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, 1997
               Commission File Number: 33-18099-NY and 33-23169-NY

         QUEST PRODUCTS CORPORATION (formerly 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
$300,584.

The number of shares  outstanding on December 31, 1997 was 138,083,713 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 30, 1998, is  approximately  $2,043,892
based  upon  the  102,194,594  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>



                           QUEST PRODUCTS CORPORATION
                                   Form 10-KSB
                       Fiscal Year Ended December 31, 1997


                                Table of Contents


<TABLE>
<CAPTION>

PART I                                                                                                         PAGE
------                                                                                                         ----
<S>                                                                                                        <C>
Item 1.           Business                                                                                    4 - 7
Item 2.           Properties                                                                                      7
Item 3.           Legal Proceedings                                                                           7 - 8
Item 4.           Submission of Matters to a Vote of Security Holders                                             8

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                    9 - 10
                  of Operations.
Item 7.           Financial Statements                                                                     F1 - F14
Item 8.           Changes in or Disagreement with Accountants on Accounting and Financial                        11
                  Disclosure.

PART III

Item 9.           Directors, Executive Officers, Promoters and Control Persons; Compliance with             11 - 13
                  Section 16(a) of the Exchange Act.
Item 10.          Executive Compensation                                                                         13
Item 11.          Security Ownership of Certain Beneficial Owners and Management                            13 - 14
Item 12.          Certain Relationships and Related Transactions                                            14 - 15

PART IV

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


Signatures                                                                                                       16
Supplemental Information                                                                                         17
</TABLE>









                                        3

<PAGE>



PART 1

ITEM 1. Business

The Company

     Quest Products  Corporation (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 four 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 approximately $9.00.

     The Company is currently  having the product  manufactured  by two vendors,
one in South Korea and one in China. 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 Phase-Out 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,  proportionate 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 final 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  1997,  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).  In 1998, management intends to aggressively enter the U.S. retail
market under the category of smoke cessation products.

Marketing (International)

     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.
Distribution in South Korea is expected to begin in the 2nd quarter of 1998. The
Company sold 51% of its products in 1997 to one major foreign distributor.

New Products

     In May 1997,  the  Company  executed  a letter of  intent  with  Automotive
Marketing,  Inc. to manufacture and distribute  aftermarket automobile products.
As of December 31, 1997, the Company has incurred  expenses of $116,111 with the
understanding  that such  expenses  will be  reimbursed  when  revenue-producing
operations commence.


                                        6

<PAGE>



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 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 six employees, including the Company's
two 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.

                                        7

<PAGE>



     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 required 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
advertising.   The  Company   cost  to  comply  with  this  order  was  $15,102,
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 attorney fees and disbursements of approximately  $39,000.  In July 1997,
the Company  agreed to pay the balance owed of $16,603.  Payments of $7,000 were
made in 1997 against this liability.  The remaining balance of $9,603 is payable
in monthly installments of $1,000 through October 1998.

     In  January  1998,  the  Company's  former  advertising  agency,   Popofsky
Advertising,  Inc.,  brought  an action  against  the  Company in New York State
Supreme  Court,  New York County for unpaid  services  rendered in the amount of
$74,000.  In March 1998, the parties  reached an agreement to settle all claims.
The Company will pay  Popofsky  Advertising,  Inc.  $50,000 in  installments  of
$15,000 by December  1998,  $15,000 by March 1999, and the final $20,000 by June
1999.

     In July  1997,  the  Company's  former  attorney,  who is a  relative  of a
director, brought an action against the Company in New York State Supreme Court,
New York County for unpaid  attorney  fees and  disbursements  of  approximately
$18,000.  During  1997,  $5,000  was paid by the  Company  and,  therefore,  the
financial  statements  include a liability for approximately  $13,000 payable to
this party.  Legal  counsel  expects  that this case will either be abandoned or
will settle for an amount less than $10,000.

     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 in 1997.

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

     NONE

                                        8

<PAGE>



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 Common
Shares ($.00003 par value) were tradable is in the over-the-counter market.

     The Class A Warrants  expired on  November 2, 1993 and the Class B Warrants
expired on 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 "QPRC".  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, 1996                                   .05           .04
Quarter Ended June 30, 1996                                    .05           .03
Quarter Ended September 30, 1996                               .05           .03
Quarter Ended December 31, 1996                                .02           .01
Quarter Ended March 31, 1997                                   .02           .01
Quarter Ended June 30, 1997                                   .016           .01
Quarter Ended September 30, 1997                              .012          .008
Quarter Ended December 31, 1997                               .012          .008

(b) Holders -- As of December 31, 1997, the approximate  number of the Company's
shareholders was 415.

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 1997, the Company's domestic marketing activities were curtailed due
to the ongoing  negotiations with the FTC. As a result, total sales decreased by
approximately $1,189,000 from $1,489,000 in 1996 to $300,000 in 1997. The number
of units  shipped  during 1997  decreased  by 72,059 to 35,911,  and the average
selling price dropped by $5.42 to $8.37 per unit. In 1998,  the Company  intends
to re-enter the domestic retail market.

     Cost of sales decreased by approximately  $230,000 from $375,000 in 1996 to
$145,000 in 1997.  Of this amount,  approximately  $250,000 was due to decreased
volume offset by approximately $20,000 due to increased average unit cost.

     Selling  expenses  decreased by  approximately  $754,000 from $1,032,000 in
1996 to $278,000 in 1997.  This  decrease is attributed  to the  curtailment  of
television  direct  response  marketing  in mid  1996  during  the  ongoing  FTC
negotiations.

                                        9

<PAGE>



     General and  administrative  expenses  decreased by approximately  $281,000
from  $776,000  in  1996  to  $495,000  in  1997.  This  decrease  is  primarily
attributable  to a $136,000  decrease in legal fees in  connection  with the FTC
negotiations,  a $111,000  decrease in salaries and related payroll costs, and a
$34,000 net decrease in various other administrative costs.

     Interest expense  decreased by approximately  $75,000 from $108,000 in 1996
to $33,000 in 1997 due to interest no longer being charged by a major vendor and
interest rate adjustments on other loans.

     During 1997, the Company  negotiated a $61,000 reduction in the amount owed
to a major vendor.

Liquidity and Capital Resources

     Cash of $367,809 was used for  operations  for the year ended  December 31,
1997 as compared to $546,646 used last year.  Cash decreased  during the year by
$232.784.

     The Company's  working capital has  deteriorated  due to the use of current
assets for operations. Working capital and current ratios were:

                               December 31,                        December 31,
                                 1997                                 1996
                                 ----                                 ----
Working capital
(deficiency)                   $(752,933)                          $(436,465)

Current ratios                    0.12:1                              0.49:1

     In order to meet short-term  marketing goals, in July 1997 certain officers
and  directors  agreed to  acquire  an  aggregate  of  10,000,000  shares of the
Company's  common stock  (representing  8% of total shares  outstanding)  for an
aggregate purchase price of $100,000.  The Company is also seeking an additional
$240,000  of  financing  under the same terms and  conditions  as offered to the
officers  and  directors.  As of December  31,  1997,  the Company has  received
$172,500.  There  is no  assurance  that  the  Company  will be  able to  obtain
additional financing.

Item 7.  Financial Statements



                                       10

<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            62            Chairman of the Board of Directors
                                             Secretary, Chief Executive Officer

Herbert M. Reichlin            56            President, Treasurer,
                                             Chief Operating Officer, Director

Bernard Gutman                 71            Director

James F. Leary                 68            Director

Luther H. Hodges, Jr.          61            Director

Alfred Fabricant               44            Director

Richard Mascola                61            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. Each director receives $1,500 annually for
attendance fees, warrants for 500,000 shares at market price each February,  and
out-of-pocket travel expenses.

     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 and became its  Secretary  in December  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.

     HERBERT M.  REICHLIN has been a Director and Treasurer of the Company since
July 30, 1996 and became its  President  in  December  1997.  Mr.  Reichlin is a
Certified  Public  Accountant  and is also the  President  of  Program  Resource
Organization, a consulting company to the health industry.

                                       11

<PAGE>



     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
Georgetown  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  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.

     ALFRED  FABRICANT has been a Director since October 7, 1997. Mr.  Fabricant
is the founding  partner of the New York law firm of Fabricant & Yeskoo LLP. Mr.
Fabricant  was  educated  at the  University  of  Miami  (1975)  and at the John
Marshall Law School (1978).

                                       12

<PAGE>



     DR.  RICHARD F. MASCOLA has been a Director  since  December 16, 1997.  Dr.
Mascola  is a  practicing  Doctor of Dental  Surgery  and is also the  Executive
Director of the Queens New York Dental Society. Dr. Mascola was educated at Holy
Cross  (1958)  at New  York  University  College  of  Dentistry,  D.D.S.  and at
Brookdale Dental Center of New York University.

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   compensation  paid  as  required  under  applicable  rules  of  the
Securities and Exchange Commission (the "SEC").

Summary Compensation Table

Name and
Principal Positions                         Year                        Salary
-------------------                         ----                        ------
Burton A. Goldstein
(Chairman and Chief
Executive Officer)                          1997                         $67,500
                                            1996                         $30,000
                                            1995                           None

     Mr. Goldstein has an employment agreement as described in Item 12.

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>
                                               Shares of Common Beneficially Owned
                                           -------------------------------------------------
Name and Address                                                         Shares Acquirable
Of Beneficial Owner                        Shares Owned                   Within 60 Days (1)             Percent Owned
-------------------                        ------------                   ------------------             -------------
<S>                                          <C>                            <C>                               <C>
Burton A. Goldstein                          5,333,333                      20,427,534                        16.3%
6900 Jericho Turnpike
Syosset, New York 11791

Herbert M. Reichlin                          5,333,333                      20,427,534                        16.3%
6900 Jericho Turnpike
Syosset, New York 11791
</TABLE>

                                       13

<PAGE>


<TABLE>
<S>                                         <C>                              <C>                              <C>
Bernard Gutman                              15,840,643  (2)                                                   11.5%
6900 Jericho Turnpike
Syosset, New York 11791

James F. Leary                                 998,653                       1,500,000                         1.8%
6900 Jericho Turnpike
Syosset, New York 11791

Luther H. Hodges, Jr.                        3,412,143                       1,500,000                         3.5%
6900 Jericho Turnpike
Syosset, New York 11791

Alfred Fabricant                             2,485,507                                                         1.8%
6900 Jericho Turnpike
Syosset, New York 11791

Richard Mascola                              2,485,507                                                         1.8%
6900 Jericho Turnpike
Syosset, New York 11791

Products & Patents, Ltd. ("P&P")             1,760,530                                                         1.3%
6900 Jericho Turnpike
Syosset, New York 11791

All Directors and Officers                  79,744,187                                                        43.8%
as a group (seven persons)
</TABLE>


(1)  Under the rules of the Securities and Exchange  Commission  (the "SEC"),  a
     person is deemed to have  "beneficial  ownership"  of any Common Stock over
     which that person has or shares voting or investment power, plus any Common
     Stock  that  person  may  acquire  within 60 days,  including  through  the
     exercise of a stock option or the conversion of a convertible security.

(2)  Includes  1,760,530  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

a.   Loans from  Director  and  Officer - A former  officer/shareholder,  who is
     still a director of the Company, is owed $34,415 by the Company. The amount
     is payable on demand with a stated interest rate of 11%. Effective June 30,
     1997, the former  officer/shareholder  agreed to no longer charge interest.
     In  addition,  $1,400 is owed to an officer on a  short-term  loan  without
     terms, which was repaid in 1998.

b.   Officer's and  Director's  Compensation  - During 1996,  an investor  group
     brought in by two individuals which acquired an 18% ownership  interest for
     $500,000 was awarded two seats on the Board of Directors  and one officer's
     position.  The two  individuals  had  consulting  agreements  for which the
     Company accrued fees of $5,000 per month for each individual from July 1996
     through  November 1997.  During 1997,  these two individuals each agreed to
     receive 3,333,333 shares of stock in lieu of $50,000 in accrued  consulting
     fees. In December 1997, the Company entered into

                                       14

<PAGE>



     employment  contracts with each of these two  individuals  for $150,000 per
     year for five years from  December  1997 through  November  2002 and issued
     options to purchase  7,500,000  shares  each an exercise  price of $.03 per
     share. As of December 31, 1997, the two individuals  were owed $47,500 each
     in accrued consulting fees and salaries.

     A director,  who was  previously  the Company's  chief  executive  officer,
     entered into a consulting  agreement  with the Company for $2,000 per month
     from October 1997 through  September  1998.  As of December 31, 1997, he is
     owed $48,493 in accrued salary, consulting fees and expenses.

Item 13.  Exhibits and Reports on Form 8-K

(A) Exhibits

     3.1          Articles of Incorporation (3)

     3.2          By-laws (3)

     10.01        Agreement dated August 21, 1995 with J&R Intercontinental (2)

     10.02        Consulting  Agreement  dated July 9, 1996  between the Company
                  and Herbert M. Reichlin (1)

     10.03        Consulting  Agreement  dated July 9, 1996  between the Company
                  and American Employer Service Corporation (1)

     10.04        Warrant  Agreement  dated July 9, 1996 between the Company and
                  Herbert M. Reichlin (1)

     10.05        Warrant  Agreement  dated July 9, 1996 between the Company and
                  Burton A. Goldstein (1)

     10.06        Warrant  Agreement  dated July 9, 1996 between the Company and
                  Milton J. Walters (1)

     10.07        Securities Purchase Agreement dated July 9, 1996 (1)

     10.08        Agreement   dated   April  30,   1997  with   Kingdom   Blinds
                  Manufacturing, Inc.

     10.09        Employment  Agreement  dated  December  1,  1997  between  the
                  Company and Burton A. Goldstein.

     10.10        Employment  Agreement  dated  December  1,  1997  between  the
                  Company and Herbert M. Reichlin.

     10.11        Consulting  Agreement  dated  December  9,  1997  between  the
                  Company and Bernard  Gutman. 

                    1)   Incorporated  by  reference to Exhibits to Form 10K for
                         fiscal year ended December 31, 1996.

                    2)   Incorporated  by  reference to Exhibits to Form 10K for
                         fiscal year ended December 31, 1995.

                    3)   Incorporated  by  reference to Exhibits to Form 10K for
                         the 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 1997.

                                       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.


                                              QUEST PRODUCTS CORPORATION

Dated:   April 10, 1998                      By:  /S/: Herbert M. Reichlin
                                                  ------------------------------
                                                  Herbert M. Reichlin, 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                                        April 10, 1998  
--------------------------------------
Chairman of the Board of Directors                                         
Secretary, Chief Executive Officer                                         
                                                                           
                                                                           
/s/ Herbert M. Reichlin                                        April 10, 1998  
--------------------------------------
President, Treasurer, Chief                                                
Operating Officer, Director                                                
                                                                           
                                                                           
/s/ Bernard Gutman                                             April 10, 1998  
--------------------------------------
Director                                                                   
                                                                           
                                                                           
/s/ James F. Leary                                             April 10, 1998  
--------------------------------------
Director                                                                   
                                                                           
                                                                           
/s/ Luther H. Hodges, Jr.                                      April 10, 1998  
--------------------------------------
Director                                                                   
                                                                           
                                                                           
/s/ Alfred Fabricant                                           April 10, 1998  
--------------------------------------
Director                                                                   
                                                                           
                                                                           
/s/ Richard Mascola                                            April 10, 1998  
--------------------------------------
Director                                                     



                                       16

<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



                                       17

<PAGE>

                          Independent Auditors' Report


To the Board of Directors and Shareholders
Quest Products Corporation (formerly Phase-Out of America, Inc.)

We have audited the accompanying  balance sheet of Quest Products Corporation as
of December 31, 1997, and the related  statements of  operations,  shareholders'
(deficit),  and cash flows for the years ended December 31, 1997 and 1996. 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 Quest Products  Corporation as
of December 31, 1997,  and the results of its  operations and its cash flows for
the years ended December 31, 1997 and 1996 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, 1997,  current  liabilities  exceed  current
assets by $880,433. 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
April 2, 1998



                                      -F1-
<PAGE>


QUEST PRODUCTS CORPORATION
Balance Sheet
December 31, 1997
================================================================================







Assets
     Current Assets
       Cash                                                             $ 27,588
       Accounts receivable - net of allowance for doubtful
         accounts of $1,000                                                2,712
       Inventory                                                          68,461
       Prepaid expenses                                                    1,496
                                                                        --------

                                                                         100,257
                                                                        --------

     Furniture and Equipment - at cost - net of accumulated
       depreciation of $19,343                                            29,072

     Patents - at cost - net of accumulated amortization of
       $9,774                                                             39,661

     Security Deposits                                                     4,137
                                                                        --------

                                                                          72,870
                                                                        --------

                                                                        $173,127
                                                                        ========


See notes to financial statements.


                                      -F2-
<PAGE>



QUEST PRODUCTS CORPORATION
Balance Sheet
December 31, 1997
================================================================================
<TABLE>
<S>                                                                       <C>        
Liabilities and Shareholders' (Deficit)
     Current Liabilities
       1992 convertible debentures - including accrued interest
         of $5,900                                                        $    15,900
       Shareholder's loan                                                     176,202
       Accounts payable                                                       583,978
       Accrued officer and director's compensation                            143,493
       Loans from director and officer                                         35,815
       Accrued expenses                                                        25,302
                                                                          -----------

                                                                              980,690
                                                                          -----------

     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
         200,000,000 shares - 138,083,713 shares issued and outstanding         4,142
       Capital in excess of par                                             3,360,410
       Accumulated (deficit)                                               (4,172,115)
                                                                          -----------

                                                                             (807,563)
                                                                          -----------

                                                                          $   173,127
                                                                          ===========
</TABLE>

See notes to financial statements.


                                      -F3-
<PAGE>


QUEST PRODUCTS CORPORATION
Statements of Operations
================================================================================


                                                     For the Years Ended
                                                         December 31,
                                                -------------------------------
                                                     1997             1996
                                                -------------     -------------


Sales - net                                     $     300,584     $   1,489,250

Cost of Sales                                         145,499           374,520
                                                -------------     -------------

                                                      155,085         1,114,730
                                                -------------     -------------

Selling Expenses                                      277,727         1,032,492

General and Administrative Expenses                   494,685           775,718
                                                -------------     -------------

                                                      772,412         1,808,210
                                                -------------     -------------

(Loss) Before Other Income (Expenses)                (617,327)         (693,480)
                                                -------------     -------------

Other Income (Expenses)
   Interest income                                      3,966             5,694
   Interest (expense)                                 (33,167)         (107,748)
   Settlement of trade payable claim                   61,000              --
                                                -------------     -------------

                                                       31,799          (102,054)
                                                -------------     -------------

Net (Loss)                                      $    (585,528)    $    (795,534)
                                                =============     =============

Basic and Diluted Net (Loss) Per Share          $        (.01)    $        (.01)
                                                =============     =============


Weighted Average Number of Shares
   Outstanding (to nearest 1,000,000)             116,000,000        90,000,000
                                                =============     =============

See notes to financial statements.


                                      -F4-
<PAGE>



QUEST PRODUCTS CORPORATION
Statements of Shareholders' (Deficit)
For the Years Ended December 31, 1997 and 1996
================================================================================

<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, 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)
   Proceeds from sale of stock              22,547,118           676       171,824            --
   Stock issued for accrued services
     rendered - officers and directors       7,166,666           215       108,535            --
   Net (loss)                                       --            --            --      (585,528)
                                           -----------   -----------   -----------   -----------

Balance - December 31, 1997                138,083,713   $     4,142   $ 3,360,410   $(4,172,115)
                                           ===========   ===========   ===========   ===========
</TABLE>

See notes to financial statements.

                                      -F5-
<PAGE>

QUEST PRODUCTS CORPORATION
Statements of Cash Flows                                             Page 1 of 2
================================================================================

                                                          For the Years Ended
                                                              December 31,
                                                         ----------------------
                                                            1997        1996
                                                         ---------    ---------
Cash Flows from Operating Activities
   Net (loss)                                            $(585,528)   $(795,534)
   Adjustments to reconcile net (loss) to net cash
     (used for) operating activities:
       Depreciation                                          2,704        2,664
       Amortization                                          3,041        2,938
       Expenses paid through the issuance of stock          48,750       30,700
       Accrued interest                                     18,009           --
       (Increase) decrease in:
         Accounts receivable                                 1,575       67,680
         Inventories                                        58,952      (28,113)
         Advances for clinical study                        25,000      (25,000)
         Prepaid expenses                                    3,918        4,438
         Other current assets                                   --       18,592
       Increase (decrease) in:
         Accounts payable                                  (30,349)      32,168
         Accrued officer compensation                      143,493       60,000
         Taxes payable                                          --       (3,780)
         Accrued expenses                                  (57,374)      86,601
                                                         ---------    ---------

                                                          (367,809)    (546,646)
                                                         ---------    ---------

Cash Flows from Investing Activities
   Acquisition of equipment                                 (5,500)     (21,390)
   Acquisition of patents                                   (2,435)          --
   Payment of security deposits                                 --         (595)
                                                         ---------    ---------

                                                            (7,935)     (21,985)
                                                         ---------    ---------

Cash Flows from Financing Activities
     Repayments of debentures                                   --      (29,297)
     Proceeds from sales of common stock                   172,500      515,482
     Payments of notes payable - vendor                    (20,940)          --
     Loans from directors                                    5,000       56,000
     Repayments to directors                                (3,600)     (65,000)
     Loan from shareholder                                      --      200,000
     Repayments to shareholder                             (10,000)     (25,000)
                                                         ---------    ---------

                                                           142,960      652,185
                                                         ---------    ---------

See notes to financial statements.

                                      -F6-
<PAGE>

QUEST PRODUCTS CORPORATION
Statements of Cash Flows                                             Page 2 of 2
================================================================================


                                                           For the Years Ended
                                                              December 31,
                                                         ----------------------
                                                            1997         1996
                                                         ---------    ---------
Net Increase in Cash                                     $(232,784)   $  83,554

Cash - beginning                                           260,372      176,818
                                                         ---------    ---------

Cash - end                                               $  27,588    $ 260,372
                                                         =========    =========


Supplemental Disclosures
     Cash paid for:
       Interest                                          $      --    $  83,463
                                                         =========    =========

     Non-cash investing and financing transactions:
       Bond and accrued interest conversions
       to common stock                                   $      --    $ 445,526
                                                         =========    =========

       Stock issued for accrued services rendered        $  60,000    $ 144,160
                                                         =========    =========

       Shareholder loan converted to common stock        $      --    $   7,500
                                                         =========    =========


See notes to financial statements.

                                      -F7-
<PAGE>

QUEST PRODUCTS CORPORATION
Notes to Financial Statements
December 31, 1997
================================================================================


1 -  The Company

     Quest  Products  Corporation  (formerly  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
     10b. In 1998, the Company  intends to re-enter 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 and a foreign  patent
          acquired  in 1997.  The  acquisition  cost has  been  capitalized  and
          amortized (straight-line method) over the life of 16 years.


                                                                       Continued


                                      -F8-
<PAGE>

     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.

          Advertising  and  marketing  expense was $16,531 and $364,381 for 1997
          and 1996, respectively.


     f.   Stock-Based Compensation - Statement of Financial Accounting Standards
          ("SFAS") No. 123 Accounting for Stock-Based Compensation,  encourages,
          but  does  not  require  companies  to  record  compensation  cost for
          stock-based employee compensation plans at fair value. The Company has
          chosen to continue to account for stock-based  compensation  using the
          intrinsic  value method  prescribed  in  Accounting  Principles  Board
          Opinion No. 25,  Accounting for Stock Issued to Employees.  APB No. 25
          requires no recognition of  compensation  expense for the  stock-based
          compensation  arrangements  provided by the Company where the exercise
          price is equal to the market price at the date of the grants.

     g.   Recent Accounting Pronouncements

          >    Earnings  (Loss)  Per  Share - The  Company  has  chosen to adopt
               Financial  Accounting  Standards No. 128 Earnings Per Share which
               replaced the  calculation  of primary and fully diluted  earnings
               per share with basic and diluted earnings per share.


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, 1997, current liabilities exceed current
     assets by $880,433.  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

       The pro forma  information  required by SFAS 123 regarding net income and
       earnings per share has been presented as if the Company had accounted for
       its warrants under the fair value method.  The fair value of each warrant
       is estimated on the date of the warrant  using the  Black-Scholes  option
       pricing model with the following weighted average assumptions:


                                                       1997              1996
                                                    ============================
           Assumptions:
              Expected life of warrants             4.7 years          4.9 years
              Risk free interest rate                    5.5%               6.0%
              Volatility of stock                        553%               260%
              Expected dividend yield                     --                 --


           The weighted  average fair value of the warrants  granted during 1997
           and 1996 was $220,000 and $917,000,  respectively. Had the fair value
           of the warrants  been  amortized to expense over the related  service
           period,   the  pro  forma  impact  on  earnings  of  the  stock-based
           compensation  for the warrants under the provision would have been as
           follows:


                                                            1997        1996
                                                         =======================
           Net (Loss):
              As reported                                $(585,528)   $(795,534)
              Pro forma                                  $(844,053)   $(940,585)

           Earnings Per Share:
              As reported                                $    (.01)   $    (.01)
              Pro forma                                  $    (.01)   $    (.01)


          In  accordance  with SFAS 123,  the  weighted  average  fair  value of
          warrants is required to be based on a  theoretical  statistical  model
          using the preceding assumptions.  In actuality, the Company=s warrants
          do not trade on a secondary exchange and, therefore, the employees and
          directors  cannot  derive any benefit from holding the warrants  under
          these plans without an increase in the market price of Company  stock.
          Such an  increase  in  stock  price  would  benefit  all  shareholders
          commensurately.

                                                                       Continued

                                     -F10-
<PAGE>


          Presented  below is a summary of stock option  plans  activity for the
          years shown:

          a.   Warrants -

<TABLE>
<CAPTION>
                                                         Weighted
                                                         Average
                                                         Exercise                  Expiration
                                            Shares        Price        Total         Dates
                                          ----------    ---------   -----------    ----------
<S>                                       <C>           <C>         <C>            <C>
           Balance - December 31, 1995     7,940,061    $     .18   $ 1,424,409
              Granted                     23,307,950    .05 - .10     1,215,398    1999 - 2001
                                          ----------                -----------

           Balance - December 31, 1996    31,248,011          .08     2,639,807
              Granted                     24,297,118   .025 - .05       864,856    2001 - 2002
              Expired                     (3,034,000)         .25      (758,500)          1997
                                          ----------   ----------   -----------

           Balance - December 31, 1997    52,511,129          .05   $ 2,746,163
                                          ==========   ==========   ===========
</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,  $107,500 has been
               paid back or  converted  into  stock.  As of December  31,  1997,
               $10,000 of  principal  and $5,900 of  interest  remain  unpaid or
               unconverted on these debentures.


5 -  Related Party Transactions

          a.   Loans from  Director and Officer - A former  officer/shareholder,
               who is still a director of the  Company,  is owed  $34,415 by the
               Company.  The amount is payable on demand with a stated  interest
               rate   of   11%.    Effective   June   30,   1997,   the   former
               officer/shareholder  agreed  to no  longer  charge  interest.  In
               addition,  $1,400  is owed to an  officer  on a  short-term  loan
               without terms, which was repaid in 1998.

          b.   Officer=s and Director's  Compensation - During 1996, an investor
               group  brought  in by  two  individuals,  which  acquired  an 18%
               ownership  interest  for  $500,000,  was awarded two seats on the
               Board  of  Directors   and  one  officer=s   position.   The  two
               individuals  had  consulting  agreements  for which  the  Company
               accrued fees of $5,000 per month for each  individual  from July,
               1996 through  November,  1997. During 1997, these two individuals
               each  agreed  to  receive  3,333,333  shares  of stock in lieu of
               $50,000  in accrued  consulting  fees.  In  December,  1997,  the
               Company entered into employment  contracts with each of these two
               individuals  for $150,000 per year for five years from  December,
               1997  through  November,  2002 and  issued  options  to  purchase
               7,500,000  shares each at an exercise price of $.03 per share. As
               of December 31, 1997, the two individuals  were owed $47,500 each
               in accrued consulting fees and salaries.

                                                                       Continued

                                     -F11-
<PAGE>


               A director,  who was  previously  the Company=s  chief  executive
               officer, entered into a consulting agreement with the Company for
               $2,000 per month from October,  1997 through September,  1998. As
               of  December  31,  1997,  he is owed  $48,493 in accrued  salary,
               consulting fees and expenses.


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 $35,000 were
     made in cash  and  $7,500  in  stock.  The  repayment  of the  $157,500  of
     remaining  principal  at December  31,  1997 and $18,702 of interest  which
     accrues at 10% will be negotiated.


7 -  Income Taxes

     The Company has available net operating loss carryforwards of approximately
     $4,500,000,  which expire in 2002 until 2012. Deferred income taxes reflect
     the net tax  effects  of net  operating  loss  carryforwards  and result in
     deferred tax assets of  approximately  $1,350,000  and $960,000 at December
     31,  1997 and 1996,  respectively,  which  were fully  offset by  valuation
     allowances due to  uncertainties  surrounding  the ultimate  realization of
     these assets.


8 -  Leases

     The Company is obligated  under a lease for office space through  November,
     2001.   Rental   expense  was  $38,760  and  $15,080  for  1997  and  1996,
     respectively.  The future minimum lease payments  required under this lease
     are as follows:


                            1998                $  58,354
                            1999                   60,449
                            2000                   62,626
                            2001                   49,941


     The Company  received  sublease  payments of $1,800 per month in 1997 for a
     portion of their office space, but there is no formal sublease agreement.


9 -  Economic Dependence

     The Company  purchased  100% of its  products  from two vendors in 1997 and
     from two other  vendors in 1996.  The Company  sold 51% of its  products in
     1997 to one customer.

                                                                       Continued

                                     -F12-
<PAGE>

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 in 1997.

     b.   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  required  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=s  cost to
          comply with this order was $15,102.


                                                                       Continued

                                     -F13-
<PAGE>

     c.   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.  In July,  1997, the Company agreed to pay the
          balance owed of $16,603.  Payments of $7,000 were made in 1997 against
          this liability.  The remaining balance of $9,603 is payable in monthly
          installments of $1,000 through October, 1998.

          In January,  1998, the Company=s former advertising  agency,  Popofsky
          Advertising,  Inc.,  brought an action against the Company in New York
          State Supreme Court,  New York County for unpaid services  rendered in
          the  amount of  $74,000.  In  March,  1998,  the  parties  reached  an
          agreement  to  settle  all  claims.  The  Company  will  pay  Popofsky
          Advertising,  Inc.  $50,000 in  installments  of $15,000 by  December,
          1998, $15,000 by March, 1999 and the final $20,000 by June, 1999.

          In July, 1997, the Company=s  former attorney,  who is a relative of a
          director,  brought  an action  against  the  Company in New York State
          Supreme  Court,   New  York  County  for  unpaid   attorney  fees  and
          disbursements of approximately  $18,000.  During 1997, $5,000 was paid
          by the Company and,  therefore,  the  financial  statements  include a
          liability  for  approximately  $13,000  payable to this  party.  Legal
          counsel expects that this case will either be abandoned or will settle
          for an amount less than $10,000.


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 $3,000, based on an estimated borrowing rate of 10%.

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




                                     -F14-