INTERACTIVE TECHNOLOGIES CORP INC
10KSB/A, 1998-09-15
ALLIED TO MOTION PICTURE PRODUCTION
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                                Washington, D.C.

                                  FORM 10-KSB/A
                                 AMENDMENT NO.1

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
              THE SECURITIES ACT OF 1934 FOR THE FISCAL YEAR ENDED
                                  May 31, 1998

                         COMMISSION FILE NUMBER: 0-19796

                   INTERACTIVE TECHNOLOGIES CORPORATION, INC.
               (Exact name of registrant as specified in charter)

         Wyoming                                              98-0120805
     (State or other                                        (IRS Employer
     jurisdiction of                                      Identification No.)
      incorporation)

                            15400 Knoll Trail Ste 106
                               Dallas, Texas 75248
                    (Address of Principal Executive Offices)

         Registrant's telephone number including area code: 972-960-9400

Securities Registered Under Section 12(b) of the Exchange Act: NONE
Securities Registered Under Section 12(g) of the Exchange Act: COMMON STOCK, 
$0.01 PAR VALUE.

         Check  whether the  Registrant:  (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___

         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of Regulation S-B 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: 
$0.00 for the parent and $1,125,444 consolidated with AIC.

     The aggregate  market value of voting stock held by  non-affiliates  of the
Registrant,  based on the  average of the  closing  bid and asked  prices of the
Registrant's  Common Stock in the NASDAQ market as reported by NASDAQ on May 31,
1998, was approximately $10,238,041. Shares of voting stock held by each officer
and  director and by each person who owns 5% or more of the  outstanding  voting
stock have been  excluded in that such  persons may be deemed to be  affiliates.
This determination of affiliate status is not necessarily conclusive.

         As of May 31, 1998, 25,370,171 shares of Common Stock, $0.01 par value,
were outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE
None.
                            LOCATION OF EXHIBIT INDEX

The index of exhibits is contained in PART IV, Item 13 herein on page 15.

<PAGE>
                                TABLE OF CONTENTS

PART I:
                                                                     Page
         Item 1.  Description of Business                             2
         Item 2.  Description of Properties                           9
         Item 3.  Legal Proceedings                                   9
         Item 4.  Submission of Matters to a Vote
                  of Security Holders                                 9

PART II:

         Item 5.  Market for Registrant's Common Equity and Related
                        Stockholder Matters                           9
         Item 6.  Management's Discussion and Analysis                10
         Item 7   Financial Statements                                13
         Item 8   Changes In and Disagreements with Accountants on
                        Accounting and Financial Disclosure           31

PART III:

         Item 9.  Directors, Executive Officers, Promoters and Control
                        Persons; Compliance With Section 16(a) of the
                        Exchange Act                                  31
         Item 10. Executive Compensation                              32
         Item 11. Security Ownership of Certain Beneficial
                        Owners and Management                         32
         Item 12. Certain Relationships and Related Transactions      33

PART IV:

         Item 13. Exhibits, and Reports on Form 8-K                   34


SIGNATURES                                                            35


                                       1
<PAGE>

PART I

Item 1. Description of Business.
- - --------------------------------
Background.

     Interactive  Technologies  Corporation,  Inc. (ITC) was incorporated in the
state of  Wyoming  on August 8,  1991.  At that  time,  ITC was  engaged  in the
business of exploiting its rights under a license  granted by CST  Entertainment
Imaging,  Inc.  ("CST").  Such license gave ITC the exclusive right to use CST's
coloring  process  to  convert  to color  black-and-white  film  and  videotape,
including black-and-white  theatrical films and television programs produced for
distribution in Europe.  ITC also had exclusive right to use CST's technology to
provide  digital  special  visual  effects  for new film and  video  productions
produced for distribution  primarily in the European territory.  ITC ceased this
effort on October 18, 1995,  when it exchanged  the license in  satisfaction  of
certain of its debt.

     On October 20, 1995,  ITC entered  into an  agreement to acquire  assets of
Syneractive,   Inc.  ("SI"),  a  Florida   corporation.   SI's  assets  included
intellectual  property consisting of a television  production and the trade name
Rebate TV. The  assets  also  included  license  rights  from the FCC to provide
Interactive Video and Data Service ("IVDS") in the Charleston-North  Charleston,
South Carolina, and  Melbourne-Titusville-Palm  Bay, Florida metropolitan areas.
In exchange  for such  assets,  ITC issued  5,700,000  shares of common stock to
Perry Douglas West, its current sole director and officer.

     On May 31, 1998,  ITC  completed  the purchase of 95.502% of the issued and
outstanding  shares of Airtech  International  Corporation,  Inc.,(AIC) and it's
subsidiaries.  Under the terms of the Stock Purchase  Agreement  entered into in
May of 1997 and  amended in August 1997 ITC  tendered  to  purchase  100% of the
issued and outstanding stock AIC.  Currently ITC has issued 10,027,731 shares of
common stock, 11,324,642 shares of convertible preferred stock and $8,595,180 of
convertible  10% debentures in exchange for 16,010,335 of AIC common stock.  ITC
will  continue to purchase the  additional  shares of AIC as they are offered by
AIC shareholders.

     Principal Products or Services and Their Markets.

     General. ITC develops and produces  interactive  television and interactive
digital media  programming  for  distribution  on cable, by broadcast and direct
satellite  television,  and  over  the  Internet.  ITC's  principal  interactive
programming  product is Rebate TV(TM) The product allows a consumer to receive a
cash rebate from ITC for  purchases of products  advertised on the Rebate TV(TM)
television  program  by  incorporating   interactive  media  and  computer  data
management.   Rebate  TV(TM)  is  designed  to  utilize  existing  communication
technologies for consumer responses.  It now uses the telephone and the Internet
as return links. However, it is also designed to easily accommodate the emerging
interactive  television  systems  as they  come  into  use,  such  as  IVDS  and
Interactive Television (via fiber optic cable/telephone cable etc.)

     As a result of the  completion of the  acquisition of AIC the Rebate TV(TM)
has been  re-evaluated  and offered for sale as a unit during  fiscal 1999.  ITC
obtained an updated business appraisal on the Rebate TV program  establishing an
estimated  value of  $4,200,000.  ITC is concentrating  on the operations on the
business of AIC and it's subsidiaries.

     Airtech was founded in 1994 as a  distributor  for  Honeywell/Enviracaire's
air purification products. In January of 1996, AIC started manufacturing its own
line of air  purification  products.  Two  years  later  AIC is  regarded  as an
emerging  leader in the industry,  especially  for  superior-quality  commercial
products. AIC currently manufactures  ceiling-mounted units, a down draft table,
portable automobile products and will soon have a portable residential unit that
will be available for Medicare recipients and other consumers.

                                       2
<PAGE>

     Airsopure  (ASP), a wholly owned subsidiary of AIC was formed in March 1997
for the  implementation  and  operation  of a franchise  program.  ASP  provides
exclusive marketing for AIC's indoor air purification products. In creating this
new  subsidiary,  a new marketing  format was introduced to the industry and ASP
became the first  home-based  franchise  organization  to offer  individuals  an
opportunity to join a team that would train and authorize the  franchisee's  the
exclusive rights to ASP air purification  products.  ASP is currently  supplying
its products to Host  Marriott  airport  locations,  Del  Frisco's  Double Eagle
restaurants,  Bennigans's,  Denny's,  NEC,  Southwest  Airlines and many others.
ASP's new S-14 hotel unit is  currently  being  tested by six large hotel chains
with the S-12 and S-16 units  under  contract  for  installation  in the Georgia
State Capital Building and in the Georgia Dome during the fall of 1998.

     MSS, Inc.,  was acquired by AIC in November of 1995 and is responsible  for
the  installation  and  service of the AIC  product  line in  Dallas/Fort  Worth
Metroplex.  MSS began operations in 1982 in the HVAC industry. MSS local markets
include  commercial and residential,  new  construction,  retrofit,  repairs and
sheet metal  fabrication.  MSS recently became affiliated with Nations Preferred
Home Warranty (NPHW), which offers exclusive home warranty coverage programs for
buyers and sellers of pre-owned  homes.  As a result of this new affiliation MSS
anticipates adding 2,000 new customers during fiscal 1999.

     Markets.  ITC is  concentrating  on the  indoor air  contamination  markets
developed by AIC and its subsidiaries.  "Indoor air contamination"  exist in the
form of particulates and/or gases in virtually every cubic inch of air breathed,
whether  in an  office  building,  homes or  retail  establishments.  Statistics
indicate that 60% of legitimate  employee  absenteeism is "respiratory  related"
and that such  absenteeism  has a  profoundly  negative  impact  on a  companies
productivity and profits.

     Air contamination  encompasses  bacteria,  pollen, dust mites, smoke, plant
spores, dust,  solvents,  glues formaldehyde,  carbon monoxide,  carbon dioxide,
viruses,  and  also  includes  diseases  such as  tuberculosis,  meningitis  and
hepatitis.  It also  includes  Volatile  Organic  Compounds  (VOC's) which are a
combination  of two different but  recognizable  molecules  that when  combined,
become unstable and potentially  fatal.  Historically,  the only know methods of
addressing and treating indoor air contamination were (1) open windows and doors
to bring fresh air into an area, and (2) the use of  electro-static  air filters
to attempt to purify the existing air in an area.

     The  indoor air  purification  industry  is in its  infancy  but  currently
considered  by  EPA to be a $1.8  billion  market.  Current  sales  of  national
commercial product lines are approximately  $100 million.  Until now, no company
has taken an aggressive,  professional  marketing  stance to educate and service
the needs of the public in indoor air quality.

     The following  markets for  distribution of the AIC product lines have been
identified and specific  models have been developed for these markets;  (1)Hotel
industry  (2)  Restaurant  (3) Schools (4)  Automobiles  (5)  consumers  and (6)
Medicare and other insurance recipients. Distribution of the indoor air products
will  be  thru  a  net  work  of  Franchisees,   International   Licenses,  HVAC
contractors,      Internet      direct     sales,      Retail      distribution,
Home/Shopping/Infomercial,  Joint Ventures,  Network Marketing, and for Medicare
the Durable Medical Equipment  suppliers.  Revenue Sources. ITC will receive its
revenues from the acquired  majority owned  subsidiary AIC. AIC revenues will be
from the sales of its air  purification  product lines,  the sale of franchises,
the sale of international licenses and from its subsidiary MSS. On completion of
design and testing of  additional  product  lines AIC  anticipates  revenues for
fiscal 1999 to be in the $22 million range.

Product Development and Design

     AIC has developed  eleven unique products for market niches that have shown
incredible product demand.  Each of the products  incorporates at least 3 proven
filtration  devices,  capturing  particles,  gases  and  odors.  For  these  and
products,  the AIC already has an increasing number of recognizable,  steady and
satisfied customers. Currently, other available technologies to clean indoor air
include;  activated  carbon  filters,  HEPA (High  Efficiency  Particulate  Air)
Filter,  air Ozonation - Ozone  Generators,  anti-Microbial  chemically  treated
filters,  high  Energy UV light,  ionization,  electrostatic  Precipitators  and
charged media filters.
                                       3
<PAGE>

     On their  own,  none of these  technologies  have  proven to be  completely
effective.  To achieve  acceptable  results,  a combination  of several of these
technologies must be implemented,  such as the technologies utilized by AIC. The
advantages of AIC's products are:

         1.  Biological  air  contaminants  are destroyed or removed rather than
         transferred  to another  media 2. The process  cleans and with  certain
         products,  disinfects the air 3. The process is effective for microbes,
         endotoxins,  toxins,  allergens,  VOCs  and  organic  odors 4. No toxic
         chemicals are employed 5. No ozone is generated or introduced  into the
         air 6. The process is  regenerating  7. The process  works well at room
         temperature  8. The required  pressure drop and energy needs are low 9.
         Self-cleaning  process does not reintroduce  toxic post process residue
         into air stream 10.  Economical to operate 11. Industry  guidelines met
         re:   single-pass   contaminant   removal  efficiency  and  particulate
         filtration

     The  following AIC products  have design  completed and are being  marketed
currently or are in the last stage of development before distribution:

                Status:     Type:                     Applications:

Series 12       complete    ceiling unit              restaurants,print shops,
                                                      casinos, etc
Series 14       complete    wall unit                 hotels, offices
Series 14M      complete    wall unit                 homes Medicare recipients)
Series 16       complete    ceiling (hidden) unit     offices, nursing homes, 
                                                      restaurants
Series 22       complete    ceiling (hidden) unit     multi-office building, 
                                                      industrial
Series 900      complete    portable auto unit        autos (via retail sales)
Series 999      complete    trunk-mounted auto unit   autos (via sales to auto 
                                                      dealers)
Series 950      complete    portable floor model      homes, offices
Series 850      complete    portable floor model      homes, offices
Series 220/230  complete    down draft table          beauty and nail salons

Product Description

Series S-12:  The series S-12 is designed to fit into a 2 foot x 4-foot space of
a  ceiling.  When  installed  in a ceiling  opening,  5.5  inches of the  unit's
decorative  ABS  plastic  lid  protrudes  from the  ceiling.  This unit  filters
approximately  1200 cubic feet of air each minute removing  particulates,  gases
and  odors.  Markets  for this  unit  include  the food and  beverage  industry,
hospital and nursing homes,  print shops,  office buildings and other industries
with problems involving  cigarette or cigar smoke, odors and particulates larger
than .3 microns.

Series S-14: The series S-14, is designed to mount against a wall at the joining
point of wall to ceiling.  This system is approximately 36" x 14" x 14" with the
visible portion being molded ABS plastic,  having a sculptured geometric appeal.
The unit filters approximately 400 cubic feet of air per minute. The markets for
this product are those having problems with any  particulate,  gas or odor found
in rooms under 400-sq. ft. such as hotel and motel rooms,  offices,  classrooms,
patient rooms and small shops.    Multiple units can be installed to accommodate
larger rooms.

Series  S-16:  The series  S-16,  developed  particularly  for smaller  offices,
nursing  homes and some hotels.  This system can be flush mounted in the ceiling
without protruding  visibly below the ceiling and can also handle  approximately
400 CFM. The unit measures 2' x 2' x 14".

Series S-22:  The series S-22 is a ductable unit for both  commercial  and light
industrial  applications.  This unit will allow remote  positioning (i.e. on the
roof) and collection of contaminants from distant zones. The clean air discharge
can be directed to zones as needed.  This unit permits  creation of negative and
positive  pressure  zones  providing  maximum  control of  airborne  contaminant
movement.  The air cleaning  capacity will be approximately  1800 cubic feet per
minute.  This unit will also be available for the upscale residential market for
both new construction.
                                       4
<PAGE>

Series 900: The series 900 is a small  portable unit designed for the automobile
that will remove both gases and  particulates.  It will clean  approximately  30
cubic feet of air per minute.  With mounting  anxiety over air quality,  new car
buyers and automakers are examining options for improving the environment in the
interior  of  vehicles.   Some  industry  experts  currently  predict  that  the
non-existent  market for auto  filtration  systems in the U.S. will skyrocket to
$200 million by the year 2000. To date, no filtration system for automobiles has
been  developed  that will  remove  particulates  and gases at a price less than
$500. The series 900 will retail for $149.

Series 999: Is being  developed  as an  automotive  after  market  product to be
mounted  in the trunk of new and used  cars.  The unit was  designed  to move 60
cubic feet of air per minute with a complete air change  every 30 seconds.  This
product  will  retail for under  $500 and  should be a leader in the  automotive
after market upon its release.

Series 950: A working  proto-type of this unit is currently  being developed and
finalized.  This is the unit is being  designed as a Class II Medical Device and
for  approval  under  Medicare  Part  B  with  related   charges.   The  product
incorporates a 5-stage filtration system which includes the following:

            (1)  Antimicrobial pre-filter
            (2)  Ultraviolet bulbs
            (3)  Hospital  grade  99.97%  HEPA filter - for removal of particles
            (4)  Trisorbent filtration - for removal of gases
            (5)  Ionizer for destruction of remaining gas molecules

Series 850:  The series 850 is a modified  version of the series 950. It will be
sold to the general public via multilevel  marketing companies and private label
distributors.  It will  look like the  series  950 but will not  incorporate  as
extensive  a  cleansing  process nor will it be  specifically  designed  for the
elderly.

Series  S-220  Down Draft  Table:  The series  S-200 was  designed  for the nail
manicure industry and was first introduced in January 1996. It has been modified
to reduce manufacturing cost and ease of servicing while improving gas, odor and
particulate  filtration  efficiency  and extending the life of the sorbent media
filter.  This  series  has a single  speed 450 CFM blower  with a sorbent  media
filter designed for the special needs of this industry..

Series  S-230 Down Draft  Table:  The series  S-300 is designed to appeal to the
pathology/histology  environment,  the  dental  lab  industry  and  other  light
industrial  markets.  This series  utilizes a 700-CFM,  two-speed  blower  using
sorbent media filter, a polyester pre-filter as a standard and offer up to a 95%
ASHRAE 2" x 4" pleated as an option.

Marketing and Sales Strategy

     AIC's marketing strategy,  perhaps as much as any other factor, will be the
reason for tremendous growth in sales. Very few other companies in this industry
have aggressively  marketed high-quality products to more than just a few groups
of  end-user  customers.  Most of the  time  in this  industry,  the  sales  and
marketing job is left to an HVAC  contractor or repairman armed with little more
than a  product  installation  guide.  AIC  is  targeting  several  distribution
channels for direct  exposure of its products and teaching  consumers  about the
costs  and  solutions  for  indoor  air  contamination.  Management  is  using a
carefully mapped multi-channel approach to market its product line, and believes
this  differentiator,   in  addition  to  its  superior  products,   will  yield
substantial  growth for the next  several  years.  For  example,  the  following
channels are being utilized:

     Franchise-  AIC formed  its  wholly-owned  subsidiary  Airsopure,  Inc.  to
develop and market a franchise  program.  Under this  program a  franchisee  can
purchase the rights for a specific  geographic area for the exclusive  rights to
AIC's air filtration equipment.

                                       5
<PAGE>

     International  Licenses - AIRTECH has  already  licensed  the  distribution
rights to its name and technology in the countries of Taiwan,  the  Philippines,
Turkey and Canada.  The  Company,  now that it has a full product line to offer,
intends to more aggressively pursue  international  distribution  relationships.
All sales are made in U.S.  dollars,  FOB Dallas.  Entire  countries  sell for a
minimum of $100,000.

     Manufacturer's  Reps - There are approximately  260,000 HVAC Contractors in
the U.S.  alone.  This  unconsolidated  group of  professionals  accounts  for a
significant  amount of the current sales of air purification and cleaning units.
The Company will make certain products available to them, such as the Series 12,
16 and 22.

     Internet - Internet  usage has doubled over the last 12 months and consumer
purchasing  will  continue to grow in  accordance.  73% of web users  search for
information  about  products and  services,  and 7.4 million  users have made at
least one purchase over the  internet.  The  demographics  of web users also fit
well with the Company's products.  Most are well educated and earn significantly
more income than average.  According to Bill Gates, founder of Microsoft,  "Like
the  PC,  the  internet  is a  tidal  wave.  It  will  wash  over  the  computer
industry...drowning those who don't learn to swim in its waves."

     Airsopure website is  www.airsopure.com.  Here, the  AIC  products  can  b
     learned about,  viewed  and  ordered.  The AIC intends to spend  additional
     funds in an effort to direct more internet traffic to this website.   AIC's
     website is   www.airtechgroup.com.  These websites give several  additional
     advantages:access to 60 million people worldwide, reduction in distribution
     costs,  quicker  advertising response times, direct feedback from customers
     and instantaneous updating of information.

     The keys to  successful  marketing  on the  internet  will be exposure  and
     association with other well-traveled websites, security, a clean design and
     ease of use and  product  testimonials  which will also be  included in the
     website.

Retail  Distribution  - AIC has developed  several  important  products which it
believes suitable for retail distribution.  Most notable are the portable Series
900 and the Series  850,  both of which have low price  points and appeal to the
broad market of consumers.  Discussions are currently in process with one of the
largest retailers in the world for distribution of both the Series 900 and 850.

Home Shopping/ Infomercial - The Series 900 and 850 will also be distributed via
a powerful  home-shopping  medium such as QVC or the Home Shopping  Network.  In
this  well  established  marketplace,  over 80% of all U.S.  cable  homes can be
reached  through the  television  or computer.  Over 40 million  Americans  have
purchased products through a home shopping medium, and some 400 new products get
introduced to television viewers each week.

Joint Venture - the Company has begun  discussions  with several  possible joint
venture partners for  international  manufacturing,  outsourcing,  marketing and
distribution.  In some countries,  the air quality is dramatically worse than it
is in the  U.S.  and the  Company  feels  that  its  products  would  be  highly
marketable in these areas. Just a few examples are Chile, Brazil and Mexico.

Network  Marketing  - One of AIC's  target  markets  is the  "Portable  Room Air
Cleaner" market.  Entry for this product will be gained thru  relationships with
both retail  organizations and large network marketing firms. Several such firms
have  indicated  interest in the products,  representing  they could sell a very
high quantity of machines.  The worldwide  market for portable room air cleaners
based on particulate filtration technology is approximately $750 million. Growth
is  estimated  between  10-15%  annually.   Due  to  its  superior   technology,
competitive  pricing and  economical  operation,  AIC is  confident  that it can
capture a  significant  share of this market.  The  advantage of this channel is
that AIC will be able to private  label  licensed  products  and drop ship large
trucks  of  finished  manufactured  goods  straight  to  the  network  marketing
company's  warehouse,  not  acting as the final  distribution  point or  returns
center.
                                       6
<PAGE>

Medicare/DME's  - AIC  knows  that  physicians  regularly  recommend  the use of
portable air filtration  systems for their  patients  suffering from chronic and
acute  episodes  of illness  related to  allergies,  asthma  and  general  upper
respiratory  distress.  In  the  absence  of a  Medicare  "code",  patients  are
generally  forced to incur the expense of such technology on a  non-reimbursable
basis. These medical conditions are frequently elevated from a chronic status to
acute episodes due to the inhaling by patients of various airborne contaminants.

     The Medicare code and charge are awarded through a review process conducted
under the auspices of the Health Care  Financing  Administration  (HCFA) and its
agencies  that  include the  Statistical  Agency for Durable  Medical  Equipment
Regional Council  (SADMERC) and the Durable Medical  Equipment  Regional Council
(DMERC).  Once  awarded a Medicare  code and  charge,  patients  suffering  from
respiratory  problems  are able to secure  through a variety of durable  medical
equipment  (DME)  providers,  medical  technology  prescribed by their attending
physicians  that will be paid for by  Medicare  or their  insurance  carrier  of
record.  AIRTECH  also knows that third party  payers  such as managed  care and
indemnity  insurance  plans will more  readily  reimburse  the  patient  for the
AIRTECH  950 after  the  technology  receives  a  Medicare  code.  Clearly,  the
successful  acquisition  of the code will  precipitate  substantial  and ongoing
revenues  for the 950 that will  accrue to the  benefit of the  company  and its
stockholders.

     AIC  has in  place a  national  distribution  network  composed  of  highly
successful durable medical equipment (DME) distributors that have existing sales
forces and  marketing  infrastructures.  Association  with the DME's  creates an
immediate  distribution  network for the Model 950 without  forcing AIC to incur
the  management  challenges of creating and  maintaining  its own sales force or
recreating  the  DMEs'  existing  client  bases.  The  DME's  already  work with
physicians  providing  other  medical  devices  such  as  walkers,  wheelchairs,
hospital beds and  electronic  monitoring  devices.  The Model 950 becomes a new
product for the DME's within an industry where new products are not common.  AIC
has  initiated  the steps  necessary to secure the Medicare  code and expects to
receive final approval for the product by the end of 1998.

     There are  approximately  38.8 million enrollees in the Medicare system. Of
these,   approximately  31  million   individuals   suffer  from  some  sort  of
upper-respiratory  problem. This represents the end-user market for Model 950. A
1% market  penetration  would  represent  to AIC  approximately  $100 million in
revenues. The channel to tap this market is the already-established DME channel,
of which there are  approximately  10,000 DME suppliers in the U.S.  These DME's
already sell millions of dollars of highly  competitive  products,  and with the
Model  950,  will be able to sell a product  at  comparably  high  margins  with
essentially no supplier competition. With the distribution strategy of utilizing
the existing DME's, the Company will only incur very limited sales and marketing
expenses.

Automobile  Dealers - There are approximately  24,000 automobile  dealers in the
U.S. Some of the auto makers have begun to experiment  with various air cleaning
systems,  such as Mercedes  Benz and BMW. The  Automotive  Clean Air Council was
formed  after the  disclosure  of research  conducted  by a leading  educational
institution:  that the quality of air in many automobile air conditioners may be
poor due to contamination  with fungi and spores which are unhealthy,  and which
can trigger allergic reactions.

     The first  indication  that this problem exists is an odor  detectable when
the AC  unit  or the air  circulation  system  is  activated.  It is  important,
however,  to note that the bacteria might be present without and before the odor
is  detected.  This  condition  is caused by buildup of mold and bacteria in the
evaporator.  The  infecting of the AC Unit causes  allergic  reactions and other
symptoms  by  breathing  in the waste  products  of these  unwanted  and growing
microbes.

     Overall,  the applications for the Company's products are limitless,  since
the cost to implement  any of AIC's  products is small  compared to the benefits
that typically accrue to the user.

                                       7
<PAGE>

Product Assembly and Start up Cost

     The Company currently maintains a warehouse facility in Dallas Texas having
approximately  10,000 square feet. In this facility the Series S-12 and S-14 are
currently being assembled at an average rate of 100 units per month.  This space
is adequate for  increased  production  of these units to 800 to 1,000 units per
month.  The  anticipated  unit volume of the Series 999, the automobile unit and
Series 950, the Medicare unit during fiscal 1999 has caused management to select
out-sourcing of these units for production.

     The Company is currently  seeking to finalize an agreement  with Sure Micro
(SM), a Dallas Texas based  manufacturing  facility  that would  assemble  these
products.  SM is both  an ISO  9000  and ISO  9001  designated  facility  having
approximately  55,000 square feet of space for its sub assembly work.  Under the
proposed agreement SM would assembly,  warehouse and ship the ITC Series 999 and
Series 950 units.  Management  feels using SM would  greatly  reduce its initial
startup production cost and the resulting  operating cost while providing strong
controls on product quality and inventories. The Company plans to shift assembly
of its other units to SM during fiscal 1999.

     The  Company  will incur  design  start up cost  during  fiscal 1999 on its
Series 999, Series 950 and redesign of Series S-14. These products cases will in
ABA plastic requiring  injection molding.  The engineering and mold tooling cost
for these  products  should be in the range of $  400,000  for the  Series  999,
$500,000  for the  Series  950  and  $500,000  for the  Series  S-14.  Once  the
engineering  and mold tooling has been completed the Company plans to out-source
the actual injection  molding required for these units.  Management is currently
in  contract  process  with  International  Purity  Corporation  (IP)  to do its
injection molding in their 110,000 square foot facility in Saginaw Texas. IP has
a staff of 70 full time employees and does injection  molding and assembly for a
large number of water purification products.

     The Company's  management feels that the out-sourcing  indicated above will
reduce  the  start  up  production  cost by  eliminating  the  necessity  for an
additional  large  facility  for  production  and  warehousing,  the  hiring and
training of a large  employee  base and the related  insurance and payroll cost.
This will  also  reduce  the start up time  required  to begin  production  thus
allowing the Company to have available products for sale to meet the anticipated
volume requirements.

Competitive Conditions.

     Trion,  Inc., a publicly traded company in the air purification  operations
consist of two principal  segments:  engineered  products and consumer products.
The engineered products group designs,  manufactures and sells commercial indoor
air quality and dust collection equipment and accounted for 70% of the company's
total sales in 1997. The consumer  products  manufactures and markets  appliance
air  cleaners,  including  both table top and free  standing  console units Ceco
Environmental  manufactures  and sells industrial air filters and filter fabric,
as well as supplies  air quality  improvement  systems.  Environmental  Elements
designs  equipment  and  supplies  systems  and  services  to the air  pollution
industry  and  designs  large scale  systems to control  gaseous  emissions.  In
addition  Environmental  Elements designs  electrostatic  precipitators,  fabric
filters and scrubbing  systems.  Honeywell/Enviracaire  has both  commerical and
consumer divisions with primary sales being from the consumer division.

     Competition  in the  commerical  market  is  very  specialized  with no one
company  offering  a  complete  line  of air  filtration  equipment  but  rather
specialized in very destinct  markets.  In most major areas in the US there will
also be various small commerical air filtration suppliers but not with a product
line  competitive  with AIC's  commerical  units.  In the  consumer  market many
suppliers and  manufacturers  have a varity of air  filtration  products.  AIC's
entrance  into the  consumer  market will be thru its  Medicare  code and charge
which  will have no  competition  for some  period of time.  The  private  label
licensing  of this  product  to  network  marketing  organizations  will also be
outside of direct  competition with the many retail products  current  available
with  none of  these  products  offering  the  technological  inovations  of AIC
consumer products line. Many of the AIC products will be protected by patents or
trademarks.

                                       8
<PAGE>

Number of Persons Employed

As of August 1, 1998 ITC and its subsidaries had 27 full-time employees

The Company's fiscal year runs June 1 to May 31 of each year.


Item 2.  Description of Properties
- ----------------------------------

     The Company  consolidated  executive operations to 15400 Knoll Trail, Suite
106, Dallas,  Texas and a warehouse  facility  located at , Dallas Texas.  These
facilities  having a total of  approximately  13,000 and a total rental cost for
fiscal 1998 of $64,000.  It is anticipated  that  additional  facilities will be
required during fiscal 1999 due to the expansion of the Company's business.


Item 3.  Legal Proceedings
- --------------------------

     The  Company is in  litigation  with LLB Realty,  L.L.C.  which has filed a
claim alleging  claims under an office lease  agreement in Superior Court of New
Jersey,  Mercer County.  The Company has asseted  claims against L.L.B.  Realty,
L.L.C. for failure to perform under the conditions of the agreement.  Settlement
negotiations have been ongoing and the Company expects this matter to be settled
in a manner not  unfavorable  to the  Company.  (See notes to audited  financial
statements).

     The Company is not a party to any other legal proceedings except for claims
and lawsuits arising in the normal course of business.


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

     NONE

                                     PART II


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

a. Market Information

     Interactive  Technologies,  Inc.  common shares were traded on the National
Association  of  Securities   Dealers   Automated   Quotation  Systems  (NASDAQ)
SmallCapMarket  under the symbol "ITNL" until October 23, 1997. Following a rule
change by NASDAQ for qualifying for a  SmallCapMarket  listing it was determined
that the Company was no longer  eligible for a listing.  Since  October 23, 1997
the  Company's  shares have been traded in the  "over-the-counter"  or "Bulletin
Board" market. High and low quotes for the quarters of fiscal year 1997 and 1998
were:

                                                  High               Low
Fiscal Year 1998

Bulletin Board
                       4th  Quarter                 5/8             $0.23
                       3rd  Quarter               $0.49               1/4
SmallCaps              2nd  Quarter               1 1/16              1/4
                       1st  Quarter               1 5/16              3/4

Fiscal Year 1997
                       4th Quarter                1 15/16             3/8
                       3rd Quarter                1  1/2            1 1/8
                       2nd Quarter                4                 1 1/4
                       1st  Quarter               5  1/4            4 1/4

                                       9
<PAGE>

b.  Holders

     As of August 1, 1998,  there were  approximately  1194 record holder of the
Company's Common Stcok.

c.  Dividends

     The Series "A" Preferred  Stock does not bear a prefrencial  dividend.  The
Series "M" Preferred  Stock has a preferred  dividend right that are tied to the
income from the Medicare Series 950 unit. (See Series "M" for details.)


Item 6   Management's Discussion and Analysis
- ---------------------------------------------

Results of Operations

     ITC's consolidated operations for the fiscal year ended May 31, 1998, based
on  pro  forma  information  in  Note  1 to the  audited  financial  statements,
consisted  of  primarily  of  revenues  from  AIC  and  its  subsidiaries.   Net
consolidated  revenues for this period were  $1,125,444.  ITC has  developed and
operates  a  computer  system and  communications  system to support  its Rebate
TV(TM) program on a national basis and during this period  produced no revenues.
ITC suspended  operations of its Rebate TV (TM) program during this fiscal year.
The  consolidated  General and  Administrative  Expenses of  $2,773,522 of which
$1,345,166 was attributable to ITC and $1,428,356 to AIC. This resulted in a net
loss from  operations of  $2,227,870.  During this period ITC realized a gain of
$113,333 from the sale of shares of AIC acquired and sold.  ITC's majority owned
subsidiary AIC completed the  development of its air  purification  product line
and started manufacturing of several of the models.

     Development  of AIC's basic line of products being  substantially  complete
has begun marketing its products directly and through its new franchise program.
During  this  period  10  franchises  were  sold  and  4  international  license
agreements  were entered into. In August of 1998 AIC entered into contracts with
the State of Georgia and the  Georgia  Dome to supply air  filtration  equipment
totaling  approximately $1.5 million with delivery scheduled before December 31,
1998.

     Production of the AIC Series 999  automobile  unit is scheduled to begin in
the fall of 1998 with projected sales during fiscal 1999 of  approximately  $5.1
million.

     The AIC Series 950 Medicare  units is scheduled  for testing in the fall of
1998 with the  designation  as a Class II  Medical  Device  and the  filing  for
approval under Medicare Part B with related  charges.  AIC anticipates  Medicare
approval of its Series 950 before the end of 1998 with  production  beginning in
the first quarter of 1999.

     AIC has  installed  its Series S-12,  S-14 and S-16 in several  hotels on a
test basis. As a result of the current  testing  program AIC anticipates  orders
for these units of approximately $2.5 million during fiscal 1999.

     The result of these various programs should increase  consolidated revenues
by  approximately  $11 million during fiscal 1999 making the Company  profitable
during  this  period.  ITC will  pursue the sale of its Rebate TV product  lines
during fiscal 1999 valued in a current appraisal at $4 million.

Material Changes in Operations and Financial Condition

     Having  completed the acquisition of AIC, the Company will focus operations
on the air  filtration  product  lines by developing  marketing  and  production
programs.  ITC is confident that with the market and products  available for the
AIC air filtration  products that gross revenues will increase to a range of $20
million  during fiscal 1999 and $40 million  during fiscal 2000. The approval of
the Series 950 by Medicare will provide  approximately  $31 million during these
fiscal periods.

                                       10
<PAGE>

     By  the  Company   out-sourcing  its  production  and  assembly  processes,
management  feels that these projected  revenues can be accomplished  without an
appreciable increase in general and administrative  expenses.  The consolidation
of the  Company's  offices  with  completion  of the sale of the  Rebate  TV and
Licenses  will reduce the  operating  loss by  approximately  $1.4 million while
providing income from these sales.

Liquidity and Capital Resources

     During  the  fiscal  ended  May 31,  1998,  ITC and AIC  continued  to fund
operations and expansion through revenues and private sales of equity securities
and debt. In fiscal year 1998,ITC received net cash from financing activities in
the amount of $839,366 with AIC receiving  $125,031 during that period.  For the
fiscal period referenced above, the combined companies received $964,397 in cash
from financing  activities.  Although ITC has no commitments  for future funding
other than sales of its Series M Preferred  Stock,  management  believes that it
can continue to raise  additional  capital for  expansion of its markets  though
revenue, debt financing and private sources.

     ITC is continuing  the sale of its  $5,000,000 in Series M Preferred  Stock
(the Series M Stock) on a private basis to  accredited  investors in the form of
200 units consisting of 25,000 shares of convertible preferred stock convertible
into  common  at the rate of one share for one  share of  preferred  and  25,000
warrants  convertible  into  common  stock at a price of $2.00  per  share.  The
preference  for this series is to a pro rata portion of 20% of the Gross Profits
from the sales of the AIRTECH Model 950 Air Purification  and Filtration  System
being  developed  as a Class II Medical  Device  for  Medicare  Recipients  with
Respiratory Conditions.  This preference is for a period of three years from the
date  production  begins.  AIRTECH  has agreed to assign a 25%  interest in this
revenue  stream  to ITC out of  which  this  20%  will  be set  aside  for  this
preference.  The  Series  M  Stock  will be  offered  pursuant  to  Rule  506 of
Regulation D of the Securities Act of 1933. Twenty-five percent (25%) of the net
proceeds of the sale of the Series M Stock will be used for market expansion and
distribution of the Rebate TV(TM) programming, and seventy-five percent (75%) of
such net proceeds will be allocated for the development and  distribution of the
AIRTECH Model 950. ITC does not have an underwriter for this placement.

     On July  31,  1998 the  Board  of  Directors  ended  the  sale of  Series M
Preferred  Stock  electing  to  withdraw  the  offering  for  additional  sales.
Following  the fiscal  year end May 31, 1998 no  additionals  shares of Series M
Preferred Stock were sold by the Company.

     On July 31, 1998 the Board of Directors  of ITC  exercised  its  conversion
right  with  respect  to the  Series  A  convertible  preferred  stock  and  the
convertible debentures.  As of July 31, 1998 ITC had issued 10,982,730 shares of
its  Series  A  convertible   preferred  stock  and  $8,595,180  in  convertible
debentures  for the  purchase  of  16,010,335  shares of  Airtech  common  stock
representing 95.502% of the total common stock outstanding of Airtech.  Pursuant
to this  conversion  ITC  will  issue  approximately  10,982,730  shares  of its
unissued common stock for the Series A preferred stock, 12,227,883 shares of its
unissued  common stock to retire the  convertible  debentures  and an additional
204,467  shares of its unissued  common stock for the payment of interest due on
the debentures as of July 31, 1998.

     The completion of this  conversion  will increase  common shares issued and
outstanding by 23,415,080.  On August 28, 1998 Mr. Perry Douglas West former CEO
and Chairman of the Board returned to ITC for  cancellation  3,400,000 shares of
common  stock held by him as  required  by the stock  purchase  agreement  dated
August 1, 1997 with Airtech.  Following the conversion of the Series A preferred
stock and the  debentures  and the  cancellation  of Mr. West  common  stock the
Company  will have  approximately  45,436,376  shares of common stock issued and
outstanding.

                                       11
<PAGE>

     On July 31, 1998, the Board of Directors  authorized a five for one reverse
stock split of the Company's common stock.  This matter will be submitted to the
stockholders of the Company for approval. On September 4, 1998 the Company filed
Schedule 14A Information  with the SEC setting a special  stockholders'  meeting
for October 5, 1998 to vote on this matter for common  stockholders of record as
of August 24, 1998.  If the five for one reverse  stock split is approved by the
stockholders  at  this  special   stockholders  meeting  the  number  of  shares
outstanding  would be decreased from the 45,436,376  shares after the conversion
above to 9,087,275  shares of common stock  outstanding.  The Board of Directors
also  authorized the increase in the par value of the common stock from $0.01 to
$0.05  as a  result  of the  five  for one  reverse  split  if  approved  by the
stockholders of the Company.

     This action was taken because the Board of Directors is of the opinion that
the Reverse Stock Split is advisable in the best interest of the Company and its
shareholders. The Board of Directors of the Company believes that the relatively
low market price of the common stock may impair the  acceptability of the common
stock to  members  of the  investing  public.  Although  the  number  of  shares
outstanding  should not affect either the marketability of the common stock, the
type of investor  who acquires it, or a Company's  reputation  in the  financial
community, certain brokerage firms, as a matter of policy will not extend margin
credit on stocks  trading  at low  prices.  Further,  many  brokerage  firms are
reluctant to recommend  lower-priced  stocks to their clients or to hold them in
their own  portfolios,  and a variety of brokerage  firms policies and practices
discourage  individual  brokers  within those firms from  dealing in  low-priced
stock  because  of the  time-consuming  procedures  that  make the  handling  of
low-priced stock economically unattractive.

     In  addition,  the Board of  directors  believes  that the  decrease in the
number of shares of common stock  outstanding  as a consequence  of the proposed
Reverse Stock Split and the  resulting  anticipated  increased  price level will
encourage  greater  interest in the common stock by the financial  community and
the investing public.

     There can be no assurance,  however,  that the foregoing  hoped-for effects
will occur  following the Reverse Stock Split,  that the market price of the new
common stock  immediately  after  implementation  of this proposed Reverse Stock
Split will be  maintained  for any period of time,  that such market  price will
approximate five times the market price before the proposed Reverse Stock Split,
or that such market price will exceed or remain in excess of the current  market
price.

     The  expansion of revenues of the Company  during  fiscal 1999 herein above
will require additional working capital.  If the proposed Reverse Stock Split is
approved  the book value  would  increase  from  approximately  $0.59  after the
conversion of the Series A preferred and debentures to approximately  $2.95. The
Board of Directors  is of the opinion  that this  increase in the per share book
value of the stock  will have a  positive  effect on the  Company's  ability  to
obtain the required additional working capital either from borrowing or from the
equity capital markets.  Following  approval of the proposed Reverse Stock Split
the  Company   anticipates  a  private   placement  of  common  stock  to  raise
approximately  $5 million in working capital that is necessary for the growth in
revenues during fiscal 1999.

     There can be no assurance  that this proposed  private  placement of common
stock will be  completed  or that the funds will  otherwise be available to fund
the operations and growth of the Company.


                                       12
<PAGE>

Item 7.  Financial Statement.
- -----------------------------

                             TURNER, STONE & COMPANY
                          Certified Public Accountants
                      12700 Park Central Drive, Suite 1610
                                Dallas, TX 75251
                                 (972) 239-1660

                          Independent Auditor's Report



Board of Directors
Interactive Technologies Corporation, Inc.
Melbourne, Florida


We have audited the  accompanying  consolidated  balance  sheets of  Interactive
Technologies Corporation,  Inc. and subsidiaries as of May 31, 1998 and 1997 and
the related  consolidated  statements of operations,  stockholders'  equity, and
cash  flows  for the  years  then  ended.  These  financial  statements  are the
responsibility of the company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in  all  material  respects,  the  financial  position  of  Interactive
Technologies Corporation,  Inc. and subsidiary at May 31, 1998 and 1997, and the
results  of their  operations  and their  cash flows for the years then ended in
conformity with generally accepted accounting principles.



/s/ TURNER, STONE & COMPANY
- ---------------------------
Certified Public Accountants
September 9, 1998


                                       13
<PAGE>


                   INTERACTIVE TECHNOLOGIES CORPORATION, INC.
                                AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                              MAY 31, 1998 AND 1997

                                     Assets

                                                         1998           1997
Current assets:

    Cash                                              $ 145,844      $   13,605
    Accounts and note receivable, trade,
      net of $0 and $25,000, respectively
      of allowance for uncollectible amounts            172,137         150,656
    Inventories                                         284,332               -
    Prepaid expenses and other assets                   133,881          14,790
                                                     ----------     ------------

           Total current assets                         736,194         179,051
                                                     ----------     ------------

Property and equipment, at cost, net of
  $217,733 and $28,855, respectively of
  accumulated depreciation                              205,874          86,285
                                                     ----------     ------------

Other assets:

    Organizational costs, net of $3,134
      and $2,334, respectively of
      accumulated amortization                              866           1,666
    License rights, net of $438,750 and
      $303,750, respectively of
      accumulated amortization                          236,250         371,250
    Proprietary software and trademark,
      net of $1,643,531 and $870,525,
      respectively of accumulated amortization        3,767,512       4,540,518
    Intellectual properties, net of $0 of
      accumulated amortization                       22,297,684               -
    Notes receivable, net of $0 of allowance
      for uncollectible amounts                         899,833               -
    Other                                               534,234               -
                                                     ----------      -----------

                                                     27,736,379       4,913,434
                                                     ----------      -----------
                                                    $28,678,447      $5,178,770
                                                     ==========      ===========






    The accompanying notes are an integral part of the financial statements.

                                       14
<PAGE>


                   INTERACTIVE TECHNOLOGIES CORPORATION, INC.
                                AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                              MAY 31, 1998 AND 1997

                      Liabilities and Stockholders' Equity

                                                       1998             1997
Current liabilities:
    Accounts payable, trade                        $  322,955      $   172,656
    Accrued expenses                                  246,694           68,678
    Notes payable                                     340,540          224,685
    Current portion of license rights
      payable                                         210,077          210,077
                                                   ----------      -------------

      Total current liabilities                     1,120,266          676,096
                                                   ----------      -------------

Long-term liabilities:
    License rights payable                            329,923          329,923
    Capital lease obligation                                -          218,750
    Convertible debentures payable                  9,000,000                -
    Deferred revenue                                  400,000                -
                                                   ----------      -------------

                                                    9,729,923          548,673
                                                   ----------      -------------

Commitments and contingencies:                              -                -

Stockholders' equity:
    Preferred stock Series M, $.001
      par value, 5,000,000 shares
      authorized, 1,029,500 and
      0, respectively, shares
      issued and outstanding                            1,030                -
    Preferred stock Series A, $1.00
      par value, 15,000,000 shares
      authorized, 11,868,016
      and 0, respectively, shares
      issued and outstanding                       11,858,016                -
    Common stock, $.01 par value
      50,000,000 shares authorized,
      25,370,171 and 13,479,613,
      respectively, shares issued
      and outstanding                                 253,701          134,796
    Paid in capital in excess of par               14,271,935       10,836,034
    Accumulated deficit                           ( 8,556,424)     ( 7,016,829)
                                                  ------------    --------------

                                                   17,828,258        3,954,001
                                                  ------------    --------------
                                                  $28,678,447      $ 5,178,770
                                                  ============    ==============



    The accompanying notes are an integral part of the financial statements.


                                       15
<PAGE>
                                                            


                   INTERACTIVE TECHNOLOGIES CORPORATION, INC.
                                AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF OPERATIONS
                        YEARS ENDED MAY 31, 1998 AND 1997



                                                       1998            1997
                                                       


Revenue                                            $       -       $    197,781
                                                   -----------    --------------

Operating expenses:

   Depreciation                                         19,835           49,669
   Amortization                                        908,806          932,973
   Production costs                                    241,280          286,646
   General and administrative                          261,491        1,652,853
   Interest expense                                     73,435          177,213
                                                   -----------    --------------

                                                     1,504,847        3,099,354
                                                   -----------    --------------
Loss from operations                               ( 1,504,847)   (   2,901,573)

Gain from sale of license rights                             -          543,501

Loss from sale of equipment                        (    34,748)   (     297,095)
                                                   ------------   --------------

Loss before income taxes                           ( 1,539,595)   (   2,655,167)

Provision for income taxes                                   -                -
                                                   ------------   --------------

Net loss                                          $( 1,539,595)  $(   2,655,167)
                                                  =============  ===============



Net loss per share:

   Basic                                          $(      .11)   $(      .22)
   Diluted                                        $(      .11)   $(      .22)









    The accompanying notes are an integral part of the financial statements.

                                                             

                                       16
<PAGE>

<TABLE>


                   INTERACTIVE TECHNOLOGIES CORPORATION, INC.

                                AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                        YEARS ENDED MAY 31, 1998 AND 1997
<CAPTION>

<S>                       <C>         <C>        <C>       <C>       <C>         <C>       <C>           <C>            <C>  
                                                     Preferred Stock     Preferred Stock
                                 Common Stock           (Series M)         (Series A)         Add'l Paid   Accumulated             
                             Shares      Amount   Shares      Amount  Shares       Amount     In Capital     Deficit       Total
                           ---------------------  ------------------  ---------------------  -----------  -----------   -----------
Balance at May 31, 1996    11,742,044  $ 117,420        -   $     -          -    $      -  $ 8,392,240   $(4,361,662)   $ 4,147,998

Issuance of common stock
  for cash                    289,549      2,895        -         -          -           -      749,978            -         752,873

Issuance of common stock
 in exchange for services     248,021      2,481        -         -          -           -      543,039            -         545,520

Issuance of common stock
 upon conversion of debt    1,199,999     12,000        -         -          -           -    1,150,777            -       1,162,777

Net loss                            -          -        -         -          -           -            -   ( 2,655,167)   (2,655,167)
                           ----------   --------  -------- --------   --------- -----------  ----------   ------------   ----------

Balance at May 31, 1997    13,479,613    134,796         -        -          -           -   10,836,034   ( 7,016,829)     3,954,001

Issuance of common stock
 for cash                     421,000      4,210         -        -          -           -      206,290             -        210,500

Issuance of common stock in
    exchange for services     294,558      2,945         -        -          -           -      166,530             -        169,475

Issuance of common stock in
    settlement of capital 
    lease                     675,000      6,750         -        -          -           -      212,000             -        218,750

Issuance of preferred stock
    for cash                        -          - 1,029,750    1,030          -           -      840,337             -        841,367

Issuance of common and 
    preferred stock in
    acquisition of AIC     10,500,000    105,000         -        - 11,856,016  11,858,016    2,010,744             -     13,973,760

Net loss                            -          -         -        -          -                        -  (  1,539,595)   (1,539,595)
                           ----------   -------- --------- -------- ----------  ----------   ----------- -------------- -----------

                           25,370,171  $ 253,701 1,029,750 $  1,030 11,858,016  $11,858,016  $14,271,935 $(  8,556,424)  $17,828,258
                           ==========  ========= ========= ======== ==========  ===========  =========== =============== ===========

</TABLE>
    The accompanying notes are an integral part of the financial statements.

                                                                               

                                       17
<PAGE>


                   INTERACTIVE TECHNOLOGIES CORPORATION, INC.
                                AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                        YEARS ENDED MAY 31, 1998 AND 1997


                                                     1998             1997
                                                     ----             ----
Cash flows from operating activities:

    Cash received from customers                  $  136,006      $   53,917
    Cash paid to employees                       (    99,676)    (   363,452)
    Cash paid to suppliers                       (   536,918)    ( 1,173,869)
    Interest paid                                          -     (    52,869)
    Taxes paid                                             -               -
                                                 ------------    ------------

    Net cash used in operating activities        (   500,588)    ( 1,536,273)
                                                 ------------    ------------

Cash flows from investing activities:

    Advances to AIC prior to acquisition         (   493,000)              -
    Cash purchased with AIC acquisition               24,294               -
    Purchase of property and equipment           (     4,834)    (       976)
    Proceeds from sale of assets                       2,000               -
                                                 ------------    ------------

    Net cash used in investing activities        (   471,540)    (       976)
                                                 ------------    ------------

Cash flows from financing activities:

    Issuance of convertible debentures                     -         419,200
    Proceeds from issuance of preferred
      stock, net of offering costs                   841,367               -
    Proceeds from notes payable                       52,500         452,947
    Repayments of notes payable                            -     (   228,262)
    Contract of sale deposits received                     -          98,099
    Repayment of capital lease obligation                  -     (     7,117)
    Proceeds from issuance of common stock           210,500         752,873
                                                 ------------    ------------

    Net cash provided by financing activities      1,104,367       1,487,740
                                                 ------------    ------------

Net increase (decrease) in cash                      132,239     (    49,509)

Cash at beginning of period                           13,605          63,114
                                                 ------------    ------------

Cash at end of period                           $    145,844     $    13,605
                                                ============     ============



    The accompanying notes are an integral part of the financial statements.

                                                                         

                                       18
<PAGE>




                   INTERACTIVE TECHNOLOGIES CORPORATION, INC.
                                AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                        YEARS ENDED MAY 31, 1998 AND 1997




                    Reconciliation of Net Income to Net Cash
                          Used in Operating Activities

                                                        1998            1997
                                                        ----            ----


Net loss                                           $( 1,539,595)   $( 2,655,167)
                                                   -------------   -------------

Adjustments to reconcile 
    net loss to net cash
    used in operating activities:

    Amortization                                        908,806         932,973
    Depreciation                                         19,835          49,669
    Provision for uncollectible accounts                      -          25,000
    Common stock issued for services                    169,475         545,520
    Loss on disposition of assets                        34,748               -
    Gain on sale of license rights                            -      (  543,501)
    Loss on abandonment of capital lease
      equipment                                               -         297,095
    (Increase) decrease in accounts receivable          136,006      (  143,864)
    (Increase) decrease in prepaid expenses          (    5,240)         34,363
    Increase (decrease) accounts payable             (  160,074)     (  140,146)
    Increase (decrease) in accrued expenses          (   64,551)         61,785
                                                   -------------    ------------

    Total adjustments                                 1,039,007       1,118,894
                                                   -------------    ------------

    Net cash used in operating activities          $ (  500,588)    $(1,536,273)
                                                   =============    ============







    The accompanying notes are an integral part of the financial statements.


                                       19
<PAGE>
                                                                       

                   INTERACTIVE TECHNOLOGIES CORPORATION, INC.
                                AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                        YEARS ENDED MAY 31, 1998 AND 1997




                   Supplemental Schedule of Non-Cash Investing
                            and Financing Activities


Issuance of common stock, preferred
    stock and debentures for assets,
    net of various liabilities in purchase
    acquisition of AIC                            $  22,973,760    $          -

Common stock issued in settlement of
    capital lease obligation                      $     218,750    $          -

Reduction of proprietory software costs
    in exchange for accounts payable
    reduction                                     $           -    $      50,000

Common stock issued in exchange for
    services                                      $      169,475   $     545,520

Abandonment of equipment, net of
    accumulated depreciation and
    related capital lease obligation              $           -    $     297,095

Sale of license rights, net of accumulated
    amortization and related license rights
    obligation                                    $           -    $     543,501














    The accompanying notes are an integral part of the financial statements.

                                                                        


                                       20
<PAGE>

                   INTERACTIVE TECHNOLOGIES CORPORATION, INC.
                                AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Interactive Technologies Corporation, Inc. (the Company) was incorporated in the
state of Wyoming on August 8, 1991. The Company owns proprietary  software and a
trademark  known as Rebate TV, which is a marketing  and sales medium for a wide
variety  of  products  and  services.   Advertisers  on  Rebate  TV  will  offer
substantial  rebates  to the  network's  viewers  through  a unique  interactive
program. Touch-tone phones will initially interact the network to secured earned
rebates,   and  later  the  network  will  be  accessed  via  wireless   digital
communications  networks currently under  development.  The Rebate TV operations
commenced in April 1996 serving  customers in the eastern  United States but was
temporarily  discontinued  subject to the sale of the show to a  national  media
market buyer.

The Company also owns license  rights  obtained from the Federal  Communications
Commission to operate an interactive and data service system in the Charleston -
North Charleston,  South Carolina. Another system in the Melbourne - Titusville,
Florida  metropolitan  area was sold during the year ended May 31, 1997(Note 3).
Management expects exploitation of these license rights to commence in 1999.

Acquisition of Airtech International Corporation (AIC)

On May 31, 1998, the Company acquired all of the outstanding common stock shares
of AIC,  which  through  its  subsidiaries  manufacture  and  sell  various  air
filtration and  purification  products.  The total purchase price of $22,937,760
was funded  through the issuance of 10,500,000 of its common stock shares valued
at $.625 per share,  the  issuance  of  11,858,016  of its Series A  convertible
preferred  stock  shares  valued at $.625 per share (Note 7) and the issuance of
$9,000,000 of convertible debentures (Note 5).

The  transaction  was  accounted  for using the purchase  method of  accounting.
Accordingly,  the purchase  price of the net assets  acquired has been allocated
among the net assets based on their relative fair values with $22,297,684 of the
purchase  price  allocated to  intellectual  properties  based on an independent
asset appraisal.

The following pro forma information  presents a summary of consolidated  results
of  operations  and  earnings  per  share  of  the  Company  and  AIC  as if the
acquisition  had occurred  June 1, 1996,  the  beginning of the earliest  period
presented in the accompanying consolidated financial statements.

                                                      1998              1997
                                                      ----              ----

         Revenues                             $    1,126,499      $   2,073,045
         Net loss                             $(   2,410,266)     $(  2,814,433)
         Net loss per common share            $(         .10)     $(        .12)

         Shares used in computation               24,693,154         22,562,320

These pro forma results have been presented for comparative purposes and include
certain adjustments,  such as additional  amortization and depreciation expense.
They are not  indicative of the actual  results that would have occurred had the
acquisition been consummated on June 1, 1996 or of the future  operations of the
consolidated companies under the management of the Company.

                                                      



                                       21
<PAGE>



                   INTERACTIVE TECHNOLOGIES CORPORATION, INC.
                                AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


Consolidated principles

On April 9,  1996,  the  Company  formed a wholly  owned  subsidiary,  Satellite
Network  Television  (SNT),  by issuing  1,000,000  common  stock shares to ITC.
Through  October 1996,  when the Company and SNT  encountered  problems with its
leased  equipment  and New Jersey  facilities  (Notes 3 and 4),  SNT  operated a
television  studio,  a post  production  facility and satellite  link  producing
commercials,  infomericals,  business videos, commercial programming, and remote
broadcasts  for  both  the  Company's  Rebate  TV  operations  and  for  outside
customers.  These operations have ceased and management does not anticipate them
to resume.

The accompanying  consolidated financial statements include the general accounts
of the Company,  SNT and AIC and its subsidiaries each of which have fiscal year
ends of May 31.  All  material  intercompany  accounts  and  balances  have been
eliminated in the consolidation.


Impairment of long-lived assets

Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121,  "Accounting for the Impairment of Long-Lived Assets
and for  Long-Lived  Assets  to Be  Disposed  Of."  This  Statement  establishes
accounting   standards  for  the  impairment  of  long-lived   assets,   certain
identifiable  intangibles  and  goodwill  related to those assets to be held and
used, and long-lived assets and certain identifiable  intangibles to be disposed
of.  The  Company  periodically  evaluates,  using  independent  appraisals  and
projected  undiscounted  cash flows, the carrying value of its long-lived assets
and certain  identifiable  intangibles  to be held and used  whenever  events or
changes in  circumstances  indicate that the carrying amount of an asset may not
be recoverable.  In addition,  long-lived assets and identifiable intangibles to
be  disposed of are  reported at the lower of carrying  value or fair value less
cost to sell.

Amortization

Organizational  costs are being  amortized  using the straight  line method over
five  years.  For the years ended May 31,  1998 and 1997,  amortization  expense
totaled $800 and $800, respectively.

License  rights  are  being  amortized  over the  initial  five year term of the
licenses.  Although they are renewable at no additional consideration,  there is
no guarantee the Company will renew these licenses.  For the years ended May 31,
1998 and 1997, amortization expense totaled $135,000 and $159,167, respectively.

Inventories

Inventories  are carried at the lower of cost or net  realizable  value (market)
and include  component  parts used in the assembly of the Company's  line of air
purification  units and  filters  and  finished  goods  comprised  of  completed
products.  The costs of inventories  are based upon specific  identification  of
direct costs and allocable  costs of direct labor,  packaging and other indirect
costs.





                                                     




                                       22
<PAGE>


                   INTERACTIVE TECHNOLOGIES CORPORATION, INC.
                                AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


At May 31, 1998, inventories consisted of the following:

         Component parts                             $    262,230
         Finished goods                                    22,102
                                                       ----------

                                                     $    284,332

Property and equipment

Property  and  equipment  are  stated  at cost  less  accumulated  depreciation.
Depreciation  of property and equipment is currently  being provided by straight
line  and  accelerated   methods  for  financial  and  tax  reporting  purposes,
respectively, over estimated useful lives of five years.

Capitalized software expenditures

Software and trademark  costs are amortized,  pursuant to Statement of Financial
Accounting  Standards  No. 86, at an annual  amount  equal to the greater of the
amount  computed  using (a) the ratio that current  gross  revenues  bear to the
total of current and anticipated  future gross revenues or (b) the straight-line
method over a seven year estimated  economic life beginning  April 18, 1996. For
each of the years  ended May 31,  1998 and 1997,  amortization  expense  totaled
$773,006.

Intellectual properties

In its acquisition of AIC the Company purchased certain intellectual properties.
Costs incurred by the Company in developing its products consisting primarily of
design,  testing and  completion  of working  prototypes,  which are  considered
patentable, are capitalized and will be amortized over the estimated useful life
of the related patents once a unit has been placed in production.

Revenue recognition

Revenues  from the  Company's  RebateTV  operations  are  recognized at the time
production and related services are provided.

Advertising

The Company's  advertising  costs, which consist of radio airtime for the Rebate
TV operations, are charged to expense when incurred. For the years ended May 31,
1998 and 1997, advertising costs totaled $0 and $33,146, respectively.

Management estimates

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


                                                    



                                       23
<PAGE>



                   INTERACTIVE TECHNOLOGIES CORPORATION, INC.
                                AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


Cash flow

For purposes of the statement of cash flows,  cash includes  demand deposits and
time deposits with  maturities of less than three months.  None of the Company's
cash is restricted.

Earnings per share

Basic and  diluted  earnings  per share  amounts are based upon  14,193,154  and
12,062,320,  respectively,  weighted  average  shares of common stock and common
stock  equivalents  outstanding.  No  effect  has  been  given  to  the  assumed
conversion of convertible  preferred  stock and  convertible  debentures and the
assumed  exercise  of  stock  options  and  warrants  as  the  effect  would  be
antidilutive.

2.        PREFERRED STOCK

Convertible preferred stock - Series A

In  connection  with the  Company's  acquisition  of AIC (Note 1),  the  Company
established this equity class and authorized  15,000,000 shares. The shares have
a par value of $1.00,  do not pay dividends and are convertible at the Company's
option  at any  time  within  24  months  after  issuance  for one  share of the
Company's common stock.

Convertible preferred stock - Series M

During the year ended May 31, 1998,  the Company  established  this equity class
and  authorized  5,000,000  shares.  During the same period,  1,029,750 of these
shares were issued for $1.00 cash, net of $188,383 of offering costs. The shares
have a par value of  $.001,  do not pay  dividends  and are  convertible  at the
Company's  option at any time within 36 months  after  issuance for one share of
the Company's  common stock. In addition,  attached to each share is one warrant
to purchase one share of common stock at a price of $2.00 per share  exercisable
within two years after issuance.

3.        NOTES RECEIVABLE

Notes receivable  relate to AIC sales of area franchises (Note 1), bear interest
at 6% to 8%, are  payable in terms  ranging  from 12 to 36 months and secured by
the area franchises.  Credit is extended on evaluation of the payee's  financial
condition and general credit information.

At May 31, 1998, notes receivable are comprised of the following:

         Domestic notes receivable                  $    300,000
         Foreign notes receivable                        666,500
                                                      ----------
                                                         966,500
         Less:  Current maturities                   (    66,667)
                                                      ----------

                                                    $    899,833
                                                    ============



                                       24
<PAGE>



                   INTERACTIVE TECHNOLOGIES CORPORATION, INC.
                                AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


4.       NOTES PAYABLE

The  Company's  notes  payable  consist of loans from various  corporations  and
individuals  provided for working capital purposes.  The notes, which contain no
significant  restrictions,  bear  interest  at rates of 10.0% to 18.0%,  are due
through May 1999 and are  unsecured.  At May 31,  1998,  $277,183 of these notes
payable were in default.

5.       CONVERTIBLE DEBENTURES

During the years ended May 31, 1997 and 1996,  the Company  issued  $419,200 and
$630,800,  respectively,  of 8% convertible  debentures  maturing  through April
2001.  The bonds are  convertible  into shares of the Company's  common stock at
conversion  prices of $1.00 to $3.75  During  the year ended May 31,  1997,  the
entire $1,050,000 of outstanding debentures were converted into 1,199,999 common
stock  shares.  Also issued in connection  with the  conversion  were  1,199,999
warrants  entitling  the holders to purchase  one common stock share at exercise
prices of $.75 to $1.00 per share. The warrants are exerciseable any time before
May 31, 2002 (Note 11).

In  connection  with the Company's  acquisition  of AIC, the Company also issued
$9,000,000 of convertible  debentures secured by the shares of AIC acquired. The
debentures bear interest at 10% payable annually on May 31 of each year, are due
on May 31, 2000 and are  convertible at the Company's  option at any time within
the two years into shares of the Company's common stock at a conversion price of
$.70.

6.       COMMITMENTS AND CONTINGENCIES

Operating leases

The Company is currently  obligated under a  noncancellable  operating lease for
its Dallas office  facilities which expires in May 2000. The Company also leased
facilities in Florida under a  non-cancelable  operating  lease  agreement which
expired in April 1998.  From May 1996 through  August 1996,  the Company  leased
facilities in New Jersey in connection with its SNT operations  (Notes 1 and 3).
For the years  ended May 31, 1998 and 1997,  rent  expense  under  these  leases
totaled $6,776 and $62,803, respectively.

Minimum future rental  payments  required under the above  operating lease is as
follows.

                           Year Ending
                             May 31,                           Amount

                              1999                         $     47,748
                              2000                               47,748
                                                             ----------

                                                           $     95,496
                                                           ============




                                                                           

                                       25
<PAGE>



                   INTERACTIVE TECHNOLOGIES CORPORATION, INC.
                                AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


Capital lease obligations

On March 27, 1996, the Company acquired various studio equipment under a capital
lease  obligation  payable monthly  through March 2001 with imputed  interest at
11.0%,  secured by the equipment and 250,000 common stock shares of the Company.
As part of the transaction,  the stockholder of the lessor/corporation purchased
50,000  common  stock  shares of the  Company  for  $200,000  cash and  received
warrants to purchase  50,000 common stock shares at $2.00 per share.  At May 31,
1996, the cost of equipment  acquired  under this lease and related  accumulated
depreciation totaled $1,100,000 and $26,190, respectively.

During  the year  ended May 31,  1997,  the  Company  withdrew  from this  lease
obligation, resulting in a lawsuit, (Notes 1 and 7) and wrote off the $1,100,000
capitalized cost of the equipment,  $77,435 of additional related equipment, the
related accumulated  depreciation of $56,068 and all but $218,750 of the related
capital  lease  obligation.  On November 30, 1997, in settlement of the lawsuit,
the  Company  issued  675,000  shares of its  common  stock at $.32 per share in
complete satisfaction of this remaining capital lease obligation.

License fees payable

The Company has acquired licenses from the Federal Communications  Commission to
operate  interactive  video and data  service  systems in  various  metropolitan
statistical areas (Note 1). The license rights are payable interest only, at 7.7
percent for two years with  principal  and  interest  payable  monthly  over the
remaining three years of the licenses.  Interest has been accrued from the dates
the licenses were formally issued.  An extension of time until December 1998 for
making payments has been granted by the FCC.

Future  principal  payments  under the  remaining  Titusville,  FL license right
obligation are as follows:

                           Year Ending
                             May 31,                         Amount

                               1999                      $    210,077
                               2000                           183,113
                               2001                           146,810
                                                         -------------

                                                         $    540,000
                                                         ============

Contract of sale deposit

In October 1994, the Company  entered an agreement with a Nevada  corporation to
sell its Charleston,  South Carolina license rights (Note 1), net of the related
obligation  assumed,  for $500,000  cash.  The Company also  retained 10% of the
gross profits derived from the operations under the license rights.





                                                        


                                       26
<PAGE>



                   INTERACTIVE TECHNOLOGIES CORPORATION, INC.
                                AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


Through May 31, 1996, $401,901 was advanced to the Company pursuant to the terms
of this agreement and was reflected as a liability until the sale was effective,
pending approval by the FCC.

During the year ended May 31,  1997,  FCC  approval was granted and the sale was
completed.  The difference  between the $500,000  sales price,  the net carrying
value of the license rights and the remaining license rights obligation  assumed
are reflected in the accompanying consolidated financial statements as a gain.

Employment agreement

The Company is currently obligated under employment  agreements with two members
of  executive   management  for  annual   compensation   totaling  $500,000  and
discretionary  bonuses  determined  by the  Company's  board of  directors.  The
agreements expire in May 2008.

The  Company's   current   compensation   benefits  do  not  provide  any  other
post-retirement or post-employment benefits.

Year 2000 computer compliance

The Company is currently  using  computer  hardware and software  that is not in
compliance with the year 2000 dating issues.  However, new software and hardware
components  have been ordered  that will enable the Company to be in  compliance
prior to December  31,  1998.  During the year ended May 31,  1998,  the Company
incurred approximately $15,000 of costs related to this effort.  Management does
not  believe  any  additional   significant   cost  will  be  incurred  and  the
accompanying  consolidated  financial  statements do not contain any reserve for
this contingency.

7.       LITIGATION

Rental operating lease

The Company is defendant, and it has filed counter claims, in a lawsuit filed by
the lessor of office space  facilities in New Jersey (Note 6). The Company never
occupied the space due to the  lessor's  failures to finish out the space to the
Company's  specifications.  The lessor seeks to recover remaining lease payments
due under the lease of $606,913 and the Company seeks to recover damages under a
capital  lease  obligation  (Note 6) for  equipment  located  in the New  Jersey
facilities and  contractually  precluded from being removed from the facilities.
Although  the Company  anticipates  a favorable  settlement  of this lawsuit the
outcome of it is uncertain.  The accompanying  consolidated financial statements
do not contain any reserve for this contingency.









                                                        


                                       27
<PAGE>


                   INTERACTIVE TECHNOLOGIES CORPORATION, INC.
                                AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


Capital lease obligation

The Company was defendant,  and it had filed counter claims,  in a lawsuit filed
by the lessor of equipment  subject to a capital lease  obligation (Note 6). The
Company  withdrew  from the lease  because of the lessor's  inability to correct
defects  in a  major  revenue  producing  component  of the  equipment  and  the
inability to use the equipment.

The  lessor  sought to  recover  lease  payments  due  under the lease  totaling
$1,043,021  and the  Company  sought  to  recover  lost  revenues  caused by the
deficient  equipment.  On August 21,  1997,  the Company  settled  this  lawsuit
agreeing to issue  350,000  common stock shares (plus an  additional  162,500 or
325,000  shares if the Company fails to file a  Registration  Statement with the
S.E.C.  by December 1, 1997 or January 2, 1998,  respectively).  The  settlement
loss was valued at the $.625  August  21st  closing  price of the  common  stock
shares, or $218,750, and is recorded in the accompanying  consolidated financial
statements by reducing the carrying value of the capital lease obligation at May
31, 1997 to $218,750.  On November 30, 1997, in  settlement of the lawsuit,  the
Company  issued 675,000 shares of its common stock at $.32 per share in complete
satisfaction of this remaining capital lease obligation.

8.       INCOME TAXES

The  Company  used  the  accrual  method  of  accounting  for tax and  financial
reporting purposes. At May 31, 1998 and 1997, the Company had net operating loss
carryforwards  for  financial  and  tax  reporting   purposes  of  approximately
$8,500,000 and $7,000,000,  respectively. These carryforwards expire through the
year 2012, and are further  subject to the  provisions of Internal  Revenue Code
Section 382.

Pursuant to Statement of Financial Accounting Standards No. 109, the Company has
recognized a $2,909,184  deferred tax asset  attributable  to the net  operating
loss carryover, net of a $105,129 deferred tax liability related to amortization
timing differences,  in the amount of $2,804,055 which have been fully offset by
a valuation allowances in the same amount, as follows:

                                           1998                 1997
                                           ----                 ----

 Beginning balance                 $    2,267,331       $    1,469,703
 Increase during period                   536,724              797,628
                                   --------------       ---------------

 Ending balance                    $    2,804,055       $    2,267,331
                                   ==============       ===============

A reconciliation  of income tax expense at the statutory  federal rate to income
tax expense at the Company's effective tax rate for the years ended May 31, 1998
and 1997 is as follows:

                                           1998                  1997
                                           ----                  ----


  Tax benefit computed at 
     statutory federal rate        $(    523,462)        $(    902,757)
  NOL carryover                          523,462               902,757
                                   --------------        --------------

         Income tax expense        $           -         $           -
                                   ==============        ==============

                                                     

                                       28
<PAGE>




                   INTERACTIVE TECHNOLOGIES CORPORATION, INC.
                                AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


9.       FINANCIAL INSTRUMENTS

The  Company's  financial  instruments  consist of its cash,  accounts and notes
receivable,  trade and its  notes,  license  rights and  convertible  debentures
payable.

Cash

The Company  maintains  its cash in bank deposit and other  accounts  which,  at
times, may exceed federally insured limits.  The Company has not experienced any
losses in such accounts, and does not believes it is subject to any credit risks
involving its cash.

Accounts and note receivable, trade

The Company  accounts and note  receivable are unsecured and represent sales not
collected at the end of the year.  Management  believes  these accounts and note
receivable are fairly stated at estimated net realizable amounts.

Convertible debentures payable

Management  believes the carrying value of their debentures  payable  represents
the fair value of these financial instruments because their terms are similar to
those in the lending market for comparable loans with comparable risks.

Notes payable and license rights payable

Management believes the carrying value of their notes payable and license rights
payable represents the fair value of these financial  instruments  because their
terms are  similar  to those in the  lending  market for  comparable  loans with
comparable risks.

10.      SUBSEQUENT EVENT

On July 31, 1998, the Company exercised its conversion right with respect to the
Series A convertible  preferred  stock (Note 2) and the  convertible  debentures
(Note 5). The  $9,000,000  of  convertible  debentures  and  $150,000 of accrued
interest were converted into  13,071,429  common stock shares and the 11,858,016
Series A  convertible  preferred  stock shares were  converted  into  11,858,016
common stock shares.  After this conversion,  the total outstanding common stock
shares of the Company approximated 50,300,000.

On August 31,  1998,  the Board of  Directors  authorized a five for one reverse
stock split of the Company's common stock shares. This matter has been submitted
to stockholders for vote and approval is anticipated by September 20, 1998.

11.      STOCK OPTIONS AND WARRANTS

During the years ended May 31, 1998 and 1997,  the Company  issued various stock
options and warrants to employees and others and uses the intrinsic value method
of accounting for these stock options. Compensation cost for options granted has
not been recognized in the accompanying financial statements because the amounts
are not material.  The options and warrants  expire between January 1999 and May
2002 and are  exercisable  at prices  from $.75 to $4.50 per option or  warrant.
Exercise  prices were set at or above the underlying  common stock's fair market
value on the date of grant.
                                                                          

                                       29
<PAGE>




                   INTERACTIVE TECHNOLOGIES CORPORATION, INC.
                                AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


The  following is a schedule of the  activity  relating to the  Company's  stock
options and warrants.  Other than the 1,029,500 and 1,200,000 warrant identified
below as granted during the year ended May 31, 1998 and 1997, respectively (Note
4), all other amounts relate to stock options the Company has issued.

                                Year Ended                    Year Ended 
                               May 31, 1998                  May 31, 1997
                               ------------                  -------------
                                      Weighted Avg.                Weighted Avg.
                            Shares      Exercise        Shares       Exercise
                          (x 1,000)      Price        (x 1,000)        Price
                          ---------   -----------     ---------       --------
Options and warrants
    outstanding at
    beginning of year        1,369       $  1.08           169         $   2.79
Granted                      1,030       $  2.00         1,200         $    .83
Exercised                        -                           -
Expired                          -                           -
                             -----                       -----
Options and warrants
    outstanding and
    exercisable at end
    of year                  2,399       $  1.47         1,369         $   1.08
                             =====                       =====

Weighted average fair
    value of options and
    warrants granted during
    the year                             $   .60                       $    .13

The following table summarizes information about the Company's stock options and
warrants outstanding at May 31, 1998, all of which are exercisable.

                                            Weighted Average
           Range of           Number           Remaining        Weighted Average
        Exercise Prices     Outstanding     Contractual Life     Exercise Price

           $.75-1.00           1,200           4.0 years                 $  .83
              $2.00             1145           2.1 years                 $ 2.00
              $4.50               54           2.0 years                 $ 4.50

The following pro forma disclosures  reflect the Company's net loss and net loss
per share amounts assuming the Company accounted for stock options granted using
the fair value method  pursuant to Statement of Financial  Accounting  Standards
No. 123.  The fair value of each option  granted  was  estimated  on the date of
grant  using  the   Black-Scholes   option  pricing  model  with  the  following
assumptions:  risk-free interest rate of 5.6%; no expected  dividends;  expected
lives of 3 to 6 years; and expected volatility of 153.4%.
                                              
                                             Year Ended          Year Ended   
                                            May 31, 1998        May 31, 1997
                                                                             

           Net loss                     $(   1,552,736)       $(   2,811,167)

           Net loss per share           $(         .11)       $(         .23)

During the year ended May 31, 1998 and 1997, the Company also issued 294,558 and
248,021  common stock  shares,  respectively,  in exchange for  services.  These
services   were   recorded  at  their  fair  value  of  $169,475  and  $545,520,
respectively, and were charged to expense.

                                       30
<PAGE>
                                                                  
Item 8. Changes In and Disagreements With Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
- --------------------

     By  unanimous  consent  of  the  Board  of  Directors  of  the  Company  on
November 10, 1995, the Registrant engaged the accounting firm of Turner, Stone &
Company of Dallas,  Texas as independent  accountants for the Registrant for the
fiscal  years  beginning  June 1,  1995.  By  unanimous  consent of the Board of
Directors  of the  Company  engaged  the  accounting  firm of  Alvin  L.  Dahl &
Associates,   PC  of  Dallas,  Texas  as  independent  accountants  its  Airtech
subsidiary.  During the  previous  two fiscal  years ending May 31, 1996 and May
31,1997 there were no  disagreements  on any matter of accounting  principles or
practices, financial statement disclosure, or auditing scope or procedure or any
reportable events.


                                    PART III


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

a. Directors and Executive Officers.

     The  following  table  sets  forth the  names,  ages and  positions  of the
directors and executive officers of the Company as of May 31, 1998. A summary of
the background  and  experience of each of these  individuals is set forth after
the table.

     The directors and executive officers are:

     NAME               AGE            POSITION

C. J. Comu              38             Chairman and Chief Executive officer

John Potter             54             Director and President

Perry Douglas West      51             Director


     The Board of Directors currently consists of three Directors,  each holding
office for a term of one year.  Mr. West  resigned as director  after the end of
the fiscal year.

     Perry  Douglas  West joined the Company in October  1995,  as Chairman  and
Chief  Executive  Officer of the Company.  Mr. West resigned as Chief  Executive
officer and Chairman of the Company during the fiscal year after operations were
relocated to Dallas,  Texas. Mr. West co-founded  American  Financial Network in
July of  l985.  Headquartered  in  Dallas,  Texas,  American  Financial  Network
operated a national  computerized  mortgage loan origination  network.  Mr. West
served as Executive Vice  President/Director  and General Counsel of this public
company from 1985 to 1991.  Mr. West has  practiced  law in Florida  since 1974,
representing various business institutions in the financial,  computer,  natural
resources and general business industries and international transactions. He was
graduated  with a Bachelor of Arts degree from The Florida  State  University in
l968 and  with a Juris  Doctorate  degree  from The  Florida  State  University,
College of Law in l974.

     C. J. Comu  began his  career in the stock and  commodities  industry  as a
specialist in precious metals and currencies. He co-founded MBA Corporate Group,
one of the largest financial applications software companies in the country. Mr.
Comu has been an entrepreneur,  financier and turnaround professional to several
start ups and operating companies during has term as President of Credit America
Holdings Group, a privately held consulting firm.



                                       31
<PAGE>

     John Potter  began his  business  career with Xerox  Corporation  and later
moved into the world of  finance  with Wells  Fargo &  Company,  handling  their
national  leasing  division.  Mr Potter was the founder of Alpha Leasing,  which
grew  into one of the  largest  leasing  companies  in the  Southwest.  Prior to
beginning his business career, Mr. Potter was an officer in the US Army.

Item 10.  Executive Compensation
- --------------------------------

     C. J. Comu and John Potter have  employment  contracts with the Company for
annual  compensation  of $250,000  each.  Under the terms of this  contract  and
agreements  with the Board of Directors  Mr. Comu and Mr.  Potter this  contract
will only be funded at such time as the  Company is in a  financial  position to
pay the  salaries  under this  contract.  Back  compensation  is not  subject to
accrual or any other form of direct liability to the Company. Perry Douglas West
has no employment  contract with the Company and any  compensation for his prior
services  will be  determined  by the  Board of  Directors  at such  time as the
Company is in a financial position.

Item 11. Security Ownership of Certain Beneficial  Owners and Management.
- -------------------------------------------------------------------------

a. Security Ownership of Certain Beneficial Owners.

     The Company  knows of no persons or groups  being the  beneficial  owner of
more than 5% of the Company's  Common  Shares other than Mr. West,  Mr. Comu and
Mr. Potter.

b. Security Ownership of Management.

     The  following  table  sets  forth  information  with  respect to the share
ownership of Common Stock,  par value $0.01,  of the Company by its officers and
directors,  both  individually  and as a group,  who are the beneficial owner of
more than 5% of the Company's Common Shares.

- -----------------------------------------------------------------------
(1)                 (2)                       (3)                  (4)
Title of Class     Name                  Amount and          Percent of
                 Address of              Nature of             Class3
                 Beneficial              Beneficial
                   Owner1                Ownership2
- -----------------------------------------------------------------------
Common       Perry Douglas West          5,700,000(4)          22.47
             1270 Orange Avenue
             Suite A
             Winter Park, FL 32789

Common       C. J. Comu                  1,017,192              4.01
             15400 Knoll Trail
             Suite 106
             Dallas, TX 75248

Common       John Potter                   691,503              2.73
             15400 Knoll Trail
             Suite 106
             Dallas, TX  75248

All Directors and Officers               7,408,695             29.21
as a group

NOTES
   1. Each person has sole voting and investment power with respect to the as 
      shares indicated as owned beneficially by each person.
   2. Except as other wise noted,  all shares  listed are owned both of record
      and beneficially.
   3. Based upon 25,370,171  shares of Common Stock  outstanding as of May 31,
      1998.
   4. Subsequant to the fiscal year, on August 28, 1998 Mr. West returned to the
      Company 3,400,000 shares of his common  stock to be  cancelled as required
      in the stock purchase agreement dated August 1, 1997.

                                       32
<PAGE>

C. Changes in Control.

     Control of the  registrant  prior to the purchase of Airtech  International
Corporation,  Inc. was in the hands of Perry Douglas West who  previously  owned
approximately  46% of the  outstanding  common  stock.  Under terms of the Stock
Purchase  Agreement  with Airtech Mr. West  surrendered  3,400,000  reducing his
ownership  to  2,300,000  shares  of the  issued  and  outstanding  stock of the
registrant.  As a result of this  transaction  the directors and officers of the
Registrant as a whole own 18.65% of the issued and outstanding common stock down
from  the  46% in  the  prior  fiscal  year.  Following  the  conversion  by the
Registrant of the convertible  debentures and preferred stock this precentage of
ownership will be reduced.

Item 12. Certain Relationships and Related Transactions.
- --------------------------------------------------------
NONE
























                                       33
<PAGE>


Item 13. Exhibits and Reports on Form 8-K.
- ------------------------------------------
                               EXHIBIT INDEX

(a.)     Exhibit                                                           Page

3.0      Charter and By-Laws                                                (1)

4.0      Instruments Defining Rights of Securities Holders

4.1      Form S-4 Registration Statement filed 8-22-97 defining
              rights of securities to be acquired by Airtech
              International Corporation shareholders                        (2)

10.0     Material Contracts

10.1     ITC lease with The Network Group, Inc. for Melbourne, Florida      (3)
              office and engineering space, dated October 25, 1997

10.5     Stock Purchase Agreement dated May 5, 1997 with
              Airtech International Corporation                             (4)

99.0     Additional Exhibits

99.1     Proforma Balance Sheet and Statement of
              Operations for Registrant and Airtech
               International Corporation dated 2-28-97                      (4)



(1) This exhibit was previously filed as an exhibit to the Registrant's  Form 10
    filed January 14, 1992 and is herein incorporated by reference.
(2) Filed form S-3  August  22,  1997 (3) Set out in Form KSB for year ended May
    31, 1996.
(4) This exhibit was previously  filed with Registrants For 10KSB for year ended
    May 31, 1997.


(b.)     Reports on Form 8-K.

     Form 8-K dated March 17, 1997 setting out Company's filing of Form S-8 with
Securities and Exchang Commission

     Form 8-K dated May 5, 1997 setting out changes in the Company's Articles of
Incorporation  increasing  authorized  capital to  50,000,000  common shares and
20,000,000 preferred shares

     Form 8-K dated May 22, 1997 setting out  agreement for the  acquisition  of
all of the  outstanding  stock in Airtech  International  Corporation  of Dallas
Texas.

     Form 8-K dated  December 8, 1997 setting out 421,000 shares of Common Stock
in  exchange  for  $210,500.00  paid  in cash to the  Company,  use of  proceeds
included the preparation  and  development  phases of "Assault on the Liberty" a
docudrama in progress.











                                       34
<PAGE>



                                   SIGNATURES


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.



                              Interactive Technologies Corporation, Inc.



                              by: /s/ C. J. Comu    
                              -----------------------------------
                              C. J. Comu, Chief Executive Officer



DATED: September 14, 1998









                                       35
<PAGE>






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