<PAGE>

                                  UNITED STATES

                       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 December 27, 2003

                           Commission File No. 0-9478

                           SPECTRUM LABORATORIES, INC.
      (Exact Name of small business registrant as specified 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)

       Registrant'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: $12,544,000

The aggregate market value of voting stock held by nonaffiliates of the
registrant is $184,320 as of February 27, 2004, based on the $2.25 per share bid
closing price for the Common Stock in the over-the-counter market on such date,
representing 81,920 shares held by nonaffiliates.

Number of shares of Common Stock outstanding as of February 27, 2004:  5,312,468

<PAGE>

                                TABLE OF CONTENTS
                            FORM 10-KSB ANNUAL REPORT
                      FOR THE YEAR ENDED DECEMBER 27, 2003
                           SPECTRUM LABORATORIES, INC.
Item No.                                                                    Page
--------                                                                    ----

   PART I
   1.      Business  ......................................................   3
   2.      Sales & Distribution  ..........................................   4
   3.      Production & Purchasing  .......................................   4
   4.      Patents Trademarks & Licenses  .................................   4
   5.      Dependence on Single Customer or Product  ......................   5
   6.      Backlog  .......................................................   5
   7.      Competition ....................................................   5
   8.      Compliance with Regulations  ...................................   5
   9.      Research & Development  ........................................   6
   10.     Number of Persons Employed  ....................................   6
   11.     Financial Information About Geographic Areas ...................   6
   12.     Properties  ....................................................   6
   13.     Legal Proceedings  .............................................   6
   14.     Submission of Matters to a Vote of Security Holders ............   7
   15.     Code of Ethics .................................................   7

   PART II
   16.     Market for Common Equity and Related Shareholder Matters  ......   7
   17.     Management's Discussion and Analysis of Financial Condition
             and Results of Operations  ...................................   8
   18.     Financial Statements  ..........................................  10
   19.     Principal Accountant Fees and Disclosures  .....................  10
   20.     Controls and Procedures  .......................................  11

   PART III
   21.     Directors, Executive Officers, Promoters and Control Persons;
             Compliance with Section 16(a) of the Exchange Act.............  11
   22.     Executive Compensation..........................................  13
   23.     Security Ownership of Certain Beneficial Owners and Management..  14
   24.     Certain Relationships and Related Transactions..................  14
   25.     Exhibits and Reports on Form 8-K................................  15


Certification    Certifications - Chief Financial Officer and
                 Chief Executive Officer ..................................  18

                                       2
<PAGE>

                                     PART I

                           FORWARD LOOKING STATEMENTS

THIS ANNUAL REPORT ON FORM 10-KSB (THE REPORT) MAY BE DEEMED TO INCLUDE OR
INCORPORATE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934
THAT INVOLVE RISK AND UNCERTAINTY, INCLUDING FINANCIAL, BUSINESS ENVIRONMENT AND
PROJECTIONS, AS WELL AS STATEMENTS THAT ARE PRECEDED BY, FOLLOWED BY, OR THAT
INCLUDE THE WORDS "BELIEVES," "EXPECTS," "ANTICIPATES," "SHOULD" OR SIMILAR
EXPRESSIONS, AND OTHER STATEMENTS CONTAINED HEREIN REGARDING MATTERS THAT ARE
NOT HISTORICAL FACTS. ADDITIONALLY, THE REPORT CONTAINS FORWARD-LOOKING
STATEMENTS RELATING TO FUTURE PERFORMANCE, GOALS, STRATEGIC ACTIONS AND
INITIATIVES AND SIMILAR INTENTIONS AND BELIEFS, INTENTIONS AND THE LIKE
REGARDING FUTURE SALES, EARNINGS, RETURN ON EQUITY, SHARE REPURCHASES, CAPITAL
EXPENDITURES AND OTHER MATTERS. THESE STATEMENTS INVOLVE ASSUMPTIONS REGARDING
THE COMPANY'S OPERATIONS, INVESTMENTS, ACQUISITIONS AND CONDITIONS IN THE
MARKETS THE COMPANY SERVES. ALTHOUGH THE COMPANY BELIEVES ITS EXPECTATIONS ARE
BASED ON REASONABLE ASSUMPTIONS, SUCH STATEMENTS ARE SUBJECT TO RISK AND
UNCERTAINTIES, INCLUDING, AMONG OTHERS, CERTAIN ECONOMIC, POLITICAL AND
TECHNOLOGICAL FACTORS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE STATED
OR IMPLIED IN THE REPORT, DUE TO, BUT NOT LIMITED TO, SUCH FACTORS AS (1)
CHANGES IN PRICING AND THE COMPETITIVE ENVIRONMENT, (2) OTHER CHANGES IN THE
BUSINESS ENVIRONMENT IN WHICH THE COMPANY OPERATES, (3) CHANGES IN RESEARCH
FUNDING, (4) UNCERTAINTIES SURROUNDING GOVERNMENT HEALTHCARE REFORM, (5)
GOVERNMENT REGULATIONS APPLICABLE TO THE BUSINESS, (6) THE IMPACT OF
FLUCTUATIONS IN INTEREST RATES AND FOREIGN CURRENCY EXCHANGE RATES, (7) THE
EFFECTIVENESS OF THE COMPANY'S FURTHER IMPLEMENTATION OF ITS SOFTWARE SYSTEMS,
(8) THE ABILITY TO RETAIN CUSTOMERS, SUPPLIERS AND EMPLOYEES (9) CHANGES IN
WORLDWIDE TAX RATES OR TAX BENEFITS FROM INTERNATIONAL OPERATIONS.

1.  BUSINESS

GENERAL
Spectrum Laboratories, Inc. (the Company or Spectrum) a Delaware Corporation was
originally incorporated under the laws of the state of California in June 1980
as Immutron, Inc. In November 1982 the company changed its name to Spectrum
Laboratories, Inc. The company reincorporated in Delaware in September 1998. The
Company's principal executive offices are located at 18617 Broadwick Street,
Rancho Dominguez, California 90220.

PRODUCT GROUPS
The Company consists of three product groups, Bioprocessing, scaled from
laboratory bench top to manufacturing of diagnostics and pharmaceuticals,
Original Equipment Manufacturing (OEM) and Operating Room Disposables which
define the company's approach to serving customers.

The Bioprocessing unit sells membranes, membrane devices and other products used
by customers at universities, government institutions, non-profit organizations,
pharmaceutical, diagnostic and biotechnology companies. These products are
originally used for life science research and high technology applications with
some applications growing into GMP (Good Manufacturing Practices) for
diagnostics and pharmaceuticals. The Original Equipment Manufacturing (OEM) unit
supplies separations devices to companies developing proprietary products for
Cell Therapy, Cell Expansion, Implants and Molecular/ Micro filtration for in
vivo and ex-vivo applications.

The Disposable Operating Room unit sells orthopedic and arthroscopic drapes,
sterile microscope covers, tissue carriers and other disposables to hospital and
clinic operating rooms.

STATUS OF PRODUCTS
Due to continuing developments in life science, high technology and other
scientific research, there can be no assurance of a continuing market for each
of the Company's products; however, through on going reviews of technical
literature, along with regular communications with customers, the Company's goal
is to keep abreast of the trends in separations techniques. This information
along with its own research technology, determines the Company's development of
improved and new products.

Customers and potential customers, wherever located, are encouraged to
communicate by telephone (via WATS) or via the website on the World Wide Web
(spectrumlabs.com) for technical staff consultation or for placing orders,
Shipments are made five days a week from four locations. The company strives to
ship its products to customers in timely and acceptable fashion. It maintains
inventory levels which it believes to be appropriate to maintain this policy.

                                       3
<PAGE>

2. SALES & DISTRIBUTION

During 2003, 2,711 products were sold to over 950 direct user accounts and 140
dealer accounts with end users including hospitals, universities,
pharmaceutical, industrial, diagnostics and biotechnology companies and
commercial laboratories as well as non-profit organizations and governmental
institutions. Small orders in laboratory quantities averaging approximately $250
accounted for 20% of the Company's sales. The Company's larger-scale quantities
for use in manufacturing accounted for 80% of sales in 2003.

3.  PRODUCTION & PURCHASING

The Company has a membrane production facility in Rancho Dominguez, Operating
Room Disposables are produced in Dallas and Chromatography instruments and
columns are produced in Houston.

The Company manufactures greater than 90% of its products, which represented
over 95% of the sales in 2003. Products not manufactured by the Company are
purchased to its specifications from numerous manufacturing sources.

None of the Company suppliers accounted for more than 10% of the Company
purchases in 2003. The Company has generally been able to obtain adequate
supplies of products and materials to meet its needs. No assurance can be given
that additional or other shortages not will occur in the future.

Whether a product is produced by the Company or purchased from outside
suppliers, it is subjected to quality control procedures, including the
verification of porosity and with certain products, the complete validation for
GMP, FDA, CE and ISO 2001 compliance, prior to final packaging. Quality control
is performed by a staff of technicians utilizing calibrated equipment.

4.  PATENTS, TRADEMARKS & LICENSES

The Company holds approximately 47 granted or pending patents and has 3
licensing agreements. The Company's significant trademarks are brand names
KrosFlo, SpectraPor, Cellmax and SpectraChrom. The brands are marketed
worldwide. Their related registered logos, and the significant trademarks, which
have various expiration dates, are expected to be renewed indefinitely.

The Company is aware of the desirability for patent and trademark protection for
its products. The Company believes other than its brand names no single patent,
license, trademark (or related group of patents and licenses, or trademarks) is
material in relation to its business as a whole.

In addition to patents, the Company relies on trade secrets and proprietary
know-how. The Company seeks protection of these trade secrets and proprietary
know-how, in part through confidentiality and proprietary information
agreements. The Company makes efforts to require its employees, directors,
consultants and advisors, outside scientific collaborators and sponsored
researchers, other advisors and other individuals and entities to execute
confidentiality agreements upon the start of employment, consulting or other
contractual relationships with the Company. These agreements provide that all
confidential information developed or made known to the individual or entity
during the course of the relationship is to be kept confidential and not
disclosed to third parties except in specific circumstances. In the case of
employees and some other parties, the agreements provide that all inventions
conceived by the individual will be the Company's exclusive property. These
agreements may not provide meaningful protection for or adequate remedies to
protect the Company's technology in the event of unauthorized use or disclosure
of information. Furthermore, the Company's trade secrets may otherwise become
known to, or be independently developed by, its competitors.

                                       4
<PAGE>

5. DEPENDENCE ON A SINGLE CUSTOMER OR PRODUCT

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 2003
and 2002 fiscal years, two distributors individually accounted for 10% or more
of the Company's total sales which were both approximately 13% in fiscal 2003
and 14% in fiscal 2002. No individual product accounted for 10% or more of sales
in either fiscal 2003 or 2002.

6. BACKLOG

As of December 27, 2003 the Company had a backlog of open orders of
approximately $354,000 and $958,000 in orders from customers requesting items to
be shipped during fiscal 2004.

7. COMPETITION

Substantial competition exists in all of the Company's marketing and production
areas. Although no comprehensive statistics are available, the Company believes
it is a major supplier of certain disposable Bioprocessing products. While the
Company generally offers thousands of membranes and membrane modules in stock
and analyzes many of its products, some of the Company's products are unusual
and have relatively little demand. There are many competitors who offer
competitive products.

In all product areas the Company competes primarily on the basis of customer
service, products quality and price. The Company markets its products through
its three business units; Bioprocessing, OEM and Operating Room Disposables. The
Company has over 10,000 catalogs in the marketplace in 2003 for the Spectrum
brands with customers and potential customers throughout the world. These
catalogs are supplemented with advertisements in chemical and other scientific
journals, though the use of mailing of special products brochures, personal
visits by sales and technical representatives with customers and through its web
site.

8. COMPLIANCE WITH REGULATIONS

The Company engages principally in the business of selling products which are
not foods or food additives, drugs or cosmetics within the meaning of the
federal Food, Drug and Cosmetic Act, as amended the "FDC Act").

The Company believes that it is in compliance in all material respects with
federal, state and local regulations relating to the manufacture, sale and
distribution of its products. The following are brief summaries of some of the
federal law and regulations which may have an impact on the Company's business.
These summaries are only illustrative of the extensive regulatory requirements
of the federal, state and local governments and are not intended to provide the
specific details of each law or regulation.

The Food and Drug Administration (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.

The Clean Air Act (CAA), as amended, and the regulations promulgated there
under, regulates the emission of harmful pollutants into the waters of the
United States. Federal or state regulatory agencies may require companies to
acquire permits, perform monitoring and install control equipment for certain
pollutants.

The Clean Water Act (CWA), as amended, and the regulations promulgated there
under, regulate the discharge of harmful pollutants into the waters of the
United States. Federal or state regulatory agencies may require companies to
acquire permits, perform monitoring and treat waste water before discharge to
the waters of the Unites States or a Publicly Owned Treatment Works (POTW).

                                       5
<PAGE>

The Occupational Safety and Health Act of 1970 (OSHA), including the Hazard
Communication Standard ("right to Know"), and the regulations promulgated there
under, require the labeling of hazard substance containers, the supplying of
Material Safety Data Sheets ("MSDS") on hazards products to customers and
hazards substances to which an employee may be exposed in the workplace, the
training of employees in the handling of hazardous substances and the use of the
MSDS, along with other health and safety programs.

9.  RESEARCH AND DEVELOPMENT

The Company incurred research and product development expenses of approximately
$868,000 in 2003 and $754,000 in 2002. Research and product development
functions are particularly important for the Company's future growth.

10.  NUMBER OF PERSONS EMPLOYED

The Company has 121 employees as of December 27, 2003 of which 6 were part time
employees. The total number employed in the United States was 117 with the
remaining 4 employed by the Company's foreign subsidiary. The Company's direct
employs and consultants have degrees in chemistry, biotechnology, engineering or
other scientific disciplines, including approximately 7 with their doctorate
degree.

11. FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS

In the years ended December 27, 2003, approximately 24% of the Company's sales
were customers outside the United States. The sales were made directly by the
Company, through distributors and by a subsidiary located in the Netherlands.

For sales with final destinations in an international market, the Company uses
Extraterritorial Income Exclusion (EIE), which provides certain Federal income
tax advantages. The effect of the tax rules governing the EIE is to lower the
effective Federal income tax rate on export income. The EIE resulting from the
Company's U.S. export sales replaced the benefit previously provided by the
Company's Foreign Corporation (FSC).

The Company's international operations and United States export sales are
subject to certain risks such as changes in the legal and regulatory policies of
foreign jurisdictions, local political and economic developments, currency
fluctuations, exchange controls, changes in tariff restrictions, royalty and tax
increases, export and import restrictions and restrictive regulations of foreign
governments, among other factors inherent in these operations. The Company is
unable to predict the extent to which its business may be affected in the future
by these matters.

12.  PROPERTIES

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. The
Company expects to continue to expand its production and distribution
capabilities in selected markets. The Company now uses about 30% of its
manufacturing capacity and expects to increase the utilization of its facilities
in the future. Information regarding the Company's major facilities is as
follows:

<TABLE>
<CAPTION>
                                                                      Lease         Monthly
      Location                  Principal Usage       Sq. Feet     Term. Date        Rental
--------------------------      ---------------       ---------    ----------      ---------
<S>                                                   <C>              <C>         <C>
Rancho Dominguez, CA            Administration
                                and Manufacturing     55,000           7/05        $  27,750
Dallas, TX                      Manufacturing         20,000          12/06            5,833
Houston, TX                     Manufacturing          9,975           8/06            4,239
Breda, The Netherlands          Sales                  1,400          12/05            2,423

</TABLE>

13. LEGAL PROCEEDINGS

The Company is not aware of any pending litigation and has no litigation
currently outstanding.

                                       6
<PAGE>

14. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to the stockholders for a vote during fiscal 2003.

15. CODE OF ETHICS

The Board of Directors adopted a Code of Business Conduct and Ethics (Code of
Ethics) at its most recent meeting on February 12, 2004. The Code of Ethics
stresses all employees, but especially the CEO, CFO and Senior Financial
Officers are to act with honesty & integrity, comply with rules and regulations
of all governing bodies and provide information that is accurate, complete,
relevant, timely and understandable in all reporting aspects.


                                     PART II

16.  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, symbol SPTM 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.

                2003                             High              Low
                ----
                First Quarter                 $  1.55           $  0.55
                Second Quarter                   2.95              0.80
                Third Quarter                    2.60              2.15
                Fourth Quarter                   3.00              1.60

                2002
                ----
                First Quarter                 $  3.05           $  1.30
                Second Quarter                   2.50              1.25
                Third Quarter                    3.00              1.05
                Fourth Quarter                   1.05              0.55

No dividends have been declared or paid by the Company since inception.
Additionally, the Company's financing agreement with the bank prohibits 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 December 27, 2003, the number of holders of record of the Company's Common
Stock was 446.

                                       7
<PAGE>
<TABLE>
<CAPTION>

                                 Equity Compensation Plan Information
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                             Number of securities
                                                                                                             remaining available for
                                                                                                             future issuance under
                                        Number of securities to be                                           equity compensation
                                        issued upon exercise of            Weighted -average exercise        plans (excluding
                                        outstanding options, warrants      price of outstanding options,     securities reflected in
Plan category                           and rights                         warrants and rights               column (a))
------------------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>                                   <C>                             <C>
Equity compenensation plans
approved by security holders                 433,100                               $1.90                           166,900
------------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders                 265,624                               $1.20                               *
------------------------------------------------------------------------------------------------------------------------------------
Total                                        698,724
--------------------------------------------------------------------------------

* Incentive plan with Company's President & COO, includes anti-dilution rights
to maintain 5% stock ownership.
</TABLE>


17. 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).

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

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 future undiscounted cash flows are not sufficient to recover
the assets' carrying amount. Management believes there has been no impairment of
the value of such assets. The analysis of indicators of impairment and future
cash flows are estimates made by management.

Patents - The Company has acquired patents utilized within the various
manufacturing processes. These patents are amortized over their respective
lives, typically 17 years. Management believes there has been no impairment in
the value of these patents.

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.

Estimates & Reserves - The Company's principal reserves relate to accounts
receivable and inventory. A detailed review of these reserves is done annually
with a general review quarterly. Based on the most recent annual review the
Company believes these reserve are adequate and the amounts consistent with
prior year's level.

A significant estimate is made in the annual impairment testing of goodwill.
Changes in management's estimate of fair value of the Company could result in
future impairment charges.

                                       8
<PAGE>

RESULTS OF OPERATIONS - FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002

Consolidated sales of $12,544,000 were below prior year by $702,000 (5.3%). From
a product group perspective, OEM sales were short of prior year by $458,000
(18.1%), Bioprocessing/laboratory products were $127,000 (1.4%) below prior year
while Operating Room Disposable products ("OR") sales under performed prior year
by $117,000 (6.7%). The decline in OEM revenues principally related to a decline
in orders from 2 significant accounts in 2003 offset by a significant increase
in a current OEM account. Spectrum anticipates the OEM account that provided the
significant increase in 2003 will continue to order at the same level in 2004
while one of the accounts that suffered a significant decrease will reverse in
2004 as this account placed an order for $1.250 million in January of 2004 to be
shipped through the months of September 2004. The decrease in
Bioprocessing/laboratory products related principally to a decline in sales to
the Company's two major distributors of $356,000 (9.7%). The short fall in OR
sales principally related to one customer who was acquired by a company that
purchases from a competitor. From a geographical perspective the principal sales
decline were U.S., as domestic sales decreased by $821,000 (7.9%). Within the
Bioprocessing/laboratory product group, the process type products did benefit
from a sales increase in excess of 10%. Management anticipates process type
products within the Bioprocessing/laboratory group will be the predominant
source of the Company's future growth.

Cost of sales decreased by $238,000 (3.4%), versus the above discussed sales
decline of 5.3%, resulting in gross margin percent of 45.8% versus 2002 gross
margin percentage of 46.9%. The decline in margin principally relates to the
Company's two main production facilities and lower absorption of overhead costs.
Actual production related costs at the two main production facilities were $4.7
million in 2003, an increase of $200,000 (4.5%) over 2002.

Research and development expenses in 2003 were $868,000, an increase of $114,000
(15.1%) over 2002. The increase principally relates to engineering consulting
and salaries as the Company attempts to expand the depth and breadth of its
product offerings.

Selling, general and administrative expenses (SG&A) were approximately $4.4
million an increase of $210,000 (5.0%) over prior year. The increase in SG&A
expenses principally related to advertising related expenditures with an
increase of $95,000 (27%). The increase in advertising principally related to
issuing 3 BioProcessor newsletters in 2003 versus 1 newsletter being issued in
2002. In addition general advertising and trade show expenditures also increased
as the Company attempted to gain greater exposure. The remaining increase in
SG&A expenditures was broad based with no one item of particular significance.

LIQUIDITY AND CAPITAL RESOURCES

During fiscal 2003, the Company generated approximately $210,000 of cash from
operating activities. Net working capital requirements in 2003 totaled $900,000
principally due to an increase in inventory. The increase in the inventory
principally reflects an increase in raw materials, specifically new membranes
related to a number of new products the Company anticipates will be available in
June of 2004. The products will be available with a broader range in the type of
membrane polymers, molecular weight cut-offs, pore sizes and tubular diameters.
The new product offerings will include: disposable Steam-in-Place cartridges,
disposable large-size SuperFlo production modules, EZ-Flex sterile, disposable
tubing set/modules combinations, the PharmFlo pilot production system plus large
scale Process Systems for pharmaceutical production. The Company is positioned
to offer turn-key Process Systems ranging from bench top testing to full scale
production.

The Company expended $539,000 on fixed assets. Included in fixed asset additions
were tooling costs of $146,000 principally related to molds associated with the
Company's 2004 new product offerings as noted above. In addition the Company in
2003 incurred approximately $259,000 associated with the implementation and
applicable hardware requirements of the Company's new computer system..

The bank credit agreement does restrict the use of the cash proceeds to certain
purposes as defined in the agreement. The credit agreement prohibits the payment
of cash dividends without prior bank approval. The Company was in violation of
one covenant at December 27, 2003 that related to cash flow to debt coverage and
the Company received a covenant waiver from its bank.

                                       9
<PAGE>

In December of 2001 Spectrum entered into a specific research, licensing,
manufacturing and supply agreements (the "Agreements") with an unrelated
company, now known as Arbios Systems, Inc. ("Arbios"). These Agreements, among
other aspects, resulted in Spectrum being granted 362,669 shares of Arbios.
Arbios became a public company on October 30, 2003 and trades on the Pink Sheets
electronic trading system under the symbol of ABOS.PK. Arbios has subsequently
been listed on the OTC Bulleting Board under the symbol of ABOS.OB. Arbios is an
early-stage biomedical device company engaged in the discovery, acquisition and
development of proprietary liver assist devices and new technologies useful in
the diagnosis and treatment of acute liver failure. In compliance with FAS115
based on the listed trade price of $2.50 per share Spectrum has allocated
$907,000 as the fair market value reflecting this amount as comprehensive income
on its balance sheet. Spectrum has classified this amount as a non current asset
as it realizes there have been limited trades in Arbios and the potential to
sell the stock may be limited. In addition Arbios being an early stage
developmental company this investment may be subject to significant adjustments.

The Company's management believes that cash on hand plus cash anticipated to be
generated from operations will be sufficient to meet the Company's cash
requirements for 2004.


18.  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

19.  PRINCIPAL ACCOUNTANT FEES AND DISCLOSURES

Aggregate fees for professional services rendered for us by McGladrey & Pullen
LLP and its affiliated entity, RSM McGladrey, Inc., for the years ended December
27, 2003 and December 28, 2002 were as follows:

Sevices Provided                             2003            2002
                                    --------------------------------
Audit Fees                                $ 104,440       $  87,000
Tax Fees                                     52,950          55,675
                                    --------------------------------
                                          $ 157,390       $ 142,675
                                    --------------------------------


AUDIT FEES

The aggregate fees billed for the years ended December 27, 2003 and December 28,
2002 were for the audits of our financial statements and review of our interim
financial statements included in our annual and quarterly reports.

AUDIT RELATED FEES

There were no fees billed for the years ended December 27, 2003 and December 28,
2002 were for the audit or review of our financial statements that are not
reported under Audit Fees.

                                       10
<PAGE>

TAX FEES

The aggregate fees billed for the years ended December 27, 2003 and December 28,
2002 were for professional services for tax compliance, tax advice and tax
planning. These services include preparation of original tax returns and advice
regarding our international operations.

ALL OTHER FEES

There were no All Other Fees billed for the years ended December 27, 2003 and
December 28, 2002.

20.  CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. The Company's Chief
Executive Officer and its Chief Financial Officer , after evaluating the
effectiveness of the Company's disclosure controls and procedures (as defined in
Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c) as of a date
within 90 days of the filing date of this annual report on Form 10-KSB (the
"Evaluation Date")), have concluded that as of the Evaluation Date, the
Company's disclosure controls and procedures were adequate and effective to
ensure that material information relating to the Company would be made known to
them by others within the Company, particularly during the period in which this
annual report on Form 10-KSB was being prepared. (b) Changes in Internal
Controls. There were no significant changes in the Company's internal controls
or in other factors that could significantly affect the Company's disclosure
controls and procedures subsequent to the Evaluation Date, nor any significant
deficiencies or material weaknesses in such disclosure controls and procedures
requiring corrective actions. As a result no corrective actions were taken.

                                    PART III

21. 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.

<TABLE>
<CAPTION>

Name                               Age      Director Since       Position
----                               ---      --------------       --------
<S>                                 <C>     <C>                  <C>
Roy T. Eddleman                     64      July 30, 1982        Chairman, CEO & Director

Walter J. Lack, J.D.                56      January 2, 1999      Secretary & Director

Thomas V. Girardi, J.D.             64      January 2, 1999      Director

Jay Henis, Ph.D.                    65      January 2, 1999      Director

Jack Whitescarver, Ph.D.            66      April 1, 1985        Director


Executive Officers of The Company
---------------------------------
Roy T. Eddleman                     64      July 30, 1982        Chairman & CEO

F. Jesus Martinez                   64          ----             President & COO

William R. Martin                   48          ----             Vice President Manufacturing

Roy Vallie                          55          ----             Vice President Sales

Brian A. Watts                      56          ----             CFO - Vice President Finance
</TABLE>

                                       11
<PAGE>

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.

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. Mr. Lack also serves as Chairman of the Audit Committee.

Thomas Girardi has been employed as an attorney in private practice for over
twenty years. Mr. Girardi also serves on the Company's Audit Committee.

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

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

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.

William Martin joined the Company in April of 2002 as Vice President of
Manufacturing. Mr. Martin has over twenty years of experience and several
patents in the medical devices field. Prior to joining the Company, Mr. Martin
held the position of Director of Operations at Endocare, Inc. and as Product
Development Manager for the Company from 1990 to 1998. Mr. Martin attended the
Hennepin County Technical College and the University of California, Irvine.

Roy Vallie joined Spectrum in September of 2003 as Vice President of Sales &
Marketing and has over 20 years in the biomedical and biopharmaceutical
industry. Most recently he was V.P. of Sales & Business Development for DeWalch
Life Technologies. Prior to this position Mr. Vallie was VP of Sales & Marketing
Brinkman, an Eppendorf Company. Mr. Vallie is a graduate of Brigham Young
University.

Brian Watts joined the Company in April 2002 as Chief Financial Officer and Vice
President of Finance. Mr. Watts held similar positions with Frank Schaffer
Publications and Ideal School Supply Corporation. Mr. Watts, a Certified Public
Accountant, began his business career with Coopers & Lybrand and was
subsequently employed by The Marmon Group, rising to the position of Assistant
Treasurer.

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 sponsors no pension, retirement, annuity, savings or similar benefit
plans that it was required to fund in 2003. The Company does sponsor an employee
only contributory 401K Plan. Directors are not compensated for their services on
the Company's Board of Directors.

Audit Committee
---------------
Spectrum has a separately-designated audit committee chaired by Mr. Lack. Mr.
Girardi is also a member of the audit committee.

                                       12
<PAGE>

22.  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 #            ALL
    Name and Position          Year      Salary         Bonus       STOCK AWARDS     OPTIONS         LTIP       OTHER (1)
--------------------------  --------  -------------  ------------  ------------------------------------------   -----------
<S>                          <C>          <C>           <C>                          <C>                           <C>
Roy T. Eddleman              2003         $160,000      $162,500                                                   311,617
Chief Executive Officer      2002          160,000       140,000                                                   324,848
                             2001          160,000       100,000                                                   321,490

F. Jesus Martinez            2003          145,000
President                    2002          145,000        35,000                       25    (2)
                             2000          145,000        36,000

Brian A. Watts               2003          120,000
Chief Financial Officer      2002          120,000        30,000                     200,000 (3)

</TABLE>

(1)      Royalties based are at 7% on sales of certain products.
(2)      Represents all stock option grants during fiscal 2001. The exercise
         price of these options is $1.20/share and they expire in May 2011.
(3)      Refer to table on next page regarding option grants.

The following table sets forth information relating to stock options held by the
Company's executive officers as of December 27, 2003:

<TABLE>
<CAPTION>
                                               Number of Securities Underlying                  Value of Unexercised
                                                    Unexercised Options                         In-the-Money Options
                                           -------------------------------------   ---------------------------------------
                      Name                       Exercisable/Unexercisable                    Exercisable/Unexercisable
----------------------------------------   -------------------------------------   ---------------------------------------
<S>                                                  <C>                                           <C>
F. Jesus Martinez                                        265,624/0                                   $319,000/$0
President

Brian A. Watts                                        49,166/150,834                               $75,224/$230,776
Chief Financial Officier

William R. Martin                                      6,146/18,854                                 $9,403/$28,847
Vice President of Manufacturing

</TABLE>
<TABLE>
<CAPTION>
                                            Option/SAR Grants in 2003
------------------------------------------------------------------------------------------------------------------
                                                 Individual Grants
------------------------------------------------------------------------------------------------------------------
                                    Number of Securities      % of Total
                                         Underlying          Options/SARs
                                        Options/SARs      Granted to Employees        Exercise       Expiration
            Name                           Granted              in 2002                Price            Date
--------------------------------    --------------------- -------------------------   ---------     --------------
<S>                                     <C>                  <C>                       <C>           <C>
None

</TABLE>

                                       13
<PAGE>

23.  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 December 27, 2003 by (i) all persons
known by management to be beneficial owners of more than 5% of its Common Stock,
(ii) all directors and nominees and (iii) all directors and nominees and
officers of the Company as a group:

<TABLE>
<CAPTION>

                                             Amount and Nature               Percent
        Name and Address                of Beneficial Ownership (1)         of Class
----------------------------------     ------------------------------      ------------
<S>                                              <C>                  <C>     <C>
Roy T. Eddleman                                  4,320,128                    81.3
18617 Broadwick Street
Rancho Dominguez, CA 90220

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

Jay Henis, Ph.D.                                  14,000              (A)      0.3
501 Marford Drive
St. Louis, MO 63141

Walter J. Lack, J.D. (1)                          102,323             (B)      1.9
10100 Santa Monica Blvd.
Los Angeles, CA  90067

Jack Whitescarver, Ph.D.                          14,000              (A)      0.3
4301 Massachusetts Ave. NW #6002
Washington, D.C.  20016

F. Jesus Martinez                                 265,624             (A)      4.8
18617 Broadwick Street
Rancho Dominguez, CA  90220

Brian A. Watts                                    40,000              (A)      0.7
18617 Broadwick Street
Rancho Dominguez, CA  90220

All directors and officers as a                  5,556,077            (C)     98.4
   group (7 in number)
</TABLE>

(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)      Excludes purchase of 7,595 shares on February 13, 2004
(C)      Includes 333,624 exercisable stock options


24.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company had related party transactions with the Company's majority
shareholder as follows:

                                                          2003          2002
                                                     ------------- -------------
7% royalty on certain products sold by the Company       $311,617      $324,848
                                                     ------------- -------------

The majority shareholder has personally guaranteed the Company's bank loan up to
$2,500,000.

                                       14
<PAGE>

25.  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)

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)

3.8               Reorganization Agreement, dated September 30, 1998, between
                  Spectrum Laboratories, Inc., and Spectrum Medical Industries,
                  Inc. (incorporated by reference to Exhibit 2 to the
                  Registrant's Form 8-K/A filed November 18, 1998, Commission
                  File No. 0-9478)

10.1              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)

10.2              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)

10.3              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)

10.4              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)

10.5              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)

                                       15
<PAGE>

10.6              Sublease agreement dated January 19, 1999 between Millipore
                  Corporation and Spectrum Laboratories, Inc. (incorporated by
                  reference to Exhibit 10.20 filed with Registrant's report on
                  Form 10-KSB for fiscal year ended January 1, 2000, Commission
                  File No. 0-9478)

10.7              First amendment, dated July 14, 1999, to the credit agreement,
                  dated December 22, 1998, between the Company and City National
                  Bank (incorporated by reference to Exhibit 10.21 filed with
                  Registrant's report on Form 10-KSB for fiscal year ended
                  January 1, 2000, Commission File No. 0-9478)

10.8              Second amendment, dated July 1, 2000, to the credit agreement,
                  dated December 22, 1998, between the Company and City National
                  Bank (incorporated by reference to Exhibit 10.8 filed with
                  Registrant's report on Form 10-KSB for fiscal year ended
                  December 30, 2000, Commission File No. 0-9478)

10.9              The Registrant's Year 2000 Stock Option Plan (incorporated by
                  reference to Exhibit 10.9 filed with Registrant's report on
                  Form 10-KSB for fiscal year ended December 30, 2000,
                  Commission File No. 0-9478)

10.10             Third amendment, dated January 8, 2001, to the credit
                  agreement, dated December 22, 1998, between the Company and
                  City National Bank (incorporated by reference to Exhibit 10.10
                  filed with Registrant's report on Form 10-KSB for fiscal year
                  ended December 30, 2000, Commission File No. 0-9478)

10.11             Royalty Agreement, dated June 1, 1976, between Roy T. Eddleman
                  and Spectrum Medical Industries (incorporated by reference to
                  Exhibit 10.11 filed with Registrant's report on Form 10-KSB
                  for fiscal year ended December 30, 2000, Commission File No.
                  0-9478)

10.12             Fourth amendment, dated December 14, 2001, to the credit
                  agreement, dated December 22, 1998, between the Company and
                  City National Bank (incorporated by reference to Exhibit 10.12
                  filed with Registrant's report on Form 10-KSB for fiscal year
                  ended December 29, 2001, Commission File No. 0-9478)

10.13             Amended and Restated Credit Agreement, dated December 26,
                  2002, between the Registrant 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 28, 2002, 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)

31a, b            Rule 13a-14(a)/15d-14(a) Certifications

32a, b            18 U.S.C. Section 1350 Certifications

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

No reports on Form 8-K were filed during the quarter ended December 27, 2003 by
the Registrant.

                                       16
<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 March 26, 2004.

SPECTRUM LABORATORIES, INC.


By:  /s/  Roy T. Eddleman
     ------------------------------------
Roy T. Eddleman
Chairman, Chief Executive Officer and Director



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



By:   /s/  Tom Girardi
     ------------------------------------
Tom Girardi
Director



By:  /s/  Walter Lack
     ------------------------------------
Walter Lack
Director



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



By:  /s/  F. Jesus Martinez
     ------------------------------------
F. Jesus Martinez
President and Chief Operating Officer



By:  /s/  Brian A. Watts
     ------------------------------------
Brian A. Watts
Chief Financial Officer and Vice President of Finance

                                       17
<PAGE>












                           SPECTRUM LABORATORIES, INC.

                        CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 27, 2003


<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 December 27, 2003 and the related
consolidated statements of income, stockholders' equity and cash flows for the
years ended December 27, 2003 and December 28, 2002. 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 audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Spectrum
Laboratories, Inc. and subsidiaries as of December 27, 2003 and the results of
their operations and their cash flows for the years ended December 27, 2003 and
December 28, 2002, in conformity with accounting principles generally accepted
in the United States of America.


/s/ McGladrey & Pullen, LLP


Irvine, California
March 12, 2004, except for the fourth paragraph of Note 5 which is dated March
25, 2004


                                      F-1
<PAGE>
<TABLE>

SPECTRUM LABORATORIES, INC.

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

                                                                                   DECEMBER 27,
ASSETS                                                                                 2003
                                                                                   ------------
<S>                                                                                <C>
CURRENT ASSETS:
    Cash and cash equivalents                                                      $ 3,837,000
    Accounts receivable, less allowances of $140,000                                 1,663,000
    Inventories                                                                      2,662,000
    Prepaid expenses                                                                   218,000
    Deferred income taxes                                                              579,000
                                                                                   ------------

        Total current assets                                                         8,959,000

INVESMENT IN MARKETABLE SECURITIES                                                     907,000

EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net                                            2,738,000

PATENTS, subject to amortization, net of accumulated amortization of $182,000          568,000

GOODWILL, net                                                                        1,122,000

DEFERRED INCOME TAXES                                                                1,127,000

OTHER ASSETS                                                                            33,000
                                                                                   ------------

        Total assets                                                               $15,454,000
                                                                                   ============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
    Current maturities of long-term debt                                           $   960,000
    Accounts payable                                                                   622,000
    Accrued expenses:
      Compensation                                                                     380,000
      Other                                                                             34,000
                                                                                   ------------
        Total current liabilities                                                    1,996,000
                                                                                   ------------

LONG-TERM DEBT, net of current maturities                                            1,785,000
                                                                                   ------------

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

STOCKHOLDERS' EQUITY:
    Common stock, $.01 par value, 25,000,000 shares authorized;
      5,312,468 shares issued and outstanding                                           53,000
    Preferred stock, par value $.01; 10,000,000 shares authorized;
      none issued and outstanding                                                           --
    Additional paid-in capital                                                       8,491,000
    Accumulated other comprehensive income                                             544,000
    Retained earnings                                                                  830,000
                                                                                   ------------
        Total stockholders' equity                                                   9,918,000
                                                                                   ------------

        Total liabilities and stockholders' equity                                 $15,454,000
                                                                                   ============
</TABLE>


See Notes to Consolidated Financial Statements.

                                                F-2
<PAGE>
<TABLE>

SPECTRUM LABORATORIES, INC.

CONSOLIDATED STATEMENTS OF INCOME
----------------------------------------------------------------------------------------
<CAPTION>


                                                                       FISCAL YEARS ENDED
                                                                --------------------------------

                                                                    2003               2002
                                                                -------------      -------------
<S>                                                             <C>                <C>
NET SALES                                                       $ 12,544,000       $ 13,246,000

COSTS AND EXPENSES
   Cost of sales                                                   6,794,000          7,032,000
   Selling, general and administrative, (including royalty
     expense to a majority stockholder of $312,000 and
     $325,000 in fiscal years 2003 and 2002, respectively)         4,417,000          4,207,000
   Research and development                                          868,000            754,000
   Compensation expense related to stock options                      12,000             21,000
   Other expense, primarily interest                                 121,000             56,000
   Other (income), gain on charitable donation                            --            (70,000)
                                                                -------------      -------------

       Total costs and expenses                                   12,212,000         12,000,000
                                                                -------------      -------------

       Income before provision for income taxes                      332,000          1,246,000

Provision (benefit) for income taxes                                (100,000)            90,000
                                                                -------------      -------------

       Net income                                               $    432,000       $  1,156,000
                                                                =============      =============

Earnings per share:
   Basic                                                        $       0.08       $       0.22
                                                                =============      =============

   Diluted                                                      $       0.08       $       0.22
                                                                =============      =============

Weighted average shares outstanding:
   Basic                                                           5,312,468          5,312,468
                                                                =============      =============

   Diluted                                                         5,381,834          5,370,098
                                                                =============      =============
</TABLE>


See Notes to Consolidated Financial Statements.

                                                     F-3
<PAGE>
<TABLE>

SPECTRUM LABORATORIES, INC.

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



                                                                                       Accumulated
                                    Common stock         Additional                       Other        Retained
                               ------------------------   Paid-in      Comprehensive   Comprehensive   Earnings
                                 Shares       Amount      Capital         Income          Income       (deficit)
                               ------------ ----------- ------------- --------------- --------------- ------------
<S>                              <C>           <C>       <C>               <C>              <C>        <C>
Balance, December 29, 2001       5,312,468     $53,000   $ 8,458,000                        $      -   $ (758,000)

Net income                               -           -             -                               -    1,156,000

Compensation expense related
   to stock options                      -           -        21,000                               -            -
                               ------------ ----------- -------------                 --------------- ------------

Balance, December 28, 2002       5,312,468      53,000     8,479,000                               -      398,000

Net income                               -           -             -         432,000               -      432,000

Other comprehensive income
   net of tax - unrealized gain
   on investment securities              -           -             -         544,000         544,000            -

                                                                      ---------------

Comprehensive Income                     -           -             -       $ 976,000               -            -
                                                                      ===============

Compensation expense related
   to stock options                      -           -        12,000                               -            -
                               ------------ ----------- -------------                 --------------- ------------

Balance, December 27, 2003       5,312,468     $53,000   $ 8,491,000                       $ 544,000     $830,000
                               ============ =========== =============                 =============== ============
</TABLE>


See Notes to Consolidated Financial Statements.

                                                               F-4
<PAGE>
<TABLE>

SPECTRUM LABORATORIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------
<CAPTION>


                                                                        FISCAL YEARS ENDED
                                                                  ------------------------------
                                                                     2003               2002
                                                                  ------------      ------------
<S>                                                               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income                                                    $   432,000       $ 1,156,000
    Adjustments to reconcile net income to net cash
      provided by operating activities:
      Depreciation and amortization                                   783,000           685,000
      Loss on disposition of equipment                                     --            19,000
      Noncash compensation                                             12,000            21,000
      Noncash charitable donation                                          --            20,000
      Deferred income taxes                                          (117,000)            3,000
      Change in working capital components:
        Decrease (Increase) in accounts receivable                    143,000          (117,000)
        (Increase) in inventories                                    (896,000)         (119,000)
        Decrease (Increase) in prepaid expenses                        15,000           (98,000)
        Decrease (Increase) in income tax refund receivable            62,000           (62,000)
        Increase in accounts payable                                   58,000           134,000
        (Decrease) Increase in accrued expenses                      (282,000)          196,000
                                                                  ------------      ------------

        NET CASH PROVIDED BY OPERATING ACTIVITIES                     210,000         1,838,000
                                                                  ------------      ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Acquisition of equipment and leasehold improvements              (539,000)         (736,000)
    Acquisition of patents                                                 --          (250,000)
                                                                  ------------      ------------

        NET CASH (USED IN) INVESTING ACTIVITIES                      (539,000)         (986,000)
                                                                  ------------      ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Principal payments of long-term debt                             (943,000)         (770,000)
    Loan Proceeds                                                          --         2,000,000
                                                                  ------------      ------------

        NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES          (943,000)        1,230,000
                                                                  ------------      ------------

        NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS       (1,272,000)        2,082,000

Cash and cash equivalents
    Beginning of year                                               5,109,000         3,027,000
                                                                  ------------      ------------

    End of year                                                   $ 3,837,000       $ 5,109,000
                                                                  ============      ============
</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 develops and
           sells proprietary tubular membranes and membrane devices for existing
           and emerging life science applications used primarily by research
           laboratories. The Company is also engaged in the manufacture and sale
           of medical laboratory equipment and supplies and disposable products.
           Certain of the Company's products are regulated by the United States
           Food and Drug Administration and the California Food and Drug Bureau.
           All products are for sale primarily to the pharmaceutical,
           biotechnology and medical industries.

           FISCAL YEAR - The Company's fiscal year ends on the Saturday nearest
           December 31. The years ended December 27, 2003 (fiscal year 2003) and
           December 28, 2002 (fiscal year 2002) both consist of 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 financial statements requires
           management to make estimates and assumptions that affect the reported
           amounts of assets, liabilities, the value of stock based compensation
           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 period. Actual results could differ
           from those estimates.

           The Company's operations are affected by numerous factors including
           market acceptance, changes in technologies and new laws and
           government regulations and policies. The Company cannot predict what
           impact, if any, the occurrence of these or other events might have on
           the Company's operations. Significant estimates and assumptions made
           by management are used for, but not limited to, the allowance for
           doubtful accounts, the reserve for slow moving or obsolete
           inventories, the fair value of long-lived and intangible assets, and
           the realizability of deferred tax assets.

           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.

           TRADE RECEIVABLES - 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. Trade receivables are carried at original invoice amount
           less an estimate made for doubtful receivables based on a review of
           all outstanding amounts on a monthly basis. Management determines the
           allowance for doubtful accounts by identifying troubled accounts and
           by using historical experience applied to an aging of accounts. Trade
           receivables are written off when deemed uncollectible. Recoveries of
           trade receivables previously written off are recorded when received.
           No interest is charged on past due accounts.

           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)

           INVESTMENT IN MARKETABLE SECURITIES CLASSIFIED AS AVAILABLE-FOR-SALE
           SECURITIES - Management determines the appropriate classification of
           the securities at the time they are acquired and evaluates the
           appropriateness of such classifications at each balance sheet date.
           Management has determined that all securities should be classified as
           available-for-sale. Available-for-sale securities are stated at fair
           value and unrealized holding gains and losses, net of the related
           deferred tax effect, are reported as a separate component of
           stockholders' equity. Realized gains and losses, including losses
           from declines in value of specific securities determined by
           management to be other than temporary, are included in income.
           Realized gains and losses are determined on the basis of the specific
           identification of the securities sold. As of December 27, 2003,
           available-for-sale securities consisted of equity ownership of one
           entity. Such ownership had a historical cost of $0 and accordingly,
           the current year unrealized gain was $907,000

           LONG-LIVED ASSETS AND PATENTS - 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 Company owned artwork, which is carried at
           its historical cost.

           The Company periodically reviews its long-lived assets including
           patents to determine potential impairment by comparing the carrying
           value of the long-lived assets with the estimated future net
           undiscounted cash flows expected to result from the use of the
           assets, including cash flows from disposition. Long-lived assets
           evaluated for impairment are grouped with other assets to the lowest
           level for which identifiable cash flows are largely independent of
           the cash flows of other groups of assets and liabilities. Should the
           sum of the expected future net cash flows be less than the carrying
           value, the Company would recognize an impairment loss at that date.
           An impairment loss would be measured by comparing the amount by which
           the carrying value exceeds the fair value (estimated discounted
           future cash flows) of the long-lived assets. For the year ended
           December 27, 2003, management has determined that no impairment of
           long-lived assets including patents exists.

           Changes in circumstances, such as the passage of new laws or changes
           in regulations, technological advances or changes to the Company's
           business strategy, could result in the actual useful lives of
           long-lived assets differing from initial estimates. Factors such as
           changes in the planned use of equipment, customer attrition,
           contractual amendments or mandated regulatory requirements could
           result in shortened useful lives. In those cases where the Company
           determines that the useful life of a long-lived asset should be
           revised, the Company will amortize or depreciate the net book value
           in excess of the estimated residual value over its revised remaining
           useful life.

           The Company has acquired patents totaling $750,000 which are being
           amortized over their respective useful lives of approximately twelve
           years. Patent amortization for the fiscal years ended 2003 and 2002
           was approximately $60,000 for each year. Estimated amortization
           expense for the next five years is approximately $60,000 annually,
           all of which relates to these patents.

           GOODWILL - In June 2001, the Financial Accounting Standards Board
           (FASB) issued Statement of Financial Accounting Standards No 142,
           GOODWILL AND OTHER INTANGIBLE ASSETS (SFAS No. 142). SFAS No. 142
           addresses financial accounting and reporting for acquired goodwill
           and other intangibles assets and was effective for the Company
           beginning December 30, 2001. Upon adoption of SFAS 142, management

                                      F-7
<PAGE>

SPECTRUM LABORATORIES, INC.

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

NOTE 1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

           has determined there is one reporting unit and evaluated the carrying
           value of goodwill for potential impairment losses and has determined
           no impairment existed. Management completed its annual goodwill
           impairment evaluation as of September 29, 2003, and has concluded
           that no impairment exists. For goodwill, the impairment evaluation
           includes a comparison of the carrying value of the reporting unit
           (including goodwill) to that reporting unit's fair value. If the
           reporting unit's estimated fair value exceeds the reporting unit's
           carrying value, no impairment of goodwill exists. If the fair value
           of the reporting unit does not exceed the unit's carrying value, then
           an additional analysis is performed to allocate the fair value of the
           reporting unit to all of the assets and liabilities of that unit as
           if that unit had been acquired in a business combination and the fair
           value of the unit was the purchase price. If the excess of the fair
           value of the reporting unit over the fair value of the identifiable
           assets and liabilities is less than the carrying value of the unit's
           goodwill, an impairment charge is recorded for the difference.

           Also in accordance with SFAS No. 142, the Company has not recorded
           amortization expense with respect to goodwill during the years ended
           December 27, 2003 and December 28, 2002.

           INCOME TAXES - Deferred income taxes are provided on a liability
           method whereby deferred income tax assets are recognized for
           deductible temporary differences and tax credit carryforwards and
           deferred income 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 income 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 income 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 reflect the potential
           dilution that could occur from common shares issuable through stock
           options (69,366 and 57,630 equivalent shares in the fiscal years 2003
           and 2002, respectively).

           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 $449,000 and $354,000 during fiscal years 2003 and
           2002, inclusive of trade shows in both years.

                                      F-8
<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 included in income as contra SG&A expenditure for fiscal years
           2003 and 2002 were approximately $51,000 and $24,000, respectively.
           As of December 27, 2003 there was $72,000 in cash and $190,000 in
           accounts receivable that were denominated in Euros.

           FAIR VALUE OF FINANCIAL INSTRUMENTS - Management believes that the
           carrying amount of cash and cash equivalents 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 December 27, 2003 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 Statement
           of Financial Accounting Standards 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.

           SFAS No. 123 requires the disclosure of pro forma net income and
           earnings per share had the Company adopted the fair value method.
           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 2002 were made using the Black-Scholes option-pricing
           model with the following weighted average assumptions in 2002:
           expected life of ten years; stock volatility of 52%; risk-free
           interest rate 4.9%; and no dividends during the expected term.

           The calculations are based on a single-option valuation approach and
           forfeitures are recognized as they occur. The following table
           illustrates the effect on net income and earnings per share had
           compensation cost for stock-based compensation been determined based
           on the grant date fair values of awards (refer to next page for
           table):

                                      F-9
<PAGE>

SPECTRUM LABORATORIES, INC.

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


NOTE 1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

<TABLE>
<CAPTION>
                                                             2003               2002
                                                         ------------      --------------
<S>                                                      <C>               <C>
Net income:
 As reported                                             $   432,000       $ 1,156,000
  Add total stock-based employee compensation
  expense determined under APB opinion 25,
  net of related tax effects                                  12,000            17,000
  (Deduct) total stock-based employee compensation
  expense determined under fair value based for all
  awards, net of related tax effects                         (64,000)          (84,000)
                                                         ------------      ------------

     Pro forma                                           $   380,000       $ 1,089,000
                                                         ============      ============

Basic earnings per share:
     As reported                                         $      0.08       $      0.22
     Pro forma                                           $      0.07       $      0.21
Diluted earnings per share:
     As reported                                         $      0.08       $      0.22
     Pro forma                                           $      0.07       $      0.21


Weighted average shares outstanding:
     Basic                                                 5,312,468         5,312,468
                                                         ============      ============

     Diluted                                              5,381,834         5,370,098
                                                         ------------      ------------
</TABLE>

           SEGMENT INFORMATION - In accordance with FASB Statement No. 131,
           DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION,
           the Company has determined the products are all classified into three
           product groups as further discussed in Note 13. The Company has
           further analyzed the type and class of its customers, and the product
           distribution methods, and has determined that the Company has one
           reportable segment.

NOTE 2.    INVENTORIES

           Inventories consist of the following at December 27, 2003:


           Raw materials                                          $ 2,196,000
           Work in process                                            271,000
           Finished goods                                             822,000
                                                                  ------------

                                                                    3,289,000
           Less reserve for slow moving and obsolete items            627,000
                                                                  ------------

                                                                  $ 2,662,000
                                                                  ============

                                      F-10
<PAGE>

SPECTRUM LABORATORIES, INC.

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


NOTE 3.    EQUIPMENT AND LEASEHOLD IMPROVEMENTS

           Equipment and leasehold improvements consist of the following at
           December 27, 2003:


           Machinery, equipment and tooling                        $ 5,573,000
           Office furniture and equipment                            1,129,000
           Artwork, at cost                                            986,000
           Leasehold improvements                                    1,092,000
                                                                   ------------

                                                                     8,780,000
           Less accumulated depreciation and amortization            6,042,000
                                                                   ------------

                                                                   $ 2,738,000
                                                                   ============

           Depreciation and amortization expense of equipment and leasehold
           improvements for fiscal years 2003 and 2002 was $722,000 and
           $625,000, respectively.

NOTE 4.    INCOME TAXES

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

                                                         2003            2002
                                                      ----------      ----------

           Current:
             Federal                                  $ (28,000)      $  53,000
             State                                        8,000          (6,000)
             Foreign                                     37,000          40,000
                                                      ----------      ----------

                                                         17,000          87,000
                                                      ----------      ----------

           Deferred:
             Federal                                   (117,000)        (81,000)
             State                                           --          84,000
                                                      ----------      ----------

                                                       (117,000)          3,000
                                                      ----------      ----------

                                                      $(100,000)      $  90,000
                                                      ==========      ==========


           Pretax income subject to foreign and U.S. income taxes for fiscal
           2003 and 2002 were as follows:

                                                         2003          2002
                                                     ------------  ------------
           U.S. income taxes                         $   222,000   $ 1,090,000
           Foreign income taxes                          110,000       156,000
                                                     ------------  ------------

                                                     $   332,000   $ 1,246,000
                                                     ============  ============

                                      F-11
<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:

                                                        2003             2002
                                                     ----------       ----------

Statutory federal income tax provision               $ 116,000        $ 436,000
State income taxes, net of federal benefit              16,000           62,000
Change in valuation allowance                               --         (180,000)
Nondeductible expenses                                  24,000            9,000
Tax credits generated in current year                 (234,000)        (169,000)
Other                                                  (22,000)         (68,000)
                                                     ----------       ----------

Income tax (benefit) provision                       $(100,000)       $  90,000
                                                     ==========       ==========

           The components of the Company's net deferred income tax assets as of
           December 27, 2003 are as follows:

                                                                        2003
                                                                    ------------

Deferred Tax Assets:
Operating loss carryforwards                                        $ 2,084,000
Intangibles, primarily in-process research and development              396,000
Stock based compensation not currently deductible                       187,000
Reserves not currently deductible                                       431,000
Equipment and leasehold improvements                                    150,000
Tax credits                                                             277,000
Other                                                                    44,000
                                                                    ------------

                                                                      3,569,000
Deferred Tax Liabilities:
Marketable Securities                                                  (363,000)
                                                                    ------------
                                                                      3,206,000
Valuation allowance                                                   1,500,000
                                                                    ------------

Net deferred tax assets                                             $ 1,706,000
                                                                    ============


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


Current assets                                                       $  579,000
Noncurrent assets                                                     1,127,000
                                                                     -----------

Net deferred tax assets                                              $1,706,000
                                                                     ===========


           In assessing the realizability of deferred tax assets, management has
           estimated that it is more likely than not that approximately
           $1,500,000 will not be realized. This 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 fiscal years 2003 and 2002, the Company utilized
           approximately $116,000 and $365,000, respectively, of net operating
           losses, to offset currently payable tax liability. Realization of the
           remaining deferred tax assets is dependent upon generating sufficient
           future taxable income. Although realization is not assured,
           management believes the net deferred taxes will be realized and

                                      F-12
<PAGE>

SPECTRUM LABORATORIES, INC.

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


NOTE 4.    INCOME TAXES (Continued)

           continue to evaluate the realizability of the deferred tax assets by
           assessing the need for and amount of a valuation allowance.

           At December 27, 2003, the Company had approximately $6,130,000 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 discussed above, it is probable that $4,507,000 of the
           Company's net operating loss will expire without utilization. Loss
           carryforwards for tax purposes expire in amounts and by fiscal year
           as follows: 2004 $954,000; 2005 $2,836,000; 2006 $1,820,000; 2007
           $274,000; 2010 $13,000; 2012 $114,000, 2018 $85,000 and 2202 $34,000.

NOTE 5.    LONG-TERM DEBT

           At December 27, 2003, the Company had a credit agreement with a bank,
           which provided for two equipment acquisition loans and a revolving
           credit note. The proceeds of the acquisitions loans are restricted to
           certain purposes, as defined in the credit agreement.

           The first of the acquisition loans has an outstanding balance at
           December 27, 2003 of $937,500, bears interest at prime plus .25%
           (4.25% at December 27, 2003) and requires monthly principal
           installments of $62,500 plus interest through March 1, 2005. The
           second loan has an outstanding balance at December 27, 2003 of
           $1,807,500, bears interest at prime plus .25% and requires monthly
           principal installments of $17,500 beginning through March 1, 2005.
           Effective April 1, 2005, the principal payments on the second
           acquisition loan are $80,000 per month through October 1, 2006 with a
           final payment of $25,000 due November 1, 2006.

           The revolving credit note provides the Company with additional
           liquidity and the ability to issue letters of credit aggregating up
           to $300,000 through April 1, 2004. The Company did not draw on the
           revolving credit note and thus there was no outstanding revolving
           credit balance as of December 27, 2003. Interest on any proceeds
           drawn on the revolving credit note bear interest at prime plus .25%
           and is payable on the first of every month. The Company is required
           to have a period of not less than 30 consecutive days during the 12
           month period ending April 1, 2004 during which time there are to be
           no outstanding revolving credit loans. Any outstanding revolving
           credit loans are to be paid April 1, 2004.

           The agreement is secured by substantially all of the assets of the
           Company and is personally guaranteed by the majority stockholder. The
           agreement also requires the maintenance of certain financial and
           non-financial loan covenants and restricts payment of dividends. The
           Company was not in compliance with one of these loan covenants at
           December 27, 2003 relating to cash flow to debt coverage. The Company
           received a covenant violation waiver from its bank on March 25, 2004.
           Future maturities of long-term debt owed on December 27, 2003 by
           fiscal year are approximately as follows: 2004 $960,000; 2005
           $960,000; 2006 $825,000.

NOTE 6.    STOCK OPTION PLAN

           The Company has an option plan referred to as the 2000 Option Plan
           (the "2000 Option Plan"or "Plan") with 600,000 shares of common stock
           reserved for option grants to key employees, directors and
           consultants. Exercise prices for the stock options will not be less
           than 100% of the fair market value of the stock on the date of grant.
           Options under the Plan expire not more than ten years from date of
           grant. Options issued under the Plan become exercisable over a
           five-year period (20% per year)

           In addition, during 1998 the Company granted nonqualified stock
           options to purchase 5% of the outstanding stock to an officer of the
           Company at $1.20 per share. The terms of this grant result in
           variable plan accounting. Accordingly, future compensation expense
           will be measured and recorded based on stock price fluctuations. At


                                      F-13
<PAGE>

SPECTRUM LABORATORIES, INC.

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


NOTE 6.    STOCK OPTION PLAN (Continued)

           the date of grant, 60% of these options vested immediately and the
           remaining 40% vest over two to four years. As of 2003, all of these
           options are fully vested. Total compensation expense recorded during
           fiscal years 2003 and 2002 was approximately $12,000 and $21,000,
           respectively.

           A summary of the status of the Plan and the nonqualified options and
           changes during fiscal years ended 2003 and 2002 is as follows:
<TABLE>
<CAPTION>
                                                             Number     Weighted Average
                                                           of shares     Exercise Price
                                                           ---------    ----------------
<S>                                                         <C>            <C>
OUTSTANDING, December 29, 2001                              634,724        $   1.81

Granted (weighted average fair value of $1.05)              225,000            1.53

Forfeited                                                   (62,000)           2.03
                                                           ---------       ---------

OUTSTANDING, December 28, 2002                              797,724            1.71

Granted                                                          --           --

Forfeited                                                   (99,000)           2.25
                                                           ---------       ---------

OUTSTANDING, December 27, 2003                              698,724        $   1.63
                                                           =========       =========
</TABLE>

            At December 27, 2003, 166,900 shares were available for future
            grants under the Plan. The number of options exercisable were
            451,484 and 445,944 as of December 27, 2003 and December 28, 2002,
            respectively.

           A further summary of options outstanding at December 27, 2003 is as
           follows:
<TABLE>
<CAPTION>

                              Options Outstanding                                       Options Exercisable
-------------------------------------------------------------------------------  ------------------------------------
                                                                 Weighted
                                              Weighted            average                               Weighted
                                               average           remaining                              average
    Exercise                Number            exercise          contractual           Number            exercise
     Prices               of options            price          life in years        of options           price
---------------------- ------------------  ----------------  ------------------  ------------------ -----------------
<S>       <C>                    <C>                <C>                 <C>                <C>                <C>
          $ 1.20                 265,624            $ 1.20              6.67               265,624            $ 1.20
            2.13                 168,100              2.13              7.37               100,860              2.13
            1.53                 225,000              1.53              9.55                45,000              1.53
            3.20                  20,500              3.20              2.96                20,500              3.20
            2.18                  10,000              2.18              3.47                10,000              2.18
            4.37                   5,000              4.37              3.10                 5,000              4.37
            2.20                   3,600              2.20              4.02                 3,600              2.20
            7.50                     500              7.50              3.79                   500              7.50
            1.88                     400              1.88              4.83                   400              1.88
                       ------------------                                        ------------------

                                 698,724                                                   451,484
                       ==================                                        ==================
</TABLE>

                                      F-14
<PAGE>

SPECTRUM LABORATORIES, INC.

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


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 2003 and 2002, the Company incurred royalty
           expenses of $312,000 and $325,000, respectively, under this
           agreement.

NOTE 8.    COMMITMENTS, RENT EXPENSE AND OTHER AGREEMENTS

           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 was $491,000 and $496,000
           in fiscal years 2003 and 2002, respectively. Minimum future rental
           payments under these operating lease agreements for the years ending
           December 31 are as follows: 2004 $492,000; 2005 $336,000; 2006
           $106,000 (total $934,000).

NOTE 9.    GEOGRAPHIC INFORMATION

           Net sales by country for fiscal years ended 2003 and 2002 are as
           follows:
<TABLE>
<CAPTION>
                                                               2003             2002
                                                           ------------     ------------
<S>                                                        <C>              <C>
United States                                              $ 9,527,000      $10,348,000
Japan                                                          634,000          627,000
Other countries, each of which represent less than 5%
  of total net sales                                         2,383,000        2,271,000
                                                           ------------     ------------

                                                           $12,544,000      $13,246,000
                                                           ============     ============
</TABLE>


           There were no significant assets held outside the United States at
           December 27, 2003 or December 28, 2002. Sales to Japan are
           denominated in U.S. dollars and there are no material differences in
           gross margin in sales to different countries.

NOTE 10.   MAJOR CUSTOMERS

           Net sales for fiscal years 2003 and 2002 include 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 December 27, 2003 and December 28, 2002:

                                 2003                          2002
                     ---------------------------     ---------------------------
                                         TRADE                           Trade
                                       ACCOUNTS                        Accounts
                      NET SALES       RECEIVABLE      Net Sales       Receivable
                     -----------     -----------     -----------     -----------

Customer A           $1,639,000      $  267,000      $1,876,000      $  401,000
                     ===========     ===========     ===========     ===========

Customer B           $1,675,000      $  232,000      $1,794,000      $  222,000
                     ===========     ===========     ===========     ===========

                                      F-15
<PAGE>

SPECTRUM LABORATORIES, INC.

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


NOTE 11.   MINORITY INTEREST

           On October 1, 1996, SLI Acquisition Corp., (SLIAC), a subsidiary of
           the Company, entered into an Asset Purchase Agreement with Cellco,
           Inc., a Delaware corporation, and acquired the operating assets and
           liabilities of Cellco, Inc. in exchange for 10,000 shares of the
           subsidiary's preferred stock valued at $2,000,000 for redemption
           purposes. One of the subsidiary's preferred stockholders sold its
           stock with a carrying value of $245,000 to the Company in 1999. At
           December 27, 2003, there is $1,755,000 in preferred stock of the
           subsidiary outstanding. The preferred stockholders of the subsidiary
           had the right to put their stock to SLIAC at any time through
           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 of SLIAC are nonvoting and have
           preference over common stockholders as to dividends and liquidation.

NOTE 12.   SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

                                            2003            2002
                                         ----------      ----------
           Cash paid for:
             Income (refunds) taxes      $ (33,000)      $ 134,000
                                         ==========      ==========

             Interest                    $ 140,000       $ 100,000
                                         ==========      ==========

NOTE 13.   PRODUCT GROUP INFORMATION

           The Company's product groups are based on specific product
           characteristics and are grouped into bioprocessing/laboratory
           products, original equipment manufacturing (`OEM") and operating room
           disposable products. Bioprocessing/laboratory products consist
           primarily of (1) hollow fiber membrane devices that allow components
           retained by a membrane to be concentrated, including filters utilized
           for micro and ultra filtration separations that are sold to biotech
           and pharmaceutical companies. (2) membranes used to concentrate,
           separate and purify dissolved or suspended molecules that are sold
           primarily to laboratories. OEM principally consists of manufacturing
           hollow fiber membrane devices to certain customer's specifications.
           Operating room disposable products consist of sterile plastic
           surgical drapes and cloth bandages that are used primarily by
           hospitals.

           Revenue by product group is as follows:

                                                       2003             2002
                                                   ------------     ------------
           Bioprocessing/laboratory products       $ 8,918,000      $ 9,045,000
           Original equipment manufacturing        $ 1,995,000      $ 2,453,000
           Operating room disposable products        1,631,000        1,748,000
                                                   ------------     ------------

                                                   $12,544,000      $13,246,000
                                                   ============     ============

                                      F-16
<PAGE>
<TABLE>

SPECTRUM LABORATORIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
<CAPTION>


NOTE 14.   VALUATION AND QUALIFYING ACCOUNT INFORMATION

                                     Balance at       Provision
                          Fiscal     beginning        charged to    Net recoveries      Balance at
                           year       of year          expense       (charge-offs)     end of year
                         ---------  ------------     ------------    ------------      ------------
<S>                       <C>       <C>              <C>             <C>               <C>
Doubtful Accounts:        2003      $   119,000      $        --     $    (9,000)      $   110,000
                                    ============     ============    ============      ============

                          2002      $   135,000      $    22,000     $   (38,000)      $   119,000
                                    ============     ============    ============      ============
Sales returns &
  allowances              2003      $    30,000      $        --     $        --       $    30,000
                                    ============     ============    ============      ============

                          2002      $    30,000      $        --     $        --       $    30,000
                                    ============     ============    ============      ============

Slow moving and
 obsolete inventory:      2003      $   669,000      $        --     $   (42,000)      $   627,000
                                    ============     ============    ============      ============

                          2002      $   783,000      $        --     $  (114,000)      $   669,000
                                    ============     ============    ============      ============

Deferred Tax Assets       2003      $ 1,500,000      $        --     $        --       $ 1,500,000
                                    ============     ============    ============      ============

                          2002      $ 1,680,000      $  (180,000)    $        --       $ 1,500,000
                                    ============     ============    ============      ============
</TABLE>


NOTE 15.   FOURTH QUARTER ADJUSTMENTS

           The Company estimates its taxes during the first three quarters of
           the year based on prior year's tax rate. A detailed tax analysis is
           prepared based on the annual results and applicable taxes recorded.
           This analysis resulted in a tax benefit of $100,000 for fiscal year
           2003 being recorded in the fourth quarter.

           In the fourth quarter, the Company allocated an additional $300,000
           of overhead costs to its inventory as a change in the estimate of
           allocable inventory costs.

           In December of 2001 Spectrum entered into a specific research,
           licensing, manufacturing and supply agreements (the "Agreements")
           with an unrelated company, now known as Arbios Systems, Inc.
           ("Arbios"). These Agreements, among other aspects, resulted in
           Spectrum being granted 362,669 shares of Arbios. Arbios became a
           public company on October 30, 2003 and trades on the Pink Sheets
           electronic trading system under the symbol of ABOS.PK. Arbios has
           subsequently been listed on the OTC Bulleting Board under the symbol
           of ABOS.OB. In compliance with FAS115 based on the listed trade price
           of $2.50 per share Spectrum has allocated $907,000 as the fair market
           value reflecting this amount on its balance sheet.

                                      F-17
<PAGE>

SPECTRUM LABORATORIES, INC.

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

NOTE 16.   SUBSEQUENT EVENT

           The Company has entered into an agreement, dated February 27, 2004,
           (the "Agreement") to potentially sell its subsidiary Spectrum
           Chromatography, Inc. ("SCI") The agreement is subject to approval of
           each parties Board of Directors and applicable due diligence review
           by the purchaser. The proceeds include cash and stock of the acquirer
           with a total value of approximately $300,000. SCI annual revenues
           were approximately $529,000 and $576,000 for the fiscal years ended
           2003 and 2002, respectively. Pre tax income was approximately $29,000
           and $54,000 in the fiscal years ended 2003 and 2002, respectively.
           The carrying value of these assets as of December 27, 2003 was
           approximately $285,000.




                                      F-18