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


                                   FORM 10-QSB


(Mark One)
[ X ]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                    SECURITIES EXCHANGE ACT OF 1934
        For the quarterly period ended June 30, 1998

[   ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                 SECURITIES EXCHANGE ACT OF 1934
        For the transition period from _______to________


                         Commission file number: 0-26998


                       ALCOHOL SENSORS INTERNATIONAL, LTD.
       (Exact name of small business issuer as specified in its charter)


                New York                          11-3104480
      (State or other jurisdiction                (IRS Employer
     of incorporation or organization)      Identification Number)


                     11 Oval Drive, Islandia, New York 11722
                    (Address of principal executive offices)


                                 (516) 342-1515
                           (Issuer's telephone number)

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

     State the number of shares  outstanding of each of the issuer's  classes of
common equity, as of the latest  practicable date: Common Stock, par value $.001
per share - 9,951,011 shares outstanding as of November 11, 1998.

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


<PAGE>


                          PART I. FINANCIAL INFORMATION



Item                                                                      Page
----                                                                      ----

Item 1.   Condensed Consolidated Financial Statements (Unaudited):

Condensed Consolidated Balance Sheets as of June 30, 1998
     and December 31, 1997. . . . . . . . . . . .. . . . . . . . . . . . .  3
Condensed Consolidated Statements of Operations for the Three
     and Six Months Ended June 30, 1998 and 1997.. . . . . . . . . . . . . .4
Condensed Consolidated Statements of Comprehensive Income for
     the Six Months Ended June 30, 1998 and 1997 . . . . . . . . . . . . . .5
Condensed Consolidated Statements of Cash Flows for the
     Six Months Ended June 31, 1998 and 1997 . . . . . . . . . . . . . . . .6
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . .7

Item 2.   Management's Discussion and Analysis . . . . . . . . . . . . . . 10












                                      -2-
<PAGE>


               ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY
                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                              June 30, 1998       December 31, 1997
                                                                              -------------       -----------------
                                                                               (Unaudited)
                              ASSETS
Current assets:
<S>                                                                           <C>                    <C> 

 Cash and cash equivalents (includes restricted cash of $100,000, at
   June 30, 1998, and $500,000, at December 31, 1997) . . . . . . . . . . .   $    112,993           $  1,882,994
  Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . .          6,117                     --
  Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        901,090                693,561
  Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . .         32,310                 55,103
  Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . .             --                 37,636
                                                                               ------------          -------------
       Total current assets . . . . . . . . . . . . . . . . . . . . . . . .      1,052,510              2,669,294

Fixed assets - at cost (less accumulated depreciation of $210,069, at
  June 30, 1998, and $174,069, at December 31, 1997)  . . . . . . . . . . .        196,170                232,170
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         14,166                 14,166
                                                                               ------------          -------------
                                                                              $  1,262,846           $  2,915,630
                                                                              =============          =============  

                 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . .   $    422,192           $    428,087
  Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . .         19,269                208,242
  Accrued officers salaries . . . . . . . . . . . . . . . . . . . . . . . .         64,495                 83,662
  Due to related party. . . . . . . . . . . . . . . . . . . . . . . . . . .         64,000                118,315
  Loans payable and accrued interest to shareholders. . . . . . . . . . . .        113,163                145,716
  Loan payable to preferred shareholder . . . . . . . . . . . . . . . . . .        100,000                     --
  Note payable  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             --                500,000
  Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . .        511,869                295,208
                                                                               ------------          -------------
       Total current liabilities. . . . . . . . . . . . . . . . . . . . . .      1,294,988              1,779,230

Accrued litigation settlement cost. . . . . . . . . . . . . . . . . . . . .         64,810                 82,977
                                                                               ------------          -------------
       Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . .      1,359,798              1,862,207
                                                                               ------------          -------------

Commitments, contingencies and other matters

Shareholders' equity (deficit):
  Preferred stock:
    Series A, 9% cumulative:
      833,333 shares  authorized, 833,333 shares issued and outstanding at
      June 30, 1998 and December 31, 1997 (liquidation value: $2,844,375,
      at June 30, 1998, and $2,731,875 at December 31, 1997). . . . . . . .      2,500,000              2,500,000
    Series B, 8% cumulative:
      600 shares authorized,  300 shares issued and outstanding at June 30,
      1998 and December 31, 1997(liquidation value: $3,167,494, at June
      30, 1998, and $3,063,333, at December 31, 1997) . . . . . . . . . . .      2,519,253              2,658,750
  Common stock, $.001 par value; 25,000,000 shares authorized, 9,306,589
      issued at June 30, 1998 and 8,849,096 issued at December 31, 1997 . .          9,306                  8,849
  Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . .     13,700,263             13,508,950
  Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . .    (18,597,573)           (17,391,177)
  Accumulated foreign currency translation adjustment . . . . . . . . . . .         (5,513)                (9,261)
                                                                               ------------          -------------
                                                                                   125,736              1,276,111
  Less treasury stock, at cost, 55,672 shares of common stock
      at June 30, 1998 and December 31, 1997. . . . . . . . . . . . . . . .       (222,688)              (222,688)
                                                                               ------------           ------------
        Total shareholders' equity (deficit). . . . . . . . . . . . . . . .        (96,952)             1,053,423
                                                                               ------------           -----------
                                                                               $ 1,262,846            $ 2,915,630
                                                                               ============           ============
</TABLE>

            See notes to condensed consolidated financial statements.


                                      -3-
<PAGE>


               ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                              Three Months Ended                   Six Months Ended
                                                                   June 30,                             June 30,
                                                         -----------------------------       -----------------------------
                                                           1998                 1997           1998                 1997
                                                           ----                 ----           ----                 ----

<S>                                                      <C>                <C>              <C>                  <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . .   $   21,539         $   32,920       $    21,539          $     33,963
Cost of goods sold . . . . . . . . . . . . . . . . . .       14,862             17,770            14,862                18,333
                                                         -----------        -----------      ------------         -------------
Gross profit . . . . . . . . . . . . . . . . . . . . .        6,677             15,150             6,677                15,630

Costs and expenses:
  Research and development . . . . . . . . . . . . . .       57,198             65,093           108,147               152,796
  Selling general and administrative . . . . . . . . .      332,151            419,670           832,109             1,083,604
                                                         -----------        -----------      ------------         -------------
    (Loss) from operations . . . . . . . . . . . . . .     (382,672)          (469,613)         (933,579)           (1,220,770)

Interest and other income. . . . . . . . . . . . . . .        2,174             15,905            10,717                42,932
Interest expense . . . . . . . . . . . . . . . . . . .       (9,348)            (8,232)          (19,114)              (17,453)
                                                         -----------        -----------      ------------         -------------
    Net (loss) . . . . . . . . . . . . . . . . . . . .   $ (389,846)        $ (461,940)      $  (941,976)         $ (1,195,291)
                                                         ===========        ===========      ============         =============


Preferred stock dividend requirement . . . . . . . . .   $  110,650         $   56,250       $   224,411          $    112,500
Accretion of difference between carrying
  amount and face amount of
  preferred stock. . . . . . . . . . . . . . . . . . .       44,525                 --            90,928                    --
                                                         -----------        -----------      ------------         ------------- 
Net loss attributable to common
  shareholders . . . . . . . . . . . . . . . . . . . .   $ (545,021)        $ (518,190)      $(1,257,315)         $ (1,307,791)
                                                         ===========        ===========      ============         =============

Basic and diluted loss per share . . . . . . . . . . .   $     (.06)        $     (.06)      $      (.14)         $       (.15)
                                                         ===========        ===========      ============         =============

Weighted average common shares
  outstanding - basic and diluted. . . . . . . . . . .    9,306,589          8,741,018         9,192,216             8,739,352
                                                         ===========        ===========      ============         =============
</TABLE>

            See notes to condensed consolidated financial statements.


                                      -4-
<PAGE>


               ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY

            CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                              Three Months Ended                   Six Months Ended
                                                                   June 30,                             June 30,
                                                         -----------------------------       -----------------------------
                                                           1998                 1997           1998                 1997
                                                           ----                 ----           ----                 ----
                                                         ===========        ===========      ============         =============

<S>                                                      <C>                <C>              <C>                  <C>          
Net (loss) . . . . .. . . . . . . . . .                  $ (389,846)        $ (461,940)      $ (941,976)          $ (1,195,291)
Other comprehensive income/(loss) -
  Currency translation adjustment . . .                      (1,039)              (972)           3,748                 (1,133)
                                                         -----------        -----------      ------------         -------------
Comprehensive (loss). . . . . . . . . .                  $ (390,885)        $ (462,912)      $ (938,228)          $ (1,196,424)
                                                         ===========        ===========      ============         =============
</TABLE>

            See notes to condensed consolidated financial statements.




                                      -5-
<PAGE>


               ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                       Six Months Ended June 30,
                                                      --------------------------
                                                        1998          1997
<S>                                                <C>              <C>
Cash flows from operating activities:
Net (loss) . . . . . . . . . . . . . . . .         $  (941,976)     $(1,195,291)
Adjustments to reconcile net (loss)
  to net cash (used in) operating activities:
  Depreciation and amortization. . . . . .              36,000           42,000
Changes in operating assets and liabilities:
  (Increase) in accounts receivable. . . .              (6,117)         (14,701)
  (Increase) in inventory. . . . . . . . .            (207,529)        (241,506)
  Decrease (increase) in prepaid expenses
   and other current assets. . . . . . . .              60,429          (75,919)
  (Decrease) in amounts due to related
   party . . . . . . . . . . . . . . . . .             (54,315)        (148,897)
  Increase (decrease) in accounts payable
   and accrued expenses. . . . . . . . . .            (194,868)        (326,765)
 (Decrease) increase in accrued interest
   to officers . . . . . . . . . . . . . .             (19,167)           5,310
 (Decrease) in accrued litigation
  settlement . . . . . . . . . . . . . . .             (18,167)              --
  Other. . . . . . . . . . . . . . . . . .               8,262            1,133
                                                   ------------     ------------
     Net cash (used in) operating
      activities                                    (1,337,448)      (1,954,636)
                                                   ------------     ------------

Cash flows from financing activities:
Proceeds from sale of common stock . . . .                  --           30,000
(Decrease) in loans payable to officers. .             (32,553)              --
Payment of note payable. . . . . . . . . .            (500,000)              --
Proceeds from loan payable - preferred 
  shareholder. . . . . . . . . . . . . . .             100,000               --
                                                   ------------     ------------
     Net cash (used in) provided by
       financing activities. . . . . . . .            (432,553)          30,000
                                                   ------------     ------------

Net (decrease) in cash and cash
   equivalents . . . . . . . . . . . . . .          (1,770,001)       (1,924,636)
Cash and cash equivalents - 
   Beginning of period . . . . . . . . . .           1,882,994         3,042,051
                                                   ------------     ------------
Cash and cash equivalents - 
   End of period . . . . . . . . . . . . .         $   112,993       $ 1,117,415
                                                   ============     ============
</TABLE>

Supplemental disclosure of non-cash financing activities:
     In March  1997,  certain  officers  and members of  management  contributed
315,000 shares of Common Stock to the Company in connection  with the settlement
of litigation that had been accrued in the amount of $1,143,844.
     In June 1997,  certain  officers  exchanged  $230,000  of  liabilities  for
options to purchase 115,000 shares of Common Stock.
     In February 1998, the holder of the Series B 8% Convertible Preferred Stock
converted 26 shares into 457,493 shares of Common Stock.
     As of June 30,  1998,  the Company  had  $344,375  and  $167,494 in accrued
dividends on the Company's  outstanding  Series A Cumulative  Non-Redeemable  9%
Convertible Preferred Stock and Series B 8% Convertible Preferred Stock.
     As of June 30,  1998,  the  accompanying  financial  statements  reflect an
adjustment  on the Series B  Preferred  Stock in the  amount of $90,928  for the
accretion towards the face value of the outstanding Series B Preferred Stock.

<TABLE>
<CAPTION>
Supplemental disclosure of cash flow information:
<S>                                                <C>              <C>        
Interest paid during the period. . . . . . .       $    13,794      $    13,143
                                                   ============     ============
</TABLE>

            See notes to condensed consolidated financial statements.

                                      -6-
<PAGE>


               ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


1.   Basis of Presentation.

     The accompanying unaudited condensed consolidated financial statements have
been prepared by Alcohol Sensors  International,  Ltd. (the "Company"),  without
audit, in accordance with generally accepted  accounting  principles for interim
financial  information  and  pursuant  to  the  Rules  and  Regulations  of  the
Securities and Exchange Commission (the "Commission").  Accordingly, they do not
include all of the  information and footnote  disclosures  required by generally
accepted accounting principles for complete financial statements. In the opinion
of  management,  all  adjustments  (consisting  of  normal  recurring  accruals)
considered  necessary for fair presentation have been included.  These financial
statements should be read in conjunction with the audited  financial  statements
and footnotes thereto included in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1997,  filed with the Commission on October 28, 1998
(Commission File No.: 0-26998).

     Operating  results for the three and six month  periods ended June 30, 1998
are not necessarily  indicative of the results that may be expected for the year
ending December 31, 1998.


2.   Significant Accounting Policies.

Loss Per Share of Common Stock

     Basic loss per share is computed based upon the weighted  average number of
common shares  outstanding  during each period and dividends  accumulated on the
preferred  stock for the period and  accretion  of the  difference  between  the
carrying  amount and face amount of preferred  stock for the period are added to
the net loss for the period. Stock options,  warrants and convertible  preferred
stock did not have an effect on the  computation  of diluted  earnings per share
for the three months ended June 30, 1998 and 1997 since they were anti-dilutive.

Recently Issued Accounting Pronouncements

     In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No.  130,  "Reporting  Comprehensive  Income"  ("SFAS No.  130").   SFAS No. 130
establishes  standards for reporting and displaying comprehensive income and its
components  in financial statements.  SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997.  Reclassification of financial statements for
earlier  periods provided for comparative purposes is required.  The adoption of
SFAS  No.  130  has  had  no  impact  on  the  Company's consolidated results of
operations, financial position or cash flows. The Company presently has no items
of other comprehensive income.

     In June 1997, the FASB issued SFAS No. 131,  "Disclosures About Segments of
an  Enterprise  and  Related   Information"  ("SFAS  No.  131").  SFAS  No.  131
establishes  standards  for the way  that  public  business  enterprises  report
information about operating segments in annual financial statements and requires
that those enterprises  report selected  information about operating segments in
interim financial reports issued to stockholders.  It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers.  SFAS No. 131 is effective for financial  statements for fiscal years
beginning  after December 15, 1997.  Financial  statement  disclosures for prior
periods are required to be restated. The Company is in the process of evaluating
the disclosure requirements. The adoption of SFAS No. 131 is expected to have no
impact on the Company's  consolidated results of operations,  financial position
or cash flows.


                                      -7-
<PAGE>

     3.   Loan Payable - Preferred Shareholder

     In June 1998, Milbright Estates, Ltd., the holder of the outstanding Series
B Preferred  Stock  ("Milbright"),  loaned the Company  $100,000 (the "June 1998
Loan"), bearing interest at 11.5% per annum and maturing on July 31,
          1998.


4.   Legal Proceedings.

     The Company and certain of its former  officers were named as defendants in
an action  commenced in July 1997 in the New York State Supreme Court,  New York
County.  Plaintiff alleges that, in July 1989, he entered into an agreement with
the individual  defendants and a company named "International  Beverage Machine"
pursuant  to which  plaintiff  claims to have made  certain  payments  which the
individual  defendants  promised  would be used to  purchase  stock in  "Alcohol
Sensors,  Inc." which,  in turn,  plaintiff  claims to be the predecessor to the
Company. Plaintiff alleges damages of $13,500,000. The Company believes that the
complaint  fails to state a claim against the Company and that plaintiff has not
been damaged by the Company,  and,  accordingly,  intends to  vigorously  defend
itself in this action.  The  ultimate  outcome of this action is unknown at this
time and the Company has not made any  provision in the  accompanying  financial
statements.

     The Company and certain of its former  officers were named as defendants in
an action  commenced  in  September  1997 in the New York State  Supreme  Court,
County of Nassau.  Plaintiff  alleges that, in February 1990,  plaintiff entered
into an exclusive  "Distributor  Agreement" with "Alcohol Sensors, Inc." wherein
plaintiff was granted a regional  license to market,  distribute  and install an
"automotive  alcohol  sensor" device to which "AS Inc." owned the patent rights.
Plaintiff  alleges  damages of $1,000,000.  The Company  believes that it has no
affiliation with "Alcohol Sensors,  Inc.," or "AS Inc.," that the Company has no
obligations under the "Distributor  Agreement"  referred to in the complaint and
that  plaintiff  has  not  been  damaged  in  any  amount  by the  Company  and,
accordingly,  intends to vigorously defend itself in the action.  This action is
currently in the discovery stage. The ultimate outcome of this action is unknown
at this time and the  Company  has not made any  provision  in the  accompanying
financial statements.

     In  1993,  the  Company  received  correspondence  from  Intoximeters  Inc.
claiming that the Company's  name  infringes  upon the name of a product of such
entity,  "Alco-Sensor."  The Company  believes that the Company's  name does not
infringe  upon such other  entity's  product name and that the name  SENS-O-LOCK
does not and will not cause a confusion in the marketplace between the Company's
product and the product of Intoximeters Inc. However,  no assurance can be given
that such entity or others  would be  successful  on a claim that the  Company's
name and/or  product names infringe upon a copyright or trademark of such entity
or others.

     The Company was served with a Demand to Arbitrate  and a Statement of Claim
by an  individual  who had performed  engineering  services for the Company on a
consulting  basis.  Claimant was seeking $650,000 and 114,449 shares of stock in
damages.  The Company  settled this matter in an Arbitration  Conference and has
agreed to transfer to Claimant  27,500 shares of stock in full  satisfaction  of
all claims in this action. This matter was settled in April 1997 and the Company
accrued  $65,000 as of December 31, 1996. In 1998, the Company was served with a
Demand to  Arbitrate  by an  individual  based  upon an  alleged  failure by the
Company to comply with the settlement terms of the aforemention arbitration.  At
this  time,  it is too  early  to  determine  the  outcome  of this  action  and
therefore, the Company has not made any additional provision in the accompanying
financial statements.

     In February  1998,  an action was  commenced  in the High Court of Justice,
Queens Bench Division,  in Oxford,  United Kingdom,  under the caption  "Scarico
(UK) Limited v. Alcohol  Sensors  Europe plc." Scarico (UK) Limited is an entity
which the Company  believes  is (a) not  presently  affiliated  with any current
supplier to the Company and (b) owned by Michael G. Ghazarian.  Mr. Ghazarian is
a former  director  and  officer of the  Company.  Alcohol  Sensors  Europe plc.
("ASE") is an English  corporation  which,  at the time of  commencement of this
action,  was 80% owned by the  Company  and 20% owned by Mr.  Ghazarian.  In the
complaint,  Scarico  (UK)  Limited  claimed  that   BP68,321.93   (approximately
$113,000, as of June 30, 1998) and $10,445  were due  on  invoices  for services
rendered to ASE between  1992 and  1997.  ASE denied that any amounts  were  due
Scarico  (UK)   Limited  and  that  certain  claimed  services   were   actually
performed  by  third  parties,  including  a current  supplier  to the  Company,
and that ASE and the Company had

                                      -8-

<PAGE>

paid  such  third  parties  directly.  On  August 11, 1998,  the Company and ASE
entered  into  a  settlement  arrangement  with  Scarico  (UK)  Limited, Digital
Vehicle Security Systems ("Digital") and Mr. Ghazarian pursuant to which Scarico
(UK) Limited, Digital and Mr. Ghazarian released to the Company all intellectual
property, contract and other rights they may have in the technology and know-how
related to the  SENS-O-LOCK and all claims to Sens-O-Lock  units,  parts and raw
materials in their  possession,  as well as the assignment to the Company of Mr.
Ghazarian's 20% interest in ASE, Mr. Ghazarian surrendered an option to purchase
22,500  shares of Common  Stock  exercisable  at $2.00 per share and expiring in
June  2001 and the  Company  (a) paid  Scarico  (UK)  Limited,  Digital  and Mr.
Ghazarian an aggregate of approximately $90,000, (b) confirmed an option granted
to Mr. Ghazarian in 1996 to purchase 100,000 shares of Common Stock  exercisable
at $3.00 per share and  expiring in  September  2001 and (c) deleted a provision
requiring that Mr.  Ghazarian be an employee of the Company in order to exercise
an option to purchase  200,000  shares of Common Stock  exercisable at $2.00 per
share and  expiring in  September  2002.  The  parties  also  exchanged  general
releases in connection with this settlement arrangement.

5.   Subsequent Events.

     Pursuant to a letter agreement,  dated August 14, 1998, between the Company
and AIIC,  AIIC,  as the holder of the  833,333  outstanding  shares of Series A
Preferred Stock,  agreed to accept (a) 230,861 shares of Common Stock as payment
in full for all accrued and unpaid  dividends on said 833,333 shares of Series A
Preferred Stock for the prior dividend payment dates of June 30, 1997,  December
31, 1997 and June 30, 1998 (i.e.,  $344,375)  and (b) agreed to accept shares of
Common Stock in lieu of payment of dividends on said 833,333  shares of Series A
Preferred Stock due on the dividend payment dates of December 31, 1998, June 30,
1999 and  December  31,  1999,  such  shares  of  Common  Stock to be  valued at
approximately $1.487 per share (subject to adjustment).

     In August  1998,  Milbright  loaned the Company (the "August 1998 Loan") an
additional  $40,000,  bearing interest at 11.5% per annum and maturing on August
31, 1998. In September  1998,  Milbright  loaned (the "September 1998 Loan") the
Company an additional $25,000,  bearing interest at 11.5% per annum and maturing
on October  31,  1998.  Repayment  of the June 1998 Loan,  August  1998 Loan and
September 1998 Loan are past due, although Milbright has not made any attempt to
require such repayment.

     In October 1998, a third party loaned the Company  $30,000 with interest at
11.5% per annum and due on November 30, 1998. In November 1998, this third party
loaned the Company an additional  $35,000,  with interest at 11.5% per annum and
due on December 10, 1998.

                                      -9-
<PAGE>

Item 2.   Management's Discussions and Analysis.

     Statements  contained in this Quarterly  Report on Form 10-QSB that are not
based upon historical fact are "forward looking  statements"  within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements included
in this Form 10-QSB  involve known and unknown  risks,  uncertainties  and other
factors which could cause actual results,  performance  (financial or operating)
or achievements  expressed or implied by such forward looking  statements not to
occur or be realized.  Such forward looking statements  generally are based upon
the best estimates by the Company of future results, performance or achievement,
based upon current conditions and the most recent results of operations. Forward
looking  statements may be identified by the use of forward looking  terminology
such  as  "may,"  "will,"   "expect,"   "believe,"   "estimate,"   "anticipate,"
"continue," or similar terms, variations of those terms or the negative of those
terms.

     Potential risks and uncertainties include, among other things, such factors
as the adequacy and reliability of parts and methods used in  manufacturing  the
Company's  Sens-O-Lock(R)  devices,   adequacy   of  the  Company's  dealer  and
distribution network,  the market acceptance of the  Company's  current ("second
generation") Sens-O-Lock  devices,  the extent of the establishment, if any,  of
insurance programs providing discounts to  customers  installing  products  such
as  the  Company's  Sens-O-Lock  devices, the impact of competitive products and
pricing, the Company's ability to raise additional  capital, the availability of
funding to purchase raw materials and manufacture finished products, the success
of  the  Company's  research  and  development  efforts in  creating  additional
improvements  to  the  Sens-O-Lock  product  line  and  other  products  for the
Company, the establishment and extent of enforcement of laws with respect to the
operation of motor vehicles by alcohol impaired drivers,  societal views towards
individuals operating  motor vehicles while impaired  through the consumption of
alcohol and the other  factors  and  information disclosed or discussed  in this
"Item 2.  Management's  Discussion  and  Analysis" and in other sections of this
Form  10-QSB.  Readers of this Form 10-QSB should carefully consider such risks,
uncertainties and other information, disclosures  and discussions  which contain
cautionary  statements  identifying  important  factors that could cause  actual
results  to  differ  materially  from  those  provided  in  the  forward looking
statements.

General

     The  Company   designs,   markets  and  sells   electronic   motor  vehicle
after-market safety products,  including a patent-pending line of breath alcohol
ignition  interlock  devices (each, a "BAIID") under the Sens-O-Lock brand name.
The Company's  Sens-O-Lock  BAIID equipment is designed to detect,  evaluate and
assist in the prevention of an alcohol impaired driver operating a vehicle.  The
Company  also  markets and sells, under the WeatherEye(TM) brand name, a line of
modular products designed to automatically  engage and adjust the headlights and
taillights of automobiles depending upon weather and sunlight conditions.

     After the  Company's  initial sale of  approximately  700 original  ("first
generation")  Sens-O-Lock units, the Company became aware in late Spring 1996 of
inconsistencies in certain integral components  manufactured for the Company and
other  manufacturing,  design and quality control problems.  As a result, in the
second  quarter  of 1996,  the  Company  discontinued  manufacturing  the  first
generation Sens-O-Lock product, recalled the first generation Sens-O- Lock units
which had been sold,  temporarily  ceased  marketing  efforts and wrote down the
Company's inventory by approximately  $556,000. From that time through September
1997, the Company devoted substantially all of its resources to the research and
development  of  new  technology  for  and  design  of  the  second   generation
Sens-O-Lock  product line,  development of new  relationships  with existing and
other  component  suppliers  and  manufacturers,  improvement  of the  Company's
component and  manufacturing  quality  control  procedures,  enhancement  of the
Sens-O- Lock  operating  software and  development  of the Company's  network of
distributors  and dealers.  The Company  completed  final parts  procurement and
ordered the initial  production of second  generation  Sens-O-Lock  units during
September and October 1997.

     In  late  February  1998,  the  Company  received   confirmation   from  an
independent   testing   laboratory  that  the  second   generation   Sens-O-Lock
successfully  completed  testing  under  the  National  Highway  Traffic  Safety
Administration  ("NHTSA")  Model  Specifications  for  Breath  Alcohol  Ignition
Interlock Devices (the "Model Specifications") for the battery of required tests
for  the   37-day   calibration   stability   challenge   protocol.   The  Model
Specifications   are  utilized  by  the  various  states  in  their   individual
certification  processes  for  use in  legislative

                                      -10-
<PAGE>

and    judicial    programs    for    supervision    of  persons   convicted  of
alcohol-related  motor vehicle  infractions,  violations and crimes  ("Mandatory
Programs").  The various states have  differing  certification  processes.  Some
states  merely  require  compliance  with the Model  Specifications  while other
states  have much higher  standards  and/or a complex  certification  procedure.
Through November 10, 1998, the Sens-O-Lock has been certified in six states. The
Company  anticipates  seeking  additional  state  certifications  of the  second
generation Sens-O-Lock on state-by-state basis, with priority based, among other
factors,  upon the  location of the  Company's  distributors  and  dealers.  The
Company  anticipates  publicizing  the Model  Specification  testing success and
applicable state certifications in promoting the Sens-O-Lock devices for markets
other than for Mandatory  Programs  (the  "Mandatory  Market"),  such as (a) the
voluntary  market,  which includes  parents of teenage  drivers (the  "Voluntary
Market"),  and (b) the commercial market,  comprising truck, bus and taxi fleets
(the "Commercial  Market").  The Company  believes that, for the U.S.  Voluntary
Market  and  Commercial  Market,  no Model  Specifications  testing  success  or
applicable  state  certification  are  required,  although  the Company  further
believes  that a  significant  portion of the  Voluntary  Market and  Commercial
Market  will not  purchase  a BAIID  without a minimum  of a 37-day  calibration
success  under the Model  Specifications  and  applicable  state  certification.
However,  there can be no assurance given that the Model Specifications  testing
success or state  certifications  will result in any  revenues to the Company or
the commercial success of the second generation Sens-O-Lock product.

     The Company  continues to evaluate  other  sensing  technologies  currently
utilized by  competitors  within the industry,  as well as sensing  technologies
under development by others for use in different  alcohol sensing  applications.
The Company intends to continue to utilize its research and development  efforts
to provide the Company with other  alternative  technical  options for different
specified  target  markets,  as well as to improve  and  enhance  the  Company's
products.

     The Company intends to seek insurance discounts to help drive the Voluntary
Market and Commercial Market, and to assist in the lobbying for stricter federal
and state laws  requiring  drivers  convicted of  alcohol-related  motor vehicle
infractions,  violations or crimes to install BAIID equipment in their vehicles.
The Company is evaluating  strategies,  marketing  plans and programs  which the
Company expects will enable the Company to work jointly with insurance companies
to enhance their respective markets. However, there can be no assurance that the
Company and such insurance companies will agree upon a strategy, plan or program
or that any  such  strategy,  plan or  program,  if  adopted,  or the  Company's
independent  lobbying  efforts,  will  result in  revenues to the Company or the
commercial success of its products.

Recent Events

     The Company had limited sales of  Sens-O-Lock  units in 1997,  primarily in
the United  Kingdom and elsewhere in Europe.  During the second quarter of 1998,
the Company sold 61 second  generation  Sens-O-Lock  units and an additional 136
units were sold in the third quarter of 1998.  There have been minimal  revenues
generated by the  WeatherEye  product line.  The Company has been dependent upon
loans  and  equity  investments  from  the  Company's  officers,  directors  and
shareholders  and  others to fund the  Company's  operations  in  absence of any
material sales through the third quarter of 1998. The Company  anticipates  that
it will require  additional loans and/or equity investments in order to continue
operations and until such time as sufficient  revenues from sales of Sens-O-Lock
units are generated.

     Management  believes that the Company  currently  does not have  sufficient
working  capital to continue its  operations  over the  long-term  and that cash
generated from  operations for the next several months will not be sufficient to
meet the  Company's  currently  anticipated  liquidity  and capital  expenditure
requirements in order to successfully  market the second generation  Sens-O-Lock
product  line  and/or for the Company to  continue  operations.  The Company has
entered  into   discussions   with  a  third  party  with  respect  to  granting
distribution/licensing  rights  to  the  Company's  Sens-O-Lock  and  WeatherEye
product lines,  which is anticipated to entail the pre-payment to the Company of
certain  royalties,  as well as debt and/or  equity  financing  for the Company.
Further, the Company has continued to have discussions with one of the Company's
preferred  shareholders with respect to additional equity and/or debt financing.
There can be no  assurance,  however,  that the Company will enter into a formal
distribution/licensing  arrangement  or receive  additional  financing from such
third party, such preferred  shareholder or any other party, that royalties from
any such  distribution/licensing  arrangement and/or financing proceeds, if any,
will be on terms favorable to the Company or that the Company will be successful
in attaining its sales goals,  nor that attaining such sales goals will have the

                                      -11-
<PAGE>

desired  effect  on  the  Company's  cash  resources.  The  failure  to  receive
sufficient   distribution/licensing   royalties  and/or  other  equity  or  debt
financing,  as well as any failure to obtain a  sufficient  level of sales,  may
result in the  Company  seeking  protection  under the Federal  Bankruptcy  Laws
and/or terminating operations.

     On  October 1,  1998,  the  Company  executed  a Consent  and  Undertaking,
pursuant  to which the  Company  admitted to the failure to timely file with the
Securities and Exchange  Commission  (the "SEC") the Company's  Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1997 and Quarterly Reports on
Form  10-QSB  for the  quarters  ended  March 31,  1998 and June 30,  1998,  and
Notifications  of Late Filing on Form 12b-25 with respect to such Forms  10-QSB,
and  consented  to the entry of an order (the  "Order") by the Federal  District
Court for the  District of Columbia  directing  the Company to file with the SEC
such Form 10-KSB by October 30, 1998 and Forms 10-QSB by November 13, 1998.  The
failure to file such Form 10-KSB and Forms 10-QSB in  accordance  with the Order
may result in the Company  being held in  contempt of court,  which could have a
material  adverse result on the Company's  business and operations.  The Company
filed its Form 10-KSB for the fiscal year ended December 31, 1997 on October 28,
1998, which, the Company believes, satisfies the first requirement of the Order.
The Company further  believes that the filing of this Form 10-QSB  satisfies the
second  requirement  of the Order and is endeavoring to file its Form 10-QSB for
the quarter ended June 30, 1998 by November 13, 1998.  However,  there can be no
assurance that such Form 10-QSB will be filed with the SEC by November 13, 1998.

Results of Operations

Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997

     Net Sales. The Company had net sales of approximately $22,000 for the three
months  ended June 30,  1998,  a decrease of 34.6% from net sales of $33,000 for
the  three  months  ended  June 30,  1997.  Net  sales in the 1998  period  were
attributable to sales of second generation  Sens-O-Lock units, all of which were
made to the domestic United States market. In the 1997 period, the Company's net
sales were attributable to sales of WeatherEye units. After initially  launching
the marketing of the second generation Sens-O-Lock in the United Kingdom in late
1997,  the Company has  refocused  its  marketing  plans to the domestic  United
States market,  which has resulted in sales of Sens-O-Lock units commencing with
the second quarter of 1998.

     Cost of Goods Sold.  The  Company  had cost of goods sold of  approximately
$15,000 in the three months ended June 30, 1998, a decrease of 16.4% compared to
cost of goods sold for the  three-month  period  ended June 30, 1997 of $18,000.
Cost of goods  sold in the 1998  period  were  attributable  to the  Sens-O-Lock
product line, while costs of goods sold in the 1997 period were  attributable to
the Company's  Weather Eye products.  Cost of goods sold  represented  69.0% and
54.0% of net  sales in the 1998 and 1997  periods,  respectively.  Cost of goods
sold  consists  primarily  of product  costs,  freight  charges,  royalties  and
inventory allowances for damaged and obsolete products.

     Costs and Expenses.  Research and development  expenses for the three-month
period ended June 30, 1998 were approximately  $57,000, a decrease of 12.1% from
$65,000 for the three months  ended June 30, 1997,  primarily as a result of the
Company  focusing on  addressing  specific  areas  related to the new design and
technology  incorporated into the second generation  Sens-O-Lock  product in the
1998 period,  as compared to more general  research and development  expenses on
the  Sens-O-Lock  product line during the 1997 period.  Research and development
expenses  represented  265.6%  and  197.7%  of net  sales  in the  1998 and 1997
periods, respectively.

     Selling,  general and  administrative  expenses for the three-month  period
ended  June 30,  1998 were  approximately  $332,000,  a  decrease  of 20.9% from
$420,000  for the three  months  ended June 30,  1997,  primarily as a result of
reduced  staff in the 1998 period as the Company  sought to lower costs to bring
expenses more in line with an  anticipated  lack of  short-term  revenues as the
Company  refocused  marketing  efforts on the  domestic  U.S.  market.  Selling,
general and  administrative  expenses  represented  1,542.1% and 1,274.8% of net
sales in the 1998 and 1997 periods, respectively.

     Interest and Other  Income.  Interest and other income for the  three-month
period ended June 30, 1998 was  approximately  $2,000,  a decrease of 86.3% from
$16,000  for the three  months  ended June 30,  1997,  primarily  as a result of
higher average cash balances during the 1997 period.

                                      -12-
<PAGE>

     Interest  Expense.  Interest expense for the three-month  period ended June
30,  1998 was  approximately  $9,000,  an  increase of 13.6% from $8,000 for the
three months ended June 30, 1997,  primarily as a result of the  availability of
cash resulting from the sale of the Company's Series B 8% Convertible  Preferred
Stock (the "Series B Preferred Stock") in September 1997.

     Net Loss.  As a result of the  foregoing,  the net loss for the 1998 period
was approximately  $390,000, a decrease of approximately 15.6% from $461,000 for
the 1997 period. The net loss per share for the 1998 period of $.06, compared to
$.06 for the 1997 period, was calculated to include the effect of the cumulative
dividends on the Series A Preferred  Stock and Series B Preferred  Stock for the
1998 period.  The Series B Preferred Stock was not  outstanding  during the 1997
period.

Six Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997

     Net Sales. The Company had net sales of  approximately  $22,000 for the six
months  ended June 30,  1998,  a decrease of 36.6% from net sales of $34,000 for
the six  months  ended  June  30,  1997.  Net  sales  in the  1998  period  were
attributable to sales of second generation  Sens-O-Lock units, all of which were
made to the domestic United States market. In the 1997 period, the Company's net
sales were attributable to sales of WeatherEye units. After initially  launching
the marketing of the second generation Sens-O-Lock in the United Kingdom in late
1997,  the Company has  refocused  its  marketing  plans to the domestic  United
States market,  which has resulted in sales of Sens-O-Lock units commencing with
the second quarter of 1998.

     Cost of Goods Sold.  The  Company  had cost of goods sold of  approximately
$15,000 in the six months ended June 30,  1998, a decrease of 18.9%  compared to
cost of goods sold for the  six-month  period  ended June 30,  1997 of  $18,000.
Costs of goods sold in the 1998  period  were  attributable  to the  Sens-O-Lock
product line, while costs of goods sold in the 1997 period were  attributable to
the Company's  Weather Eye products.  Costs of goods sold represented  69.0% and
54.0% of net sales in the 1998 and 1997 periods, respectively.

     Costs and  Expenses.  Research and  development  expenses for the six-month
period ended June 30, 1998 were approximately $108,000, a decrease of 29.2% from
$153,000 for the six months  ended June 30,  1997,  primarily as a result of the
Company  focusing on  addressing  specific  areas  related to the new design and
technology  incorporated into the second generation  Sens-O-Lock  product in the
1998 period,  as compared to more general  research and development  expenses on
the  Sens-O-Lock  product line during the 1997 period.  Research and development
expenses  represented  502.1%  and  449.9%  of net  sales  in the  1998 and 1997
periods, respectively.

     Selling, general and administrative expenses for the six-month period ended
June 30, 1998 were approximately  $832,000,  a decrease of 23.2% from $1,084,000
for the six months ended June 30, 1997,  primarily as a result of reduced  staff
in the 1998 period as the Company  sought to lower costs to bring  expenses more
in line with an anticipated lack of short-term revenues as the Company refocused
marketing   efforts  for  the  domestic  U.S.  market.   Selling,   general  and
administrative  expenses  represented  3,863.3% and 3,190.5% of net sales in the
1998 and 1997 periods, respectively.

     Interest and Other  Income.  Interest  and other  income for the  six-month
period ended June 30, 1998 was approximately  $16,000,  a decrease of 63.0% from
$43,000 for the six months ended June 30, 1997,  primarily as a result of higher
average cash balances during the 1997 period.

     Interest Expense.  Interest expense for the six-month period ended June 30,
1998 was  approximately  $19,000,  an increase of 9.5% from  $17,000 for the six
months ended June 30, 1997,  primarily as a result of the  availability  of cash
resulting  from  the sale of the  Series A  Preferred  Stock  in  December  1996
resulting  in the  Company's  availability  to reduce loan  balances in the 1997
period.

     Net Loss.  As a result of the  foregoing,  the net loss for the 1998 period
was approximately  $942,000,  a decrease of approximately  21.2% from $1,195,000
for the 1997  period.  The net  loss per  share  for the  1998  period  of $.14,
compared to $.15 for the 1997 period,  was  calculated  to include the effect of
the cumulative  dividends on the Series A Preferred Stock and Series B Preferred
Stock for the 1998  period.  The Series B  Preferred  Stock was not  outstanding
during the 1997 period.


                                      -13-
<PAGE>

Liquidity and Capital Resources

     At  June  30,  1998,  the  Company  had  a  working   capital   deficit  of
approximately  $242,000,  as compared to working capital of $890,000 at December
31, 1997. This decrease in working capital of $1,133,000 is primarily due to the
net loss for the six months ended June 30, 1998, new loans payable to the holder
of the Series B Preferred Stock and increases in dividends payable on the Series
A  Preferred  Stock and Series B  Preferred  Stock,  which  more than  offset an
increase in inventory,  reductions in accrued expenses and amounts due officers,
a related party, and shareholders and repayment of a note payable.

     At  June  30,  1998,   the  Company  had  cash  and  cash   equivalents  of
approximately  $113,000,  a  net  decrease  in  cash  and  cash  equivalents  of
$1,770,000  from  $1,883,000  at  December  31,  1997.  Cash  used in  operating
activities for the six months ended June 30, 1998 was $1,370,000,  a decrease of
$584,000 as compared to the six months  ended June 30, 1997.  The major  factors
contributing  to this  reduction  include  the  smaller  loss  from  operations,
decreased  accounts payable and accrued  expenses and inventory  acquisitions as
the  Company  focused  upon  matching  purchasing  with an  anticipated  lack of
short-term sales of the second generation  Sens-O-Lock in the 1998 period.  Cash
used in  investing  activities  for the  1998  period  was  $127,000,  primarily
relating to the  accretion of the  difference  between the  carrying  amount and
redemption  amount of the Series B Preferred Stock. The Company had no investing
activities in the 1997 period.  Cash used in financing  activities  for the 1998
period was $400,000,  the result of the Company's  repayment of a $500,000 note,
offset  by a new  loan of  $100,000,  compared  to cash  provided  by  financing
activities  in the 1997 period of $30,000,  which  resulted from the exercise in
the 1997 period of warrants sold in private placements conducted in 1993 through
1995.

     On September  26, 1997,  the Company sold a total of 300 shares of Series B
Preferred  Stock at a price of  $10,000  per share to  Milbright  Estates,  Ltd.
("Milbright").  The net proceeds  from the sale of the Series B Preferred  Stock
was  approximately  $2,675,000.  The rights,  preferences  and privileges of the
Series  B  Preferred  Stock  are  set  forth  in  amendments  to  the  Company's
Certificate of Incorporation (the "Series B Provisions") filed with the New York
Secretary of State. The Series B Preferred Stock has a liquidation preference of
$10,000 per share and bears cumulative dividends at a rate of eight percent (8%)
per share per annum.  Such dividends are payable only  immediately  prior to the
conversion  of the Series B  Preferred  Stock into  Common  Stock.  The Series B
Preferred Stock is currently convertible, in whole or part, at the option of the
holder,  into  shares  of  Common  Stock at any  time.  Each  share of  Series B
Preferred Stock is convertible  into that number of shares of Common Stock as is
determined  by dividing  (i) the sum of (a)  $10,000  plus (b) the amount of all
accrued but unpaid or  accumulated  dividends on the share of Series B Preferred
Stock being so converted by (ii) the  Conversion  Price in effect at the time of
conversion.  The "Conversion  Price" of the Series B Preferred Stock is equal to
the lower of (x)  $4.03125 or (y) 82.5% of the average  closing bid price of the
Common Stock over the ten  consecutive  trading days  immediately  preceding the
date of the conversion notice delivered to the Company. If not sooner converted,
all  outstanding  shares of Series B Preferred  Stock are  subject to  automatic
conversion on the earlier of (i) September 26, 1999 or (ii) immediately prior to
the  consummation  of the  acquisition  of the  Company  pursuant to a merger or
consolidation  or the sale of  substantially  all of the assets of the  Company.
Except in connection with such automatic  conversion,  in no event will a holder
of Series B  Preferred  Stock be  entitled  to  convert  any  shares of Series B
Preferred  Stock if such  conversion  would  cause the sum of (i) the  number of
shares of Common  Stock  beneficially  owned by the  holder  and its  affiliates
(other  than  shares of Common  Stock  which  may be deemed  beneficially  owned
through  the  ownership  of the  unconverted  portion of the Series B  Preferred
Stock) and (ii) the number of shares Common Stock  issuable upon the  conversion
of such  shares  of the  Series B  Preferred  Stock,  to  result  in  beneficial
ownership by the holder and its affiliates of more than 4.99% of the outstanding
shares of Common Stock. As of February 9, 1998, Milbright converted 26 shares of
Series B Preferred Stock into 457,493 shares of Common Stock.  Additionally,  as
of November 5, 1998,  Milbright  converted an additional four shares of Series B
Preferred Stock into 469,233 shares of Common Stock. Based on the average of the
closing  bid prices of the Common  Stock for the ten  consecutive  trading  days
preceding  November 10, 1998, the currently  outstanding  270 shares of Series B
Preferred  Stock would,  if  convertible,  be  convertible  into an aggregate of
34,132,290 shares of Common Stock (giving effect to accrued dividends).

     Pursuant to a letter agreement,  dated August 14, 1998, between the Company
and AIIC,  AIIC,  as the holder of the  833,333  outstanding  shares of Series A
Preferred Stock,  agreed to accept (a) 230,861 shares of Common Stock

                                      -14-
<PAGE>

as  payment  in  full  for  all accrued  and unpaid  dividends  on said  833,333
shares of Series A Preferred Stock for the prior dividend  payment dates of June
30, 1997, December 31, 1997 and June 30, 1998 (i.e., $344,375) and (b) agreed to
accept  shares of Common  Stock in lieu of payment of  dividends on said 833,333
shares of Series A Preferred Stock due on the dividend payment dates of December
31, 1998, June 30, 1999 and December 31, 1999, such shares of Common Stock to be
valued at approximately $1.487 per share (subject to adjustment).

     In June 1998, Milbright loaned (the "June 1998 Loan") the Company $100,000,
bearing  interest at 11.5% per annum and  maturing on July 31,  1998.  In August
1998,  Milbright  loaned the Company  (the  "August  1998  Loan") an  additional
$40,000, bearing interest at 11.5% per annum and maturing on August 31, 1998. In
September  1998,  Milbright  loaned (the  "September  1998 Loan") the Company an
additional $25,000,  bearing interest at 11.5% per annum and maturing on October
31, 1998.  Repayment of the June 1998 Loan,  August 1998 Loan and September 1998
Loan are past due,  although  Milbright has not made any attempt to require such
repayment.

     In October 1998, a third party loaned the Company  $30,000 with interest at
11.5% per annum and due on November 30, 1998. In November 1998, this third party
loaned the Company an additional  $35,000,  with interest at 11.5% per annum and
due on December 10, 1998.

     In October  1998,  the Company  received  two $20,000  loans from the party
negotiating a distribution agreement with the Company. These loans bear interest
at 8.5% and are due on June 30, 1999 and April 6, 1999.

     Management  believes that the Company  currently  does not have  sufficient
working  capital to continue its  operations  over the  long-term  and that cash
generated from  operations for the next several months will not be sufficient to
meet the  Company's  currently  anticipated  liquidity  and capital  expenditure
requirements in order to successfully  market the second generation  Sens-O-Lock
product  line  and/or for the Company to  continue  operations.  The Company has
entered  into   discussions   with  a  third  party  with  respect  to  granting
distribution/licensing  rights  to  the  Company's  Sens-O-Lock  and  WeatherEye
product lines,  which is anticipated to entail the pre-payment to the Company of
certain  royalties,  as well as debt and/or  equity  financing  for the Company.
Further,  the Company has  continued to have  discussions  with  Milbright  with
respect to additional  equity and/or debt financing.  There can be no assurance,
however,  that the  Company  will  enter  into a  formal  distribution/licensing
arrangement or receive additional financing from such third party,  Milbright or
any other party, that royalties from any such distribution/licensing arrangement
and/or financing proceeds,  if any, will be on terms favorable to the Company or
that the Company  will be  successful  in attaining  its sales  goals,  nor that
attaining  such sales goals will have the desired  effect on the Company's  cash
resources.  The failure to receive sufficient  distribution/licensing  royalties
and/or  other  equity  or debt  financing,  as well as any  failure  to obtain a
sufficient  level of sales,  may result in the Company seeking  protection under
the Federal Bankruptcy Laws and/or terminating operations.

Year 2000 Compliance

     Many currently  installed  computer systems and software products are coded
to accept only two digit entries in the date code field.  These date code fields
will need to accept four digit entries to distinguish twenty-first century dates
from twentieth  century  dates.  As a result,  in less than two years,  computer
systems and software  used by many  companies  may need to be upgraded to comply
with  such  "Year  2000"  requirements.   The  Company  is  in  the  process  of
implementing a review of issues  related to the Company's Year 2000  compliance.
This review is intended  to  determine  the affect of the turn of the century on
the  operability  of the  Company's  products,  management  information  systems
("MIS"), non-MIS systems the Company utilizes to conducts its business and other
internal and external  processes which may impact the Company's  operations.  In
connection  with this  evaluation,  the Company also  anticipates  reviewing the
Company's  vendors,  distributors  and suppliers for Year 2000 compliance and to
effect changes where necessary.

     The Company anticipates that this review process will be conducted in three
phases:  the first  phase is  anticipated  to  encompass  a review of all of the
Company's  products,  internal  and external  systems/processes  and vendors and
suppliers for Year 2000 compliance;  the second phase is expected to correct all
items  identified  as non-  compliant  and  essential to the  operations  of the
Company;  and the third phase is  contemplated  to be a second  review to ensure
Year 2000 compliance and interoperability of all systems/processes.

                                      -15-
<PAGE>

     The Company  anticipates  conducting its review with its current resources,
but cannot  assure  that it has  sufficient  resources  to  complete  the review
process in a timely manner.  The Company has not  determined at this time,  what
total costs it will incur to conduct the review  process  and to  implement  any
necessary corrections.  Although the Company believes that the software utilized
in the second  generation  Sens-O-Lock  and the  Company's MIS software are Year
2000 compliant and is working to ensure that the Company's products and internal
systems are Year 2000 compliant,  there can be no assurance that such compliance
is or will be  achieved.  The  failure  to be Year 2000  compliant  could have a
material  adverse  effect  on the  Company's  business,  operating  results  and
financial condition.

Inflation

     The rate of inflation has had little impact on the Company's  operations or
financial  position  in the  past  and  inflation  is  not  expected  to  have a
significant impact on the Company's  operations or financial position during the
year ending December 31, 1998.

Currency Fluctuations

     The Company anticipates marketing internationally, as well as in the United
States.  To the extent the  Company  is able to market its  products  in foreign
countries,  the  Company  will  become  subject  to the  risks  associated  with
international sales, including,  but not limited to, regulatory controls imposed
by foreign  governments,  shipping delays,  customs duties and export quotas and
other  trade   restrictions,   increased   collection  risks  and  international
political,  regulatory and economical developments,  any one of which could have
an  adverse  effect on the  Company's  operating  results.  To the  extent  that
revenues  are  derived in  currencies  other than U.S.  Dollars,  the  Company's
operating results may be affected adversely by fluctuations in currency exchange
rates. The Company has not engaged in currency- hedging transactions intended to
reduce the effect of  fluctuations  in currency  exchange rates on the Company's
foreign business  operations.  Even if the Company were to determine that it was
in its best interests to enter into any such hedging transactions in the future,
there can be no  assurance  that the Company  will be able to do so or that such
transactions, if entered into, will materially reduce the effect of fluctuations
in currency exchange rates on the Company's foreign business operations.


                                      -16-
<PAGE>

                   PART II.  OTHER INFORMATION


Item 1.   Legal Proceedings.

     Reference is hereby made to Item 3 to the  Company's  Annual Report on Form
10-KSB for the fiscal year ended  December 31,  1997,  filed on October 28, 1998
(Commission File No.: 0-26998),  and to the references therein, for a discussion
of all material  pending  legal  proceedings  to which the Company or any of its
subsidiaries are parties.


Item 2.   Changes in Securities and Use of Proceeds.

     In August 1998, the Company issued an aggregate of 230,861 shares of Common
Stock to AIIC as payment in full of  $344,375  of  dividends  due on the 833,333
shares of Series A Preferred  Stock  registered in the name of AIIC.  This stock
issuance was a transaction  not including any public  offering  which was exempt
from the registration  requirements under the Securities Act pursuant to Section
4(2) thereof.

     As of November 5, 1998,  the Company  issued 469,233 shares of Common Stock
to  Milbright  upon  Milbright's  conversion  of 26 shares of Series B Preferred
Stock.  This stock issuance was a transaction  not including any public offering
which was exempt from the  registration  requirements  under the  Securities Act
pursuant to Section 4(2) thereof.


Item 3.   Defaults upon Senior Securities.

     Repayment of the June 1998 Loan,  August 1998 Loan and September  1998 Loan
are past due,  although  Milbright  has not made any  attempt  to  require  such
repayment.


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

     None.


Item 5.   Other Information.

     None.


Item 6.   Exhibits and Reports on Form 8-K.

     (a)  Exhibits.

     Set forth below are all exhibits to this Quarterly Report on Form 10-QSB.

Exhibit
Number    Description
-------   -----------
10.1      Order  containing  the  Release  and   Settlement   Agreement,   dated
          August 13,  1998,  among the  Company,  Alcohol  Sensors  Europe  plc,
          Michael  Ghazarian,  Digital Vehicle Security Systems Ltd. and Scarico
          (UK) Ltd. (Incorporated by reference to Exhibit 10.21 to the Company's
          Annual  Report on Form  10-KSB for the year ended  December  31,  1997
          (Commission  File  Number:  0-26998),  filed  with the  Commission  on
          October 28, 1998.)
10.2      Promissory  Note,  dated  June  12,  1998,  of  the  Company,  in  the
          principal   amount of  $100,000  payable to  Milbright   Estates  Ltd.
          (Incorporated  by  reference to  Exhibit 10.23 to the Company's Annual


                                      -17-
<PAGE>

          Report on Form 10-KSB for the year ended December 31, 1997 (Commission
          File Number: 0-26998), filed with the Commission on October 28, 1998.)
10.3      Letter  Agreement,  dated  August 14,  1998,
          between the  Company and  American  International  Insurance  Company.
          (Incorporated  by reference to Exhibit 10.24 to the  Company's  Annual
          Report on Form 10-KSB for the year ended December 31, 1997 (Commission
          File Number: 0-26998), filed with the Commission on October 28, 1998.)
10.4      Promissory  Note,  dated  August  13,  1998, of  the  Company,  in the
          principal  amount  of  $25,000  payable  to  Milbright   Estates  Ltd.
          (Incorporated  by reference to Exhibit 10.25 to the  Company's  Annual
          Report on Form 10-KSB for the year ended December 31, 1997 (Commission
          File  Number:  0-26998),  filed with the  Commission  on October  28,
          1998.)
10.5      Patent  Assignment,  dated  September 21, 1998, from  Joseph M. Lively
          and  WeatherEye,  Inc.  to the Company.  (Incorporated by reference to
          Exhibit  10.26 to  the Company's  Annual Report on Form 10-KSB for the
          year ended  December  31, 1997  (Commission  File  Number:   0-26998),
          filed  with the  Commission  on  October  28,  1998.)
10.6      Promissory  Note,  dated  September 4, 1998,  of the  Company,  in the
          principal  amount  of  $40,000  payable  to  Milbright   Estates  Ltd.
          (Incorporated  by reference to Exhibit 10.27 to the  Company's  Annual
          Report on Form 10-KSB for the year ended December 31, 1997 (Commission
          File Number: 0-26998), filed with the Commission on October 28, 1998.)
27        Financial Data Schedule.

     (b) Reports on Form 8-K.

     None.


                                      -18-
<PAGE>


                                   SIGNATURES

     In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                     ALCOHOL SENSORS INTERNATIONAL, LTD.



Dated: November 13, 1998         By:  /s/ Joseph M. Lively
                                    --------------------------------------------
                                            Joseph M. Lively President
                                    (Principal Executive and Accounting Officer)












                                      -19-
<PAGE>


                       ALCOHOL SENSORS INTERNATIONAL, LTD.
                    FORM 10-QSB - QUARTER ENDED JUNE 30, 1998

                                  Exhibit Index

Exhibit
Number    Description
--------  ----------- 
10.1      Order  containing  the  Release  and   Settlement   Agreement,   dated
          August 13,  1998,  among the  Company,  Alcohol  Sensors  Europe  plc,
          Michael  Ghazarian,  Digital Vehicle Security Systems Ltd. and Scarico
          (UK) Ltd. (Incorporated by reference to Exhibit 10.21 to the Company's
          Annual  Report on Form  10-KSB for the year ended  December  31,  1997
          (Commission  File  Number:  0-26998),  filed  with the  Commission  on
          October 28, 1998.)
10.2      Promissory  Note,  dated  June  12,  1998,  of  the  Company,  in  the
          principal   amount of  $100,000  payable to  Milbright   Estates  Ltd.
          (Incorporated  by  reference to  Exhibit 10.23 to the Company's Annual
          Report on Form 10-KSB for the year ended December 31, 1997 (Commission
          File Number: 0-26998), filed with the Commission on October 28, 1998.)
10.3      Letter  Agreement,  dated  August 14,  1998,
          between the  Company and  American  International  Insurance  Company.
          (Incorporated  by reference to Exhibit 10.24 to the  Company's  Annual
          Report on Form 10-KSB for the year ended December 31, 1997 (Commission
          File Number: 0-26998), filed with the Commission on October 28, 1998.)
10.4      Promissory  Note,  dated  August  13,  1998, of  the  Company,  in the
          principal  amount  of  $25,000  payable  to  Milbright   Estates  Ltd.
          (Incorporated  by reference to Exhibit 10.25 to the  Company's  Annual
          Report on Form 10-KSB for the year ended December 31, 1997 (Commission
          File  Number:  0-26998),  filed with the  Commission  on October  28,
          1998.)
10.5      Patent  Assignment,  dated  September 21, 1998, from  Joseph M. Lively
          and  WeatherEye,  Inc.  to the Company.  (Incorporated by reference to
          Exhibit  10.26 to  the Company's  Annual Report on Form 10-KSB for the
          year ended  December  31, 1997  (Commission  File  Number:   0-26998),
          filed  with the  Commission  on  October  28,  1998.)
10.6      Promissory  Note,  dated  September 4, 1998,  of the  Company,  in the
          principal  amount  of  $40,000  payable  to  Milbright   Estates  Ltd.
          (Incorporated  by reference to Exhibit 10.27 to the  Company's  Annual
          Report on Form 10-KSB for the year ended December 31, 1997 (Commission
          File Number: 0-26998), filed with the Commission on October 28, 1998.)
27        Financial Data Schedule.



                                      -20-