  applications  which are
utilized in the  packaging  foam  industry and (ii) the joint  patent  rights to
manufacture,  use, sell and sublicense the Technology.  Mr. Fricke has renounced
any and all of his interest in the license.  For a more detailed  description of
the financial terms of the license, see above.

MARKETING AND SALES

     MARKETING AGREEMENT

     In 1996 and 1997, the Company  believed that its marketing  resources would
most  effectively  be deployed by  contracting  an outside  vendor to market its
products.  Consequently, as of November 1, 1996, the Company replaced all of its
in-house  sales force,  consisting of five  salesmen and three  representatives,
with  an  outside  vendor,  SSC.  SSC  represented  to the  Company  that it had
experience  selling  similar  products on a national  basis.  SSC was to develop
sales in governmental markets and in the private sector.

     The Company  entered into two agreements  with SSC: a consulting  agreement
(the  "Consulting  Agreement")  dated as of  November  1,  1996,  and a customer
service agreement (the "Service Agreement") dated as of December 15, 1996. Under
the terms of the Consulting Agreement, SSC was to provide the


<PAGE>


Company  with a  comprehensive  sales and  marketing  program for the  Company's
products,  including  hiring sales  representatives,  developing sales contacts,
marketing plans,  advertising  campaigns,  customer service programs,  and sales
accounting and reporting systems.  Under the Consulting  Agreement,  the Company
was to pay SSC a flat fee of $8,000 per month,  an additional  fee of $4,000 for
each sales  manager  engaged by SSC to service  the  Company's  account,  with a
minimum of three such sales managers to be so engaged, plus approved expenses of
SSC and its sales  managers.  In  addition,  in the event the  Company's  annual
revenues would exceed  $2,600,000,  the Company would have been obligated to pay
each  sales  manager  a 2%  commission  on  gross  revenues  generated  in their
respective  territories,  and, in the event the Company's annual revenues exceed
$2,800,000,  the Company would have been obligated to pay SSC a 5.5%  commission
on the Company's gross revenues, with the $8,000 monthly payments to be credited
against the payment of such commissions.

     Under the terms of the  Service  Agreement,  SSC was to provide the Company
with order entry, billing,  order tracking,  sales forecasting and planning, and
information  processing services.  The agreement provides for the Company to pay
SSC an additional  $5,000 per month for such services,  provided that, if at any
time the volume of the  Company's  business  exceeds SSC's ability to adequately
perform such services,  the parties shall agree upon an increased fee. A failure
to so agree would result in termination of the Service Agreement. At the time it
entered  into such  agreements,  based upon the  Company's  experience  with its
in-house  sales  team,  and based  further  upon the  contacts,  reputation  and
experience of SSC,  management  believed that  contracting for its marketing and
sales needs would provide the Company with a greater  opportunity  to market its
products to more customers in less time.

     Through December 31, 1997,  SSC's efforts produced  aggregate sales of less
than $100 worth of products. The Company has terminated the SSC agreements,  and
has brought  in-house all of its sales and marketing  efforts.  On May 29, 1998,
SSC filed an action against the Company. See "Item 3. Legal Proceedings."

     The Company no longer  out-sources  its sales and marketing  functions.  In
April, 1998, the Company hired Mr. Robert Berger to lead its sales and marketing
efforts and an additional salesperson to assist in such functions.

     PAINT STRIPPING CHEMICALS - AMERISTRIP

     The   Company  is   focusing   its  sales  and   marketing   efforts  on  a
product-by-product basis, with its paint stripping product having been the first
product  to be  offered  in  the  marketplace.  Prior  to the  severance  of the
relationship  between  the  Company  and SSC,  SSC was to have been  seeking  to
develop sales in governmental  markets and in the private sector.  In connection
with  such  efforts,  the  Company  and SSC were  contacting  major  chains  and
providing them with literature, samples and demonstrations.

     The  Company  has placed  advertisements  in several  magazines,  including
magazines  intended for  commercial  contractors  as well as the  do-it-yourself
market.  The Company is in the process of establishing a direct sales unit where
orders will be taken by a telephone representative of the Company and shipped to
the  end-user.  The  Company is also  offering  its  products  for sale over the
Internet at its site, www.ameristrip.com.

     NATURALCOOL

     The Company's  in-house sales staff is targeting a number of industries for
marketing  of the  NaturalCool  products,  focusing  initially  primarily on the
convenience  store  market.  The  Company  has  established  relationships  with
refrigeration  distributors  and suppliers,  but has not entered into any formal
distribution agreements, and with restaurant equipment suppliers. In some cases,
the  suppliers  purchase  units from the Company  and  install  them in a new or
renovated  restaurant  facility.  In these cases, the Company does not occur the
installation expenses associated with sales directly to the end-user.


<PAGE>



     The Company also markets these products directly to the end-user  customers
through  advertising  and trade  association  membership  marketing.  Also,  the
Company has begun using utility company rebate programs as a means of generating
sales.  Under these programs,  certain utility  companies offer rebates to their
customers for installing  energy-saving  equipment.  Even where the utilities do
not  offer  rebates,   in  some  cases  the  utility  companies  will  recommend
energy-saving  equipment to their  customers.  The Company is also  offering the
NaturalCool products for sale over the Internet.

     FOAMS

     Since the Company is still  experimenting  with and conducting  research on
the foam  technologies,  the Company does not actively market its foam products.
The Company  intends to begin  marketing  its foam products in 1998 to companies
involved in the construction industry and through distributors.

     OTHER TECHNOLOGIES

     Until   the   other   Technologies   have   been   fully   researched   and
commercializable  products have been  developed,  the Company will not establish
marketing  strategies for the sale of these  potential  products.  Additionally,
management  continues  to seek to  acquire  other  technologies  for  commercial
exploitation.  The  potential  acquisitions  may be  structured as either direct
purchases or purchases of holding  companies owning the  technologies.  Although
the Company is engaged in many discussions to acquire technologies, there can be
no  assurances  that the Company will be able to do so or to do so on acceptable
terms.

SUPPLY ARRANGEMENTS

     NaturalCool.  All of the raw materials for manufacturing these products are
off-the-shelf and readily available to the Company from numerous suppliers.  The
Company does not anticipate any difficulty obtaining raw materials in quantities
and at  prices  acceptable  to the  Company.  The  units  are  assembled  at the
Company's Newport, VT facility.

     Paint  Stripping.  The  Company  uses  its own  formulation  for its  paint
stripper.  The Company purchases the raw material used in the formulation from a
number of suppliers.  The Company believes that there will be no shortage of raw
materials.  The Company uses  contract  blenders to blend the  formulation.  The
Company  believes  that there  exist  sufficient  contract  blenders  capable of
handling the Company's requirements.

     Foam. The foam products  require large amounts of MDI, the base chemical of
which is manufactured and distributed by several large companies, including BASF
and W.R. Grace & Co. The Company does not anticipate any difficulties  obtaining
the necessary amounts of MDI or production  equipment,  although there can be no
assurances thereof.

COMPETITION

     There are many other  companies that offer similar or competitive  products
to the products  either  developed  or under  development  by the  Company.  The
industries  in which the Company  markets and intends to market its products are
characterized  by  substantial  and  intense  competition.  Almost  all  of  the
companies offering similar or competitive  products,  both domestic and foreign,
are substantially larger and have substantially greater resources,  distribution
capabilities and experience than the Company.  It is also likely that there will
be other  competitors  in the future.  The following is a list of certain of the
companies  with  which the  Company  competes  or will be  competing:  (1) Paint
Stripping Chemicals - Peel-A-Way Corp., Minnesota Mining and Manufacturing,  and
Back to Nature;  (2) Foams - Sealed Air  Corporation,  and Carpenter  Foam;  (3)
NaturalCool - Cool Breeze as well as several localized companies.


<PAGE>



     Under the terms of the Company's Supply Agreement,  the manufacturer of the
Company's  paint  stripping  product  reserved for itself the right to engage in
direct sales of the paint stripping product. The Company's supplier,  therefore,
may compete  directly with the Company in sales of the paint  stripping  product
under different product labels. See "Licenses - Paint Stripping"

     The  Company's  objective is to develop  environmentally-friendly  products
which will  compete  with the existing  paint  stripping,  foams and ambient air
exchange technologies available that are produced by competitors of the Company.
The  Company  cannot  provide  any  assurances  that the  Company  will  develop
competitive  products,  that a market for such products  (assuming that they are
developed) will develop,  that the Company will be able to develop  marketing or
distribution  channels,  or that competitors  having greater financial and other
resources  will not, or have not,  devoted  those  resources to the research and
development  of new or existing  products  which will compete with the Company's
products.  There can be no assurance that the Company will  effectively  compete
against any competitor.

GOVERNMENT REGULATIONS

     The manufacture and sale of paint stripping  chemicals,  carbohydrate  foam
and ambient air exchanger equipment are subject, to varying degrees, to federal,
state and local regulation. The predominance of the regulatory burden however is
imposed upon the manufacturer,  such as the inventor/supplier,  of the Company's
paint  stripping  product  and not the  Company.  The  Company  must comply with
federal labeling  requirements for the Company's paint stripping product,  which
require a description of the various  chemicals  included in the product and the
hazards attendant to the use thereof.  The foam, for construction  purposes,  is
regulated by state and local building codes. Failure to properly comply with all
regulations  applicable  to the Company's  products  could result in the Company
incurring  substantial  costs in order to comply or cessation of  manufacture of
the  offending  products  and the  possible  imposition  of civil  and  criminal
penalties.

INTELLECTUAL PROPERTY

     The  Company's  business  is  dependent  upon its  ability to  commercially
exploit certain patented and unpatented  proprietary  technologies which it owns
or has licensed  from third  parties.  The ability of the Company to exploit the
Technologies depends on many circumstances beyond its control. No assurances can
be given that the Company will be able to commercially exploit such intellectual
property rights and develop marketable products. The inability of the Company to
satisfy  the  terms and  conditions  of the  licenses  with the  holders  of the
proprietary  Technology  rights  could have a materially  adverse  effect on the
Company.  Under the revised terms of the various license agreements  relating to
the foam,  the Company is obligated to make minimum  monthly  payments of $5,000
and minimum weekly payments of $1,200,  in the aggregate,  to the licensor.  The
failure by the  Company to make such  minimum  weekly and monthly  payments  may
result in the licenses becoming  non-exclusive to the Company; and, in fact, the
Company  currently  is in default  under the  license and is  operating  under a
non-exclusive  license.  The failure of the Company to make royalty payments due
under any  license may result in  termination  of such  license.  Certain of the
Technologies  are  unpatented  proprietary  technologies  and in certain  cases,
because (i) the Company's  financial  resources are  insufficient  to adequately
protect  and/or  prosecute  such  patents,  and (ii) the Company  believes  that
information which may become available to competitors  during the patent process
could put the Company's  products at competitive risk,  neither the inventor nor
the Company believes that seeking patent protection is prudent.

EMPLOYEES

     As of December 31, 1997, the Company had seven  employees,  including three
officers.  As of such date,  the  Company had also  engaged the  services of two
consultants, in addition to its then-existing

<PAGE>



marketing arrangements with SSC which have since been terminated. See "Marketing
and Sales - Marketing Agreement."

     None of the Company's  employees is represented by a labor organization and
the Company  considers its  relationship  with  employees and  consultants to be
satisfactory.

ITEM 2.  PROPERTIES

     The Company does not own any real property.

     The Company  formerly leased 12,000 square feet in a building located at 91
Commerce  Drive  in  Brookfield,   Connecticut  (the  "Brookfield  Lease").  The
Brookfield  Lease was  executed  by and  between  a trustee  acting on behalf of
Brookfield Commerce, a Connecticut  partnership,  as lessor, and the Company, as
lessee,  on February 22, 1993.  The Company used this  facility for research and
development of products,  marketing meetings and shipment of chemicals. The term
of the lease is for five years, commencing March 1, 1993 and ending February 28,
1998. The Company had the option to renew the lease for an additional  five-year
period,  but elected not to renew the lease. The base rent on an annual basis is
$55,350 for the period through August 31, 1993,  $73,800 the next twelve months,
$76,752 for the twelve months thereafter, $79,822 for the next twelve months and
$83,015 until the lease expires or is renewed. The lease was not renewed.

     The Company's  corporate  headquarters are located in  approximately  6,000
square feet of space leased by the Company in a building  located at 27 Governor
Street,  Ridgefield,  Connecticut (the "Ridgefield Lease"). The Ridgefield Lease
was  executed  by and  between a trustee  acting on behalf of the  Joseph H. and
Ellen Ann Donnelly Trust, as lessor,  and the Company,  as lessee,  on September
30,  1992.  The term of the  Ridgefield  Lease is for  three  years,  commencing
October 1, 1995 and ending  September 30, 1998. The base rent on an annual basis
is $40,517 for the first  twelve  months,  $42,543  the next  twelve  months and
$44,500 for the twelve months thereafter until the lease expires or is renewed.

     The  Company  leases,  on a month to month  basis,  property at Denby Road,
Newport,  Vermont.  The property contains  approximately 12,000 square feet. The
Company  currently  pays rent of $3,000 per  month,  but the rent  increases  to
$4,000 per month  effective  September  15,  1998,  at which time an  additional
rental payment of $6,000 is also due.

     The Company  believes  its  facilities  are  suitable  and adequate for its
existing  operations  and those  reasonably  expected in the next twelve months.
With the exception of the NaturalCool  units which are  manufactured in Newport,
VT, and the  fulfillment  of Internet  sales and samples which is carried out in
Newport,  VT, the Company's  facilities are not suitable for  manufacturing  and
distributing products in significant quantities.  Therefore, the Company intends
to rely on  outside  manufacturers  to  manufacture  its  products  as they  are
developed and marketed.  The Company  currently does not possess the capacity to
manufacture  any of its products in anything  more than sample  quantities  in a
laboratory facility. Although the Company has identified certain companies which
it  would  consider  engaging  for  the  purpose  of  manufacturing  some of the
Company's  intended  products,  no such  agreements have been entered into as of
this date.  The AmeriStrip  product is being  manufactured  on a  batch-by-batch
basis.

ITEM 3.  LEGAL PROCEEDINGS

     On May 29, 1998,  SSC filed an action  against the Company in federal court
in the Southern  District of New York. By  agreement,  the suit was moved to the
District of Connecticut.  The complaint contains four counts,  each requesting a
judgment for $180,880 plus interest and attorney's fees. The suit alleges breach
of contract,  misrepresentation by the Company,  unjust enrichment,  and quantum
meruit. The Company does not believe SSC is entitled to any of the damages it is
seeking,  has brought  various  counterclaims  against  SSC in the  action,  and
intends to defend itself vigorously. At the present time, the


<PAGE>



Company cannot determine the likely outcome of this matter; however, if SSC were
to  prevail  on  its  claims,  and  the  Company  were  not  to  prevail  on its
counterclaims,  the matter could have a material  adverse  effect on the Company
and its financial condition.

     The Company  commenced  an action  against Mr.  Clement  Royer,  the former
president of the Company's Natural Cool Division,  in November,  1997, which was
settled in June 1998. The complaint sought the return of corporate records, test
data and the like, as well as  compensatory  damages and  attorney's  fees.  The
terms of the settlement  involved Mr. Royer's returning all corporate  documents
and disclaiming any rights to the NaturalCool product.

     An action  brought  against the Company in July,  1997, in U.S.  Bankruptcy
Court  for the  District  of  Connecticut,  by  Richard  Coan,  Trustee  for the
bankruptcy estate of Samuel E. Bernstein,  is pending. The suit seeks a judgment
to recover  accrued but unpaid wages totaling  approximately  $100,000 for 1995,
which Mr. Bernstein had waived his right to receive.  The Trustee seeks to avoid
the waiver under the  Bankruptcy  Code and recover the value of the waiver.  The
Company is defending itself in the matter, and cannot predict the outcome of the
matter or whether a settlement will be reached.  However,  the Company  believes
that if the Trustee is successful  in obtaining a judgment  against the Company,
it should not be required  to pay more than the total debt owed to the  debtor's
creditors,  plus related fees,  which the Company  believes to be  approximately
$26,000.  The Company's  financial  statements for the year ending  December 31,
1997 include a provision for loss of $26,000 to reflect this matter.

     Ms. Kathleen Kennedy,  the licensor under certain technology  licenses with
the Company,  has  threatened an action  against the Company,  claiming past due
minimum royalty payments of approximately $145,000. The Company believes that if
an action is brought,  the Company has a meritorious defense and the matter will
not have a material adverse effect on the Company or its financial condition.

     In July,  1998, the investor  group that has loaned working  capital to the
Company and holds the Company's  promissory note in the principal amount of $1.3
million - which group includes  Messrs.  Sean  McNamara,  Nicky Hunt and Richard
Hill,  directors of the Company - commenced  legal action against certain former
officers,  employees and consultants of the Company,  including Messrs.  Stephen
Thompson, Robert Thompson,  Clement Royer and Paul Grillo. The action, initiated
in Superior  Court for the Judicial  District of  Stamford/Norwalk  at Stamford,
seeks  compensatory  damages  of  not  less  than  $685,000,  attachment  on the
defendants'  property to secure a judgment,  and punitive  damages.  Pursuant to
Connecticut  procedures,  the matter first seeks a  pre-judgment  attachment  of
defendants'  property.  The causes of action stated in the complaint to be filed
are fraud and violation of state  securities law. The Company is not currently a
party to this matter, and at the present time the Company is unable to determine
if the  Company  will  become a party  with  interests  adverse  to those of the
directors who are plaintiffs.

     Other than as set forth herein,  there are no legal actions pending against
the  Company  nor to the  knowledge  of the  Company  are any  such  proceedings
contemplated.

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 ending December 31, 1997.

<PAGE>


                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET PRICE OF COMMON STOCK

     On March 6, 1997,  the  Company's  Common Stock was accepted for trading on
the  Electronic  Bulletin Board of the NASD;  however,  the Company has not been
able to obtain  any  quoted  prices for the stock  prior to June 24,  1997.  The
following table sets forth the range of sale prices for the Common Stock for the
periods shown. The information was obtained from the National  Quotation Bureau,
which reports low closing bid prices and high closing bid prices for the periods
indicated.

     There has not been an  active  market  for the  Company's  securities.  The
limited  market has caused the  securities  to be subject to  significant  price
fluctuations.  In addition,  the price quotations reflect  inter-dealer  prices,
without retail mark-up,  mark-down or commissions,  and may not represent actual
transactions.


        Quarterly Period                 Low Bid             High Bid
        ----------------                 -------             --------
        4/1/97 - 6/30/97*                 $.6875             $1.1875
        7/1/97 - 9/30/97                  $.34375            $2.00
       10/1/97 - 12/31/97                 $.125              $.59375
        1/1/98 - 3/31/98                  $.0625             $.1875
        4/1/98 - 6/30/98                  $.13               $.30

     * On March 6, 1997, the Company's  Common Stock was accepted for trading on
the  Electronic  Bulletin Board of the NASD;  however,  the Company has not been
able to obtain any quoted prices for the stock prior to June 24, 1997.


HOLDERS

     The Company had  approximately  1,648 holders of record of its Common Stock
as of June 30, 1998.

DIVIDEND POLICY

     It is the policy of the Board of Directors to retain earnings,  if any, for
use in the maintenance and expansion of the Company's business.  The Company has
not declared any cash dividends to the holders of its capital stock and does not
anticipate declaring or paying dividends in the foreseeable future.

RECENT SALES OF UNREGISTERED SECURITIES

     Since the  Reorganization,  through  December 31, 1997,  the Company issued
923,726  shares  of  Common  Stock to  approximately  202  individuals,  for the
aggregate consideration of approximately $1,650,000. The Company believes, based
upon  representation  letters  provided  to it from  such  investors,  that such
issuances were made to approximately 135 "accredited  investors" as such term is
defined under Rule 501of  Regulation D promulgated  under the Securities Act and
to approximately 67 non-accredited  investors.  The Company made such sales with
the intention of relying upon the  exemption  afforded by Rule 506 of Regulation
D;  however,  the  Company  has  never  filed a Form D with the  Securities  and
Exchange Commission,  nor has the Company complied with filing requirements,  if
any, of the states in which sales were made. In certain  instances,  the Company
paid  what it  believed  to be  finder's  fees  to  individuals  who  introduced
investors to the Company.

     During  1997 and the first half of 1998,  a group of  investors,  including
current  shareholders  and directors of the Company,  advanced  working  capital
loans and committed to make loans to the Company

<PAGE>



in the aggregate amount of approximately $1.3 million.  During the first quarter
of 1998,  in  consideration  for,  among other things,  not demanding  immediate
repayment of the loans,  the Company and the  investor  group agreed to exchange
all of such outstanding indebtedness for a promissory note (the "Investor Note")
and stock  options.  The Investor Note is in the aggregate  principal  amount of
$1.3 million,  and accrues interest at a rate of 8% per annum beginning  January
1, 1998. In connection with the Investor Note, the Company has issued options to
acquire  common stock as follows:  options to purchase 2.6 million  shares at an
exercise  price of $.01 per share,  1.95 million  shares at an exercise price of
$.25 per share,  and 1.95 million  shares at an exercise  price of $.50,  all of
which may be exercised at any time between June 30, 1999 and June 30, 2003,  the
expiration  date of the  options.  The  Investor  Note is  repayable as follows:
$433,333 in principal  amount is due and payable on or before September 9, 1998;
an additional  $433,333 in principal amount on or before January 9, 1999; and an
additional  $433,333 in principal amount on or before March 9, 1999. In addition
to any other  remedies they may have, if the Company fails to make the principal
payment on the  shareholder  loans on  September  9, 1998,  the Company  will be
obligated to issue to the lender options to acquire an additional  75,000 shares
of common stock, exercisable at a price of $.01 per share, for each 30 days that
the principal payments are in default.

     In March and April,  1998, the Company issued its 6% Convertible Notes (the
"Notes") in the aggregate  principal  amount of $711,500 in a private  placement
under Rule 505 of Regulation D. Interest on the Notes is payable  semi-annually.
The principal amount of the Notes, together with unpaid interest thereon, is due
and  payable,  if not  earlier  converted,  on  March 3,  1999.  The  Notes  are
convertible  into shares of Common Stock at the option of the holder at any time
following  the  earlier  of (i) 90  days  after  the  filing  of a  registration
statement  with the SEC covering the shares to be received  upon  conversion  or
(ii)  the date the SEC  declares  such  registration  statement  effective.  The
conversion  price per share is the lesser of (i) 70% of the average  closing bid
price  per  share  of  Common  Stock  for the  five  trading  days  prior to the
conversion date or (ii) $0.25. Upon conversion,  any accrued and unpaid interest
is waived by the holder. The Company has the option to repurchase the Notes from
the holder prior to  registration  of the underlying  shares at a premium of 10%
over the  purchase  price of the Notes.  The Company has agreed to file with the
SEC not later  than June 3,  1998,  and use its best  efforts  to have  declared
effective not later than July 3, 1998, a registration  statement registering for
resale the shares that would be issued upon conversion of the Notes. The Company
technically  is in default of the  registration  obligation at the present time,
but intends to file a  registration  statement  as promptly as  practicable.  As
compensation to the placement agent, Alexander,  Wescott & Co, Inc., the Company
paid cash fees of 10% of the gross proceeds. In addition,  the Company paid a 3%
nonaccountable expense  reimbursement,  and certain other out-of-pocket expenses
of the agent.  The Company  also issued to the agent  Warrants  exercisable  for
284,600 shares of Common Stock, at an exercise price of $.30 per share, expiring
June 28, 2003.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

GENERAL

     Since the  Reorganization,  management  of the Company has  concentrated  a
significant  portion of its efforts on the  marketing  and sale of the Company's
paint stripping product and NaturalCool products.  Additionally,  subject to the
Company's  successful  completion of its research with regard to evaluating  the
appropriate  mechanism  for  delivery  of the foam  product  onto  its  intended
surface,  and subject to the Company's ability to obtain  additional  financing,
management  believes  that the  Company's  foam  products  could  be  ready  for
marketing during 1998,  although no assurances  thereof can be given. Based upon
the Company's current financial status,  and the Company's emphasis on its paint
stripping and foam products,  management  does not believe that it will commence
any additional research and development in 1998.

     The Company  has had losses  from  operations  since its  inception.  It is
likely that the Company  will  continue  to have losses from  operations  in the
near-term future, including the year ending December 31,



<PAGE>



1998, as it is still in the early stages of marketing its initial  products.  In
addition,  there is not any  assurance  that the  Company  will have profit from
operations at any time after 1998.

     The report of the Company's  independent auditor contains a paragraph as to
the Company's ability to continue as a going concern. Among the factors cited by
the  auditors  as  raising  substantial  doubt as to the  Company's  ability  to
continue as a going concern are (i) the Company has incurred recurring operating
losses and (ii) the Company has a working capital deficiency.  See Note 3 to the
Financial Statements included herein.

     The Company does not anticipate any significant costs relating to upgrading
or reprogramming of its software for the year 2000.

RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1997 AND 1996

     Sales;  Gross  Margins;  Net Losses.  For the year ended December 31, 1997,
sales  increased to $134,464 from $63,854 in the prior year, an increase of 110%
due to modest sales growth of the  Company's  paint  stripping  product line and
modest initial sales of the Company's NaturalCool product.

     The Company's  gross margin on sales  decreased  from 38% in 1996 to 35% in
1997. The Company expects that, if it is successful in increasing its sales, its
gross  margins in future  periods  should  increase  due to better  pricing from
product manufacturers for larger manufacturing runs.

     For the year ended  December 31, 1997,  the Company  reported a net loss of
$(4,436,589),  or $(.38) per share, as compared with $(3,917,765), or $(.47) per
share in the prior year, an increased loss of $518,824, or 13%, due primarily to
an extraordinary item totaling  $(621,000) which is discussed below. The Company
has continued to incur net losses as sales of its products have not materialized
at levels sufficient to cover the Company's cost of marketing and selling, which
has  included   substantial   non-cash  expenses  associated  with  compensating
marketing  and selling  personnel in shares of the Company's  common stock.  The
decline in the net loss per share in 1997 from 1996 is due to a larger number of
shares outstanding  during 1997.  Without the extraordinary  item, the Company's
1997 operating loss was  approximately  $105,000 smaller than its 1996 operating
loss.  As  described  in Footnote 10 to the  financial  statements  for the year
ending December 31, 1997, the extraordinary  item relates to issuances of common
stock, aggregating 464,000 shares,  authorized by the Company's former President
under   circumstances  in  which  the  Company's  current   management  has  not
ascertained  whether  there  was  adequate,  or  any,   consideration  for  such
issuances.

     Selling,  General and Administrative  Expenses. For the year ended December
31, 1997, the Company incurred selling,  general and administrative  expenses of
$3,506,715,  as  compared  to  $3,571,515  in the  prior  year,  a  decrease  of
approximately 2%. As noted above,  however,  the Company's selling,  general and
administrative  expenses have included  substantial non-cash expenses associated
with  compensating  marketing  and selling  personnel in shares of the Company's
common stock.  Calculations  with respect to the percentage of selling,  general
and administrative expenses relative to sales are not meaningful.

     During the fourth  quarter of 1997 and the first half of 1998,  the Company
and third  parties have taken a number of actions which are and will continue to
have the result of  significantly  reducing the Company's  selling,  general and
administrative   expenses.  These  include  (1)  termination  of  the  Company's
agreements with SSC, pursuant to which the Company paid  approximately  $203,000
between  November 1, 1996 and December 31, 1997, which savings will be offset in
part by selling expenses  associated with the increase in the Company's in-house
sales staff; (2) resignation and termination of certain officers,  employees and
consultants who had been compensated in 1997 and 1996 with  substantial  amounts
of common stock;  and (3) closing the Company's  laboratory  facility  which was
located in Brookfield, CT.


<PAGE>



     Research and  Development.  For the year ended December 31, 1997,  research
and  development  expenses were  essentially  stable relative to the prior year,
declining to $265,736 from $274,932.  As the Company's paint  stripping  product
line has come to market,  and other  product  lines are  further  along in their
development, research and development expenses have tended to decrease. In light
of the closing of the  Brookfield,  CT, research  facility,  the Company expects
these expenses to decline in 1998.  Calculations  with respect to the percentage
of research and development expenses relative to sales are not meaningful.

     Extraordinary  Item.  For the year ended  December  31,  1997,  the Company
recorded an extraordinary  expense item of $(621,000).  As described in Footnote
10 to the  Financial  Statements,  this  expense  reflects  the  issuance by the
Company of 464,000 shares of common stock to several third parties,  which stock
issuances  were  authorized  solely by the Company's  previous  Chief  Executive
Officer.  Management has been unable to ascertain from the records maintained by
the prior  Chief  Executive  Officer  and Chief  Financial  Officer,  or through
independent  investigation,  the nature of the  consideration  which was to have
supported such stock issuances.  In addition, to the extent that the Company may
learn the purported  consideration  for such issuances,  management  believes it
does not have any reasonable  means of determining,  particularly in the case of
non-cash consideration such as services rendered,  whether the consideration was
in  fact  received  by the  Company.  In that  regard,  promptly  following  the
resignation of the former Chief Executive Officer, management instituted certain
internal  controls  designed to reduce the likelihood of a future  occurrence of
this problem.  Specifically,  requests to the Company's  transfer agent to issue
stock must be signed by two officers, and no such stock issuance  authorizations
will be  delivered  without  a  proper  resolution  of the  Board  of  Directors
authorizing the issuance of stock.

BALANCE SHEETS

     At December 31, 1997, the Company had current assets of $202,942,  compared
to $49,265 at December 31, 1996.  The increase in current  assets was  primarily
attributable to an increase in inventories from $13,187 to $159,473,  due to the
manufacturing  of  inventories  in 1997  in  anticipation  of  larger  sales  of
NaturalCool products. Sales of those products did not materialize at levels that
the  Company had  anticipated.  At December  31,  1997,  the Company had cash of
$12,282,  compared to cash of $3,994 at December 31, 1996,  reflecting  the slow
pace of sales of the Company's products to date.

     Accounts  payable  and other  accrued  expenses  declined  to  $104,769  at
December  31,  1997,  from  $260,972 at December  31,  1996,  as a result of the
termination  of certain  employees and  consultants  in late 1997 as well as the
winding down of the Company's Brookfield, CT, research facility.

     Stockholders'  loans, net of current  maturities,  increased to $526,665 at
December  31, 1997,  from $0 at December  31, 1996,  as a result of loans having
been  extended to the  Company  for  operating  purposes  throughout  1997 by an
investor group including current directors of the Company.

     As of  December  31,  1997,  the  Company  had an  accumulated  deficit  of
$(16,120,834), which includes the net loss for fiscal year 1997 of $(4,436,589).

LIQUIDITY AND CAPITAL RESOURCES

     The  Company  has  never  generated  sufficient  revenues  to  finance  its
operations and has been able to remain in business solely as a result of raising
capital.  At December 31, 1997,  the Company had current  assets of $202,942 and
current  liabilities of $729,869.  The Company's  ability to continue as a going
concern in the near term is dependent upon obtaining additional financing. As of
December 31, 1997,  the Company did not have the financial  resources to operate
its business,  continue  research and  development  or market its products.  The
Company has been financing its operations through loans from shareholders, which
aggregated approximately $1,151,765 as of June 30, 1998, and from the


<PAGE>



approximately  $619,000 net proceeds of a private placement of convertible notes
completed  in April,  1998.  See "Item 5.  Market For Common  Equity And Related
Stockholder  Matters - Recent  Sales Of  Unregistered  Securities."  The Company
continues to seek  additional  capital from an array of potential  sources.  The
Company has provided  information  regarding its Technologies to venture capital
firms  and is in  discussions  with  some  of  them,  although  there  can be no
assurances that any such  discussions  will result in the Company  obtaining any
additional  capital.  Even if the Company is able to obtain  additional  capital
there  can be no  assurances  that  the  structure  or  terms  of such  proposed
financing will be on acceptable terms.

     The Company has entered into agreements with the respective licensors under
the licenses  with respect to the various  Technologies  under which the Company
has undertaken substantial ongoing financial commitments.  Unless the Company is
able to obtain  additional  financing,  the  Company  will be unable to meet its
commitments under such agreements. See "Item 1. The Company - Licenses."

     The Company  estimates that it will require  approximately  $1.1 million in
financing in order to continue  operations for fiscal 1998 and the first half of
fiscal 1999. Much of that financing has been provided to date through additional
shareholder  loans,  accruing  interest at 8%, and  convertible  Notes issued in
April, 1998, in the aggregate principal amount of $711,500.  See "Item 5. Market
For Common Equity And Related Stockholder Matters - Recent Sales Of Unregistered
Securities."  The shareholders who have been lending funds to the Company do not
have any commitment to continue  lending money,  and, if additional loans or not
made, and if the Company is not successful  raising  capital from other sources,
the Company may be forced to scale back or cease its  operations.  In  addition,
the Company has agreed to repay $433,333 in principal  amount of the shareholder
loans on or before September 9, 1998; an additional $433,333 in principal amount
on or before January 9, 1999; and an additional  $433,333 in principal amount on
or before March 9, 1999. The principal amount of the Convertible Notes, together
with unpaid interest thereon, is due and payable,  if not earlier converted,  on
March 3, 1999.  At the present  time the Company has not  identified a source of
repayment of any of these obligations.

FORWARD-LOOKING STATEMENTS

     This Form 10-KSB contains  certain  forward-looking  statements  within the
meaning of Section 27A of the  Securities  Act of 1933, as amended,  and Section
21E of the Securities  and Exchange Act of 1934, as amended,  which are intended
to be covered by the safe harbors created thereby.  Investors are cautioned that
all  forward-looking  statements  involve  risks  and  uncertainties  including,
without  limitation,  the growth of the  Company,  acceptance  of the  Company's
products,  future  financings and available  working  capital,  acquisitions and
expenses, and general market conditions.  A1though the Company believes that the
assumptions  underlying  the  forward-looking  statements  contained  herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements included in this Form 10-KSB
will prove accurate. In light of the significant  uncertainties  inherent in the
forward-looking  statements  included herein,  the inclusion of such information
should not be regarded as a  representation  by the Company or any other  person
that the objectives and plans of the Company will be achieved.


<PAGE>



ITEM 7.  FINANCIAL STATEMENTS

     The  audited  financial  statements  of the Company as of and for the years
ending December 31, 1997 and 1996 are included beginning at Page F-1 below.


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

     The Company reported a change in its principal independent auditors for the
year ending  December 31, 1997, in current  reports on Form 8-K filed January 23
and April 17, 1998.

                                    PART III

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

     The following sets forth certain  information with respect to the directors
and executive officers of the Company.

Name                     Age      Position(s)
----                     ---      -----------

Richard J. Fricke        53       President & Chief Executive  Officer (since 
                                  January,  1998);  Director;
                                  Secretary (until January, 1998)

Richard W. Hill          61       Director (since October, 1997)

Nicky Hunt               44       Director (since January, 1998)

Sean F. McNamara         40       Secretary (since January, 1998); Director
                                  (since October, 1997)

Robert Percheski         46       Chief Financial Officer (since March 18, 1998)
  
Robert W. Berger         27       Vice President, Sales and Marketing (since
                                  April 8, 1998)
 
Stephen J. Thompson      42       President and Chief Executive Officer (until
                                  January,  1998);  Director
                                  (until March 10, 1998)

Robert F. Thompson       66       Executive Vice President,  Chief Operating 
                                  Officer and Chief Financial
                                  Officer (until January, 1998)


     Mr. Sean F.  McNamara  has been a Director of the  Company  since  October,
1997, and Secretary since January,  1998. He joined the Management  Committee in
January,  1998 and is currently  active in the  management  of the Company.  Mr.
McNamara  has spent the past 16 years as the owner of a  proprietary  derivative
trading  firm with  offices  in New York,  Chicago,  and  Dublin,  Ireland.  Mr.
McNamara served on the board of the New York Futures  Exchange from 1984-88,  as
Chairman  of the New  Products  Committee  and  Floor  Committee.  In 1990,  Mr.
McNamara  began a four-year  effort to establish a futures and options  exchange
(FINEX Europe) in Dublin,  Ireland. The Exchange opened in June 1994 and was the
first  US-regulated  futures  exchange on foreign soil. Mr.  McNamara  served as
Chairman of the Exchange  from  1994-96.  In addition,  Mr.  McNamara  serves as
Chairman of FINEX (a financial futures Exchange in NY and parent organization to
FINEX Europe). Mr. McNamara is also a principal in Capital Resources Advisors, a
privately-held  consulting  firm in Chicago,  IL,  serving  pension  funds.  Mr.
McNamara is also a director  of  Financial  Auction  Network,  a  privately-held
software development company.

     Richard W. Hill has been a director of the Company since October,  1997. He
joined the Management Committee in January,  1998 and is currently active in the
management of the Company. Mr. Hill retired from Prudential Insurance Company as
President,  Small Business  Operations (SBO) in 1996. As President of SBO he had
bottom-line  responsibility  for  Prudential's  group life and health  insurance
programs for smaller employers  countrywide.  Mr. Hill joined Prudential in 1957
upon  graduation from Rutgers  University  with a BS in Mathematics.  During his
39-year  career with the company he held a wide variety of actuarial,  marketing
and senior management positions in Prudential's corporate, regional


<PAGE>


and subsidiary operations.  From 1975 through 1981, he was senior vice president
in charge of marketing and operations for Prudential's newly formed Property and
Casualty Insurance  subsidiary  (PruPAC),  which became one of the country's ten
largest auto and home insurers.  Through the mid-1980s, he was vice president in
charge of  individual  insurance  sales and  marketing in  Prudential's  largest
region,  the ten  state  SouthCentral  Region  headquartered  in  Jacksonsville,
Florida.  Mr. Hill is a Trustee of Rutgers  University and is a Board member and
chair of the finance  committee of Bayshore  Community  Hospital,  Holmdel,  New
Jersey.  He is a Fellow of the Society of  Actuaries  and a Chartered  Financial
Consultant.

     Mr. Nicky Hunt has been a director of the Company since January,  1998, and
now serves on its  Management  Committee.  He is active in the management of the
company.  Mr.  Hunt  began his  career  in Dublin in 1973 as a foreign  exchange
dealer for the Central Bank of Ireland,  followed by the Bank of America, and as
chief  foreign  exchange  dealer  at Allied  Irish  Investment  Bank.  He became
treasury  manager  of the Bank of Nova  Scotia  in  1979.  From  1982-92  he was
Treasurer of the National Bank of Kuwait in Singapore.  He was  responsible  for
establishing a 24-hour trading operation,  expanding regional  relationships and
significant  profit  generation.  He was transferred to London in 1990 to assume
global treasury  responsibilities  during the Gulf War. In 1992, he was hired by
the  Bank of  Ireland  as  Treasurer  of the  London  operation.  In 1993 he was
appointed head of the Dublin  trading  operation and relocated to Dublin . Until
his retirement in March,  1997, Mr. Hunt was a director of Bank of Ireland Group
Treasury.  He  served  as a  member  of the  Senior  Management  Group  and  had
responsibilities in strategy, due diligence,  and treasury operations in London,
Dublin and New York.  He also  managed  relationships  with First New  Hampshire
Bank,  Bank of Ireland Home  mortgages  and other  subsidiaries.  Mr. Hunt has a
number of business interests and is a principal and non-executive director of an
Irish Software company. Mr. Hunt is a resident of Dublin, Ireland.

     Mr. Richard J. Fricke has served as President & Chief Executive  Officer of
the Company since  January,  1998. He is also a Director of the Company.  He has
been a practicing  general practice  attorney in the State of Connecticut  since
1970 and was admitted to the bar the same year. From 1970-73, he worked with the
law firm of Gregory & Adams, in Wilton, Connecticut. From 1973 to 1990, he was a
partner  in the Law Firm of Crehan & Fricke,  in  Ridgefield,  Connecticut.  Mr.
Fricke filed for protection  under Chapter 7 of the federal  bankruptcy  laws in
1996. In addition to private practice,  Mr. Fricke was Town Counsel for the town
of Ridgefield,  Connecticut. From 1973-81, he served as Director of Village Bank
& Trust  Company  and for the  Ridgefield  Community  Center and the  Ridgefield
Montessori  School.  Mr. Fricke received his  undergraduate and law degrees from
Cornell University in 1967 and 1970, respectively.  Mr. Fricke's biographies can
be found in Marquis Who's Who in America,  Who's Who in the World,  Who's Who in
Business and Finance, and Who's Who in the East.

     Mr. Robert  Percheski has served as Chief Financial  Officer of the Company
since  March  18,  1998.  Currently  and  since  1997 Mr.  Percheski  has been a
self-employed consultant in the area of financial operations and insurance. From
1974 to  1996,  he  worked  for  Prudential  Insurance,  most  recently  as Vice
President  and Chief  Financial  Officer,  Northeastern  Operations,  Prudential
Insurance & Financial Services,  from 1993-96.  Mr. Percheski holds a MBA degree
(accounting   concentration)  and  a  BS  in  Commerce  (finance),   from  Rider
University.  He  also  holds  the  following  industry  designations:  Chartered
Financial  Consultant,  Chartered Life Underwriter,  Certified Internal Auditor,
and Fellow Life Management Institute.

     Mr. Robert W. Berger has served as Vice President,  Sales and Marketing, of
the Company since April 8, 1998. From December, 1993, to April, 1998, Mr. Berger
was  employed by Oxford  Health  Plans,  a provider of group  health  plans,  in
Edison,  NJ, as Regional  Manager from 1997 to 1998,  Sales Manager from 1996 to
1997, and Sales  Representative  from 1993 to 1996. From May, 1992, to December,
1993, he was employed as Service  Representative with Northwestern National Life
Insurance Company, in Bedminster, NJ.


<PAGE>



     Mr.  Stephen J. Thompson was President and Chief  Executive  Officer of the
Company  from  September  15,  1995,  until  January,  1998,  the  date  of  his
resignation  as an officer of the  Company.  He  resigned  as a director  of the
Company  effective  March 10, 1998.  Prior to joining the Company,  Mr. Thompson
worked primarily in municipal and state government.  In 1993, a property holding
company,  Olympic of Venice Place & Evers,  Inc., a Connecticut  corporation  in
which Mr.  Thompson had been  involved as president and  treasurer,  voluntarily
petitioned for bankruptcy  protection under Chapter 11 of the Federal bankruptcy
laws.  Mr.  Thompson  graduated  from  Ridgefield  High School and  attended the
University of Miami from 1972-1973 and Western Connecticut State College, Ancell
School of Business,  from  1977-1979.  Mr. Stephen J. Thompson is the son of Mr.
Robert F. Thompson.

     Mr.  Robert F.  Thompson was  Executive  Vice  President,  Chief  Financial
Officer and Chief  Operating  Officer of the Company  from  September  15, 1995,
until January,  1998,  the date of his  resignation.  Mr.  Thompson is a retired
Corporate  Officer  of  American  Can Co. He  completed  twenty-nine  years with
American Can Co. and at  retirement  in 1988 was  Assistant  Treasurer and Chief
Credit  Officer.  Mr.  Thompson  served  as  President  of the  Credit  Research
Foundation,  Columbia,  Maryland,  from 1989 to 1993. Mr.  Thompson  serves as a
director of Morgan Foods,  Inc.,  Austin,  Indiana,  and the New York Credit and
Financial Management Association,  New York, New York. Mr. Thompson holds a B.A.
degree in Economics  from St.  Francis  College,  the  Executive  Award from the
Graduate  School of Credit and  Financial  Management,  Dartmouth  College,  and
attended the Graduate School of Business at New York  University.  Mr. Robert F.
Thompson is the father of Mr. Stephen J. Thompson.

     Currently  all  directors  hold  office  until the next  annual  meeting of
shareholders and until their successors have been duly elected and qualified.

     Officers  are  elected  by and  serve  at the  discretion  of the  Board of
Directors.  Sean F.  McNamara,  Director  &  Secretary  of the  Company,  is the
son-in-law  of Richard W. Hill,  a Director.  Stephen J.  Thompson and Robert F.
Thompson, former members of the Company's management, are father and son.

BOARD COMMITTEES

     Audit  Committee.  The Audit Committee of the Board of Directors was formed
in December  1995 to review the results and scope of the annual  audit and other
services  provided  by the  Company's  independent  accountants,  to review  and
evaluate the Company's control functions and to monitor transactions between the
Company and its employees, officers and directors.

     Until January,  1998, Stephen J. Thompson,  Richard J. Fricke and Robert F.
Thompson  were the  members of the Audit  Committee.  As of April 2,  1998,  the
members are Sean F. McNamara, Nicky Hunt and Richard W. Hill.

     Compensation  Committee.   The  Compensation  Committee  of  the  Board  of
Directors  reviews and approves the  compensation and benefits for the Company's
executive officers.

     Until January,  1998, Stephen J. Thompson,  Richard J. Fricke and Robert F.
Thompson were the members of the  Compensation  Committee.  As of April 2, 1998,
the members are Sean F. McNamara, Nicky Hunt and Richard W. Hill.

     Management  Committee.  The Management  Committee of the Board of Directors
was formed during the first  quarter of 1998 and  currently  consists of Messrs.
McNamara, Hunt and Hill. Since its formation, and until such time as the Company
has greater depth in its senior  management,  the Management  Committee takes an
active role in day-to-day management decisions, corporate planning and corporate
transactions.


<PAGE>



COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     The Company's Compensation Committee was formed in October, 1996, to review
and approve the  compensation and benefits of the Company's  executive  officers
and make  recommendations to the Board of Directors  regarding such matters.  No
interlocking  relationship  exists between any member of the Company's  Board of
Directors or Compensation  Committee and any member of the board of directors or
compensation  committee  of any  other  company,  nor has any such  interlocking
relationship  existed in the past. In the year ended December 31, 1997, the full
Board of Directors  participated in deliberations  concerning  executive officer
compensation.

DIRECTOR COMPENSATION

     The Company's  directors  have not received any cash fees through  December
31, 1997,  for their  services as Board members and committee  members,  but are
entitled to be reimbursed  for expenses  incurred in connection  with  attending
Board and committee meetings.

     It is expected  that  directors  will  receive  common stock and options to
acquire  common  stock of the  Company  in the  future  for  their  services  as
directors and for serving on the Board's Management Committee. Specifically, the
Company has agreed to issue to each of Messrs.  Sean  McNamara  and Richard Hill
200,000  shares of common stock for their  services for 1997.  In addition,  the
Company has agreed for 1998 to issue stock  options  to: (1) all  directors  for
their  services as  directors  pursuant to a formula in which a nominal $500 per
month will be  converted  into stock  options,  plus (2)  members of the Board's
Management  Committee (currently three persons) pursuant to a formula in which a
nominal $30,000 per year will be converted into stock options. In addition,  for
1998, each member of the Management Committee is being granted 100,000 shares of
common stock as compensation for their services in that capacity.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

     Based  solely  upon a review of Forms 3, 4 and 5, and  amendments  thereto,
furnished  to the Company  with  respect to its most  recent  fiscal  year,  the
Company  believes  that (1) Mr. Sean F.  McNamara  and Mr.  Richard W. Hill each
failed to file a Form 3 upon becoming directors of the Company in October, 1997,
(2)  Mr.  Hill  failed  to file a Form 4 or Form 5  reporting  two  transactions
involving  the  acquisition  of shares of the Company's  Common  Stock,  (3) Mr.
Richard J. Fricke failed to file timely an initial report on Form 3 statement of
initial  ownership of shares of the Company's  Common  Stock,  and has failed to
file any Forms 4 or a Form 5 reporting two transactions,  one in February, 1997,
and one in August, 1997, involving the acquisition from the Company of shares of
Common  Stock,  and (4) Mr.  Stephen  Thompson and Mr. Robert  Thompson,  former
members of the Company's  management,  each failed to file a Form 3 statement of
initial ownership, and Mr. Stephen Thompson failed to file any Forms 4 or a Form
5 reporting two transactions,  one in February,  1997, and one in August,  1997,
involving the acquisition from the Company of shares of Common Stock.


<PAGE>



ITEM 10.  EXECUTIVE COMPENSATION

     The following table sets forth compensation received by the Company's Chief
Executive  Officer and the four remaining  most highly paid  executive  officers
(except  where such  compensation  does not exceed  $100,000  per annum) for the
three fiscal years ended December 31, 1997.

<TABLE>
<CAPTION>
                                                         Summary Compensation Table
                                                         --------------------------
                                 Annual Compensation                                     Long Term Compensation Awards
                           -----------------------------------                     -------------------------------------
           (a)              (b)         (c)             (d)            (e)               (f)                (g)
                                                                   Other Annual                          Securities
Name and                                                           Compensation       Restricted        Underlying
Principal Position         Year      Salary ($)      Bonus ($)      ($)2, 3, 4     Stock Awards ($)   Options/SARs(#)
-------------------        ----      ----------      ---------      ----------     ----------------   ------------------
<S>                        <C>    <C>                                 <C>     
Stephen J. Thompson        1997   $18,000 1,2,3,4,5                    $438,374
    President, Chief                      
    Executive Officer                     
    (until 1/98) &                        
    Director (until                       
    3/10/98)                              
                           1996   $34,000 1,2,3,4,5                    $190,425
                           1995   $50,000 1,2,3,4,5                    $220,783
                                          
Richard J. Fricke          1997   $18,000 1,2,3,4,5,6                  $438,374
    President and Chief                   
    Executive Officer                     
    (since 1/98),                         
    Director, Secretary                   
    (until 1/98)                          
                           1996   $34,000 1,2,3,4,5,6                  $190,425
                           1995   $50,000 1,2,3,4,5,6                  $220,783

</TABLE>
--------------------
1.   Although the  employment  contracts  for Stephen J. Thompson and Richard J.
     Fricke each provide for compensation of $300,000 plus incentive bonuses for
     the year ended  December 31,  1996,  these  amounts were not actually  paid
     through December 31, 1996. In 1995 Mr. Stephen Thompson and Mr. Fricke each
     received $50,000 in cash compensation,  and in 1996 Stephen J. Thompson and
     Richard F. Fricke each received $34,000 in cash compensation. Each of these
     executive  officers has waived his rights with respect to salary arrearages
     through 1996.

2.   In addition to their base salaries,  the Company  established a Medical and
     Dental  Reimbursement  Plan for each of Stephen J.  Thompson and Richard J.
     Fricke  providing for  reimbursement of up to $10,000 of medical and dental
     expenses annually  incurred by such officers.  The Company has not received
     any requests for reimbursements under this plan.

3.   The  Company in 1997,  1996 and 1995 paid  $14,093,  $14,136  and  $10,213,
     respectively, for the health insurance premiums for Stephen J. Thompson and
     Richard J. Fricke,  in the  aggregate.  The Company in 1997,  1996 and 1995
     paid  $3,471,  $7,289  and  $2,070,  respectively,  for the life  insurance
     premiums for Stephen J. Thompson and Richard J. Fricke, in the aggregate.

4.   Other Annual Compensation  includes for each of Messrs.  Fricke and Stephen
     Thompson:  for 1997,  250,000  shares of common  stock valued at $1.125 per
     share, and 93,040 shares valued at $1.50 per share; for 1996, 85,000 shares
     valued  at $1.99 per share of Common  Stock;  and for 1995,  84,750  shares
     valued at $2.46 per share.

5.   Under the terms of their respective employment agreements,  each of Stephen
     J. Thompson and Richard J. Fricke were originally entitled to (i) an annual
     bonus equal to ten percent (10%) of the  Company's net income,  and (ii) an
     annual Common Stock option bonus of stock options exercisable for ten years
     at an exercise  price of $.01 per share for one percent  (1%) of the number
     of shares of  Common  Stock  issued  and  outstanding  as of the end of the
     fiscal year for which such options are granted.  These agreements have been
     terminated,  and neither person is entitled to further  compensation  under
     such arrangements.

6.   Mr. Fricke receives office space and secretarial  services from the Company
     to support his  independent  law  practice.  The value of such  services is
     estimated to be approximately $1,800 annually, based on Mr. Fricke spending
     less than 5% of his time on his independent law practice.


<PAGE>



EMPLOYMENT AGREEMENTS

     Each of the  executive  officers of the Company has executed an  employment
contract  with  substantially  similar  provisions  concerning  covenants not to
compete and confidentiality.

     Richard J.  Fricke's  employment  agreement was executed on August 13, 1991
(the  "Fricke  Employment  Agreement")  and  provides,  other than the  standard
provisions   described  above,   that  he  will  be  Corporate  Counsel  for  an
undetermined term. After the execution of the Fricke Employment  Agreement,  the
Board of Directors  appointed Mr. Fricke to the additional position of Secretary
and Director.  Mr. Fricke was subsequently succeeded as Secretary by Mr. Sean F.
McNamara.  Pursuant to the terms of the Fricke Employment Agreement, in addition
to his salary,  Mr.  Fricke is  entitled to a bonus of ten percent  (10%) of the
annual net income of the Company and an annual  stock option bonus of options to
purchase 1% of the number of shares of Common Stock.  issued and  outstanding as
of the end of the fiscal year for which such  options are  granted,  exercisable
for ten years at an  exercise  price of $.01 per share.  The  Fricke  Employment
Agreement also provides that the Company shall pay for Mr. Fricke's  automobile,
health and major medical insurance and life insurance.  Mr. Fricke's  employment
agreement  has been  terminated,  but he continues to be employed by the Company
without an employment agreement.

     Stephen J. Thompson's  employment agreement was executed on August 13, 1991
(the  "Thompson  Employment  Agreement")  and provided,  other than the standard
provisions  described  above,  that he would be Chief  Executive  Officer of the
Company for an undetermined term. After the execution of the Thompson Employment
Agreement,  the Board of  Directors  appointed  Mr.  Thompson to the  additional
position  of  President  and  Director.  Pursuant  to the terms of the  Thompson
Employment  Agreement,  in  addition  to his stated  salary,  Mr.  Thompson  was
entitled to a bonus of ten percent (10%) of the annual net income of the Company
and an annual  stock  option  bonus of options to  purchase  1% of the number of
shares of Common Stock issued and  outstanding  as of the end of the fiscal year
for which such  options are  granted,  exercisable  for ten years at an exercise
price of $.01 per share.  The Thompson  Employment  Agreement also provided that
the Company would pay for Mr.  Thompson's  automobile,  health and major medical
insurance and life insurance. This agreement was terminated upon the resignation
of Mr. Thompson.

     Robert F. Thompson's  employment agreement was executed on January 31, 1996
and provided,  other than the standard provisions described above, that he would
serve as the Company's Chief Operating Officer and Chief Financial Officer. This
agreement was terminated upon the resignation of Mr. Thompson.

     The Company does not have any  compensatory  plan or  arrangement  with any
employee  relating  to  the  termination  of  employment  of  the  employee,   a
change-in-control  of the Company, or a change in  responsibilities  following a
change-in-control.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

     The Company's By-Laws provide for the  indemnification,  to the full extent
allowed by Florida law, of its directors, officers, employees and agents who are
or were a party, or are threatened to be made a party to any threatened, pending
or completed  legal action,  suit or proceeding by reason of the fact that he or
she is or was serving a director,  officer,  employee or agent of the Company or
is or was serving in such capacity at another  entity at the Company's  request.
The extent,  amount and eligibility for such indemnification are determined by a
majority vote of a quorum of disinterested directors, or by a majority vote of a
quorum of disinterested shareholders.

     Section 607.0850 of the Florida Business Corporation Act empowers a Florida
corporation to indemnify any person who is a party to any proceeding (other than
an  action by or in the  right of such  corporation)  by reason of the fact that
such  person  is  or  was  a  director,  officer,  employee  or  agent  of  such
corporation,  or is or was  serving  at the  request  of such  corporation  as a
director,  officer,  employee  or agent of another  corporation  or  enterprise,
provided that he acted in good faith and in a manner he  reasonably  believed to
be in or not opposed to the best interests of the corporation, and, with respect
to


<PAGE>


any  criminal  action or  proceeding,  had no  reasonable  cause to believe  his
conduct was unlawful.  A Florida  corporation  may indemnify any person who is a
party to any  proceeding  by or in the right of the  corporation  under the same
conditions,  except  that  no  indemnification  is  permitted  without  judicial
approval if the officer or director is adjudged to be liable in the  proceeding.
Where an officer, director,  employee or agent of a corporation is successful on
the merits or  otherwise  in the defense of any action  referred  to above,  the
corporation  must  indemnify  him against  the  expenses  which he actually  and
reasonably incurred in connection therewith.

     Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors,  officers and controlling  persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the  Commission  such  indemnification  is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following  table shows, as of June 30, 1998, the shares of Common Stock
beneficially   owned  by  the  directors,   executive   officers  and  principal
shareholders  (greater  than  5%) of the  Company  individually  and,  as to the
directors  and  executive  officers,  as a group.  The address of each person or
entity, unless otherwise noted, is c/o Safe Alternatives Corporation of America,
Inc., 27 Governor Street, Ridgefield, CT 06877.

     The  number  of  shares  beneficially  owned by each  person  or  entity is
determined  under  rules of the  Securities  and  Exchange  Commission,  and the
information is not necessarily  indicative of beneficial ownership for any other
purpose. Under such rules,  beneficial ownership includes any shares as to which
the person has the sole or shared voting power or investment  power and also any
shares  which the person  has the right to  acquire as of a date  within 60 days
after the relevant date through the exercise of any stock option or other right.


<TABLE>
<CAPTION>
Beneficial Owner and Address                  Number of Shares Owned      Percent of Class
----------------------------                  ----------------------      ----------------
<S>                                               <C>                         <C>
Sean F. McNamara                                  675,848 1,2                  4.8
35 Spring House Lane
Basking Ridge, NJ  07920

Richard W. Hill                                   327,120 1,3                  2.4
5 Barrister Lane
Middletown, NJ  07748

Nicky Hunt                                        140,000 1,4                  1.0
Coolbawn, 2 Ailesbury Road
Ballsbridge, Dublin 4
Ireland

Richard J. Fricke                               1,765,195 5                   13.1
Robert Percheski                                   85,000 6                      *
37 Cameron Drive
Marlborough, MA  01752

Robert W. Berger                                  115,000 7                      *
1308 Centennial Avenue, Suite 108
Piscataway, NJ  08854

Stephen J. Thompson                             1,614,071 8                   11.9
11 Girolametti Court
Ridgefield, CT 06877

Robert F. Thompson                                 82,080                       *
13 Flat Rock Drive
Ridgefield, CT 06877

Officers  and  Directors  as a group            4,804,314 1,9                 33.5
  (8  persons)10
</TABLE>


<PAGE>
---------------
*    Less than 1%

1.   Does not  include  options  which  the  Company  has  agreed to issue to an
     investor group in relation to the $1.3 million note held by such group,  as
     such options are not first  exercisable until June 30, 1999. The beneficial
     owners of such options,  all of which have an  expiration  date of June 30,
     2003, will include: (i) Mr. McNamara to acquire options on 1,002,000 shares
     with an exercise  price of $.01,  765,000  shares with an exercise price of
     $.25, and 765,000  shares with an exercise price of $.50,  (ii) Mr. Hunt to
     acquire  options on 460,000 shares with an exercise price of $.01,  345,000
     shares with an exercise  price of $.25, and 345,000 shares with an exercise
     price of $.50, and (iii) Mr. Hill to acquire options on 130,000 shares with
     an exercise  price of $.01,  97,500 shares with an exercise  price of $.25,
     and 97,500 shares with an exercise price of $.50.

2.   Includes  300,000  shares of common  stock  which the Company has agreed to
     issue to Mr.  McNamara  (but has not yet  issued)  in  connection  with his
     services as a director and member of the Management  Committee for 1997 and
     1998,  but does not include (i) options  earned  through June 30, 1998,  to
     acquire  227,851  shares,  at exercise prices ranging from $.05 to $.15 per
     share,  which the  Company  has agreed to issue (but has not yet issued) to
     Mr.  McNamara  for  services  as a director  and  member of the  Management
     Committee for 1998,  because such options are not first  exercisable  until
     the  first  anniversary  of  their  grant  date,  or  (ii)  Mr.  McNamara's
     proportionate  share of stock options which the Company has agreed to issue
     to an  investor  group in relation  to the $1.3  million  note held by such
     group (see footnote 1).

3.   Includes  300,000  shares of common  stock  which the Company has agreed to
     issue to Mr. Hill (but has not yet issued) in connection  with his services
     as a director and member of the Management Committee for 1997 and 1998, but
     does not include (i)  options  earned  through  June 30,  1998,  to acquire
     227,851  shares,  at exercise  prices  ranging from $.05 to $.15 per share,
     which the  Company has agreed to issue (but has not yet issued) to Mr. Hill
     for services as a director and member of the Management Committee for 1998,
     because such options are not first  exercisable until the first anniversary
     of their  grant  date,  or (ii)  Mr.  Hill's  proportionate  share of stock
     options  which the  Company  has  agreed to issue to an  investor  group in
     relation to the $1.3 million note held by such group (see footnote 1).

4.   Includes (i) 100,000 shares of common stock which the Company has agreed to
     issue to Mr. Hunt (but has not yet issued) in connection  with his services
     as a member of the Management Committee for 1998, and (ii) 40,000 shares of
     common stock which the Company has agreed to issue to Mr. Hunt (but has not
     yet issued) for specific  services  performed for the Company in the second
     quarter of 1998,  but does not include (i) options  earned through June 30,
     1998, to acquire  227,851  shares,  at exercise prices ranging from $.05 to
     $.15 per  share,  which the  Company  has  agreed to issue (but has not yet
     issued) to Mr. Hunt for services as a director and member of the Management
     Committee for 1998,  because such options are not first  exercisable  until
     the first anniversary of their grant date, or (ii) Mr. Hunt's proportionate
     share of stock options which the Company has agreed to issue to an investor
     group in relation to the $1.3 million note held by such group (see footnote
     1).

5.   Includes  136,800 shares which are owned by his spouse,  Penny Fricke,  and
     82,080 shares owned by the Fricke Family  Trust,  but Mr. Fricke  disclaims
     beneficial  ownership of such shares,  but does not include  options earned
     through June 30, 1998, to acquire 37,975 shares, at exercise prices ranging
     from $.05 to $.15 per share, which the Company has agreed to issue (but has
     not yet issued) to Mr.  Fricke for  services as a  director,  because  such
     options  are not first  exercisable  until the first  anniversary  of their
     grant date.

6.   Includes (i) 25,000  shares of common stock which the Company has agreed to
     issue to Mr.  Percheski in  connection  with his joining the  Company,  but
     which have not yet been  issued,  and (ii)  options  which the  Company has
     agreed to issue (but has not yet issued) to Mr. Percheski to acquire 60,000
     shares of common stock at an exercise price of $.10 per share.


<PAGE>



7.   Includes  100,000  shares of common  stock  which the Company has agreed to
     issue to Mr.  Berger in  connection  with his  joining  the  Company and as
     compensation for his agreement to receive a below-market  salary, but which
     have not yet been issued.

8.   Includes  205,200 shares owned by his spouse and The Thompson Family Trust.
     Mr.  Thompson  has in the  past  disclaimed  beneficial  ownership  of such
     shares.

9.   Includes (i) 205,200  shares which are owned by Stephen  Thompson's  spouse
     and The Thompson Family Trust, (ii) 136,800 shares which are owned by Penny
     Fricke,  the spouse of Richard J. Fricke,  (iii) 41,040 shares owned by Mr.
     Fricke's daughter,  Laura J. Main, (iv) 41,040 shares owned by Mr. Fricke's
     son, Richard L. Fricke,  and 41,040 shares owned by Mr. Fricke's  daughter,
     Amanda C. Fricke,  and (v) 82,080  shares owned by the Fricke Family Trust.
     Mr. Thompson and Mr. Fricke,  respectively,  disclaim beneficial  ownership
     with respect to such shares.  Includes 21,124 shares which are owned by The
     Ridge Group,  a Connecticut  general  partnership in which Penny Fricke and
     Stephen J. Thompson each owns a 50% equity  interest.  Mr. Fricke disclaims
     beneficial ownership with respect to such shares.

10.  This group includes Messrs.  Stephen J. Thompson and Robert F. Thompson who
     were members of the Company's  management as of December 31, 1997,  but not
     as of June 30, 1998.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     During 1997 and the first half of 1998, a group of shareholders,  including
three current directors of the Company (Messrs. Sean McNamara, Richard Hill, and
Nicky Hunt),  advanced working capital loans and committed to making  additional
loans to the  Company,  aggregating  approximately  $1.3  million.  See "Item 5.
Market  For Common  Equity And  Related  Stockholder  Matters - Recent  Sales Of
Unregistered  Securities."  During the first quarter of 1998,  in  consideration
for, among other things,  not demanding  immediate  repayment of the loans,  the
Company  and the  investor  group  agreed to  exchange  all of such  outstanding
indebtedness  for the Investor Note and stock  options.  In connection  with the
Investor Note, the Company issued five-year options to the shareholder/directors
to acquire an aggregate of 6.5 million shares of common stock at exercise prices
of $.01, $.25 and $.50, with the options exercisable at any time after the first
anniversary   of  the  grant  date.  In  addition  to  any  other  remedies  the
shareholder/directors  may  have,  if the  Company  fails to make the  principal
payment on the  Investor  Note due on  September  9, 1998,  the Company  will be
obligated  to  issue  to  the  shareholders/directors   options  to  acquire  an
additional  75,000  shares of common stock,  exercisable  at a price of $.01 per
share, for each 30 days that the principal payments are in default.

     The  Company  has agreed to provide  Richard J.  Fricke,  President,  Chief
Executive  Officer and Director of the Company,  with office space,  facilities,
fixtures,  equipment  supplies  and  secretarial  services  and to allow  him to
operate and maintain a legal practice  independent of the Company.  The value of
such services is estimated to be  approximately  $1,800  annually,  based on Mr.
Fricke spending less than 5% of his time on his independent law practice.

     Mr. Fricke also is one of the licensors under the foam Technology  license;
however,  he  renounced  his  interest  in the  license  in 1998.  See  "Item 1.
Description of Business - Licenses."

     The Ridge Group, a Connecticut  general partnership in which Mr. Fricke and
Stephen J. Thompson - a former Director,  President and Chief Executive  Officer
of the Company,  and a beneficial owner of approximately 10% of the Common Stock
- each owns a 50% equity interest, has loaned the Company approximately $384,000
in demand obligations at no interest.  In addition,  Stephen Thompson has in his
individual  capacity  loaned  the  Company  an  additional  $108,100  in  demand
obligations at no interest.

     Mrs. Kathleen Kennedy, a shareholder of the Company,  is licensor under the
Technology licenses for the Company's foam, coatings and sealants, and recycling
solvents Technologies.


<PAGE>



     The Company  believes that the terms of the  transactions  discussed herein
are at least as favorable  to the Company as those which the Company  could have
negotiated with unaffiliated parties.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits.  The following  exhibits are filed  herewith or  incorporated  by
reference herein.

Exhibit
  No.         Description
  ---         -----------

 3.1*   Certificate of Incorporation of the Company

 3.2*   By-Laws of the Company

 4*     Copy of specimen certificate representing shares of common stock, $.0001
        par value per share, of the Company

10.1*   Asset Purchase Agreement and Plan of Reorganization  between the Company
        and SAC Delaware dated August 21, 1995

10.2*   Lease  Agreement  between  Nicholas  R.  Dinapoli,  Jr.,  as Trustee for
        Brookfield  Commerce and the Company for property located at 27 Governor
        Street, Ridgefield, Connecticut, dated February 22, 1993

10.3*   Lease Agreement between Nicholas R. Dinapoli,  as trustee for Brookfield
        Commerce,  and the Company for  property  located at 91 Commerce  Drive,
        Brookfield, Connecticut, dated February 22, 1993

10.4*   Supply Agreement for paint stripping products between Samax Enterprises,
        Inc. and the Company dated January 5, 1996

10.5*   License Agreement for coatings and sealants Technologies between Richard
        B.Kennedy and the Company as licensee dated December 9, 1992

10.6*   License  Agreement  for  packaging  applications  of  foam  Technologies
        between  Richard B. Kennedy,  Patrick J. Crehan and Richard J. Fricke as
        licensors and the Company as licensee dated December 9, 1992

10.7*   License  Agreement for fire retardant  applications of foam Technologies
        between  Richard B. Kennedy,  Patrick J. Crehan and Richard  J.Fricke as
        licensors and the Company as licensee dated December 9, 1992

10.8*   Amendment to Technology License Agreements of foam Technologies  between
        Richard  B.Kennedy,  Patrick J. Crehan and Richard J.Fricke as licensors
        and the Company as licensee dated August 23, 1993

10.9*   Employment  Agreement  between the Company and Mr.  Stephen J.  Thompson
        dated August 13, 1991, as amended

10.10*  Employment Agreement between the Company and Mr. Richard J. Fricke dated
        August 13, 1991, as amended
<PAGE>
10.11*  Employment  Agreement  between the Company  and Mr.  Robert F.  Thompson
        dated January 31, 1996

10.12*  Consulting Agreement between SSC Marketing, Inc and the Company dated as
        of November 1, 1996

10.13*  Customer Service  Agreement  between SSC Marketing,  Inc and the Company
        dated as of November 1, 1996

10.14   License  Agreement  between Clement H. Royer and the Company dated as of
        February 19, 1997, relating to NaturalCool technology

10.15   Chase-Royer Commercial Transaction among Rudolph L. Chase, Natural Cool,
        Ltd.,  Natural Cool,  Inc.,  and Clement H. Royer,  dated as of March 1,
        1997, relating to conveyance of rights to NaturalCool technology

10.16   Financial  Accord among Rudolph L. Chase,  Raymond C. Chase, and Clement
        H.  Royer,  dated  as  of  March  1,  1997,  relating  to  royalties  on
        NaturalCool Technology

10.17   Agreement between Natural Cool, Inc., and the Company dated as of May 6,
        1998, relating to acquisition of assets of Natural Cool, Inc.

10.18   License  Agreement  between  Rudolph  Chase and Raymond  Chase,  and the
        Company  dated as of May 6, 1998,  relating to licensing of  NaturalCool
        patent rights

10.19   Promissory Note of Natural Cool, Inc., guaranteed by the Company,  dated
        as of May 6, 1998,  relating to  acquisition  of assets of Natural Cool,
        Inc.

10.20   Bill of Sale of  Rudolph  Chase and  Raymond  Chase,  dated as of May 6,
        1998, relating to sale of stock of Natural Cool, Inc. to the Company

10.21   Bill of Sale of Natural Cool, Inc, dated as of May 6, 1998,  relating to
        sale of assets of Natural Cool, Inc. to the Company

27      Financial Data Schedule


-----------
*    Incorporated by reference from the Registrant's  Registration  Statement on
     Form 10-SB filed December 31, 1996.

(b)  Reports on Form 8-K.

     No reports on Form 8-K were filed during the last quarter of the year ended
December 31, 1997.

<PAGE>



                 SAFE ALTERNATIVES CORPORATION OF AMERICA, INC.
                                TABLE OF CONTENTS


Report of Independent Auditors -  
  Green, Holman, Frenia and Company, LLP                        F-1

Report of Independent Auditors -  
  Ernst & Young LLP                                             F-2

Balance Sheets,
December 31, 1997 and 1996                                      F-3

Statements of Operations,
For the Years Ended December 31, 1997 and 1996                  F-4

Statements of Changes in Stockholders' Deficit,                 F-5
  For the Years Ended December 31, 1997 and 1996

Statements of Cash Flows,                                       F-6
  For the Years Ended December 31, 1997 and 1996

Notes to Financial Statements                            F-7 - F-13

<PAGE>


                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders
Safe Alternatives Corporation of America, Inc.

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

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  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 audit provides 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 Safe Alternatives  Corporation
of  America,  Inc. as of  December  31, 1997 and the results of its  operations,
stockholders' deficit and cash flows for the year then ended, in conformity with
generally accepted accounting principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company will continue as a going concern. As more fully described in Note 3, the
Company  has  incurred  recurring  operating  losses  and has a working  capital
deficiency. These conditions raise substantial doubt about the Company's ability
to continue as a going  concern.  The  financial  statements  do not include any
adjustments  to reflect the possible  future effects on the  recoverability  and
classification of assets or the amounts and  classifications of liabilities that
may result from the outcome of this uncertainty.

                             /S/ GREEN, HOLMAN, FRENIA AND COMPANY, L.L.P.

                             Certified Public Accountants

Woodbridge, New Jersey
July 1, 1998

                                       F-1
<PAGE>



                         Report of Independent Auditors


To the Board of Directors and Stockholders
Safe Alternatives Corporation of America, Inc.

We have audited the accompanying balance sheet of Safe Alternatives  Corporation
of America,  Inc.,  as of December  31,  1996,  and the  related  statements  of
operations,  changes in  stockholders'  deficit and cash flows for the year then
ended.  These  financial  statements  are the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  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 audit provides 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 Safe Alternatives  Corporation
of America, Inc. at December 31, 1996, and the results of its operations and its
cash  flows for the year then  ended,  in  conformity  with  generally  accepted
accounting principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company will continue as a going concern. As more fully described in Note 3, the
Company  has  incurred  recurring  operating  losses  and has a working  capital
deficiency. These conditions raise substantial doubt about the Company's ability
to continue as a going  concern.  The  financial  statements  do not include any
adjustments  to reflect the possible  future effects on the  recoverability  and
classification  of assets or the amounts and  classification of liabilities that
may result from the outcome of this uncertainty.

                                              /S/ ERNST & YOUNG LLP

Stamford, Connecticut
February 24, 1997


                                       F-2

<PAGE>



                 SAFE ALTERNATIVES CORPORATION OF AMERICA, INC.
                                 BALANCE SHEETS
                           DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                                1997                1996
                                                                            ------------        ------------
                                         ASSETS
<S>                                                                         <C>                 <C>         
Current Assets
  Cash                                                                      $     12,282        $      3,994
  Accounts receivable                                                             31,187              12,162
  Advances to employees                                                           19,922
  Inventories                                                                    159,473              13,187
                                                                            ------------        ------------
    Total current assets                                                         202,942              49,265
                                                                            ------------        ------------

Property, Plant and Equipment
  Equipment                                                                      136,084             134,548
  Leasehold improvements                                                          64,722              64,722
  Furniture and fixtures                                                         107,142             107,032
                                                                            ------------        ------------
                                                                                 307,948             306,302
  Less accumulated depreciation                                                 (190,621)           (174,085)
                                                                            ------------        ------------
    Property, plant and equipment, net                                           117,327             132,217
                                                                            ------------        ------------

Other Assets
  Organization costs, less accumulated amortization of
    $60,822 and $52,713 in 1997 and 1996, respectively                             8,109
  Deposits and other noncurrent assets                                            72,713              12,564
                                                                            ------------        ------------
    Total other assets                                                            72,713              20,673
                                                                            ------------        ------------
                                                                            $    392,982        $    202,155
                                                                            ============        ============

                         LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities
  Accounts payable and other accrued expenses                               $    104,769        $    260,972
  Current maturities of stockholders' loans                                      625,100             467,065
                                                                            ------------        ------------
    Total current liabilities                                                    729,869             728,037
                                                                            ------------        ------------
Stockholders' Loans, Net of Current Maturities                                   526,665
                                                                            ------------        ------------
Loss Contingency                                                                  26,000
                                                                            ------------        ------------

Stockholders' Deficit
  Common stock, $.0001 par value, 200,000,000 shares
   authorized, 12,471,120 in 1997 and 9,304,000 issued
   (including shares in treasury)                                                  1,247                 931
  Additional paid-in capital                                                  15,227,876          11,155,273
  Accumulated deficit                                                        (16,120,834)        (11,684,245)
  Subscription issuable                                                            2,160               2,160
                                                                            ------------        ------------
                                                                                (889,551)           (525,881)

  Treasury stock                                                                      (1)                 (1)
                                                                            ------------        ------------
  Total stockholders' deficit                                                   (889,552)           (525,882)

                                                                            $    392,982        $    202,155
                                                                            ============        ============
</TABLE>



      See independent auditors' report and notes to financial statements.


                                      F-3

<PAGE>



                 SAFE ALTERNATIVES CORPORATION OF AMERICA, INC.
                            STATEMENTS OF OPERATIONS
                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                             1997                    1996
                                                                         ------------            ------------
<S>                                                                      <C>                     <C>         
Sales                                                                    $    134,464            $     63,854
                                                                         ------------            ------------
Costs and Expenses
  Cost of goods sold                                                           72,890                  39,501
  Selling, general and administrative                                       3,506,715               3,571,515
  Research and development                                                    265,736                 274,932
  Depreciation and amortization                                                57,806                  66,680
                                                                         ------------            ------------
    Total costs and expenses                                                3,903,147               3,952,628
                                                                         ------------            ------------
Loss from Operations                                                       (3,768,683)             (3,888,774)
                                                                         ------------            ------------

Other Income and Expenses
  Interest expense - stockholders                                             (20,906)                (28,991)
  Estimated litigation settlement                                             (26,000)
                                                                         ------------            ------------

    Total other income and expenses                                           (46,906)                (28,991)
                                                                         ------------            ------------
Loss Before Extraordinary Item                                             (3,815,589)             (3,917,765)

Extraordinary Item                                                           (621,000)
                                                                         ------------            ------------

Net Loss                                                                 $ (4,436,589)           $ (3,917,765)
                                                                         ============            ============ 

Earnings (Loss) per Common Share:
  Loss Before Extraordinary Item                                         $      (0.33)           $      (0.47)
  Extraordinary Item                                                            (0.05)                   0.00
                                                                         ------------            ------------
  Net Loss per Common Share                                              $      (0.38)           $      (0.47)
                                                                         ============            ============ 
Average Number of Common Shares Outstanding                                11,415,628               8,342,511
                                                                         ============            ============ 

</TABLE>



      See independent auditors' report and notes to financial statements.


                                      F-4


<PAGE>



                 SAFE ALTERNATIVES CORPORATION OF AMERICA, INC.
                  STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT


<TABLE>
<CAPTION>
                                                                       Additional
                                                Common Stock             Paid-in       Accumulated   Subscription   
                                           Shares         Amount         Capital         Deficit       Issuable     
                                           ------         ------         -------         -------       --------     
<S>                                      <C>          <C>             <C>            <C>             <C>            
Balance at December 31, 1995             8,500,000    $        850    $  7,413,260   $ (7,766,480)   $      2,160   
Proceeds from sale of common stock,
    net of expenses of $128,728            406,100              41       1,706,503   
Issuance of common stock as
    compensation                           397,900              40       2,035,510   
Net loss                                                                               (3,917,765)
                                         ---------             ---      ----------    -----------           -----   

Balance at December 31, 1996             9,304,000             931      11,155,273    (11,684,245)          2,160   
Proceeds from sale of common stock         878,840              88       1,042,062
Issuance of common stock as                     --
    compensation                         2,288,280             228       3,030,542
Net loss                                                                               (4,436,589)     
                                         ---------             ---      ----------    -----------           -----   
Balance at December 31, 1997            12,471,120    $      1,247    $ 15,227,877   $(16,120,834)   $      2,160   
                                        ==========    ============    ============   ============    ============   

<CAPTION>

                                             Treasury Stock                       
                                         Shares         Amount             Total  
                                         ------         ------             -----  
<S>                                    <C>           <C>             <C>          
Balance at December 31, 1995           (1,065,066)   $       (107)   $   (350,317)
Proceeds from sale of common stock,                                               
    net of expenses of $128,728           482,000              48       1,706,592
Issuance of common stock as                                                       
    compensation                          571,384              58       2,035,608
Net loss                                                               (3,917,765)
                                                                                  
Balance at December 31, 1996              (11,682)             (1)       (525,882)
Proceeds from sale of common stock                                      1,042,150 
Issuance of common stock as                                                       
    compensation                                                        3,030,770
                                       ----------    ------------    ------------ 
Net loss                                                               (4,436,589)
                                                                                  
Balance at December 31, 1997              (11,682)   $         (1)   $   (889,551)
                                       ==========    ============    ============ 
</TABLE>


      See independent auditors' report and notes to financial statements.


                                      F-5

<PAGE>



                     SAFE ALTERNATIVES CORPORATION OF AMERICA, INC.
                                STATEMENTS OF CASH FLOWS
                     FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                             1997                 1996
                                                                         -----------           ----------- 
<S>                                                                      <C>                   <C>         
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                                 $(4,436,589)          $(3,917,765)
Adjustments to reconcile net loss to net
 cash used in operating activities
  Depreciation and amortization                                               57,811                66,680
  Estimated litigation settlement                                             26,000
  Non-cash compensation and commission                                     3,030,769             2,035,608
  Changes in assets and liabilities
   Accounts receivable                                                       (19,025)                 (953)
   Advances to employees                                                      19,922               (11,944)
   Inventories                                                              (146,286)               (9,219)
   Prepaid expenses and other current assets                                   2,744
   Deposits and other noncurrent assets                                      (60,149)               11,494
   Accounts payable                                                         (156,203)              161,249
                                                                         -----------           ----------- 
  Net cash used in operating activities                                   (1,683,750)           (1,662,106)
                                                                         -----------           ----------- 

CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to fixed assets                                                  (34,812)              (45,588)
                                                                         -----------           ----------- 
  Net cash used by investing activities                                      (34,812)              (45,588)
                                                                         -----------           ----------- 

ASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from stockholders' loans                                          832,700               332,115
  Repayments of stockholders' loans                                         (148,000)             (339,350)
  Net proceeds from issuance of common
   stock and subscriptions                                                 1,042,150             1,706,592
                                                                         -----------           ----------- 
  Net cash provided by financing activities                                1,726,850             1,699,357
                                                                         -----------           ----------- 
Net Increase (Decrease) in Cash                                                8,288                (8,337)

Cash at Beginning of Year                                                      3,994                12,331
                                                                         -----------           ----------- 
Cash at Ending of Year                                                   $    12,282           $     3,994
                                                                         ===========           ===========
</TABLE>




      See independent auditors' report and notes to financial statements.

                                      F-6

<PAGE>



                 SAFE ALTERNATIVES CORPORATION OF AMERICA, INC.
                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1997 AND 1996

1.   REORGANIZATION AND BASIS OF PRESENTATION

On September 15, 1995,  the  stockholders  of Safe  Alternatives  Corporation of
America,  Inc.,  a Delaware  corporation,  ("SAC  Delaware")  approved  an Asset
Purchase Agreement and Plan of Reorganization (the "Reorganization") whereby the
assets of SAC  Delaware  were sold to Safe  Alternatives  of  America,  Inc.,  a
Florida  corporation  then operating under the name Portsmouth  Corporation (the
"Company"),  in exchange for 8,000,000 shares of the Common Stock of the Company
and  the   assumption  of  SAC   Delaware's   liabilities.   Subsequent  to  the
Reorganization,  SAC Delaware was liquidated.  Pursuant to such liquidation, SAC
Delaware  distributed to each stockholder  0.2736 shares of the Company's Common
Stock  for  each  share  of SAC  Delaware  that was  owned.  As a result  of the
Reorganization,  the  stockholders of SAC Delaware  controlled 94% of the issued
and outstanding Common Stock of the Company and,  therefore,  the Reorganization
has been accounted for as the  acquisition  of the Company by SAC Delaware.  The
financial  statements  presented,  therefore,  include the historical  financial
statements  of  SAC  Delaware  prior  to  the   Reorganization.   Prior  to  the
Reorganization,  the Company had been an inactive  public entity with no assets,
liabilities,  or net worth.  The costs of this  transaction have been charged to
expense.

In  addition,  as part of the  Reorganization,  the Company  agreed to pay a six
percent   royalty  (the   "Royalty")  on  the  gross  revenues  of  the  Company
attributable  to the  assets  of the  Company  acquired  in the  Reorganization,
payable to the  stockholders  of SAC Delaware of record as of September 15, 1995
(representing  8,000,000  of  the  8,500,000  common  shares  outstanding  as of
December 31, 1995). The Royalty is payable on a quarterly basis during the sixty
months  beginning  September 28, 1995, and the  cumulative  total of all royalty
payments  is limited to  $8,500,000.  No Royalty  payments  have been made as of
December 31, 1997 and 1996.

The issuance of 8,000,000  shares of the  Company's  Common Stock in  connection
with the Reorganization has been treated as a reverse stock split and the shares
of  issued  and   outstanding   Common  Stock  of  the  Company   prior  to  the
Reorganization have been restated for all periods presented.

Subsequent  to  the  Reorganization,  the  Company  changed  its  name  to  Safe
Alternatives Corporation of America, Inc.

Operations

The Company has secured  exclusive  manufacturing,  marketing,  and distribution
rights  to  certain   patented,   patent   pending  and   application-in-process
technologies.  Such technologies are associated with paint stripping  chemicals,
water-based foams, and an ambient air exchanger.

                                       F-7


<PAGE>



                 SAFE ALTERNATIVES CORPORATION OF AMERICA, INC.
                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1997 AND 1996

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Method of Accounting

The financial  statements  are prepared  using the accrual basis of  accounting.
Generally accepted  accounting  principles  requires  management,  under certain
circumstances,  to make  estimates  and  assumptions  that  affect  the  amounts
reported in the financial  statements  and  accompanying  notes.  Actual results
could differ from those estimates.

Allowance for Doubtful Accounts

The Company considers trade receivables to be fully collectible; accordingly, no
allowance for doubtful accounts is required.

Inventories

Inventories,  primarily  finished  goods,  are  stated  at  the  lower  of  cost
(first-in, first-out method) or market value.

Property, Plant and Equipment

Property,  plant and equipment are recorded at cost. Depreciation is provided on
a  straight-line  basis over estimated  useful lives of the  respective  assets.
Leasehold  improvements  are  depreciated  over the shorter of the lease term or
economic life of the related improvement. Maintenance and repairs are charged to
expense as incurred; major renewals and betterments are capitalized.  When items
of  property,  plant and  equipment  are sold or retired,  the related  cost and
accumulated  depreciation  are removed from the accounts and any gain or loss is
included  in the  results of  operations.  Depreciation  expense was $49,696 and
$47,543 for the years ended December 31, 1997 and 1996, respectively.

Organization Costs

Organization costs are amortized over 60 months using the straight-line  method.
Amortization  expense was $8,110 and $12,165  for the years ended  December  31,
1997 and 1996, respectively.

Earnings Per Share

The following data show the amounts used in computing earnings per share.

                                                    1997          1996
                                                -------------  --------------
    Loss from continuing operations
      before extraordinary items                $(3,815,589)   $(3,917,765)
    Loss used in basic EPS                       (3,815,589)    (3,917,765)
                                                -------------  --------------
    Weighted average number of common
      shares used in basic EPS                   11,415,628      8,342,511
                                                =============  ==============


                                       F-8
<PAGE>



                 SAFE ALTERNATIVES CORPORATION OF AMERICA, INC.
                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1997 AND 1996

3.   GOING CONCERN

The  accompanying  financial  statements  have been prepared in conformity  with
generally accepted accounting principles, which contemplates continuation of the
Company  as a  going  concern.  However,  the  Company  has  incurred  recurring
operating  losses and has a working  capital  deficiency.  At December 31, 1997,
current  liabilities  exceed current assets by $526,927,  and total  liabilities
exceed total assets by $889,552.  These conditions raise substantial doubt about
the Company's ability to continue as a going concern.

In view of these  matters,  realization  of a major portion of the assets in the
accompanying  balance  sheet  is  dependent  upon  continued  operations  of the
Company,  which  in turn is  dependent  upon the  Company's  ability  to  obtain
sufficient financing, and the success of its future operations. Management plans
to finance its  operations  with a combination  of sales of common stock and, in
the longer term, borrowings and revenues from product sales. Management believes
these  actions  provide the  opportunity  for the Company to continue as a going
concern.

4.   LEASES

The  Company  rents its  office  space  under a  noncancelable  operating  lease
agreement which expires on September 30, 1998. In addition,  the Company is also
leasing a laboratory and testing facility under a noncancelable  operating lease
expiring on February 28, 1998.

Future minimum rental payments under the Company's  operating leases are $44,181
in 1998. Rent expense was $138,868 and $113,885 for the years ended December 31,
1997 and 1996, respectively.

5.   STOCKHOLDERS' DEFICIT

Treasury Stock

Treasury stock  represents  1,682 shares  (recorded at cost) being held in trust
(by Richard J. Fricke, an officer of the Company) to be used for future issuance
to employees,  investors,  and other potential  funding sources.  As the Company
directly  benefits from the sales of the shares in the trust,  these shares have
been recorded as treasury stock.

Shares Issued as Compensation and Commission

During 1997 and 1996, respectively, 1,098,200 and 799,284 fully vested shares of
the Company's Common Stock were issued to outside consultants. The fair value of
shares awarded,  based upon the value of Common Stock sold during those periods,
were  $1,508,150 and $1,697,608  for 1997 and 1996,  respectively,  and has been
recorded as compensation expense.

In  addition,  during 1997 and 1996,  respectively,  686,080  and 170,000  fully
vested  shares of the  Company's  Common  Stock were  issued to  officers of the
Company. The fair value of shares awarded,  based upon the value of Common Stock
sold  during  these  periods,  were  $841,620  and  $338,000  for 1997 and 1996,
respectively, and have been recorded as compensation expense.


                                       F-9

<PAGE>



                 SAFE ALTERNATIVES CORPORATION OF AMERICA, INC.
                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1997 AND 1996

6.   INCOME TAXES

The Company has available  unused  operating loss  carryforwards at December 31,
1997 of  approximately  $7,920,000 for federal purposes and $7,891,000 for state
purposes that may be applied against future taxable income for federal and state
liability,  respectively.  Cumulative  net operating  loss  carryforwards  as of
December  31,  1996 as reported on the  Company's  federal and state  income tax
returns  approximated  $6,573,000.  As a result of changes in  ownership  of the
Company, the future tax benefits from its net operating losses will be limited.

The tax  benefit of the  cumulative  carryforwards  as of  December  31, 1997 is
approximately  $2,690,000  for federal  and  approximately  $828,000  for state,
offset in full by a valuation allowance.

The tax  benefit of the  cumulative  carryforwards  as of  December  31, 1996 is
approximately  $2,234,000  for federal  and  approximately  $690,000  for state,
offset in full by a valuation allowance.

7.   LICENSE AGREEMENTS

The Company maintains four significant exclusive licensing agreements. Each such
license  has  substantially  the  same  terms  and  conditions.  Each  licensing
agreement  is valid until  April 17,  2050,  unless the  Company  fails to pay a
royalty of four percent of the gross sales derived from the  exploitation of the
respective   technology,   with  certain  limitations  for  sales  derived  from
inter-company transfers or transactions with subsidiaries.  The Company has also
agreed to pay all maintenance  fees and fees for filing and  prosecuting  patent
applications  pending at the time the licenses were  executed.  All rights under
the licenses are freely assignable by the Company.  The licenses were amended on
August 23, 1993 to collectively  provide for a required  minimum monthly payment
of $5,000,  in the  aggregate.  In addition,  a weekly payment of $1,200 to Mrs.
Kathleen  Kennedy during her lifetime is required in lieu of  progressive  sales
minimums due  beginning in 1993.  The four percent  royalty  payments  described
above, however, would nonetheless survive.

During 1997, the Company modified the payment terms of the licensing agreements,
thus causing the agreements to become non-exclusive.

8.   RELATED PARTY TRANSACTIONS

Stockholders' Loans

Stockholders' loans at December 31, 1997 and 1996, consisted of the following:

<TABLE>
<CAPTION>
                                                                          1997            1996
                                                                         ----            ----
<S>                                                                   <C>            <C>       
Unsecured demand note to a Partnership of two stockholders,
  bearing no interest.                                                $  352,965     $  316,265
Unsecured demand note to a stockholder, bearing no interest.
                                                                      $    8,800     $   15,800
Unsecured demand note to a stockholder, bearing no interest.

                                                                      $       -      $  135,000
</TABLE>


                                      F-10

<PAGE>



                 SAFE ALTERNATIVES CORPORATION OF AMERICA, INC.
                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1997 AND 1996

8.   RELATED PARTY TRANSACTIONS (CONTINUED)

Unsecured notes to five stockholders, bearing
interest at 8%.  One-third of the outstanding
balance  in  due  September  1998,  including
interest.   The  remaining   balance  is  due
January 1999, including interest.                  $  790,000      $        -
                                                   ----------      ----------
Total                                              $1,151,765      $  467,065
Less current maturities                            $  625,100      $  467,065
                                                   ----------      ----------
Long-term debt, net of current maturities          $  526,665      $        -
                                                   ==========      ==========

Aggregate maturities required on stockholders' loans at December 31, 1997 are as
follows:

                     Year                  Amount
                     ----                 ------

                     1998               $  625,100
                     1999                  526,665
                                        ----------

                     Total              $1,151,765

Officers' Compensation

The  officers  of the  Company  have  employment  contracts  entitling  them  to
aggregate cash compensation of $725,000 plus incentive bonuses. Amounts actually
paid to the  officers in 1997 and 1996  amounted to $36,000 and $148,000 in each
of the years,  respectively.  Each of the  officers  has waived his rights  with
respect to salary arrearages. No bonuses have been paid out in any of the years.
In accordance with their employment  agreements,  the two executive officers are
entitled  to options to  purchase  (at par value) 1% of the  outstanding  Common
Stock  of the  Company  at  December  31 of  the  prior  year.  Based  on  these
agreements, the Company issued to each of these officers 85,000 shares of Common
Stock from  Treasury in 1996 and  recorded  additional  compensation  expense to
officers of $338,000.

Licensing Agreement

An officer of the  Company  has an  interest  in one of the  licenses  discussed
above.  For the years  ended  December  31,  1997 and 1996,  there  have been no
payments to such officer under the aforementioned agreements.


                                      F-11

<PAGE>



                 SAFE ALTERNATIVES CORPORATION OF AMERICA, INC.
                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1997 AND 1996

9.   MARKETING AGREEMENT

The Company has entered into two  agreements  with SAC - a consulting  agreement
(the "Consulting Agreement") dated as of November 1, 1996 and a customer service
agreement  (the "Service  Agreement")  dated as of December 15, 1996.  Under the
terms  of  the  Consulting  Agreement,  SSC  will  provide  the  Company  with a
comprehensive sales and marketing program for the Company's products,  including
hiring  sales  representatives,  developing  sales  contacts,  marketing  plans,
advertising  campaigns,  customer  service  programs,  and sales  accounting and
reporting  systems.  The Company will pay SSC a flat fee of $8,000 per month, an
additional  fee of $4,000 for each sales  manager  engaged by SSC to service the
Company's account, with a minimum of three such sales managers to be so engaged,
plus approved expenses of SSC and its sales managers.  In addition, in the event
SAC's  annual  revenues  exceed  $2,600,000,  the  Company  shall pay each sales
manager  a 2%  commission  on  gross  revenues  generated  in  their  respective
territories.  In the event the Company's annual revenues exceed $2,800,000,  the
Company shall pay SSC a 5.5% commission on the Company's  gross  revenues,  with
the  $8,000  monthly  payments  to be  credited  against  the  payment  of  such
commissions.  Under the terms of the  Service  Agreement,  SSC will  provide the
Company  with order  entry,  billing,  order  tracking,  sales  forecasting  and
planning,  and  information  processing  services.  The Company  will pay SSC an
additional $5,000 per month for such services, provided that, if at any time the
volume of SAC's  business  exceeds  SSC's  ability to  adequately  perform  such
services,  the parties shall agree upon an increased  fee. A failure to so agree
will result in termination of the Service Agreement.

In December 1997, the Company terminated this agreement for cause. Subsequently,
SSC  Marketing  filed a lawsuit  for  alleged  breach of  contract.  The Company
believes the suit is completely  without merit and intends to vigorously  defend
its position.

10.  EXTRAORDINARY ITEM

During  the year  ended  December  31,  1997,  the  former  President  and Chief
Executive  Officer of Safe  Alternatives  Corporation  of America,  Inc.  issued
464,000 shares in the Company to several  individuals  and unrelated  companies.
Management  has not been able to ascertain if there was any known or  documented
reason.  The  fair  market  value  of  these  issued  shares  totaled  $621,000.
Management has not determined if any legal action will be taken at the corporate
level.

11.  CONTINGENCIES

The  Company is a  defendant  in a lawsuit  filed by the  creditors  of a former
salesman. In 1995, the salesman waived salaries totaling approximately $100,000.
The suit asks for a reinstatement  of the waived  salaries.  Outside counsel for
the  Company  has  advised  that a  favorable  outcome  is  unlikely.  Since the
plaintiffs can only be awarded the amount of debt owed, accordingly, a provision
for loss of $26,000 has been charged to operations in the accompanying financial
statements for 1997.


                                      F-12

<PAGE>



                 SAFE ALTERNATIVES CORPORATION OF AMERICA, INC.
                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1997 AND 1996

12.  SUBSEQUENT EVENTS

Convertible Notes

In March and April 1998,  the Company issued  $711,500 of 6%  convertible  notes
due, if not earlier converted,  on March 3, 1999. The conversion price per share
is the lesser of 70% of the average  closing bid price per share of common stock
for the five trading days prior to the conversion date or $0.25.

Natural Cool, Inc.

On May 5, 1998,  the  Company  purchased  the assets of Natural  Cool,  Inc.  in
exchange for the Company's assumption of approximately  $152,700 of the seller's
debts.  The purchased assets consist of inventory,  fixed assets,  and all other
tangible and intangible property.

Norfield Corporation

On July 15, 1998,  the Company  entered into an agreement to purchase the assets
of Norfield  Corporation.  The total purchase price of the assets ranges between
$400,000 and $450,000,  depending upon the future financial  performance of this
new  division.  The  purchase  price will  consist of  $250,000  in cash and the
remainder in  promissory  notes.  The assets  include  inventory,  fixed assets,
leasing  and  licensing  agreements,  and  all  other  tangible  and  intangible
property.





                                      F-13

<PAGE>



                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                  SAFE ALTERNATIVES CORPORATION OF AMERICA, INC.

Date: August 27, 1998             By:    /s/ Richard J. Fricke
                                         --------------------------
                                         Richard J. Fricke
                                         President & Chief Executive Officer

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


<TABLE>
<CAPTION>
Signature                               Title                               Date
---------                               -----                               ----

<S>                               <C>                                  <C>
/s/ Richard J. Fricke
-------------------------         President, Chief Executive           August 27, 1998
Richard J. Fricke                 Officer & Director (Principal
                                  Executive Officer)


/s/ Robert Percheski
------------------------          Chief Financial Officer              August 27, 1998
Robert Percheski                  (Principal Financial and
                                  Accounting Officer)


/s/ Richard W. Hill
-------------------------         Director                             August 27, 1998
Richard W. Hill


/s/ Nicky Hunt
------------------------          Director                             August 27, 1998
Nicky Hunt


/s/ Sean F. McNamara 
------------------------          Director & Secretary                 August 27, 1998
Sean F. McNamara
</TABLE>


<PAGE>



                                 EXHIBIT INDEX

Exhibit
 No.         Description
 ---         -----------

 3.1*   Certificate of Incorporation of the Company

 3.2*   By-Laws of the Company

 4*     Copy of specimen certificate representing shares of common stock, $.0001
        par value per share, of the Company

10.1*   Asset Purchase Agreement and Plan of Reorganization  between the Company
        and SAC Delaware dated August 21, 1995

10.2*   Lease  Agreement  between  Nicholas  R.  Dinapoli,  Jr.,  as Trustee for
        Brookfield  Commerce and the Company for property located at 27 Governor
        Street, Ridgefield, Connecticut, dated February 22, 1993

10.3*   Lease Agreement between Nicholas R. Dinapoli,  as trustee for Brookfield
        Commerce,  and the Company for  property  located at 91 Commerce  Drive,
        Brookfield, Connecticut, dated February 22, 1993

10.4*   Supply Agreement for paint stripping products between Samax Enterprises,
        Inc. and the Company dated January 5, 1996

10.5*   License Agreement for coatings and sealants Technologies between Richard
        B.Kennedy and the Company as licensee dated December 9, 1992

10.6*   License  Agreement  for  packaging  applications  of  foam  Technologies
        between  Richard B. Kennedy,  Patrick J. Crehan and Richard J. Fricke as
        licensors and the Company as licensee dated December 9, 1992

10.7*   License  Agreement for fire retardant  applications of foam Technologies
        between  Richard B. Kennedy,  Patrick J. Crehan and Richard  J.Fricke as
        licensors and the Company as licensee dated December 9, 1992

10.8*   Amendment to Technology License Agreements of foam Technologies  between
        Richard  B.Kennedy,  Patrick J. Crehan and Richard J.Fricke as licensors
        and the Company as licensee dated August 23, 1993

10.9*   Employment  Agreement  between the Company and Mr.  Stephen J.  Thompson
        dated August 13, 1991, as amended

10.10*  Employment Agreement between the Company and Mr. Richard J. Fricke dated
        August 13, 1991, as amended

10.11*  Employment  Agreement  between the Company  and Mr.  Robert F.  Thompson
        dated January 31, 1996

10.12*  Consulting Agreement between SSC Marketing, Inc and the Company dated as
        of November 1, 1996
<PAGE>
10.13*  Customer Service  Agreement  between SSC Marketing,  Inc and the Company
        dated as of November 1, 1996

10.14   License  Agreement  between Clement H. Royer and the Company dated as of
        February 19, 1997, relating to NaturalCool technology

10.15   Chase-Royer Commercial Transaction among Rudolph L. Chase, Natural Cool,
        Ltd.,  Natural Cool,  Inc.,  and Clement H. Royer,  dated as of March 1,
        1997, relating to conveyance of rights to NaturalCool technology

10.16   Financial  Accord among Rudolph L. Chase,  Raymond C. Chase, and Clement
        H.  Royer,  dated  as  of  March  1,  1997,  relating  to  royalties  on
        NaturalCool Technology

10.17   Agreement between Natural Cool, Inc., and the Company dated as of May 6,
        1998, relating to acquisition of assets of Natural Cool, Inc.

10.18   License  Agreement  between  Rudolph  Chase and Raymond  Chase,  and the
        Company  dated as of May 6, 1998,  relating to licensing of  NaturalCool
        patent rights

10.19   Promissory Note of Natural Cool, Inc., guaranteed by the Company,  dated
        as of May 6, 1998,  relating to  acquisition  of assets of Natural Cool,
        Inc.

10.20   Bill of Sale of  Rudolph  Chase and  Raymond  Chase,  dated as of May 6,
        1998, relating to sale of stock of Natural Cool, Inc. to the Company

10.21   Bill of Sale of Natural Cool, Inc, dated as of May 6, 1998,  relating to
        sale of assets of Natural Cool, Inc. to the Company

27      Financial Data Schedule


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*  Incorporated by reference from the Registrant's  Registration  Statement   on
    Form 10-SB filed December 31, 1996.

(b)  Reports on Form 8-K.