ALCOHOL SENSORS INTERNATIONAL LTD, 10KSB, 1997-04-15

ALCOHOL SENSORS INTERNATIONAL LTD
10KSB, 1997-04-15
SEARCH, DETECTION, NAVAGATION, GUIDANCE, AERONAUTICAL SYS

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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-SB
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the fiscal year ended
December 31, 1996 Commission File No. 0-26998

ALCOHOL SENSORS INTERNATIONAL, LTD.
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(Exact name of Small Business Issuer as specified in its charter)

New York 11-3104480
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. Number)

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

Issuer's telephone number
including area code: (516) 342-1515

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

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.001
-----------------------------

Class "A" and Class "B" Common Stock Purchase Warrants
------------------------------------------------------
(Title of Class)

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

Yes X No
--------- ---------

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

Issuer's revenues for its most recent fiscal year: $40,586.00

Aggregate market value of voting stock held by non-affiliates of registrant as
of March 31, 1997: $22,976,474.

Number of shares outstanding of each of the issuer's classes of common stock,
as of the latest practicable date: Common Stock, $.001 par value 8,416,018
outstanding as of April 10, 1997.

Documents incorporated by reference: Issuer Prospectus dated November 9, 1995
filed pursuant to Rule 424 (b) of the Securities Act of 1933. (Part I)

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Item 1. Business

BACKGROUND

ALCOHOL SENSORS INTERNATIONAL, LTD. ("ASI" and the "Company") was
incorporated in February, 1992 to market and sell its patent pending line of
ignition interlock devices to the corporate/commercial and individual markets
under the SENS-O-LOCK(TM) brand name. The Company's equipment is designed to
detect, evaluate and assist in the prevention of an alcohol impaired driver
from operating a vehicle. See, "Patents and Technology".

Since inception, ASI has been engaged primarily in research and
development. In late 1995, the Company's Sens-O-Lock(TM) unit was certified to
be in compliance with National Highway Traffic Safety Administration ("NHTSA")
guidelines and several individual states including New York, California and
Texas. In early Spring of 1996, the Company began shipping its first series of
SENS-O-LOCK(TM). In the late Spring of 1996, the Company became aware of
inconsistencies in certain integral components manufactured for the Company and
other manufacturing, and quality control problems. Despite field testing, these
problems were primarily of the type and nature that were not detectable until
the product was out in the field in a variety of environments and uses. As a
result, in late spring 1996, the Company discontinued manufacturing of the
Sens-O-Lock(TM) units.

Up until the Company had discontinued production, the Company had sold
approximately 700 units over a two month period. The Company still has several
of its original units in the market that are still in operation today. ASI has
recalled the units which have been sold, but not all those units which had been
sold were returned.

While the Company had been manufacturing its initial SENS-O-LOCK(TM),
its engineers were conducting research and development on what the Company
believed would be its next and improved technology. Management believed that
this new technology would antiquate all others that were being utilized at that
time, both by its competitors and itself. Rather than re-visiting the present
technology and attempting to solve the manufacturing and production
difficulties it had experienced, management chose to pursue the path of the new
technology since it believed that this would ultimately place the Company in a
far better position with regard to its competitors and the overall marketplace
of its products. This resulted in the Company writing down inventory in the
second quarter of 1996 in the amount of approximately $556,000.00.

As a result of halting production of its original series, the Company
stopped selling its product which resulted in the cessation of revenues.
Management determined that the best use of the Company's limited resources
would be to research and develop the new technology.

The development of this new technology, alcohol specific technology
(AST), which was developed in cooperation with a third party with whom the
Company has signed an exclusive contract, has taken much longer than had been
anticipated. The technology will need to be refined to meet the Company's
strictest requirements, before being placed into the production process.

In determining to pursue this new technology for long term competitive
advantages, management considered that the alcohol specific technology would
not be available for a number of months. The Company, therefore, spent funds on
research and development it previously believed would not be necessary.
However, management believes the decision it made was in the long term best
interest of the Company. Concurrently, management reduced the Company's
workforce and other operating expenses, including deferring management's
salaries by approximately 50% until the Sens-O-Lock(TM) is ready for
production.

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The new technology for the advanced Sens-O-Lock(TM) product is in the
final stages of development. However, during pre-production testing in the
earlier part of this year, additional research and development was found to be
necessary. This ultimately resulted in a delay in production currently
estimated to be several months. The delay period has also allowed engineering
time to enhance software requirements for foreign markets bringing these on
line concurrent with domestic production.

The Company continues to evaluate other sensing technologies currently
in the industry primarily to ensure that ASI's proprietary technology remains
cutting edge and at the forefront of breath alcohol detection.

Once research and development is completed the Company will begin
conducting various tests upon the prototypes that will be built. Afterwards,
the product will undergo certification testing. Management believes that a
product will be available in the second half of 1997.

Management believes that Alcohol Sensors International, Ltd.'s
products as currently designed will be superior in performance to those of its
competitors in many respects, including an alcohol specific sensing technology
which remains calibrated, is more accurate and employs a multi-lingual speech
guide for user operation.

The Company is establishing a network of independent representatives
and dealers covering most of the Continental United States to sell, install and
service its products. The Company's business strategy will concentrate on
penetrating three markets - the mandate market by obtaining approval in states
which require convicted drunk drivers to install an ignition interlock device
after one or more convictions; the voluntary market which includes parents of
teenage drivers; and the commercial market comprising fleet owners of truck,
buses and taxi fleets.

RECENT DEVELOPMENTS

In December, 1996 ASI entered into an agreement with American
International Insurance Company ("AIIC"), a subsidiary of American Insurance
Group ("AIG"). Pursuant to the terms of this Convertible Preferred Stock and
Warrant Purchase Agreement, AIIC purchased for $2.5 million, 833,333 shares of
Series A Convertible Preferred Stock and 833,333 Warrants to purchase the
Company's Common Stock.

The Preferred Stock is convertible into 555,556 shares of Common Stock
(a conversion price of $4.50 per share). The Preferred Stock requires the
payment of a dividend of 9%, payable semi-annually in June and December, to
AIIC. ASI has the discretion to pay the first four dividend payments in cash or
common stock equivalent. Additionally, AIIC received a warrant to purchase
833,333 shares of Common Stock exercisable at any time prior to December 20,
1998 at a purchase price of $5.50 per share.

Management believes that entering this Agreement with AIIC is
significant in that it provided the Company with capital necessary to continue
its development of its alcohol specific technology as well as the introductions
to insurance companies with which it hopes to develop marketing relationships.

In October, 1996 the Company, along with Michael Ghazarian, formed a
European subsidiary, Alcohol Sensors Europe, Plc for the supervision of all of
its manufacturing needs. Mr. Ghazarian is a Director of ASI, as well as the
managing director of Digital Vehicle Security Systems, the company that had
signed an agreement with ASI to be the exclusive distributor of ASI's products
in Europe. With the formation of ASE, Digital Vehicle Security Systems has
assigned to ASE its exclusive distribution rights with ASI. ASI is the owner of
80% of ASE, with Mr. Ghazarian owning the remaining 20%.

Mr. Ghazarian is also the director/owner of Scarico UK, Ltd., with a
manufacturing cooperative located in Varese, Italy. It is the intention of the
Company to have its products manufactured by Scarico.

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In November, 1996 the Company received an inquiry letter form the
Securities and Exchange Commission, Division of Enforcement ("SEC"). The SEC
sought the voluntary cooperation of the Company in providing information to the
Commission. In December, 1996 the Company responded to the SEC and has not
received any further comments or response.

GENERAL DESCRIPTION OF COMPANY'S PRODUCTS
SENS-O-LOCK(TM)

The SENS-O-LOCK(TM) is an IGNITION INTERLOCK device intended for use
in motor vehicles to prevent a person from drinking and driving. The driver of
the SENS-O-LOCK(TM) equipped vehicle is required to provide a breath sample
before and during the operation of the vehicle. This is accomplished by
requiring an Initial Breath Test to start the car, and requiring one or more
subsequent breath tests (rolling retests) while operating the vehicle. Should
the initial (start-up) breath test FAIL, indicating the driver's breath
contains an unsafe level of alcohol, the vehicle will remain interlocked
(engine immobilized). If a test is failed while ROLLING, SENS-O-LOCK(TM) will
ask the driver to stop the vehicle. After issuing a repeated warning, a
sufficient time is allowed for the operator to pull the vehicle over to the
side of the road. If the driver continues operating the vehicle, the system
will enter the alarm mode, requiring the driver to pull over, STOP the vehicle,
and turn the ignition key to the "OFF" position in order to terminate the
alarm.

THE EQUIPMENT

The SENS-O-LOCK(TM) system consists of three components installed in a
vehicle. One is the CPU (Central Processing Unit), one is the CCM (Car Control
Module) and the third and only major component visible in the vehicle, is the
compact and streamlined sensor head which performs breath alcohol analysis. In
most installations a small LED display will also be mounted on the dashboard.

The SENS-O-LOCK(TM) is capable of providing messages in five different
languages (English, British English, French, German and Spanish) selectable at
the time of installation. The messages are:

1. Please Wait 6. Rolling Retest Passed, Thank You
2. Please Provide a Sample 7. You May Not Start the Vehicle
3. You May Start the Vehicle 8. Emergency Override, You May Start the Vehicle
4. Please Stop the Vehicle 9. Invalid Sample, Please Wait
5. Please Return For Service 10. Vehicle is Now Locked Out, Call For Service

Three models will be available, the mandatory unit (model 1100), the
voluntary unit (2100) and the commercial unit (model 3100).

DEFINITIONS AND FEATURES OF SENS-O-LOCK(TM)

1. Turn the ignition key to the ON position and you will hear a voice command
from your radio's speaker*, "PLEASE PROVIDE A SAMPLE." The LED will display a
RED light.

2. You will hear two BEEPS and the LED will flash GREEN with each beep (RED
remains on) which is your signal to proceed.

3. First, take a DEEP BREATH, then place your lips completely around the
mouthpiece and exhale a steady, forceful stream of air. As you are doing this,
you will hear a steady tone and the LED will display a corresponding steady
GREEN light (RED remains on). CONTINUE TO EXHALE CONTINUOUSLY UNTIL THE STEADY
TONE STOPS AND YOU HEAR TWO BEEPS, INDICATING THE BREATH SAMPLE WAS ACCEPTABLE.
The LED will flash GREEN with each beep and then turn off. (RED remains on.)

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4. If you PASS, the voice will say, "YOU MAY START THE VEHICLE." You may then
turn the key to the start position and drive the vehicle. If you FAIL, the
voice will say, "YOU MAY NOT START THE VEHICLE" and you will not be able to
start. However, after returning the key to the OFF position you will be able to
try again immediately by repeating steps 1 through 4.

SENS-O-LOCK(TM) 1100 ONLY: The failure of a breath test at start-up
will be recorded in the DATA LOGGER and, depending on state law, may constitute
a violation of interlock regulations even though SENS-O-LOCK(TM) will not
permit you to start.

5. It is important to exhale a steady, forceful stream of air continuously
until the steady tone stops and you hear the two beeps. If you stop exhaling
before the tone stops, or your steady stream of air is interrupted, you will
hear, "INVALID SAMPLE, PLEASE WAIT." This will immediately be followed by the
voice command, "PLEASE PROVIDE A SAMPLE." You will hear two BEEPS and may
proceed to repeat steps 2 through 4.

6. Free Restart Allowance:
Once you pass your initial breath test, you will be able to start and
operate your vehicle. If the engine stalls or is temporarily shut off, you may
restart the engine within two minutes without the need to provide a new breath
sample. However, if the alarm mode is entered due to the failure of a rolling
retest, then no free restart will be allowed. The normal start-up sequence must
be followed.

7. Rolling Retests:
Once you have passed the initial breath test at startup, you will be
required to pass at least one rolling retest while driving. SENS-O-LOCK(TM)
1100 ONLY: depending on interlock regulations in your state, one or more
rolling retests at fixed or random intervals may be required after you begin
driving. SENS-O-LOCK(TM) 2100 ONLY: a rolling retest will occur at a random
interval during the first 30 minutes of driving.

When the rolling retest is requested, you will hear a voice command
from your radio's speaker*, "PLEASE PROVIDE A SAMPLE," as when you first start
your vehicle. You will hear two BEEPS and the LED will flash GREEN with each
beep (RED remains on) which is your signal to proceed.

You have up to thirty seconds to provide the sample. Take a DEEP
BREATH and place your lips completely around the mouthpiece. Then exhale a
steady, forceful stream of air, just as you would on initial start-up. As you
are doing this, you will hear a steady tone and the LED will display a
corresponding steady GREEN light (RED remains on). CONTINUE TO EXHALE
CONTINUOUSLY UNTIL THE STEADY TONE STOPS AND YOU HEAR TWO BEEPS, INDICATING THE
BREATH SAMPLE WAS ACCEPTABLE. The LED will flash GREEN with each beep then turn
off. (RED remains on.)

Should you not be able to provide a sample within thirty seconds, or
your breath sample is not accepted, you will hear "INVALID SAMPLE, PLEASE
WAIT." This will immediately be followed by the voice command, "PLEASE PROVIDE
A SAMPLE." You will hear two BEEPS and may proceed to try again, but ONLY ONE
TIME. If you provide another invalid sample during the rolling retest, or
ignore the voice command, SENS-O-LOCK(TM) will direct you to stop driving. You
will hear, "PLEASE STOP THE VEHICLE," and SENS-O-LOCK(TM) will allow you
sufficient time to safely pull over and turn off the ignition. However, if you
continue to drive SENS-O-LOCK(TM) will enter the ALARM MODE, which causes the
vehicle's lights to flash and the horn to sound repeatedly until the vehicle is
pulled over and the key turned to the OFF position.

SENS-O-LOCK(TM) 1100 ONLY: The failure of a rolling retest for any
reason will be recorded in the DATA LOGGER as a violation of interlock
regulations and may subject you to a permanent ignition lockout within five
days.

You will hear a warning message at each startup following such a
violation, "PLEASE RETURN FOR SERVICE."

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WHEN YOU PASS THE ROLLING RETEST: you will hear, "THANK-YOU!" and may
continue driving.

IF YOU FAIL THE ROLLING RETEST: you will hear, "PLEASE STOP THE
VEHICLE," and SENS-O-LOCK(TM) will allow you sufficient time to safely pull
over and shut off the ignition.

8. Emergency Override:
If permitted by the interlock regulations in your state,
SENS-O-LOCK(TM) has an Emergency Override capability for use in
life-threatening emergencies only, allowing the driver to start immediately
upon entering the vehicle without providing a breath sample. Under these
special circumstances, turn the key to the "ON" position, then press the
Emergency Override switch located either under the dash, depending on the
installation in your vehicle. You will hear the system acknowledge this action,
"EMERGENCY OVERRIDE" and may start the vehicle and drive. However, within two
minutes of starting your vehicle, SENS-O-LOCK(TM) will request a rolling
retest. Failing the rolling retest or ignoring the request will activate the
ALARM MODE. Ask your SENS-O-LOCK(TM) dealer if the system is active in your
vehicle and for the location of the Emergency Override switch in your
installation.

SENS-O-LOCK(TM) 1100 ONLY: USE OF THE EMERGENCY OVERRIDE WILL BE
RECORDED IN THE DATA LOGGER. This feature should be used only in the event of a
life-threatening emergency, and you will be required to show documentation,
such as a hospital bill, etc., in order to justify its use to your interlock
supervisor.

SENS-O-LOCK(TM) 1100 ONLY: LOCKOUTS
Depending on state law, there are various events that may result in an
ignition lockout:

1. FAILURE TO RETURN FOR DATA DOWNLOADING ON SCHEDULE. You have a seven-day
grace period. Warning messages will be heard at each startup during this time,
"PLEASE RETURN FOR SERVICE," and you should return to have the data downloaded.
If you fail to do so by the seventh day, beyond your state's mandatory download
schedule, the ignition will temporarily lock out and you will not be able to
start your vehicle. When you insert the key and turn it to the ON position, you
will hear, "VEHICLE IS NOW LOCKED OUT, PLEASE CALL FOR SERVICE." It will be
necessary to have a certified SENS-O-LOCK(TM) technician visit your vehicle,
download the data as required by law, and re-enable your ignition. There will
be an additional charge for this service. It is your responsibility to properly
schedule and keep your download appointments.

2. FAILURE TO RETURN FOR DATA DOWNLOADING WITHIN FIVE DAYS OF INTERLOCK
VIOLATION. You have a five day grace period following a violation of interlock
rules, such as failing or ignoring the request for a rolling retest, (see #7,
above). Warning messages will be heard at each startup following the violation,
"PLEASE RETURN FOR SERVICE," and you should make arrangements to have the data
downloaded immediately, regardless of when your last download was performed.
(Since this is not a regularly scheduled download, there may be an additional
charge for this service.) If you fail to do so, by the fifth day following the
violation, the ignition will permanently lock out and you will not be able to
start your vehicle. When you insert the key and turn it to the ON position, you
will hear, "VEHICLE IS NOW LOCKED OUT, PLEASE CALL FOR SERVICE." It will be
necessary to have a certified SENS-O-LOCK(TM) technician visit your vehicle,
download the data as required by law, and re-enable your ignition. There will
be an additional charge for this service.

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RADIO MUTE FEATURE

When SENS-O-LOCK(TM) requests a breath sample, the BEEPS come from the
hand-held sensor head, but the VOICE is routed through the speakers(*) used by
your vehicle's audio system (radio, cassette player, etc.) The SENS-O-LOCK(TM)
voice is self-amplified and does not require you to have the radio turned on in
order to be heard. However, if your audio system is playing, SENS-O-LOCK(TM)
will automatically mute it (reduce volume to zero) so that the voice commands
can be heard and understood. Muting will continue through each operational
sequence until completed. For example, on startup your radio will be muted when
the request to "PLEASE PROVIDE A SAMPLE" is heard until the breath test is
passed and you hear, "YOU MAY START THE VEHICLE," after which audio output will
be restored.

(*) Note: If the vehicle does not have a radio, or the speakers are
inoperative, it will be necessary to install a small speaker in
order to hear the voice commands.

SLEEP MODE

In order to preserve battery power, SENS-O-LOCK(TM) is equipped with a "sleep
mode" feature that reduces power consumption to less than 1ma. when the vehicle
is not in use. This is particularly important when the vehicle will be out of
service for extended periods of time. Several minutes after you shut off the
ignition, the RED LED will turn off, which indicates the system has entered the
sleep mode. As soon as the key is turned to the ON position, the system will
return to full operational mode as indicated by the glowing RED LED.

LED DISPLAY

In most SENS-O-LOCK(TM) installations, the LED display will be mounted on or
just under the dash. Except when in sleep mode, the RED LED will glow at all
times, indicating the system is powered and fully operational. The GREEN LED
flashes in synchronization with the "beeps" from the sensor head, and glows
steadily corresponding to the steady tone heard when providing a proper breath
sample. This provides visual reinforcement to the audio signals and is an aid
to the hearing impaired. Once the breath test is passed, the GREEN LED will
turn off.

PRODUCT MODELS

(A) SENS-O-LOCK(TM) 1100 SERIES - MANDATED INSTALLATION

The Company intends to market a Breath Alcohol Ignition Interlock
Device, which meets or exceeds issued standards published by the National
Highway Traffic Safety Administration and certification standards in thirteen
states including the New York pilot program and the California mandate program.
The SENS-O-LOCK(TM) device is trademarked as a brand name and ASI is the
assignee of a filed patent application currently pending in the U.S. Patent and
Trademark Office for its alcohol sensing device. Although management believes a
patent will issue, there is no assurance that such patent will issue or that
upon issuance such patent will sufficiently protect it from competitors or that
its technology will not be challenged by existing competitive patents issuable
in the future.

ASI's SENS-O-LOCK(TM) 1100 limits the ability of impaired drivers to
start their vehicles and helps to keep them off the road. This product series
was designed for state mandated use by convicted -- driving while intoxicated
("DWI") -- offenders who are court ordered to install the interlock device in
their auto and maintain monitoring of data stored in the device every 60 days
or subject to the requirements of the respective jurisdiction. More than half
the states have enacted laws requiring mandated installations following DWI
conviction.

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(B) SENS-O-LOCK(TM) 2100 SERIES - VOLUNTARY INSTALLATIONS

This model is a variation of the 1100 Series and is designed for
individuals who voluntarily desire the equipment's protection. Aside from the
safety and moral considerations, in the future a SENS-O-LOCK(TM) installation
may afford car insurance premium discounts as some carriers are currently
considering promoting discounts for drivers who install an interlock device.
The main difference between this unit and the 1100 Series is that the data
logger is optional in the 2100 Series.

This model also varies from the 1100 Series because it has been
designed for the corporate/commercial market, particularly operating fleets of
road vehicles including trucks, taxis, car rentals, company cars, ships,
trains, worksites and similar other groups. All of the same advantages as in
the other series including possible insurance benefits are applicable to
commercial installations.

Based on the strong interest that SENS-O-LOCK(TM) has received at
trade shows, solicitations from foreign and domestic sources for distribution
licenses, and its presentations to departments of transportation in many states
management believes it can capture significant percentages of the ignition
interlock market. (See "Government Regulation".)

MANUFACTURING AND MATERIALS

The Company will utilize the services of its European subsidiary,
Alcohol Sensors Europe, Plc. (ASE), which was formed in October, 1996 (see
Marketing and Distribution section), for the supervision of all of its
manufacturing needs. The manufacturing process consists of component assembly
and systems integration of electronic and mechanical parts, which are then
encased in a high impact plastic package. Component availability is subject to
various lead times. The Company has also designed and developed the software
necessary for the operation of its ignition interlock system. ASI maintains
internal product controls which consist primarily of prototype production, test
engineering, materials purchasing and quality control of its prototypes. The
Company believes that its manufacturing arrangements are sufficient to satisfy
anticipated future demands.

The Company purchases and organizes the purchase of sensing components
for its interlock system from third party vendor suppliers, who then ship the
materials to ASE. The components are then assembled and packaged into the final
product for shipment to end users pursuant to the Company's instructions.

Having ASE supervising the manufacturing process will provide ASI with
quality control. The manufacturing will be performed by Scarico UK, Ltd.
Michael Ghazarian, a Director of ASI is also the director/owner of Scarico.

ASI believes high product quality will be an integral part of its
products ultimate success in the voluntary and commercial markets and a
prerequisite for approval by states in the mandate market. The Company's
subsidiary, ASE, will be responsible for production and quality control. The
Company will periodically test manufactured products on a random basis, at its
distribution facilities or where it believes necessary and proper testing can
be accomplished.

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INSTALLATION AND SERVICE

ASI has established a network of 15 independent representatives
covering most of the United States which is divided into 16 exclusive
territories. The representatives are responsible for the selection of entities
who will act as the Company's State Operations and Certification Centers
("SOCC") (see SOCC discussion). The representative's responsibilities also
include the recruitment and appointment of qualified, authorized independent
dealers. All appointments within their territories are in accordance with the
Company's instructions and specifications. Each appointed dealer signs an
agreement with the Company which designates the dealer as either "Certified" or
"Retail". Certified dealers are specifically equipped to sell, install and
service the Company's products to the mandate market in addition to ASI's other
target markets. Retail dealers have no mandate market responsibility and are
limited to marketing and installation solely in the voluntary and commercial
markets. All SOCC entities also sign ASI's Certified Dealer Agreement with an
added Supplement which further defines their role beyond the regular activities
of a certified dealer. See "Marketing and Distribution".

State Operations and Certification Centers ("SOCC") - These entities
will play a key role and assume major responsibilities in maintaining
communications and providing assistance to authorized ASI dealers and the Motor
Vehicle Departments or other appropriate authorities in its state of operation.
They will obtain, review and provide explanation of the respective state laws
concerning interlock device installation, updating knowledge and data bases and
keeping authorized dealers abreast of current information.

The SOCC is charged with responsibility to train all dealer/installer
personnel in the knowledge, application and explanation of the product,
applicable state laws, and the installation, downloading and servicing of
SENS-O-LOCK(TM) in accordance with ASI guidelines and state laws. SOCC
personnel will conduct training on its premises to installers and other
employees of authorized dealers within its territory using a curriculum and
materials developed by ASI.

SOCC will initiate procedures necessary to have an interlock installed
in a motor vehicle after receiving notification from the court or probation
department. These procedures will include notifying the installing dealer and
the probationer, facilitating an appointment to install the device and train
the driver(s) about the proper use of the interlock device, notification to ASI
and state authorities upon completion of installation, and the keeping of
accurate and permanent data records and serial numbers for each device
installed within its territory.

SOCC will collect data downloaded by authorized dealers from vehicles
within its territory and will be responsible to transmit this data to the
appropriate state authorities. This data is deemed confidential and is
furnished only to designated state authorities and/or ASI headquarters. This
data is encrypted and only SOCC's have translation software.

SOCC will be expected to maintain an inventory of spare parts,
instruction and installation manuals and other applicable components required
to support the dealers and anticipated installations within its territory.
These will be provided by ASI and will also include specialized training
equipment and proprietary information to assist SOCC in the performance of its
duties with ASI bearing the reasonable cost of any special training and
equipment. The SOCC trains the dealers in their respective territories at their
cost.

SOCC shall receive a fee for each installed SENS-O-LOCK(TM) 1100
Series within its territory from its mandate dealer network as an
administrative fee. The SOCC may concurrently operate as a certified installer
dealer if it also elects to act in that capacity.

The Company presently has twelve operation centers in ten states.

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Authorized Dealer Installation Locations - All authorized dealer
locations are selected and certified by ASI. Certification requires that they
be financially sound and responsible with a successful history of automotive
aftermarket installations. The SENS-O-LOCK(TM) is installed only by ASI's
trained and certified installers who have completed a comprehensive course
given by the Company's SOCC either at the dealer's location or at the SOCC site
as part of their dealer agreement. The installation process, by ASI trained and
certified installers, should take approximately one hour.

These locations are equipped with the necessary equipment to ensure
proper installation and the installation area is secured to prevent
unauthorized persons from observing or accessing secured items such as tamper
seals and installation instructions. Prior to installation, the vehicle is
screened for mechanical and electrical conditions that may interfere with
device's functioning. The installation site maintains all records of their
interlock customers, which are sent to the SOCC.

The Company provides support to the states and the
dealer/representatives through its SOCC in the following manner:

(1) Operating a communication system via a long distance telephone
carrier with a modern digital telephone switch network to communicate by
electronic mail with the installation centers, the probation departments and
others interested in the automotive interlock program.

(2) Providing educational information and documents to the courts,
installers, probationers and their families, to create awareness that an
automotive interlock device may prevent DWI.

(3) Providing probation departments with a decoding program for
downloading encrypted information.

(4) Acting as an intermediary between the probation departments,
probationers and installers with bi-directional communication among all
parties.

(5) Maintaining national TOLL FREE NUMBERS twenty-four (24) hours a
day, seven (7) days a week.

MARKETING AND DISTRIBUTION

The Company's marketing strategy will initially concentrate on product
sales to the voluntary and mandate markets. Thereafter the Company will attempt
to penetrate the commercial vehicle markets. According to the U.S. Department
of Justice - Bureau of Judicial Statistics - there were approximately 1,250,000
U.S. DWI convictions during 1992 including first time convictions and repeat
offenders.

The Company intends to market and sell its products through an
independent Dealer-Representative Network and direct sales. The Company has not
conducted any test marketing programs to date. The Company has entered into
exclusive ignition interlock Representative Agreements with 15 independent
representative firms covering specific territories throughout the United
States, which the Company believes affords sufficient sales coverage in most
states. Their responsibilities include the selection of entities for the
Company's State Operations and Certification Center, appointment of dealers
including automotive chains, auto stores, repair stations, auto specialty
retail stores and alarm and radio installers, all of whom would sign Dealer
Agreements, and thereafter receive Company training to sell, service and
install the SENS-O-LOCK(TM) system in customers' vehicles. These agreements
generally contain provisions for a one year term with annual renewable,
terminable without cause upon 30 days written notice by either party and
automatically terminable for cause if the representative breaches various
specific contract conditions. Representatives will receive 5% net commissions
against gross sales on all product sales made in the representatives' territory
through dealers.

<PAGE>

The Company has entered into agreements with dealers nationwide who
were recruited by their territorial representative and/or ASI directly. ASI or
its SOCC's trains all dealers to sell, install and service its products.
Dealers are designated as either "Certified" or "Retail". (See "Installations
and Service".)

The Company intends to continue its participation in trade shows,
advertise in trade journals, hold seminars and prepare a variety of
instructional aids to introduce its products and to educate potential users,
representatives and dealers.

The Company has prepared judicial/legal information packages and video
tapes for distribution as permitted by state regulatory authorities to court
officers. These include the American Association of Motor Vehicle
Administrators, the National Association of Governors Highway Safety
Representative, the National District Attorney Association and the American
Probation and Parole Association. The Company has continuing contact with
organizations interested in improving highway safety.

The Company will provide a renewable one full year warranty for parts
and labor on SENS-O-LOCK(TM) for mandate market installations. A full product
warranty on parts and labor for the voluntary and commercial markets is given
for 90 days from installation by an authorized dealer. Servicing for the
systems during and beyond the warranty period will be provided by the Company's
authorized dealers. There is no assurance that dealers will provide
satisfactory service.

ASI signed an exclusive Dealer/Distributor Agreement with a United
Kingdom company, Digital Vehicle Security Systems ("DVSS"), in October, 1993 to
cover potential marketing and sales in the European market which agreement was
re-affirmed in May, 1996 and subsequently assigned to ASE. The Company intends
to identify and pursue the same markets in Europe as it has done domestically.
The Company is unaware of foreign government regulatory compliance
requirements, if any, at this time.

ASE was formed in October 1996 by ASI and Michael Ghazarian (a member
of the Company's Board of Directors), and the managing director of Digital
Vehicle Security Systems. ASE is owned 80% by ASI and 20% by Michael Ghazarian.
ASE was formed primarily as an opportunity for ASI to control its own
manufacturing and distribution processes.

Michael Ghazarian in July, 1996 executed a Consulting Agreement with
the Company whereby Mr. Ghazarian was to assume responsibility for all mold
making and tooling for the Sens-O-Lock(TM) and the production process; from
establishing the final design through the manufacturing of initial and ongoing
production of Sens-O-Lock(TM) devices. Mr. Ghazarian is also a director/owner
of Scarico UK Ltd. At present, it is the intention of the Company to have its
products manufactured by Scarico. The term of this agreement was fro six (6)
months with a consulting fee of $100 per month. All inventions and patents
developed by Mr. Ghazarian during the term of this agreement were to be
assigned to ASI. The Company would own all molds and tooling upon payment of
same to Mr. Ghazarian.

WEATHEREYE(TM) HEADLIGHT MANAGEMENT SYSTEM

In August, 1996, the Company entered into an agreement with a
corporation that is owned by Joseph M. Lively, Esq., a member of the Company's
Board of Directors. Mr. Lively, along with others, invented a certain
technology which automatically turns on the headlights of automobiles to
varying capacities daytime running lights, as well as automatically putting on
the vehicles headlights and taillights on at full capacity when the windshield
wipers are turned on. The Company is marketing this technology under the name
of WeatherEye Intelligent Headlight Management System.

Pursuant to the terms of this agreement the Company has the right to
modularize the original system which was developed. ASI was granted the
exclusive right to distribute the products to the new and used car dealers in
the United States as well as the non-exclusive right to distribute in other
world-wide markets.

12
<PAGE>

The Company will pay the corporation owned by Mr. Lively a royalty on
each modularized unit sold ranging from $0.19 to $2.00 depending on the unit
sold.

In its attempt to expand its market potential, the Company has
modularized the various components that comprise the WeatherEye Headlight
Management System. The rationale was that certain features of the WeatherEye,
such as daytime running lights, were being included on newer car models.

Believing that consumers would be reluctant to purchase a headlight
management system that contained a feature that was standard equipment on their
vehicle was the catalyst for the modulazation of WeatherEye.

The consumer now has the ability to select certain or all of the
features which the WeatherEye Headlight Management System can provide, by way
of a modular system.

Daytime running lights have been proven as an effective means in
reducing accidents. Insurance companies have realized this and many offer
premium discounts to drivers whose autos are equipped with this feature.

Many states require the headlights and taillights to be put on when
the windshield wipers are in use. The WeatherEye puts these lights on
automatically when the windshield wipers are turned on and turns them off
automatically when the wipers are turned off.

Additionally, since WeatherEye "thinks" for itself, you will not have
to be concerned about discovering a dead battery as a result of leaving your
lights on. When the ignition is turned off, all the vehicle's lights are
automatically shut off. According to the American Automobile Association, they
made 27.5 million service calls due to dead batteries in 1995.

WeatherEye Headlight Management System is a system which provides the
safety of daytime running lights not just in daytime, but around the clock,
automatically adapting to the safest setting for any driving condition. It
automatically performs all the following function:

in daylight, headlights are on at reduced power whenever the vehicle is
running;

at dusk, headlights are raised to full brightness, dash and
taillights are on;

when wipers are switched on, headlights are raised to full brightness,
dash and taillights are on;

when wipers are switched off, headlights are raised to full brightness
and all others automatically adjust to appropriate intensity;

when the ignition is turned off, all lights go off

and valet - lights remain on for 45 seconds after vehicle is turned off.

GOVERNMENT REGULATION

The Company intends that its Sens-O-Lock(TM) products comply with the
Federal Department of Transportation's issued standards published by NHTSA and
varying state certification standards where its breath interlock devices will
be certified. On April 7, 1992 NHTSA published a notice which set forth its
newest model specifications for the performance and testing of breath interlock
devices. The Company's original SENS-O-LOCK(TM) device had been certified as
meeting the government's standards. More than thirty five (35) states including
the largest populated states such as California, Texas and New York have either
passed interlock legislation or administrative directives. ASI's first series
of SENS-O-LOCK(TM) devices had received certification in twelve (12) states -
California, Florida, Georgia, Kansas, Maryland, Michigan, Minnesota, Nebraska,
New York, Oklahoma, Utah and Missouri. The Company's primary marketing efforts
will focus on California, New York metropolitan area and Texas. Certification
standards vary by jurisdiction and are only applicable to the products
installed pursuant to court ordered installations.

13
<PAGE>

RESEARCH AND DEVELOPMENT

The Company believes that it must enhance its existing products and develop new
products in order to maintain its competitive position. The Company's ongoing
product research activities will include refinement and improvement of current
products and the development of new product options and features. The Company
intends to continue to provide for research and development, including the
hiring of additional qualified engineering, production and technical personnel
and setting up laboratory facilities. During 1996, ASI spent approximately
$913,000 on research and development.

PATENTS AND TRADEMARKS

On November 24, 1994 and March 8, 1995 the Company acquired all
rights, title and interest from the inventors, its in-house engineers, of the
ignition interlock technology, its methodology, design and two pending patent
applications, covering such methodology and design. These patents were filed in
November, 1994 and January, 1995, respectively covering the Company's products.
The Company has agreements with its engineers that any and all technologies,
design and methodologies will be assigned to the Company. While ASI believes
that the applications relate to patentable devices or concepts, there can be no
assurance that patents will issue, or that any patents issued can be
successfully defended. The Company has also obtained trademarks to protect the
SENS-O-LOCK(TM) brand name of its products. ASI relies on a combination of
patent, trademark, trade secret laws, confidentiality, non-disclosure and other
contractual agreements and technical measures to protect its proprietary
rights. There can be no assurance that the Company's efforts to protect such
rights will be successful.

INSURANCE

The Company maintains liability insurance with coverage limits of
$1,000,000 for each occurrence and $2,000,000 in the aggregate along with an
additional $7,000,000 umbrella policy. The Company believes that such coverage
is adequate for its products, and although it does not anticipate any liability
claims, there is no assurance that claims will not arise in the future, or that
any damages or costs associated with these claims will not exceed the available
insurance coverage limits.

COMPETITION

The industries and markets in which the Company operates are highly
competitive. Some of the Company's competitors may have substantially greater
financial resources, larger research, development and sales staffs and greater
name recognition than the Company, and who may introduce new or improved
products in the future.

Market participants must compete on many fronts, including development
time, engineering expertise, product quality, performance and reliability,
price, name recognition, customer support and access to distribution channels.
While the Company believes that it will be able to compete favorably primarily
through product quality, technical excellence and customer service, there is no
assurance that the Company will be able to compete successfully or develop
competitive products in the future.

EMPLOYEES

As of December 31, 1996, the Company had 14 full time employees,
including its officers, 3 administrative personnel and 2 sales personnel. None
of the Company's employees is represented by a collective bargaining agreement
nor has the Company experienced any work stoppage. The Company believes its
relationship with its employees is satisfactory.

Item 2. Properties

The Company leases a 10,000 square foot facility pursuant to a five
year lease with a five year option to renew, at an annual rental of $85,000 for
the first year with yearly five (5%) percent increases thereafter.

14
<PAGE>

Item 3. Legal Proceedings and Settled Litigation

The Company was named as a defendant in an action commenced in the United
States District Court for the Eastern District of New York in July 1996. The
plaintiff is seeking $9 million in damages plus 100,000 shares of Company's
stock, alleging he performed certain work for the Company as an independent
contractor and was never compensated for the services he performed. The
Company's position is that the plaintiff in this action failed to provide the
services as contracted and was not entitled to receive any payment. Defendant
has submitted it answer and management believes the claims alleged in this
lawsuit are frivolous and is defending the action vigorously. At this time, it
is too early to determine the outcome of this action and, therefore, the
Company has not made any provision in its financial statement.

The Company and certain of its officers were named as defendants in an
action commenced in the Supreme Court of the State of New York, Orange County,
by two individuals claiming an equity interest in the Company, as well as
damages of $18.5 million, based upon a purported agreement with another
company, Alcohol Sensors, Inc., with which the claimants, certain officers of
the Company and others were affiliated in 1989, and a claim that one of the
individuals is the inventor of the technology that the Company is using.
Management agreed to settle this action in February, 1997, subject to the
approval of the Court, for a total of 315,000 shares of the Company's common
stock and certain members of management have agreed to donate their private
shares to provide for the settlement. At December, 1996, the Company has
accrued approximately $1,144,000 in connection with this settlement.

The Company and certain of its officers were named as defendants in an
action commenced in the United States District Court for the Eastern District
of New York in March 1996, by a stockholder seeking $2 million in alleged
damages as a result of the Company's handling of a prior action, BARRY BEYER,
ET AL V. ALCOHOL SENSORS INTERNATIONAL, LTD., ET al. This previous action was
settled for a total of $382,675. In connection therewith, certain members of
management contributed 55,672 of their private shares of stock to the Company
along with $107,642. As a result of the Beyer settlement, management believes
this settlement renders the claims of the present action without merit and is
vigorously defending the action.

This Company was served with a Demand to Arbitrate and a Statement of
Claim by a former individual who had performed engineering services for the
Company on a consulting basis. Claimant was seeking $650,000 and 114,449 shares
of stock in damages. The Company settled this matter in a Mediation Conference
and has agreed to transfer to Claimant 27,500 shares of stock in full
satisfaction of all claims in this action. This matter was settled in April
1997 and the Company has accrued approximately $65,000 at December 31, 1996.

The Company was recently served with a Demand to Arbitrate by a former
employee. Claimant is seeking $75,000 and approximately 36,000 stock options as
damages. The Company has recently filed its answer to this demand. At this
time, it is too early to determine the outcome of this action and therefore the
Company has not made any provision in its accompanying financial statements.

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

*None.

15
<PAGE>

PART II

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

Since January 1, 1996, the Company's Units comprised of two shares of
common stock and one Class "A Warrant and 1/2 Class "B" Warrant, have been
traded on the Nasdaq SmallCap Market ("Nasdaq"). The common stock and warrants
did not trade separately until August 9, 1996 when same became detachable. The
following table sets forth the high and low prices for the Units during the
period indicated:

PERIOD ENDED HIGH LOW
January 1, 1996 through
March 31, 1996 18 1/4 12

PERIOD ENDED HIGH LOW
April 1, 1996 through
June 30, 1996 20 11 3/4

PERIOD ENDED HIGH LOW
July 1, 1996 through
August 8, 1996 15 3/4 8

On August 8, 1996, the closing price of the Units was $9.19

Following the separation of the unit, the shares of common stock and
Class A and Class B Warrants were individually traded on the Nasdaq SmallCap
Exchange. The table set forth below indicates the highs and lows for the common
stock, A and B Warrants.

PERIOD ENDED HIGH LOW
August 9, 1996 through
September 30, 1996
Common Stock 4 7/8 2 13/16
A Warrant 2 5/8 5/8
B Warrant 1 3/8 1/2

PERIOD ENDED HIGH LOW
October 1, 1996 through
December 31, 1996
Common Stock 4 5/16 2 5/8
A Warrant 2 1/8 13/16
B Warrant 1 9/16 1/2

PERIOD ENDED HIGH LOW
January 1, 1997 through
March 31, 1997
Common Stock 7 1/4 3 3/8
A Warrant 3 3/8 1
B Warrant 2 3/8 7/8

Common Stock shareholders of record on March 31, 1997, excluding the
exact number of beneficial owners whose securities are held in street name, are
approximately 400, including holders in street name.

<PAGE>

Dividend Policy

No dividends have been declared on the Company's common stock through
March 31, 1997 and the Board of Directors has no current intention to declare
or pay dividends on the common stock in the foreseeable future. The Company
will pay a dividend of 9% semi-annually in June and December on its Series A
Preferred Stock payable in cash or in stock, which was issued to American
International Insurance Company pursuant to the terms of the Convertible
Preferred Stock and Warrant Purchase Agreement, dated December 20, 1996.

Item 6. Management's Discussion and Analysis Results of Operations and
Financial Condition

GENERAL

Since the Company's founding in February, 1992 it has been engaged
primarily in the research, development and design of an innovative
technologically advanced ignition interlock system to detect various
intoxication levels of motor vehicle drivers.

In late 1995, the Company's Sens-O-Lock(TM) unit was certified to be
in compliance with National Highway Traffic Safety administration ("NHTSA"
Guidelines). In the early Spring 1996, the Company began shipping its first
series of Sens-O-Lock(TM). At a point in the late spring, ASI became aware of
inconsistencies in certain integral components manufactured for the Company and
other manufacturing and quality control problems. These were problems which ASI
did not become aware of until the units were actually in the field and being
used. After verifying these problems, the Company immediately suspended
production and instituted a recall.

RESULTS OF OPERATIONS

Year Ended December 31, 1996 and December 31, 1995

The Company had revenues for the year ended December 31, 1996 of
$40,586. The Company had revenues for the year ended December 31, 1995 of
$68,559.

The Company's loss from operations for the year ended December 31,
1996 was $6,161,934 as compared to $3,370,307 for the twelve months ended
December 31, 1995, an increase of $2,791,627, or 83%. Expenditures on research
and development increased to $913,456 for the period compared to $894,793 for
the prior period, an increase of $18,663, or 2%. General and administrative
expenses increased to $3,101,571 for the period compared to $1,512,938 for the
prior period, an increase of $1,588,633 or 105%. The increase in general and
administrative expenses are a result of the Company's efforts to develop a
distribution network, begin marketing efforts for its Sens-O-Lock(TM) products
and for the relocation and expansion of its corporate offices. The Company
incurred costs relating to the hiring of marketing and selling personnel and
other marketing costs, increased rental costs and administrative personnel in
its corporate offices and an increase in overhead costs such as insurance,
telephone and utilities.

For the year ended December 31, 1996 the Company recorded litigation
settlement expenses of $1,591,496, which were substantially funded by shares
donated by the principal shareholders as compared with $990,000 for the year
ended December 31, 1995.

In connection with problems encountered with the contract manufacturer
of its initial Sens-O-Lock(TM) units, the Company wrote off certain inventory,
aggregating approximately $556,000. The Company presently has an inventory of
approximately $287,000, after all writedowns. The Company is now placing its
efforts and resources toward the manufacturing of its new Alcohol Specific
Technology Sens-O-Lock(TM) (AST); representing the Company's future.

17
<PAGE>

Interest income for the year ended December 31, 1996 was $82,538
resulting from investing the net proceeds of the Company's initial public
offering as compared with $22,028 from the previous year. The Company incurred
interest expenses of $41,747 in 1996 as compared to $276,608 in the prior year,
resulting from the debt reduction of discounts and deferred financing fees
related to its private placement in 1995.

LIQUIDITY AND CAPITAL RESOURCES

From inception through September 30, 1995, the Company financed its
operations primarily from private placements of equity and debt securities
totaling approximately $2,500,000. On November 9, 1995, the Company
successfully completed its initial public offering selling 1,000,000 Units,
each comprised of two shares of common stock, one redeemable Class "All common
stock purchase warrant exercisable after November 9, 1996 at $3.75 per share
and 1/2 redeemable Class "B" common stock purchase warrant exercisable after
November 9, 1996 at $5.00 per share. On December 19, 1995 the Underwriters'
overallotment option of 150,000 Units was exercised in full. The Company's net
proceeds from its initial public offering were approximately $5,800,000. In
1996, the Company received $436,000 from the exercise of warrants. The Company
has loans and accrued interest to officers of approximately $300,000 which it
intends to repay from cash generated from operations. The Company has obtained
a $500,000 line of credit with Bank of New York at 5.25% as secured by a
$500,000 Certificate of Deposit.

As a result of the Company's decision to halt production and shipment
of its original interlock series, ASI had, in effect, no stream of revenues.
The Company halted production due to problems and anomalies that were
encountered during the manufacturing process, performed by third party
contractors. The Company wrote off approximately $556,000 of inventory in the
second quarter of 1996 as a result of these problems. This, coupled with the
cost of the research and development of the alcohol specific technology,
created a strain on the Company's financial situation.

In approximately October, 1996, the Company found it necessary to look
for additional funding. It was management's original intent to raise $2.5
million by means of a 506 offering. ASI had taken significant steps in
obtaining raising the necessary capital by this route when it was presented
with the unique opportunity to obtain this funding from a large insurance
company.

In December 1996, the Company completed a transaction with American
International Insurance Company (AIIC), a subsidiary of American International
Group, whereby AIIC made a $2.5 million investment in ASI in return for
Convertible Preferred Stock and Warrants.

This capital infusion has allowed the Company to continue its research
and development with regard to the alcohol specific technology and to purchase
components for the manufacture of the Company's products and to continue
Company operations.

Management believes that its current cash investments and future funds
from the sale of its WeatherEye products will be sufficient to operate the
Company through the end of 1997. In order to preserve its cash, management
substantially reduced its operating expenses and deferred approximately 50% of
management's salaries.

The Company has established a plan of operations in which it intends
to purchase raw materials, components and manufacturing services to complete
units which will be sold to the Company's dealer network. The Company intends
to fund research and development, including engineering personnel costs,
laboratory equipment purchases and rental costs and independent laboratory
testing services. The Company may find the need to raise additional capital for
purposes of continuing operations, to obtain components parts and for
manufacturing. Management believes that this subject should be addressed at the
completion of the research and development stage of the interlock device. There
can be no assurance that such capital will be available on terms acceptable to
the Company on a timely basis or at all.

18
<PAGE>

The Company has completed its renovation for office space, furnishings
and equipment, as well as having established a networked management, inventory
control, and customer and fulfillment information systems. The Company's
efforts subsequent to the initial public offering have been focused toward the
setting up of Company systems and personnel to assist the Company in fulfilling
its business plan and to capitalize on the opportunities available to it.

Item 7 Financial Statements

See Financial Statements annexed.

Item 8. Changes and Disagreement with Accountants on Accounting and
Financial Disclosure

Not applicable.

PART III

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

The following table lists the current directors and executive officers
of the Company:

NAME AGE POSITION
<S> <C> <C>
Robert B. Whitney 56 Chief Executive Officer, President
and Director

John T. Ruocco 49 Sr. Executive Vice President and Director

Michael A. Sylvester 58 Vice President, Chief Financial Officer,
Treasurer and Director

Steven A. Martello 41 Vice President, Chief Operating Officer and
Director

Michael Ghazarian 33 Director of Production and Manufacturing
and Director

Joseph M. Lively 41 Corporate Counsel and Director

J. Ernest Hansen 58 Director
</TABLE>

Each director is elected for a one year term or until his successor is
elected and shall have qualified. The Board serves as a nominating committee
for new directors and as a compensation committee. Each officer of the Company
is elected by the Board of Directors.

<PAGE>

ROBERT B. WHITNEY, CHIEF EXECUTIVE OFFICER, PRESIDENT AND DIRECTOR

Robert B. Whitney has been Chief Executive Officer, President and a
Director of the Company since inception. Mr. Whitney along with John T. Ruocco
developed and filed a patent application on ASI's alcohol sensing device. From
1985 through January, 1987, Mr. Whitney was vice president and a founder of
Nycom Telecommunications, Inc., a New York based public company engaged in
selling long distance operator assisted telephone services. From January, 1987
through 1989 he was a director of marketing and sales for United Artists
Telecommunications, Inc. From 1992 to the present he has been engaged in the
development of ASI's business and technology as an officer of the Company.

JOHN T. RUOCCO, SR. EXECUTIVE VICE PRESIDENT AND DIRECTOR

John T. Ruocco has been Executive Vice President and Director of the
Company since inception. From 1985 through January, 1987 he was President and a
founder of Nycom Telecommunications, Inc. From January, 1987 through 1989 he
was employed by United Artists Telecommunications, Inc., assisting that company
in its entry to the New York telecommunications industry. From 1992 to present
he has been engaged in the development of ASI's business and technology as an
officer of the Company.

MICHAEL A. SYLVESTER, VICE PRESIDENT, CHIEF FINANCIAL OFFICER, TREASURER AND
DIRECTOR

Michael A. Sylvester has been an Officer and Director of the Company
since inception. From 1983 through 1995 he had been CEO and President of M & S
Chevrolet. At present he remains President of M & S Chevrolet and an officer of
Morning Star Ford and a partner in the real estate firm of Perry Realty, all
located in Highland, New York.

DR. STEVEN A. MARTELLO, VICE PRESIDENT, CHIEF OPERATING OFFICER AND DIRECTOR

Dr. Steven A. Martello has served in the capacity of Chief Operating
Officer and a Director since July, 1992. From 1984 to 1990 he was engaged as a
deputy to the Director of Presidential Advance Operations with the White House.
He has held various corporate management positions including that of Vice
President at Worldlink Information Systems, Inc. and at companies including
General Mills, Inc. and Dr. Martello has served as a director of the Industry
Advisory Board to the American Association of Motor Vehicle Administrators
*("AAMVA") , assisting in liaison with Department of Motor Vehicle
Commissioners and industry.

MICHAEL GHAZARIAN, DIRECTOR OF PRODUCTION AND MANUFACTURING AND DIRECTOR

Mr. Ghazarian is Managing Director of Digital Vehicle Security Systems
in Chesham Bucks, U.K. Digital Vehicle Security Systems is a
Manufacturer/Distributor of Name Brand and O.E.M. electronics products for the
Automotive Industry, including Security Systems, and automotive components. In
addition to systems sold under Digital's own brands GUARDIAN and FIGHTER, and
distributed in twenty seven countries, Digital provides product on an O.E.M.
basis to Toyota, Ford, BMW, LDV, Daewoo, Suoda, Philips and Proton. Mr.
Ghazarian also holds the position of Managing Director of Scarico, U.K., Ltd.
Scarico is a Manufacturer/Distributor of key sub-assemblies and components for
the White Goods (electric appliances) Industry, such as motors, switch panels,
doors, locking assemblies. These products are sold on an O.E.M. basis to major
appliance manufacturers including Whirlpool, Zanussi, Vailiant, Creda and
Ariston. Mr. Ghazarian currently holds the position of Managing Director of
ASE, Plc.

JOSEPH M. LIVELY, CORPORATE COUNSEL, DIRECTOR

Mr. Lively has served as the Company's Corporate Counsel since October
1995, originally as an outside counsel. Mr. Lively was in private practice
prior to becoming the Company's in-house counsel. He is admitted to practice in
New York and the federal courts for the Southern and Eastern Districts of New
York.

<PAGE>

J. ERNEST HANSEN, DIRECTOR

J. Ernest Hansen is President of American International Insurance
Company, American International Insurance Company of California, Inc.,
Minnesota Insurance Company, AIG Marketing, Inc. and New Hampshire Insurance
Services, Inc. He has worked for twenty-five years within the property and
casualty insurance industry. Most recently, before joining AIG in 1990, he was
part of the Tillinghast management consulting practice and, prior to that,
managed the National General Insurance Company, a mass marketing personal lines
insurer. His career includes work in commercial insurance and reinsurance,
domestic and overseas, as well as personal lines.

Item 10. Executive Compensation

The following table summarizes the compensation earned by the Chief
Executive Officer and one other executive officer who earned compensation of
approximately $100,000 for the last fiscal year:

<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Salary Bonus Other Annual Long Term
Name and Principal Position Year ($) ($) Compensation Compensation
- ------------------------------------------ ----------- ------------------ ----------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C>
Robert B. Whitney, CEO 1996 $99,944 - - -
John T. Ruocco, Sr. Exec. VP 1996 $99,944 - - -
</TABLE>

EMPLOYMENT AGREEMENTS

Robert B. Whitney and John T. Ruocco are each employed under a
three-year agreement, effective January 1, 1996, with a base annual salary of
$99,944. The term may be extended an additional two years by mutual consent.
They may each also receive annual bonuses at the sole discretion of the Board
of Directors of the Company, based upon the financial and operating performance
of the Company. The Board has not authorized any bonuses as of this time. Both
officers have executed non-competition and non-solicitation agreements with the
Company covering the two years following termination of employment.

1995 STOCK OPTION PLAN

The Company has adopted, the Company's 1995 Incentive Stock Option
Plan ("Plan") . The Board believes that the Plan is desirable to attract and
retain executives and other key employees of outstanding ability. Under the
Plan, options to purchase an aggregate of not more than 600,000 shares of
Common Stock may be granted from time to time, of which 300,000 are allocated
for employees and 300,000 options are allocated for outside directors and
consultants to the Company.

The Plan is administered by the Board of Directors which may empower a
committee of directors to administer the Plan. The Board is generally empowered
to interpret the Plan, prescribe rules and regulations relating thereto,
determine the terms of the option agreements, amend them with the consent of
the optionee, determine the employees to whom options are to be granted, and
determine the number of shares subject to each option and the exercise price
thereof. The per-share exercise price for incentive stock options ("ISO") and
for non-qualified stock options ("NQSO") will not be less than the greater of
$3.00 per share or 100% of the fair market, value of a share of the Common
Stock on the date the option is granted (110% of fair market value on the date
of grant of an ISO if the optionee owns more than 10% of the Common Stock of
the Company). Upon exercise of an option, the optionee may pay the purchase
price with previously acquired securities of the Company, or at the discretion
of the Board, the Company may loan some or all of the purchase price to the
optionee.

21
<PAGE>

Options will be exercisable for a term determined by the Board, which
will be not greater than ten years from the date of grant. Options may be
exercised only while the original grantee has a relationship with the company
which confers eligibility to be granted options or within three months after
termination of such relationship with the Company, or up to one year after
death or total and permanent disability. In the event of the termination of
such relationship between the original grantee and the Company for cause (as
defined in the Plan), all options granted to that original optionee terminate
immediately. In the event of certain basic changes in the Company, including a
change in control of the Company (as defined in the Plan) , in the discretion
of the Committee, each option may become fully and immediately exercisable.
ISOs are not transferable other than by will or the laws of descent and
distribution. NQSOs may be transferred to the optionee's spouse or lineal
descendants, subject to certain restrictions. Options may be exercised during
the holder's lifetime only by the holder, his or her guardian or legal
representative.

Options granted pursuant to the Plan may be designated as ISOs, with
the attendant tax benefits provided under Section 421 and 422 of the Internal
Revenue Code of 1986. Accordingly, the Plan provides that the aggregate fair
market value (determined at the time an ISO is granted) of the Common Stock
subject to ISOs exercisable for the first time by an employee during any
calendar year (under all plans of the Company and its Subsidiaries) may not
exceed $100,000. The Board may modify, suspend or terminate the Plan; provided,
however, that certain material modifications affecting the Plan must be
approved by the stockholders, and any change in the Plan must be approved by
the stockholders, and any change in the Plan that may adversely affect an
optionee's rights under an option previously granted under the Plan requires
the consent of the optionee.

22
<PAGE>

Item 11. Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information regarding beneficial
ownership of the Company's Common Stock entitled to vote as of December 31,
1996 by (i) each person known by the Company to be the beneficial owner of more
than five percent of the outstanding Common Stock, (ii) each director and
executive officer of the Company individually, and (iii) all directors and
executive officers as a group.
<TABLE>
<CAPTION>

NUMBER OF SHARES OF
OPTIONS/WARRANTS PERCENT OWNERSHIP OF THE
NUMBER OF SHARES OF COMMON EXERCISABLE FOR CAPITAL STOCK
STOCK OWNED COMMON (ON A FULLY DILUTED BASIS)
----------- STOCK --------------------------------
NAME & ADDRESS AS OF 12/31/96 AS OF 3/31/97 OWNED AS OF 12/31/96 AS OF 3/31/97
-------------- -------------- ------------- ------- -------------- -------------
(1) (1) (4) (1) (1) (4)
<S> <C> <C> <C> <C> <C>
Robert B. Whitney
11 Oval Drive
Islandia, NY 11722 646,082 566,260 7.41 6.73

John T. Ruocco
11 Oval Drive
Islandia, NY 11722 646,082 566,260 7.41 6.73

Michael A. Sylvester
11 Oval Drive
Islandia, NY 11722 646,082 566,260 7.41 6.73

Dr. Steven A. Martello
11 Oval Drive
Islandia, NY 11722 150,000 110,888 1.72 1.32

Ariel Enterprises (3)
11 Oval Drive
Islandia, NY 11722 180,000 180,000 100,000 3.17 3.33

Joseph M. Lively
11 Oval Drive
Islandia, NY 11722 39,850 39,850 140,000 2.03 2.10

Michael Ghazarian
11 Oval Drive
Islandia, NY 11722 5,000 5,000 100,000 1.19 1.23

J. Ernest Hansen (2)
11 Oval Drive
Islandia, NY 11722 555,556 555,556 833,333 13.74 14.16
------- ------- ------- ----- -----

TOTALS 2,868,652 2,590,074 1,173,333 44.08 42.33

</TABLE>

All officers and directors as a group are seven.
Michael A. Sylvester and John T. Ruocco, officers and directors of the Company
are brothers-in-law.
(1) The Company presently has 8,721,018 and 8,416,018
common shares outstanding as of December 31, 1996 and March 31, 1997
respectively.

(2) J. Ernest Hansen is President of American International Insurance
Company (AIIC) and is the beneficial owner of the Company shares as a
result of a Convertible Preferred Stock and Warrant Purchase Agreement and the
Company dated December 20, 1996. Pursuant to the terms of this Agreement,
555,556 shares of Common Stock may be issued upon conversion of the Preferred
Stock and 833,333 shares of Common Stock may be issued upon the exercise of the
Warrants. The Agreement grants AIIC anti-dilution rights, and provides for
dividend payments of 9% paid semi-annually, in June and December. This dividend
payment may be paid in the form of cash or stock for the first two years of the
Agreement. Therefore, the Company has reserved 833,333 shares of Common Stock
in the event the dividends are to be paid in the form of stock.

(3) Ariel Enterprises is a trust that has been established for the benefit
of the Martello family.

(4) Gives effect to the contribution of 315,000 shares of Common Stock by
certain officers in connection with a litigation settlement.

<PAGE>

Item 12. Certain Relationships and Related Transactions

For the period commencing February, 1992 through December, 1994
Messrs. Whitney and Ruocco accrued $90,000 in salaries. The Company borrowed
$40,000 from an unaffiliated third party with the aggregate indebtedness
including other officers amounting to approximately $300,000. The Company
repaid approximately $166,000 to officers from the proceeds of its initial
public offering and repaid the note with the unaffiliated third party.

Berger & Paul, the Company's former SEC counsel, were issued 270,000
common shares at par value in consideration of unpaid legal services rendered
to the Company between December, 1992 and July, 1994.

Any future transactions with officers, directors or principal
stockholders will be on terms no less favorable than could be obtained from
unaffiliated third parties and will be approved by a majority of the directors
disinterested in the transaction.

Some of the officers were named as parties to some of the litigation
actions both settled and currently pending. These officers have donated a
portion of their personal stock holdings toward the settlement of certain
actions. (See Legal Proceedings and Settled Litigation.)

Michael Ghazarian, a Director of the Company, is the managing director
of Digital Vehicle Security Systems, the company that had signed an agreement
with ASI to be the distributor of its products in Europe.

Mr. Ghazarian is also a 20% owner of Alcohol Sensors Europe, Plc., a
subsidiary of the Company. The agreement ASI had with Digital was subsequently
assigned to ASE.

Mr. Ghazarian is also the director/owner of Scarico UK, Ltd., with a
manufacturing cooperative located in Varese, Italy. At present, it is the
intention of the Company to have its products manufactured by Scarico.

In 1996, the Company was charged approximately $174,000 for molds,
tooling and operating expenses from Digital and Scarico UK, Ltd.

Michael Ghazarian originally entered into an agreement with ASI in
October, 1993 with delivery of product to begin in April, 1994. Mr. Ghazarian
believed the Company in fact, had the technology to produce an ignition
interlock, but later discovered that ASI did not have the requisite ability to
establish credit lines with third party manufacturers in order to produce the
units.

One of the reasons ASI went public was to raise the necessary capital
to initiate production. In March, 1996 the Company began the manufacturing
process through third party manufacturers. In May, 1996, the Company and Mr.
Ghazarian re-affirmed their prior agreement of October, 1993. Mr. Ghazarian's
rationale for re-affirming this prior agreement was that he reasonably believed
that the Company would in fact be able to produce the product. This belief was
based on the fact that he knew he would be able to handle the Company's
manufacturing process if the Company could not. He is not just a distributor,
but also a manufacturer. He could step in and manufacture the product's
requirements for both his markets and those of the U.S.

The Company, realizing its limitation and the problems associated with
its initial product launch as well as recognizing Mr. Ghazarian's vast
experience as an aftermarket product manufacturer, elected to enter into a
consulting agreement with Mr. Ghazarian.

The material terms of the consulting agreement were for a duration of
six (6) months with a fee to be paid by ASI of $100 per month, plus
pre-approved expenses. Mr. Ghazarian assumed total responsibility for building
molds and tooling for the Sens-O-Lock(TM) and completing the Company's
proprietary air tube design. ASI would retain ownership of the molDs and
tooling upon conveyance of the final payment to Mr. Ghazarian. Mr. Ghazarian
would convey all rights, title and interests to all inventions and patents
produced and developed in accordance with this agreement.

24
<PAGE>

Subsequent to the consulting agreement, it became even more evident
that the Company had to develop an even closer relationship with Mr. Ghazarian
particularly in light of the fact that ASI would have to share its trade
secrets and proprietary information with Mr. Ghazarian to effectuate the
required development and quality assurance with regard to the manufacture of
the product.

Further, the Company believed that it was in its interest,
particularly in light of the importance that the Sens-O-Lock be manufactured
properly, that Mr. Ghazarian receive a substantial vested interest in the
Company. Accordingly, in consideration of Mr. Ghazarian's successful completion
of this tasks under the Consulting Agreement, the Company awarded him 100,000
stock options at a strike price of $3.00. Also, the Company formed a subsidiary
Company owned 80% by ASI and 20% by Mr. Ghazarian, to supervise the final
research and development and industrialization of the new technology and
manufacturing and quality assurance of ASI's WeatherEye and Sens-O-Lock(TM)
products. ASE shaLl supervise the manufacturing to be performed by Mr.
Ghazarian's company, Scarico UK, in Varese, Italy.

Joseph Lively, a director and the Company's Corporate Counsel, is one
of the inventors of the product that eventually became the Company's WeatherEye
series. He is the sole shareholder of a company that was assigned the patent
rights to this product. This company and ASI entered into an agreement in
August, 1996 whereby ASI was provided with certain exclusive marketing and
manufacturing rights to the product. The Company is obligated to pay a royalty
of between $0.19 and $2.00 per unit.

PART IV

Item 13. Exhibits and Reports on Form 8-K

(a) 1. Financial Statements and Schedules

See Financial Statements annexed.

2. Exhibits

(11) Statement of Computation of Per Share Amounts

(b) Reports on Form 8-K
1. Report dated December 20, 1996.

<PAGE>

SIGNATURE

Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

ALCOHOL SENSORS INTERNATIONAL, LTD.

Dated: April 15, 1997 By:
-------------------------------------
Robert B. Whitney, CEO

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

Dated: April 15, 1997 -------------------------------------
Robert B. Whitney

Dated: April 15, 1997 -------------------------------------
John T. Ruocco

Dated: April 15, 1997 -------------------------------------
Steven A. Martello

Dated: April 15, 1997 -------------------------------------
Michael A. Sylvester

Dated: April 15, 1997 -------------------------------------
Michael Ghazarian

Dated: April 15, 1997 -------------------------------------
Joseph M. Lively

Dated: April 15, 1997 -------------------------------------
J. Ernest Hansen

<PAGE>
REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Alcohol Sensors International, Ltd.
Islandia, New York

We have audited the accompanying consolidated balance sheet of Alcohol
Sensors International, Ltd. and subsidiary as at December 31, 1996 and the
related consolidated statements of operations, changes in stockholders'
equity and cash flows for the years ended December 31, 1996 and December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the consolidated financial statements enumerated above
present fairly, in all material respects, the financial position of Alcohol
Sensors International, Ltd. and subsidiary as at December 31, 1996 and the
results of their operations and their cash flows for the years ended December
31, 1996 and December 31, 1995, in conformity with generally accepted
accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A, the Company
has suspended manufacturing, expects substantial losses and may deplete its
working capital and equity before it is able to generate positive cash flow.
These factors raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note A. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.

As described more fully in Note L, the Company is a defendant in
litigation, the ultimate outcome of which cannot be presently determined.

Richard A. Eisner & Company, LLP

New York, New York
March 18, 1997

With respect to Note L
April 3, 1997

F-1
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

AS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents (Notes B<1> and E) ................................. $ 3,042,051
Accounts receivable .......................................................... 16,392
Inventory (Note B<3>)......................................................... 287,462
Prepaid expenses ............................................................. 138,295
--------------
Total current assets........................................................ 3,484,200
Fixed assets--at cost (less accumulated depreciation of $91,921)
(Notes B<6> and C)............................................................ 367,618
Other assets .................................................................. 23,084
--------------
TOTAL ...................................................................... $ 3,874,902
==============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................. $ 703,955
Accrued expenses ............................................................. 215,802
Due to related party (Note H<1>) ............................................. 153,513
Loans payable and accrued interest to officers/stockholders (Note D) ........ 282,880
Note payable (Note E)......................................................... 500,000
Deposits ..................................................................... 10,000
--------------
Total current liabilities .................................................. 1,866,150
--------------
Accrued litigation settlement cost (Note L) ................................... 1,208,813
--------------
Commitments, contingencies and other matters (Notes I and L)...................

Stockholders' equity (Notes A, F and L):
Series A nonredeemable, 9% cumulative preferred stock--3,000,000 shares
authorized, 833,333 issued and outstanding (liquidation value $2,506,875) .. 2,500,000
Common stock--$.001 par value; 25,000,000 shares authorized, 8,776,690 issued 8,777
Additional paid-in capital ................................................... 11,419,483
Accumulated deficit .......................................................... (12,900,000)
Accumulated foreign currency translation adjustment .......................... (5,633)
--------------
Total ...................................................................... 1,022,627
Less treasury stock, at cost, 55,672 shares of common stock ................... (222,688)
--------------
Total stockholders' equity ................................................. 799,939
--------------

TOTAL ...................................................................... $ 3,874,902
==============
</TABLE>

Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.

F-2
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Net sales ................................................... $ 40,586 $ 68,559
Cost of goods sold .......................................... 39,971 41,135
-------------- --------------
Gross profit ................................................ 615 27,424
-------------- --------------

Expenses:
Research and development ................................... 913,456 894,793
Selling, general and administrative ........................ 3,101,571 1,512,938
Litigation settlement expense (Note L) ..................... 1,591,496 990,000
Cost of goods sold--inventory write-off .................... 556,026
-------------- --------------
Total .................................................... 6,162,549 3,397,731
-------------- --------------
Loss from operations ........................................ (6,161,934) (3,370,307)
Interest income ............................................. 82,538 22,028
Interest expense (including amortization of debt discount
and deferred financing fees of $189,300 in 1995) .......... (41,747) (276,608)
-------------- --------------
NET LOSS .................................................... $(6,121,143) $(3,624,887)
============== ==============
Net loss per common share (Note A<8>) ....................... $(.73) $(.56)
============== ==============
Weighted average number of shares outstanding ............... 8,430,960 6,458,486
============== ==============
</TABLE>

Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.

F-3
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(NOTES A, F AND L)

<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
PREFERRED STOCK (PAR VALUE $.001) AT COST
--------------------- -------------------- ---------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES SHARES SHARES
ISSUED AMOUNT ISSUED AMOUNT ISSUED AMOUNT
--------- ---------- ----------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance--January 1, 1995 ............... 7,214,245 $ 7,214
Issuance of common stock for services .. 194,125 194
Issuance of warrants for services .....
Issuance of stock options for services
Issuance of common stock in private
placement (net of $11,700 legal fees) . 258,500 259
Warrants issued with debt in private
placements ............................
Issuance of units from initial public
offering .............................. 2,300,000 2,300
Contribution of common stock from
officers .............................. (1,000,000) (1,000)
Cancellation of shares issued for prior
services .............................. (850,000) (850)
Net loss ...............................
Unrealized gain on marketable
securities ............................
----------- -------
Balance--December 31, 1995 ............. 8,116,870 8,117
Issuance of preferred stock and
warrants .............................. 833,333 $2,500,000
Issuance of stock and stock options for
services .............................. 3,844 4
Issuance of common stock for litigation
settlement ............................ 300,000 300
Exercise of warrants ................... 355,976 356
Contribution of common stock and cash
by certain officers and stockholders . 55,672 $(222,688)
Net loss ...............................
Unrealized loss on marketable
securities ............................
Accumulated foreign currency
translation adjustment ................
--------- ---------- ----------- ------- --------- ----------
BALANCE--DECEMBER 31, 1996.............. 833,333 $2,500,000 8,776,690 $ 8,777 55,672 $(222,688)
========= ========== =========== ======= ========= ==========
</TABLE>
<PAGE>

(RESTUBBED TABLE CONTINUED FROM ABOVE)

<TABLE>
<CAPTION>
ACCUMULATED
UNREALIZED FOREIGN
ADDITIONAL GAIN (LOSS) CURRENCY
PAID-IN ACCUMULATED ON MARKETABLE TRANSLATION
CAPITAL DEFICIT SECURITIES ADJUSTMENT TOTAL
--------- ----------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C>
Balance--January 1, 1995 ............... $ 2,510,705 $ (3,153,970) $ (636,051)
Issuance of common stock for services .. 407,181 407,375
Issuance of warrants for services ..... 238,800 238,800
Issuance of stock options for services 80,000 80,000
Issuance of common stock in private
placement (net of $11,700 legal fees) . 246,541 246,800
Warrants issued with debt in private
placements ............................ 88,000 88,000
Issuance of units from initial public
offering .............................. 5,825,277 5,827,577
Contribution of common stock from
officers .............................. 1,000 -0-
Cancellation of shares issued for prior
services .............................. 850 -0-
Net loss ............................... (3,624,887) (3,624,887)
Unrealized gain on marketable
securities ............................ $ 83 83
----------- ------------- ------------- -----------
Balance--December 31, 1995 ............. 9,398,354 (6,778,857) 83 2,627,697
Issuance of preferred stock and
warrants .............................. 2,500,000
Issuance of stock and stock options for
services .............................. 265,996 266,000
Issuance of common stock for litigation
settlement ............................ 989,700 990,000
Exercise of warrants ................... 435,283 435,639
Contribution of common stock and cash
by certain officers and stockholders . 330,150 107,462
Net loss ............................... (6,121,143) (6,121,143)
Unrealized loss on marketable
securities ............................ (83 ) (83)
Accumulated foreign currency
translation adjustment ................ $(5,633) (5,633)
----------- ------------- ------------- ----------- -----------
BALANCE--DECEMBER 31, 1996.............. $11,419,483 $(12,900,000) $ -0 - $(5,633) $ 799,939
=========== ============= ============= =========== ===========
</TABLE>

Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.

F-4
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ....................................................... $(6,121,143) $(3,624,887)
Adjustments to reconcile net loss to net cash (used in)
operating activities:
Depreciation and amortization ................................. 82,147 9,271
Amortization of debt discount ................................. 88,000
Amortization of bond discount ................................. (7,210)
Common stock issued for services .............................. 16,000 407,375
Common stock issued for litigation settlement ................. 990,000
Warrants issued for services .................................. 238,800
Options issued for services ................................... 250,000 80,000
Other ......................................................... (5,633)
Changes in operating assets and liabilities:
(Increase) in accounts receivable ............................ (16,392)
(Increase) in inventory ...................................... (144,572) (142,890)
Decrease (increase) in prepaid expenses ...................... 51,404 (154,699)
(Increase) in other assets ................................... (23,084)
Increase in accounts payable ................................. 473,346 102,154
Increase in accrued expenses ................................. 150,755
Increase in due to related party ............................. 153,513
Increase in accrued litigation settlement cost ............... 218,813 990,000
(Decrease) increase in deposits .............................. (39,036) 39,036
-------------- --------------
Net cash (used in) operating activities ..................... (3,940,798) (1,998,134)
-------------- --------------
Cash flows from investing activities:
Acquisition of fixed assets .................................... (82,101) (371,821)
Purchases of marketable securities ............................. (2,324,101) (2,817,025)
Sales of marketable securities ................................. 4,304,402 843,935
(Increase) decrease in restricted cash ......................... 1,017,317 (1,017,317)
-------------- --------------
Net cash provided by (used in) investing activities ........ 2,915,517 (3,362,228)
-------------- --------------
Cash flows from financing activities:
Proceeds from sale of common stock and units ................... 6,074,377
Proceeds from sale of preferred stock and warrants ............ 2,500,000
Proceeds from exercise of warrants ............................. 435,639
Contribution of capital by certain officers/stockholders ...... 107,462
Proceeds from notes payable .................................... 1,000,000
Payments of notes payable ...................................... (500,000) (196,050)
-------------- --------------
Net cash provided by financing activities ................... 3,543,101 5,878,327
-------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ....................... 2,517,820 517,965
Cash and cash equivalents--beginning of year .................... 524,231 6,266
-------------- --------------
CASH AND CASH EQUIVALENTS--END OF YEAR .......................... $ 3,042,051 $ 524,231
============== ==============
Supplemental disclosure of cash flow information:
Interest paid during the year .................................. $ 37,594 $ 59,781

Supplemental schedule of noncash financing activities:
During 1996, certain officers/stockholders contributed 55,672 shares of common stock to the
Company valued at $222,688 and are held in treasury.

</TABLE>

Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.

F-5
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS

(NOTE A) -- THE COMPANY AND BASIS OF PRESENTATION:

Alcohol Sensors International, Ltd. (the "Company") was formed for the
development and commercial exploitation of a breath alcohol ignition
interlock device ("SENS-O-LOCK"). In October 1996, the Company incorporated a
subsidiary in the United Kingdom ("UK"), Alcohol Sensors Europe, PLC ("ASE"),
of which it owns 80% of the outstanding common stock. The consolidated
financial statements include the accounts of the Company and ASE. Significant
intercompany balances and transactions have been eliminated in consolidation.

In 1995, the Company prepared its financial statements as a development
stage company. During the first quarter of 1996 when the Company commenced
shipping SENS-O-LOCK, the Company determined that it was no longer a
development stage company. During the second quarter of 1996 the Company
experienced substantial returns of its product due to manufacturing
difficulties. As a result, the Company suspended manufacturing and resumed
its research and development on a new technology. This development has taken
longer than anticipated and must still go through a period of testing before
manufacturing can be resumed. There is no assurance that the product will be
successful or that shipping will resume. Further, there is no assurance that
the Company will be able to market its product.

Although the Company had working capital at December 31, 1996, a
substantial portion has been used in the continuing research and development
and its resources may be depleted before shipment of its product can be
resumed, which the Company believes will be followed by a positive cash flow.
The Company has taken steps to reduce its operating costs and postpone cash
outflow. However, the Company anticipates that losses will continue at least
until the shipment of product and maybe thereafter.

(NOTE B) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

[1] Cash equivalents:

The Company considers all highly liquid investment instruments purchased
with a maturity of three months or less to be cash equivalents.

[2] Marketable securities:

Securities classified as available-for-sale are carried at market value
with unrealized gains or losses reported as a separate component of
stockholders' equity. Securities classified as held-to-maturity are carried
at amortized cost.

[3] Inventory:

Inventory consisting of electronic components, is stated at the lower of
cost (first-in, first-out basis) or market.

[4] Patent costs:

Patent application costs are charged to expense as incurred.

[5] Research and development:

Research and development costs are charged to expense as incurred.

[6] Depreciation:

Fixed assets are recorded at cost. Depreciation is provided on the
straight-line method over the estimated useful lives from three to five years
of the depreciable assets. Molds and tooling are depreciated on the
straight-line basis over the shorter of three years or the estimated units of
production. Amortization of leasehold improvements is provided over the
shorter of the lease term or the estimated useful life of the asset.

F-6
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(NOTE B) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

[7] Use of 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.

[8] Loss per share of common stock:

Net loss per share of common stock is based on the weighted average number
of shares outstanding excluding 1,000,000 shares contributed to the Company
by certain officers in conjunction with the initial public offering. Options
and warrants have been excluded since they would be anti-dilutive. Common
stock, options and warrants issued within twelve months of the Company's
initial public offering are considered outstanding through June 30, 1995
using the treasury stock method.

[9] Fair value of financial instruments:

The Company considers its financial instrument obligations, which are
carried at cost, to approximate fair value due to the near term repayment due
dates.

[10] Accumulated foreign currency translation adjustment:

Assets and liabilities are translated to United States dollars at year-end
exchange rates. Income and expense items are translated at average rates of
exchange prevailing during the period of operations of ASE. Gains or losses
from translation adjustments are accumulated in a separate component of
stockholders' equity.

Condensed financial information of the Company's UK subsidiary as at and
for the year ended December 31, 1996 is as follows:

<TABLE>
<CAPTION>
<S> <C>
Assets .................... $ 53,281
Liabilities .............. 195,506
Stockholders' deficiency (142,225)
Revenue .................. -0-
Net loss ................. (156,592)
</TABLE>

[11] Revenue recognition:

The Company recognizes revenue when a product is shipped.

(NOTE C) -- FIXED ASSETS:

Fixed assets as at December 31, 1996 consists of the following:

<TABLE>
<CAPTION>
<S> <C>
Furniture and fixtures ....... $153,749
Equipment .................... 126,616
Leasehold improvements ....... 120,993
Molds and tooling ............ 58,181
----------
Total ........................ 459,539
Less accumulated
depreciation................. 91,921
----------
Total ...................... $367,618
==========
</TABLE>

(NOTE D) -- LOANS PAYABLE TO OFFICERS/STOCKHOLDERS:

Loans payable to officers/stockholders of $132,782 at December 31, 1996
bear interest at 10% per annum and are due on demand. Interest accrued on
such loans aggregated $150,098 at December 31, 1996.

F-7
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Loans due to officers/stockholders includes amounts for services rendered to
the Company. Interest expense on these obligations for the years ended
December 31, 1996 and December 31, 1995 was $12,091 and $32,262,
respectively.

(NOTE E) -- NOTES PAYABLE:

The Company has a credit facility of $500,000 with a bank and the note is
due on June 30, 1997. The loan bears interest at 5.25% and is collateralized
by the Company's $500,000 certificate of deposit.

(NOTE F) -- STOCKHOLDERS' EQUITY:

[1] The Company issued common stock in connection with services rendered
and settlement of litigation as follows:

<TABLE>
<CAPTION>
FAIR VALUE OF SHARES
ISSUED FOR
NUMBER -----------------------------------------
OF RESEARCH GENERAL ACCRUED
YEAR ENDED SHARES AND AND LITIGATION
DECEMBER 31, ISSUED DEVELOPMENT ADMINISTRATION SETTLEMENT TOTAL
- -------------- --------- ------------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
1995 .......... 194,125 $300,000 $107,375 $ 407,375
1996 .......... 303,844 16,000 $990,000 1,006,000
</TABLE>

In connection with research and development costs, the Company issued
shares to engineering consultants primarily for the design and development of
the SENS-O-LOCK. In connection with general and administrative costs, the
Company issued shares primarily for legal services, marketing consultants
and trade advertising expenditures. The Company valued such shares at fair
value which was determined by the selling price of the most recent private
placement in effect at the time of issuance or by the market price of the
Company's stock with a 30% discount.

[2] In September 1996, the Company issued 213,500 options to purchase the
Company's stock for consulting and legal services. The options are
exercisable at $3.00 and expire in September 2001. The Company recorded an
expense of $250,000 in connection with the issuance of these options.

[3] In connection with a litigation settlement (see Note L) in October
1996, certain officers and stockholders contributed approximately $107,000 in
cash and 55,672 shares of common stock to the Company. The shares are held in
treasury at December 31, 1996.

[4] In December 1996, the Company was authorized to issue 3,000,000 shares
of Series A nonredeemable, cumulative preferred stock. In December 1996, the
Company issued 833,333 shares of nonredeemable, cumulative Series A preferred
stock and warrants, expiring in December 1998, to purchase 833,333 shares of
common stock at an exercise price of $5.50 per share for an aggregate of
$2,500,000. The Series A preferred stock is convertible into to 556,556
shares ($4.50 per share) of common stock as at December 31, 1996. Dividends
accrue on the Series A nonredeemable, cumulative preferred stock at 9% per
annum (compounded semi-annually on any accrued and unpaid dividends).

F-8
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(NOTE F) -- STOCKHOLDERS' EQUITY: (Continued)

[5] The Company has the following warrants outstanding at December 31,
1996:

<TABLE>
<CAPTION>
EXERCISE
DESCRIPTION SHARES PRICE EXPIRATION DATE
- ---------------------------------------- -------------- ---------- ----------------
<S> <C> <C> <C>
Warrants issued in connection with debt 523,999(a) $ 1.50 November 2000
Warrants issued in connection with debt 396,000(a) 1.50 May 2000 through
September 2000
Compensatory warrants ................... 150,000(b) 1.00 December 2000
Class A warrants ........................ 1,150,000(c) 3.75 November 2000
Class B warrants ........................ 575,000(c) 5.00 November 2000
Warrants issued with preferred stock ... 833,333(d) 5.50 December 1998
Underwriters' warrants .................. 100,000(e) 10.00 November 1999
</TABLE>

(a) Issued in connection with the Company's private placements of debt.

(b) Issued to consultants for services rendered in 1995 and valued by the
Company at $238,800.

(d) Issued in connection with the sale of the Series A nonredeemable, 9%
cumulative preferred stock in December 1996.

(e) Exercisable for units consisting of 2 shares of common stock, 1 Class
A warrant and 1/2 Class B warrant.

(NOTE G) -- STOCK OPTIONS:

In 1996, the Company adopted the 1995 Incentive Stock Option Plan (the
"Plan"). Under the Plan, options to purchase an aggregate of not more than
600,000 shares of common stock may be granted from time to time, of which
300,000 are allocated for employees and 300,000 options are allocated for
outside directors and consultants to the Company. During 1996, the Company
issued 324,250 options to purchase common stock at an exercise price of $3.00
per share (market price at the date of grant) which expire in September
2001. All the options to purchase common stock are exercisable as at December
31, 1996 and the Company has 275,750 shares reserved for future issuance
under the Plan as at December 31, 1996.

During the year ended December 31, 1995, the Company granted options,
expiring from September 2000 to December 2000, to purchase 150,000 shares of
common stock to employees at $2.00 per share.

During the year ended December 31, 1995, the Company issued 30,000 options
for legal and consulting services rendered, at exercise prices ranging from
$1.00 to $3.00 per share, expiring in December 2000. In connection with the
issuance of these options, the Company recorded a charge of $80,000.

A summary of the status of the Company's stock options as at December 31,
1996 are as follows:

<TABLE>
<CAPTION>
1996 1995
------------------------ ----------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE
- ----------------------------------- --------- ----------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year .. 180,000 $1.89
Granted ............................ 324,250 3.00 180,000 $1.89
Outstanding at end of year ......... 504,250 2.60 180,000 1.89
Options exercisable at end of year 504,250 2.60 180,000 1.89
</TABLE>

F-9
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(NOTE G) -- STOCK OPTIONS: (Continued)

The following table summarizes information about fixed stock options
outstanding as at December 31, 1996:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- --------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
NUMBER OF CONTRACT AVERAGE AVERAGE
EXERCISE OPTIONS LIFE EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
- ---------- ------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
$1 25,000 4 $1 25,000 $1
$2 150,000 4 2 150,000 2
$3 329,250 5 3 329,250 3
</TABLE>

The Company applies APB 25 and related interpretations in accounting for
its options. Accordingly, no compensation cost has been recognized for its
stock option grants to employees and directors. Had compensation cost for the
Company's stock option grants been determined based on the fair value at the
grant dates for awards consistent with the method of SFAS No. 123, the
Company's net loss and loss per share would have been as indicated below. The
effects of applying SFAS No. 123 in this pro forma disclosure are not
necessarily indicative of future amounts.

<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C> <C>
Net loss ........... As reported $(6,121,143) $(3,624,887)
Pro forma (6,246,974) (3,693,887)
Net loss per share As reported (.73) (.56)
Pro forma (.74) (.57)
</TABLE>

The fair value of each option grant is estimated on the date grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995: dividend yield of zero percent
(0%), in 1996 and 1995; expected volatility of seventy percent (70%) and
forty percent (40%) in 1996 and 1995, respectively, risk-free interest rates
of 6.50% in 1996 and 5.56% in 1995 and expected life of 5 years.

(NOTE H) -- RELATED PARTY TRANSACTION:

[1] In October 1993, the Company entered into an exclusive distribution
agreement with Digital Vehicle Security Systems Limited ("Digital") to sell
SENS-O-LOCK's purchased from the Company in certain European territories. This
contract was assigned to ASE in October 1996.

In 1996, the Company was charged approximately $174,000 for molds,
tooling, and operating expenses from Digital and Scarico UK, Ltd., electronic
consumer goods manufacturers, whose managing director is a 20% owner in ASE
and a member of the Company's Board of Directors.

In July 1996, the Company entered into a consulting agreement with
Digital for $100 per month which expires on January 1, 1997. The agreement
calls for Dig ital to provide for the design of molds and tooling for the
SENS-O-LOCK and the production process. The SENS-O-LOCK will be produced
by Scarico UK, Ltd. Digital assigned to the Company the worldwide right,
title and interest to each idea, invention and improvement made by them.

[2] The Company previously leased its premises through November 1995 from
a Company, of which a principal officer was also a director of the Company, on
a month to month basis for $900 per month.

[3] In August 1996, the Company entered into a royalty agreement with a
company which is owned by a member of the Board of Directors. The Company was
granted an exclusive right to distribute Weather Eye Intelligent Headlight
Management Systems ("Weather Eye") in the United States as well as the

F-10
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(NOTE H) -- RELATED PARTY TRANSACTION: (Continued)

nonexclusive right to distribute in other worldwide markets. The Company is
obligated to pay a royalty of between $.19 and $2.00 per unit sold.

(NOTE I) -- COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:

[1] In 1995 the Company entered into a Marketing Agreement with Texas
Interlock Corporation ("TIC") whereby the Company granted TIC the right to
develop, market, sell and distribute its SENS-O-LOCK device in the state of
Texas. TIC agreed to use its best efforts to assist in the certification
process of the SENS-O-LOCK device in Texas and to prepare a strategy to
obtain legislative support for statutes creating a mandated market for the
Company's product. The Company agreed to compensate TIC at the rate of $100
for each SENS-O-LOCK device leased from the Company during the term of the
agreement. No revenues were recorded in connection with such agreement.

[2] Employment contracts:

The Company has employment contracts with certain officers for aggregate
annual salaries of $400,000 which expires through December 31, 1998. The
agreements provide for annual bonuses at the discretion of the board of
directors.

The Company has employment contracts with two engineers for aggregate
annual salaries of $156,000 which expire in September 1997 and are
automatically renewed. The Company will pay a royalty of $1.00 per unit sold
for certain technology as determined in the contract.

[3] Leases:

The Company has an operating lease for office space. The following is the
future annual rental payments:

<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- --------------
<S> <C>
1997 .......... $ 84,000
1998 .......... 88,000
1999 .......... 92,000
2000 .......... 47,000
----------
Total ....... $311,000
==========
</TABLE>

Rent expense was approximately $100,000 and $39,000 for 1996 and 1995,
respectively.

[4] Purchase commitments:

The Company has $800,000 of purchase inventory commitments as at
December 31, 1996.

[5] Securities and Exchange Commission inquiry:

In November 1996, the Company received a letter of inquiry from the
Securities and Exchange Commission, Division of Enforcement (the "SEC")
requesting that the Company voluntarily provide certain information. In
December 1996, the Company responded to the SEC and has not received any
further comments or a response.

(NOTE J) -- INCOME TAXES:

[1] The Company has a deferred tax asset of approximately $4,182,000,
relating to a United States and state net operating loss carryforward of
approximately $10,200,000. In addition the Company has a deferred tax

F-11
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(NOTE J) -- INCOME TAXES: (Continued)

asset of $129,000, relating to accrued litigation settlement of
approximately $1,208,000 and compensatory options and warrants of
$570,000. The net operating loss carryforward expires from 2007
to 2011. The tax benefits of these deferred tax assets are fully
reserved for since the likelihood of realization of the benefit
cannot be established.

The Tax Reform Act of 1986 contains provisions which limits the net
operating loss carryforwards available for use in any given year should
certain events occur, including significant changes in ownership interests.
As a result of the Company's initial public offering, as well as other
previous ownership changes, the net operating loss carryover will be subject
to these annual limitations until the net operating loss is utilized or
expires.

[2] The tax effects of principal temporary differences and net operating
(losses) are as follows as at December 31, 1996:

<TABLE>
<CAPTION>
<S> <C>
Asset:
Accrued litigation and other.................... $ 729,000
Federal and state operating loss carryforwards (4,182,000)
Valuation allowance ............................ (4,911,000)
-------------
Net deferred tax asset ......................... $ -0-
=============
</TABLE>

The valuation allowance as at December 31, 1995 was approximately
$1,800,000. The differences between the statutory Federal income tax rate of
34% are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Net loss:
United States.. $(5,964,551) $(3,624,887)
Foreign ....... (156,592)
-------------- --------------
$(6,121,143) $(3,624,887)
============== ==============
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Statutory rate benefit . . . (34.0)% (34.0)%
Nondeductible expenses . . . .1 .1
Valuation allowance. . . . . 33.9 33.9
--------- ---------
Effective tax rate . . . . . 0% 0%
========= =========
</TABLE>

(NOTE K) -- CONCENTRATION OF CREDIT RISKS:

The Company places its cash and cash equivalents at various financial
institutions. At times, such amounts might be in excess of the FDIC insurance
limit.

(NOTE L) -- LITIGATION:

[1] Pending litigation:

F-12
<PAGE>
ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(NOTE L) -- LITIGATION: (Continued)

contractor and was never compensated for the services he performed. The
Company's position is that the plaintiff in this action failed to provide the
services as contracted and was not entitled to receive any payment. Defendant
has submitted it answer and management believes the claims alleged in this
lawsuit are frivolous and is defending the action vigorously. At this time,
it is too early to determine the outcome of this action and therefore the
Company has not made any provision in the accompanying financial statements.

The Company was recently served with a Demand to Arbitrate by a former
employee. Claimant is seeking $75,000 and approximately 36,000 stock options
as damages. The Company has recently filed its answer to this demand. At this
time, it is too early to determine the outcome of this action and therefore
the Company has not made any provision in the accompanying financial
statements.

The Company and certain of its officers were named as defendants in an
action commenced in the United States District Court for the Eastern District
of New York in March 1996, by a stockholder seeking $2 million in alleged
damages as a result of the Company's handling of a prior action, Barry Beyer,
et al v. Alcohol Sensors Internal, Ltd., et al. This previous action was
settled for a total of $382,675. In connection therewith, certain members of
management donated 55,672 of their private shares and cash of $107,642 to the
Company. As a result of the Beyer settlement, management believes this
settlement renders the claim of the present action without merit and is
vigorously defending this action. The Company has not made any provision in
the accompanying financial statements.

[2] Settled litigation:

The Company and certain of its officers were named as defendants in an
action commenced in the Supreme Court of the State of New York, Orange
County, by two individuals claiming an equity interest in the Company, as
well as damages of $18.5 million, based upon a purported agreement with
another company, Alcohol Sensors, Inc. with which the claimants, certain
officers of the Company and others were affiliated in 1989, and a claim that
one of the individuals is the inventor of the technology that the Company is
using. Management agreed to settle this action in February 1997 subject to
the approval of the Court, for a total of 315,000 shares of Company common
stock. Certain members of management have agreed to donate their private
shares to provide for the settlement. At December 31, 1996 the Company has
accrued $1,144,000 in connection with this settlement.

This Company was served with a Demand to Arbitrate and a Statement of
Claim by a former individual who had performed engineering services for the
Company on a consulting basis. Claimant was seeking $650,000 and 114,449
shares of stock in damages. The company settled this matter in a Mediation
Conference and has agreed to transfer to Claimant 27,500 shares of stock in
full satisfaction of all claims in this action. This matter was settled in
April 1997 and the Company has accrued $65,000 at December 31, 1996.

F-13
<PAGE>
EXHIBIT 11

ALCOHOL SENSORS INTERNATIONAL, LTD. AND SUBSIDIARY

COMPUTATION OF LOSS PER SHARE

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Net loss ...................................................... $(6,121,143) $(3,624,887)
Cumulative dividend on Series A preferred .....................
nonredeemable stock ........................................... (6,875)
-------------- --------------
Net loss attributable to common stockholder ................... $(6,128,018) $(3,624,887)
============== ==============
Shares:
Weighted-average number of common shares outstanding ........ 8,430,960 7,183,156
Add common stock equivalents issued within twelve months of
an initial public offering (determined by the "treasury
stock" method)(1) ........................................... 275,330
Officers' shares contributed to the Company in conjunction
with the initial public offering ............................ (1,000,000)
-------------- --------------
Weighted-average outstanding shares .......................... 8,430,960 6,458,486
============== ==============
Loss per common share ......................................... $(.73) $(.56)
============== ==============

</TABLE>

- ------------
(1) In accordance with Securities and Exchange Commission requirements,
common shares, options and warrants issued during the twelve-month
period prior to the filing of an initial public offering have been
included in the calculation as if they were outstanding through June
30, 1995 using the treasury stock method.

F-14

<PAGE>

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Balance Sheet and the operations for the year ended December 31, 1996 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,042,051
<SECURITIES> 0
<RECEIVABLES> 16,392
<ALLOWANCES> 0
<INVENTORY> 287,462
<CURRENT-ASSETS> 3,484,200
<PP&E> 459,539
<DEPRECIATION> 91,921
<TOTAL-ASSETS> 3,874,902
<CURRENT-LIABILITIES> 1,866,150
<BONDS> 500,000
0
2,500,000
<COMMON> 8,777
<OTHER-SE> (1,708,838)
<TOTAL-LIABILITY-AND-EQUITY> 3,874,902
<SALES> 40,586
<TOTAL-REVENUES> 40,586
<CGS> 39,971
<TOTAL-COSTS> 595,997
<OTHER-EXPENSES> 5,606,523
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41,747
<INCOME-PRETAX> (6,121,143)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,121,143)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,121,143)
<EPS-PRIMARY> (0.73)
<EPS-DILUTED> 0

</TABLE>