================================================================================
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                ----------------
                                   FORM 10-KSB
(Mark One)
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                   For the fiscal year ended December 31, 1998

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934

           For the transition period from              to

                           Commission File No. 0-27646

                          GUM TECH INTERNATIONAL, INC.
                 ----------------------------------------------
                 (Name of small business issuer in its charter)

               Utah                                      87-0482806
  (State or Other Jurisdiction              (I.R.S. Employer Identification No.)
of Incorporation or Organization)

        246 East Watkins Street
              Phoenix, Az                                 85004
(Address of principal executive offices)                (Zip Code)

                                 (602) 252-1617
                (Issuer's Telephone Number, Including Area Code)

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

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

                            No Par Value Common Stock
                                (Title of Class)

         Check whether the Registrant (1) filed all reports required to be filed
by  Section  13 or 15(d)  of the  Securities  Exchange  Act of 1934  during  the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports),  and (2) has been subject to such filing requirements for
the past 90 days. YES [X]   NO [ ]

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

         The  Registrant's  revenues  for its year ended  December 31, 1998 were
$5,272,547.

         As of March 26, 1999, 7,144,061 shares of the Registrant's no par value
Common Stock were  outstanding.  As of March 26,  1999,  the market value of the
Registrant's no par value Common Stock, excluding shares held by affiliates, was
$66,711,070 based upon a closing bid price of $9.75 per share of Common Stock on
the Nasdaq National Market.

                       DOCUMENTS INCORPORATED BY REFERENCE

         PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT RELATING TO ITS
FORTHCOMING  1999 ANNUAL MEETING OF STOCKHOLDERS  ARE  INCORPORATED BY REFERENCE
INTO PART III  HEREOF TO THE  EXTENT  PROVIDED  HEREIN.  EXCEPT AS  SPECIFICALLY
INCORPORATED BY REFERENCE HEREIN, THE PROXY STATEMENT IS NOT BEING FILED AS PART
OF THIS ANNUAL REPORT ON FORM 10-KSB.

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<PAGE>
                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----
PART I

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

PART II

  Item 5  --  Market for Common Equity and Related Stockholder Matters...    8
  Item 6  --  Management's Discussion and Analysis of Financial
              Condition and Results of Operations........................    9
  Item 7  --  Financial Statements.......................................   14
  Item 8  --  Changes in and Disagreements with Accountants on
              Accounting and Financial Disclosure........................   15

PART III

  Item 9  --  Directors and Executive Officers, Promoters and
              Control Persons; Compliance with Section 16(a)
              of the Exchange Act.......................................    15
  Item 10 --  Executive Compensation....................................    15
  Item 11 --  Security Ownership of Certain Beneficial Owners
              and Management............................................    15
  Item 12 --  Certain Relationships and Related Transactions............    15
  Item 13 --  Exhibits, List and Reports on Form 8-K....................    15

                                        2
<PAGE>
                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

SUMMARY

     Gum Tech  develops  and  manufactures  specialty  chewing gum  products for
branded and private label customers,  as well as products marketed under its own
brand.   Specialty   chewing  gums  include   vitamins,   herbals,   and  active
over-the-counter drug ingredients formulated to provide specific  health-related
benefits to the user. Gum Tech  manufactures and continues to develop  specialty
chewing gums that provide the following benefits:

     +    promote oral hygiene and breath freshness;

     +    promote weight management;

     +    reduce pain;

     +    relieve indigestion;

     +    contribute to energy and endurance;

     +    reduce the risk of osteoporosis;

     +    reduce tobacco cravings; and

     +    relieve cold and flu symptoms.

A  substantial  majority  of Gum Tech's  sales  currently  are  attributable  to
products developed, manufactured and packaged by Gum Tech for marketing and sale
by major branded and private label  consumer  products  companies such as Breath
Asure,   Inc.,   Ranir/DCP,   Inc.,   Heritage  Consumer   Products,   Herbalife
International, Inc., and Pharma-Green Ltd. Gum Tech also is actively involved in
discussions   with  other  major  consumer  product   companies   regarding  the
development and formulation of a variety of specialty chewing gum products.

     In 1998, following a significant management restructuring, Gum Tech changed
its principal strategy from developing,  manufacturing, and distributing its own
branded  and  private  label gum  products  to  developing,  manufacturing,  and
packaging specialty  gum products for sale and distribution by major branded and
private  label  customers  that  have the  capital  resources  and  distribution
capability to promote and market specialty  chewing gums on a large national and
international  scale. Gum Tech adopted this change in strategy primarily because
it did not have the financial  resources,  name  recognition,  and  distribution
capability to successfully market and distribute its gums on a wide scale basis.

     Gum Tech operates the only stainless  steel gum  manufacturing  facility in
the United States  registered with the Food and Drug  Administration  to produce
Over-The-Counter  (OTC)  chewing  gum  products.  Completed  in  1996,  Gum Tech
believes this facility is the only facility in the United States that  currently
is capable of producing over-the-counter drugs in chewing gum form.

     Gum Tech  recently  announced  a joint  venture  with  Gel  Tech,  Inc.,  a
California  corporation,  to manufacture,  market and distribute  health-related
products using a patent-pending, nasal gel technology. The initial product to be
developed and marketed by this joint venture is Zicam(TM),  a nasal gel formula.

                                        3
<PAGE>
An initial  internal study of Zicam indicated that Zicam reduced the duration of
the common cold from an average of 10-14 days to 1-3 days. Gum Tech and Gel Tech
have signed a letter of intent under which both  parties  would  transfer  their
respective  interests  in the  patent  rights  to the nasal  gel  technology  in
exchange for  membership  interests in Gel Tech LLC, a recently  formed  Arizona
limited liability company. The letter of intent also provides that Gum Tech will
have a 60%  interest in the  capital  and profits of the joint  venture and that
parties  affiliated  with Gel Tech,  Inc. will own a 40% interest in the capital
and profits of the joint venture. In addition, the letter of intent contemplates
that Gum Tech will lend up to $3.5 million  dollars to the joint venture,  which
will be secured by a pledge of the intellectual  property rights  contributed to
the joint venture.  The parties to the joint venture currently are negotiating a
definitive operating agreement and related documents.  Until the parties execute
definitive  agreements,  Gum Tech cannot  assure that the actual  terms will not
differ  materially from those  contemplated by the letter of intent, or that the
parties will be successful in reaching a definitive agreement.  Because Zicam is
in the initial stages of production and distribution,  there can be no assurance
that this product will be successful.

     Gum Tech was incorporated in Utah in 1991. Gum Tech's  principal  executive
offices are located at 246 E. Watkins Street, Phoenix, Arizona and its telephone
number is (602) 252-1617.

STRATEGY

     Gum Tech is pursuing the following business strategies:

     +    CONTINUE TO RESEARCH AND DEVELOP NEW GUM PRODUCTS.  Gum Tech possesses
          considerable gum formulation expertise, and together with its existing
          and  potential  customers,  develops  new  products  in the  specialty
          chewing gum market. The Company is uniquely  positioned to manufacture
          over-the- counter gum products because it possesses the only stainless
          steel gum making facility in the United States registered with the FDA
          to produce over-the-counter chewing gum products.

     +    PARTNER WITH MAJOR CONSUMER PRODUCT COMPANIES TO INCREASE SALES. Since
          early 1998,  the Company  has  pursued a strategy of  partnering  with
          major consumer  products  companies that have the financial  resources
          and distribution capability to market and distribute specialty chewing
          gum  products  on  a  national   scale.   Gum  Tech   expanded   these
          relationships  significantly  during 1998 with the  addition of Breath
          Asure,  Ranir/DCP,  Heritage Consumer Products,  Pharma-Green Ltd. (an
          Israeli company), and EcoDenT, among others.

     +    IMPROVE  ITS  MANUFACTURING   OPERATIONS  TO  ENHANCE  EFFICIENCY  AND
          INCREASE   PROFIT  MARGINS.   Gum  Tech  has  recently   expanded  its
          operations,  including adding  personnel and additional  packaging and
          coating equipment,  to meet an expected increase in demand for several
          products.   Following  this  expansion  of  operations,  Gum  Tech  is
          continuing  to take steps to increase  its  business  and to lower the
          costs of manufacturing its gum products.

     +    CONTINUE TO EFFECTIVELY  MARKET GUM TECH BRANDED  PRODUCTS.  While Gum
          Tech  has  changed  its  principal   strategy  to  focus  on  contract
          manufacturing for others, Gum Tech continues to support several of its
          own branded  products  and  believes  that these  products and related
          marketing  efforts  provide a showcase  for new product  concepts  and
          demonstrate Gum Tech's expertise in developing new gum formulations.

     +    EFFECTIVELY  MANAGE  THE  DEVELOPMENT  AND  GROWTH OF THE GEL TECH LLC
          JOINT VENTURE AND THE MANUFACTURING AND MARKETING OF ZICAM. Zicam is a
          new product  that Gum Tech  believes  represents  an  opportunity  for
          substantial growth in its revenues. In order to realize this growth in
          revenues,  however,  Gum Tech must effectively  manage the development
          and growth of its joint  venture  with Gel Tech and Zicam must achieve
          significant market acceptance.  In addition, Gum Tech has committed to
          the Gel Tech LLC to fund its initial capital  requirements to develop,
          manufacture,  and  market  Zicam,  including  the costs  necessary  to
          conduct an independent clinical study.

                                        4
<PAGE>
PRODUCT INFORMATION

     The table below describes certain  information  related to specific chewing
gum products  currently  manufactured  by Gum Tech for other  consumer  products
companies.
<TABLE>
<CAPTION>
PRODUCT                                   BENEFITS TO USER                        MARKET                  Distributed by
-------                                   ----------------                        ------                  --------------
<S>                          <C>                                            <C>                     <C>
Breath Asure Dental Gum(TM)   Promotes oral hygiene and breath freshness     Oral Care              Breath Asure
Private label dental gums     Promotes oral hygiene and breath freshness     Oral Care              Ranir/DCP
AcuTrim(R)                    Promotes weight management                     OTC drug               Heritage Consumer Products
Aspergum(R)                   Pain relief                                    OTC drug               Heritage Consumer Products
Chooz                         Antacid and prevents osteoporiasis             OTC drug               Heritage Consumer Products
Herbalife NRG(R)              Improves energy & endurance                    Dietary supplement     Herbalife
Herbalife Chew Slim(R)        Promotes weight management                     Dietary supplement     Herbalife
Pharma-Green seven varieties  Various                                        Dietary supplement     Pharma-Green Ltd.
Brain Gum                     Improves brain function                        Dietary supplement     KK Research
</TABLE>

Gum Tech also markets the following products under the Gum Tech brand:  Ginseng,
Chew   &   Soothe(R),   CitrusSlim(R),    Chromatrim(R),    Calcium,   Zone(TM),
DentaHealth(R) and Love Gum(R).



MANUFACTURING AND PACKAGING

     The manufacture of specialty chewing gums involves:

     +    storing bulk raw materials and "fine" raw  materials,  such as flavor,
          colors and active ingredients;

     +    producing and mixing the gum base in large stainless steel mixers;

     +    extruding the gum into selected sizes and shapes;

     +    coating the gum, generally with a sugarless coating solution;

     +    branding the product if required;

     +    packaging the gum in blister packages; and

     +    packaging  the  blisters,  according to customer  specifications,  for
          shipment.

     All of Gum Tech's gum products contain one or more active ingredients which
are  added  either to the gum  center in the  mixing  stage or  included  in the
coating process.

     Prior to  commencing  production  of the chewing  gum, Gum Tech records lot
numbers for all  ingredients,  examines and files  certificates  of ingredients,
performs quality control tests, and sanitizes  equipment and utensils.  Gum Tech
personnel conduct  additional quality control tests throughout the manufacturing
process.   Gum  Tech   manufactures   its  products  in  compliance   with  good
manufacturing procedures requiring written standard operating procedures.

     Gum Tech manufactures all of its gum products, including those marketed and
distributed by others. In 1998, Gum Tech added  significantly to its coating and
packaging  capability  and secured an  additional  gum  rolling  line to meet an
anticipated increase in demand for its gums.

                                        5
<PAGE>
COMPETITION

     Although the specialty gum market is emerging as a market category distinct
from the traditional, established chewing gum market, Gum Tech and the companies
to whom it sells face significant  competition in each of the four categories in
which they operate.  These  categories  include oral care  products,  OTC drugs,
smoking cessation and dietary supplements. In the oral care products market, Gum
Tech  manufactures  products  for  Breath  Asure and  Ranir/DCP,  which  compete
directly with Arm & Hammer dental gum, Trident Advantage and V-6 dental gum. Gum
Tech  manufactures  OTC  drug-related  gum  products,   including  Aspergum,  an
analgesic,  Chooz, an  antacid/calcium  supplement,  and AcuTrim, a dietary gum.
Each of these products competes generally with analgesics, antacids, and dietary
products produced and marketed by major consumer products companies. Gum Tech is
evaluating  opportunities in the smoking  cessation  market,  which is currently
dominated by the  Nicorette  product  marketed by Pharmacia  and Upjohn.  In the
dietary  supplement market, Gum Tech's various gum products compete with a large
number of non-gum dietary supplement products.

     Competitive factors in the chewing gum industry include price,  flavor, and
name recognition  resulting from media advertising.  Gum Tech currently does not
have the capital resources,  marketing and distribution  networks,  product name
recognition,  and advertising  budget to produce or introduce chewing gum brands
that could compete effectively with the multi-national chewing gum manufacturers
and large specialty chewing gum marketers.  Accordingly,  Gum Tech has adopted a
strategy of  partnering  with major  branded and private  label  customers  that
possess the  resources  and  capabilities  needed to market and  distribute  gum
products on a wide scale basis.

FDA AND OTHER GOVERNMENT REGULATION

     Gum Tech is subject to various Federal,  state and local laws affecting its
business.  All of Gum Tech's  products  are  subject to  regulation  by the FDA,
including  regulations  with  respect  to  labeling  of  products,  approval  of
ingredients in products,  claims made regarding the products,  and disclosure of
product  ingredients.  In addition,  some of Gum Tech's  products are considered
"drugs," which require that the  manufacture of such products  comply with "good
manufacturing   practices"  mandated  by  the  FDA,  which  prescribes  specific
requirements and procedures for the manufacture of FDA-regulated  drug products.
If Gum Tech fails to comply with these requirements and procedures,  the FDA has
the right to restrict the sale of or remove such products  from the market.  Gum
Tech  believes  all of its  products  comply  with all  regulatory  requirements
including the FDA manufacturing standards and practices for drug products.

     Advertising  claims made by Gum Tech with  respect to its products are also
subject to the jurisdiction of the FDA and the Federal Trade Commission. In both
cases, Gum Tech is required to obtain scientific data to support any advertising
or labeling of health claims it makes concerning its products.

     In addition,  Gum Tech's chewing gum  manufacturing  facility is subject to
regulation by various governmental agencies including state and local licensing,
zoning land use, construction and environmental  regulations and various health,
sanitation, safety and fire codes and standards.  Suspension of certain licenses
or approvals, due to failure to comply with applicable regulations or otherwise,
could interrupt Gum Tech's manufacturing operations. Gum Tech also is subject to
federal and state laws  establishing  minimum wages and regulating  overtime and
working conditions.

TRADEMARKS, TRADE NAMES AND PROPRIETARY RIGHTS

     Gum Tech owns a perpetual,  exclusive  U.S.  license  (and a  non-exclusive
license abroad) to use  Microdent(TM),  a  plaque-reducing  agent, in its coated
chewing gum products.  Microdent is the critical  ingredient in the chewing gums
manufactured and packaged by Gum Tech for Breath Asure and Ranir/DCP.

                                        6
<PAGE>
     Gum Tech routinely seeks trademark protection from the United States Patent
Office ("USPO") and from similar  agencies in foreign  countries for chewing gum
brands.  Despite  these  protections,  Gum Tech may not be able to  successfully
defend any trademarks granted to it against claims from or use by competitors or
that trademark  applications will be approved by the USPO or any similar foreign
agency.

     Gum Tech considers some of its chewing gum formulations and processes to be
proprietary in nature and relies upon a combination of nondisclosure agreements,
other   contractual   restrictions  and  trade  secrecy  laws  to  protect  this
proprietary  information.  Despite  these  precautions,  these  steps may not be
adequate to prevent  misappropriation  of Gum Tech's proprietary  information or
that  Gum  Tech's  competitors  will  not  independently   develop  chewing  gum
formulations  and  processes  that are  substantially  equivalent or superior to
those developed by Gum Tech.

EMPLOYEES

     As of March 1, 1999, the Company  employed  approximately  60  individuals,
including 2 executive  officers,  42 manufacturing  and warehouse  personnel,  4
research and development personnel, and 12 administrative/sales personnel.

ITEM 2. DESCRIPTION OF PROPERTY

     Gum Tech  leases an  approximately  28,000  square  foot  building  for its
principal executive offices and chewing gum manufacturing facilities at 246 East
Watkins, Phoenix, Arizona 85004 on a ten-year lease (with two three-year renewal
options) expiring December 2005 at a monthly rental of approximately $12,000. In
September  1998,  Gum Tech leased an  additional  31,000  square  foot  building
located near its principal executive offices and manufacturing facility to house
Gum Tech's warehouse and packaging  operations.  This lease provides for monthly
rent of  approximately  $11,000  and a five year  term,  subject  to a five year
renewal option.

ITEM 3. LEGAL PROCEEDINGS

LITIGATION

     On October 16, 1996, a lawsuit was filed against Gum Tech and other parties
in the United  States  District  Court for the Central  District of  California,
CV-95-9784.  The action is entitled GCN Products, Inc. vs. Roy Kelly, et al. The
complaint,  as it relates to Gum Tech, principally alleged that Gum Tech engaged
in unlawful rebates,  appropriations and overcharges,  commercial bribery, fraud
and unjust  enrichment.  On  September 4, 1998,  the court  granted a motion for
summary  judgment in Gum Tech's  favor,  and dismissed  the  plaintiff's  claims
against  Gum Tech and its  current  and former  directors.  The  ruling  remains
subject to appeal.

     On July 2, 1998,  Kirk  Gossett,  a former  employee  of Gum Tech,  filed a
lawsuit against Gum Tech and three officers and employees of Gum Tech, and their
spouses, alleging violation of overtime requirements of the Fair Labor Standards
Act. Mr.  Gossett is claiming  damages of over  $80,000,  in addition to seeking
treble damages permitted under the Fair Labor Standards Act. Gum Tech denies all
allegations and intends to vigorously defend the suit.

     On January 27, 1999, an action was filed against Gum Tech and certain other
parties in the  Superior  Court of the State of Arizona in and for the County of
Maricopa,  CV-99-01528, by Paul F. Janssens-Lens. As it relates to Gum Tech, the
complaint alleges intentional interference with business relations,  intentional
misrepresentation,  negligent misrepresentation,  securities fraud, and consumer
fraud.  The  plaintiff  seeks  compensatory  damages  of  $720,000,  unspecified
punitive damages, and attorneys' fees and costs. Gum Tech denies the plaintiff's
allegations and intends to vigorously defend the action.

                                        7
<PAGE>
     Gum Tech is not  involved  as a party to any other legal  proceeding  other
than various claims and lawsuits arising in the normal course of business,  none
of  which,  in  the  opinion  of  Gum  Tech's  management,  is  individually  or
collectively material to Gum Tech's business.

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

     Not applicable.

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Gum Tech's Common Stock has traded on the Nasdaq  National Market under the
symbol "GUMM" since April 24, 1996.

     The following table sets forth for the quarters indicated the range of high
and low closing  prices of the Company's  common stock as reported by the Nasdaq
National Market, but does not include retail markup, markdown or commissions.

                                                         MARKET PRICE
                                                   ----------------------
                                                      HIGH          LOW
                                                      ----          ---
     FISCAL YEAR 1997
     First Quarter ..............................  $  8.75      $   5.50 
     Second Quarter .............................  $ 11.875     $   7.688
     Third Quarter ..............................  $ 15.125     $  10.75 
     Fourth Quarter .............................  $ 11.75      $   6.75 

     FISCAL YEAR 1998
     First Quarter ..............................  $  7.375     $  4.8125
     Second Quarter .............................  $  7.5625    $  5.25  
     Third Quarter ..............................  $ 10.75      $  7.1875
     Fourth Quarter .............................  $  8.00      $  5.4375

     FISCAL YEAR 1999
     First Quarter (through March 26, 1999) .....  $ 14.6719    $  8.3750

     As of  March  26,  1999,  Gum  Tech  had  approximately  3,571  record  and
beneficial stockholders.

DIVIDEND POLICY

     Gum Tech has paid only  limited  cash  dividends on its common stock in the
past and  intends  to retain  earnings,  if any,  for use in the  operation  and
expansion  of its  business.  The amount of future  dividends,  if any,  will be
determined by the Board of Directors based upon Gum Tech's  earnings,  financial
condition, capital requirements and other conditions.

                                        8
<PAGE>
ITEM 6. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

     Gum Tech  develops  and  manufactures  specialty  chewing gum  products for
branded and private label customers,  as well as products marketed under its own
brand.   Specialty   chewing  gums  include   vitamins,   herbals,   and  active
over-the-counter drug ingredients formulated to provide specific  health-related
benefits to the user. A substantial  majority of Gum Tech's sales  currently are
attributable to products  developed,  manufactured  and packaged by Gum Tech for
marketing  and  sale by  major  branded  and  private  label  consumer  products
companies.

RESULTS OF OPERATIONS  FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR
ENDED DECEMBER 31,1997.

     The following table presents  certain  Statement of Operations  information
expressed in dollars and as a percentage of Net Sales for the periods indicated:

                                             YEARS ENDED DECEMBER 31
                                   --------------------------------------------
                                           1998                   1997
                                   --------------------    --------------------

Net Sales ......................   $ 5,272,547     100%    $ 3,776,562     100%
Cost of Sales ..................     4,357,010      83       4,197,777    (111)

Gross profit ...................       915,537      17        (421,215)    (11)
Operating expenses .............     6,164,022     117       3,881,238     103
Research & development .........       667,067      12         209,783       5

Income (loss) from operations ..    (5,915,552)   (112)     (4,512,236)   (119)
Interest and other income ......       127,947       2         204,220       5
Interest expense ...............       473,811       9       1,090,618      29
Provision (benefit) for
  income taxes .................            --      --              --      --
Net income (loss) ..............   $(6,261,416)   (119)    $(5,398,634)   (143)

     NET SALES. Net sales for 1998 were $5.27 million,  approximately  40% above
the 1997 level. Sales in 1998 reflect the change in the Company's strategy early
in the year to a focus on contract  manufacturing  whereas sales in 1997 largely
reflect  sales of  Cigarrest,  which  the  Company  marketed,  and  sales of the
Company's own gum products. Sales in 1998 included deliveries of diet and energy
gums to Herbalife in the first half of the year,  Aspergum (an  analgesic  gum),
and Chooz (an antacid gum) in the second quarter, Breath Asure dental gum in the
third  quarter,  and Ranir/DCP  private label dental gum,  AcuTrim (a diet gum),
seven different gums to  Pharma-Green  and a dental gum to EcoDenT in the fourth
quarter.

     COST OF  SALES.  Cost of sales  increased  to $4.4  million,  approximately
$159,000  above the 1997 level,  primarily  reflecting  the  increased  level of
sales. In 1997, the Company recorded sales under its barter agreements at a zero
value with a cost of sales of  $715,000.  Adjusting  for this cost,  the cost of
sales for 1997 was $3.5 million,  or 92% of net sales.  The  improvement  in the
gross  profit  percentage  from 8% in  1997  to 17% in 1998 is due to  increased
utilization of plant  facilities  resulting in lower per unit overhead costs and
the efficiencies  realized by producing larger  quantities of the same gum. Both
periods were impacted by sizable write-offs of obsolete  inventory  ($260,000 in
1998 and $350,000 in 1997).

     GROSS PROFIT.  Gross profit for 1998  increased to $915,537  reflecting the
higher level of sales and increased utilization of plant facilities.

     OPERATING EXPENSES.  Operating expenses in 1998 were significantly impacted
by one-time  charges  related to the management  restructuring  that occurred in
early 1998 and continuing charges  attributable to the Company's prior corporate
strategy.  These charges resulted from an extension of stock options to a former
officer of the Company ($1.48 million) and an expense to reflect options owed to
another  individual  ($732,000),  both  of  which  were  non-cash  charges,  and
severance compensation to certain corporate officers ($600,000). Excluding these
items,  operating  expenses  were $3.4  million,  or $480,000 less than the 1997
level, which is primarily attributable to a decrease in advertising expenses.

     RESEARCH & DEVELOPMENT.  Research & development  expenses increased in 1998
to $667,067  from $209,783 in 1997 due to the  introduction  of more than 20 new
gum products in 1998,  including  three that contained  over-the-counter  drugs.
Research and development  expenses include the cost of formulation,  process and
ingredient validation,  and production scale-up costs of new products as well as
costs of product concepts still under study.

                                        9
<PAGE>
     INTEREST AND OTHER INCOME.  Interest  income declined in 1998 from 1997 due
to a decrease in the Company's invested cash position during the year.

     INTEREST  EXPENSE.  Interest  expense  decreased due to the refinancing and
restructuring  of an equipment  lease in late 1997 to a term loan and conversion
into common  stock of  approximately  $1.0  million in  principal  amount of the
Company's convertible debt in the second half of 1998.

     NET INCOME (LOSS).  The net loss for 1998 was $6.3 million compared to $5.4
million the prior year.  Although the results for 1998 were negatively  impacted
by some  significant  one time  charges,  the Company  continued to experience a
sizable loss in 1998 due to insufficient sales to support the Company's overhead
expenses.

LIQUIDITY AND CAPITAL RESOURCES

     As of December 31, 1998,  the  Company's  working  capital was $2.2 million
compared to $5.1 million at the end of 1997. For 1998, the Company experienced a
decrease in cash used by operating  activities  of $3.9  million  primarily as a
result of the net loss for the period and an increase in  inventory  of $863,000
and accounts receivable of $415,000.

     Investing  activities  consumed  $864,000  in  1998,  largely  due  to  the
Company's investment in additional packaging, coating and gum rolling equipment,
as well as leasehold  improvements  to both of its production  facilities.  Cash
flow from investing activities provided net cash of $39,000 in 1997.

     Financing  activities  in 1998  provided net cash of $1.7  million  largely
through the exercise of common stock options and warrants.  Financing activities
provided  $6.2 million of cash in 1997 from the  exercise of warrants  issued in
conjunction  with the Company's  initial public offering and the issuance of the
Company's convertible notes in March 1997.

     In  February  1999,  the  Company  entered  into  a  $2  million  financing
arrangement with a commercial bank for the sale of accounts receivable submitted
to the bank. To date, the Company has not borrowed under this facility,  and may
cancel the  facility,  at any time,  without  penalty.  Since  December 31, 1998
financing activities have provided net cash of $1.0 million through the exercise
of options and warrants.  In addition,  $500,000 of convertible  notes have been
converted into common stock.

     On March 30, 1999,  Gum Tech announced that it had entered into a letter of
intent with an institutional investor for $6 million of combined senior debt and
preferred  equity.  The letter of intent  provides  that Gum Tech may redeem the
debt and repurchase  the preferred  stock with common stock rather than cash, at
Gum Tech's option, within the next two years. The primary purpose of the private
placement is to raise funds to finance the initial development and operations of
the Gel Tech LLC. The proposed  private  placement is subject to the negotiation
and delivery of a definitive  purchase  agreement and related  documents and the
completion of satisfactory  due diligence by the purchaser.  As a result,  there
can be no assurance  that Gum Tech will be able to  successfully  complete  this
proposed  private  placement or that the principal  terms will not be materially
different  then outlined  above.  The  securities to be offered in this proposed
private  placement  will not be registered  under the Securities Act of 1933 and
may not be  offered  or sold in the  United  States  absent  registration  or an
applicable exemption from registration requirements.

FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION

     This report contains  forward-looking  statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including statements regarding
Gum Tech's  anticipated  growth in business  and future  results of  operations.
These  forward-looking  statements are based on Gum Tech's  expectations and are
subject  to a number  of  risks  and  uncertainties,  many of  which  cannot  be
predicted or  quantified  and are beyond Gum Tech's  control.  Future events and
actual results could differ materially from those set forth in, contemplated by,
or underlying the  forward-looking  statements.  Factors that could cause actual
results to differ  materially  from Gum Tech's  expectations  include  less than
anticipated  demand  for  Gum  Tech's  chewing  gum  products,  lack  of  market
acceptance for or uncertainties  concerning the efficacy of Zicam, a decrease in
the  level  of  reorders  from  existing   customers,   financial   difficulties
encountered by one or more of Gum Tech's  principal  customers,  difficulties in
obtaining additional capital for marketing,  research and development, and other
expenses,  the  possibility  of material  charges  incurred as a result of prior
activities, aggressive pricing and marketing efforts by rival gum manufacturers,
unavailability of third-party material products at reasonable prices,  inventory
obsolescence due to shifts in market demand, and material  litigation  involving
product   liabilities   and  consumers   issues.   These   potential  risks  and
uncertainties, together with those mentioned below and elsewhere in this report,
could affect Gum Tech's future operating results,  financial condition,  and the
market price of its common stock.

     Information contained in this report includes "forward-looking statements",
which can be identified by the use of forward-looking  words such as "believes",
"expects",  "may",  "should",  or  "anticipates"  or by discussions of trends or
strategy.  Gum Tech gives no assurance  that it will achieve the future  results
addressed by these forward-looking statements.

     The  following  matters  constitute   cautionary   statements   identifying
important factors that relate to the forward- looking statements.  These factors
include certain risks and uncertainties  that could cause actual results to vary

                                       10

<PAGE>
materially from the future results addressed in the forward-looking  statements.
These and other factors could also cause actual results to vary  materially from
the future results contemplated by such forward-looking statements.

LIMITED OPERATING HISTORY; RECENT LOSSES

     Gum Tech began operations in February 1991 and has had a limited  operating
history upon which potential  investors may evaluate its  performance.  Gum Tech
has reported  significant  losses in each of the last three years.  Gum Tech can
give no assurance that future  operations will be profitable.  The likelihood of
Gum Tech's  success must be considered  relative to the problems,  difficulties,
complications  and  delays   frequently   encountered  in  connection  with  the
development and operation of a new business and Gum Tech's significant change in
strategy in early 1998.

RELIANCE ON A FEW CUSTOMERS

     With Gum Tech's  shift in  strategy  in early  1998 to a focus on  contract
manufacturing,  Gum Tech has become very  dependent  for its  current  sales and
future growth on a few customers.  These  customers  include  Herbalife,  Breath
Asure,  Ranir/DCP,  and  Heritage  Consumer  Products.  If  any of  these  large
customers  reduces  its  orders for Gum Tech's  products,  Gum Tech's  sales and
operating  results  could be adversely  affected.  While the decision to partner
with these firms relieves Gum Tech of the direct  responsibility to market these
products,  it does introduce a dependability  on these customers to market their
products effectively. Further, Gum Tech also is at risk for their non-payment or
late payment for amounts owed to Gum Tech. While Gum Tech intends to add to this
portfolio  of  customers  to reduce  the risk of  non-performance  by any single
customer, there can be no assurance that it will be successful in that effort.

FDA AND OTHER GOVERNMENT REGULATION

     Gum Tech's  chewing  gum  products  are subject to  regulation  by the FDA,
including  regulations  with  respect  to  labeling  of  products,  approval  of
ingredients in products,  claims made regarding the products,  and disclosure of
product  ingredients.  Failure to comply with these  regulations could cause the
FDA to suspend  sales of one or more of Gum Tech's  products or to remove  those
products from the market.

     Gum Tech's advertising claims regarding its products, including claims made
by companies for which Gum Tech  manufactures  its products,  are subject to the
jurisdiction  of the FTC as well as the  FDA.  In both  cases,  Gum Tech and the
companies  for which Gum Tech  manufactures  its products are required to obtain
scientific  data to support any  advertising or labeling  health claims it makes
concerning its products,  although no  pre-clearance or filing is required to be
made with either agency.

     Gum Tech's chewing gum  manufacturing  facility is subject to regulation by
various governmental agencies, including state and local licensing, zoning, land
use, construction, and environmental regulations and various health, sanitation,
safety  and  fire  codes  and  standards.  Suspension  of  certain  licenses  or
approvals,  due to failure to comply with  applicable  regulations or otherwise,
could  interrupt  Gum Tech's  manufacturing  operations  and delay  shipments of
product to its customers.

     Gum Tech also is  subject to federal  and state laws  establishing  minimum
wages and regulating overtime and working conditions. Because many of Gum Tech's
personnel  are paid at rates based on the federal  minimum  wage, an increase in
such minimum wage will result in an increase in Gum Tech's labor costs.

NO ASSURANCE OF SCIENTIFIC PROOF

     Under FDA and FTC rules, Gum Tech is required to obtain  scientific data to
support any health claims it makes concerning its products. Gum Tech believes it
has obtained  appropriate  scientific  data for all of its products and gathered
and organized the scientific  data when required.  Gum Tech has not yet provided
nor been requested to provide any  scientific  data to the FDA. The marketing of
certain of Gum Tech's  products  involves  claims that such  products  assist in
weight loss,  promote dental hygiene and reduce the duration of the common cold.

                                       11

<PAGE>
There can be no assurance that the scientific  data obtained in support of these
claims will be deemed acceptable by the FDA or FTC, should either agency request
any such data in the future.  If scientific data is not deemed  acceptable,  Gum
Tech  would be forced to obtain  acceptable  supporting  data for its  claims or
cease marketing the product based on those claims. In particular, the claim that
Zicam  significantly  reduces the  duration  and  severity of the common cold is
based on an initial internal study and has not yet been  independently  verified
by a clinical study.

DIFFICULTIES IN ACHIEVING WIDESPREAD MARKET ACCEPTANCE FOR NEW PRODUCTS

     Gum Tech's  future  success  depends in part on the success of the Gel Tech
LLC joint venture in developing and marketing Zicam, a recently introduced nasal
gel product.  For a number of reasons,  including  lack of financial  resources,
inability  to mount large scale media  advertising  campaigns,  and lack of name
recognition,  Gum Tech has been unable to achieve  significant market acceptance
with respect to any of its own specialty gum products. As a result, Gum Tech and
the Gel Tech LLC will face  significant  challenges in  establishing  Zicam as a
widely accepted consumer health related product.

NO ASSURANCE OF PROPRIETARY PROTECTION

     Gum Tech  seeks  trademark  and  patent  protection  from the USPO and from
similar  agencies in foreign  countries  for chewing gum brands.  Despite  these
precautions,  Gum Tech may not be able to  successfully  defend any  trademarks,
trade names, or patents against claims from or use by competitors.

     Gum Tech considers some of its chewing gum formulations and processes to be
proprietary  in  nature  and  relies  upon  a  combination   of   non-disclosure
agreements, other contractual restrictions and trade secrecy laws to protect its
proprietary  information.  Despite these precautions,  Gum Tech may be unable to
prevent  misappropriation  of this proprietary  information and cannot guarantee
that its competitors will not independently develop chewing gum formulations and
processes that are substantially equivalent or superior to its own.

COSTS OF NEW PRODUCT DEVELOPMENT

     Gum Tech may  experience  difficulties  that  could  delay or  prevent  the
introduction  of  new  chewing  gum  products.  Gum  Tech's  growth  and  future
operations  may depend  upon  chewing  gum  products  that are  currently  being
developed  and that may not be accepted by the market.  If Gum Tech is unable to
develop  successful  new chewing  gum  products  on a timely  basis,  Gum Tech's
operating  results  and  financial  condition  could  be  materially   adversely
affected.

RISKS ASSOCIATED WITH BUSINESS EXPANSION

     Significant growth will place substantial  strains on Gum Tech's management
team and its operational,  accounting,  and information systems. In addition, if
Gum  Tech  overestimates   demand  for  its  products  and  sales  do  not  meet
expectations,  Gum Tech may suffer the  effects  of excess  capacity,  including
higher than  necessary  labor and  inventory  costs .  Successful  management of
growth  will  require  Gum Tech to improve  its  financial  controls,  operating
procedures,  and management  information  systems, and to train,  motivate,  and
manage  employees.  Failure to manage growth  effectively  would have a material
adverse  effect on the  results  of Gum  Tech's  operations  and its  ability to
execute its business strategy.

DATA PROCESSING AND TECHNOLOGY AND YEAR 2000

     Gum Tech recognizes the potential business impacts related to the Year 2000
computer system issue and is implementing a plan to assess and improve its state
of readiness  with respect to these issues.  The "Year 2000 issue" refers to the
risk that systems, products, and equipment having date-sensitive components will
not  recognize   dates  after  December  31,  1999.   These  risks  are  derived
predominantly  from the fact  that  many  software  programs  have  historically
categorized  the  "year" in a  two-digit  format.  The Year 2000  issue  creates
potential risks for Gum Tech in its information  technology and  non-information
technology systems used in its business operations. Gum Tech also may be exposed
to risks from third parties with whom Gum Tech interacts that fail to adequately
address their own Year 2000 issue.

                                       12
<PAGE>
     In recognition of the Year 2000 issue, Gum Tech has started a comprehensive
review of all information technology and non-information technology systems that
it uses.  This review  includes  testing and  analysis  and  inquiries  of third
parties supplying information technology and non-information technology systems,
computer hardware and software  products and components,  and other equipment to
Gum Tech.

     As a result of its review to date, Gum Tech has determined  that certain of
its internal  software  systems may be inadequate for its future business needs,
and may need to be updated,  because of various  considerations,  including Year
2000 non-compliance. Gum Tech expects to make necessary modifications or changes
to its computer information systems related to Year 2000 non-compliance prior to
the Year  2000.  Gum Tech  believes  the costs of  modification  to the  current
information  technology systems will not have a material effect on its financial
position or results of operations.

     At this time, Gum Tech has not developed Year 2000 contingency plans, other
than the review and remedial actions  described above, and does not intend to do
so unless it believes  such plans are  merited by the results of its  continuing
Year 2000 review.

     If Gum Tech or the third  parties with which it has  relationships  were to
cease or not successfully complete Year 2000 remediation efforts, Gum Tech could
encounter  disruptions  to its  operations  that could  have a material  adverse
effect on its business, financial condition, and results of operations. Gum Tech
also could be  materially  and  adversely  impacted  by  widespread  economic or
financial market disruption caused by Year 2000 computer system failures.

DEPENDENCE UPON MANAGEMENT PERSONNEL AND EXECUTIVE OFFICERS; MANAGEMENT CHANGES

     Gum Tech's  operations  are  dependent  upon its ability to hire and retain
qualified  management personnel and upon the continued services of its executive
officers.  The loss of the  services  of any of Gum Tech's  executive  officers,
whether as a result of death,  disability,  or otherwise,  could have a material
adverse effect upon its business.

     Gum Tech experienced  significant  changes in its management team and Board
of Directors in 1998,  including  the  appointment  of a new President and a new
Chief Financial Officer.

NEED FOR ADDITIONAL FINANCING

     Gum Tech will be required to seek  additional  debt or equity  financing in
the  future  in order to fund  its  proposed  investment  in Gel Tech  LLC,  its
manufacturing  activities,  and its research and development programs. There can
be no assurance that such  additional  financing will be available on acceptable
terms or at all. Any future equity financing may involve substantial dilution to
the interests of Gum Tech's stockholders.

PRODUCT LIABILITY

     Gum Tech is subject to significant  liability  should use or consumption of
any Gum Tech manufactured products cause injury,  illness or death. Although Gum
Tech carries  product  liability  insurance,  there can be no assurance that its
insurance will be adequate to protect Gum Tech against product  liability claims
or that insurance coverage will continue to be available on reasonable terms.

POSSIBLE VOLATILITY OF SECURITIES PRICES

     The market price of Gum Tech's  common  stock has been highly  volatile and
may continue to be volatile in the future.  Factors such as operating results or
public  announcements  may have a significant  effect on the market price of our
securities.  Market prices for securities of many small capitalization companies
have  experienced  wide  fluctuations  in response to  variations  in  quarterly
operating  results,  general  economic  indicators  and other factors beyond our
control.

                                       13
<PAGE>
AUTHORIZATION AND ISSUANCE OF PREFERRED STOCK; PREVENTION OF CHANGES IN CONTROL

     Gum Tech's  Certificate of  Incorporation  authorizes the issuance of up to
1,000,000  shares of preferred stock with rights and  preferences  determined by
the Board of Directors.  Under the  Certificate of  Incorporation,  the Board of
Directors  may,  without  shareholder  approval,   issue  preferred  stock  with
dividend,  liquidation,  conversion,  voting,  redemption  or other rights which
could  adversely  affect the voting  power or other rights of the holders of the
common  stock.  The  issuance of any shares of  preferred  stock  having  rights
superior  to those of the common  stock may result in a decrease in the value or
market  price of the common stock and could be used by the Board of Directors as
a device to prevent a change in control  of Gum Tech.  Holders of the  preferred
stock  may  have  the  right  to  receive  dividends,   certain  preferences  in
liquidation, and conversion rights that are preferential or superior to those of
the common stockholders.

ELIMINATION  OF DIRECTOR LIABILITY

     Gum Tech's Certificate of Incorporation  contains a provision eliminating a
director's liability to the company or its stockholders for monetary damages for
a breach of fiduciary  duty.  This  limitation  does not apply in  circumstances
involving a financial benefit to a director,  the intentional infliction of harm
to Gum Tech, or certain  wrongful acts,  such as the breach of a director's duty
of  loyalty or acts or  omissions  which  involve  intentional  misconduct  or a
knowing  violation  of  criminal  law.  Gum  Tech's  Bylaws  contain  provisions
obligating  it to indemnify  its  directors  and officers to the fullest  extent
permitted  under Utah law. These  provisions  could serve to insulate Gum Tech's
officers and directors against liability for actions which damage the company or
its stockholders.

SIGNIFICANT NUMBER OF SHARES ELIGIBLE FOR IMMEDIATE AND FUTURE SALES

     Sales of  substantial  amounts  of common  stock in the open  market or the
availability of such shares for sale could adversely affect the market price for
Gum Tech's common stock.  Substantially all of Gum Tech's  outstanding shares of
common stock,  including shares underlying  vested but unexercised  warrants and
options,  have either been  registered for public sale or may be sold under Rule
144 under the  Securities  Act of 1933.  Therefore,  all of these  shares may be
immediately sold by the holders.

ITEM 7. FINANCIAL STATEMENTS

                          INDEX TO FINANCIAL STATEMENTS

FINANCIAL STATEMENTS                                                        PAGE
  Independent Auditors' Report                                              F-1

  Balance Sheet as of December 31, 1998                                     F-2

  Statements of Operations for the years ended
   December 31, 1998 and 1997                                               F-4

  Statements of Changes in Stockholders' Equity for the
   years ended December 31, 1998 and 1997                                   F-5

  Statements of Cash Flows for the years ended
   December 31, 1998 and 1997                                               F-6

  Notes To Financial Statements                                             F-7


                                       14
<PAGE>
                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors
Gum Tech International, Inc.

We have audited the accompanying  balance sheet of Gum Tech International,  Inc.
as of December 31, 1998 and the related  statements  of  operations,  changes in
stockholders'  equity and cash flows for the years ended  December  31, 1998 and
1997.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Gum Tech International, Inc. as
of December  31, 1998 and the results of its  operations  and its cash flows for
the years ended December 31, 1998 and 1997 in conformity with generally accepted
accounting principles.

                                                    Angell & Deering
                                                    Certified Public Accountants

Denver, Colorado
February 5, 1999, except for
the last paragraph of Note
14 as to which the date is
March 30, 1999

                                      F-1
<PAGE>
                          GUM TECH INTERNATIONAL, INC.
                                  BALANCE SHEET
                                DECEMBER 31, 1998

                                     ASSETS

Current Assets:
  Cash and cash equivalents                                         $   517,852
  Restricted cash                                                        20,149
  Accounts receivable - trade, net of allowance
    for doubtful accounts of $35,000                                  1,462,639
  Inventories                                                         1,896,161
  Prepaid expenses                                                       60,851
                                                                    -----------
     Total Current Assets                                             3,957,652
                                                                    -----------
Property and Equipment, at cost:
  Machinery and equipment                                             4,272,746
  Office furniture and equipment                                        238,371
  Leasehold improvements                                                332,452
                                                                    -----------
                                                                      4,843,569
  Less accumulated depreciation                                      (1,295,342)
                                                                    -----------
     Net Property and Equipment                                       3,548,227
                                                                    -----------
Other Assets:
  Deposits                                                              279,131
  Intangible assets, net of accumulated amortization
    of $156,526                                                         114,855
                                                                    -----------
     Total Other Assets                                                 393,986
                                                                    -----------
     Total Assets                                                   $ 7,899,865
                                                                    ===========

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

                                      F-2
<PAGE>
                          GUM TECH INTERNATIONAL, INC.
                                  BALANCE SHEET
                                DECEMBER 31, 1998

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
  Accounts payable and accrued expenses                            $  1,344,067
  Accrued interest                                                       42,449
  Customer deposits                                                      34,763
  Current portion of long-term debt                                     381,280
                                                                   ------------
     Total Current Liabilities                                        1,802,559
                                                                   ------------
Long-Term Debt, net of current portion above:
  Financial institutions and other                                    2,736,525
  Obligations under capital leases                                       24,256
  Less current portion above                                           (381,280)
                                                                   ------------
     Total Long-Term Debt                                             2,379,501
                                                                   ------------

Commitments and Contingencies                                                --

Stockholders' Equity:
  Preferred stock: no par value, 1,000,000 shares
   authorized, none issued or outstanding                                    --
  Common stock: no par value, 20,000,000 shares
   authorized, 6,857,999 shares issued and outstanding               15,145,037
  Additional paid in capital                                          2,915,152
  Accumulated deficit                                               (14,342,384)
                                                                   ------------
     Total Stockholders' Equity                                       3,717,805
                                                                   ------------
     Total Liabilities and Stockholders' Equity                    $  7,899,865
                                                                   ============

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

                                      F-3
<PAGE>
                          GUM TECH INTERNATIONAL, INC.
                            STATEMENTS OF OPERATIONS
                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

                                                         1998           1997
                                                     -----------    -----------
Net sales                                            $ 5,272,547    $ 3,776,562

Cost of sales                                          4,357,010      4,197,777
                                                     -----------    -----------

     Gross Profit                                        915,537       (421,215)

Operating expenses                                     6,164,022      3,881,238
Research and development                                 667,067        209,783
                                                     -----------    -----------

     Income (Loss) From Operations                    (5,915,552)    (4,512,236)
                                                     -----------    -----------

Other Income (Expense):
  Interest and other income                              127,947        204,220
  Interest expense                                      (473,811)    (1,090,618)
                                                     -----------    -----------

     Total Other Income (Expense)                       (345,864)      (886,398)
                                                     -----------    -----------

Income (Loss) Before Provision For Income Taxes       (6,261,416)    (5,398,634)

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

Net Income (Loss)                                    $(6,261,416)   $(5,398,634)
                                                     ===========    ===========

Net Income (Loss) Per Share of Common Stock:
  Basic                                              $      (.97)   $     (1.02)
  Diluted                                            $      (.97)   $     (1.02)
Weighted Average Number of Common Shares
 Outstanding:
  Basic                                                6,427,815      5,294,099
  Diluted                                              6,427,815      5,294,099

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

                                      F-4
<PAGE>
                          GUM TECH INTERNATIONAL, INC.
                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997


                                      COMMON STOCK      ADDITIONAL
                               ----------------------    PAID IN    ACCUMULATED
                                 SHARES      AMOUNT      CAPITAL      DEFICIT
                                 ------      ------      -------      -------

Balance at December 31, 1996   4,948,740  $ 7,965,060  $       --  $ (2,682,334)

Issuance of common stock upon
 exercise of stock options and
 warrants (net of costs of 
 $188,678)                       907,720    4,123,090          --            --

Beneficial conversion feature
 of convertible notes                 --           --     665,790            --

Net loss                              --           --          --    (5,398,634)
                               ---------  -----------  ----------  ------------

Balance at December 31, 1997   5,856,460   12,088,150     665,790    (8,080,968)

Issuance of common stock upon
 exercise of stock options and
 warrants                        785,962    2,032,897          --            --

Conversion of notes payable 
 into common stock               215,577    1,023,990          --            --

Compensation from extension and
 issuance of stock options            --           --   2,249,362            --

Net loss                              --           --          --    (6,261,416)
                               ---------  -----------  ----------  ------------

Balance at December 31, 1998   6,857,999  $15,145,037  $2,915,152  $(14,342,384)
                               =========  ===========  ==========  ============

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

                                      F-5
<PAGE>
                          GUM TECH INTERNATIONAL, INC.
                            STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

                                                          1998          1997
                                                      -----------   -----------
Cash Flows From Operating Activities:
 Net income (loss)                                    $(6,261,416)  $(5,398,634)
 Adjustments to reconcile net income (loss) to net
  cash (used) by operating activities:
   Depreciation                                           304,277       551,404
   Amortization                                           108,816        47,710
   Provision for bad debts                                 34,613        94,500
   (Gain) loss on disposal of assets                       (2,699)       10,633
   Interest expense from beneficial conversion
    feature of notes payable                                   --       665,790
   Compensation from forgiveness of note receivable       114,012            --
   Compensation from extension and issuance of
    stock options                                       2,249,362            --
   Changes in assets and liabilities:
    (Increase) in accounts receivable                    (415,018)     (648,527)
    (Increase) decrease in employee receivables            61,054       (61,054)
    (Increase) decrease in inventories                   (862,779)      333,562
    Decrease in income tax receivable                          --       234,440
    (Increase) decrease in prepaid expenses
     and other                                             92,254       (55,106)
    (Increase) decrease in interest receivable             60,164       (60,164)
    Decrease in deposits and other                          7,291       128,602
    Increase in accounts payable and accrued
     expenses                                             586,058       470,600
    Increase (decrease) in customer deposits               19,763       (50,500)
                                                      -----------   -----------
    Net Cash (Used) By Operating Activities            (3,904,248)   (3,736,744)
                                                      -----------   -----------
Cash Flows From Investing Activities:
 Capital expenditures                                    (990,557)     (134,083)
 Proceeds from disposal of equipment                       16,122         6,363
 Receipt of principal on notes receivable                 250,000       177,653
 Increase in deposits and other                          (139,358)      (10,598)
                                                      -----------   -----------
     Net Cash Provided (Used) By Investing
      Activities                                         (863,793)       39,335
                                                      -----------   -----------
Cash Flows From Financing Activities:
 Proceeds from borrowing                                       --     2,530,000
 Principal payments on notes payable                     (343,184)     (204,871)
 Issuance of common stock                               2,032,897     4,311,768
 Offering costs incurred                                       --      (188,678)
 Debt issuance costs incurred                             (11,733)     (259,648)
                                                      -----------   -----------
     Net Cash Provided By Financing Activities          1,677,980     6,188,571
                                                      -----------   -----------
     Net Increase (Decrease) in Cash and Cash
      Equivalents                                      (3,090,061)    2,491,162

     Cash and Cash Equivalents at Beginning of Year     3,607,913     1,116,751
                                                      -----------   -----------
     Cash and Cash Equivalents at End of Year         $   517,852   $ 3,607,913
                                                      ===========   ===========
Supplemental Disclosure of Cash Flow Information:
 Cash paid during the year for:
  Interest                                            $   392,693   $   306,972
  Income taxes                                                150           150

Supplemental Disclosure of Non-cash Investing and
 Financing Activities:
  Conversion of account receivable to a note
   receivable                                         $        --   $   225,665
  Note payable incurred for purchase of equipment
   under a capital lease                                       --     1,564,457
  Conversion of notes payable into common stock         1,023,990            --

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

                                      F-6
<PAGE>
                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS


1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

     ORGANIZATION

     Gum Tech  International,  Inc. (the "Company") was  incorporated in Utah on
     February 4, 1991 to develop,  market and distribute  specialty  chewing gum
     products  for  branded  and private  label  customers,  as well as products
     marketed  under the Company's  brand.  The Company  currently  targets four
     market segments:  oral care, smoking  cessation,  dietary  supplement,  and
     over-the-counter (OTC) drug. The Company's current strategy is to offer its
     research and the use of its  formulations in exchange for  co-manufacturing
     agreements  with major branded and private label customers that possess the
     capital resources to promote functional chewing gum on a large national and
     international scale.

     INVENTORIES

     Inventories  are stated at the lower of cost or market.  Cost is determined
     using the first-in, first-out pricing method.

     PROPERTY AND EQUIPMENT

     Depreciation of the primary asset  classifications  is calculated  based on
     the following estimated useful lives using the straight-line method.

             CLASSIFICATION                          USEFUL LIFE IN YEARS
             --------------                          --------------------
             Machinery and equipment                         5-30
             Office furniture and equipment                  5
             Leasehold improvements                          10

     Depreciation  of property and  equipment  charged to operations is $304,277
     and $551,404 for the years ended December 31, 1998 and 1997, respectively.

     INTANGIBLE ASSETS

     Debt issuance costs are being amortized using the straight-line method over
     the term of the notes.

     REVENUE RECOGNITION

     The Company  recognizes  revenue  from product  sales upon  shipment to the
     customer, net of an allowance for sales returns.

     STOCK-BASED COMPENSATION

     During the year ended December 31, 1996, the Company  adopted  Statement of
     Financial  Accounting Standard (SFAS) No. 123,  "Accounting for Stock-Based
     Compensation".  The Company will continue to measure  compensation  expense
     for its stock-based  employee  compensation plans using the intrinsic value
     method  prescribed by APB Opinion No. 25,  "Accounting  for Stock Issued to
     Employees". See Note 7 for pro forma disclosures of net income and earnings
     per share as if the fair value-based  method prescribed by SFAS No. 123 had
     been applied in measuring compensation expense.

     LONG-LIVED ASSETS

     In accordance with Statement of Financial  Accounting  Standards (SFAS) No.
     121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
     Assets to be Disposed  Of",  the  Company  reviews  for the  impairment  of

                                      F-7
<PAGE>
                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS

1.   ORGANIZATION  AND SUMMARY OF SIGNIFICANT  ACCOUNTING  POLICIES  (CONTINUED)
     LONG-LIVED ASSETS (CONTINUED)

     long-lived assets and certain identifiable intangibles,  whenever events or
     changes in  circumstances  indicate that the carrying value of an asset may
     not be  recoverable.  An  impairment  loss  would  be  recognized  when the
     estimated future cash flows is less than the carrying amount of the assets.
     No impairment losses have been identified by the Company.

     INCOME TAXES

     Deferred  income taxes are provided for temporary  differences  between the
     financial  reporting and tax basis of assets and liabilities  using enacted
     tax laws and rates for the  years  when the  differences  are  expected  to
     reverse.

     BARTER CREDITS

     The Company  records sales under barter  transactions at the carrying value
     of the inventory  after reducing the inventory to its net realizable  value
     for any impairment.  At the time barter credits are utilized by the Company
     for advertising,  packaging, travel expenses and other purchases an expense
     is recognized  based on the carrying  value of the barter credits plus cash
     paid. The Company recorded the sales under its barter  transactions in 1996
     and 1997 at a zero value and,  therefore,  when the barter credits are used
     by the Company it will  recognize an expense only for the cash expended for
     the items purchased.

     NET INCOME (LOSS) PER SHARE OF COMMON STOCK

     As of  December  31,  1997,  the Company  adopted  Statement  of  Financial
     Accounting  Standards (SFAS) No. 128, "Earnings Per Share", which specifies
     the method of  computation,  presentation  and  disclosure for earnings per
     share.  SFAS No. 128  requires the  presentation  of two earnings per share
     amounts, basic and diluted.

     Basic  earnings per share is calculated  using the average number of common
     shares outstanding.  Diluted earnings per share is computed on the basis of
     the average number of common shares outstanding plus the dilutive effect of
     outstanding stock options using the "treasury stock" method.

     The basic and diluted earnings per share are the same since the Company had
     a net loss in 1998 and 1997 and the  inclusion  of stock  options and other
     incremental shares would be antidilutive.  Consequently,  options, warrants
     and other incremental  shares to purchase 1,554,968 and 2,502,680 shares of
     common stock at December 31, 1998 and 1997, respectively were excluded from
     the computation of diluted earnings per share.

     CASH AND CASH EQUIVALENTS

     For purposes of the  statements  of cash flows,  the Company  considers all
     highly  liquid  investments  with a maturity of three months or less at the
     date of purchase to be cash equivalents.

     ESTIMATES

     The  preparation of the Company's  financial  statements in conformity with
     generally accepted accounting  principles requires the Company's management
     to make  estimates  and  assumptions  that affect the  reported  amounts of
     assets and liabilities and disclosure of contingent  assets and liabilities

                                      F-8
<PAGE>
                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS

1.   ORGANIZATION  AND SUMMARY OF SIGNIFICANT  ACCOUNTING  POLICIES  (CONTINUED)
     ESTIMATES (CONTINUED)

     at the date of the financial statements and the reported amount of revenues
     and expenses during the reporting period.  Actual results could differ from
     those estimates.

2.   RESTRICTED CASH

     Cash of  $20,149  was held as  collateral  by a bank for a letter of credit
     issued  to  the  lessor  of  the  Company's   manufacturing  and  warehouse
     facilities.

3.   INVENTORIES

     Inventories at December 31, 1998 consists of the following:

             Raw materials and packaging             $1,216,070
             Work in process                            731,686
             Finished goods                             178,405
             Less reserve for obsolescence             (230,000)
                                                     ----------
                Total                                $1,896,161
                                                     ==========
4.   LONG-TERM DEBT

     Long-term debt consists of the following:

     FINANCIAL INSTITUTIONS AND OTHER 
     9.73% installment note due in 2001 with monthly 
     principal and interest payments of $39,550, 
     collateralized by machinery and equipment.                      $1,230,525

     11% subordinated  convertible notes with interest
     payable quarterly until  January 1, 2000 at which time
     the  principal and interest is payable in twenty four
     equal monthly  installments  through January 1, 2002.
     The notes are convertible into common stock of the
     Company at $4.75 per share.                                      1,506,000

     OBLIGATIONS UNDER CAPITAL LEASES 
     9.4% installment notes due in 2001 with monthly 
     principal and interest payments of $1,000, 
     collateralized by equipment.                                        24,256
                                                                     ----------
     Total Long-Term Debt                                             2,760,781

     Less current portion of long-term debt                            (381,280)
                                                                     ----------
     Long-Term Debt                                                  $2,379,501
                                                                     ==========

                                      F-9
<PAGE>
                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS

4.   LONG-TERM DEBT (CONTINUED)

     Installments  due on debt  principal,  including  the  capital  leases,  at
     December 31, 1998 are as follows:

                Year Ending
               December 31,
               ------------
                   1999                              $  381,280
                   2000                               1,173,043
                   2001                               1,206,458
                                                     ----------
                   Total                             $2,760,781
                                                     ==========
5.   INCOME TAXES

     The  components of the provision for income taxes are as follows:

                                                    1998         1997
                                                    ----         ----
             Current:
             Federal                                $ --         $ --
             State                                    --           --
                                                    ----         ----
               Total                                  --           --
                                                    ----         ----
             Deferred:
             Federal                                  --           --
             State                                    --           --
                                                    ----         ----
               Total                                  --           --
                                                    ----         ----

             Total Provision For Income Taxes       $ --         $ --
                                                    ====         ====

     The provision  (benefit) for income taxes reconciles to the amount computed
     by  applying  the federal  statutory  rate to income  before the  provision
     (benefit) for income taxes as follows:

                                                    1998         1997
                                                    ----         ----
             Federal statutory rate                 (34)%         (34)%
             State income taxes, net of
               federal benefits                      (5)           (5)
             Valuation allowance                     39            39
             Other                                   --            --
                                                   ----          ----

             Total                                   -- %          -- %
                                                   ====          ====

     The  following is a  reconciliation  of the  provision  for income taxes to
     income before provision for income taxes computed at the federal  statutory
     rate of 34%.

                                                    1998           1997
                                                    ----           ----
             Income taxes at the federal
               statutory rate                   $(2,128,881)   $(1,835,536)
             State income taxes, net of
               federal benefits                    (330,603)      (294,204)
             Nondeductible expenses                   8,864         20,969
             Valuation allowance                  2,450,620      2,108,771
             Other                                       --             --
                                                -----------    -----------
             Total                              $        --    $        --
                                                ===========    ===========

                                      F-10
<PAGE>
                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS


5.   INCOME TAXES (CONTINUED)

     Significant components of deferred income taxes as of December 31, 1998 are
     as follows:

             Net operating loss carryforward                   $ 8,745,000
             Reserve for bad debts                                  14,700
             Reserve for obsolete inventory                         96,600
                                                               -----------

             Total deferred tax asset                            8,856,300
                                                               -----------

             Depreciation                                         (373,300)
             Stock option compensation                          (2,338,000)
                                                               -----------

             Total deferred tax liability                       (2,711,300)
             Less valuation allowance                           (6,145,000)
                                                               -----------

             Net Deferred Tax Asset                            $        --
                                                               ===========

     The Company  has  assessed  its past  earnings  history  and trends,  sales
     backlog,  budgeted sales,  and expiration  dates of  carryforwards  and has
     determined that it is more likely than not that no deferred tax assets will
     be  realized.  The  valuation  allowance of  $6,145,000  is  maintained  on
     deferred tax assets which the Company has not  determined to be more likely
     than not realizable at this time. The net change in the valuation allowance
     for  deferred  tax assets was an increase of  $2,945,000.  The Company will
     continue to review this valuation on a quarterly basis and make adjustments
     as appropriate.

     At December 31, 1998,  the Company had federal and state net operating loss
     carryforwards of approximately  $20,700,000 and $21,400,000,  respectively.
     Such  carryforwards  expire in the years 2011 through 2018 and 2001 through
     2003 for federal and state purposes, respectively.

6.   STOCKHOLDERS' EQUITY 

     AMENDMENT TO AUTHORIZED COMMON SHARES

     In  June  1998,  the  Company's  Board  of  Directors  authorized,  and the
     shareholders   approved,   an  amendment  of  the  Company's   Articles  of
     Incorporation,  to increase the number of authorized shares of common stock
     from 10,000,000 to 20,000,000.

7.   STOCK OPTIONS AND WARRANTS 

     STOCK OPTION PLAN

     In March 1995,  the Company  adopted a stock option plan (the "Plan") which
     provides for the grant of both  incentive  stock options and  non-qualified
     options. A total of 2,000,000 shares of common stock have been reserved for
     issuance under the Plan.

     Options  under the Company's  plan are issuable only to eligible  officers,
     directors,  key  employees  and  consultants  of the  Company.  The Plan is
     administered  by a  committee  selected  by the Board of  Directors,  which
     determines  those  individuals who shall receive  options,  the time period
     during which the options may be  exercised,  the number of shares of common
     stock that may be purchased under each option, and the option price. Unless
     sooner terminated, the Plan shall remain in effect until January 1, 2005.

                                      F-11
<PAGE>
                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS


7.   STOCK OPTIONS AND WARRANTS (CONTINUED)

     STOCK OPTION PLAN (CONTINUED)

     The per share  exercise  price of the common stock may not be less than the
     fair  market  value of the common  stock on the date the option is granted.
     The aggregate  fair market value  (determined  as of the date the option is
     granted) of the common stock that any employee may purchase in any calendar
     year  pursuant to the  exercise of incentive  stock  options may not exceed
     $100,000.  No person who owns,  directly or indirectly,  at the time of the
     granting of an incentive  stock  option to him,  more than 10% of the total
     combined  voting  power of all  classes  of stock of the  Company  shall be
     eligible to receive any  incentive  stock options under the Plan unless the
     option  price is at least 110% of the fair market value of the common stock
     subject to the option, determined on the date of grant.

     All options  granted under the Plan provide for the payment of the exercise
     price in cash  or,  with the  prior  written  consent  of the  Company,  by
     delivery  to the  Company of shares of common  stock  already  owned by the
     optionee  having a fair  market  value equal to the  exercise  price of the
     options being exercised, or by a combination of such methods of payment.

     The following  table  contains  information  on the stock options under the
     Company's  Plan  for the  years  ended  December  31,  1997 and  1998.  The
     outstanding agreements expire from April 1999 to June 2001.

                                                  NUMBER OF     WEIGHTED AVERAGE
                                                   SHARES        EXERCISE PRICE
                                                   ------        --------------
     Options outstanding at December 31, 1996     1,318,000         $4.00
       Granted                                      565,000          9.81
       Exercised                                   (184,000)         1.72
       Canceled                                     (15,000)         6.38
                                                 ----------         -----

     Options outstanding at December 31, 1997     1,684,000          6.18
       Granted                                      912,000          5.79
       Exercised                                   (600,250)         2.78
       Canceled                                  (1,298,750)         7.65
                                                 ----------         -----

     Options outstanding at December 31, 1998       697,000         $5.86
                                                 ==========         =====

     On April  24,  1998,  the  Board  of  Directors  approved  a  repricing  of
     substantially all outstanding employee stock options granted under the Plan
     with an  exercise  price of  greater  than  $5.625  per share to $5.625 per
     share.  The Board of Directors  would not typically  consider  reducing the
     exercise price of previously granted options.  However,  these options were
     repriced due to the  occurrence  of certain  events  beyond the  reasonable
     control of the  employees of the Company  which  significantly  reduced the
     incentive  these options were intended to create.  The fair market value of
     the  common  stock was  $5.625  on the date of the  repricing.  Options  to
     purchase approximately 588,000 shares were affected by this repricing.

     NON-QUALIFIED STOCK OPTIONS

     The  Company  has  granted  non-qualified  stock  options  to  consultants,
     distributors and other individuals.  The outstanding agreements expire from
     November 1999 to June 2001.

                                      F-12
<PAGE>
                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS

7.   STOCK OPTIONS AND WARRANTS (CONTINUED)

     NON-QUALIFIED STOCK OPTIONS (CONTINUED)

     The  following   table  contains   information  on  all  of  the  Company's
     non-qualified stock options for the years ended December 31, 1997 and 1998.

                                                  NUMBER OF     WEIGHTED AVERAGE
                                                   SHARES        EXERCISE PRICE
                                                   ------        --------------

     Options outstanding at December 31, 1996      360,000           $ 1.80
       Granted                                     100,000             4.75
       Exercised                                  (180,000)            1.80
       Canceled                                         --               --
                                                  --------           ------

     Options outstanding at December 31, 1997      280,000             2.85
       Granted                                      25,000            11.44
       Exercised                                  (180,000)            1.80
       Canceled                                         --               --
                                                  --------           ------

     Options outstanding at December 31, 1998      125,000           $ 6.09
                                                  ========           ======

     PROFORMA DISCLOSURES

     The Company  adopted SFAS No. 123 during the year ended  December 31, 1996.
     In accordance  with the provisions of SFAS No. 123, the Company applies APB
     Opinion No. 25,  "Accounting  for Stock Issued to  Employees,"  and related
     interpretations  in  accounting  for  its  plans  and  does  not  recognize
     compensation expense for its stock-based  compensation plans other than for
     options granted to  non-employees.  If the Company had elected to recognize
     compensation expense based upon the fair value at the grant date for awards
     under these plans  consistent with the  methodology  prescribed by SFAS No.
     123,  the  Company's  net income and earnings per share would be reduced to
     the following pro forma amounts:

                                                       1998            1997
                                                       ----            ----
     Net income (loss):
          As reported                               $(6,261,416)    $(5,398,634)
          Pro forma                                 $(7,299,820)    $(5,881,867)

     Net income (loss) per share of common stock:
          As reported                               $      (.97)    $     (1.02)
          Pro forma                                 $     (1.14)    $     (1.11)

     These pro forma  amounts may not be  representative  of future  disclosures
     since the  estimated  fair value of stock  options is  amortized to expense
     over the  vesting  period and  additional  options may be granted in future
     years.  The fair value for these options was estimated at the date of grant
     using the Black-Scholes option pricing model with the following assumptions
     for the years ended December 31, 1998 and 1997.

                                                     1998           1997
                                                     ----           ----
             Risk-free interest rate                  5.45%          5.88%
             Expected life                          2 years        2 years
             Expected volatility                     61.82%         63.51%
             Expected dividend yield                     0%             0%

                                      F-13
<PAGE>
                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS

7.   STOCK OPTIONS AND WARRANTS (CONTINUED)

     The  Black-Scholes   option  valuation  model  was  developed  for  use  in
     estimating  the  fair  value  of  traded  options  which  have  no  vesting
     restrictions  and are fully  transferable.  In addition,  option  valuation
     models  require the input of highly  subjective  assumptions  including the
     expected  stock price  volatility.  Because the  Company's  employee  stock
     options have characteristics  significantly  different from those of traded
     options, and because changes in subjective input assumptions can materially
     affect the fair value  estimates,  in  management's  opinion,  the existing
     models do not  necessarily  provide a reliable  single  measure of the fair
     value of its employee stock-based compensation plans.

     The  weighted  average  fair value  price of options  granted was $1.56 and
     $3.82 in 1998 and 1997, respectively.

     The following table summarizes  information about stock-based  compensation
     plans outstanding at December 31, 1998:

     Options Outstanding and Exercisable by Price Range as of December 31, 1998:
<TABLE>
<CAPTION>
                                OPTIONS OUTSTANDING               OPTIONS EXERCISABLE
                      --------------------------------------    -----------------------
                                      WEIGHTED
                                       AVERAGE      WEIGHTED                   WEIGHTED
        RANGE OF                      REMAINING      AVERAGE                    AVERAGE
        EXERCISE        NUMBER       CONTRACTUAL    EXERCISE      NUMBER       EXERCISE
         PRICES       OUTSTANDING    LIFE-YEARS       PRICE     EXERCISABLE      PRICE
         ------       -----------    ----------       -----     -----------      -----
     <S>                <C>            <C>           <C>          <C>           <C>
     $ 5.50 -  6.88     677,000        1.72          $  5.70      403,500       $  5.63
     $        11.44      20,000        1.45          $ 11.44       10,000       $ 11.44
     --------------    --------        ----          -------     --------       -------

     $ 5.50 - 11.44     697,000        1.71          $  5.86      413,500       $  5.77
     ==============     =======        ====          =======      =======       =======
</TABLE>
     COMPENSATION EXPENSE

     The Company  recorded  compensation  expense of $2,249,362 and $-0- for the
     years  ended  December  31,  1998 and 1997,  respectively  for the value of
     certain options granted to non-employees of the Company  ($770,612) and for
     the extension of options  previously  granted to an Officer and Director of
     the Company ($1,478,750). The valuation of the options and warrants granted
     to employees is based on the difference  between the exercise price and the
     market value of the stock on the  measurement  date.  The  valuation of the
     options  granted to  non-employees  is  estimated  using the  Black-Scholes
     option pricing model.

     WARRANTS
     1995 BRIDGE LOAN

     In 1995,  the  Company  borrowed  $1,550,000  from a group of four  lenders
     ("1995 Bridge Loan"). As additional consideration for the 1995 Bridge Loan,
     the Company issued an aggregate of 465,000  common stock purchase  warrants
     to the lenders.  Each warrant is  exercisable  to purchase one share of the
     Company's  common stock at $2.00 per share in perpetuity.  In 1997,  75,000
     warrants were  exercised and 390,000  warrants are  outstanding at December
     31, 1998.

                                      F-14
<PAGE>
                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS

7.   STOCK OPTIONS AND WARRANTS (CONTINUED)

     UNDERWRITER'S WARRANTS

     In  connection  with the  Company's  Initial  Public  Offering  in 1996 the
     Company issued the  Underwriter  warrants to purchase up to 40,000 units of
     the Company's  securities for $24.75 per unit.  Each warrant is exercisable
     to purchase  three shares of common stock and one  redeemable  common stock
     purchase warrant which is exercisable to purchase one share of common stock
     at $7.50 per share at  anytime  until  April 24,  2001.  The  Underwriter's
     warrant is exercisable at anytime until April 24, 2001.

     In 1998 and  1997,  1,428 and  2,830,  respectively,  of the  Underwriter's
     warrants were exercised and 35,742 are outstanding as of December 31, 1998.

     MARKETING AND DEVELOPMENT OPTIONS

     In 1998, the Company agreed to issue 200,000 stock options to an individual
     in  consideration  for a joint  venture  opportunity  to develop and market
     various gum  products.  The options are  exercisable  at $9.00 per share at
     anytime until October 30, 2000.

8.   PREFERRED STOCK

     The authorized preferred stock of the Company consists of 1,000,000 shares,
     no par value. The preferred stock may be issued in series from time to time
     with such designation,  rights, preferences and limitations as the Board of
     Directors  of  the  Company  may  determine  by  resolution.   The  rights,
     preferences  and  limitations  of separate  series of  preferred  stock may
     differ with  respect to such matters as may be  determined  by the Board of
     Directors,  including without limitation, the rate of dividends, method and
     nature of payment of dividends,  terms of  redemption,  amounts  payable on
     liquidation,  sinking fund provisions (if any), conversion rights (if any),
     and  voting  rights.  Unless  the nature of a  particular  transaction  and
     applicable  statutes  require  approval,  the  Board of  Directors  has the
     authority to issue these shares without shareholder approval.

9.   COMMITMENTS AND CONTINGENCIES
     LEASES

     The Company leases its office and packaging  facilities,  manufacturing and
     warehouse   facilities  and  certain   equipment  under  long-term  leasing
     arrangements.  The Company's  manufacturing and warehouse  facilities lease
     contains two three-year renewal options. In addition,  the Company's office
     and packaging facilities contains a five year renewal option. The following
     is a schedule of future  minimum lease  payments at December 31, 1998 under
     the Company's  capital  leases  (together with the present value of minimum
     lease  payments)  and  operating  leases  that have  initial  or  remaining
     noncancellable lease terms in excess of one year:

      YEAR ENDING                       CAPITAL
      DECEMBER 31,                      LEASES       FACILITIES         TOTAL
      ------------                      ------       ----------         -----
       1999                             $12,004      $  254,272      $  266,276
       2000                              12,004         277,950         289,954
       2001                               3,001         287,310         290,311
       2002                                  --         303,426         303,426
       2003                                  --         252,383         252,383
       Thereafter                            --         278,277         278,277
                                        -------      ----------      ----------
       Total Minimum Lease Payments      27,009      $1,653,618      $1,680,627
                                                     ==========      ==========

                                      F-15
<PAGE>
                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS

9.   COMMITMENTS AND CONTINGENCIES (CONTINUED)

     LEASES (CONTINUED)

     Less amount representing interest    2,753
                                        -------
     Present Value of Net Minimum 
       Lease Payments                   $24,256
                                        =======

     Rental  expense  charged to  operations  was  $193,152 and $187,826 for the
     years ended December 31, 1998 and 1997, respectively.

     Leased  equipment  under  capital  leases  as of  December  31,  1998 is as
     follows:

     Equipment                                                     $ 47,727
     Less accumulated depreciation                                  (26,250)
                                                                   --------
     Net Property and Equipment Under Capital Leases               $ 21,477
                                                                   ========

     THE YEAR 2000

     The Company is  currently  working to resolve the  potential  impact of the
     Year 2000 on the processing of date-sensitive  information by the Company's
     computerized  information  systems.  The Year 2000 problem is the result of
     computer  programs  being  written  using two digits  (rather than four) to
     define  the  applicable  year.  Any of the  Company's  programs  that  have
     time-sensitive  software  may  recognize a date using "00" as the year 1900
     rather than the year 2000, which could result in  miscalculations or system
     failures.  Costs of addressing  potential problems are expensed as incurred
     and are not  expected to have a material  adverse  impact on the  Company's
     financial position,  results of operations or cash flows in future periods.
     However,  if  the  Company  or its  vendors  are  unable  to  resolve  such
     processing  issues  in a timely  manner,  it  could  result  in a  material
     financial  risk.  Accordingly,  the Company  plans to devote the  necessary
     resources to resolve all  significant  Year 2000 issues in a timely manner.
     While the Company  does not at this time  anticipate  significant  problems
     with  suppliers and customers,  it has not developed Year 2000  contingency
     plans,  other than the review and remedial actions described above and does
     not  intend to do so unless  it  believes  such  plans are  merited  by the
     results of its continuing Year 2000 review.

10.  RELATED PARTY TRANSACTIONS

     In 1998, two former officers and directors of the Company repaid notes they
     owed to the  Company of  $250,000  plus  $48,770 of  accrued  interest.  In
     addition,  the  Company  wrote off two notes  receivable  in the  amount of
     $145,017 which included  $24,344 of accrued interest in connection with the
     termination of two former officers of the Company.

11.  EMPLOYEE BENEFIT PLAN

     Effective  September  1,  1997,  the  Company  adopted a Simple  Retirement
     Account Plan for employees who are not covered by any collective bargaining
     agreement. The Company shall make a matching contribution for each employee
     in an amount equal to each employees Salary Reduction Contributions for the
     Plan year of up to 3% of the employees  compensation for the Plan year. The
     Company made  matching  contributions  of $33,353 and $20,059 for the years
     ended  December 31, 1998 and 1997,  respectively.  Each  employee  shall be
     fully vested at all times in his  contribution  and the Company's  matching
     contributions.

                                      F-16
<PAGE>
                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS

12.  CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

     Financial   instruments   which   potentially   subject   the   Company  to
     concentrations  of  credit  risk  consist  principally  of  temporary  cash
     investments   and  accounts   receivable.   The  Company  places  its  cash
     equivalents and short term investments  with high credit quality  financial
     institutions  and  limits  its  credit  exposure  with  any  one  financial
     institution.  The Company  provides credit in the normal course of business
     to many of the nation's top drug stores, mass merchandisers and health food
     chains and major private label companies. The Company's accounts receivable
     are due from  customers  located  throughout  the United States and various
     foreign countries.  The Company performs periodic credit evaluations of its
     customers'  financial  condition and generally requires no collateral.  The
     Company obtains  letters of credit form its foreign  customers to limit its
     exposure to credit risk on its accounts  receivable.  The Company maintains
     reserves for  potential  credit  losses,  and such losses have not exceeded
     management's expectations.

     Sales to major customers, which comprised 10% or more of net sales, for the
     years ended December 31, 1998 and 1997 were as follows:

                                                 1998           1997
                                                 ----           ----
     Customer A                                  23.8%
     Customer B                                  38.3%          15.0%
     Customer C                                                 10.2%
     Customer D                                                 15.0%

13.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     Disclosures  about Fair Value of Financial  Instruments  for the  Company's
     financial  instruments are presented in the table below. These calculations
     are subjective in nature and involve  uncertainties and significant matters
     of judgment and do not include income tax  considerations.  Therefore,  the
     results cannot be determined with precision and cannot be  substantiated by
     comparison to  independent  market values and may not be realized in actual
     sale or settlement of the instruments.  There may be inherent weaknesses in
     any calculation  technique,  and changes in the underlying assumptions used
     could  significantly  affect the results.  The following  table  presents a
     summary of the  Company's  financial  instruments  as of December 31, 1998:


                                                            1998 
                                                  -------------------------
                                                  CARRYING       ESTIMATED 
                                                   AMOUNT        FAIR VALUE 
                                                   ------        ---------- 
     Financial Assets:  
       Cash and cash equivalents                  $517,852        $517,852  
       Restricted cash                              20,149          20,149  

     Financial Liabilities: 
       Long-term debt                            2,760,781       2,760,781

     The carrying amounts for cash and cash equivalents,  receivables,  accounts
     payable and accrued  expenses  approximate  fair value because of the short
     maturities  of  these  instruments.  The  fair  value  of  long-term  debt,
     including  the  current  portion,  approximates  fair value  because of the
     market  rate of  interest  on the  long-term  debt  and the  interest  rate
     implicit in the obligations under the capital leases.

14.  SUBSEQUENT EVENTS

     FINANCING ARRANGEMENT

     In February  1999,  the Company  entered  into a financing  agreement  (the

                                      F-17
<PAGE>
                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS

14.  SUBSEQUENT EVENTS (CONTINUED)

     FINANCING ARRANGEMENT (CONTINUED)

     "Agreement")  with a Bank for the sale of its  accounts  receivable,  up to
     $2,000,000,  on a full recourse basis. Under the Agreement, the Company may
     sell its  receivables  to the Bank and obtain up to 80% of the  receivables
     assigned and will receive the  remaining  20% at the time of payment by the
     customer to the Bank. The Company will pay the Bank a factor management fee
     of 1% per  month on the face  amount  of each  outstanding  invoice  and an
     administrative  fee of 1% per month of the average  daily  balance of funds
     advanced against factored  invoices for each monthly period.  The Agreement
     is collateralized by substantially all assets of the Company.

     LETTER OF INTENT FOR JOINT VENTURE

     In January  1999,  the Company  entered into a binding  agreement  with Gel
     Tech,  Inc. ("Gel Tech") with respect to the formation of Gel Tech,  L.L.C.
     ("LLC") for the purpose of  developing,  marketing and selling  homeopathic
     remedies  utilizing a zinc-based nasal gel technology or other  homeopathic
     nasal gels. The Company and Gel Tech will contribute  certain  intellectual
     property rights relating to the product. The Company will provide a loan to
     the LLC of $3.5  million  with  interest  at 8% per annum  based on certain
     terms and conditions. The LLC will be managed by five managers, two of whom
     will be  designated  by the Company,  two of whom will be designated by Gel
     Tech,  and one of whom will be  designated  jointly by the  Company and Gel
     Tech.  The LLC will be owned 60% by the  Company  and 40% by Gel Tech.  The
     Company and Gel Tech must negotiate and agree upon the form of a definitive
     operating agreement (the "Operating Agreement") to effectuate the letter of
     intent.  The  Operating  Agreement  will  contain  the  specific  terms  of
     operation of the LLC and the duties and responsibilities of the Company and
     Gel Tech.

     The LLC will enter into employment agreements with four individuals and the
     Company  will  grant them  options  to acquire up to 190,000  shares of the
     Company's  common stock at the fair market value of the common  stock.  The
     options will be nonqualified stock options,  will have a term of five years
     from their grant  date,  10,000 of which will vest on the date of grant and
     the remainder will vest on the first anniversary of the date of grant.

     LETTER OF INTENT FOR FINANCING

     On March 30, 1999, the Company entered into a letter of intent with Citadel
     Investment  Group,  L.L.C.  ("Citadel")  for  $6,000,000 in financing.  The
     financing  consists of $4,000,000 of 8% Senior Secured Redeemable Notes and
     $2,000,000 of Redeemable  Preferred  Stock at a rate of 14% per annum.  The
     interest on the Notes and dividends on the  Preferred  Stock may be paid in
     shares of common stock. In addition, the Preferred Stock shall be converted
     into  common  stock at 80% of the  average  closing bid price of the common
     stock during the 20 trading day period  immediately  preceding the maturity
     date. The Notes and Preferred  Stock will have a term of two years from the
     date  of  issuance  and  50% of the  original  issuance  of the  Notes  and
     Preferred  Stock shall be required to be redeemed  within  twelve months of
     their  issuance.  The financing is subject to negotiation of the Definitive
     Agreements  and  there  can be no  assurance  that  the  financing  will be
     completed by the Company.

                                      F-18
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     There  have  been  no  changes  in or  disagreements  with  accountants  on
accounting or financial disclosure.

                                    PART III

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

     Information  regarding (i) Gum Tech's  directors and executive  officers is
set forth under the caption  "Information  Concerning  Directors  and  Executive
Officers" and (ii)  compliance with Section 16(a) is set forth under the caption
"Section 16(a) Beneficial  Ownership Reporting  Compliance," in Gum Tech's Proxy
Statement  relating to its 1999 Annual Meeting of Shareholders  (the "1999 Proxy
Statement")  and is  incorporated  by reference  into this Annual Report on Form
10-KSB,  which has been filed with the Commission in accordance  with Rule 14a-6
promulgated  under  the  Exchange  Act.  With  the  exception  of the  foregoing
information and other  information  specifically  incorporated by reference into
this  report,  Gum Tech's  1999  Proxy  Statement  is not being  filed as a part
hereof.

ITEM 10. EXECUTIVE COMPENSATION

     Information regarding executive compensation is set forth under the caption
"Executive  Compensation"  in the 1999 Proxy  Statement,  which  information  is
incorporated herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information  regarding  security ownership of certain beneficial owners and
management  is set forth  under  the  caption  "Security  Ownership  of  Certain
Beneficial Owners and Management" in the 1999 Proxy Statement, which information
is incorporated herein by reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information  regarding certain  relationships  and related  transactions of
management   is  set  forth  under  the  caption   "Certain   Transactions   and
Relationships"  in the 1999 Proxy Statement,  which  information is incorporated
herein by reference.

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K

EXHIBITS

     EXHIBIT NO.    TITLE
     -----------    -----

     3.01           Certificate of Incorporation and Amendments thereto
                    of the Registrant(1)

     3.02           Bylaws of the Registrant(1)

     10.01          1995 Stock Option Plan(1)

     10.02          Amendment to Stock Option Plan(1)

     10.03          Employment Contract with Gary S. Kehoe(1)

                                       15
<PAGE>
     10.04          Employment Contract with William J. Hemelt (2)

     10.05          Settlement Agreement and Release with Gerald N. Kern (3)

     10.06          Form of Bridge Loan Agreement together with Exhibits 
                    thereto(1)

     10.07          Lease Agreement - Phoenix, Arizona manufacturing facility(1)

     10.08          Lease Agreement between Gum Tech and Beardsley & 1-17
                    L.L.C., for the lease of packaging/warehouse facility (3)

     10.09          Form of Convertible Note Dated February 20, 1997(4)

     10.10          Registration Rights Agreement(4)

     10.11          Installment Loan with Textron Financial Corporation (3)

     10.12          Form of Manufacturing Agreement

     23             Consent of Angell & Deering

     27             Financial Data Schedule
----------
(1)  Incorporated  by reference to the  Registrant's  Registration  Statement on
     Form SB-2  declared  effective by the  Commission  on April 24, 1996,  file
     number 333-870.

(2)  Incorporated by reference to the Registrant's Report on Form 10-QSB for the
     quarter ending September 30, 1998, file number 000-27646.

(3)  Incorporated by reference to the Registrant's Report on Form 10-KSB for the
     year ending December 31, 1997, file number 000-27646.

(4)  Incorporated by reference to the Registrant's Form 8-K filed March 6, 1997.

REPORTS ON FORM 8-K

     The  Company  filed no reports  on Form 8-K during the last  quarter of the
fiscal year ended December 31, 1998.

                                       16
<PAGE>
                                   SIGNATURES

     In accordance  with Section 13 or 15(d) of the Exchange Act, the Registrant
has duly  caused  this  Report to be signed  on its  behalf by the  undersigned,
thereunto duly authorized, in Phoenix, Arizona, on March 31, 1999.

                                      GUM TECH INTERNATIONAL, INC.


                                      By: /s/ Gary S. Kehoe
                                          ---------------------------------
                                          Gary S. Kehoe
                                          President and Chief Operating Officer

     Pursuant to the  requirements  of the  Securities  Act of 1933, as amended,
this  Report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities and on the dated indicated.

         SIGNATURE                        TITLE                        DATE

/s/ Bruce Jorgenson            Chairman of the Board             March 31, 1999
----------------------         of Directors
Bruce Jorgenson

/s/ Gary S. Kehoe              President and Chief               March 31, 1999
----------------------         Operating Officer and
Gary S. Kehoe                  Director

/s/ William Yuan               Director                          March 31, 1999
----------------------
William Yuan

/s/ William Boone              Director                          March 31, 1999
----------------------
William Boone

/s/ W. Brown Russell           Director                          March 31, 1999
----------------------
W. Brown Russell

/s/ William J. Hemelt
----------------------         Chief Financial Officer           March 31, 1999
William J. Hemelt

                                       17