U. S. 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, 1996
    Commission File Number:            33-18099-NY and 33-23169-NY

                            PHASEOUT 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)

                 6900 Jericho Turnpike, Syosset, New York 11791
                   (Address of principal executive offices)

Issuer's telephone number, including area code:                 (516) 364-3500

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

                                      [ X ]

The  registrant's  operating  revenues  for its most  recent  fiscal  year  were
$1,489,250.

The number of shares outstanding on December  31, 1996 was 108,369,929 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 ($.02) of
the Company's Common Stock, as of March 20, 1997 , is  approximately  $1,750,022
based  upon  the  87,501,114  shares  of  Registrant's   Common  Stock  held  by
non-affiliates.

(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, 1996

                                TABLE OF CONTENTS



PART I                                                                      PAGE
------                                                                      ----

Item 1.     Business                                                          4
Item 2.     Properties                                                        8
Item 3.     Legal Proceedings                                                 8
Item 4.     Submission of Matters to a Vote of Security Holders               9

PART II
-------

Item 5.     Market for Company's Common Equity and Related Stockholder
            Matters.                                                          9
Item 6.     Management's Discussion and Analysis of Financial Condition
            and Results of Operations.                                       10
Item 7.     Financial Statements                                       F1 - F14
Item 8.     Changes in or Disagreement with Accountants on Accounting
            and Financial Disclosure.                                        11
PART III
--------

Item 9.     Directors, Executive Officers, Promoters and Control Persons;
            Compliance with Section 16(a) of the Exchange Act.               11
Item 10.    Executive Compensation                                           13
Item 11.    Security Ownership of Certain Beneficial Owners and Management   13
Item 12.    Certain Relationships and Related Transaction                    15

PART IV
-------

Item 13.    Exhibits and Reports on Form 8-K                                 15

Signatures
Supplemental Information

                                        3


<PAGE>



PART 1

ITEM 1. BUSINESS

THE COMPANY

      PhaseOut of America,  Inc., (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.

      During  the last three  years,  the  Company  has been  concentrating  its
efforts  in two areas:  (1) test  marketing  the  product  domestically  through
various   channels  of   distribution   and  (2)  entering  into   international
distribution agreements utilizing television infomercials and commercials.

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.

      The Company is currently having the product manufactured in South Korea. A
second  manufacturing  source in China is going  on-line in mid 1997.  These two
sources of supply will be able to produce all future PhaseOut units required for
sale.

      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).

                                        4


<PAGE>



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 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.

                                        5


<PAGE>



ADDITIONAL STUDIES

      The Company  conducted a  scientific  study at Ameritech  Laboratories  to
demonstrate  the  condensation  of  nicotine  and  tars  within  the  filter  of
cigarettes due to the use of the PhaseOut  device.  This study  demonstrated  an
increase of nicotine  content within the filter,  porportionate to the number of
PhaseOut  perforations in the cigarette.  The study concluded that the increased
weight of the filter was due to the  condensation of nicotine due to the cooling
effect of the  external  air  introduced  through  the wholes  pierced  into the
cigarette filters by the PhaseOut device.

      The Company is in the initial  stages of a clinical  study taking place at
the  University of Miami,  which will gauge the  effective  quit rate of smokers
using the PhaseOut device in conjunction with behavior modification.  This study
will also measure the  effectiveness of the PhaseOut device as a cigarette toxin
reduction  technology in an natural  environment.  Previous studies were machine
studies or human studies in a tightly controlled laboratory environment.

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).  The Company has  received  patents in China,
Taiwan and Japan.  In  addition,  the Company has applied for patents in fifteen
(15) foreign countries, including England, France, Germany and Italy.

MARKETING (DOMESTIC)

      The  focus  of the  Company's  marketing  to date has  been 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).

      During  the  second  half of  1996,  the  Company's  marketing  activities
domestically,  were  curtailed  due to the  negotiations  with the Federal Trade
Commission as to what advertising  claims could be made to describe the PhaseOut
product  (see  Legal   Proceedings).   Once  advertising  claims  are  approved,
management  intends  to  aggressively  enter the U.S.  retail  market  under the
category of smoke cessation 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.

     PhaseOut  has started  distribution  through  television  infomercials  and
commercials  in the  following  countries:  Greece,  Portugal,  Spain,  Uruguay,
Brazil,  South Africa,  Phillippines,  Argentina,  Romania,  Moldavia,  Hungary,
Chile, Columbia, Australia and Zimbabwe.

                                        6


<PAGE>



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 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

                                        7


<PAGE>



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 seven  employees,  including  the
Company's three officers and directors and four  administrative  and secretarial
personnel.

ITEM 2. PROPERTIES

      The Company leases approximately 2,600 square feet of office space at 6900
Jericho Turnpike, Syosset, New York 11719.

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.

      On  August  20,  1996,  a consent  order was  agreed to with the FTC which
settled  charges that various  advertising  claims for the PhaseOut device ("the
device") were unsubstantiated or false. The order requires the Company to send a
postcard to  identifiable  past  purchasers of the device  notifying them of the
commission's  action and  advising  them that the device has not been  proven to
reduce the risk of smoking  related  diseases or make  cigarettes  "safer".  The
order also prohibits the Company from making certain claims in its current

                                        8


<PAGE>



advertising.  The Company  estimated  that the cost to comply with this order is
$35,000,  representing  the cost of  identifying  each purchaser and to mail the
post cards.

      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  $39,000.  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.  Based on the Award of  Arbitrator  dated  October  28, 1996 which
disposed of all claims by both parties,  the Company paid $123,157 to On-Air and
issued a note for $20,940 which was paid after December 31, 1996.

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

                              NONE

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,  1997.  The  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, 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
Quarter Ended June 30, 1996                           .05               .03
Quarter Ended September 30, 1996                      .05               .03
Quarter Ended December 31, 1996                       .02               .01

(b) Holders -- As of December 31, 1996, the approximate  number of the Company's
shareholders was 390.

                                        9


<PAGE>



(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

RESULTS OF OPERATIONS

      During 1996, the Company's  domestic  marketing  activities were curtailed
due to the ongoing negotiations with the FTC. As a result, total sales decreased
by approximately  $43,000 from $1,532,000 in 1995 to $1,489,000 in 1996. Of this
amount, approximately $641,000 was due to a decrease in domestic sales which was
offset by a $598,000 increase in the Company's  wholesale  international  sales.
The number of units shipped during 1996 increased by 46,950 to 107,970,  but the
average  selling  price dropped by $11.00 to $14.00 per unit.  Once  advertising
claims are approved, the Company intends to re-enter the domestic retail market.

      Cost of sales increased by approximately $110,000 from $265,000 in 1995 to
$375,000 in 1996.  Of this amount,  approximately  $204,000 was due to increased
volume offset by approximately $94,000 due to decreased average unit cost.

      Selling expenses  decreased by  approximately  $290,000 from $1,322,000 in
1995 to $1,032,000 in 1996.  This decrease is attributed to the  curtailment  of
television  direct  response  marketing  in mid  1996  during  the  ongoing  FTC
negotiations.

      General and administrative  expenses  increased by approximately  $111,000
from  $665,000  in  1995  to  $776,000  in  1996.  This  increase  is  primarily
attributable to a $105,000 increase in legal fees in connection with the ongoing
FTC negotiations and a $35,000 accrual for the estimated cost to comply with the
FTC consent order offset by a $29,000 reduction in salary and other expenses.

      Interest expense  increased by approximately  $58,000 from $50,000 in 1995
to $108,000 in 1996 due to increased  borrowing and interest  being charged by a
major vendor.

LIQUIDITY AND CAPITAL RESOURCES

      Cash of $546,646 was used for  operations  for the year ended December 31,
1996 as compared to $282,390 used last year.  Cash  increases  principally  were
from  proceeds  of sales of common  stock and  borrowing  during  the year ended
December 31, 1996.

      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 and directors  have been repaid as has $32,500 of
the  principal  to the  individual  investor  with  the  balance  to be  paid in
installments over 67 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.

                                       10


<PAGE>



ITEM 7.  FINANCIAL STATEMENTS


                          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, 1996, and the related  statements of  operations,  shareholders'
(deficit),  and cash flows for the years ended December 31, 1996 and 1995. 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 audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Phase-Out of America,  Inc. as
of December 31, 1996,  and the results of its  operations and its cash flows for
the years ended December 31, 1996 and 1995 in conformity with generally accepted
accounting principles.

As  discussed  in Note 10 to the  financial  statements,  the  Company  has been
subject to certain  governmental  regulatory  matters by the U.S.  Food and Drug
Administration.  At present time,  neither the Company nor its legal counsel can
predict the ultimate  outcome of the matters  addressed  by this  agency.  These
matters,  if pursued by this agency,  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, 1996,  current  liabilities  exceed  current
assets by $436,465. 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
March 20, 1997

                                     - F1 -


<PAGE>



PHASE-OUT OF AMERICA, INC.
BALANCE SHEET
DECEMBER 31, 1996
================================================================================




Assets

 CURRENT ASSETS
  Cash                                                                  $260,372
  Accounts receivable - net of allowance for doubtful
    accounts of $1,000                                                     4,287
  Inventory                                                              127,413
  Advances for clinical study                                             25,000
  Prepaid expenses                                                         5,414
                                                                        --------
                                                                         422,486
                                                                        --------
FURNITURE AND EQUIPMENT - at cost - net of accumulated
  depreciation of $16,639                                                 26,276

PATENTS - at cost - net of accumulated
  amortization of $6,733                                                  40,267

SECURITY DEPOSITS                                                          4,137
                                                                        --------
                                                                          70,680
                                                                        --------
                                                                        $493,166
                                                                        ========



See notes to financial statements.

                                     - F2 -


<PAGE>




PHASE-OUT OF AMERICA, INC.
BALANCE SHEET
DECEMBER 31, 1996
================================================================================



Liabilities and Shareholders' (Deficit)

 CURRENT LIABILITIES
  1992 convertible debentures - including accrued interest
    of $4,900                                                          $ 14,900
  Note payable - vendor                                                  20,940
  Shareholder's loan - current portion                                   32,939
  Taxes payable                                                           4,297
  Accounts payable                                                      614,327
  Accrued officer and director's compensation                            60,000
  Loans from directors                                                   33,169
  Accrued expenses                                                       78,379
                                                                    -----------

                                                                        858,951
                                                                    -----------
SHAREHOLDER'S LOAN - net of current portion                             137,500
                                                                    -----------
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 -
    108,369,929 shares issued and
    outstanding                                                           3,251
  Capital in excess of par                                            3,080,051
  Accumulated (deficit)                                              (3,586,587)
                                                                    -----------

                                                                       (503,285)
                                                                    -----------
                                                                       $493,166
                                                                    ===========



See notes to financial statements.

                                     - F3 -


<PAGE>


PHASE-OUT OF AMERICA, INC.
STATEMENS OF OPERATIONS
================================================================================



                                                     FOR THE YEARS ENDED
                                                         DECEMBER 31,
                                                --------------------------------
                                                      1996              1995
                                                ================================


SALES - net                                        $1,489,250        $1,532,405

COST OF SALES                                         374,520           264,566
                                                 ------------      ------------
                                                    1,114,730         1,267,839
                                                 ------------      ------------
SELLING EXPENSES                                    1,032,492         1,322,199

GENERAL AND ADMINISTRATIVE EXPENSES                   775,718           664,648
                                                 ------------      ------------
                                                    1,808,210         1,986,847
                                                 ------------      ------------
(LOSS) BEFORE OTHER INCOME (EXPENSES)                (693,480)         (719,008)
                                                 ------------      ------------
OTHER INCOME (EXPENSES)
   Interest income                                      5,694                89
   Interest (expense)                                (107,748)          (49,742)
                                                 ------------      ------------
                                                     (102,054)          (49,653)
                                                 ------------      ------------
NET (LOSS)                                          $(795,534)        $(768,661)
                                                 ============      ============
(LOSS) PER SHARE                                    $   (0.01)        $   (0.02)
                                                 ============      ============
WEIGHTED AVERAGE NUMBER OF SHARES
   OUTSTANDING (to nearest 1,000,000)              90,000,000        68,000,000
                                                 ============      ============





See notes to financial statements.

                                     - F4 -


<PAGE>



PHASE-OUT OF AMERICA, INC.
STATEMENTS OF SHAREHOLDERS' (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
================================================================================

<TABLE>
<CAPTION>


                                                 Number Of
                                                Common Stock  Amount    Capital In
                                                  Shares      $.00003    Excess Of   Accumulated
                                                (Post-Split) Par Value  Par Value     (Deficit)
                                                ================================================
<S>                                             <C>          <C>      <C>         <C>
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)
  Proceeds from sales of stock                   20,045,592      601      514,881          --
  Bond and accrued interest conversions to
    stock                                           210,517        6       10,520          --
  Senior subordinated convertible debentures
    and accrued interest
    conversions to stock                          8,700,000      261      434,739          --
  Shareholder's loan converted to stock             125,000        4        7,496          --
  Stock issued for accrued services rendered:
    Officers and directors                        3,857,143      116      160,294          --
    Outside services                                560,000       17       14,433          --
  Net (loss)                                           --       --           --        (795,534)
                                                -----------   ------   ----------   -----------

BALANCE - December 31, 1996                     108,369,929   $3,251   $3,080,051   $(3,586,587)
                                                ===========   ======   ==========   ===========

</TABLE>


See notes to financial statements.

                                     - F5 -


<PAGE>



PHASE-OUT OF AMERICA, INC.
STATEMENTS OF CASH FLOWS                                             PAGE 1 OF 2
================================================================================


                                                          FOR THE YEARS ENDED
                                                             DECEMBER 31,
                                                   -----------------------------
                                                           1996          1995
                                                   -----------------------------
Cash Flows from Operating Activities
   Net (loss)                                            $(795,534)   $(768,661)
   Adjustments to reconcile net (loss) to net cash
     (used for) operating activities:
       Depreciation and amortization                         5,602        6,074
       Expenses paid through the issuance of
           restricted common stock                          30,700      159,086
       (Increase) decrease in:
         Accounts receivable                                67,680      (69,883)
         Inventories                                       (28,113)     256,186
         Advances for clinical study                       (25,000)        --
         Prepaid expenses                                    4,438        3,511
         Other current assets                               18,592      (18,592)
       Increase (decrease) in:
         Accrued bond interest                                --         25,968
         Accounts payable                                   32,168       46,269
         Accrued officer compensation                       60,000      144,160
         Taxes payable                                      (3,780)       3,270
         Amounts due to affiliate                             --        (91,488)
         Accrued expenses                                   86,601       21,710
                                                         ---------    ---------
                                                          (546,646)    (282,390)
                                                         ---------    ---------
CASH FLOWS FROM INVESTING ACTIVITIES
   Acquisition of equipment                                (21,390)        (800)
   Payment of security deposits                               (595)        --
   Return of security deposits                                --            300
                                                         ---------    ---------
                                                           (21,985)        (500)
                                                         ---------    ---------
CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from sales of debentures                          --        290,000
   Repayments of debentures                                (29,297)        --
   Proceeds from sales of common stock                     515,482      120,000
   Payments of capital leases                                 --           (586)
   Loans from directors                                     56,000       25,753
   Repayments to directors                                 (65,000)        --
   Loan from shareholder                                   200,000         --
   Repayments to shareholder                               (25,000)        --
                                                         ---------    ---------
                                                           652,185      435,167
                                                         ---------    ---------


See notes to financial statements.

                                     - F6 -


<PAGE>



PHASE-OUT OF AMERICA, INC.
STATEMENTS OF CASH FLOWS                                             PAGE 2 OF 2
================================================================================


                                                          FOR THE YEARS ENDED
                                                             DECEMBER 31,
                                                   -----------------------------
                                                           1996          1995
                                                   -----------------------------

NET INCREASE IN CASH                                     $  83,554    $ 152,277
CASH - beginning                                           176,818       24,541
                                                         ---------    ---------
CASH - end                                               $ 260,372    $ 176,818
                                                         =========    =========
SUPPLEMENTAL DISCLOSURES
 CASH PAID FOR:
   Interest                                              $  83,463    $  23,880
                                                         =========    =========
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
 Bond and accrued interest conversions to
   common stock                                         $ 445,526    $  34,014
                                                         =========    =========
  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             $ 144,160    $ 125,715
                                                         =========    =========
  Shareholder loan converted to common stock             $   7,500    $    --
                                                         =========    =========


See notes to financial statements.

                                     - F7 -


<PAGE>



PHASE-OUT OF AMERICA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
================================================================================




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  had  primarily  marketed  the  product in the United  States
      through direct response  marketing  including radio,  television spots and
      infomercials.  This  domestic  marketing  was curtailed due to the ongoing
      negotiations  with the Federal  Trade  Commission  ("FTC") as discussed in
      Note 10c. Once  advertising  claims are approved,  the Company  intends to
      reenter the  domestic  retail  market.  The Company also  distributes  the
      product overseas.

2 -   Summary of Significant Accounting Policies

      a.    INVENTORY  - Inventory  is valued at cost (on a first-in,  first-out
            basis)  which  is  not in  excess  of  market  value.  Inventory  is
            comprised entirely of finished goods.

      b.    FURNITURE  AND  EQUIPMENT - Furniture  and  equipment are carried at
            cost.  Depreciation is computed on the straight-line method over the
            estimated useful lives (three to seven years) 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  dates  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  acquisition  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  response  advertising and marketing will have
            measurable future benefit.



                                                                       Continued

                                     - F8 -


<PAGE>



            Advertising and marketing expense was $364,381 and $739,660 for 1996
            and 1995, respectively.

      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  reclassifications had no impact upon the results
            of operations.

      i.    STOCK  OVERSUBSCRIPTION  - As of December 31, 1996, the common stock
            issued by the Company  exceeded  the  authorized  limit by 8,369,929
            shares.   Subsequent  to  the  year-end,   the  Board  of  Directors
            authorized a 30,000,000 share increase in the authorized shares.

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, 1996, current liabilities exceed
      current  assets  by  $436,465.  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

                                     - F9 -


<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        1997
              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
              Issued with purchase of
                common stock                           250,000           .10             25,000        1999
              Issued for services                   23,057,950     .05 - .075         1,190,398        2000 - 2001
                                                  ------------                    -------------

           BALANCE - December 31, 1996              31,248,011                     $  2,639,807
                                                  ============                     ============
</TABLE>


      b.    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%. All
            of the debentures were converted to common stock during 1996.

      c.    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,  $107,500  has  been  paid  back or
            converted into stock. As of December 31, 1996,  $10,000 of principal
            and  $4,900  of  interest  remain  unpaid  or  unconverted  on these
            debentures.


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.

                                                                       Continued

                                     - F10 -


<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  DIRECTOR - A former  officer/shareholder,  who is still a
            director of the Company, is owed $33,169 by the Company.  The amount
            is payable on demand with a stated interest rate of 11%.

      c.    ACCRUED  OFFICER  AND  DIRECTOR'S  COMPENSATION  - During  1996,  an
            investor group consisting of two individuals,  which acquired an 18%
            ownership interest for $500,000,  was awarded two seats on the Board
            of Directors and one officer position. The two individuals will each
            receive a consulting  fee of $60,000 per annum for their  management
            duties  ($30,000  each for 1996).  The 1996 fees of  $60,000  remain
            unpaid as of December 31, 1996.

      d.    OTHER - The Company's  general  counsel is a relative of a director.
            The Company incurred  approximately  $57,518 of legal fees with this
            firm in 1996 and $25,000 in 1995, of which $18,205  remained  unpaid
            as of December 31, 1996.

6 -   Shareholder's Loan

      During 1996, the Company received $200,000 from an individual as a loan in
      connection with the Company's  media campaign.  Repayments of $25,000 were
      made in cash and $7,500 in stock.  The $167,500 of remaining  principal at
      December 31, 1996 is to be paid at the rate of $2,500 per month.  Interest
      accrues at 10% and will be paid with a final balloon payment.

7 -   Income Taxes

      The  Company  has   available   net  operating   loss   carryforwards   of
      approximately $3,200,000, which expire in 2002 until 2011. Deferred income
      taxes reflect the net tax effects of net operating loss  carryforwards and
      result in deferred  tax assets of  approximately  $960,000 and $780,000 at
      December  31,  1996 and 1995,  respectively,  which were  fully  offset by
      valuation  allowances  due  to  uncertainties   surrounding  the  ultimate
      realization of this asset.

                                                                       Continued

                                     - F11 -


<PAGE>



8 -   Leases

      The Company is obligated under a lease for office space through  November,
      2001.   Rental  expense  was  $15,080  and  $23,413  for  1996  and  1995,
      respectively.  The future minimum lease payments required under this lease
      are as follows:

                             1997                 $ 56,323
                             1998                   58,354
                             1999                   60,448
                             2000                   61,849
                             2001                   50,739


      The Company currently receives sublease payments of $1,800 per month for a
      portion of their office space, but there is no formal sublease agreement.

9 -   Economic Dependence

      The  Company  purchased  100% of its  products  in 1996 and 1995  from two
      vendors.

10 -  Commitments and Contingencies

      a.    DIRECT RESPONSE  MARKETING  AGREEMENT - In 1994, the Company entered
            into certain  agreements with On-Air  Infonetwork,  Inc.  ("On-Air")
            relating to the Company's direct response  marketing campaign during
            1995 and 1996.

            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.  Based on the
            Award of Arbitrator  dated October 28, 1996,  which  disposed of all
            claims by both parties, the Company paid $123,157 to On-Air and gave
            them a note for $20,940 which was paid after December 31, 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.

                                                                       Continued

                                     - F12 -


<PAGE>



      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 FDC 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.

            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.

            On August 20, 1996, a consent order was agreed to with the FTC which
            settled charges that various advertising claims for the product were
            unsubstantiated  or false.  The order requires the Company to send a
            postcard to identifiable  past-purchasers  of the product  notifying
            them of the FTC's action and advising  them that the product has not
            been proven to reduce the risk of  smoking-related  diseases or make
            cigarettes  safer.  The order also prohibits the Company from making
            certain  claims in its current  advertising.  The Company  estimates
            that the cost to comply with this order is $35,000, representing the
            cost to find identifiable past-purchasers and mail the postcards and
            has accrued this amount.

      d.    OTHER - 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  $39,000.   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

                                     - F13 -


<PAGE>


11-   Disclosure About Fair Value of Financial Instruments

      The carrying amounts of cash,  accounts  receivable,  accounts payable and
      other current assets and liabilities approximate fair value because of the
      short maturity of these items.

      The carrying  amounts of various  loans  payable  exceed the fair value by
      approximately $14,000, based on an estimated borrowing rate of 10.5%.

      These  fair  value   estimates  are   subjective  in  nature  and  involve
      uncertainties and matters of significant judgment and, therefore,  can not
      be determined with precision.  Changes in assumptions could  significantly
      affect these estimates.

                                     - F14 -


<PAGE>


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

                                      NONE

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

Burton A. Goldstein           61            Chairman of the Board of Directors
                                                    Co-Chief Executive Officer

Irwin Pearl                   55         President, Co-Chief Executive Officer
                                                                      Director

Herbert M. Reichlin           55                    Secretary-Treasurer, Chief
                                                             Operating Officer
                                                                      Director

Bernard Gutman                70                                      Director

James F. Leary                67                                      Director

Luther H. Hodges, Jr.         60                                      Director

Milton J. Walters             57                                      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:

      BURTON A.  GOLDSTEIN  has been  Chairman of the Board of  Directors of the
Company since March 10, 1997.  Mr.  Goldstein is President of American  Employer
Services Corp., a provider of employee benefit  consulting  services to industry
and associations.  A chartered Life Underwriter, Mr. Goldstein is also active in
estate preservation for business owners and wealthy individuals.

      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

                                       11


<PAGE>



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.

      HERBERT M. REICHLIN   has been a Director and  Secretary-Treasurer  of the
Company  since July 30,  1996.  Mr.  Reichlin is a practicing  Certified  Public
Accountant  and is also  the  President  of  Program  Resource  Organization,  a
consulting company to the health industry.

      BERNARD GUTMAN  has been a Director of the Company since  inception.  From
inception,  Mr. Gutman was President of the Company until September 14, 1987 and
was Chairman of the Board of Directors until March 10, 1997. 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.

      JAMES F. LEARY has been a Director 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 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.

      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 Fe,
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
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

                                       12


<PAGE>



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.

      MILTON J. WALTERS has been a Director of the Company since March 10, 1997.
Mr. Walters is President of Tri-River  Capital Group that serves the specialized
investment banking needs of the financial service industry. His more than twenty
five years of investment  banking  experience has been dedicated to serving this
industry sector.  He has represented  clients in a wide variety of liquidity and
capital  financings,  conversions  of mutual  savings  and loans,  acquisitions,
sales., divestitures, recapitalization and captive finance company formations.

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
former  Chairman  and Chief  Executive  Officer  for  services  rendered  in all
capacities by him to the Company during fiscal years 1996, 1995 and 1994.

Summary Compensation Table

Name and
Principal Positions           Year              Salary
-------------------           ----              ------                  Other
                                          Cash        Non Cash      Compensation
                                          ----        --------      ------------
Bernard Gutman
(Former Chairman and
Chief Executive               1996      $47,780         -0-           $40,004
Officer)                      1995      $49,932       $52,000         $43,676
                              1994       $5,739       $53,103         $17,574

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:

                                       13


<PAGE>



Name and Address                    Shares of Common
Of Beneficial Owner                 Beneficially Owned      Percent Owned (1)
-------------------                 ------------------      -----------------

Burton A. Goldstein                   9,778,976 (2)                 7.5%
6900 Jericho Turnpike
Syosset, New York 11791

Irwin Pearl                           2,250,000                     1.7%
6900 Jericho Turnpike
Syosset, New York 11791

Herbert M. Reichlin                  9,778,975 (2)                  7.5%
6900 Jericho Turnpike
Syosset, New York 11791

Bernard Gutman                       16,208,019 (3)                 12.5%
6900 Jericho Turnpike
Syosset, New York 11791

James F. Leary                          998,653                       .8%
6900 Jericho Turnpike
Syosset, New York 11791

Luther H. Hodges, Jr.                 1,412,143                      1.1%
6900 Jericho Turnpike
Syosset, New York 11791

Milton J. Walters                     2,000,000 (2)                  1.5%
6900 Jericho Turnpike
Syosset, New York 11791

Products & Patents, Ltd.("P&P")       1,867,906                      1.4%
6900 Jericho Turnpike
Syosset, New York 11791

All Directors and Officers           42,426,766                      32.7%
as a group (seven persons)


----------

(1)   Based upon 129,927,880 shares and warrants issued as of December 31, 1996.

(2)   Represents warrants issued and owned.

(3)   Includes  1,867,906  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.

                                       14


<PAGE>



ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      In October  1994,  an  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.

      Bernard  Gutman,  the  Director  and former  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 June 1996,  the Board of Directors  approved a revision of the existing
employment  contracts  with  management  providing  for salaries of $50,000 each
until  September  1997  (aggregate  $100,000  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 (2)
        3.2    By-laws (2)
      10.01    Agreement dated August 21, 1995 with J&R Intercontinental (1).
      10.02    Consulting Agreement dated July 9, 1996 between the Company and
               Herbert M. Reichlin
      10.03    Consulting Agreement dated July 9, 1996 between the Company and
               American Employer Service Corporation
      10.04    Warrant Agreement dated July 9, 1996 between the Company and
               Herbert M. Reichlin
      10.05    Warrant Agreement dated July 9, 1996 between the Company and
               Burton A. Goldstein
      10.06    Warrant Agreement dated July 9, 1996 between the Company and
               Milton J. Walters
      10.07    Securities Purchase Agreement dated July 9, 1996
               1)  Incorporated by reference to Exhibits to Form 10K for fiscal
                   year ended December 31,  1995.
               2)  Incorporated by reference to Exhibits to Form 10K for the
                   year ended December 31, 1989.

(B)   REPORTS ON FORM 8-K

      No reports on Form 8-K were filed during the last quarter of 1996.

                                       15


<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:/s/ Irwin Pearl
                                                      --------------------------
                                                       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
--------------------                                         ----

/s/ Burton A. Goldstein
--------------------------
Burton A. Goldstein
Chairman of the Board of
Directors, Co-Chief Executive
Officer                                                      March 26, 1997

/s/ Irwin Pearl
--------------------------
Irwin Pearl
President & Co-Chief Executive
Officer, Director                                            March 26, 1997

/s/ Herbert M. Reichlin
--------------------------
Herbert M. Reichlin
Secretary-Treasurer, Chief
Operating Officer, Director                                  March 26, 1997

/s/Bernard Gutman
--------------------------
Bernard Gutman
Director                                                     March 26, 1997

/s/ James F. Leary
--------------------------
James F. Leary
Director                                                     March 26, 1997

/s/ Luther H. Hodges, Jr.
--------------------------
Luther H. Hodges, Jr.
Director                                                     March 26, 1997

/s/ Milton J. Walters
--------------------------
Milton J. Walters
Director                                                      March 26, 1997


<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