<PAGE>

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

                     ANNUAL REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                    For the Fiscal Year Ended January 1, 2000

                           Commission File No. 0-9478

                           SPECTRUM LABORATORIES, INC.
                 (Name of small business issuer in its charter)

               Delaware                                         95-4718363
               --------                                         ----------
    (State or other Jurisdiction of                          (I.R.S. Employer
     Incorporation or Organization)                          Identification No.)

               18617 Broadwick Street
               Rancho Dominguez, California                        90220
               (Address of principal executive offices)         (Zip Code)

         Issuer's telephone number, including area code: (310) 885-4600

       Securities registered under Section 12(b) of the Exchange Act: None

         Securities registered under Section 12(g) of the Exchange Act:

                                  Common Stock
                                (Title of Class)

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

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-KSB
or any amendment to this Form 10-KSB [ X ].

      State issuer's revenues for its most recent fiscal year: $13,083,000

The aggregate market value of voting stock held by nonaffiliates of the
registrant is $280,182 as of February 29, 2000, based on the $3.13 per share
closing price for the Common Stock in the over-the-counter market on such date,
representing 89,515 shares held by nonaffiliates.

Number of shares of Common Stock outstanding as of February 29, 2000:  5,311,968

<PAGE>

                                TABLE OF CONTENTS
                            FORM 10-KSB ANNUAL REPORT
                       FOR THE YEAR ENDED JANUARY 1, 2000
                           SPECTRUM LABORATORIES, INC.
Item No.                                                                    Page
--------                                                                    ----

       PART I
       1.     Description of Business  ......................................  3
       2.     Description of Property  ......................................  7
       3.     Legal Proceedings  ............................................  8
       4.     Submission of Matters to a Vote of Security Holders  ..........  8

       PART II
       5.     Market for Common Equity and Related Shareholder Matters  .....  8
       6.     Management's Discussion and Analysis of Financial Condition
              and Results of Operations  ....................................  8
       7.     Financial Statements  ......................................... 10
       8.     Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosure  ..................................... 11

       PART III
       9.     Directors, Executive Officers, Promoters and Control Persons;
              Compliance with Section 16(a) of the Exchange Act  ............ 12
       10.    Executive Compensation  ....................................... 14
       11.    Security Ownership of Certain Beneficial Owners
              and Management  ............................................... 14
       12.    Certain Relationships and Related Transactions  ............... 16
       13.    Exhibits and Reports on Form 8-K  ............................. 16

                                                                               2
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THIS ANNUAL REPORT FORM 10-KSB CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS, THE
REALIZATION OF WHICH MAY BE IMPACTED BY CERTAIN IMPORTANT FACTORS WHICH ARE
DISCUSSED IN "ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS," UNDER ITEM 6,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL
-------

Spectrum Laboratories, Inc. (the Company or Spectrum) was incorporated in
California on June 5, 1980 under the name Immutron, Inc. On November 23, 1982,
the Company changed its name to Spectrum Laboratories, Inc. In September 1998,
Spectrum Medical Industries, Inc. (SMI) was merged into the Company and the
Company was reincorporated in Delaware. Spectrum Chromatography, Inc. and
Spectrum Europe B.V., formerly subsidiaries of SMI, are now wholly-owned
subsidiaries of the Company.

BUSINESS
--------

The Company is a leader in the development and commercialization of proprietary
tubular membranes and membrane devices for existing and emerging life sciences
applications. These products are used by life science research laboratories for
emerging applications for molecular/biological separations, fluid purification
and cell expansion/bioreactors. The Company's platform technology allows it to
create membranes and devices to meet a wide range of performance criteria and to
integrate the devices into systems for life sciences applications. The Company's
fundamental strengths are based on the control of material, membrane
characteristics, surface modification, device properties, biological utility,
and cell maintenance know-how.

The Company's proprietary products are used for research by OEM manufacturers
and for Process Separations. Most laboratory products are sold through
laboratory distributors. OEM and private label products are sold primarily to
manufacturers. They include re-sale versions of the Company's laboratory
products as well as specially designed membrane products. Process or scale-up
separation products are sold to pharmaceutical and diagnostic manufacturers for
process development and manufacturing. The Process Separation products also
include the necessary systems for operating the separation application. Both OEM
and Process products are sold directly by the Company. The Company's products
and trademarks, Spectra/Por, Cellmax and KrosFlo are well-known and used
throughout the world for purification of proteins, cells expansion,
encapsulation and diagnostic particles separation. Company personnel work
closely with existing and potential customers to develop new Mass Transfer
Membranes (MTM) products, applications and devices for the research markets.

In addition, the Company has entered into strategic partnerships, licensing
agreements and collaborative arrangements with leading corporations and research
scientists. Some of these ventures include:

The Company is marketing Cellmax rapid drug screening and testing technology
developed at the National Cancer Institute and Rhode Island Hospital. This
fast-track drug screening and testing method greatly reduces the use of animals
in new drug discovery, drug efficacy screening and drug dosing.

The Company markets, sells and develops MTM perfusion systems for human cell
expansion. The perfusion systems are sold under the trade name CELLMAX(R) and
have been successfully used to expand and maintain mammalian cells including
human cell lines.

The Company has a joint venture with Stanford Research International, Edison
Technologies, Inc. and EPRI. This venture, Facilichem, Inc., was established to
commercialize new membrane systems for major industrial separations while
greatly reducing current costs. The systems will be marketed for waste stream
separators for environmental markets, chiral molecule separations for

                                                                               3
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pharmaceutical use and food and beverage separation, providing the addition and
removal of trace substances which contribute to and/or improve flavor and taste.

Facilichem, Inc. was awarded a two-million dollar grant in November 1998, by the
Advanced Technology Program of the National Institute of Standards and
Technology (ATP) to commercialize its proprietary separation systems. Spectrum
is the supplier of membranes to Facilichem, Inc.

In 1999, the Company acquired an exclusive license from Monsanto Co. for
Supported Polymeric Liquid Membrane (SPLM). The Company is developing and plans
to market laboratory and industrial products using this technology for the
preferential extraction of organic compounds from dilute aqueous solutions and
removal and mitigation of environmental pollutants from potable water.

The Company's MTM devices, loaded with hepatocytes (liver cells) have been used
successfully as liver-assist devices for patients suffering from acute liver
failure. The device provides a life sustaining "bridge" to patients suffering
from fulminant liver failure who are candidates for a liver transplant or until
their own liver regenerates and recovers. By providing MTM's devices and systems
to clinical scientists, the Company believes that its products will be part of
applications and protocols for therapies undergoing the regulatory approval
process controlling such therapies. The Company is in discussions to develop a
strategic partnership for this technology.

PRODUCTS
--------

TUBULAR MEMBRANES FOR DIALYSIS, FILTRATION AND CELL CULTURE

The Company manufactures and markets many types of porous membranes used to
concentrate, separate and purify dissolved or suspended molecules. The Company
is a market leader in the manufacture of hollow fiber membrane products whose
applications include: point-of-use water filtration; gas filtration for
semiconductor blow-off guns, plasma gas cauterizing devices, insufflator kits
for endoscopic surgery; drug filtration for surgical eyewash solutions and pain
management parenterals.

The Company is also the market leader in supplying dialysis membranes for
protein concentration to the research laboratory market. The purification and
separation of components in fluid streams is a key element in biomedical
research, molecular biology and clinical diagnostics.

On October 1, 1996, the Company purchased certain assets of Cellco, Inc.,
providing artificial capillary systems to academic, pharmaceutical, laboratory
and clinical research markets involved in the expansion and maintenance of human
and animal cells. These are closed systems that minimize the possible
contamination encountered with other culture devices.

OPERATING ROOM (OR) DISPOSABLES

Disposable OR products consist of hollow fiber filters for laproscopic
procedures, sterile surgical drapes for orthopedic and arthroscopic surgical
procedures, sterile camera covers, rubber elastic bandages (sterile and
non-sterile), Esmarch Elastic Bandages, and a tamper-resistant container system
for use in harvesting bone and tissue for human transplantation and other
surgical specialty products.

MARKETS AND METHODS OF DISTRIBUTION
-----------------------------------

TUBULAR MEMBRANES FOR DIALYSIS, FILTRATION AND CELL CULTURE

The Company has over 400 active customers worldwide, comprised of pharmaceutical
and diagnostic manufacturers, medical device manufacturers, laboratories,
laboratory distributors and research institutions for its hollow fiber membrane
and dialysis products. Approximately 17% of its sales are from non-U.S.
customers for fiscal years 1999 and 1998. Spectrum's cell culture and process
filtration products are sold to over 150 active customers worldwide, comprised
of academic, research, pharmaceutical, laboratory, and clinical research

                                                                               4
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companies and institutes. Domestic sales are made with a direct sales force and
foreign sales are made through direct sales and laboratory products
distributors.

OPERATING ROOM (OR) DISPOSABLES

The three major product groups are: Operating Room Equipment Drapes, Orthopedic
Soft Goods and Esmarch Bandages.

The products are distributed through a number of channels including important
National and Regional Catalog Houses, OEM & Private Label Accounts, Regional OR
Specialty Distributors, Custom Procedure Tray Manufacturers and Direct Sales to
Institutions and International Distributors. Nearly all Operating Room Equipment
Drapes are sold in sterile ready-to-use format. OR Drapes are sold primarily
through OEM & Private label accounts, through Regional OR Specialty Distributors
and through Regional and National Catalog Houses. Over the past three and one
half years, the importance of OR Specialty Distributor sales has declined while
OEM, Private Label and Catalog House sales have increased. OR Drapes constitute
nearly all international sales and approximately half of direct sales.
Orthopedic Soft Goods are primarily sold through Regional and National Catalog
Houses and Procedure Tray Manufacturers. Approximately one-third of Orthopedic
Soft Goods sales are in non-sterile, bulk format primarily to Tray
Manufacturers. Essentially no Soft Goods and Esmarch Bandages are sold
internationally. Esmarch Elastic Bandages are sold through Catalog Houses,
Regional OR Specialty Distributors, Procedure Tray Manufacturers and Private
Label.

The Company has over 200 active customers, the most active of which are over 100
hospitals and over 75 hospital supply dealers. Export and OEM accounts are
currently confined to a select few products, mostly for orthopedics. The Company
does not employ its own sales force but uses stocking distributors capable of
supplying product delivery on a local level.

RAW MATERIALS AND SUPPLIES
--------------------------

TUBULAR MEMBRANES FOR DIALYSIS, FILTRATION AND CELL CULTURE

The Company purchases common raw polymers and a variety of casting solvents from
several approved suppliers. The Company uses these materials to formulate and
manufacture several different kinds of proprietary membranes for specific
separation and purification processes in the Life Sciences field. Additionally,
the Company purchases commercially available membranes for certain applications
from several qualified suppliers. The Company has not experienced difficulty in
obtaining the necessary raw materials and supplies to conduct its business. Many
membranes are assembled into housings that are molded from commonly available
plastic resins by third party molders using molds owned by the Company.
Membranes are often affixed to the housings by means of proprietary potting
resins supplied by two independent suppliers that are covered by an industry
cooperative disaster recovery plan. The plan allows the suppliers to manufacture
the resins in the event of an interruption of supply. Membranes are also
pre-assembled into ready-to-use devices or marketed as pre-packaged finished
products to research laboratories.

Spectrum is dependent on a limited number of suppliers for hollow fiber membrane
products but has not experienced any difficulty in obtaining necessary supplies.

OPERATING ROOM (OR) DISPOSABLES

The principal raw materials used in producing sterile surgical drapes and
elastic bandages are yarn, natural latex and plastic film. There are several
suppliers in the United States for yarn. The Company is dependent on a limited
number of suppliers for plastic film but has not experienced any difficulty in
obtaining necessary supplies, and none are presently anticipated.

                                                                               5
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PATENTS AND TRADEMARKS
----------------------

The Company holds a number of trademark registrations for its products, some of
which are closely identified with the Company, such as the Spectra/Por
trademark. The Company also owns or licenses numerous issued patents and pending
patents that expire at various dates through the year 2019. Some of the
Company's patents or patent estates include: hollow fiber syringe tip filter,
rapid drug screening, membrane surface modification chemistries, liquid phase
separation membranes, apparatus for forming a rolled tubular fabric article,
surgical extremity drape and a video camera drape. The Company acquired the
rights to the Cellmax trademark and all related patents, including a patent for
serum-free production of packaged viral vector. Fundamental core technology is
kept as trade secrets. Employees and vendors are covered by non-disclosure
agreements.

A finding of invalidity or unenforceability of certain of the Company's patents
could have a materially adverse effect on the Company's business.

GOVERNMENT REGULATIONS
----------------------

The Food and Drug Administration (the "FDA") and the California Food and Drug
Bureau ("CFDB") regulate the manufacture and quality control procedures of
certain of the Company's products. Compliance with FDA and CFDB regulations is a
significant expense but the Company believes that such expenses are costs of
doing business in the industry and that the Company's expenses are similar to
those of other companies in the business.

In addition to regulations enforced by the FDA and the CFDB, the Company is also
subject to regulations under the Environmental Protection Act, the Occupational
Safety and Health Act, and other present and potential supranational, foreign,
Federal, state and local regulations. Compliance with any of these has not had a
material effect on the capital expenditures, operations or competitive position
of the Company to date. The Company adheres to the strict provisions of its ISO
9001 certification status.

The Company cannot predict whether future changes in government regulations
might increase its cost of conducting business or affect the time required to
develop and introduce new products.

DEPENDENCE UPON FEW CUSTOMERS
-----------------------------

The Company does not believe that its business would be adversely affected by
the loss of any individual customer or small group of customers. During the 1999
and 1998 fiscal years, two dealers accounted for 10% or more of the Company's
total sales which were approximately 15% and 17% in 1999 and 1998, respectively
for one dealer, and were approximately 11% in 1999 and 12% in 1998 for another.
The Company's sales to dealers are proprietary branded products which would be
resourced from other dealers or directly from the Company if a specific dealer
or dealers fail to supply the Company's products.

SEASONAL ASPECTS
----------------

The Company's business is not subject to significant seasonal fluctuations in
sales.

COMPETITIVE FACTORS
-------------------

The Company's ability to sell its products is subject to competitive factors
that include price, quality, timely delivery and competition from companies with
greater resources. The Company's membrane and membrane devices compete with AG
Technologies, Pall Corporation, Sartorius GMBH, and Millipore Corporation in the
laboratory products area. Laboratory products are price and performance
competitive with other products for media sterilization. OEM and private label
products offer high surface area in compact housings in comparison with
competing products. Process products are offered as disposables, single use in
competition with traditional tangential flow devices which are cleaned and
re-used. Tangential flow products are attractive to users who have critical

                                                                               6
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applications where single use will ensure optimum performance and/or simplify
the validation of the process for FDA approval.

OPERATING ROOM (OR) DISPOSABLES

There are distinctly different competitors among its medical disposable product
lines. Significant consolidation has taken place recently in the OR Equipment
Drape business. The major competitors offering a full line of OR Equipment
Drapes include Microtek Medical, Medical Technique Instruments, MTI, Zeiss,
Advance Medical Designs and Deka Medical. Each manufacturer has niches in either
a specific type of equipment drape or specific accounts with the exception of
Microtek which, with over 50% of the market share, is the market leader with a
strong presence in all niches. The Company has been most effective in competing
with its Video Camera Drape line particularly on the basis of quality and price.
Orthopedic Soft Goods are similarly consolidating but remains very fragmented.
Major competitors include Alba, Balfour, Technol and DeRoyal Industries among
others. Esmarch Elastic Bandage is produced by a small number of non-medical
rubber producers who then sell bulk non-sterile product to medical device firms
for packaging and sterilization. As a result, there are numerous competitors
distributing Esmarch Bandages but the range of offerings is relatively limited
with competition being primarily driven by price.

Companies such as Johnson & Johnson and Baxter Healthcare Corporation dominate
the market with products that include surgical extremity drapes as part of an
integrated "procedure pack," both custom and standard, for specific types of
procedures, (e.g., orthopedic surgery or arthroscopic or cardiovascular surgical
cases).

The Company manufactures a rubber elastic bandage that does not require the need
for metal clips. Currently, the market is dominated by such competitors as
Becton Dickinson, producers of ACE(R) bandages, Johnson & Johnson, producers of
Dyna-Flex(R) and Kendall, producers of Tensor(R), all of which have greater
resources than the Company.

RESEARCH AND PRODUCT DEVELOPMENT
--------------------------------

The Company incurred research and product development expenses of approximately
$662,000 in 1999 and $780,000 in 1998. Research and product development
functions are particularly important for the Company's future growth.

EMPLOYEES
---------

On January 1, 2000, the Company had 109 employees, of which 106 were full-time
employees.

ITEM 2.  DESCRIPTION OF PROPERTY

The Company's executive offices are located at 18617 Broadwick Street, Rancho
Dominguez, California. All facilities used by the Company are leased, in good
condition and are adequate for the Company's present operating requirements.
Production and administrative facilities are located in California and Texas.
The Company has a sales and distribution facility in The Netherlands.

Information regarding the Company's major facilities is as follows:

                                                            Lease      Monthly
      Location           Principal Usage      Sq. Feet   Term. Date    Rental
----------------------   ------------------   --------   ----------   --------
Rancho Dominguez, CA     Administration
                          and Manufacturing    55,000       7/05      $ 27,750
Laguna Hills, CA         Manufacturing          8,830       mo-mo        8,830
Dallas, TX               Manufacturing         20,000       12/00        5,417
Houston, TX              Manufacturing          9,975       08/03        4,090
Breda, The Netherlands   Sales                  1,400       12/02        2,035

                                                                               7
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ITEM 3.  LEGAL PROCEEDINGS

There are no material pending legal proceedings to which the Company is a party
or of which any of its property is the subject. The Company knows of no legal
proceedings contemplated by any governmental authority or agency.

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

None.

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

The Company's Common Stock is currently traded on the over-the-counter market
with trading prices quoted in the Over the Counter (OTC) Bulletin Board.

The following table sets forth the high and low market prices for the last two
years. The quotations shown represent inter-dealer prices without adjustment for
retail markups, markdowns or commissions and do not necessarily reflect actual
transactions.

                1999                          High                Low
                ----
                First Quarter               $   1/16           $   1/16
                Second Quarter                  1/8                1/16
                Third Quarter                 2                  1
                Fourth Quarter                3 1/8              1 1/16

                1998
                ----
                First Quarter                 5                  1 1/4
                Second Quarter                4 3/8              1 7/8
                Third Quarter                 4 3/8              1 1/4
                Fourth Quarter                  1/4                1/16

The above market prices, for all quarters prior to the fourth quarter of 1998,
have been retroactively adjusted for the 1 for 10 reverse stock split which
occurred in September 1998.

No dividends have been declared or paid by the Company since inception.
Additionally, the Company's financing agreements with the bank prohibit the
payment of dividends without the bank's approval. The Company intends to employ
all available funds for development of its business and, accordingly, does not
intend to pay cash dividends in the foreseeable future.

As of January 1, 2000, the number of holders of record of the Company's Common
Stock was 776.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

The following discussion relates to the Company and its majority-owned
subsidiaries, SLI Acquisition Corp. (SLIAC), Spectrum Europe B.V. (Spectrum
B.V.) and Spectrum Chromatography, Inc. (Chromatography).

In September 1998, Spectrum Medical Industries, Inc. (SMI), which formerly owned
approximately 80% of the Company, was merged into the Company. As a result, the
operating results of all periods presented include the operations of SMI and
those of Chromatography, which was formerly a subsidiary of SMI and is now a
subsidiary of the Company.

                                                                               8
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RESULTS OF OPERATIONS - FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998

Research and development expenses decreased in 1999 as compared to 1998 by
approximately 15% and was primarily attributable to the close-down, in late
1998, of a research facility in Maryland that was no longer required.

Selling expenses decreased in 1999 as compared to 1998 by approximately 19%
primarily due to cost reduction measures implemented in late 1998.

General and administrative expenses in 1999 were essentially level with those in
1998. Cost reductions in late 1998 were significantly offset in 1999 due to
relocation costs as the Company moved and consolidated two of its California
locations into a new California facility.

Interest expense decreased in 1999 as compared to 1998 due to debt reduction.

There was an income tax credit for 1999 primarily as a result of the
re-evaluation of the estimated required valuation allowance on deferred tax
assets as discussed below. The 1998 income tax provision, as a percentage of
income before the provision for income taxes, is lower than expected primarily
because SMI, prior to its merger into the Company, was an S corporation and,
hence, paid no federal income taxes and had a low state income tax rate.

The Company has applied a valuation allowance on its net deferred tax assets
which exceed the recoverability of those assets from estimated future taxable
income for the next three years. This valuation allowance could change
substantially in future years due to changes in estimates of future taxable
income and changes in the components of the deferred tax assets. Accordingly,
income taxes as a percentage of income before income taxes could vary
significantly in future years.

In assessing the realizability of deferred tax assets, management has estimated
that it is more likely than not that approximately $2,200,000 will not be
realized. Approximately $1,500,000 of the valuation allowance represents a
portion of net operating loss carryforwards attained through a prior business
acquisition. Tax law limits the use of an acquired entity's net operating loss
carryforwards to subsequent taxable income of the consolidated entity. During
1999, the Company realized approximately $1,225,000 of the total operating loss
carryforwards acquired. The realization of this amount was recorded as an offset
to the goodwill recorded in connection with this prior acquisition. The
remaining portion of net deferred tax assets realized during 1999 represents
management's best estimate of projected tax liability over the next three years.
However, there can be no assurance that the Company will meet its expectations
of future taxable income. Management will continue to evaluate the realizability
of the deferred tax assets by assessing the need for and amount of a valuation
allowance.

LIQUIDITY AND CAPITAL RESOURCES

During fiscal 1999, the Company generated approximately $1,079,000 of cash from
operating activities. Net income before non-cash expenses of depreciation and
amortization was the primary source of these cash flows. Cash decreased, for the
year, by approximately $305,000 primarily as a result of pay-down on bank debt
and expenditures for equipment and leasehold improvements. A significant portion
of the capital expenditures was related to the relocation, during 1999, of two
of the Company's California facilities into one facility in California.

During 1999, the Company restructured its loan agreement with a bank. The
Company is in violation of one covenant in this loan agreement and has obtained
a waiver of this violation. One of the loans under the loan agreement, with a
balance of approximately $233,000 at January 1, 2000, matures on July 1, 2000.
The Company expects to request an extension of the maturity date but, while such
requests have been granted in the past, there is no assurance that such request,
if made, will be granted. The loan agreement prohibits the payment of cash

                                                                               9
<PAGE>

dividends without prior approval. The Company does not intend to pay cash
dividends in fiscal 2000.

The Company believes that cash on hand and cash expected to be generated from
operations will be sufficient to meet cash requirements for the fiscal year
2000.

In October 1996, a subsidiary of the Company, SLI Acquisition Corp. (SLIAC),
acquired certain assets and liabilities of Cellco, Inc., a Delaware corporation,
in exchange for 10,000 shares of SLIAC's preferred stock valued at $2,000,000.
At January 1, 2000, there is $1,755,000 of the preferred stock still
outstanding. Beginning October 1, 2000, and continuing until September 30, 2001,
the holders of the preferred stock have the right to put their stock to SLIAC
for an aggregate price of $1,755,000. In the event SLIAC is combined with the
Company and the combined company completes an underwritten offering, the
preferred stockholders have the right to exchange such stock for 7% of the newly
combined company. If the preferred stockholders convert their stock wholly, or
in a substantial portion, to a cash payment, the Company would most probably be
required to obtain additional funds from outside sources and there is no
assurance that such financing, if necessary, could be obtained.


YEAR 2000 MATTERS

The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
hardware or computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the Year 2000. In anticipation of
this problem, the Company instituted procedures to make the necessary changes to
our computer hardware and software programs. Such changes were completed during
the third quarter of fiscal 1999.

As of the time of the preparation of this report, we had not experienced any
significant Year 2000 problems nor are aware of any such problems being
experienced by any of our major suppliers or customers. As a result, we do not
expect any material adverse effects on our business or operations, based on
information available to us as of the time of this report. However, there is no
assurance that problems, unknown to us at this time, could not occur at a later
time. Although we believe that such potential future problems are unlikely, they
could, if they do occur, result in a material, adverse impact on the Company's
business, financial condition and the results of its operations.


ITEM 7.  FINANCIAL STATEMENTS

The financial statements in response to this Item are submitted in a separate
section of this Report. The Index to the financial statements is as follows:

INDEPENDENTS AUDITORS' REPORT                                                F-1

FINANCIAL STATEMENTS
    Consolidated balance sheet                                               F-2
    Consolidated statements of income                                        F-3
    Consolidated statements of stockholders' equity                          F-4
    Consolidated statements of cash flows                                    F-5
    Notes to consolidated financial statements                               F-6

                                                                              10
<PAGE>

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

None

                                                                              11
<PAGE>

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Directors
---------

Named below are directors serving until an Annual Meeting of Shareholders and
until their respective successors are elected and qualified.

Name                          Age    Director Since    Position
----                          ---    --------------    --------

Roy T. Eddleman               60     July 30, 1982     Chairman,  CEO & Director

John J. Driscoll, J.D.        50     July 30, 1982     Secretary & Director

Jack Whitescarver, Ph.D.      62     April 1, 1985     Director

Thomas V. Girardi, J.D.       60     January 2, 1999   Director

Jay Henis, Ph.D.              61     January 2, 1999   Director

Walter J. Lack, J.D.          52     January 2, 1999   Director


Executive Officers of The Company
---------------------------------

Roy T. Eddleman               60     July 30, 1982     Chairman & CEO

F. Jesus Martinez             60         ----          President & COO

Malcolm Morrison, Ph.D.       57         ----          Vice President Operations

Robert J. Sudol               52         ----          Vice President Marketing
                                                       & Sales

Larry D. Womack               60         ----          Vice President Finance


Business Experience of Directors and Executive Officers
-------------------------------------------------------

Roy T. Eddleman was elected Chairman of the Board and Chief Executive Officer of
the Company on July 30, 1982. Mr. Eddleman has been engaged primarily as a
private investor and entrepreneur for more than twenty years.

John J. Driscoll has been employed as an attorney in private practice for over
ten years.

Jack Whitescarver is the Deputy Director for the Office of AIDS Research at the
National Institutes of Health in Bethesda, Maryland and has been there more than
eight years.

Thomas Girardi has been employed as an attorney in private practice for over
twenty years.

Jay Henis is a practicing scientist and for nine years has been President and
CEO of Henis Technologies, Inc. He is also President and CEO of Orex
Pharmaceuticals.

                                                                              12
<PAGE>

Walter Lack has been employed as an attorney in private practice for over twenty
years. He is also a Director of HCCH Holdings, Inc., Microvision, Inc. and
Supergen, Inc.

F. Jesus Martinez has been Chief Operating Officer and President of the Company
since September, 1995. Mr. Martinez held the position of Vice President of R&D
and Operations from August 1989 to September 1995. He has held senior management
positions at Baxter Healthcare Corporation, National Medical Care, Minntech
Corporation and is inventor or co-inventor of over twenty patents in medical
devices.

Dr. Malcolm Morrison has been employed by the Company since January 1985. Prior
to becoming Vice President Operations in October, 1998, he was Director of
Quality Assurance and Regulatory Affairs. From 1985 to September 1998, Dr.
Morrison was Manager of Quality Assurance and Regulatory Affairs.

Robert Sudol joined the Company in June 1998 as Vice President/General Manager
for Hospital Products. He became Vice President Marketing and Sales in October
1999. Previously he was President of Cyberdent, Inc. for one and one half years
and Vice President of American CareSource for two and one half years.

Larry Womack joined the Company as Controller in June 1997 and became Vice
President Finance and Chief Financial Officer in February, 1999. He was formerly
employed, for four years, by Unique Stamping & Coating, Inc. and was Vice
President Finance.

There are no family relationships between any of the Company's directors and
officers. There are no arrangements or understandings between any director and
any other person pursuant to which any person was elected or nominated as a
director.

The Company had no pension, retirement, annuity, savings or similar benefit
plans in 1999. Directors are not compensated for their services on the Company's
Board of Directors.

                                                                              13
<PAGE>

ITEM 10.  EXECUTIVE COMPENSATION

The following table sets forth the annual compensation paid and accrued by the
Company during its last three fiscal years to executive officers who were paid
in excess of $100,000 including cash and issuance of securities:

<TABLE>
<CAPTION>
                                   ANNUAL COMPENSATION            LONG TERM COMPENSATION
                                 ----------------------   ------------------------------------
                                                           RESTRICTED     STOCK OPTIONS
NAME AND POSITION         YEAR    SALARY      BONUS       STOCK AWARDS         #          LTIP   ALL OTHER(2)
-----------------------   ----   --------   -----------   -------------   -------------   ----   ------------
<S>                       <C>    <C>        <C>                                <C>               <C>
Roy T. Eddleman           1999   $160,000   $125,000                                             $   335,337
Chief Executive Officer   1998   $160,000                                                            560,951
                          1997   $160,000                                                            616,960

F. Jesus Martinez         1999   $145,000
President                 1998   $145,000                                      265,599
                          1997   $145,000   $61,751 (1)
</TABLE>

(1)  Includes a payment of $13,626 which was made in connection with the sale
     of Microgon, Inc. to the Company.
(2)  Consulting fees for services rendered in connection with product design and
     royalties of 7% on sales of certain  products, as follows:

             Year                 Consulting                     Royalties
             ----                 --------------                 --------------
             1999                 $           -                  $     335,337
             1998                       211,500                        349,451
             1997                       282,000                        334,960

The following table sets forth information relating to stock options held by the
Company's executive officers as of January 1, 2000:

                      Number of Securities Underlying     Value of Unexercised
                            Unexercised Options           In-the-Money Options

Name                    Exercisable/Unexercisable      Exercisable/Unexercisable
------------------      -------------------------      -------------------------

F. Jesus Martinez                 214,703/50,896            $266,000/$63,000
President


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock at January 1, 2000 by (i) all persons
known by management to be beneficial owners of more than 5% of its Common Stock,
(ii) all nominees for directors and (iii) all officers and nominees for
directors of the Company as a group:

                                           Amount and Nature            Percent
Name and Address                      of Beneficial Ownership (1)      of Class
--------------------------------    -------------------------------    ---------

Roy T. Eddleman                                4,320,128                   81.3
18617 Broadwick Street
Rancho Dominguez, CA 90220

                                                                              14
<PAGE>

Thomas V. Girardi, J.D.                          800,002                   15.1
1126 Wilshire Blvd.
Los Angeles, CA  90017

John J. Driscoll, J.D.                             5,000 (A)                 .1
Park Avenue Tower
65 East 55th Street
New York, NY  10022

Jack Whitescarver, Ph.D.                           3,750 (A)                 .1
4301 Massachusetts Ave. NW #6002
Washington, D.C.  20016

Jay Henis, Ph.D.                                   3,750 (A)                 .1
501 Marford Drive
St. Louis, MO  63141

Walter J. Lack, J.D.                             102,323                    1.9
10100 Santa Monica Blvd.
Los Angeles, CA  90067

F. Jesus Martinez                                221,343 (A)                4.0
18617 Broadwick Street
Rancho Dominguez, CA  92220

All directors and officers as a                5,461,446 (B)               98.4
   group (10 in number)


(1)        All amounts are amounts of ownership of common stock of the Company
           unless otherwise indicated

(A)        Entire amount is amount of exercisable stock options

(B)        Includes 238,993 exercisable stock options

                                                                              15
<PAGE>
ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

           The Company had transactions with related parties as follows:

<TABLE>
<CAPTION>
                                                                    1999            1998
           <S>                                                    <C>             <C>
           Expenses (income) related to transactions with the
             Company's majority shareholder:
               Rental of facilities owned by the shareholder(1)   $218,968        $300,748
               Royalties (2)                                       335,337         349,451
               Consulting services (3)                                  --         211,500
               Interest income on advances (4)                      (2,713)        (18,444)
           Expenses for legal services to a firm which
            employs a member of the Board of Directors                  --          40,000
</TABLE>

           The majority shareholder has personally guaranteed the Company's bank
           loan up to $3,100,000.

           (1)  These leases terminated on December 31, 1999

           (2)  7% fee on sales of certain products by the Company

           (3)  $23,500 per month. Charge for consulting services was terminated
                in September 1998.

           (4)  4% interest charges on outstanding balance


ITEM 13.   EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits
------------

Exhibit No.                         Description

3.1               Articles of Incorporation of Registrant (incorporated by
                  reference to Exhibit 4.1 filed with Registrant's Registration
                  Statement on Form S-2, Registration No. 2-68999)

3.2               Amendment to Article I of the Articles of Incorporation of
                  Registrant (incorporated by reference to Exhibit 3.2 filed
                  with Registrant's Report on Form 10-K for the fiscal year
                  ended December 31, 1982, Commission File No. 0-9478)

3.3               Bylaws of Registrant (incorporated by reference to Exhibit 4.2
                  filed with Registrant's Registration Statement on Form S-2,
                  Registration No. 2-68999)

3.4               Amendment to Article III, section 2 of Registrant's Bylaws
                  (incorporated by reference to Exhibit 3.3 filed with
                  Registrant's Report on Form 10-K for the fiscal year ended May
                  31, 1982, Commission File No. 0-9478)

3.5               Amendment to Article IV, Section 6 and Section 7 of the
                  Registrant's Bylaws (incorporated by reference to Exhibit 3.4
                  filed with Registrant's Report on Form 10-K for the fiscal
                  year ended May 31, 1982, Commission File No. 0-9478)

3.6               Articles of Amendment to Registrant's Articles of
                  Incorporation increasing authorized stock to 25,000,000 shares
                  (incorporated by reference to Registrant's Schedule 14C-2
                  Information Statement, Exhibit A, filed with the Commission on
                  October 19, 1996, Commission File No. 0-9478)

                                                                              16
<PAGE>

3.7               Certificate of Ownership of Microgon into Spectrum
                  Laboratories (incorporated by reference to Exhibit 2B to the
                  Registrant's Form 8-K/A on October 15, 1996, Commission File
                  No. 0-9478)

10.1              Agreement for Sale of Assets dated as of August 1, 1982
                  between Registrant and Glenco Scientific, Inc. (incorporated
                  by reference to Exhibit 10.7 filed with Registrant's report on
                  form 10-K for the fiscal year ended December 31, 1982,
                  Commission File No. 0-9478)

10.2              Agreement for Sale of Assets dated as of August 1, 1982
                  between Registrant and Spectrum Medical, Inc. (incorporated by
                  reference to Exhibit 10.8 filed with Registrant's Report on
                  Form 10-K for the fiscal year ended December 31, 1982,
                  Commission File No. 0-9478)

10.3              Agreement for Sale of Assets dated as of July 1, 1983 between
                  the Registrant and all the shareholders of Innometrics, Inc.
                  (incorporated by reference to Exhibit 10.8 filed with
                  Registrant's Report on Form 10-K for the fiscal year ended
                  December 31, 1983, Commission File No. 0-9478)

10.4              Agreement and Plan of Reorganization dated March 31, 1983
                  between the Registrant and all the shareholder of Innometrics,
                  Inc. (incorporated by reference to Exhibit 10.8 filed with
                  Registrant's Report on Form 10-K for the fiscal year ended
                  December 31, 1983, Commission File No. 0-9478)

10.5              Sublease dated September 15, 1982, between Registrant and
                  Glenco Scientific, Inc. for facilities at 15413 Vantage
                  Parkway East, Houston, Texas (incorporated by reference to
                  Exhibit filed with Registrant's Report on Form 10-K for the
                  fiscal year ended December 31, 1983, Commission File No.
                  0-9478)

10.6              Registrants Stock Compensation Plan (incorporated by reference
                  to Exhibit 10.11 filed with Registrant's Report on Form 10-K
                  for the fiscal year ended December 31, 1983, Commission File
                  No. 0-9478)

10.7              Registrant's 1982 Stock Option Plan (incorporated by reference
                  to Exhibit 10.12 filed with Registrant's Report on Form 10-K
                  for the fiscal year ended December 31, 1983, Commission File
                  No. 0-9478)

10.8              Purchase Agreement dated as of July 21, 1983 between
                  Registrant and Biotic Technologies, Inc. (incorporated by
                  reference to Exhibit 10.13 filed with Registrants Report on
                  Form 10-K for the fiscal year ended December 31, 1983,
                  Commission File No. 0-9478)

10.9              Closing Agreement dated as of October 26, 1983 between
                  Registrant, Arden A. Kelton and Environmental Diagnostics,
                  Inc. (incorporated by reference to Exhibit 10.14 with
                  Registrant's Report on Form 10-K for the fiscal year ended
                  December 31, 1983, Commission File No. 0-9478)

10.10             Evaluation and Option Agreement dated August 17, 1984 between
                  Registrant and Instrumentation Laboratories, Inc.
                  (incorporated by reference to Exhibit 10.10 filed with
                  Registrant's Report on Form 10-K for the fiscal year ended
                  December 31, 1984, Commission File No. 0-9478)

                                                                              17
<PAGE>

10.11             Amendment to Investment and Loan Agreement dated August 1,
                  1995 among the Company, Microgon and certain preferred
                  shareholders of Microgon (incorporated by reference to Exhibit
                  2A to the Registrant's Form 8K/A filed on October 15, 1995,
                  Commission File No. 0-9478)

10.12             Stock Option Plan adopted October 11, 1996 (incorporated by
                  reference to Exhibit B to Registrant's filing of Schedule
                  14-2, filed with the Commission on October 9, 1996)

10.13             City National Bank loan agreement dated as of February 28,
                  1997, between Registrant, Spectrum Medical Industries, Inc.,
                  and City National Bank (incorporated by reference to Exhibit
                  10.13 filed with Registrant's report on Form 10-KSB for fiscal
                  year ended December 31, 1996, Commission File No. 0-9478)

10.14             Registrant's purchase agreement of Cellco, Inc. (incorporated
                  by reference to Exhibit 10.14 with Registrant's Form 8-K dated
                  November 1, 1996, Commission File No. 0-9478)

10.15             First amendment, dated October 10, 1997, to the City National
                  Bank loan agreement dated as of February 28, 1997, between
                  Registrant, Spectrum Medical Industries, Inc., and City
                  National Bank (incorporated by reference to Exhibit 10.15
                  filed with Registrant's report on Form 10-KSB for fiscal year
                  ended January 3, 1998, Commission File No.
                  0-9478)

10.16             Second amendment, dated May 7, 1998, to the City National Bank
                  loan agreement dated as of February 28, 1997, between
                  Registrant, Spectrum Medical Industries, Inc., and City
                  National Bank (incorporated by reference to Exhibit 10.16
                  filed with Registrant's report on Form 10-KSB for fiscal year
                  ended January 3, 1998, Commission File No. 0-9478)

10.17             Third amendment, dated July 17, 1998, to the City National
                  Bank loan agreement dated as of February 28, 1997, between
                  Registrant, Spectrum Medical Industries, Inc., and City
                  National Bank (incorporated by reference to Exhibit 10.17
                  filed with Registrant's report on Form 10-KSB for fiscal year
                  ended January 2, 1999, Commission File No.
                  0-9478)

10.18             Credit agreement, dated as of December 22, 1998, between
                  Registrant and City National Bank (incorporated by reference
                  to Exhibit 10.18 filed with Registrant's report on Form 10-KSB
                  for fiscal year ended January 2, 1999, Commission File No.
                  0-9478)

10.19             Incentive Agreement dated August 10, 1998, between Spectrum
                  Medical Industries, Inc., the Registrant and F. Jesus Martinez
                  and Roy T. Eddleman (incorporated by reference to Exhibit
                  10.19 filed with Registrant's report on Form 10-KSB for fiscal
                  year ended January 2, 1999, Commission File No. 0-9478)

10.20             Sublease agreement dated January 19, 1999 between Millipore
                  Corporation and Spectrum Laboratories, Inc.

10.21             First amendment, dated July 14, 1999, to the credit agreement,
                  dated December 22, 1998, between the Company and City National
                  Bank

                                                                              18
<PAGE>

16                Letter on change in certifying accountant (incorporated by
                  reference to Exhibit 16 filed with Registrant's report on Form
                  10-KSB for fiscal year ended January 2, 1999, Commission File
                  No. 0-9478)

21                Subsidiaries of the Registrant (incorporated by reference to
                  Exhibit 21 filed with Registrant's report on Form 10-KSB for
                  fiscal year ended January 2, 1999, Commission File No. 0-9478)

27                Financial Data Schedule for the year ended January 1, 2000


(b) Reports on 8-K
------------------

No reports on Form 8-K were filed during the quarter ended January 1, 2000 by
the Registrant.

                                                                              19
<PAGE>

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on April 14, 2000.

SPECTRUM LABORATORIES, INC.



By:  /s/  Roy T. Eddleman
     --------------------

Roy T. Eddleman
Chairman and Chief Executive Officer



By:  /s/  Jay Henis
     --------------

Jay Henis
Director



By:  /s/  Walter J. Lack
     -------------------

Walter J. Lack
Director



By:  /s/  Jack Whitescarver
     ----------------------

Jack Whitescarver
Director



By:  /s/  F. Jesus Martinez
     ----------------------

F. Jesus Martinez
President and Chief Operating Officer



By:  /s/  Larry D. Womack
     --------------------

Larry D. Womack
Vice President Finance and
Chief Financial Officer

                                                                              20
<PAGE>

                           SPECTRUM LABORATORIES, INC.

                        CONSOLIDATED FINANCIAL STATEMENTS

                                 JANUARY 1, 2000

<PAGE>

                                 C O N T E N T S

                                                                            Page
--------------------------------------------------------------------------------

INDEPENDENT AUDITOR'S REPORT                                                F-1
--------------------------------------------------------------------------------

FINANCIAL STATEMENTS
  Consolidated balance sheet                                                F-2
  Consolidated statements of income                                         F-3
  Consolidated statements of stockholders' equity                           F-4
  Consolidated statements of cash flows                                     F-5
  Notes to consolidated financial statements                                F-6
--------------------------------------------------------------------------------

<PAGE>

                          INDEPENDENT AUDITOR'S REPORT



To the Board of Directors
Spectrum Laboratories, Inc.
Rancho Dominguez Hills, California

We have audited the accompanying consolidated balance sheet of Spectrum
Laboratories, Inc. and subsidiaries as of January 1, 2000 and the related
consolidated statements of income, stockholders' equity and cash flows for the
years ended January 1, 2000 and January 2, 1999. 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 audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Spectrum
Laboratories, Inc. and subsidiaries as of January 1, 2000 and the results of
their operations and their cash flows for the years ended January 1, 2000 and
January 2, 1999 in conformity with generally accepted accounting principles.

/s/ McGladrey & Pullen, LLP

Anaheim, California
March 24, 2000 except for Note 5 which is dated April 6, 2000

                                       F-1
<PAGE>

<TABLE>
SPECTRUM LABORATORIES, INC.

CONSOLIDATED BALANCE SHEET
------------------------------------------------------------------------------------------------
<CAPTION>

                                                                                    JANUARY 1,
ASSETS                                                                                 2000
                                                                                  --------------
<S>                                                                               <C>
CURRENT ASSETS:
    Cash and cash equivalents                                                     $     550,000
    Accounts receivable, less allowance for doubtful accounts of $143,000             1,508,000
    Inventories                                                                       2,389,000
    Prepaid expenses                                                                    287,000
    Deferred taxes                                                                      340,000
                                                                                  --------------
        Total current assets                                                          5,074,000

EQUIPMENT AND LEASEHOLD IMPROVEMENTS                                                  2,315,000

GOODWILL, net of accumulated amortization of $711,000                                 1,287,000

DEFERRED TAXES                                                                        1,585,000

OTHER ASSETS                                                                            167,000
                                                                                  --------------

        Total assets                                                              $  10,428,000
                                                                                  ==============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
    Current maturities of long-term debt                                          $     953,000
    Accounts payable                                                                    811,000
    Accrued expenses and other current liabilities:
      Compensation                                                                      337,000
      Other                                                                             400,000
                                                                                  --------------
        Total current liabilities                                                     2,501,000
                                                                                  --------------

LONG-TERM DEBT, net of current maturities                                               900,000
                                                                                  --------------

COMMITMENTS

MINORITY INTEREST                                                                     1,755,000
                                                                                  --------------

STOCKHOLDERS' EQUITY:
    Common stock, $.01 par value, 25,000,000 shares authorized;
      5,311,968 shares issued and outstanding                                            53,000
    Preferred stock, par value $.01; 10,000,000 shares authorized;
      none issued and outstanding                                                             -
    Additional paid-in capital                                                        8,347,000
    Accumulated deficit                                                              (3,128,000)
                                                                                  --------------
        Total stockholders' equity                                                    5,272,000
                                                                                  --------------

        Total liabilities and stockholders' equity                                $  10,428,000
                                                                                  ==============
</TABLE>

See notes to consolidated financial statements.

                                                          F-2
<PAGE>

<TABLE>
SPECTRUM LABORATORIES, INC.

CONSOLIDATED STATEMENTS OF INCOME
------------------------------------------------------------------------------------------------
<CAPTION>
                                                                        FISCAL YEARS ENDED
                                                                  ------------------------------
                                                                       1999            1998
                                                                  --------------  --------------

<S>                                                               <C>             <C>
NET SALES                                                         $  13,083,000   $  12,490,000

COSTS AND EXPENSES
    Cost of sales                                                     6,381,000       6,021,000
    Selling                                                           1,431,000       1,772,000
    General and administrative                                        3,325,000       3,337,000
    Research and development                                            662,000         780,000
    Compensation expense related to stock options                        86,000         217,000
    Other expense, primarily interest                                   185,000         251,000
                                                                  --------------  --------------

        Total costs and expenses                                     12,070,000      12,378,000
                                                                  --------------  --------------

        Income before provision for income taxes (credits)            1,013,000         112,000

Provision for income taxes (credits)                                   (235,000)         14,000
                                                                  --------------  --------------

        Net income                                                $   1,248,000   $      98,000
                                                                  ==============  ==============

Earnings per share:
    Basic                                                         $        0.23   $        0.02
                                                                  ==============  ==============

    Diluted                                                       $        0.23   $        0.02
                                                                  ==============  ==============

Weighted average shares outstanding:
    Basic                                                             5,311,968       4,928,790
                                                                  ==============  ==============

    Diluted                                                           5,391,843       4,985,158
                                                                  ==============  ==============

See notes to consolidated financial statements.
</TABLE>
                                                       F-3

<PAGE>

<TABLE>
SPECTRUM LABORATORIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>

                                                                                                                       Accumulated
                                                                                                                          other
                                        Compre-               Common stock             Additional                        compre-
                                        hensive       ------------------------------    paid-in        Accumulated       hensive
                                          income          Shares          Amount         capital         deficit       income (loss)
                                      --------------  --------------  --------------  --------------  --------------  --------------

<S>                                   <C>                 <C>         <C>             <C>             <C>             <C>
Balance, January 3, 1998                                  4,815,458   $      48,155   $   3,797,264   $  (1,036,611)  $     (38,985)

Comprehensive income:
    Net income                        $      98,000               -               -               -          98,000               -

    Foreign currency translation
      gain, net of reclassification
      adjustment                             38,985               -               -               -               -          38,985
                                      --------------

Comprehensive income                  $     136,985
                                      ==============

Stock issued for cash                                       267,146           2,645         747,355               -               -

Stock issued in exchange for
    debt and accrued interest                               229,364           2,200         709,000               -               -

Compensation expense
    related to stock options                                      -               -         217,000               -               -

Cash distributions to
    stockholders                                                  -               -          72,381        (964,389)              -

Distributions to stockholders                                     -               -       2,473,000      (2,473,000)              -
                                                      --------------  --------------  --------------  --------------  --------------

Balance, January 2, 1999                                  5,311,968          53,000       8,016,000      (4,376,000)              -

Net income                                                        -               -               -       1,248,000               -

Minority interest contributed
    to additional paid-in capital                                 -               -         245,000               -               -

Compensation expense
    related to stock options                                      -               -          86,000               -               -
                                                      --------------  --------------  --------------  --------------  --------------

Balance, January 1, 2000                                  5,311,968   $      53,000   $   8,347,000   $  (3,128,000)  $           -
                                                      ==============  ==============  ==============  ==============  ==============


</TABLE>

See notes to consolidated financial statements.

                                                           F-4
<PAGE>

<TABLE>
SPECTRUM LABORATORIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------

<CAPTION>
                                                                        FISCAL YEARS ENDED
                                                                  ------------------------------
                                                                       1999            1998
                                                                  --------------  --------------

<S>                                                               <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income                                                    $   1,248,000   $      98,000
    Adjustments to reconcile net income to net cash
      provided by operating activities:
      Depreciation and amortization                                     914,000         714,000
      Noncash compensation                                               86,000         217,000
      Deferred taxes                                                   (325,000)              -
      Change in working capital components:
        Decrease in accounts receivable                                  11,000          80,000
        (Increase) in inventories                                      (693,000)       (183,000)
        (Increase) decrease in prepaid expenses                        (164,000)         43,000
        Increase (decrease) in accounts payable                          44,000        (253,000)
        Increase (decrease) in accrued expenses                         (42,000)        156,000
        Other                                                                 -          20,000
                                                                  --------------  --------------

        NET CASH PROVIDED BY OPERATING ACTIVITIES                     1,079,000         892,000
                                                                  --------------  --------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Acquisition of equipment and leasehold improvements                (557,000)       (407,000)
    Increase in other assets                                            (13,000)       (200,000)
    Repayment of stockholder receivable                                       -         306,000
                                                                  --------------  --------------

        NET CASH (USED IN) INVESTING ACTIVITIES                        (570,000)       (301,000)
                                                                  --------------  --------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from the issuance of long-term debt                              -         275,000
    Proceeds from the sale of common stock                                    -         750,000
    Principal payments of long-term debt                               (814,000)     (1,003,515)
    Distributions to stockholders                                             -        (892,008)
                                                                  --------------  --------------

        NET CASH (USED IN) FINANCING ACTIVITIES                        (814,000)       (870,523)
                                                                  --------------  --------------

        NET (DECREASE) IN CASH AND CASH EQUIVALENTS                    (305,000)       (279,523)

Cash and cash equivalents
    Beginning of year                                                   855,000       1,134,523
                                                                  --------------  --------------

    End of year                                                   $     550,000   $     855,000
                                                                  ==============  ==============
</TABLE>

See notes to consolidated financial statements.

                                                          F-5
<PAGE>

SPECTRUM LABORATORIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

           NATURE OF OPERATIONS AND BASIS OF PRESENTATION - The consolidated
           financial statements include the accounts of Spectrum Laboratories,
           Inc. (Spectrum) and its subsidiaries (collectively, the Company), SLI
           Acquisition Corp. (SLIAC), Spectrum Europe B.V. (Spectrum B.V.) and
           Spectrum Chromatography (Chromatography). The Company is engaged
           primarily in the manufacture and sale of medical laboratory equipment
           and supplies and disposable products. All products are for sale
           primarily to the pharmaceutical, biotechnology and medical
           industries.

           REORGANIZATION - On September 30, 1998, Spectrum Medical Industries,
           Inc. (Medical), which formerly owned 79.9% of Spectrum Laboratories,
           Inc., merged with Spectrum Laboratories, Inc., which continues as the
           legal successor. The merger was a combination of two companies under
           common control and has been accounted for in a manner similar to a
           pooling of interests. In connection with this reorganization, Medical
           distributed its 79.9% ownership in Spectrum, 1,013,543 shares, to the
           stockholders of Medical and the Company effected a one-for-ten
           reverse stock split and reincorporated in Delaware. This reverse
           stock split has been accounted for as if it occurred as of the
           beginning of the earliest year presented in these consolidated
           financial statements. Accordingly, stock options and corresponding
           exercise prices have been adjusted to reflect the reverse split.

           FISCAL YEAR - The Company's fiscal year ends on the Saturday nearest
           December 31. The years ended January 1, 2000 (fiscal year 1999) and
           January 2, 1999 (fiscal year 1998) both consist of approximately 52
           weeks.

           PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
           statements include the accounts of Spectrum and its wholly owned
           subsidiaries and majority-owned subsidiary, SLIAC. All intercompany
           balances and transactions have been eliminated in consolidation.

           USE OF ESTIMATES - The preparation of the 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 revenue and expenses during the reporting years.
           Actual results could differ from those estimates.

           CREDIT RISK - The Company sells its products nationally and
           internationally, primarily through distributors to medical equipment
           and medical supply companies. The Company performs ongoing credit
           evaluations of its customers and generally does not require
           collateral. The Company maintains reserves for potential credit
           losses.

           CASH AND CASH EQUIVALENTS - The Company classifies all highly liquid
           investments with original maturities of 90 days or less at the time
           of purchase as cash and cash equivalents. The Company, periodically
           throughout the year, has amounts on deposit that exceed insured
           limits.

           INVENTORIES - Inventories are stated at the lower of cost (using the
           first-in first-out method) or market value.

                                       F-6
<PAGE>

SPECTRUM LABORATORIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

           EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Furniture, equipment and
           leasehold improvements are recorded at cost, net of accumulated
           depreciation and amortization. Depreciation of equipment is provided
           using the straight-line method over the estimated useful lives
           (generally five years) of the respective assets. Leasehold
           improvements are amortized on a straight-line basis over the lesser
           of the lease term or the estimated useful life of the asset.
           Amortization of leasehold improvements is included with depreciation
           expense. No depreciation is being provided for the artwork, which is
           carried at its historical cost.

           GOODWILL - Goodwill represents the excess of the purchase price over
           the fair value of net assets acquired resulting from a prior
           acquisition and is amortized on a straight-line basis over 20 years.
           The Company evaluates the recoverability of goodwill annually by
           comparing undiscounted expected future cash flows from the related
           operations to the carrying value of goodwill.

           DETERMINING IMPAIRMENT ON LONG-LIVED ASSETS - The Company recognizes
           impairment losses for long-lived assets used in operations when
           indicators of impairment are present and the undiscounted cash flows
           are not sufficient to recover the assets' carrying amount. There was
           no impairment of the value of such assets for the fiscal years 1999
           or 1998.

           INCOME TAXES - Deferred taxes are provided on a liability method
           whereby deferred tax assets are recognized for deductible temporary
           differences and tax credit carryforwards and deferred tax liabilities
           are recognized for taxable temporary differences. Temporary
           differences are the differences between the reported amounts of
           assets and liabilities and their tax bases. Deferred tax assets are
           reduced by a valuation allowance when, in the opinion of management,
           it is more likely than not that some portion or all of the deferred
           tax assets will not be realized. Deferred tax assets and liabilities
           are adjusted for the effects of changes in tax laws and rates on the
           date of enactment.

           EARNINGS PER SHARE - Basic earnings per share is computed by dividing
           the net income attributable to the common stockholders by the
           weighted average number of common shares outstanding during the
           period. There is no adjustment in the net income attributable to
           common stockholders. Diluted earnings per share reflects the
           potential dilution that could occur from common shares issuable
           through stock options (79,875 and 56,368 shares in the fiscal years
           1999 and 1998, respectively). During 1999 and 1998, 96,300 and 4,864
           options, respectively, were excluded from diluted common shares as
           they were antidilutive.

           REVENUE RECOGNITION - The Company records revenue at the time the
           related products are shipped.

           PRODUCT RETURNS AND WARRANTIES - The Company records a provision for
           estimated product returns and warranties at the time the revenue is
           recognized.

           RESEARCH AND DEVELOPMENT - The Company expenses research and
           development costs as incurred.

           ADVERTISING COSTS - Costs associated with advertising and promoting
           products are expensed as incurred. Advertising and promotion expense
           was approximately $55,000 and $68,000 during fiscal years 1999 and
           1998.

                                      F-7
<PAGE>

SPECTRUM LABORATORIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

           REMEASUREMENT OF FOREIGN CURRENCIES - Monetary assets and liabilities
           of Spectrum B.V. are remeasured into U.S. dollars at year-end
           exchange rates and nonmonetary assets and stockholders' equity are
           remeasured using historical rates of exchange. Income and expenses
           are remeasured at average rates during the respective years. The
           functional currency of this subsidiary is the U.S. dollar; therefore,
           remeasurement gains or losses are included in income. Remeasurement
           gains (losses) included in income for fiscal years 1999 and 1998 were
           $0 and ($31,000), respectively.

           FAIR VALUE OF FINANCIAL INSTRUMENTS - Management believes that the
           carrying amount of cash and cash equivalents, accounts receivable,
           accounts payable and accrued expenses approximates fair value because
           of the short maturity of these financial instruments. Long-term debt
           bears interest at a rate indexed to the prime rate and, therefore,
           management believes the carrying amount of the outstanding borrowings
           at January 1, 2000 and January 2, 1999 approximates fair market
           value.

           ACCOUNTING FOR STOCK-BASED COMPENSATION - The Company accounts for
           stock-based employee compensation under the requirements of
           Accounting Principles Board (APB) Opinion No. 25, which does not
           require compensation to be recorded if the consideration to be
           received is at least equal to fair value at the measurement date.
           Nonemployee stock-based transactions are accounted for under the
           requirements of the Financial Accounting Standards Board's (FASB)
           Statement of Financial Accounting Standards (SFAS) No. 123,
           ACCOUNTING FOR STOCK-BASED COMPENSATION, which requires compensation
           to be recorded based on the fair value of the securities issued or
           the services received, whichever is more reliably measurable.

           SEGMENT INFORMATION - Effective January 4, 1998, the Company adopted
           FASB Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
           AND RELATED INFORMATION. Statement No. 131 superseded FASB Statement
           No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE.
           Statement No. 131 establishes standards for the way that public
           business enterprises report information about operating segments in
           annual financial statements and requires that those enterprises
           report selected financial information about operating segments in
           interim financial reports. Statement No. 131 also establishes
           standards for related disclosures about products and services,
           geographic areas and major customers. The adoption of Statement No.
           131 did not affect results of operations or financial position, but
           did affect the disclosure of product information.


NOTE 2.    INVENTORIES

           Inventories consist of the following at January 1, 2000:

           Raw materials                                          $   1,482,000
           Work in process                                              118,000
           Finished goods                                               789,000
                                                                  --------------

                                                                  $   2,389,000
                                                                  ==============

                                      F-8
<PAGE>

SPECTRUM LABORATORIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 3.    EQUIPMENT AND LEASEHOLD IMPROVEMENTS

           Equipment and leasehold improvements consist of the following at
           January 1, 2000:

           Machinery, equipment and tooling                       $   4,869,000
           Office furniture and equipment                             1,974,000
           Artwork, at cost                                             974,000
           Leasehold improvements                                       555,000
                                                                  --------------

                                                                      8,372,000
           Less accumulated depreciation and amortization            (6,057,000)
                                                                  --------------

                                                                  $   2,315,000
                                                                  ==============


           Depreciation and amortization expense of equipment and leasehold
           improvements for fiscal years 1999 and 1998 was $472,000 and
           $424,000, respectively.


NOTE 4.    INCOME TAXES

           The Company's provision for income taxes (credits) consists of the
           following:

                                                       1999            1998
                                                  --------------  --------------
           Current:
             Federal                              $      25,000   $           -
             State                                       51,000         (14,000)
             Foreign                                     14,000          28,000
                                                  --------------  --------------

                                                         90,000          14,000
                                                  --------------  --------------


           Deferred:
             Federal                                   (325,000)              -
             State                                            -               -
                                                  --------------  --------------

                                                  $    (235,000)  $      14,000
                                                  ==============  ==============

                                      F-9
<PAGE>

SPECTRUM LABORATORIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 4.    INCOME TAXES (Continued)

           The reported provision for income taxes differs from the amount
           computed by applying the statutory federal income tax rate of 35% to
           the consolidated income before provision for income taxes as follows:

<TABLE>
<CAPTION>
                                                                       1999            1998
                                                                  --------------  --------------

           <S>                                                    <C>             <C>
           Statutory federal income tax provision                 $     355,000   $      39,000
           Nondeductible amortization of intangibles                    108,000          75,000
           State income taxes, net of federal benefit                    61,000          23,000
           S corporation income exclusion                                     -        (308,000)
           Change in valuation allowance                               (787,000)        183,000
           Nondeductible expenses                                        48,000               -
           Other                                                        (20,000)          2,000
                                                                  --------------  --------------

           Income tax provision                                   $    (235,000)  $      14,000
                                                                  ==============  ==============
</TABLE>


           Medical, with the consent of its stockholders, had previously elected
           to be taxed under sections of the federal and California income tax
           laws which provide that, in lieu of corporate income taxes, the
           stockholders separately account for their pro rata share of the
           Company's items of income, deductions, losses and credits. No
           significant effect on deferred taxes resulted following the merger
           and dissolution of Medical.

           The components of the Company's net deferred income tax assets as of
           January 1, 2000 are as follows:

<TABLE>
<CAPTION>
           <S>                                                                    <C>
           Operating loss carryforwards                                           $   2,808,000
           Intangibles                                                                  607,000
           Reserves not currently deductible                                            378,000
           Equipment and leasehold improvements                                         220,000
           Other                                                                        112,000
                                                                                  --------------
                                                                                      4,125,000
           Valuation allowance                                                        2,200,000
                                                                                  --------------

           Net deferred tax assets                                                $   1,925,000
                                                                                  ==============
</TABLE>

           The net deferred tax assets have been classified on the accompanying
           consolidated balance sheet as follows:

<TABLE>
<CAPTION>
           <S>                                                                    <C>
           Current assets                                                         $     340,000
           Noncurrent assets                                                          1,585,000
                                                                                  --------------

           Net deferred tax assets                                                $   1,925,000
                                                                                  ==============
</TABLE>

                                      F-10
<PAGE>

SPECTRUM LABORATORIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 4.    INCOME TAXES (Continued)

           In assessing the realizability of deferred tax assets, management has
           estimated that it is more likely than not that approximately
           $2,200,000 will not be realized. Approximately $1,500,000 of the
           valuation allowance represents a portion of net operating loss
           carryforwards attained through a prior business acquisition. As
           further discussed below, tax law limits the use of an acquired
           entity's net operating loss carryforwards to subsequent taxable
           income of the consolidated entity. During 1999, the Company realized
           approximately $1,225,000 of the total operating loss carryforwards
           acquired. The realization of this amount was recorded as an offset to
           the goodwill recorded in connection with this prior acquisition. The
           remaining portion of net deferred tax assets realized during 1999
           represents management's best estimate of projected tax liability over
           the next three years. However, there can be no assurance that the
           Company will meet its expectations of future taxable income.
           Management will continue to evaluate the realizability of the
           deferred tax assets by assessing the need for and amount of a
           valuation allowance.

           At January 1, 2000, the Company had approximately $8.3 million in net
           operating loss carryforwards for federal income tax purposes
           available to offset future taxable income. Certain of these loss
           carryforwards are limited to approximately $298,000 annually. Any
           unused net operating loss is carried forward. As a result of the
           limitation, it is possible that more than $4,500,000 of the entity's
           net operating loss may expire without utilization. Loss carryforwards
           for tax purposes expire in amounts and by fiscal year as follows:
           2003 $909,000; 2004 $2,279,000; 2005 $1,319,000; 2011 $20,000; 2012
           $347,000; 2013 $776,000; 2014 to 2021 $299,000 per year; 2022
           $275,000.


NOTE 5.    LONG-TERM DEBT

           At January 2, 1999, the Company had a credit agreement with a bank
           which provided for two term loans. One of the term loans has an
           outstanding balance at January 1, 2000 of $1,620,000, bears interest
           subject to the bank's yield maintenance agreement (9.14% at January
           1, 2000) and requires monthly principal installments of $60,000 plus
           interest through March 1, 2002, when all principal and interest is
           due. The other term loan has an outstanding balance at January 1,
           2000 of $233,000, bears interest at prime plus .25% (8.75% at January
           1, 2000) and requires monthly principal installments of $8,530 plus
           interest through July 1, 2000, when all principal and interest is
           due. The agreement is secured by substantially all assets, requires
           maintenance of a time deposit of $100,000 and is personally
           guaranteed by the majority stockholder. The agreement also requires
           the maintenance of certain financial and nonfinancial loan covenants
           and restricts payment of dividends. The Company was not in compliance
           with one non financial covenant at year end which was subsequently
           waived by the bank on April 6, 2000. Future maturities of long-term
           debt by fiscal year are as follows: 2000 $953,000; 2001 $720,000; and
           2002 $180,000.


NOTE 6.    STOCK OPTION PLAN

           The Company has a stock option plan that provides for issuance of
           options to purchase up to 200,000 shares of its common stock. The
           plan provides for the granting of options to qualified employees and
           consultants of the Company at prices that are not less than the fair
           market value of the shares as of the date of grant. The options
           become exercisable as specified in the plan, expire not more than ten
           years from the date of grant and become exercisable over a four-year
           period (25% per year). No options have been exercised to date. In
           addition, during 1998 the Company granted nonqualified stock options
           to purchase 5% of the outstanding stock to an officer at $1.20 per
           share. At the date of grant, 60% of these options vested immediately
           and the remaining 40% vest over two to four years.

                                      F-11
<PAGE>

SPECTRUM LABORATORIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 6.    STOCK OPTION PLAN (Continued)

           A summary of the status of the plan and the nonqualified options and
           changes during fiscal years ended 1999 and 1998 is as follows:

<TABLE>
<CAPTION>
                                                                                      Weighted
                                                                                      average
                                                                      Number          exercise
                                                                    of shares          price
                                                                  --------------  --------------

<S>                                                                     <C>       <C>
           OUTSTANDING, January 3, 1998                                  98,200   $        2.90

           Granted at fair value (weighted average fair value
             of $1.36)                                                   70,050            2.13
           Granted below fair value (weighted average fair value
             of $2.09)                                                  265,599            1.20
           Forfeited                                                    (48,600)           2.80
                                                                  --------------  --------------

           OUTSTANDING, January 2, 1999                                 385,249            1.60

           Forfeited                                                     (5,500)           1.97
                                                                  --------------  --------------

           OUTSTANDING, January 1, 2000                                 379,749   $        1.59
                                                                  ==============  ==============
</TABLE>

           At January 1, 2000, 85,850 shares were available for future grants
           under the plan.

           A further summary of options outstanding at January 1, 2000 is as
           follows:

<TABLE>
<CAPTION>
                    Options Outstanding                        Options Exercisable
----------------------------------------------------------  ------------------------
                                               Weighted
                                 Weighted       average                   Weighted
                                 average       remaining                  average
   Range of          Number      exercise     contractual     Number      exercise
exercise prices    of options     price      life in years  of options     price
-----------------  ----------  ------------  -------------  ----------  ------------

<S>                  <C>       <C>                <C>         <C>       <C>
 $ 1.20              265,599   $      1.20           -        214,670   $      1.20
   2.44               50,000          2.44        3.20         12,500          2.44
   3.20               25,400          3.20        6.00         25,400          3.20
   4.37                5,000          4.37        6.00          3,750          4.37
   7.50                  500          7.50        6.75            375          7.50
   1.87 to $ 2.20     16,000          2.17        6.68         11,800          2.17
   2.50                  500          2.50        8.25            125          2.50
   1.25               16,750          1.25        8.75          4,188          1.25
                   ----------                               ----------

                     379,749                                  272,808
                   ==========                               ==========
</TABLE>

                                      F-12
<PAGE>

SPECTRUM LABORATORIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 6.    STOCK OPTION PLAN (Continued)

           SFAS No. 123 requires the disclosure of pro forma net income and
           earnings per share had the Company adopted the fair value method as
           of the beginning of fiscal year 1995. Under SFAS No. 123, the fair
           value of stock-based awards to employees is calculated through the
           use of option-pricing models, even though such models were developed
           to estimate the fair value of freely tradable, fully transferable
           options with vesting restrictions which significantly differ from the
           Company's stock option awards. These models also require subjective
           assumptions, including future stock price volatility and expected
           time to exercise, which greatly affect the calculated value. The
           Company's calculations for the options granted in 1998 were made
           using the Black-Scholes option-pricing model with the following
           weighted average assumptions: expected life, 48 months following
           complete vesting; stock volatility, ranging up to 115% in 1998;
           risk-free interest rates, ranging from 4.9% to 5.6%; and no dividends
           during the expected term.

           The calculations are based on a single-option valuation approach and
           forfeitures are recognized as they occur. If the computed fair value
           of awards had been amortized to expense over the vesting period of
           the awards, pro forma net income (loss) of the Company would have
           been approximately $1,225,000 ($0.23 per basic and diluted share) in
           fiscal year 1999 and ($77,000) [($0.02) per basic and diluted share]
           in fiscal year 1998.


NOTE 7.    RELATED-PARTY TRANSACTIONS

           ROYALTY AGREEMENT - The Company is committed under a royalty
           agreement to pay the majority stockholder royalties of 7% of the net
           sales of certain products, as defined through the life of the defined
           products. During 1999 and 1998, the Company incurred royalty expenses
           of $335,000 and $349,000, respectively, under this agreement.

           CONSULTING AGREEMENT - The Company was committed under a consulting
           agreement to pay the majority stockholder consulting fees for
           services rendered in connection with product design and development.
           During 1998 the Company incurred expenses of $212,000 under this
           agreement. This agreement was terminated in 1998.

           LEASES - The Company had leased office, manufacturing and warehouse
           facilities from the majority stockholder under operating lease
           agreements. Rent expense under these leases was $219,000 and $301,000
           in 1999 and 1998, respectively. These leases were terminated in 1999.

           LEGAL SERVICES - During 1999 and 1998, the Company incurred expenses
           of $0 and $40,000, respectively, for legal services to a firm which
           employed a member of the Board of Directors.

                                      F-13
<PAGE>

SPECTRUM LABORATORIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 8.    COMMITMENTS AND RENT EXPENSE

           LEASE COMMITMENTS AND RENT EXPENSE - The Company is obligated under
           the terms of various operating lease agreements for manufacturing,
           warehouse and office facilities. Certain of these leases provide for
           rent escalation adjustments. Rent expense, including amounts paid to
           the majority stockholder, was $759,000 and $649,000 in fiscal years
           1999 and 1998, respectively. Minimum future rental payments under
           these operating lease agreements for the years ending December 31 are
           as follows: 2000 $472,000; 2001 $413,000; 2002 $420,000; 2003
           $380,000; 2004 $352,000; and thereafter $177,000 (total $2,214,000).

           CONTRACT RESEARCH AND DEVELOPMENT - The Company has agreed to work on
           a specific research and development project with an unrelated
           company. The Company anticipates that it will incur $100,000 to
           $200,000 during fiscal year 2000 in connection with this research and
           development project.


NOTE 9.    GEOGRAPHIC INFORMATION

           Sales by country for fiscal years ended 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
                                                                       1999            1998
                                                                  --------------  --------------

           <S>                                                    <C>             <C>
           United States                                          $  10,214,000   $   9,336,000
           Japan                                                        753,000         808,000
           Other countries, each of which represent less
               than 5% of total net sales                             2,116,000       2,346,000
                                                                  --------------  --------------

                                                                  $  13,083,000   $  12,490,000
                                                                  ==============  ==============
</TABLE>


           There were no significant assets held abroad at January 1, 2000 or
           January 2, 1999.


NOTE 10.   MAJOR CUSTOMERS

           Net sales for fiscal years 1999 and 1998 includes sales to the
           following major customers (each of which accounted for 10% or more of
           the total sales of the Company) together with the receivables due
           from those customers as of January 1, 2000 and January 2, 1999:

<TABLE>
<CAPTION>
                                          1999                            1998
                             ------------------------------  ------------------------------
                                                  Trade                           Trade
                                                Accounts                        Accounts
                                Net Sales      Receivable       Net Sales      Receivable
                             --------------  --------------  --------------  --------------

<S>                          <C>             <C>             <C>             <C>
           Customer A        $   1,980,000   $     286,000   $   2,078,000   $     215,000
                             ==============  ==============  ==============  ==============

           Customer B        $   1,402,000   $     220,000   $   1,529,000   $     119,000
                             ==============  ==============  ==============  ==============
</TABLE>

                                      F-14
<PAGE>

SPECTRUM LABORATORIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 11.   MINORITY INTEREST

           On October 1, 1996, a subsidiary of the Company, SLIAC, entered into
           an Asset Purchase Agreement with Cellco, a Delaware corporation, and
           acquired the operating assets and liabilities of Cellco in exchange
           for 10,000 shares of the subsidiary's preferred stock valued at
           $2,000,000. One of the subsidiary's preferred stockholders
           contributed its stock with a carrying value of $245,000 to the
           Company. At January 1, 2000, there is $1,755,000 in preferred stock
           of the subsidiary outstanding. The preferred stockholders of the
           subsidiary have the right to put their stock to SLIAC at any time
           from October 1, 2000 to September 30, 2001 for an aggregate price of
           $1,755,000. In the event the subsidiary is combined with the Company
           and the combined company completes an underwritten offering, the
           preferred stockholders have the right to exchange such stock for 7%
           of the newly combined company. The preferred shares are nonvoting and
           have preference over common stockholders as to dividends and
           liquidation.


NOTE 12.   SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                                       1999            1998
                                                                  --------------  --------------

           <S>                                                    <C>             <C>
           Cash paid for:
               Income taxes                                       $      85,000   $      50,000
                                                                  ==============  ==============

               Interest                                           $     222,000   $     294,000
                                                                  ==============  ==============

           Supplemental schedule of noncash activities:
               Stockholder's contribution of additional capital
                 from the proceeds of stockholder distributions   $           -   $      72,000
                                                                  ==============  ==============

               Stock issued in exchange for debt                  $           -   $     552,000
                                                                  ==============  ==============

               Stock issued in exchange for accrued interest      $           -   $     159,000
                                                                  ==============  ==============

               Note payable to majority stockholder offset
                 against advances to majority stockholder         $           -   $     134,000
                                                                  ==============  ==============

               Accrued royalties to majority stockholder offset
                 against advances to majority stockholder         $           -   $      74,000
                                                                  ==============  ==============

               Contribution of 21% ownership in Chromatography
                 by majority stockholder in exchange for
                 advances to majority stockholder                 $           -   $      46,000
                                                                  ==============  ==============

               Increase in deferred taxes offset against
                 acquired goodwill                                $   1,225,000   $           -
                                                                  ==============  ==============
</TABLE>

                                      F-15
<PAGE>

SPECTRUM LABORATORIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 13.   PRODUCT GROUP INFORMATION

           The Company's product groups are based on specific product
           characteristics and are grouped into laboratory products and
           operating room disposable products. Laboratory products consist
           primarily of (1) membranes used to concentrate, separate and purify
           dissolved or suspended molecules that are sold primarily to
           laboratories and (2) hollow fiber membrane devices that allow
           components retained by a membrane to be concentrated, including
           filters utilized for micro and ultrafiltration separations that are
           sold to biotech and pharmaceutical companies. Operating room
           disposable products consist of sterile plastic surgical drapes and
           cloth bandages that are sold primarily to hospitals.

           Revenue by product group is as follows:

<TABLE>
<CAPTION>
                                                                       1999            1998
                                                                  --------------  --------------

           <S>                                                    <C>             <C>
           Laboratory products                                    $  11,331,000   $  10,867,000
           Operating room disposable products                         1,752,000       1,623,000
                                                                  --------------  --------------

                                                                  $  13,083,000   $  12,490,000
                                                                  ==============  ==============
</TABLE>

NOTE 14.   VALUATION AND QUALIFYING ACCOUNT INFORMATION

           Following is information regarding the Company's allowance for
           doubtful accounts:

<TABLE>
<CAPTION>
                                     Balance at      Provision          Net
                                     beginning       charged to     Recoveries      Balance at
                                      of year         expense      (Charge-offs)   end of year
                                  --------------  --------------  --------------  --------------

           <S>                    <C>             <C>             <C>             <C>
           Fiscal year:
               1999               $     125,000   $      15,000   $       3,000   $     143,000
                                  ==============  ==============  ==============  ==============
               1998               $     198,000   $      55,000   $    (128,000)  $     125,000
                                  ==============  ==============  ==============  ==============
</TABLE>

                                      F-16