SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

               [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                                       OR

             [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1995
              Commission File Number: 33-18099-NY and 33-23169-NY

                           PHASE-OUT OF AMERICA, INC.
        (Exact Name of small business issuer as specified in its charter)

         DELAWARE                                               11-2873662
(State or other jurisdiction of                          (IRS Employer I.D. No.)
Incorporation or organization)

                     140 Broadway, Lynbrook, New York 11563
                    (Address of principal executive offices)

Issuer's telephone number, including area code:                   (516) 599-1900

Securities registered pursuant to Section 12(b) of the Act:                 None
Securities registered pursuant to Section 12(g) of the Act:                 None

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15 (d) of the  Securities  Exchange Act of 1934,  during the  preceding 12
months (or for such shorter period that the registrant was required to file such
reports),  and (2) has been subject to such filing  requirements for the past 90
days.

                           YES _X_           NO___

Check if no disclosure of delinquent  filers  pursuant to Item 405 of Regulation
S-B  is not  contained  herein,  and  will  not be  contained  to  the  best  of
registrant's   knowledge,   in  definitive   proxy  or  information   statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB or any amendment to this Form 10-KSB.

The  registrant's  operating  revenues  for its most  recent  fiscal  year  were
$1,532,405.

The number of shares  outstanding  on March 31,  1996 was  74,859,319  shares of
Common Stock, .00003 par value.




Continued...


<PAGE>



The aggregate market value of the voting Common Stock held by non-affiliates (1)
of the registrant  based on the average of the high and low bid prices ($.04) of
the Company's  Common Stock,  as of May 31, 1996,  is  approximately  $2,058,462
based  upon  the  51,461,555  shares  of  Registrant's   Common  Stock  held  by
non-affiliates.

The number of shares  outstanding of each of the Registrant's  classes of Common
Stock, as of December 31, 1995 is 74, 859,319 shares all of one class of $.00003
par value common stock.

(1)  "Affiliates"  solely for purposes of this item refers to those persons who,
during the three months  preceding  the filing of this Form 10-KSB were officers
or  directors  of the  Company  and/or  beneficial  owners  of 5% or more of the
Company's outstanding stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      NONE


Transitional Small Business Disclosure Format: (check one)    Yes___     No_X_

                                        2

<PAGE>



                            PHASEOUT OF AMERICA, INC.
                                   Form 10-KSB
                       Fiscal Year Ended December 31, 1995


                                Table of Contents
                                -----------------


<TABLE>
<CAPTION>
PART I                                                                                                       PAGE
------                                                                                                       ----


<S>                                                                                                     <C>
Item 1.           Business                                                                                     4
Item 2.           Properties                                                                                   9
Item 3.           Legal Proceedings                                                                            9
Item 4.           Submission of Matters to a Vote of Security Holders                                         10

PART II

Item 5.           Market for Company's Common Equity and Related Stockholder Matters.                         10
Item 6.           Management's Discussion and Analysis of Financial Condition and Results                     11
                  of Operations.
Item 7.           Financial Statements                                                                  F3 - F15
Item 8.           Changes in or Disagreement with Accountants on Accounting and Financial                     15
                  Disclosure.

PART III

Item 9.           Directors, Executive Officers, Promoters and Control Persons; Compliance with               16
                  Section 16(a) of the Exchange Act.
Item 10.          Executive Compensation                                                                      18
Item 11.          Security Ownership of Certain Beneficial Owners and Management                              19
Item 12.          Certain Relationships and Related Transactions                                              20

PART IV

Item 13.          Exhibits and Reports on Form 8-K                                                            20
</TABLE>


Signatures
Supplemental Information



                                        3

<PAGE>


PART 1

ITEM 1. Business

The Company

     The Company is a corporation  organized  under the laws of Delaware on July
17,  1987,  has a limited  operating  history  and has  operated at a loss since
inception.  Since the completion of its initial  public  offering in April 1989,
the  Company  had  primarily   concentrated   its  efforts  in  two  areas:  the
establishment  of medical  credibility  through  clinical trials performed at an
independent  testing  facility and the test marketing of PHASEOUT (also referred
to  as  the  "Product"  or  the  "device')  throughout  the  United  States  and
internationally via various channels of distribution.

     The Company's primary product,  PHASEOUT, is a patented device developed to
help  a  person  quit  smoking  without  the  use  of any  drugs,  chemicals  or
attachments.  The  device  was  designed  to  gradually  reduce  the  amounts of
nicotine, tar and carbon monoxide consumed from cigarette smoke.

     Prior to 1994,  the  Company,  concentrated  its efforts in two areas:  (1)
establishing  medical  credibility  through  clinical  trials on human subjects,
performed at independent testing facilities to validate the scientific findings,
(the device has been  scientifically  tested by the U.S.  Testing  Company using
Federal Trade Commission ("FTC") methods and guidelines and clinically tested on
smokers by independent researchers under controlled laboratory conditions at the
Johns Hopkins University School of Medicine); and (2) test-marketing the product
throughout the U.S.  through various  channels of  distribution.  Market testing
took place in selected  catalogs and on television  via a half-hour  infomercial
producing a greater  number of orders in 1995,  when  promotional  expenses were
increased.


     The  Company  had  received  a  "warning  letter"  from  the  Food and Drug
Administration  "FDA" in mid  1993,  stating  that the  PhaseOut  product  was a
medical device and subject to the  provisions of the FDA. The Company  responded
through legal  counsel,  taking the position that the PhaseOut  product is not a
medical  device  within the meaning of the Food,  Drug and  Cosmetics Act "FDCA"
(see Item 3, Legal  Proceedings).  There is no assurance that the FDA will alter
its position that the product is a medical device subject to the FDA.


The Product

     The  PHASEOUT  device is a simple,  easy to use,  mechanical,  light-weight
instrument  that allows the smoker to continue  to smoke their  preferred  brand
cigarettes  and at the  same  time,  gradually  and  sequentially  reduce  their
nicotine  intake  by  over  80%.  This  weaning  process  is the  same  type  of
detoxification  methodology that has proved successful with many other addictive
substances.  Once the smoker has been weaned, their chances to quit for good are
greatly enhanced.  PHASEOUT's  weaning  methodology has an important  additional
psychological benefit for all smokers. It allows the smoker to continue to smoke
their preferred brand until they are ready to quit. Of course,  to achieve these
results  under  normal  smoking  conditions,  smokers  must  avoid  compensatory
practices,  such as smoking more cigarettes and blocking the  ventilation  holes
created by the PHASEOUT device.

     The  PHASEOUT  system  works  without  the use of any drugs,  chemicals  or
attachments  The average  retail price to consumers is $39.95 plus  shipping and
handling. The average wholesale price is $10.00 - $12.00.

                                        4

<PAGE>


     The Company is currently  having the product  manufactured  in Taiwan.  The
Company's  primary source of supply is capable of producing over 30,000 PHASEOUT
units per week. A second manufacturing source in South Korea is going on-line in
mid 1996. In addition,  the Company's  management is studying the feasibility of
having the product manufactured domestically.


How PhaseOut Works

     A smoker  inserts their entire  unopened  pack of  cigarettes  (filtered or
unfiltered - soft pack or box) into the PHASEOUT device. With a simple press and
release that takes just seconds, PHASEOUT processes all of the cigarettes within
the pack.

     The device strategically creates from one to four microfine perforations in
the lip end of each cigarette. These perforations filter and ventilate the smoke
drawn through the cigarette,  thereby  reducing the amount of nicotine and other
toxins inhaled by the smoker.

     One miniature filter  (perforation) is created in Phase one,  filtering out
up to 26% of the  nicotine,  and similar  amounts of other toxins such as carbon
monoxide and tar.  Additional  perforations  are created as the smoker  proceeds
through each of the four Phases.  With each  additional  perforation  there is a
progressive  reduction  of  nicotine  and other  harmful  substances  based upon
controlled laboratory studies. By Phase IV, 80.7% of the nicotine,  91.6% of the
tar, 89.2% of carbon monoxide and 90% of all other tobacco  constituents  (Total
Particulate  Matter) have been eliminated.  As discussed above, these reductions
under normal  smoking  conditions  depend upon proper use of the product and the
treated  cigarettes by smokers.  The suggested period on each phase is two weeks
(eight  week  total),  however,  smokers  can  tailor  the  program to their own
individual liking and proceed at their own pace, under their own timetable.  The
smoker is in control. There is no pressure, no fear of failure. Importantly, any
change in the taste,  flavor or draw of the  cigarette is lessened as the smoker
proceeds through the program due to the gradual transition from phase to phase.

The Smoking Cessation Market

     Cigarette smoking is the number one cause of preventable  illness and death
in the United States.  In excess of 450,000  deaths were directly  attributed to
cigarette  smoking  last year.  More than one of every six deaths in the U.S. is
caused  by  cigarette  smoking.  Of the  country's  total  health  care  budget,
approximately  25% ($65  billion)  is spent  for  smoking  related  illness  and
disease.  This does not include an additional  $35 billion in lost  productivity
and higher insurance costs.



     In the United States,  there are currently  reported to be approximately 46
million  smokers  and  worldwide  the number of smokers is  estimated  to be 1.2
billion.

Scientific and Clinical Testing

Scientific

     The United States Testing  Company,  Inc., an independent  testing facility
which  tests  cigarettes  in  accordance  with  government  standards  for major
cigarette manufacturers, conducted laboratory tests on the use

                                        5

<PAGE>



of PHASEOUT on cigarettes.  These tests were based upon the F.T.C. method, which
is used to rate the tar,  nicotine and carbon monoxide yields of cigarettes sold
in the United States.  Their findings were reported in  Determination of Percent
Reduction of Tar,  Nicotine and Carbon  Monoxide of  Cigarettes  with the Use of
PhaseOut device for Perforating  Packaged  Cigarettes/U.S.  Patent  #4,231,378 .
This report  showed  reductions  of tar,  nicotine  and carbon  monoxide  yields
ranging from 26% in Phase I to 92% in Phase IV using the PHASEOUT method.

Clinical

     Independent  researchers at the Johns Hopkins University School of Medicine
conducted clinical research on PHASEOUT in a controlled  laboratory setting. The
study,  entitled  Phase-Out Filter  Perforation:  Effects on Human Tobacco Smoke
Exposure,  was  published  in the April  30,  1992,  issue of the  international
medical journal  PHARMACOLOGY,  BIOCHEMISTRY  AND BEHAVIOR , thus supporting the
scientific machine studies conducted  previously by U. S. Testing Company.  Some
excerpts follow:


o    "Use of the  PhaseOut  filter  perforation  device  may  allow  smokers  to
     continue  smoking their usual preferred brand of cigarettes  while reducing
     their exposure to tobacco smoke  constituents.  This could have  beneficial
     health effects and could be  particularly  useful as a weaning method prior
     to smoking cessation."

o    "Percentage  decrements  in  nicotine  delivery  observed  in  humans  were
     strikingly similar to reductions  observed in smoking machine testing.  The
     concordance  between human and machine testing data supports the conclusion
     that the  PhaseOut  device works as expected to dilute the smoke stream and
     reduce constituent exposure."

o    "In conclusion, this study showed that filter perforation achieved with the
     PhaseOut  device  significantly  reduced  human  exposure to tobacco  smoke
     constituents  when tested in an acute  smoking  protocol  under  controlled
     laboratory smoking conditions.  Exposure reductions of 30-80% were observed
     for both nicotine and CO.  Percentage  reductions in  constituent  exposure
     generally  corresponded  well to those  anticipated  from machine  testing,
     indicating  that the controlled  smoking  technology was valid and that the
     PhaseOut device operates as expected in a human smoking assay."

Field Studies


     A field study was conducted by Louise Leonhardt,  a nutritional  consultant
who teaches  adult  education at a local Long Island high school.  She conducted
two studies, one with fifteen students and the other with forty students. Out of
the  fifty-five  participants,  forty  smokers  (or 73%)  quit  and the  balance
continue to use PhaseOut.

     Another  field study was  conducted by Dr.  Robert D.  Brandstetter,  M.D.,
Pulmonary Medicine, Associate Director of Medicine and Chief of Critical Care at
New Rochelle  Medical Center in New York. Dr.  Brandstetter  had limited success
with  acupuncture,  psychotherapy,  nicotine gum and the  nicotine  patch on his
patients.  Dr.  Brandstetter  then  supplied  PhaseOut to 35 of his patients who
smoked from one to two packs per day.  22 smokers  (63%) quit and still have not
smoked for over a year. Dr.  Brandstetter had stated that he observed  decreases
of  coughing,  shortness  of breath  and  sputum  production  in  smokers  using
PhaseOut.

     Although these field studies are not scientifically controlled studies, the
results are promising since the

                                        6

<PAGE>



current  average quit success rate of all other products  including the nicotine
patch and gum is less than 10%. The Company intends to conduct further  research
and studies  researching the  effectiveness  of the product in helping people to
quit smoking.

Patents

         The United States Patent Office has issued two patents for the PhaseOut
System  (Patent  Number  4,231,378  issued  November  4, 1980 and Patent  number
5,218,976  issued  June 15,  1993).  In  addition,  the  Company has applied for
patents in eighteen (18) foreign  countries,  including  China,  Taiwan,  Japan,
England, France, Germany and Italy.

Marketing (Domestic)

     The focus of the  Company's  marketing  is to create an  awareness  for the
product through the use of various direct  response  marketing  venues.  Some of
these  are:  the use of a  thirty  minute  television  infomercial,  short  form
television  commercials,  sixty second radio  commercials,  mail order catalogs,
print advertising and through credit card mailings (syndication).

     The  Company,  in  December  1994,  entered  into a contract  with a direct
response television  production and marketing company. As part of the agreement,
this company was responsible to edit the existing infomercial using Jackie Mason
as host and create one and two minute spot commercials. To insure the success of
these  commercials ,the direct response company committed to invest a minimum of
$200,000 for initial TV airings. Once they expended a minimum of $200,000,  they
would  qualify for a "reverse"  royalty  from the Company on sales made in other
marketing venues.  The agreement called for specific minimum quarterly  purchase
quotas  (73,000 units per year).  The Company  initiated an  arbitration  action
against the direct  response  company for failure to perform  under the terms of
the agreement (see Legal Proceedings). As a result of this, the Company formed a
relationship with another direct response media buying agency.

     On  June  8,  1995,   the  Company   entered  into  an  agreement  with  an
international  marketing  representative  firm.  This agreement  compensates the
representative  on a commission  basis for all export business that results from
their efforts.

     On October 17, 1995, the Company entered into a marketing  agreement with a
network marketing organization  utilizing independent  distributors that sell to
individuals  on a one to one  basis.  They are  focusing  their  efforts  on the
marketing of the Company's Total Quit Smoking Program and the Company's  Support
Group line of consumable products (see New Products).

Marketing (International)

     The Company has been  invited to  participate  in the World  Conference  on
Smoking and Health to be held in Beijing in 1997.  China currently has in excess
of 300 million smokers.


     On August 21, 1995,  the Company  entered  into an  agreement  with a South
Korean  trading  company  for the  distribution  and  manufacture  of a modified
(design)  PhaseOut  product in South Korea.  Because of the improved  design and
reduced size of this PhaseOut device, it will be utilized in the Japanese market
as well. South Korea has 10 million smokers and Japan has 35 million smokers.



                                        7

<PAGE>


     PhaseOut  has started  distribution  through  television  infomercials  and
commercials  in the  following  countries:  Greece,  Portugal,  Spain,  Uruguay,
Brazil, South Africa,  Phillippines,  Argentina,  United Arab Emirates,  Tahiti,
France, Hong Kong, Romania, Moldavia.

New Products

     The  Total  Quit  Smoking  Program.  A  comprehensive,   self-help  smoking
cessation  program to combine the use of the patented  PhaseOut  device with the
latest  behavior  modification  techniques.  This  program  addresses  both  the
physiological and the psychological  addictions to smoking. Limited distribution
of this new product began this year through an agreement with a direct (network)
marketing company.

         The PhaseOut Support Group Product Line. The Company recently developed
a line of consumable  products  specifically  formulated  for smokers and former
smokers.  Limited  distribution of this new product line began this year through
an agreement with a direct (network)  marketing  company.  The initial "PhaseOut
Support Group" product line consists of:

     PhaseOut ReNewal - A gentle alpha hydroxy glycolic acid, antioxidant facial
     cream to help  reduce  accelerated  skin  aging  sometimes  experienced  by
     smokers.

     PhaseOut  WhyTen - An extra  strength  oxidizing  tooth gel to help  remove
     tobacco stains.

     PhaseOut Breath Sweet - A natural,  fast acting breath sweetener formulated
     for smokers.

     PhaseOut HeartSmart - A coated, low dosage aspirin.

     PhaseOut ConTrol - A natural comprehensive weight management system to help
     maintain desired weight.

     PhaseOut  ReStore  - A high  potency  antioxidant  and  herbal  nutritional
     supplement.

     PhaseOut   DenSity  -  A  calcium  rich  mineral  and  herbal   nutritional
     supplement.

     PhaseOut  StressBuster - A dietary  supplement with relaxants  derived from
     traditional herbs and herbal extracts.

         To date, only nominal amounts of these products have been sold.

Competition

     The Company competes with numerous products and techniques  designed to aid
smokers to stop smoking.  Many of the companies  promoting  these  products have
been in existence for longer  periods of time, are better  established  than the
Company,  have financial  resources  substantially  greater than the Company and
have more extensive facilities than those which now or in the foreseeable future
will become  available to the Company.  In addition,  other firms may enter into
competition with the Company in the near future.

     One type of significant  competitive  product is the nicotine patch,  which
requires a  prescription  by  licensed  physicians  for  treatment  of  nicotine
withdrawal. This appears to be the quit smoking method that is now

                                        8

<PAGE>



most commonly  prescribed.  However,  management  expects to counter the initial
success of the patch program  because  there are stirrings of adverse  publicity
regarding patches due to their side effects and usage limitations.

     In addition to the nicotine patch,  other  pharmaceutical  companies are in
the process of introducing  alternate nicotine delivery methods in the form of a
nasal spray, which will have many of the same side effects as the nicotine patch
and will most probably require a prescription  when first brought to the market.
Recently,  the FDA has  allowed  the  nicotine  gum,  which  was  formerly  only
available by prescription, to be sold over-the-counter.

Employees

     At the  present  time,  the  Company  has eight  employees,  including  the
Company's four officers and directors and four  administrative  and  secretarial
personnel.

Item 2. Properties

     The Company  office is located in  approximately  2,000  square feet at 140
Broadway,  Lynbrook, New York 11563, telephone number (516) 599-1900 in premises
rented on a month to month basis at a monthly rent of $1,500.00.

Item 3. Legal Proceedings

     In June,  1993,  the Company  received a "Warning  Letter"  from the FDA in
which the FDA stated its belief that the Product is a "medical device",  and is,
therefore,  subject to the  provisions  of the FDA.  Since the  Company has been
marketing the product without seeking or obtaining  pre-marketing  approval from
the FDA, if the FDA's  position  is correct,  the  Company's  activities  are in
violation of the Food Drug and Cosmetics Act and the FDA would have the right to
enjoin  further  marketing by the Company of the  product.  The Company does not
believe that the product is a medical  device within the meaning of the FDCA and
has  advised the FDA of its  position  through the  Company's  Washington,  D.C.
counsel,  Hyman,  Phelps & McNamara,  specializing  in FDA  matters.  The answer
submitted  on July 7,  1993,  by the  Company  counsel  took the  position  that
PHASEOUT is a mechanical  device that treats just the cigarette (not the smoker)
by creating additional internal filters within the existing filter or cigarette.
However,  in an effort to cooperate  with the FDA, the Company  proposed to make
substantial  revisions to the promotional  statements for the product to make it
clearer to the public that the  product is not  intended to be used as a medical
device.  Neither the Company  nor its counsel has  received  any written or oral
response from the FDA since that time.  However,  no assurance can be given that
the FDA will not in the future seek to enjoin the  Company  from  marketing  the
product without  complying with the FDCA and seeking other remedies  against the
Company.  Management  believes that the FDA letter came as a result of the FDA's
investigation   of  the  smoke   cessation   industry.   As  a  result  of  that
investigation,  the FDA  banned  the  sale  of  certain  over-the-counter  smoke
cessation product using active  ingredients as of December,  1993.  PHASEOUT was
not affected by this ban.

     The Company was advised by the FTC by letter dated  October 20, 1993,  that
the FTC was conducting a non-public,  informal inquiry to determine  whether the
Company had engaged in deceptive or unfair practices in violation of the Federal
Trade Commission Act (the "FTC Act") in connection with certain of the Company's
advertising  claims.  In that  connection,  the FTC  requested  that the Company
provide it with certain  information  and documents and also requested a meeting
on June 9. 1994, with the Company's officers.  The Company supplied the FTC with
all the information they requested.  Subsequently,  the FTC canceled the meeting
stating

                                        9

<PAGE>



that  they had  sufficient  information.  Management  believed  that the FTC was
apparently  satisfied  with the  Company's  response  to their  inquiry  and its
willingness to cooperate.  However,  on August 3, 1995, the FTC submitted to the
Company  a draft  administrative  complaint  and a  proposed  consent  agreement
outlining the terms of a possible  settlement of the FTC's claims.  In response,
the  Company  has  submitted a  counter-proposal  and has  engaged in  extensive
dialogue with FTC staff to negotiate a resolution of the FTC's claims.

     The draft administrative complaint, which has not to date been filed by the
Commission,  alleges  that  certain  statements  and  claims  contained  in  the
Company's print and broadcast advertisements for the sale of the PHASEOUT device
are false and  misleading  in that they are not  reasonably  substantiated  and,
therefore,  violate  Sections 5 and 12 of the FTC Act.  The  Company  denies the
material allegations in the draft  administrative  complaint and will vigorously
defend  such an action in the event that a  settlement  cannot be reached  and a
complaint  is actually  filed.  The Company has made and  continues  to make all
reasonable efforts to resolve the FTC's concerns without resort to litigation.

     In the event that the FTC institutes an administrative  proceeding  against
the Company,  it could have an adverse  effect on the operations of the Company.
Regardless of the ultimate outcome of any such action,  the Company would likely
incur substantial expenses in defense.

     In February 1995, the Company's former attorney,  John B. Lowy,  brought an
action against the Company in New York State Supreme Court,  New York County for
unpaid attorneys fees and  disbursements of  approximately  $36,000.  Management
intends to vigorously  defend all, but  approximately  $16,000 of the claim. The
financial  statements  include a liability  for  $16,000  payable to this party.
Legal  counsel has not  rendered an opinion as to the  ultimate  outcome of this
matter.

     In  March  1996,  the  Company  made a  demand  for  arbitration  before  a
commercial  panel of the  American  Arbitration  Association  against the direct
response TV and marketing  company  ("On-Air  Infonetwork")  that was purchasing
television  time for the Company's  thirty minute  infomercial,  to seek damages
sustained as a result of their failure to perform  pursuant to an agreement with
the Company. In April, 1996, in connection with the proceedings commenced by the
Company,  On-Air Infonetwork obtained a temporary  restraining order against the
Company. The temporary  restraining order was vacated when the Company agreed to
set aside $75,000 and a percentage of sales up to an additional  $25,000  (total
$100,000), in a special escrow account with the Company's legal counsel. Hearing
dates have been  scheduled in the  arbitration  for July,  1996.  The  Company's
maximum exposure in the event the arbitration is lost is approximately  $150,000
and the  reinstatement of the reverse royalties on sales made in other marketing
venues domestically.

Item 4. Submission of Matters to a Vote of Security Holders

     For the fourth  quarter of the fiscal  year ended  December  31,  1995,  no
matters  whatsoever  were  submitted to a vote of security  holders  through the
solicitation of proxies or otherwise.

Item 5. Market for Company's Common Equity and Related Stockholder Matters

(a) Market  information - The principal U.S. market in which the Company's Units
(each unit consisting of two shares of Common Stock and one Class A Common Stock
Purchase  Warrant to purchase  an  additional  share and a Class B Common  Stock
Purchase Warrant),  Common Shares (all of which are one class, $.00003 par value
Common  Stock)  and  Class  A and  Class B  Warrants,  were  tradable  is in the
over-the-counter  market.  The Class A Warrants  expired on November 2, 1993 and
the Class B Warrants were extended to December 31, 1996. The

                                       10

<PAGE>



aforesaid securities are not traded or quoted on any automated quotation system.
The OTC Bulletin  Board  symbol for the  Company's  Common Stock is "POUT".  The
following table sets forth the range of high and low bid quotes of the Company's
Common Stock per quarter as provided by the  National  Quotation  Bureau  (which
reflect inter-dealer prices without retail mark-up,  mark-down or commission and
may not necessarily represent actual transactions).

                                                    Bid Price
Period                                                  High          Low
------                                                  ----          ---

Quarter Ended March 31, 1994                            .03           .01
Quarter Ended June 30, 1994                             .065          .05
Quarter Ended September 30, 1994                        .09           .03
Quarter Ended December 31, 1994                         .0725         .05
Quarter Ended March 31, 1995                            .105          .075
Quarter Ended June 30, 1995                             .09           .08
Quarter Ended September 30, 1995                        .08           .075
Quarter Ended December 31, 1995                         .05           .03
Quarter Ended March 31, 1996                            .05           .04

(b) Holders -- As of December 31, 1995, the approximate  number of the Company's
shareholders was 305.

c)  Dividends  -- The Company has not paid or declared  any  dividends  upon its
Common Stock since its inception and, by reason of its present  financial status
and its contemplated financial requirements,  does not contemplate or anticipate
paying any dividends upon its Common Stock in the foreseeable future.

Item 6. Management's  Discussion and Analysis of Financial Condition and Results
        of Operations  Year Ended  December 31, 1995 Compared to Year Ended
        December 31,1994

         The Company incurred a net loss of $768,661 for the year ended December
31, 1995 as compared to a loss of $484,507 for the year ended December 31, 1994.

     During fiscal 1995, the Company sought to create an increased awareness for
its product using television  direct response  marketing  methods.  As a result,
sales for fiscal 1995  increased  by  $1,203,000  from 1994 sales of $329,000 to
1995 sales of  $1,532,000.  This increase in sales reflects an increase in units
sold of approximately  28,000 units, from approximately  33,000 units in 1994 to
approximately  61,000 in 1995 and an increase in average  selling  price of $15,
from $10 in 1994 to $25 in 1995.  In 1994,  substantially  all  sales  were at a
wholesale  price of $10,  whereas in 1995  approximately  23,600 units were sold
through  television  direct response  methods at a retail price of approximately
$45.95  including  shipping and  handling.  Additional  revenue is obtained from
"upsells" of a smoker's vitamin and/or a smoker's toothpaste.

     Cost of sales increased by $108,000,  from $157,000 in 1994, to $265,000 in
1995. Of this amount,  approximately $135,000 of the increase is attributable to
the increased number of units sold,  offset by approximately  $27,000 in savings
from a decrease in average unit cost during 1995.

     Selling expenses  increased by approximately  $1,099,000,  from $223,000 in
1994,  to  $1,322,000  in 1995.  Of this  amount,  approximately  $1,044,000  is
attributed to increased costs relating to the television direct

                                       11

<PAGE>



response marketing,  $41,000 to radio marketing costs, and the remaining $14,000
to increases in existing costs.

     General and administrative costs increased by approximately  $240,000, from
$425,000 in 1994, to $665,000 in 1995. Of this amount, approximately $177,000 is
attributable to increases in payroll and related taxes,  $50,000 to increases in
professional fees, and the remaining $13,000 to increases in existing costs.

Liquidity and Capital Resources

     Cash of $282,390 was used for  operations  for the year ended  December 31,
1995 as compared to $134,126 used last year.  Cash  increases  principally  were
from proceeds of sales of common stock and convertible  subordinated  debentures
during the year ended December 31, 1995.


     In order to meet short-term  marketing goals, the Company borrowed $200,000
from an individual  and $65,000 from  officers and  directors in March,  1996 to
continue to finance the airing of the Company's  television  infomercial through
September 1996. The officers have been repaid as has $30,000 of the principal to
the  individual  investor  with the balance to be paid in  installments  over 72
months.

     The Company currently has no established  sources of financing or available
lines of credit.  The Company  may seek  additional  financing.  It has not been
determined whether it be debt or equity.  There have been no commitments made to
provide  financing of any kind.  There is no assurance  that the Company will be
able to obtain additional financing.


     Management  believes but cannot assure that the levels of 1995 revenue will
continue  throughout  1996.  In this regard,  first  quarter 1996  revenues were
approximately $650,000 as compared with first quarter 1995 revenues of less than
$50,000.



Distribution and Marketing


     During 1995 the  Company's  increased  television  media  exposure  for the
PHASEOUT device which helped marketing efforts in other marketing venues such as
catalogs,  radio,  syndication  and export  sales.  The Company has entered into
marketing agreements in several countries already and is in discussion with many
more.  Management is of the opinion that  international  sales will  represent a
significant portion of the Company's overall revenues in the future. There would
be a material  adverse  effect if a number of the marketing  relationships  were
canceled.

     The Company  introduced  two new product  lines this year.  The first was a
comprehensive self-help quit smoking program targeting  corporations,  insurance
companies,  HMO's and consumers.  This program combines the PhaseOut device with
the latest behavior modification techniques. The second product line consists of
eight  consumable  products for smokers and former smokers.  These initial eight
products  are:  a stain  fighting  toothpaste,  a breath  mint,  a  weight  loss
supplement, a smoker's vitamin, a calcium supplement,  an anti-stress product, a
one a day coated aspirin and a alpha-hydroxy skin cream.

     To date, only nominal sales of these products have been made.


     The  Company,  in  cooperation  with  our  South  Korean  distributor,  has
developed  an upgraded  PHASEOUT  unit,  which was  designed  primarily  for the
Japanese market and for use in South Korea.

                                       12

<PAGE>


Item 7.  Financial Statements


                                       13

<PAGE>



PHASE-OUT OF AMERICA, INC.
Balance Sheets
December 31, 1995
================================================================================

<TABLE>
<CAPTION>
<S>                                                                     <C>
Assets
     Current Assets
       Cash                                                             $176,818
       Accounts receivable - net of allowance for doubtful
         accounts of $-0-                                                 71,967
       Inventory - stated at the lower of cost or market -
         first-in, first-out                                              99,300
       Prepaid expenses                                                    9,852
       Other current assets                                               18,592
                                                                        --------

                                                                         376,529

     Property and Equipment - at cost - net of accumulated
       depreciation of $13,975                                             7,550

     Patents - at cost - net of accumulated amortization of
     $3,795                                                               43,205

     Other Assets                                                          3,542

                                                                          54,297

                                                                        $430,826
                                                                       =========
</TABLE>



                                      -F3-
<PAGE>



PHASE-OUT OF AMERICA, INC.
Balance Sheets
December 31, 1995
================================================================================


<TABLE>
<CAPTION>
<S>                                                                                <C>
Liabilities and Shareholders' (Deficit)
     Current Liabilities
       Senior subordinated convertible debentures - including
         accrued interest of $24,958                                                $   459,958
       1992 convertible debentures - including accrued interest
         of $8,265                                                                       29,765
       Taxes payable                                                                      8,077
       Accounts payable                                                                 582,159
       Accrued officer compensation                                                     144,160
       Loans from officer/shareholder                                                    31,650
       Other current liabilities                                                         26,176
                                                                                    -----------

                                                                                      1,281,945
                                                                                    -----------
     Shareholders' (Deficit)
       Series A Convertible Preferred Stock - par value $.001-
        authorized 600,000 shares - no shares issued and
        outstanding
       Series  B  Convertible  Preferred  Stock  - par  value$.001-
        authorized 5,000,000 shares - no shares issued and
        outstanding
       Common  Stock - par  value  $.00003 - authorized
        100,000,000 shares - 74,859,319 shares issued and
        outstanding                                                                       2,246
       Capital in excess of par                                                       1,937,688
       Accumulated (deficit)                                                         (2,791,053)
                                                                                    -----------

                                                                                       (851,119)
                                                                                    -----------
                                                                                    $   430,826
                                                                                    ===========
</TABLE>


See notes to financial statements.


                                     - F4 -

<PAGE>



PHASE-OUT OF AMERICA, INC.
Statements of Operations
================================================================================


                                                     For the Years Ended
                                                         December 31,
                                                 -------------------------------
                                                     1995              1994
                                                 ===============================

Sales - net                                      $  1,532,405      $    328,686

Cost of Sales                                         264,566           157,209
                                                 ------------      ------------

                                                    1,267,839           171,477
                                                 ------------      ------------

Selling Expenses                                    1,322,199           223,042

General and Administrative Expenses                   664,648           425,363
                                                 ------------      ------------

                                                    1,986,847           648,405
                                                 ------------      ------------

                                                     (719,008)         (476,928)
                                                 ------------      ------------
Other Income (Expenses)
   Interest income                                         89               570
   Royalty income                                        --               2,930
   Interest (expense)                                 (49,742)          (11,079)
                                                 ------------      ------------

                                                      (49,653)           (7,579)
                                                 ------------      ------------

Net (Loss)                                       $   (768,661)     $   (484,507)
                                                 ============      ============

(Loss) Per Share                                 $      (0.02)     $      (0.01)
                                                 ============      ============


Weighted Average Number of Shares
   Outstanding (to nearest 1,000,000)              68,000,000        57,000,000
                                                 ============      ============


See notes to financial statements.


                                     - F5 -

<PAGE>


PHASE-OUT OF AMERICA, INC.
Statement of Shareholders' (Deficit)
For the Year Ended December 31, 1995
================================================================================


<TABLE>
<CAPTION>
                                                      Number of
                                                    Common  Stock         Amount      Capital in
                                                       Shares            $.00003       Excess of      Accumulated        Deferred
                                                     (Post-Split)        Par Value     Par Value        (Deficit)      Compensation
                                                  ==================================================================================
<S>                                                  <C>             <C>              <C>              <C>              <C>
Balance - January 1, 1994                            53,494,288      $     1,605      $ 1,352,597      $(1,537,885)     $    68,750
  Proceeds from sales of stock                           50,045                2            4,999             --               --
  Shares issued to Products &
    Patents, Ltd. for patent rights
    and reduction of accounts
    payable                                           6,000,000              180          146,820             --               --
  Stock issued for accrued
    services rendered:
      Officers                                        1,500,000               45           16,455             --               --
      Consultants and employees                       1,940,000               57           27,107             --               --
  Bond conversions to stock                              50,000                2            2,499             --               --
  Return of escrow shares                            (2,750,000)             (82)         (68,668)            --            (68,750)
  Net (loss)                                               --               --               --           (484,507)            --
                                                    -----------      -----------      -----------      -----------      -----------

Balance - December 31, 1994                          60,284,333            1,809        1,481,809       (2,022,392)            --
  Proceeds from sales of stock                        2,006,061               60          119,940             --               --
  Bond and accrued interest
    conversions to stock                                624,245               19           33,996             --               --
  Stock issued to supplier                            1,000,000               30           17,470             --               --
  Stock issued for accrued
     services rendered:
      Officers and directors                          4,022,038              121          161,353             --               --
      Consultants                                     6,935,000              207          123,120             --               --
  Net (loss)                                               --               --               --           (768,661)            --
                                                    -----------      -----------      -----------      -----------      -----------

Balance - December 31, 1995                          74,871,677      $     2,246      $ 1,937,688      $(2,791,053)     $      --
                                                    ===========      ===========      ===========      ===========      ===========
</TABLE>



See notes to financial statements.


                                     - F6 -

<PAGE>



PHASE-OUT OF AMERICA, INC.
Statements of Cash Flows                                             Page 1 of 2
================================================================================

<TABLE>
<CAPTION>
                                                                             For the Years Ended
                                                                                  December 31,
                                                                       -----------------------------------
                                                                          1995                    1994
                                                                       ===================================

<S>                                                                    <C>                      <C>
Cash Flows from Operating Activities
   Net (loss)                                                          $(768,661)               $(484,507)
   Adjustments to reconcile net (loss) to cash
     (used for) operating activities:
       Depreciation and amortization                                       6,074                    3,417
       (Increase) decrease in:
         Accounts receivable                                             (69,883)                  50,085
         Inventories                                                     256,186                  150,326
         Prepaid expenses and other current assets                       (15,081)                    (638)
       Increase (decrease) in:
         Accrued bond interest                                            25,968                       --
         Accounts payable                                                 46,269                   47,307
         Accrued officer compensation                                    144,160                  125,715
         Taxes payable                                                     3,270                  (18,485)
         Amounts due to affiliate                                        (91,488)                 (51,011)
         Other current liabilities                                        21,710                       --
         Expenses paid through the issuance of
           restricted common stock                                       159,086                   43,665
                                                                       ---------                ---------
                                                                        (282,390)                (134,126)

Cash Flows from Investing Activities
   Acquisition of fixed assets                                              (800)                    (550)
   Decrease in other assets                                                  300                       85
                                                                              --
                                                                       ---------                ---------
                                                                            (500)                    (465)
                                                                       ---------                ---------


Cash Flows from Financing Activities
   Proceeds from sales of debentures                                     290,000                       --
   Advances from officer/shareholder                                      25,753                   (8,000)
   Payments of capital leases                                               (586)                  (7,287)
   Proceeds of sales of common stock                                     120,000                    2,500


   Proceeds from senior secured short-term note                               --                  125,000
   Loan from director/shareholder                                             --                   20,000
   Loans to officers                                                          --                    8,200
                                                                       ---------                ---------

                                                                         435,167                  140,413
                                                                       ---------                ---------
</TABLE>



See notes to financial statements.


                                     - F7 -

<PAGE>



PHASE-OUT OF AMERICA, INC.
Statements of Cash Flows                                             Page 2 of 2
================================================================================

<TABLE>
<CAPTION>
                                                                                   For the Years Ended
                                                                                       December 31,
                                                                                -----------------------------
                                                                                    1995                 1994
                                                                                =============================
<S>                                                                             <C>                  <C>
Net Increase in Cash                                                            $152,277             $  5,822

Cash - beginning                                                                  24,541               18,719
                                                                                --------             --------
Cash - end                                                                      $176,818             $ 24,541
                                                                                ========             ========

Supplemental Disclosures
     Cash paid for:
       Interest                                                                 $ 23,880             $    886
                                                                                ========             ========


     Non-cash investing and financing transactions:
       Acquisition of patent rights from affiliate through
          issuance of common stock                                              $     --             $ 47,000
                                                                                --------             ========


       Debt due to affiliate paid through the issuance
         of common stock                                                        $     --             $100,000
                                                                                ========             ========


       Bond and accrued interest conversions to common stock                    $ 34,014             $  5,000
                                                                                ========             ========

       Assumption of accounts payable:
         In exchange for inventory                                              $173,257             $     --
                                                                                ========             ========

         In payment of amounts due to affiliate                                 $227,709             $     --
                                                                                ========             ========

       Loan from director/shareholder converted to debentures                   $ 20,000             $     --
                                                                                ========             ========

       Senior secured notes payable converted to senior
         subordinated convertible debentures                                    $125,000             $     --
                                                                                ========             ========

       Stock issued to supplier                                                 $ 17,500             $     --
                                                                                ========             ========


       Stock issued for accrued services rendered                               $125,715             $     --
                                                                                ========             ========
</TABLE>


See notes to financial statements.


                                     - F8 -

<PAGE>



PHASE-OUT OF AMERICA, INC.
Notes to Financial Statements
December 31, 1995
================================================================================


1 - The Company

     Phase-Out of America,  Inc.  (the  "Company")  was  organized as a Delaware
     Corporation  on July 17, 1987 and operated as a  development  stage company
     through  1993.  The  Company's  purpose  is to market  and  distribute  its
     patented phase-out system smoking cessation device (the "product").

     The Company has primarily marketed the product in the United States through
     direct  response   marketing   including   radio,   television   spots  and
     infomercials and is beginning to foreign distribution.


2 - Summary of Significant Accounting Policies

     a.   Inventory  -  Inventory  is valued at cost  (specifically  identified)
          which  is not in  excess  of  market  value.  Inventory  is  comprised
          entirely of finished goods.

     b.   Property and  Equipment - Property and  equipment are carried at cost.
          Depreciation  is  computed  on  the  straight-line   method  over  the
          estimated useful lives of the assets.

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

     d.   Patents - Patents  represent  a patent  dated  June 15,  1993 that was
          acquired by the Company on October 25, 1994. The acquisitions cost has
          been capitalized and amortized (straight-line method) over the life of
          16 years.

     e.   Advertising Costs - All costs relating to direct response  advertising
          and marketing have been expensed in the period incurred. The Company's
          direct response  advertising  costs do not qualify for  capitalization
          under the American Institute of Certified Public Accountants Statement
          of Position 93-7 Reporting on  Advertising  Costs  guidelines  because
          there is no historical  data to provide a basis that the direct market
          will have measurable future benefit. Advertising costs during 1995 and
          1994 were $216,937 and $65,572, respectively.



                                                                       Continued


                                     - F9 -

<PAGE>



     f.   Earnings (Loss) Per Share - Loss per share is computed by dividing the
          net loss by the weighted average number of shares  outstanding  during
          the year.  Common  stock  equivalents  have not been  included  in the
          earnings per share computation because of their anti-dilutive effect.

     g.   Stock-Based  Compensation - The Company  occasionally  issues stock to
          employees  and  non-employees  in lieu of  cash  as  compensation  for
          services  rendered.  The  Company  has  adopted  Financial  Accounting
          Standard #123 which  requires those  transactions  to be accounted for
          based on the  fair  value of the  consideration  received  or the fair
          value of the equity  instruments  issued,  whichever is more  reliably
          measurable.

     h.   Reclassifications  - Various accounts in the prior year's Statement of
          Operations have been reclassified for comparative  purposes to conform
          with the  presentation  in the current  year's  financial  statements.
          These reclassifcations had no impact upon the results of operations.


3 - Status of the Company

     The financial statements have been prepared on a going-concern basis, which
     contemplates  the realization of assets and the satisfaction of liabilities
     in the normal course of business over a reasonable length of time.

     The Company has had recurring net operating  losses since its inception and
     has made use of privately-placed debt and equity financing to provide funds
     for operations. As of December 31, 1995, current liabilities exceed current
     assets by $905,416.  Those  factors,  as well as the  Company's  relatively
     recent  entry  into  the  marketplace,  create  an  uncertainty  about  the
     Company's ability to continue as a going concern.

     The Company has intentions of expanding and refining its marketing  efforts
     to improve the  efficiency  of these efforts and to increase  revenues.  In
     addition,  the  Company  is  continuing  its  efforts  to obtain  long-term
     financing through the issuance of long-term debt and equity securities.

     The  financial  statements  do not  include any  adjustments  that might be
     necessary should the above or other factors affect the Company's ability to
     continue as a going concern.


                                                                       Continued


                                     - F10 -

<PAGE>


4 - Warrants and Convertible Debentures

       a.  Warrants -

<TABLE>
<CAPTION>
                                                                            Price Per                              Expiration
                                                          Shares              Share                Total              Dates
                                                         ----------------------------------------------------------------------
<S>                                                      <C>                 <C>                 <C>                      <C>
Balance - December 31, 1994                              3,034,000           $   .25             $   758,500              1996
   Issued with purchase of
     common stock                                        2,900,000               .15                 435,000              1998
   Issued for services                                   2,006,061           .10-.15                 230,909       1996 - 1998
                                                         ---------                               -----------

Balance - December 31, 1995                              7,940,061                               $ 1,424,409
                                                         =========                               ===========
</TABLE>


     b    1992 Convertible  Debentures - In 1992, the Company initiated a series
          of  private  placement   offerings  of  two  and  three   Subordinated
          Convertible  Debentures  with an annual  interest rate of 10% and with
          variable conversion rates (ranging from $.05 to $.10 per share). These
          offerings  raised a total of  $117,500.  The  Company is in default on
          interest  payments and is in violation of  covenants.  Of the original
          $117,500 raised, $96,000 has been converted into stock. As of December
          31, 1995, $21,500 of principal and $8,266 of interest remain unpaid or
          unconverted on these debentures.

     c.   Senior Secured Notes Payable - In 1994,  the Company  issued  one-year
          Senior  Secured Notes Payable for $125,000,  which were converted into
          the   Company's   1995  Private   Placement  of  Senior   Subordinated
          Convertible Debentures.

     d.   Senior  Subordinated  Convertible  Debentures  - In 1995,  the Company
          conducted  a  private  placement  of Senior  Subordinated  Convertible
          Debentures  (due 1998),  in which  $310,000 was obtained  from private
          lenders, $125,000 was converted from the 1994 Senior Secured Notes and
          $20,000 was converted  from a 1994  directors/shareholders  loan for a
          total of $435,000.  The debentures are  convertible at $.075 per share
          through   1998  and,  in  certain   circumstances,   are   mandatorily
          convertible.  The debentures  bear an annual interest rate of 10%. The
          Company is  technically  in default  because  the  December  17,  1995
          interest  payments,  totaling $19,750,  were paid between one and four
          days after the 30-day grace period.


5 - Related Party Transactions

     a.   Licensing  Agreements  - The Company  had  licensing  agreements  with
          Products & Patents,  Ltd. ("P&P"), a company related by management and
          control.


     In October 1994, the agreement with P&P was further amended to provide for:
     (1) transfer of patents,  worldwide marketing and manufacturing  rights for
     5,000,000 shares of common stock; (2) reduction of $100,000 in the sum owed
     to P&P for 1,000,000 shares of common stock; (3) purchase of inventory from
     P&P up to $150,000 from the proceeds of the Company's  private placement at
     a specified  unit cost and; (4) payment of a specified  per unit royalty of
     purchases  by the Company  from outside  sources  after  depletion of P&P's
     inventory.


                                                                       Continued

                                         - F11 -

<PAGE>


          In August,  1995,  the  relationship  with P&P was  terminated and the
          Company's obligation to pay royalties was discontinued.  In connection
          with  this  transaction,  the  Company  agreed  to  assume a  $400,966
          liability to one of P&P's suppliers in exchange for the elimination of
          the  liability  owed  to P&P  of  $227,709  and  inventory  valued  at
          $173,257.  There  was no gain or loss  recognized  as a result of this
          transaction.

     b.   Loan from  Officer/Shareholder - An officer/shareholder of the Company
          is owed  $31,650 by the  Company.  The amount is payable on demand and
          there is no stated rate of interest.

     c.   Other - The Company's  general counsel is a relative of certain of the
          officers.  The Company  incurred  approximately  $25,000 of legal fees
          with this firm in 1995 and $9,000 in 1994, of which  $21,780  remained
          unpaid as of December 31, 1995.

6 - Income Taxes

          The  Company  has  available  net  operating  loss   carryforwards  of
          approximately  $2,600,000,  which expire in 2002 until 2010.  Deferred
          income  taxes  reflect  the  net tax  effects  of net  operating  loss
          carryforwards  and  result in  deferred  tax  assets of  approximately
          $780,000  and  $600,000 at December  31, 1995 and 1994,  respectively,
          which were fully offset by valuation  allowances due to  uncertainties
          surrounding the ultimate realization of this asset.

7 - Leases

     The  Company  leases  automobiles  for its  officers,  none of  which  have
     purchase or renewal  options.  Rental  expense was $23, 413 and $22,404 for
     1995 and 1994,  respectively.  The future minimum rental payments  required
     under these leases are as follows:

                               1996                $  29,100
                               1997                   13,044
                               1998                    5,856

     The Company is currently in negotiations for the lease of office space.


8 - Economic Dependence

The Company purchased 100% of its products in 1995 and 1994 from one vendor.


                                                                       Continued


                                     - F12 -

<PAGE>


9 - Other Commitments and Contingencies

     a.   Direct Response Marketing  Agreement - By agreement dated December 30,
          1994, and subsequently  amended on July 13, September 21, and December
          22, 1995, the Company granted to On-Air  Infonetwork,  Inc. ("On-Air")
          the exclusive  television  direct  response  marketing  rights for the
          product in the United  States and  Canada.  In addition to agreeing to
          spend $50,000 on  production,  talent and editing costs in conjunction
          with the production of the Company's  infomercial and other television
          commercials,  On-Air agreed to generate  certain  minimum sales and to
          expend  substantial  monies on broadcast  media time.  Once On-Air has
          expended a minimum  total on media,  the Company is liable for reverse
          royalties on units sold excluding  those sold through  On-Air's direct
          response marketing campaign.

          In March,  1996,  the Company made a demand for  arbitration  before a
          commercial  panel  of the  American  Arbitration  Association  against
          On-Air,  to seek  damages  sustained  as a result of their  failure to
          perform pursuant to an agreement with the Company.  In April, 1996, in
          connection  with the  proceedings  commenced  by the  Company,  On-Air
          obtained a  temporary  restraining  order  against  the  Company.  The
          temporary restraining order was removed when the Company agreed to set
          aside $75,000 and a percentage  of sales up to an  additional  $25,000
          (total $100,000), in a special escrow account with the Company's legal
          counsel. No hearing dates have been scheduled in the arbitration.  The
          Company's  maximum  exposure in the event the  arbitration  is lost is
          approximately  $150,000 and the reinstatement of the reverse royalties
          on sales made in other marketing venues  domestically.  As of December
          31, 1995, there was a liability of approximately  $101,000 included in
          accounts  payable  relating to this agreement  which will be increased
          based upon sales in 1996.

     b.   Other  Marketing  Agreements  - The Company has entered  into  various
          marketing  agreements both  domestically and abroad.  Those agreements
          generally  have sales quotas  which the other  parties must achieve in
          order to maintain exclusivity but generally do not bind the Company to
          any purchase commitments.

     c.   Regulatory  Matters  - On  June  1,  1993,  the  U.S.  Food  and  Drug
          Administration  (FDA) sent a warning letter to the Company. The letter
          stated that due to the Company's  marketing and promotional  materials
          used at the time for the  product,  the FDA  believed  the product was
          being sold as a medical  device and should be subject to regulation as
          a medical  device under the Federal  Food,  Drug and Cosmetic Act (FDC
          Act),  and that the product was in violation of certain  provisions of
          that Act.

          The Company  believes that the product is not a medical  device within
          the meaning of the FDA Act and has  advised  the FDA of its  position.
          However,   in  an  act  of  cooperation  with  the  FDA,  the  Company
          volunteered to make revisions in its promotional  material in order to
          make it clearer to the public that the  product is not  intended to be
          used as a medical device.


                                                                       Continued


                                     - F13 -

<PAGE>


          Since these revisions have been made, the Company has not received any
          communications  from the FDA about this matter.  However, no assurance
          can be  given  that  the  FDA  will  not in the  future  continue  its
          investigation  and prohibit the Company from  marketing the product or
          invoke  other  remedies  without the Company  complying  with  medical
          device status requirements of the FDC Act.

          On October 20, 1993, the Federal Trade Commission  ("FTC") advised the
          Company that they were  conducting a non-public,  informal  inquiry to
          determine  whether  the Company  had  engaged in  deceptive  or unfair
          practices in violation of the Federal Trade Commission Act ("FTC Act")
          in connection with certain advertising claims made by the Company. The
          Company  provided certain  information and documents  requested by the
          FTC.

           Management  believed that the FTC was  apparently  satisfied with the
           Company's response to their inquiry and its willingness to cooperate.
           However, on August 3, 1995, the Company received a complaint from the
           FTC Division  for  Advertising  Practices  with regard to the ongoing
           investigation.

           The FTC submitted to the Company a draft administrative complaint and
           a  proposed  consent  agreement  outlining  the  terms of a  possible
           settlement  of  the  FTC's  claims.  In  response,  the  Company  has
           submitted a  counter-proposal  and has engaged in extensive  dialogue
           with FTC staff to negotiate a resolution of the FTC's claims.

           The draft administrative complaint,  which has not to date been filed
           by the FTC,  alleges that certain  statements and claims contained in
           the Company's print and broadcast  advertisements for the sale of the
           product  are false  and  misleading  in that they are not  reasonably
           substantiated  and,  therefore,  violate Sections 5 and 12 of the FTC
           Act.  The  Company  denies  the  material  allegations  in the  draft
           administrative complaint and will vigorously defend such an action in
           the event that a  settlement  cannot be reached  and a  complaint  is
           actually  filed.  The Company has made,  and  continues to make,  all
           reasonable  efforts to resolve the FTC's  concerns  without resort to
           litigation.

           In the event that the FTC  institutes  an  administrative  proceeding
           against  the  Company,  it  could  have  an  adverse  effect  on  the
           operations of the Company.  Regardless of the ultimate outcome of any
           such action,  the Company would likely incur substantial  expenses in
           defense  which,  in  the  aggregate,   would  exceed  the  applicable
           materiality standard.

           In February,  1995,  the  Company's  former  attorney,  John B. Lowy,
           brought an action  against  the  Company  in New York  State  Supreme
           Court, New York County for unpaid attorney fees and  disbursements of
           approximately  $36,000.  Management  intends to vigorously defend all
           but  approximately  $16,000 of the claim.  The  financial  statements
           include a liability for $16,000 payable to this party.  Legal counsel
           has not  rendered  an  opinion  as to the  ultimate  outcome  of this
           matter.


                                                                       Continued


                                     - F14 -

<PAGE>


10 - Subsequent Event

     In March,  1996, the Company borrowed $200,000 from an individual  investor
     to finance the airing of the Company's television infomercial.  The Company
     has  agreed to use the money for a period of six months and to pay a fee of
     2 1/2% per month.  The  Company's  Chairman,  President and a Director have
     also loaned money to the Company for the financing of the infomercial. Each
     individual  may  withdraw  their  funds at any time  upon 60 days'  written
     notification to the Company.


                                     - F15 -

<PAGE>


Item  8.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
          Financial Disclosures.

     On January 12, 1996, the Company informed Stewart W. Robinson ("Robinson"),
certified  public  accountants,  that  effective  January 1, 1996,  the Board of
Directors of the Company  (including the Audit Committee thereof) had determined
not to continue  the  engagement  of Robinson  as the  registrant's  independent
certified public accountant.  Effective January 15, 1996, the registrant engaged
Raich Ende Malter Lerner & Company  ("Raich") as the  Company's new  independent
certified  public  accountants to audit the  registrant's  financial  statements
(beginning with the fiscal year ended December 31, 1995).

     Robinson's  reports on the  financial  statements  for each of the past two
fiscal  years of the  Company  ended  December  31, 1993 and  December  31, 1994
respectively  ("Applicable Fiscal Years"), did not contain an adverse opinion or
disclaimer  of opinion and were not  qualified  or  modified as to  uncertainty,
audit scope or accounting  principles except as follows: The accountant's report
of Stewart W. Robinson on the financial statements of PhaseOut of America, Inc.,
as of and for the two years ended  December  31,  1993 and 1994 was  modified to
refer to the  ultimate  outcome  of  matters  raised by two  Federal  regulatory
agencies  and to the ability of the  Company to  continue as a going  concern as
discussed  in note 1 and note 8 of the notes to the  financial  statement in the
Form 10KSB filed with the SEC on May 3, 1995. During the Applicable Fiscal Years
and during the interim period since December 31, 1994, there was no disagreement
between the  Company and  Robinson  on any matter of  accounting  principles  or
practices,  financial statement disclosure or auditing scope or procedure, which
disagreement,  if not resolved to the satisfaction of Robinson would have caused
it to make a reference to the subject matter of the  disagreement  in connection
with its reports.

     During the  Applicable  Fiscal  Years and during the  Interim  Period  from
December 31, 1994 to January 12,  1996,  Robinson did not (A) advise the Company
that the  internal  controls  necessary  for the  Company  to  develop  reliable
financial  statements did not exist; (B) advise the Company that information had
come to the  attention  of Robinson  that led it to no longer be able to rely on
the  representation  of the  Company's  management  or that  had  made  Robinson
unwilling to be associated with the Company's  financial  statements;  C) advise
the Company of the need to expand  significantly  the scope of its audit or that
information had come to the attention of Robinson  during the Applicable  Fiscal
Years and during such  interim  period that if further  investigated,  (1) might
materially  impact the fairness or the reliability of either a previously issued
audit report to the underlying financial statements,  or the financial statement
issued (or to be issued) covering the fiscal  periods(s)  subsequent to the date
of the most recent financial  statements covered by an audit report or (2) cause
Robinson to be unwilling to rely on representations of the Company's  management
or be associated  with the  Company's  financial  statements  and (D) advise the
Company that  information  had come to the  attention of Robinson  that Robinson
concluded  materially  impacts the  fairness  or  reliability  of either,  (1) a
previously  issued audit report or the underlying  financial  statements or, (2)
the financial  statements issued (or to be issued) covering the fiscal period(s)
subsequent  to the date of the most recent  financial  statements  covered by an
audit report.

     As stated above, the Company has engaged, effective as of January 15, 1996,
Raich  as its new  principal  independent  accountant  to  audit  the  Company's
financial  statements  (beginning with the fiscal year ended December 31, 1995).
Prior to such engagement,  the Company (including any of its  representatives or
agents) did not consult with  representatives of Raich regarding the application
of  accounting  principles  to a  specified  transaction  (either  completed  or
proposed):  or the type of audit opinion that might be rendered on the Company's
financial  statements  and neither a written  report was provided to the Company
nor oral  advice was  provided  that Raich  concluded  was an  important  factor
considered by the Company in reaching a decision as to the accounting,

                                       14

<PAGE>


auditing or financial reporting issue.

Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance
        with Section 16 (a) of the Exchange Act.

     The following table sets forth certain information concerning the directors
and executive officers of the Company:

Name                           Age              Position(s) with the Company
----                           ---              ----------------------------

Bernard Gutman                 69           Chairman of the Board of Directors
                                                       Chief Executive Officer

James F. Leary                 66                   Vice Chairman of the Board
                                             Chief Financial Officer, Director

Irwin Pearl                    54           President, Chief Operating Officer
                                                                      Director

Drew A. Gutman                 36                Secretary-Treasurer, Director

Daniel Silkiss                 72                                     Director

Luther H. Hodges, Jr.          59                                     Director

     Directors   are  elected  to  serve  until  the  next  annual   meeting  of
stockholders  and until their  successors  have been elected and have qualified.
Officers  are  appointed  to serve until the  meeting of the Board of  Directors
following the next annual  meeting of  stockholders  and until their  successors
have been elected and have qualified.

     A summary of the  business  experience  of each officer and director of the
Company is as follows:

     BERNARD  GUTMAN has been  Chairman of the Board of Directors of the Company
since inception.  From inception to September 14, 1987, Mr. Gutman was President
of the Company. He has also been an officer,  director and principal shareholder
of Products & Patents,  a publicly  held company since its inception on December
11,  1981.  From 1978 to February  1982,  Mr.  Gutman  served as  President  and
Chairman  of  the  Board  of  Directors  of  National  Vitamin  Corporation,   a
publicly-held   corporation  involved  in  the  marketing  and  distribution  of
vitamins.  From 1981 to 1983, Mr. Gutman was President of the Gutman  Consulting
Company,  which was wholly owned by Mr. Gutman and which provided  financial and
marketing  consulting  services  to various  companies.  From 1955 to 1978,  Mr.
Gutman was Chairman of Delco Corporation, a publicly-held corporation engaged in
the home  improvement  business.  He is the father of Drew Gutman, a Director of
the Company.

     JAMES F.  LEARY has been a  Director  and Chief  Financial  Officer  of the
Company  since August 1994.  Mr. Leary the  President  and Founder of Sunwestern
Management,  Inc., Dallas,  Texas,  engaged in venture capital investing through
two limited partnerships. Prior to Sunwestern's inception in 1981, Mr. Leary was
Senior  Executive Vice President,  Chief  Financial  Officer and Director of the
Associates Corporation of North America, Dallas, Texas. Prior to his tenure with
Associates, he served as Senior Vice President of The

                                       15

<PAGE>


National  Bank of North America (now  National  Westminster  Bank USA) and as an
Assistant Treasurer of CIT Financial Corporation.  Mr. Leary is Vice Chairman of
Finance of Search Capital Group,  Inc., Dallas, TX (NASDAQ) and is a director of
MaxServ, Inc. (NASDAQ), several open-end mutual stock funds under the management
of Capstone Asset Management Company,  and Anthem Financial  Services,  Inc. Mr.
Leary has a B.A. degree in Business  Administration  from Gerogetown  University
1951, an MBA in Banking and Finance from New York University 1953, and is also a
graduate of the Advanced  Management Program of the Harvard University  Graduate
School of Business in 1956.

     IRWIN PEARL has been a director of the Company since August 1987 and became
its President in September 1994. Mr. Pearl had been Chief Executive  Officer and
Chairman of the Board of Directors of AquaSciences International, Inc. ("AQSI"),
a  publicly-owned  company,  from January  1987-1992  when he resigned.  AQSI is
engaged in water treatment technologies for home, commercial and industrial use.
From 1981 to 1985,  Mr. Pearl was a director of Crystin  Management  Company,  a
private management consulting firm in New York. From 1971 to 1981, Mr. Pearl was
the  President  and  principal   shareholder  of  Business  Concepts   Marketing
Corporation,  a private company engaged in the development and distribution of a
proprietary hotel guest directory.  From 1971 to 1981, he was also the President
and principal  shareholder of Promotional Media Incorporated,  a private company
engaged in the  publication of  traffic-building  promotions for the supermarket
industry.

     DREW GUTMAN has been the Secretary-Treasurer of the Company since September
1987. He has been a director of the Company since inception. Mr. Gutman had been
an officer and director of Products & Patents from April 1986 until August 1993.
From July 1983 to May 1984, he was an accountant  with Eisner & Lubin,  a public
accounting firm. From June 1984 to August 1985, Mr. Gutman was an accountant for
Merrill  Lynch  Hubbard,  Inc., a real estate  syndication  company.  Mr. Gutman
graduated from Hofstra  University in May 1983 with a B.S. degree in accounting.
He is the son of Bernard Gutman, Chairman of the Board of the Company.

     DANIEL  SILKISS has been a Director of the Company  since August 1994.  Mr.
Silkiss is currently President of LCD International  Group, Ltd. ("LCD") and has
been a  technical  consultant  to the  Company  since  1987.  LCD is  engaged in
licensing, consulting and distribution.  Other services include market research,
direct  sales,  product  registration  and  joint  ventures  in  the  fields  of
chemicals,   pharmaceutical,   cosmetics,   biotechnology,   telecommunications,
foodstuffs, botanicals and smoke cessation devices and programs. Mr. Silkiss has
coordinated clinical investigations at prestigious hospitals and medical schools
including Mt. Sinai, New York/Cornell,  NYU, and Albert Einstein in New York; UC
San Diego,  UCLA and  Stanford in  California;  Children's  New England  Medical
Center in Massachusetts;  University of Chicago in Illinois;  and many others in
both  the  United  States  and  Canada,  interacting  with  the  FDA  and  other
governmental  agencies.  He has initiated seminars in conjunction with hospitals
and  international  congresses,  obtained  NDA (New  Drug  Approval)  for  DDAVP
(Desmopressin Acetate) and IND (Investigational New Drug) for Gutron (Midodrin),
an alpha  adrenergic;  and has  marketed  drugs in the U.S.  and  overseas.  Mr.
Silkiss  has  been a guest  speaker  at the FDA as well as a  consultant  to and
participant in the United Nations Development Program for developing countries.

     LUTHER H. HODGES,  JR. has been a Director of the Company since April 1995.
He  currently  serves as a member of the  faculty  of the  Anderson  Schools  of
Management,  the  University  of New Mexico;  Chairman of the Board of the Santa
Fean, LLC and is a Director of Search Capital Corporation,  Dallas, Texas; and a
director of Safety Floor International,  Bethesda,  MD., Zomeworks  Corporation,
Albuquerque,  and CWF Energy Company,  Dallas, Texas.  Additionally,  Mr. Hodges
manages two closely  held  investment  partnerships  and  operates  the Santa Fe
Buyers Brokerage Company, a licensed real estate broker in New Mexico. He serves

                                       16

<PAGE>



on the Governor's  Economic  Development  Commission  and the State  Treasurer's
Investment  committee in New Mexico.  Mr.  Hodges is also a trustee of the North
American   Institute  in  Santa  Fe  and  the  National  Symphony  Orchestra  in
Washington, D.C. Previously, Mr. Hodges was Chairman and Chief Executive Officer
of Washington Bancorporation (1983-89), a regional bank holding company, and The
National  Bank of  Washington  (1981-89)  and served as Chairman of the Board of
Starlight Publishing Company,  Albuquerque,  N.M. He served as Undersecretary of
the U.S.  Department  of Commerce  (1979) and as the first  Deputy  Secretary of
Commerce (1980). He had been a democratic candidate for the United States Senate
from North  Carolina  (1978)  and from  1962-1977  served in various  management
positions  at  the  North  Carolina  National  Bank  (presently  Nations  Bank),
including  Chairman of the Board  (1974-77).  Mr. Hodges has long been active on
the  Board  of  Directors  of  numerous  community,  educational  and  corporate
organizations.  Mr.  Hodges was  educated at the  University  of North  Carolina
(1957) and at the Harvard Graduate School of Business  Administration (1961). He
served to the rank of Lieutenant, United States Navy.

Compliance With Section 16(a) of The Securities Exchange Act of 1934

     The Company does not have any securities registered under Section 12 of the
Securities Exchange Act of 1934, and, accordingly, compliance with Section 16(a)
thereof is not required or applicable.

Item 10. Executive Compensation

     The following  Summary  Compensation  Table sets forth certain  information
concerning  total annual  compensation  paid to Bernard  Gutman,  the  Company's
Chairman and Chief Executive Officer,  Irwin Pearl, the Company's  President and
Chief Operating Officer and Drew Gutman, the Company's  Secretary/Treasurer (the
"named Executive  Officers") for services  rendered in all capacities by them to
the Company during fiscal years 1995 and 1994.

Summary Compensation Table

<TABLE>
<CAPTION>
Name and
Principal Positions                Year                         Salary
-------------------                ----                -------------------------
                                                       Cash              Non Cash           Compensation
                                                       ----              --------           ------------
<S>                                <C>               <C>                  <C>                  <C>
Bernard Gutman
(Chairman and
Chief Executive
Officer)                           1995              $49,932              $52,000              $43,676
                                   1994              $ 5,739              $53,103              $17,574
                                   1993              $     0              $40,000              $52,903
Irwin Pearl
(President, Chief
Operating Officer)                 1995              $49,250              $59,875              $32,297
                                   1994              $22,250              $30,000              $     0
                                   1993              $     0              $     0              $     0
Drew Gutman
(Secretary/
Treasurer)                         1995              $38,000              $41,083              $44,486
                                   1994              $15,180              $43,249              $18,378
                                   1993              $     0              $40,000              $52,903
</TABLE>


                                       17

<PAGE>



The category  "Other  Compensation"  includes the leasing of an automobile,  any
automobile expenses, telephone expenses and entertainment expenses.

Item 11. Security Ownership of Certain Beneficial Owners and Management

(a)  Security Ownership of Certain Beneficial Owners -- The persons set forth on
     the charts  below are known to the Company to be the  beneficial  owners of
     more than 5% of the  Company's  outstanding  voting  Common Stock as of the
     date hereof.

(b)  Security  Ownership of Management -- Information  concerning the number and
     percentage  of shares of voting Common Stock of the Company owned of record
     and beneficially by management, is set forth on the charts below:

<TABLE>
<CAPTION>
Name and Address                          Shares of Common
Of Beneficial Owner                       Beneficially Owned          Percent Owned (1)
-------------------                       ------------------          -----------------
<S>                                         <C>                              <C>
Bernard Gutman                              15,097,486(2)                    20%
140 Broadway
Lynbrook, New York 11563

Drew Gutman                                  3,346,425                        4.5%
140 Broadway
Lynbrook, New York 11563

Irwin Pearl                                  1,350,000                        2.0%
140 Broadway
Lynbrook, New York 11563

Daniel Silkiss                               1,800,000                        2.4%
140 Broadway
Lynbrook, New York 11563

James F. Leary                                 998,853                        1.3%
140 Broadway
Lynbrook, New York 11563

Luther H. Hodges, Jr                           805,000                        1.0%
140 Broadway
Lynbrook, New York 11563

Products & Patents, Ltd.                     2,807,373                        3.8%
140 Broadway
Lynbrook, New York 11563

All Directors and Officers                  23,397,764                       31.5%
as a group (six persons)
</TABLE>

                                       18

<PAGE>



(1)  Based upon 74, 859,319 shares issued as of December 31, 1995.
(2)  Includes  2,807,373  shares held by P&P  inasmuch  as Bernard  Gutman is an
     officer and director of P&P.  Mr.  Gutman has sole  discretionary  power of
     these shares. P&P currently has no active business operations.


Item 12. Certain Relationships and Related Transactions

     In October  1994,  the  agreement  with P&P was  amended  to  provide  for:
transfer of patents,  worldwide marketing and manufacturing rights for 5,000,000
shares of Common  Stock and;  reduction  of  $100,000 in the sum owed to P&P for
1,000,000 shares of Common Stock.

     In August 1995, the relationship with P&P was terminated. Consequently, the
Company's  obligation to pay royalties  has been  discontinued.  Pursuant to the
termination  of the  relationship  with P&P, all debt due to P&P was canceled in
exchange for assumption of certain trade  liabilities.  In connection  with this
transaction,   the  Company   assumed  P&P's   obligation  to  its  supplier  of
approximately   $401,000  and  took  title  to  approximately  53,000  units  of
inventory.

     The  Chairman/CEO is an officer,  director and  significant  (approximately
22%) shareholder of P&P and P&P, which is now inactive,  is a shareholder of the
Company.

     In September  1994, the Board of Directors  approved  employment  contracts
with management  providing for salaries of $100,000 each for a three year period
(aggregate  $300,000  per year).  Additionally,  these  agreements  provide  for
certain benefits and perquisites.  As of the date of this report,  the contracts
have not been reduced to writing.

Item 13. Exhibits and Reports on Form 8-K


(A) Exhibits
           3.1    Articles of Incorporation (1)
           3.2    By-Laws (1)
         10.01    Agreement dated October 17,1995 with Integrity International
         10.02    Agreement dated June 9, 1995 with Tokyo Boeki
         10.03    Agreement dated August 21, 1995 with J&R Intercontinental
         10.04    Agreement dated August 1995 with Products & Patents
                  (1)    Incorporated  by  reference to Exhibits to Form 10K for
                         fiscal year ended December 31, 1989.


(B)      Reports on Form 8-K
         No reports on Form 8-K were filed during the last quarter of 1995.

                                       19

<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. PHASE-OUT OF AMERICA,
INC.


Dated: March 26, 1997                             By: __________________________
                                                      Irwin Pearl, President

     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.

SIGNATURES AND TITLE                                         DATE
--------------------                                         ----


---------------------
Bernard Gutman
Chairman of the Board of Directors
Chief Executive Officer *                                March 26, 1997


---------------------
James F. Leary
Vice Chairman of the Board &
Chief Financial Officer *                                March 26, 1997


---------------------
Irwin Pearl
President, Chief Operating
Officer and Director *                                   March 26, 1997


---------------------
Drew A. Gutman
Secretary-Treasurer & Director *                         March 26, 1997


---------------------
Daniel Silkiss
Director                                                 March 26, 1997


---------------------
Luther H. Hodges, Jr.
Director                                                 March 26, 1997
* A majority of the Board of Directors.

                                       20

<PAGE>

                            SUPPLEMENTAL INFORMATION


     Supplemental  Information  to be Furnished  with Reports Filed  Pursuant to
Section 15(d) of the Act by Registrants  Which Have Not  Registered  Pursuant to
Section 12 of the Act.


                                      NONE



                                       21

<PAGE>

                          Independent Auditors' Report



To the Board of Directors and Shareholders
Phase-Out of America, Inc.


We have audited the accompanying balance sheet of Phase-Out of America,  Inc. as
of December 31, 1995, and the related  statements of  operations,  shareholders'
(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 Phase-Out of America,  Inc. as
of December 31, 1995,  and the results of its  operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.

As discussed in Note 9 to the financial statements, the Company has been subject
to  certain   governmental   regulatory  matters  by  the  U.S.  Food  and  Drug
Administration  and the Federal Trade Commission.  At present time,  neither the
Company nor its legal  counsel can predict the  ultimate  outcome of the matters
addressed by these agencies. These matters, if pursued by the agencies, may have
a material adverse effect on the operations of the Company.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 3 to the
financial  statements,  the Company has had recurring net operating losses since
its  inception,  has relied upon debt and equity  financing to provide funds for
operations  and, as of December 31, 1995,  current  liabilities  exceed  current
assets by $905,416. These conditions raise substantial doubt about the Company's
ability to continue as a going concern.  The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.



RAICH ENDE MALTER LERNER & CO.
East Meadow, New York
May 2, 1996