SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

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


(Mark One)
[X]      Annual report pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934 [Fee Required]

For the fiscal year ended December 31, 1996

[ ]      Transition report pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934 [No Fee Required]

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 of incorporation            (I.R.S. Employer
or organization)                                       Identification Number)


4205 North 7th Avenue
Phoenix, AZ                                                    85013
----------------------------------------------         -------------------------
(Address of principal executive offices)                      (Zip Code)



Issuer's telephone number:  (602) 277-0606

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

Securities registered pursuant to Section 12(g) of the Act:
                          $.001 Par Value Common Stock
                         Common Stock Purchase Warrants
                                (Title of Class)



<PAGE>

     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
                                   -----      -----

     As of February 28, 1997,  4,948,740 shares of the Registrant's no par value
Common Stock were outstanding.  As of February 28, 1997, the market value of the
Registrant's no par value Common Stock, excluding shares held by affiliates, was
$29,708,415 based upon a closing bid price of $8.62 per share of Common Stock on
the NASDAQ National Market.

     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.

     The  Registrant's  revenues  for its year  ended  December  31,  1996  were
$3,868,642.

     The following  documents are incorporated by reference into Part III, Items
9 through 12 hereof: None.



                                        2

<PAGE>

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS
-------  -----------------------

Introduction

     The  Company  was  organized  in 1991 to  develop,  market  and  distribute
specialty  chewing gum products under its own brand names and on a private label
basis for other  chewing  gum  marketers.  The  Company's  current  chewing  gum
products contain  ingredients which it claims (i) promote weight loss (under the
"ChromaTrim"  and  "CitrusSlim"  brand  names),  (ii)  contribute  to energy and
endurance (under the "Buzz Gum", "Power Gum" and "Love Gum" brand names),  (iii)
alleviate certain premenstrual symptoms (under the "Repose" brand name) and (iv)
promote oral hygiene and breath freshness (under the "DentaHealth"  brand name).
The  Company  also  markets a chewing  gum product  which  includes  antioxidant
vitamins  (under the "Vita A-C-E"  brand name).  Sales of Power Gum and Love Gum
commenced in 1994 while sales of Buzz Gum,  ChromaTrim and CitrusSlim  commenced
in 1991, 1993 and 1995, respectively.  The Company began distribution of Repose,
DentaHealth  and Vita  A-C-E in April  1996 and is  currently  developing  zinc,
anti-smoking and calcium supplement gums.

     The Company  contracted  with others for the manufacture of all its chewing
gum products until February 1996 when it completed  leasehold  improvements  and
began  initial  manufacture  of chewing gum  products in its 28,000  square foot
facility in Phoenix,  Arizona.  The facility employs 33 workers and produces all
of the Company's chewing gum products. See "Item 1 Manufacturing and Packaging."

     The Company's  business  strategy is to (i) manufacture its own chewing gum
products  and the  private  label  chewing  gum  products  of other  chewing gum
marketers in greater  quantities and at lower costs,  (ii) increase  revenues by
(a)  expanding  its marketing  efforts for existing  chewing gum  products,  (b)
developing  new chewing gum products  through its own  research and  development
facilities,  (c) further  developing  its private label  business,  and (d) form
marketing alliances and joint ventures with multinational companies which market
consumer  packaged goods, and (iii) expand its distribution and customer base by
adding over-the-counter ("OTC") non-prescription  medications (such as antacids,
cough  suppressants,  pain  relievers and the like) to its chewing gum products.
The Company has not yet  commenced  the  distribution  or  marketing  of any OTC
chewing gum  products  but expects  (but  cannot  assure)  that it will do so by
October 1997. See "Item 1 - Strategy."

     The Company markets its chewing gum products through wholesale distributors
who distribute  primarily to natural food stores and directly as well as through
food brokers,  independent  representatives  and  distributors to drug store and
convenience store chains (including Walgreen's,  Drug Emporium, Long's, Thrifty,
Sav-On,  Phar-Mor,  Eckard and  Payless),  mass  market  and club  store  chains
(including Target and K-Mart) and major supermarket  chains (including  Safeway,
Smith's  and  Lucky's).   In  addition,   the  Company  sells  in  a  number  of
international  markets  including  Europe,  the Far East and the  former  Soviet
Union.  The Company also  manufactures  product for sale to larger private label
customers who market under their own brand names.

                                        3

<PAGE>

     Some of the  Company's  specialty  chewing  gum  products  are  subject  to
regulation by the United States Food and Drug Administration ("FDA"). If the FDA
concludes  that certain  chewing gum products are "drugs" under  applicable  FDA
regulations or if the Company  commences  marketing of OTC chewing gum products,
the FDA may restrict or remove any or all of the Company's  chewing gum products
from the market if such products violate FDA rules or regulations.

     The  Company  was  incorporated  in Utah in  February  1991 as a  specialty
chewing gum products  marketer  under the name Nekros  International  Marketing,
Inc. with office and warehouse  facilities  initially located in Ogden, Utah. In
November 1994,  control of the Company changed and between May 1995 and November
1995,  the Company  raised an  aggregate  of  $1,006,000  of equity  capital and
$2,400,000  of debt  capital.  The funds raised in 1995 were used to establish a
new management team, develop additional chewing gum products,  build inventories
and purchase  chewing gum  manufacturing  equipment  for its 28,000  square foot
leased manufacturing facility in Phoenix, Arizona.

     In October  1995,  the  Company  borrowed  $1,550,000  from a group of four
lenders (the "1995 Bridge Loan"). As additional compensation for the 1995 Bridge
Loan, the Company issued an aggregate of 465,000 common stock purchase  warrants
to the  lenders,  each such  warrant  exercisable  to purchase  one share of the
Company's Common Stock at $2.00 per share exercisable in perpetuity.  The Bridge
Loan bore  interest at 8% per annum and was repaid in April 1996 using  proceeds
from the Prior Offering. The Bridge Loan lenders included Brett Bouchy, a former
principal stockholder of the Company (who received 165,000 warrants), and Robert
H. Wood, a former  director of the Company (who received  75,000  warrants).  In
March  1996,  Brett  Bouchy  sold  100,000  warrants to Gary S. Kehoe and 65,000
warrants to Robert H. Wood,  both  officers and  directors  of the Company,  for
$5.00 per  warrant.  The purchase  price was paid by the issuance of  promissory
notes by Messrs.  Kehoe and Wood to Mr. Bouchy bearing interest at 9% per annum.
The warrants are not collateral for the promissory  notes.  The promissory notes
are due the earlier of (i) six months after the  warrants are  exercised or (ii)
if during the period from April 24, 1997 until April 24, 2000 the closing  price
of the  Company's  Common  Stock on  NASDAQ is $10.00 or more per share for five
consecutive  trading days then the promissory  notes are due six months from the
last such trading day. If neither event occurs, the promissory notes become void
and of no value on April  24,  1999 and the  warrants  remain  the  property  of
Messrs.  Kehoe  and  Wood.  Under  no  circumstances  will the  warrants  become
returnable to Mr. Bouchy.

     In December 1995, Dale dissolved and issued 51% and 49% respectively of its
Common  Stock in the  Company and its loans  receivable  due from the Company to
Riverlux  Trust  REG and Brett  Bouchy.  Riverlux  Trust  REG and  Brett  Bouchy
received   665,265   shares  and  639,175   shares,   respectively,   of  Dale's
stockholdings in the Company and $433,500 and $416,500,  respectively, of Dale's
loans receivable from the Company.  The loans were repaid out of proceeds of the
Prior Offering. Subsequently, Riverlux Trust REG and Mr. Bouchy each sold 20,000
shares of the Company's Common Stock to Mr. Kehoe for $2.00 per share.

                                        4

<PAGE>

     In January 1996,  the Company  raised  $3,095,875  through a private equity
placement to repurchase and retire 619,175 shares of the Company's  Common Stock
held by a former principal  stockholder.  In April 1996, the Company sold to the
public 460,000 Units of its securities at $18.00 per Unit,  each Unit consisting
of three  shares of Common  Stock and one Common  Stock  Purchase  Warrant  (the
"Public  Warrant") to purchase an  additional  share of Common Stock at any time
until  April 24,  2001 at $7.50 per share (the  "Prior  Offering").  At the same
time,   the  Company   registered   619,175   shares  which  were  sold  in  the
aforementioned  private  placement.  The  Prior  Offering  was  underwritten  by
Kensington Securities, Inc. (the "Prior Representative").

     In March 1997, the Company completed the sale of an aggregate of $2,530,000
of convertible  debentures  ("Debentures").  The Debentures bear interest at 11%
per annum,  are due and payable on January 1, 2002 and are convertible  into the
Company's  Common Stock at $4.75 per share.  The Common Stock issuable under the
Debentures carries certain registration rights after July 31, 1997. However, any
Common Stock issuable upon  conversion of the Debentures is subject to a lock-up
agreement with the Company through  January 31, 1998.  Proceeds from the sale of
the Debentures will be used for working capital and other corporate purposes.

Strategy

     The Company pursues the following business strategy:

     (i) Manufacture its own chewing gum products.  The Company will continue to
manufacture its chewing gum products under its own labels and on a private label
basis for other chewing gum marketers.  The Company  believes that operating its
own manufacturing  facility  significantly reduces its dependence on third party
manufacturers,  assists it in maintaining the secrecy of its proprietary chewing
gum  formulas,  reduces its product  costs and  increases  product  capacity for
itself and its large volume customers.

     (ii)  Increase  revenues by expanding  its  marketing  efforts for existing
chewing gum products,  developing new chewing gum products,  further  developing
its private label  business and forming  marketing  alliances.  The Company will
continue to expand marketing  efforts for existing  products (both in the United
States and internationally) and to further develop its private label business in
order to manufacture  more chewing gum products for other chewing gum marketers.
The Company  will  continue to develop new  specialty  chewing gum  products for
itself and its private label customers,  such as the three specialty products it
introduced  in  1996  (Vita  A-C-E,  Repose  and  DentaHealth),  and  its  zinc,
anti-smoking and calcium supplement gums, which are under  development.  Because
the Company is significantly smaller than most of its competitors, it intends to
develop,  manufacture and market specialty chewing gum products in niche markets
that are considered too small for exploitation by many of these competitors.

                                        5

<PAGE>

Development of these  products will be undertaken at the Company's  research and
development  laboratory  facility  located  within the  Company's  manufacturing
facility in Phoenix,  Arizona,  which  consists of 900 square feet of laboratory
space staffed by two employees and assisted by members of management and outside
consultants.  The  Company  also  seeks to form  marketing  alliances  and joint
venture arrangements with multinational companies which market consumer packaged
goods to promote and distribute the Company's existing and future gum products.

     (iii) Expand its  distribution  and customer base by adding OTC medications
(such as  antacids,  cough  suppressants,  pain  relievers  and the like) to its
chewing gum  products.  The  Company  has  certain  OTC chewing gum  products in
development  and  expects  to  explore  market  potential  for a number  of such
products in the near future.  The Company believes that OTC chewing gum products
may appeal to certain retailers (such as drug stores and health food stores) and
offer the Company the potential to develop new consumer niche markets.  Any such
OTC chewing gum  products  will  require  FDA  permission  to market and will be
subject to ongoing FDA marketing and  manufacturing  regulations.  See "Item 1 -
FDA and Other Government Regulation."

Marketing

     The Company markets its chewing gum products through wholesale distributors
who distribute  primarily to natural food stores and directly as well as through
food brokers,  independent  representatives and distributors to large drug store
and  convenience  store chains  (including  Walgreen's,  Drug Emporium,  Long's,
Thrifty,  Sav-On,  Phar-Mor,  Eckard and  Payless),  mass  market and club store
chains  (including  Target and K-Mart) and major  supermarket  chains (including
Safeway,  Smith's and  Lucky's).  In addition,  the Company sells in a number of
international  markets  including  Europe,  the Far East and the  former  Soviet
Union.

     The Company also  manufactures and private labels certain specialty chewing
gum products to retail  health food  chains,  wholesalers  and other  marketers,
including  Schiff/Weider  Nutrition,  General  Nutrition  Centers (GNC),  Hammer
Corp., Body Ammo and GEN. Under private label arrangements, the Company supplies
chewing gum products  (including formulas used by the Company and its customers)
labeled with brand names  selected by its private  label  customers or otherwise
includes the private label customer's name on the gum product packaging.

     In January  1996,  the  Company  entered  into a five-year  agreement  (the
"Mayday  Agreement") with Mayday,  Inc. ("Mayday") pursuant to which it retained
Mayday to oversee  and  administer  the  Company's  sales  agents,  brokers  and
distributors in certain  markets.  The Mayday Agreement was cancelled in January
1997.

     The  Company  intends to continue  to expand its  marketing  efforts by (i)
hiring  additional  sales  personnel  to  obtain  and  manage  new  brokers  and
distributors, (ii) developing media advertising materials for use by the Company
and its brokers and distributors, (iii) retaining personnel to further develop

                                        6

<PAGE>

the  Company's   private  label  business  and  seek  other  forms  of  contract
manufacturing  business and (iv) forming marketing  alliances and joint ventures
with multinational companies which market consumer packaged goods.

Manufacturing and Packaging

     In March 1996, the Company began manufacturing,  packaging and shipping its
chewing gum products from a 28,000 square foot leased manufacturing  facility in
Phoenix,  Arizona.  The  manufacture  of chewing gum  products  involves (i) the
storage of bulk raw materials and "fine" raw materials  (such as flavor,  colors
and active  ingredients),  (ii)  production  and mixing of the gum base in large
stainless  steel mixers,  (iii) the extruding of the gum into selected sizes and
shapes,  (iv)  coating  the gum (in the  case of  chiclet  gums)  with  sugar or
sugarless solutions and (v) packaging the gum in bottles or blister packages for
shipment.

     Prior to commencing production of the chewing gum, lot numbers are recorded
for all ingredients, certificates of ingredients are examined and filed, quality
control tests are performed and equipment and utensils are sanitized. Additional
quality control tests are conducted throughout the manufacturing process.

     The Company leases  approximately  $2 million of chewing gum  manufacturing
equipment  on a  six-year  lease at a monthly  rental of  $32,300  from  Textron
Financial  Corporation.  The Company has the option to purchase the equipment at
the conclusion of the lease for the greater of the then fair market value of the
equipment  (which may not exceed 30% of the cost of the equipment) or 20% of the
original cost of the equipment.

     The Company's manufacturing facility produces most of the Company's chewing
gum products and  provides  the capacity to meet most of the  Company's  private
label product requirements for the foreseeable future.

Competition

     The  distribution  and sale of chewing gum products are highly  competitive
and  includes  three  multi-billion  dollar  United  States-based  multinational
companies (Wm.  Wrigley Jr.  Company,  Warner  Lambert  Company and Nabisco Food
Group,  Inc.) which own most of the chewing gum brands,  large specialty chewing
gum  manufacturers,  such as The Topps Company ("Bazooka" brand chewing gum) and
Marvel Holdings,  Inc.  ("Double Bubble" brand chewing gum), and small specialty
chewing gum product marketers, such as the Company.

     Competitive  factors in the chewing gum industry include price,  flavor and
name recognition resulting from media advertising. The Company does not have the
capital   resources,   marketing  and   distribution   networks,   manufacturing
facilities,  personnel,  product  name  recognition  or  advertising  budget  to
introduce chewing gum brands intended to compete with the multinational  chewing
gum  manufacturers or the large specialty  chewing gum marketers.  However,  the
Company believes (but cannot assure) that it can develop and market specialty

                                        7

<PAGE>

chewing  gum  products  in niche  markets  (such as the  weight  loss,  vitamin,
premenstrual symptom,  dental hygiene,  anti-smoking,  zinc and calcium markets)
that  are  considered  too  small  for  exploitation  by many  of the  Company's
competitors.

FDA and Other Government Regulation

     The Company is subject to various  federal,  state and local laws affecting
its business. The Company's chewing gum products manufactured by it or by others
for it  under  contract  or  otherwise  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.  Moreover,  if the FDA concludes that any of the Company's
chewing gum products are "drugs" under  applicable FDA  regulations or otherwise
violate FDA rules or  regulations,  the FDA may (i) require that  manufacture of
such products be in accordance with FDA "good  manufacturing  practices"  (which
prescribe  specific  requirements  and  procedures  for the  manufacture  of FDA
regulated  products),  or (ii) restrict or remove such products from the market.
The  Company  (i)  believes  all of its  products  are in  compliance  with  all
regulatory requirements, (ii) has not been advised that the FDA considers any of
its  products to be "drugs",  and (iii) has not  submitted  any  information  or
applications  for approval to the FDA. If the Company  commences  marketing  OTC
chewing gum products,  such products will be subject to marketing permission and
ongoing regulation by the FDA including (i) requirements that the Company comply
with certain FDA manufacturing standards and practices, (ii) conformity with FDA
labeling  requirements  including  dosage  information  and (iii) the ability to
determine   the  origin  of  all  chewing  gum   ingredients   included  in  the
manufacturing process.

     Advertising  claims made by the Company  with  respect to its  products are
subject  to the  jurisdiction  of the FTC as well as the FDA.  In both cases the
Company is required to obtain  scientific  data to support  any  advertising  or
labeling   health  claims  it  makes   concerning  its  products,   although  no
preclearance or filing is required to be made with either agency.

     The Company'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 the Company's manufacturing operations. If the Company commences
marketing  OTC chewing gum  products,  its  manufacturing  facility will also be
subject to inspection and regulation by the FDA.

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

                                        8

<PAGE>

Barter Agreement

     In December 1996, the Company entered into a barter  agreement (the "Barter
Agreement") with Active Media Services, Inc. ("Active") pursuant to which Active
accepted  $3,500,000 of the Company's gum products in exchange for  advertising,
printing and travel credits.  The Company must pay for  approximately 60% of the
advertising,  printing and travel expenses in cash and may pay the remaining 40%
using its bartered  credits.  Any unused credits on February 28, 2000 expire and
will be valueless.  The Company booked approximately  $750,000 of revenue in the
fourth quarter of calendar year 1996 as a result of the Barter Agreement,  which
represented  approximately  19.3% of the  Company's  revenues for the year ended
December 31, 1996.

Trademarks, Trade Names and Proprietary Rights

     The Company  routinely  seeks  trademark  protection from the United States
Patent  Office  ("USPO")  and from  similar  agencies in foreign  countries  for
chewing gum brands.  There can be no assurance  that the Company will be able to
successfully  defend any  trademarks or trade names granted to it against claims
from or use by competitors or that trademark or trade name  applications will be
approved by the USPO or any similar foreign agency.

     The Company 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
such proprietary information. There can be no assurance that these steps will be
adequate to prevent misappropriation of the Company's proprietary information or
that the  Company's  competitors  will not  independently  develop  chewing  gum
formulations and processes that are substantially  equivalent or superior to the
Company's.

Employees

     As of February 28, 1997, the Company employed 49 individuals  including its
nine  executive  officers,  30  manufacturing  and  warehouse  personnel and ten
administrative personnel.

Litigation

     In October  1996,  an action was filed  against  the  Company in the United
States  District  Court for the  Central  District  of  California,  CV-95-9784,
entitled "GCN  Products,  Inc. vs. Roy Kelly,  et al." In its  complaint,  as it
relates to the  Company,  the  Plaintiff  alleges  that the  Company  engaged in
unlawful rebates,  appropriations,  overcharges,  commercial bribery,  fraud and
unjust enrichment.  The Plaintiff seeks  compensatory and punitive damages.  The
Company denies the Plaintiff's  allegations and intends to vigorously defend the
Action.

     No other material litigation is pending or threatened against the Company.


                                        9

<PAGE>


ITEM 2.  DESCRIPTION OF PROPERTY

     The Company  leases  3,345  square feet for its  executive  offices at 4205
North 7th Avenue, Phoenix, Arizona 85013 on a three-year lease expiring December
31, 1998 for an average rental of  approximately  $3,000 per month.  The Company
also leases an  approximately  28,000  square foot  building for its 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.

     The Company  believes  its  facilities  are  adequate  for its needs in the
foreseeable future and that additional space is available at reasonable rates.

ITEM 3.  LEGAL PROCEEDINGS
-------  -----------------

     Not applicable.

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

     Not applicable.


                                       10

<PAGE>


                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
-------  --------------------------------------------------------

         The Company's  Common Stock has traded on the 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
National Market but does not include retail markup, markdown or commissions.

                                                                   Price
                                                              ----------------
By Quarter Ended:                                              High      Low
-----------------                                              ----      ---

March 31, 1997 (through February 28, 1997)................    $8.75     $5.50
December 31, 1996.........................................     7.75      5.75
September 30, 1996........................................     6.125     6.00
June 30, 1996.............................................     6.875     6.375

     As of February  28,  1997,  the Company  had  approximately  380 record and
beneficial stockholders.

Dividend Policy

     The Company 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  the  Company's  earnings,
financial condition, capital requirements and other conditions.

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

Overview

     The  Company  was  organized  in 1991 to  develop,  market  and  distribute
specialty chewing gum products. The Company's first chewing gum product included
a natural caffeine substance marketed to runners and other exercise  enthusiasts
as a source of energy and  carbohydrates.  In 1994 and 1995,  the Company raised
funds  through  debt and equity  financings  which were used to  establish a new
management team, develop additional chewing gum products,  build inventories and
purchase  chewing gum  manufacturing  equipment for the Company's  28,000 square
foot manufacturing  facility which commenced  operations in late March 1996. The
facility has 33 employees  and by the end of 1996 the Company  produced  100% of
its chewing gum products in the facility.


                                       11

<PAGE>

     Information contained in this Report contains "forward-looking  statements"
which  can be  identified  by the  use of  forward-looking  terminology  such as
"believes,"  "expects," "may," "should" or "anticipates" or the negative thereof
or other  variations  thereon or comparable  terminology,  or by  discussions of
strategy.  No  assurance  can be given  that the future  results  covered by the
forward-looking  statements will be achieved.  The following matters  constitute
cautionary  statements  identifying  important  factors  with  respect  to  such
forward-looking  statements,  including  certain risks and  uncertainties,  that
could cause actual results to vary materially from the future results covered in
such forward-looking  statements.  Other factors could also cause actual results
to vary  materially  from the future  results  covered  in such  forward-looking
statements.

Results of Operations

     The following table sets forth certain statement of operations  information
expressed  both in  dollars  and as a  percentage  of net sales for the  periods
indicated:
<TABLE>
<CAPTION>


                                                                    Years Ended December 31,
                                                                    ------------------------
                                               1996                         1995                         1994
                                               ----                         ----                         ----
<S>                                     <C>          <C>             <C>          <C>              <C>         <C>   
Net sales                               $3,868,642   100.0%          $4,343,590   100.0%           $1,941,562  100.0%
Cost of sales                            2,070,403    53.5            2,310,643    53.2             1,011,956   52.1
Gross profit                             1,798,199    46.5            2,032,947    46.8               929,606   47.9
Operating expenses                       4,199,288   108.5            1,118,510    25.7               694,555   35.8
Research and development                   364,728     9.5               90,348     2.1                  -       -
Income (loss) from
     operations                         (2,765,817)  (71.5)             824,089    19.0               235,051   12.1
Interest and other income                  117,219     3.0               53,212     1.2                   940     .1
Interest expense                           219,668     5.6              108,980     2.5                 4,402     .2
Pro forma provision (benefit)
     for income taxes                     (232,371)    6.0              270,850     6.2                81,000    4.2
Pro forma net income (loss)             (2,635,895)   68.1              497,471    11.5               150,589    7.8
</TABLE>

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

     Net Sales. After realizing  revenues of approximately  $750,000 in December
1996 from its Barter Agreement, net sales nevertheless decreased by $474,948, or
11%, to $3,868,642  for the year ended  December 31, 1996 compared to $4,343,590
for the year ended December 31, 1995.  This decrease was primarily  attributable
to a substantial reduction in product sales to two former significant customers.
See "Item 1 - Barter Agreement."


                                       12

<PAGE>

     Cost of Sales.  Cost of sales,  as a percentage  of sales,  increased 1% to
$2,070,443 or 54% of net sales for the year ended December 31, 1996, compared to
$2,310,643 or 53% of net sales for the same period in 1995.  The primary  reason
for the increase was the Company's  manufacturing  plant has been operating at a
minimal capacity which has resulted in a higher cost per pound of gum.

     Gross Profit.  Gross profit,  as a percentage of sales,  decreased by 1% to
$1,798,199 or 46% of net sales for the year ended December 31, 1996, compared to
$2,032,947 or 47% of net sales for the same period in 1995.

     Operating  Expenses.  Operating  expenses were  $4,199,288,  an increase of
$3,080,778 for the year ended December 31, 1996,  compared to the same period in
1995.  Approximately  $1,239,467  of  these  operating  expenses  were  directly
attributable to the operations of the manufacturing  plant,  including  $420,662
relating to depreciation  expense.  No manufacturing  expenses were incurred for
the  year  ended  December  31,  1995  as the  Company  had  not  yet  commenced
manufacturing operations. Moreover, because the manufacturing facility continues
to  operate  at only a small  percentage  of its  capacity,  revenues  were  not
sufficient to offset the manufacturing operating expenses.  Factors contributing
to  an  increase  in  non-manufacturing   operating  expenses  were  related  to
advertising  ($941,469),  indirect labor  ($714,093),  direct labor  ($454,647),
professional fees for legal, accounting,  art/production, and general consulting
($468,862), insurance ($230,625), and infomercial expenses ($364,286).

     Research  and  Development.  Research  and  development  expenditures  were
$364,728 for the year ended December 31, 1996,  compared to $90,348 for the same
period in 1995.  The majority of these costs were related to the  write-offs  of
various  gums  used  in the  debugging  and  testing  of the  new  manufacturing
equipment,  the development and production  scale-up of the Jack Lalanne product
line,  DentaHealth,  Vita A-C-E and Repose,  the  development of three "over the
counter" products and various private label products.

     Interest and Other Income and Interest  Expense.  Interest and other income
were  $117,219,  an increase of $64,007  primarily as a result of an increase in
working  capital  from  equity  financings  that  were  invested  in  short-term
investments. Interest expense was $219,668, an increase of $110,688 for the year
ended December 31, 1996 compared to the same period in 1995. This increase was a
result  of  the  Company  entering  into a  $1.85  million  equipment  financing
agreement with Textron Financial Corporation for the Company's gum manufacturing
equipment in December 1995. In addition, the Company issued $2.4 million of debt
securities in 1995. Proceeds from the loans were used to pay deposits on chewing
gum manufacturing equipment, to build inventories of new products, for marketing
expenses and working  capital.  Proceeds  from the Prior  Offering  were used to
retire debt in May 1996.

     Net Income.  The Company lost  $2,635,895  for the year ended  December 31,
1996  compared  to a profit of $497,471  for the same  period in 1995.  The loss
incurred  for  1996 was  primarily  due to an  increase  in  operating  expenses
incurred in establishing the Company's manufacturing facility.

                                       13

<PAGE>

Year Ended December 31, 1995 Compared to Year Ended December 31, 1994

     Net Sales.  Net sales  increased by $2.4 million,  or 124%, to $4.3 million
for the year ended  December 31, 1995 ("1995")  compared to $1.9 million for the
year ended December 31, 1994 ("1994"). This increase was primarily the result of
the  introduction  of  "CitrusSlim"  which  accounted for $340,000 of such sales
increase and the  expansion of the  Company's  distribution  channels to include
infomercial   television   broadcasts  which  the  Company  believes  were  also
responsible  for a large part of the additional  sales.  Product pricing was not
changed in 1995.

     Cost of Sales. Cost of sales increased 1% to 53% in 1995 compared to 52% in
1994 primarily as a result of new package  designs,  increased  production costs
and the  purchase of higher  priced gum from a foreign  supplier to be used in a
chewing gum product sold internationally. The majority of the Company's costs of
sales  resulted from  purchases of gum products from third party  manufacturers.
Costs of sales are  expected  to be  reduced  when the  Company's  manufacturing
facility is completed.

     Gross Profit.  Gross profit  decreased 1% to 47% in 1995 compared to 48% in
1994 as a result  of the  increased  costs  discussed  above and  certain  price
discounts given by the Company to volume distributors.  During 1995, the Company
pursued  relationships  with  distributors  that  specialized in selling to mass
merchandisers,   drug  and  convenience  stores  and  national  broadcasters  of
infomercials.  While these distributors were offered volume price discounts, the
arrangement  increased sales revenue,  decreased monthly sales  fluctuations and
allowed for more orderly production planning

     Operating Expenses.  Operating expenses increased $423,955 in 1995 compared
to 1994 but  decreased as a  percentage  of net sales from 36% in 1994 to 26% in
1995.  The  increase  in  expenditures  was  primarily  due to the hiring of new
management  personnel  ($152,508) together with increases in trade show expenses
($48,939),  legal fees ($80,317) and travel expenses ($60,634). The reduction of
operating  expenses  as a  percentage  of net sales was the result of  increased
sales. Operating expenses will increase as the Company expands its manufacturing
operations.

     Research  and  Development.  Research  and  development  expenditures  were
$90,348 in 1995  compared to $0 in 1994 and resulted  from  expenses  associated
with  development of new products.  Prior to June 1995,  development  activities
were conducted by outside  consultants.  The Company  developed three additional
products which it intended to introduce in 1995. However, the Company was unable
to obtain  assurances  that its  existing  manufacturer  would be able to supply
adequate  quantities of the product.  Consequently,  management decided that the
new  products  will be  introduced  in 1996  when  the  Company's  manufacturing
facility is completed.

     Interest and Other Income and Interest Expense.  Interest expense increased
$108,980 in 1995 (from  $4,402 in 1994) as a result of the Company  issuing $2.4
million  of  debt  securities,  which  will be  retired  using  proceeds  of the
Offering. Proceeds from the loans were used  to  pay  deposits  on  chewing  gum

                                       14

<PAGE>

manufacturing  equipment,  to build  inventories of new products,  for marketing
expenses  and working  capital.  Interest  and other  income  increased  $52,272
primarily as a result of an increase in working  capital from equity  financings
that was invested in short-term investments.

     Pro Forma  Provisions  for Income  Taxes.  Beginning  January 1, 1993,  the
Company was an S Corporation  under the provisions of the Internal  Revenue Code
through  November 18, 1994. As such,  the Company was not subject to federal and
state income taxes and, accordingly,  no provision was made for income taxes for
1993 and 1994,  and the  Company's  stockholders  were  required  to report  the
Company's  taxable  income on their tax returns.  The  statements  of operations
include a pro forma income tax  adjustment  that represent the federal and state
provision  for income taxes as if the Company had been a taxable  entity  paying
federal and state income taxes for all periods presented at the rates applicable
in  each  period.  Effective  November  18,  1994,  the  Company  revoked  its S
Corporation  election and all income  subsequent to that date will be subject to
federal and state income taxes.

     Pro forma Net Income.  Net income after pro forma  income  taxes  increased
from $150,589 in 1994 to $497,471 in 1995 primarily as a result of increased net
sales and the resulting economies of scale applicable to the Company's fixed and
variable expenses.

Liquidity and Capital Resources

     As of December 31, 1996,  the Company's  working  capital was $3.65 million
compared to $1.92 million as of December 31, 1995.  For the year ended  December
31,  1996,  the Company  experienced  a decrease in cash  provided by  operating
activities  of  $3,702,827  primarily  as a result of an increase  in  operating
expenses,  prepaid  expenses and  inventories.  The  increase in  inventory  was
directly  related  to the  build-up  of new  product,  finished  goods  and  raw
materials for the manufacturing plant.

     Investing  activities  consumed  $1,037,009  in  cash  for the  year  ended
December 31, 1996  compared to $1,531,945 of cash consumed in the same period of
1995. This was primarily from equipment  purchased to start up the manufacturing
plant and loans provided to three Company officers.

     Financing  activities  provided  $5,353,260  in  cash  for the  year  ended
December 31, 1996,  compared to  $2,770,676 in cash for the same period in 1995.
This  increase  in cash was  primarily  a  result  of the  Company  successfully
completing  its Prior  Offering of 400,000  units (each unit  consisted of three
shares of no par value common  stock and one  redeemable  common stock  purchase
warrant) for gross proceeds of $7.2 million on April 24, 1996. In addition,  the
Underwriter  exercised its Overallotment  Option of 60,000 units and the Company
received gross proceeds of $1.08 million on May 24, 1996. The Company paid $1.45
million in  commissions,  underwriter's  expenses and other costs related to the
Prior Offering.  The Company used $2.57 million from the Prior Offering to repay
certain debt.


                                       15

<PAGE>

     Textron  Financial  Corporation  provided lease financing of  approximately
$1.85  million for the Company's gum  manufacturing  equipment  under a six-year
equipment lease agreement executed in December 1995.

     The Company's  future results of operations  and the other  forward-looking
statements contained in this document,  in particular the statements  concerning
plant efficiencies and capacities,  capital spending,  research and development,
competition,  marketing  and  manufacturing  operations  and  other  information
provided herein involve a number of risks and uncertainties.  In addition to the
factors discussed above, among the other factors that could cause actual results
to differ  materially are general  business  conditions and the general economy;
rival  gum  manufacturers'  pricing  and  marketing  efforts;   availability  of
third-party  material  products at  reasonable  prices;  risk of  nonpayment  of
accounts  receivable;  risks of inventory  obsolescence  due to shifts in market
demand;  timing of  product  introductions;  and  litigation  involving  product
liabilities and consumer issues.


                                       16

<PAGE>



ITEM 7.  FINANCIAL STATEMENTS
-------  --------------------






















                                       17

<PAGE>


                          INDEX TO FINANCIAL STATEMENTS




Financial Statements                                                 Page
--------------------                                                 ----
  Independent Auditors' Report                                        F-2

  Balance Sheet as of December 31, 1996                               F-3

  Statements of Operations for the years ended
   December 31, 1996 and 1995                                         F-5

  Statements of Changes in Stockholders' Equity for the
   years ended December 31, 1996 and 1995                             F-6

  Statements of Cash Flows for the years ended
   December 31, 1996 and 1995                                         F-7

  Notes To Financial Statements                                       F-8























                                       F-1


<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, 1996 and the related  statements  of  operations,  changes in
stockholders'  equity and cash flows for the years ended  December  31, 1996 and
1995.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Gum Tech International, Inc. as
of December  31, 1996 and the results of its  operations  and its cash flows for
the years ended December 31, 1996 and 1995 in conformity with generally accepted
accounting principles.




                                          /S/  ANGELL & DEERING
                                         ---------------------------------------
                                          Angell & Deering
                                          Certified Public Accountants

Denver,  Colorado
January 24, 1997,  except for
Note 12 as to which the date
is March 6, 1997







                                       F-2


<PAGE>

                          GUM TECH INTERNATIONAL, INC.
                                  BALANCE SHEET
                                DECEMBER 31, 1996



                                     ASSETS
                                     ------


Current Assets:
  Cash and cash equivalents                                        $1,116,751
  Restricted cash                                                      54,629
  Accounts receivable, net of
   allowance for doubtful
   accounts of $35,000                                                753,872
  Inventories                                                       1,366,944
  Income tax receivable                                               234,440
  Prepaid expenses                                                    816,031
                                                                   ----------

     Total Current Assets                                           4,342,667
                                                                   ----------

Property and Equipment, at cost:
  Machinery and equipment                                           3,290,692
  Office furniture and equipment                                      116,667
  Leasehold improvements                                              190,526
                                                                   ----------
                                                                    3,597,885
  Less accumulated depreciation                                      (459,403)
                                                                   ----------

     Net Property and Equipment                                     3,138,482
                                                                   ----------
Other Assets:
  Deposits                                                            277,582
  Notes receivable                                                    316,000
  Other                                                               135,893
                                                                   ----------

     Total Other Assets                                               729,475
                                                                   ----------

     Total Assets                                                  $8,210,624
                                                                   ==========










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

                                       F-3


<PAGE>

                          GUM TECH INTERNATIONAL, INC.
                                  BALANCE SHEET
                                DECEMBER 31, 1996



                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------


Current Liabilities:
  Accounts payable                                              $   386,162
  Accrued expenses                                                   12,103
  Customer deposits                                                  65,500
  Current portion of long-term debt                                 223,567
                                                                -----------

     Total Current Liabilities                                      687,332
                                                                -----------
Long-Term Debt, net of current portion above:
  Obligations under capital leases                                1,488,054
                                                                -----------

Commitments and Contingencies                                            --

Stockholders' Equity:
  Preferred stock: no par value,
   1,000,000 shares authorized,
   none issued or outstanding                                            --
  Common stock: no par value,
   10,000,000 shares authorized,
   4,948,740 shares issued and
   outstanding                                                    7,965,060
  Retained earnings (deficit)                                    (1,929,822)
                                                                -----------

     Total Stockholders' Equity                                   6,035,238
                                                                -----------
     Total Liabilities and
      Stockholders' Equity                                      $ 8,210,624
                                                                ===========











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

                                       F-4


<PAGE>

                          GUM TECH INTERNATIONAL, INC.
                            STATEMENTS OF OPERATIONS
                 FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995



                                              1996                   1995
                                              ----                   ----

Net sales                                 $ 3,868,642             $4,343,590

Cost of sales                               2,070,443              2,310,643
                                          -----------             ----------

     Gross Profit                           1,798,199              2,032,947

Operating expenses                          4,199,288              1,118,510
Research and development                      364,728                 90,348
                                          -----------             ----------

     Income (Loss) From
      Operations                           (2,765,817)               824,089
                                          -----------             ----------

Other Income (Expense):
  Interest and other income                   117,219                 53,212
  Interest expense                           (219,668)              (108,980)
                                          -----------             ----------

     Total Other Income (Expense)            (102,449)               (55,768)
                                          -----------             ----------

Income (Loss) Before Provision
 For Income Taxes                          (2,868,266)               768,321

Provision (benefit) for income
 taxes                                       (232,371)               270,850
                                          -----------             ----------

Net Income (Loss)                         $(2,635,895)            $  497,471
                                          ===========             ==========

Net Income (Loss) Per Share of
 Common Stock                             $      (.60)            $      .11
                                          ===========             ==========

Weighted Average Number of
 Common Shares Outstanding                  4,423,402              4,392,658
                                          ===========             ==========












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

                                       F-5


<PAGE>
<TABLE>
<CAPTION>

                                    GUM TECH INTERNATIONAL, INC.
                           STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                           FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995


                                                                                                      
                                                           Common Stock                      Retained
                                                 ------------------------------              Earnings
                                                   Shares               Amount              (Deficit)
                                                   ------               ------              ---------

<S>                                              <C>                 <C>                  <C>        
Balance at December 31, 1994                     3,016,740           $  279,000           $   246,051

Cash dividends                                          --                   --               (37,449)

Issuance of common stock in
 private offering (net of
 offering costs of $117,883)                       420,000              638,117                    --

Net income                                              --                   --               497,471
                                                 ---------           ----------           -----------

Balance at December 31, 1995                     3,436,740              917,117               706,073

Issuance of common stock upon
 exercise of stock options                         132,000              234,000                    --

Issuance of common stock and
 warrants in public offering
 (net of offering costs of
  $1,466,057)                                    1,380,000            6,813,943                    --

Net loss                                                --                   --            (2,635,895)
                                                 ---------           ----------           -----------

Balance at December 31, 1996                     4,948,740           $7,965,060           $(1,929,822)
                                                 =========           ==========           ===========


</TABLE>











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

                                                  F-6


<PAGE>
<TABLE>
<CAPTION>
                                       GUM TECH INTERNATIONAL, INC.
                                         STATEMENTS OF CASH FLOWS
                              FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

                                                                          1996                 1995
                                                                          ----                 ----

<S>                                                                    <C>                    <C>   
Cash Flows From Operating Activities:
  Net income (loss)                                                   $(2,635,895)          $   497,471
  Adjustments to reconcile net income (loss) to cash (used)
   by operating activities:
    Depreciation                                                          454,654                13,077
    Provision for bad debts                                                20,111                11,000
    Loss on disposal of assets                                             11,036                    --
    Changes in assets and liabilities:
     (Increase) decrease in accounts receivable                           161,348              (661,302)
     (Increase) in inventories                                           (468,279)             (663,928)
     (Increase) in income tax receivable                                 (234,440)                   --
     (Increase) in prepaid expenses and other                            (826,172)              (43,940)
     (Increase) in deposits and other                                     (80,401)              (52,207)
     Increase (decrease) in accounts payable and
      accrued expenses                                                   (133,330)              102,235
     Increase in customer deposits                                         28,541                36,959
                                                                      -----------           -----------

          Net Cash (Used) By Operating Activities                      (3,702,827)             (760,635)
                                                                      -----------           -----------

Cash Flows From Investing Activities:
  Capital expenditures                                                   (572,602)             (864,322)
  Increase in notes receivable                                           (216,000)             (100,000)
  Receipt of principal on notes receivable                                     --               100,000
  Deposits on purchase of equipment and other                            (248,407)             (667,623)
                                                                      -----------           -----------

          Net Cash (Used) By Investing Activities                      (1,037,009)           (1,531,945)
                                                                      -----------           -----------

Cash Flows From Financing Activities:
  Proceeds from borrowing                                                 706,397             2,400,000
  Principal payments on notes payable                                  (2,589,330)              (41,742)
  Issuance of common stock                                              8,514,000               756,000
  Cash dividends                                                               --               (37,449)
  Offering costs incurred                                              (1,277,807)             (306,133)
                                                                      -----------           -----------

          Net Cash Provided By Financing Activities                     5,353,260             2,770,676
                                                                      -----------           -----------

          Net Increase in Cash and Cash Equivalents                       613,424               478,096

          Cash and Cash Equivalents at Beginning of Year                  503,327                25,231
                                                                      -----------           -----------

          Cash and Cash Equivalents at End of Year                    $ 1,116,751           $   503,327
                                                                      ===========           ===========

Supplemental Disclosure of Cash Flow Information:
   Cash paid during the year for:
    Interest                                                          $   327,031           $     3,191
    Income taxes                                                           24,409               246,442

Supplement Disclosure of Non-cash Investing and
   Financing Activities:
    Capital lease obligations incurred for new
    equipment                                                         $ 1,194,544           $        --







</TABLE>





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

                                                 F-7


<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  under its own brand names and on a private  label basis for other
     chewing gum marketers.  The Company  currently markets chewing gum products
     with certain ingredients added to promote weight control, energy endurance,
     oral hygiene and breath  freshness.  The Company  also markets  chewing gum
     products  which  include  anti-oxidant  vitamins,  zinc,  calcium and anti-
     smoking preparations.

     Amendment  to  Authorized  Common and  Preferred  Shares and Stock Split
     ------------------------------------------------------------------------
     In March 1995, the Company's  stockholders adopted a resolution approving a
     five for one stock split of the issued and outstanding  common shares.  The
     Company's  Board  of  Directors  also  authorized,   and  the  shareholders
     approved,  an  amendment  and  restatement  of the  Company's  Articles  of
     Incorporation,  to increase the number of authorized shares of common stock
     from 1,000,000 to 10,000,000  shares and to authorize the issuance of up to
     1,000,000 shares of preferred stock.

     In December  1995,  the  Company  approved a two for one stock split of the
     issued and outstanding  common shares.  All share information and per share
     data have been retroactively  restated for all periods presented to reflect
     the stock splits and increase in authorized shares.

     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                        5-10
             Office furniture and equipment                 5
             Leasehold improvements                         10

     Depreciation  of property and  equipment  charged to operations is $454,654
     and $13,077 for the years ended December 31, 1996 and 1995, respectively.

     Revenue Recognition
     -------------------
     The Company  recognizes  revenue  from product  sales upon  shipment to the
     customer.

     Stock-Based Compensation
     ------------------------
     During the year ended December 31, 1996, the Company  adopted  Statement of
     Financial Accounting Standard (SFAS) No. 123,


                                       F-8


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


 1.  Organization and Summary of Significant Accounting Policies (Continued)
 ---------------------------------------------------------------------------

     Stock-Based Compensation (Continued)
     ------------------------------------
     "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  123  had  been  applied  in  measuring
     compensation expense.

     Income Taxes
     ------------
     Beginning  January 1, 1993,  the  Company  was an S  corporation  under the
     provisions of the Internal Revenue Code and, accordingly,  no provision was
     made for income  taxes  since all  income,  deductions,  gains,  losses and
     credits  were  reported  on the  tax  returns  of the  stockholders.  The S
     corporation  status of the Company  terminated  on  November  18, 1994 and,
     thereafter,  the Company became a taxable  entity.  Effective  November 18,
     1994,  the  Company  adopted  the  provisions  of  Statement  of  Financial
     Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes."
     SFAS No. 109 requires the liability  method of accounting for income taxes.
     Deferred income taxes result from temporary  differences in the recognition
     of revenue and expenses for income tax and  financial  reporting  purposes.
     These differences are primarily due to depreciation.

     Deferred Offering Costs
     -----------------------
     In connection  with the Company's  public offering (Note 6), costs incurred
     to complete the  offering  have been  deferred and were offset  against the
     proceeds of the offering.

     Net(Loss) Income Per Share of Common Stock
     ------------------------------------------
     Net  income  (loss) per share of common  stock is based  upon the  weighted
     average number of outstanding  shares of common stock and,  pursuant to the
     Securities  and Exchange  Commission  Staff  Accounting  Bulletins,  common
     shares,  options and  warrants  issued by the  Company at prices  below the
     assumed initial public offering price during the twelve months  immediately
     preceding the offering date are included in the calculation as if they were
     outstanding for all periods presented.

     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 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

                                       F-9

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


 1. Organization and Summary of Significant Accounting Policies (Continued)
 -------------------------------------------------------------------------

     Estimates (Continued)
     ---------------------

     liabilities and disclosure of contingent assets and liabilities 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  $54,629  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, 1996 consist of the following:

             Raw materials and packaging            $  591,032
             Work in process                           361,059
             Finished goods                            414,853
                                                    ----------

                Total                               $1,366,944
                                                    ==========

4. Long-Term Debt
-----------------
     Long-term debt consists of the following:

     Obligations Under Capital Leases
     --------------------------------
     8.8% to 9.4%  installment  notes  due in
     2002 and 2003 with monthly principal and
     interest     payments     of    $30,057,
     collateralized by equipment.  At the end
     of  the  lease  term  the   Company  may
     purchase the equipment for a price equal
     to the  greater of the then fair  market
     value,  or 20% of  original  cost of the
     equipment,  with the fair  market  value
     not to exceed 30% of the  original  cost
     of the  equipment.  If the Company  does
     not  exercise  the  purchase  option the
     lease may be extended for an  additional
     one year term.                                         $1,669,707

     9.4% installment  notes due in 2002 with
     monthly  principal and interest payments
     of $1,000, collateralized by equipment.                    41,914
                                                            ----------

     Total Long-Term Debt                                    1,711,621

     Less current portion of long-term debt                   (223,567)
                                                            ----------   

     Long-Term Debt                                         $1,488,054
                                                            ==========


                                      F-10


<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, 1996 are as follows:

                 Year Ending
                December 31,
                    1997                               $  223,567
                    1998                                  245,158
                    1999                                  268,837
                    2000                                  294,806
                    2001                                  313,996
                 Later Years                              365,257
                                                       ----------

                    Total                              $1,711,621
                                                       ==========

5. Income Taxes
---------------

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

                                                 1996                   1995
                                                 ----                   ----

             Current:
                Federal                        $(232,371)              $234,440
                State                                 --                 36,410
                                               ---------               --------
                  Total                         (232,371)               270,850
                                               ---------               --------

             Deferred:
                Federal                               --                     --
                State                                 --                     --
                                               ---------               --------
                  Total                               --                     --
                                               ---------               --------

             Total Provision
              for Income Taxes                 $(232,371)              $270,850
                                               =========               ========


     The $232,371  benefit for income taxes for the year ended December 31, 1996
     is the result of the carryback of the net operating  loss for 1996 to prior
     tax years which resulted in an income tax refund receivable of $234,440.

     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:

                                                        1996         1995
                                                        ----         ----

             Federal statutory rate                      (34)%         34%
             State franchise taxes,
              net of federal benefits                     (5)           3
             Valuation allowance                          32           --
             Other                                        (1)          (2)
                                                         ---           --

                  Total                                   (8)%         35%
                                                         ===           ==


                                      F-11


<PAGE>

                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS


5. Income Taxes (Continued)
---------------------------

     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%.

                                                1996               1995
                                                ----               ----

      Income taxes at the federal
       statutory rate                          $(975,210)        $261,229
      State income taxes, net of
       federal taxes                            (135,712)          25,355
      Net operating loss carryover                    --          (12,372)
      Nondeductible expenses                       6,550            4,157
      Valuation allowance                        912,512               --
      Other                                      (40,511)          (7,519)
                                               ----------        --------

           Total                               $(232,371)        $270,850
                                               =========         ========

     Significant components of deferred income taxes as of December 31, 1996 are
     as follows:

     Net operating loss carryforward                          $ 862,493
     Depreciation                                                63,825
     Other                                                      (13,806)
                                                              ---------

     Total deferred tax asset                                   912,512
     Less valuation allowance                                  (912,512)
                                                              ---------

     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 is more likely than not that no deferred tax assets will be
     realized. The valuation allowance of $912,512 is maintained on deferred tax
     assets  which the  Company  has not  determined  to be more likely than not
     realizable at this time. The Company will continue to review this valuation
     on a quarterly basis and make adjustments as appropriate.

     At December 31, 1996,  the Company had federal and state net operating loss
     carryforwards  of  approximately  $2,300,000 and $3,000,000,  respectively.
     Such  carryforwards  expire in the year 2011 and 2001 for federal and state
     purposes, respectively.

6. Stockholder's Equity
-----------------------
     Private Offering of Common Stock
     --------------------------------
     In January  1996,  the Company sold  619,175  shares of its common stock at
     $5.00 per share through an Underwriter. The Company paid a sales commission
     of 10% of the gross  proceeds  of the  common  stock  sold.  All of the net
     proceeds of the offering  ($2,786,288)  were used to repurchase  from Brett
     Bouchy, a principal stockholder of the Company, and retire,  619,175 shares
     of the Company's common stock held by

                                      F-12


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


 6.  Stockholder's  Equity  (Continued) 
 -------------------------------------
     Private Offering of Common Stock (Continued)
     --------------------------------------------
     Mr. Bouchy at a repurchase price of $4.50 per share.  Other expenses of the
     offering,  including  legal  fees,  accounting  fees,  printing  and  other
     expenses were paid by Mr. Bouchy.

     Public Stock Offering
     ---------------------
     The closing for the Company's  IPO occurred on April 30, 1996.  The Company
     sold 400,000 units of its securities,  each unit consisting of three shares
     of the  Company's  common stock and one  redeemable  common stock  purchase
     warrant to the public at $18.00 per unit.  Each warrant is  exercisable  to
     purchase  one share of common stock at $7.50 per share for a period of five
     years  until April 24, 2001 and may be redeemed by the Company for $.01 per
     warrant if the  closing  price of the common  stock on the NASDAQ  National
     Market System is at least $9.00 per share for 20 consecutive  trading days.
     In May 1996, the Underwriter exercised its option to purchase an additional
     60,000 units from the Company to cover over-allotments.

     The Company paid the  Underwriter a commission  equal to ten percent of the
     gross  proceeds of the offering  and a  non-accountable  expense  allowance
     equal to three percent of the gross proceeds of the offering. In connection
     with the offering,  the Company issued the Underwriter a warrant, for $100,
     to  purchase  up to 40,000  units for  $24.75 per unit.  The  Underwriter's
     warrant is exercisable for a period of four years beginning April 24, 1997.
     The units subject to the  Underwriter's  warrant are identical to the units
     sold to the public.

7. Stock Option 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 1,200,000 shares of common stock have been reserved for
     issuance  under the Plan.  The Plan was amended in May 1996 to increase the
     shares  available  for issuance to 1,500,000.  Incentive  stock options 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.

     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

                                      F-13


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


7. Stock Options and Warrants (Continued)
-----------------------------------------
     Stock Option Plan (Continued)
     -----------------------------
     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.

     The exercise date of an option  granted under the Plan cannot be later than
     three  years from 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,  1995 and  1996.  The
     outstanding agreements expire from March 1998 to December 1999.

                                                 Number of     Weighted Average
                                                  Shares        Exercise Price
                                                  ------        --------------
             Options outstanding at
              January 1, 1995                           --           $  --
               Granted                             750,000            1.64
               Exercised                                --              --
               Cancelled                                --              --
                                                 ---------           -----

             Options outstanding at
              December 31, 1995                    750,000            1.64
               Granted                             700,000            6.11
               Exercised                          (132,000)           1.77
               Cancelled                                --              --
                                                 ---------           -----

             Options outstanding at
              December 31, 1996                  1,318,000           $4.00
                                                 =========           =====


     Non-qualified Stock Options
     ---------------------------
     The  Company  has  granted  non-qualified  stock  options  to  consultants,
     distributors and other individuals.  The outstanding agreements expire from
     April 1998 to October 1998. The following table contains information on all
     of the stock options, except those granted under the Company's stock option
     plan, for the years ended December 31, 1995 and 1996.



                                      F-14


<PAGE>

                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS


 7.  Stock Options and Warrants (Continued)
 ------------------------------------------
     Non-qualified Stock Options (Continued)
     ---------------------------------------

                                               Number of      Weighted Average
                                                Shares         Exercise Price
                                                ------         --------------
             Options outstanding at
              January 1, 1995                        --             $  --
               Granted                          500,000              2.98
               Exercised                             --                --
               Cancelled                             --                --
                                                -------             -----

             Options outstanding at
              December 31, 1995                 500,000              2.98
               Granted                               --                --
               Exercised                             --                --
               Cancelled                       (140,000)             6.00
                                               --------             -----

             Option outstanding at
              December 31, 1996                 360,000             $1.80
                                               ========             =====

     The Company adopted Financial  Accounting Standard No. 123, "Accounting for
     Stock-Based  Compensation"  (SFAS 123) during the year ended  December  31,
     1996. In accordance  with the  provisions of SFAS 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 123,
     the  Company's  net income and  earnings  per share would be reduced to the
     following pro forma amounts:

                                                1996            1995
                                                ----            ----

        Net income (loss):
               As reported                   $(2,635,895)     $497,471
               Pro forma                     $(4,185,208)     $349,508

        Net income (loss) per
          share of common stock:
               As reported                         $(.60)         $.11
               Pro forma                           $(.95)         $.08

     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, 1996 and 1995.


                                      F-15


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


7. Stock Options and Warrants (Continued)
-----------------------------------------

                                               1996             1995
                                               ----             ----

             Risk-free interest rate            5.88%              6.44%
             Expected life                    2 years            2 years
             Expected volatility               58.73%                .5%
             Expected dividend yield               0%                 0%

     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 following table summarized  information about stock based  compensation
     plans outstanding at December 31, 1996:

     Options Outstanding and Exercisable by Price Range as of December 31, 1996:

<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>  
      $1.50 - 2.00       618,000          1.25              $1.61              618,000            $1.61
      $6.00 - 6.13       700,000          2.94              $6.11              700,000            $6.11
      ------------     ---------          ----              -----            ---------            -----

      $1.50 - 6.13     1,318,000          2.15              $4.00            1,318,000            $4.00
      ============     =========          ====              =====            =========            =====
</TABLE>


     Warrants
     --------
     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. All 465,000 of the
     warrants are outstanding at December 31, 1996.





                                      F-16


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


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  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 executive offices contains
     a two year renewal  option.  The following is a schedule of future  minimum
     lease  payments at December  31, 1996 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
      ------------           ------             ----------           -----
       1997                 $  372,692          $  156,109        $  528,801
       1998                    372,692             163,832           536,524
       1999                    372,692             125,915           498,607
       2000                    372,692             131,976           504,668
       2001                    363,689             132,527           496,216
       Thereafter              385,412             555,980           941,392
                            ----------          ----------        ----------

     Total Minimum
      Lease Payments         2,239,869          $1,266,339        $3,506,208
                                                ==========        ==========

     Less amount
      representing
      interest                 528,248
                            ----------
     Present Value
      of Net Minimum
      Lease Payments        $1,711,621
                            ==========

     Rental expense charged to operations was $176,994 and $53,362 for the years
     ended December 31, 1996 and 1995, respectively.


                                      F-17


<PAGE>

                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS


9. Commitments and Contingencies (Continued)
--------------------------------------------
     Leases (Continued)
     ------------------
     Leased  equipment  under  capital  leases  as of  December  31,  1996 is as
     follows:

        Equipment                                        $1,900,951
        Less accumulated depreciation                       227,781
                                                         ----------
 
        Net Property and Equipment Under
         Capital Leases                                  $1,673,170
                                                         ==========

     Employment Agreements
     ---------------------
     In January 1996, the Company entered into an employment  agreement with Mr.
     Bernstein  through  December 31, 2000 which may be extended  until December
     31,  2005  at  Mr.  Bernstein's  option  if the  Company's  net  sales  (as
     hereinafter  defined) for the calendar year ending December 31, 2000 exceed
     $50 million. Under the employment agreement,  Mr. Bernstein is to receive a
     base salary of $100,000 with subsequent annual base salaries equal to 2% of
     the  Company's  prior year's net sales but in no event may such annual base
     salary  exceed  $500,000.  "Net  sales" are defined as gross sales from the
     sale of all products in the "Target Markets",  which in turn are defined as
     all markets except (i) the natural food markets, (ii) private label markets
     or (iii) markets  developed  from direct  response  television  infomercial
     advertising.  In  addition,  Mr.  Bernstein  is entitled to an annual bonus
     equal to (i) 5% of the first $5 million of net sales in excess of the prior
     year's net sales,  (ii) 4% of the next $5 million of net sales in excess of
     the prior year's net sales, (iii) 3% of the next $5 million of net sales in
     excess of the prior year's net sales and (iv) 2% of all net sales in excess
     of $20 million of net sales in the prior year.

10. Related Party Transactions
------------------------------

     On November 18, 1994, Gregory Gossett, the Company's founder, President and
     majority  stockholder,  sold  1,550,000  shares of his common  stock in the
     Company to Dale  Holdings,  Inc.,  LDC ("Dale") for  $750,000,  or $.48 per
     share.  On the same date, the Company sold an additional  516,740 shares to
     Dale for $250,000, or $.48 per share.

     In February 1995,  Dale sold an aggregate of 367,150 shares of common stock
     of the Company held by it to a group of eleven  investors for $560,000,  or
     $1.53 per share.  After  paying  commissions  of  $56,000,  Dale loaned the
     remaining  $504,000 to the Company,  evidenced by a promissory note. In May
     1995 the Company and Dale each sold 420,000 shares of the Company's  common
     stock  through an  Underwriter  at $1.80 per share and paid a commission of
     10% of the gross  proceeds  of the common  stock.  Dale  loaned the Company
     $346,000  from  the  proceeds  of the  common  stock  sold by it,  which is
     evidenced by a promissory note. Both loans from Dale were collateralized by
     all of the Company's accounts receivable,

                                      F-18


<PAGE>

                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS


10. Related Party Transactions (Continued)
------------------------------------------
     inventory and equipment.  The notes were distributed to Dale's two partners
     in December 1995 and the notes were subordinated to the Company's equipment
     lease and were repaid in 1996.

     On March 24, 1995,  the Company  entered into an employment  agreement with
     Richard Ratcliff,  its then Chief Executive  Officer,  which provides for a
     salary,  bonus, stock options and loan to Mr. Ratcliff.  In March 1996, the
     employment agreement was amended to delete the bonus provision.

     The Company entered into exclusive U.S. and foreign distribution agreements
     (the "Distribution Agreements") with Bernstein Bros. Marketing Incorporated
     (doing  business  as National  Distributing)  ("National").  National  held
     exclusive rights to market the Company's ChromaTrim gum to retailers within
     the United  States,  except  retailers  in the natural food  industry,  the
     private label market or directly to customers  ("direct  response") through
     media  advertisements  and  infomercials   broadcast  on  cable  television
     networks.  United  Merchants,  Inc.  ("UMI") held rights to market the same
     products on a direct  response basis within the United States and both on a
     direct response basis and to retail accounts outside the United States.

     In January 1996, the Company,  National and UMI cancelled  their  exclusive
     U.S., and foreign Distribution  Agreements.  The Company entered into a two
     year agreement  with National  pursuant to which the Company agreed to sell
     National,  on a non-exclusive basis,  ChromaTrim and CitrusSlim chewing gum
     for sale by  National  solely  to  non-chain  convenience  stores,  grocery
     stores,  drugstores  and other  similar  retail  food  stores.  The Company
     entered  into a two year  agreement  with UMI pursuant to which the Company
     agreed to sell to UMI on a  non-exclusive  basis  ChromaTrim and CitrusSlim
     chewing  gum for sale by UMI solely in the  United  States  through  direct
     response television infomercial advertising.

     Richard Bernstein,  a director of the Company,  is an executive officer and
     director of National and a principal  stockholder of UMI. The  Distribution
     Agreements, which primarily relate to the Company's ChromaTrim chewing gum,
     represented  17.3% and  69.5% of the  Company's  total  sales for the years
     ended December 31, 1996 and 1995,  respectively.  Trade accounts receivable
     from  National and UMI combined  were $227,047 and $775,130 at December 31,
     1996 and 1995,  respectively.  Payments are generally due within 30 days of
     the invoice date.

     The Company  loaned  $100,000  to National at 8% interest in December  1994
     which  was  evidenced  by a  promissory  note  due in  1995.  The  $100,000
     principal and $3,000 interest was repaid to the Company in March 1995.


                                      F-19


<PAGE>

                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS


10. Related Party Transactions (Continued)
------------------------------------------

     The Company has notes receivable from officers and directors as of December
     31, 1996, as follows:

     8% unsecured note due from the Company's
     Senior Vice  President,  with  principal
     and interest due in December 1997.                        $100,000

     8% unsecured note due from the Company's
     Vice   President,   with  principal  and
     interest due in January 1998.                              150,000

     8% unsecured note due from the Company's
     President  and CEO,  with  principal and
     interest   payable  out  of  stock  sale
     profits,  if stock sale  profits are not
     sufficient to repay the loan by November
     1999, then the balance will be converted
     to compensation.                                           66,000
                                                              --------

             Total                                            $316,000
                                                              ========

          The Company  repaid  notes  payable to  stockholders  in the amount of
          $2,150,000  in 1996  together  with  interest  at 8% in the  amount of
          $159,943.

 11.  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'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,  as a percentage of net sales, for the years
          ended December 31, 1996 and 1995 were as follows:

                                             1996             1995
                                             ----             ----

             Customer A                      14.1%            42.8%
             Customer B                                       26.7%
             Customer C                      19.3%
             Customer D                      11.2%

                                      F-20


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


12. Subsequent Events
---------------------

          On March 6, 1997,  the Company  completed  the sale of  $2,530,000  of
          convertible  debentures.  The convertible  debentures bear interest at
          11% per annum which is payable on a quarterly  basis.  The  debentures
          are interest  only until  January 1, 2000 at which time the  principal
          and interest will be paid in  twenty-four  equal monthly  installments
          through January 1, 2002. The debentures are convertible into shares of
          the  Company's  common  stock at $4.75 per  share.  The  common  stock
          issuable under the convertible debentures carries certain registration
          rights after July 31, 1997 and are subject to a lock-up agreement with
          the Company which prohibits the holder from selling their common stock
          prior to January 31, 1998.

          The Company paid the Private  Placement  Agent a commission  of 10% of
          the gross proceeds of the debentures.







































                                      F-21









<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.



                                       18

<PAGE>

                                    PART III

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

Directors and Executive Officers

     The name, age and position of each of the Company's  executive officers and
directors are set forth below:

<TABLE>
<CAPTION>

     Name                        Age                         Position
     ----                        ---                         --------
<S>                             <C>        <C>                                                         
Richard Ratcliff(1)(2)           62        Chairman of the Board of Directors and Senior Vice
                                           President
Gerald N. Kern(1)(2)             59        Chief Executive Officer, President and Director
Lester Goldstein                 52        Vice President of Operations
Gary S. Kehoe                    38        Chief Operating Officer and Director
Richard Bernstein                36        Vice President of Marketing and Director
Roy Kaplan                       62        Vice President of Sales
Jeffrey L. Bouchy                31        Secretary, Treasurer and Chief Financial Officer
William G. Meris(1)              31        Director
Robert J. Kwait(2)               61        Director

</TABLE>

----------

(1)  Member of the Audit Committee.
(2)  Member of the Stock Option Plan/Compensation Committee.

     Directors  hold office for a period of one year from their  election at the
annual meeting of  stockholders  or until their  successors are duly elected and
qualified.  Officers of the Company are elected by, and serve at the  discretion
of, the Board of  Directors.  The Company's  executive  officers were all leased
employees from the  commencement  of their  employment  with the Company through
December 31, 1995, when the Company's  employee leasing  agreement was cancelled
by it. In August 1996 and May 1996,  respectively,  Messrs.  Earl K. Manhold III
and Robert H. Wood  resigned as  directors  and in August  1996,  Mr.  Meris was
elected a director.  In August 1996, (i) Mr. Ratcliff  resigned as the Company's
Chief  Executive  Officer  and  was  appointed  its  Chairman  and  Senior  Vice
President, (ii) Mr. Epert resigned as President of the Company and was appointed
its Vice  Chairman and  Executive  Vice  President  and (iii) Gerald N. Kern was
appointed  Chief  Executive  Officer,  President and a director.  On December 5,
1996, Messrs. Epert and Gossett resigned as officers and directors and Robert J.
Kwait was appointed as a director.  Mr. Monte  resigned as a director in October
1996.

Background

     The  following  is a summary of the business  experience,  for at least the
last five years, of each executive officer and director of the Company:

                                       19

<PAGE>

     Richard  Ratcliff  became  Chief  Executive  Officer  and a director of the
Company in March 1995.  Mr.  Ratcliff was the  co-founder  with Mr. Epert and an
executive officer of Food For Health Co., Inc., a health food distributor,  from
1971 until he sold the company with Mr. Epert in 1991. From 1991 until he became
Chief Executive  Officer of the Company in March 1995, he was a passive investor
for his own account.  Since 1991, he has also been  President of Niche,  Inc., a
privately-held  company through which he provides consulting services on matters
relating to the natural food  industry.  Mr.  Ratcliff is also (i) a director of
First Community Financial Corp., an asset-based lender, (ii) a salaried officer,
director and principal  stockholder of Meris  Financial,  Inc., a privately-held
investment firm, and (iii) was formerly a director of Interhealth  Nutritionals,
Inc.,  a  privately-held  producer  of health  food  ingredients,  including  an
ingredient used by the Company in one of its chewing gum products.  See "Certain
Transactions." Mr. Ratcliff resigned as the Company's Chief Executive Officer in
August 1996 and is currently  Chairman of the Board of Directors and Senior Vice
President of the Company.  He devotes such time as is necessary to the Company's
affairs.

     Gerald N. Kern became the Company's Chief Executive Officer,  President and
a  director  in August  1996.  From  1983 to 1994,  he was  President  and Chief
Operating  Officer  of  Meditech   Pharmaceuticals,   Inc.,  a  manufacturer  of
proprietary  drugs. From August 1994 until August 1996, he was President of Aura
Interactive,  a manufacturer of interactive consumer products.  Prior to serving
at Meditech,  Mr. Kern was the  Executive  Vice  President  and Chief  Operating
Officer of Max Factor, one of the world's largest cosmetics companies, from 1977
to 1980.  Mr. Kern was a division  President  and corporate  Vice  President for
International Playtex from 1967 to 1977.

     Lester Goldstein was employed by Aura Systems from 1992 until he joined the
Company in November 1996 as an associate  division  manager,  Vice  President of
Consumer  Products and ultimately  Vice  President of  Operations.  From 1989 to
1992,  he was  employed by TRW and from 1981 to 1989 by Rockwell  International.
Mr. Goldstein earned a B.A. degree from Hofstra University, and an M.S. and Ph.D
degree in Physics from Polytechnic Institute of Brooklyn.

     Gary S. Kehoe was  employed by  LifeSavers  Company,  a division of Nabisco
Food Group, Inc., in various capacities from 1976 until he joined the Company in
June  1995 as its Chief  Operating  Officer  and a  director.  As a Senior  Food
Technologist  for  LifeSavers,  Inc., Mr. Kehoe developed six bubble gum flavors
and was listed as an  inventor  or  co-inventor  on 12 U.S.  chewing gum patents
filed by Lifesavers, Inc.

     Richard  Bernstein joined the Company in January 1996 as its Vice President
of Marketing.  Since 1991, he has also been President,  a director and principal
stockholder of Bernstein Bros. Marketing Corporation (doing business as National
Distributing).  National Distributing markets retail consumer products including
the Company's ChromaTrim and CitrusSlim chewing gum products. See "ITEM 12." Mr.
Bernstein  graduated from the  University of Southern  California in 1981 with a
Bachelor  of Science  degree and became a director of the Company in April 1995.
He devotes such time as is necessary to the Company's affairs.

                                       20

<PAGE>

     Roy Kaplan was the  President  of Mayday,  Inc., a  manufacturer  of motion
sickness  products from 1989 to 1997.  From 1984 to 1989, he was Vice  President
and General Sales Manager of Mass  Industries.  He joined the Company in January
1997.

     Jeffrey L. Bouchy earned his Bachelor of Science degree in Accounting  from
Arizona  State  University  in 1989 and his Master of  Science  degree in Sports
Management  from West  Virginia  University  in 1992.  From 1992 to 1993, he was
assistant to the  Director of Finance at the  Charlotte  Coliseum,  a sports and
events  facility in  Charlotte,  North  Carolina.  From 1993 until 1994,  he was
President of Southwest Food Services, Inc., a privately-held fast food franchise
based in Phoenix,  Arizona. From 1994 until he joined the Company in May 1995 as
its Chief Financial  Officer,  he was a production  manager at Fun Tees, Inc., a
privately-held apparel manufacturer.

     William G. Meris was  employed by  Prudential  Securities,  Inc.  from 1987
until 1994, first as an intern in the Corporate Finance Department,  and then as
a retail stockbroker from 1989 until April 1994.  Subsequently,  he was employed
as a retail  stockbroker  by  Franklin-Lord,  Inc. from May 1994 to August 1994.
From October 1994 until March 1995, Mr. Meris was a co-owner of Cyberia, Inc., a
virtual  reality  entertainment  firm. From January 1995 until June 1995, he was
also a co-manager of Meris Financial,  Inc., a private investment and consulting
company. Since June 1995, Mr. Meris has been President of WGM Corporation, which
acts as the General Partner of The Monolith Fund, a private  investment  limited
partnership. He is also a director of Interhealth Nutritionals, Inc. He earned a
Bachelor  of  Science  degree in  Business  Administration  from  Arizona  State
University.

     Robert J.  Kwait has been the  President  and  controlling  stockholder  of
Robert J. Kwait & Associates, Inc. ("RJK") since 1981. RJK develops store brands
for retailers and contract  manufacturers  and has  specialized  in  introducing
store brands for  feminine  hygiene,  adult  incontinence,  sun care,  vitamins,
diagnostics,  infant products and  over-the-counter  cold remedies to drug store
chains. RJK serves as a manufacturing  consultant and as a sales representative.
As a manufacturing consultant, RJK assists manufacturers in product development,
pricing  strategies,  packaging  issues,  marketing  programs  and retail  trade
relations.  As a sales  representative,  RJK introduces  new products,  develops
packaging,  creates  customer  marketing  programs for individual  retailers and
provides  retailers with industry updates including key market trends. Mr. Kwait
earned a Bachelor of Arts degree from Boston  University  and a Juris  Doctorate
degree from Case Western Reserve University Law School.

Information With Respect to Delinquent Filers

     Three of the Company's  directors  (Messrs.  Epert,  Bernstein and Gossett)
inadvertently  failed to file one Form 4 each  during  the  calendar  year ended
December 31,  1996.  Messrs.  Epert and  Bernstein  subsequently  filed a Form 5
reporting the Form 4 transaction.

                                       21

<PAGE>

Significant Employee

     Richard  A.  Sigtermans  was  Manager of Quality  Control  and  Information
Systems for the Company  from October  1995 until his  promotion  to  Production
Manager in September 1996. In such capacity,  Mr.  Sigtermans is responsible for
chewing gum production and also administers the Company's management information
and  quality  assurance  departments.  From  1991 to 1993,  he was  employed  by
Lifesavers  Company,  a division of Nabisco Food Group, Inc., in its new product
development group. From 1993 until he joined the Company in October 1995, he was
employed by Compac Corporation,  a division of TriMas Corporation,  first as its
Quality Project Coordinator and then as its Computer Operations Supervisor.  Mr.
Sigtermans graduated from GMI Engineering & Management Institute with a Bachelor
of Science degree in 1991.

ITEM 10.  EXECUTIVE COMPENSATION

     None of the Company's  executive  officers or directors  currently  receive
compensation  in excess of $100,000 per year except Mr. Kern, Mr.  Goldstein and
Mr. Kaplan. See below.

     On August 21, 1996, the Company  entered into an employment  agreement with
Mr. Kern through  December 31, 1997  extendable at the  Company's  option for an
additional one year. Under the employment agreement,  Mr. Kern receives a salary
of $150,000  per year (with  annual  increases  of $50,000  beginning  in August
1997),  was granted an option to purchase 50,000 shares of the Company's  Common
Stock at $6.00 per share  under the 1995 Stock  Option  Plan and was  advanced a
loan of $66,000 from the  Company.  Mr. Kern will receive a bonus equal to 5% of
the Company's after tax net income for the year ending December 31, 1997, if his
employment is extended for the 1998 calendar year. In December 1996, the Company
extended  Mr.  Kern's  employment  agreement  and his  stock  options  for three
additional years through December 31, 2000.

     On September 1, 1996, the Company entered into an employment agreement with
Mr.  Goldstein,  the Company's Vice President of Operations,  terminable upon 30
days notice by either party. The employment  agreement  provides for a salary of
$120,000  annually through December 31, 1997 and $145,000  annually for the year
ending December 31, 1998. Mr. Goldstein will also receive a bonus equal to 1% of
the  Company's  after tax net income for the years ended  December  31, 1997 and
1998,  prorated if his employment is terminated  prior to end of either calendar
year.

     On January 1, 1997, Roy Kaplan,  a Vice  President of the Company,  entered
into an employment  agreement with the Company for the same  employment term and
providing for the same salary and bonus as Mr. Goldstein.



                                       22

<PAGE>

     The following table discloses  certain  compensation  paid to the Company's
executive officers for the years ended December 31, 1994, 1995 and 1996.

<TABLE>
<CAPTION>


                                            Summary Compensation Table
                                                                          Long Term Compensation
                               Annual Compensation                        Awards          Payouts
                               -------------------                        -----------------------

    (a)          (b)          (c)            (d)           (e)              (f)            (g)             (h)              (i)
Name
and
Prin-                                                     Other                                                             All
cipal                                                    Annual         Restricted                                         Other
Posi-                                                    Compen-           Stock        Options/          LTIP            Compen-
tion            Year       Salary($)      Bonus($)      sation($)       Award(s)($)      SARS(#)       Payouts($)        sation($)
----            ----       ---------      --------      ---------       -----------      -------       ----------        ---------

<S>             <C>          <C>            <C>            <C>            <C>             <C>           <C>               <C>
Gregory W.
Gossett,        1994        26,460            0             0                0              0               0                0
President       1995           0              0         31,000(1)            0              0               0                0

Richard
Ratcliff,
Chief
Executive       1995        27,500            0             0                0         520,000(2)           0                0
Officer         1996        54,000            0             0                0              0               0                0

Gerald N.
Kern,
Chief
Executive
Director        1996        56,250            0             0                0         300,000(3)           0                0
</TABLE>

----------

(1)  Represents consulting fees paid by the Company.
(2)  Represents  options to  purchase  up to  520,000  shares at $1.50 per share
     until March 1998.
(3)  Represents  options  to  purchase  50,000  shares at $6.00 per share  until
     August 1999 and 250,000 at $6.125 per share until December 1999.

Option Grants in Last Year and Stock Option Grant

     The following  table provides  information on option grants during the year
ended December 31, 1996 to the named executive officers:
<TABLE>
<CAPTION>


                                             % of Total
                                           Options Granted
                         Options            to Employees            Exercise             Expiration
       Name              Granted             in the Year              Price                 Date
       ----              -------             -----------              -----                 ----
<S>                    <C>                    <C>                    <C>                  <C>    
Gerald N. Kern          50,000(1)               7.2%                $6.00(1)           August 1999(1)
Gerald N. Kern         250,000                 35.7%                $6.13(1)
December 1999(1)
</TABLE>

(1)  See footnote (1) to the Summary Compensation Table.

                                       23

<PAGE>



Aggregate Option Exercise in Last Year and Year-End Option Values

     The  following  table  provides  information  on the  value  of  the  named
executive  officer's  unexercised  options at December 31, 1996. An aggregate of
132,000 shares of Common Stock were acquired upon exercise of options during the
year ended December 31, 1996.

<TABLE>
<CAPTION>

                                                                             Value of Unexercised
                                 Number of Unexercised                       In-The-Money Options
                                Options at Year End (1)                         at Year End (1)
                                -----------------------                         ---------------

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

<S>                         <C>                     <C>               <C>                       <C>
Richard Ratcliff            468,000                 0                 $2,164,500                0
Gerald N. Kern              300,000                 0                 $    6,250                0
</TABLE>

(1)  Based upon a price of $6.125 per share on December 31, 1996.

     The Company's nonsalaried directors receive reimbursement for out-of-pocket
expenses  incurred  in  attending  Board of  Directors'  meetings  and have been
granted stock options under the Company's 1995 Stock Option Plan.

1995 Stock Option Plan

     In March 1995,  the Company  adopted a stock option plan (the "Plan") which
provides  for the grant of  options  intended  to qualify  as  "incentive  stock
options" and  "nonqualified  stock options" within the meaning of Section 422 of
the United States  Internal  Revenue Code of 1986 (the "Code").  Incentive stock
options are issuable  only to eligible  officers,  directors,  key employees and
consultants of the Company.

     The Plan is  administered  by the  Compensation  Committee  of the Board of
Directors which is comprised of nonemployee directors. At December 31, 1996, the
Company had reserved  1,500,000  shares of Common  Stock for issuance  under the
Plan. Under the Plan, the Board of Directors  determines which individuals shall
receive  options,  the time period  during which the options may be partially or
fully  exercised,  the number of shares of Common  Stock  that may be  purchased
under each option and the option price.

     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.  No
person who owns,  directly  or  indirectly,  at the time of the  granting  of an
incentive stock option,  more than 10% of the total combined voting power of all
classes of stock of the Company is eligible to receive  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 on the date of grant.


                                       24

<PAGE>

     No options may be transferred by an optionee other than by will or the laws
of descent and distribution,  and during the lifetime of an optionee, the option
may only be  exercisable  by the optionee.  Options may be exercised only during
the time the option  holder is an  employee  of the Company or within 90 days of
termination of such  employment if a Registration  Statement on Form S-8 ("S-8")
covering the  underlying  shares was effective as of the date of  termination of
employment.  If an S-8 covering the  underlying  shares was not effective on the
date of  termination,  then the employee has one year  following  termination to
exercise the options.  If an employee is terminated for cause,  any  unexercised
options will be cancelled as of the date of such termination.  Options under the
Plan must be granted  within three years from the effective date of the Plan and
the exercise date of an option cannot be later than three years from the date of
grant. Any options that expire  unexercised or that terminate upon an optionee's
ceasing to be employed by the Company become  available once again for issuance.
Shares  issued upon  exercise of an option will rank  equally  with other shares
then outstanding.

     As of February 28,  1997,  1,228,000  unexercised  options had been granted
under  the  Plan  to  executive   officers  and  directors  and  were  currently
outstanding.  The per share exercise prices represented the fair market value of
the Company's Common Stock at the date such options were granted, based on prior
sales of the Company's Common Stock. The table below sets forth the total number
of options issued to each executive  officer and director of the Company and the
exercise price. Messrs.  Kehoe's and Bouchy's options are exercisable until June
1, 1998.  All other options are  exercisable  at various  times through  January
2000. To date, a total of 132,000 stock options have been exercised.

                                     Total Number of
    Name of Executive                Options Issued            Exercise Price
    -----------------                --------------            --------------
John E. Epert                             20,000                    $1.80
Richard Ratcliff                         468,000                     1.50
Gary S. Kehoe                            150,000               2.00 to $6.125
Jeffrey L. Bouchy                        100,000               2.00 to $6.125
Robert H. Wood                            20,000                     2.00
William G. Meris                          20,000                    6.125
Gerald N. Kern                           300,000               6.00 to $6.125
Lester Goldstein                          50,000                    6.125
Robert J. Kwait                           20,000                    6.375
Richard Bernstein                         30,000                    6.125
Roy Kaplan                                50,000                    6.125
                                      ----------
TOTAL                                  1,228,000
                                       =========

     In  addition  to  the  above  options  issued  to  executive  officers  and
directors,  202,500  options have been issued to  employees  ranging in exercise
price from $6.125 to $6.375 per share.  Additionally,  the Company has agreed to
issue 100,000 options to three individuals  (50,000 options exercisable at $4.50
per share and 50,000  options  exercisable  at $5.00 per  share) for  investment
banking consulting services.


                                       25

<PAGE>



ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------  --------------------------------------------------------------

     The  following  table sets forth  information  concerning  the  holdings of
Common Stock (without  giving effect to any shares issuable upon exercise of the
Public Warrants or the Prior Representative's Unit Warrants) by each person who,
as of the date of this  Report,  holds of record or is known by the  Company  to
hold  beneficially or of record,  more than 5% of the Company's Common Stock, by
each  director,  and by all  directors and  executive  officers as a group.  All
shares are owned  beneficially and of record. The address of all persons (unless
otherwise noted in the footnotes  below) is in care of the Company at 4205 North
7th Avenue, Phoenix, Arizona 85013.

                                     Amount of                  Percent of
Name                                 Ownership                     Class
----                                 ---------                     -----
Gerald N. Kern(1)                       300,000                      5.7
Richard Ratcliff(2)                     468,000                      8.6
Gary S. Kehoe(3)                        290,000                      5.6
Jeffrey L. Bouchy(4)                    102,000                      2.0
Gregory W. Gossett                      265,000                      5.4
William G. Meris(5)                      20,000                       .4
Richard Bernstein(6)                     30,000                       .6
Riverlux Trust REG(7)                   645,265                     13.0
Karl B. Berger(8)                       450,000                      8.8
Bruce Jorgenson(9)                      250,000                      5.1
Robert J. Kwait(10)                      20,000                       .4
Lester Goldstein(11)                     50,000                      1.0
All officers and directors as
a group (9 persons)
(1)(2)(3)(4)(5)(6)(10)(11)            1,280,000                     20.7

----------

(1)  Includes  options to purchase 50,000 shares at $6.00 per share until August
     1999 and 250,000 shares at $6.125 per share until  December 1999.  Does not
     include an option to purchase  50,000 shares from Mr. Ratcliff at $6.00 per
     share. See "Item 12."
(2)  Includes  options to purchase up to 468,000 shares at $1.50 per share until
     March 1998.  Does not include an option held by Mr. Kern to purchase 50,000
     shares from Mr. Ratcliff at $6.00 per share. See "Item 12."
(3)  Includes  warrants  to  purchase  100,000  shares  at  $2.00  per  share in
     perpetuity  and options to purchase  50,000 shares at $2.00 per share until
     June 1998 and 100,000 shares at $6.125 at any time until December 1999.
(4)  Represents  options to purchase 20,000 shares at $2.00 per share until June
     1998, 20,000 shares at $2.00 per share until October 1998 and 60,000 shares
     at $6.125 per share until December 1999.
(5)  Represents  options to  purchase  20,000  shares at $6.125 per share  until
     August 1999.
(6)  Represents  options to purchase  30,000 at $6.125 per share until  December
     1999.

                                       26

<PAGE>



(7)  Riverlux  Trust REG,  whose  address  is  Baahofstrasse  23, CH 6301,  Zug,
     Switzerland,  is a  Liechtenstein  company  wholly owned and  controlled by
     Willy P. Verhaegen, Hans P. Bruellman and Doris Moeckli.
(8)  Includes warrants to purchase 150,000 shares at $2.00 per share exercisable
     in perpetuity.  Mr. Berger's address is 97 Patterson Road, Joliet, Illinois
     60434.
(9)  Dr. Jorgenson's address is 1580 Antelope Drive, #100, Layton, Utah 84041.
(10) Includes  options  to  purchase  20,000  shares at $6.375  per share  until
     January 2000.
(11) Represents  options to  purchase  50,000  shares at $6.125 per share  until
     December 1999.



                                       27

<PAGE>

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------  ----------------------------------------------

     The Company  was  incorporated  on  February  4, 1991.  Between the date of
incorporation  and November  1994,  the Company issued an aggregate of 2,500,000
shares of its Common Stock to officers, directors and business associates for an
aggregate of $29,000, or $.012 per share.

     In November 1994, Gregory W. Gossett, the Company's founder,  President and
majority  stockholder,  sold 1,550,000 shares of his Common Stock in the Company
to Dale  Holdings,  LDC ("Dale") for  $750,000,  or $.48 per share.  On the same
date,  the Company sold an additional  516,740  shares to Dale for $250,000,  or
$.48  per  share.  Accordingly,  as of  November  1994,  Dale  was the  majority
stockholder of the Company, owning an aggregate of 2,066,740 shares, or 68.5% of
the Company's then  outstanding  Common Stock.  At that time (and until December
1995) Dale was owned 51% by Riverlux Trust REG, a Liechtenstein company, and 49%
by Brett  Bouchy.  In January  1995 Dale  purchased  24,850  shares  from Miguel
Paloma, a nonaffiliated stockholder of the Company.

     In February 1995,  Dale sold an aggregate of 367,150 shares of Common Stock
of the Company held by it to a group of  investors  for  $560,000,  or $1.53 per
share. After paying  commissions of $56,000,  Dale loaned the remaining $504,000
to the Company, evidenced by a promissory note bearing interest at 8% per annum,
which was paid in full with proceeds of the Prior Offering. Proceeds of the loan
were used by the Company to (i) purchase  inventory,  (ii) provide Mr.  Ratcliff
with the $100,000 loan required under his employment  agreement,  (iii) pay cash
dividends  to the  Company's  stockholders  aggregating  $37,449,  (iv)  repay a
stockholder loan in the amount of $43,000, (v) pay legal and accounting fees and
(v) satisfy working capital needs, including the purchase of inventory.

     On March 24, 1995,  the Company  entered into an employment  agreement with
Richard  Ratcliff,  its Chief  Executive  Officer,  which provides for a salary,
bonus and loan to Mr.  Ratcliff.  On June 1,  1995,  the  Company  entered  into
employment agreements with Messrs.  Manhold,  Kehoe and Bouchy. In January 1996,
the Company entered into employment  agreements with Messrs. Epert and Bernstein
and in August 1996 the Company  entered into an  employment  agreement  with Mr.
Kern.  Subsequently,  Messrs. Ratcliff, Epert and Manhold voluntarily terminated
their  employment  agreements  and Messrs.  Ratcliff and Epert  entered into new
employment  agreements in August 1996,  effective through December 31, 1997. See
"Item 10 - Executive Compensation."

     In May 1995, the Company sold 420,000 shares of its Common Stock to a group
of  non-affiliated  investors for $1.80 per share.  At the same time,  Dale also
sold  420,000  shares of the  Company's  Common  Stock owned by it for $1.80 per
share to a group of investors.

     In June 1995,  Dale loaned the Company  $346,000  evidenced by a promissory
note bearing  interest at 8% per annum due the earlier of June 19, 1997,  or the
closing  date  of  the  Offering.  This  second  Dale  loan  resulted  from  the
aforementioned  sale by Dale in May  1995 of  420,000  shares  of the  Company's
Common Stock at $1.80 per share. The two loans from Dale which aggregate

                                       28

<PAGE>

$850,000  were  collateralized  by  all of the  Company's  accounts  receivable,
inventory  and  equipment  (subordinated  to the Textron  Financial  Corporation
equipment  lease)  and were  repaid  in full  from  the  proceeds  of the  Prior
Offering.

     In April and October  1995,  the Company  issued  40,000 and 100,000  stock
options  respectively to Meris Financial  Incorporated  ("Meris") for consulting
services rendered to the Company including  services rendered in connection with
the Offering. The options were exercisable at $6.00 per share and were to expire
three years from the date of issuance.  In March 1996, at the Company's request,
Meris agreed to cancel its options in order to assist the Company in  compliance
with certain NASD rules which limit the number of options and warrants  issuable
in connection with a public offering.

     In October  1995,  the  Company  borrowed  $1,550,000  from a group of four
lenders (the "1995 Bridge Loan"). As additional compensation for the 1995 Bridge
Loan, the Company issued an aggregate of 465,000 common stock purchase  warrants
to the  lenders,  each such  warrant  exercisable  to purchase  one share of the
Company's Common Stock at $2.00 per share exercisable in perpetuity.  The Bridge
Loan bore  interest at 8% per annum and was repaid in full from  proceeds of the
Prior  Offering.  The  Bridge  Loan  lenders  included  Brett  Bouchy,  a former
principal stockholder of the Company (who received 165,000 warrants), and Robert
H. Wood, a former  director of the Company (who received  75,000  warrants).  In
March  1996,  Brett  Bouchy  sold  100,000  warrants to Gary S. Kehoe and 65,000
warrants to Robert H. Wood,  both  officers and  directors  of the Company,  for
$5.00 per  warrant.  The purchase  price was paid by the issuance of  promissory
notes by Messrs.  Kehoe and Wood to Mr. Bouchy bearing interest at 9% per annum.
The warrants are not collateral for the promissory  notes.  The promissory notes
are due the earlier of (i) six months after the  warrants are  exercised or (ii)
if during the period  commencing  from April 24,  1997 until  April 24, 2000 the
closing  price of the  Company's  Common  Stock on  NASDAQ is $10.00 or more per
share for five  consecutive  trading days then the promissory  notes are due six
months from the last such trading day. If neither event occurs,  the  promissory
notes becomes void and of no value on April 24, 1999 and the warrants remain the
property of Messrs.  Kehoe and Wood.  Under no  circumstances  will the warrants
become  returnable  to Mr.  Bouchy.  Mr. Bouchy sold the warrants in response to
comments  from the  National  Market who had advised the  Company  that  neither
NASDAQ nor the National  Market would list the  Company's  securities so long as
Mr. Bouchy was an equity holder in the Company.  The National Market's objection
to allowing Mr. Bouchy to remain an equity  holder in the Company  resulted from
fines  and  censures  imposed  upon Mr.  Bouchy  by the NASD and the  Securities
Commission of the State of Arizona.

     In December 1995, Dale dissolved and issued 51% and 49% respectively of its
Common  Stock in the  Company and its loans  receivable  due from the Company to
Riverlux  Trust  REG and Brett  Bouchy.  Riverlux  Trust  REG and  Brett  Bouchy
received   665,265   shares  and  639,175   shares,   respectively,   of  Dale's
stockholdings in the Company and $433,500 and $416,500,  respectively, of Dale's
loans receivable from the Company. The loans were repaid in full out of proceeds
of the Prior Offering. Subsequently, Riverlux Trust REG and Mr. Bouchy each sold
20,000 shares of the Company's Common Stock to Mr. Kehoe for $2.00 per share.


                                       29

<PAGE>

     In January 1996, the Company  repurchased from Brett Bouchy,  the remaining
619,175  shares of the  Company's  Common Stock owned by him for $4.50 per share
resulting in a gain to Mr. Bouchy of $2,489,083. In order to fund the repurchase
and  retirement  of such  shares,  the Company  sold in a January  1996  private
placement  of its Common  Stock an  aggregate  of 619,175  shares to the Selling
Stockholders  for $4.50 per share  after  payment of  commissions.  The  Company
repurchased  Brett  Bouchy's  shares in response to comments  from the  National
Market as set  forth in the  carry  over  paragraph  above.  Without a NASDAQ or
National Market listing, the Company would have been unable to complete a public
offering of its securities.

     In January 1996, the Company entered into a two-year distribution agreement
with  Bernstein  Bros.   Marketing   Corporation  (doing  business  as  National
Distributing) (a company in which Richard Bernstein,  an officer and director of
the Company, is President,  a director and a principal  stockholder) pursuant to
which the  Company  agreed to sell to  National  Distributing  at fixed  product
prices on a  non-exclusive  basis  ChromaTrim  and  CitrusSlim  chewing  gum for
distribution by National  Distributing  solely to non-chain  convenience stores,
grocery  stores,  drugstores and other similar retail food stores.  There are no
minimum sales  requirements  imposed under the agreement.  The Company considers
the product  prices offered to National  Distributing  under the agreement to be
fair,  reasonable and  consistent  with product prices which would be offered to
unaffiliated distributors.  Sales by National Distributing of ChromaTrim chewing
gum under a prior  distribution  agreement with the Company  accounted for 42.8%
and 14.1% of the Company's total sales for the years ended December 31, 1995 and
1996 respectively.

     In January 1996, the Company entered into a two-year distribution agreement
with Universal Merchants, Inc. ("UMI") (a company in which Richard Bernstein, an
officer  and  director of the  Company  was  formerly a  principal  stockholder)
pursuant to which the Company agreed to sell to UMI at fixed product prices on a
non-exclusive  basis  ChromaTrim and CitrusSlim  chewing gum for distribution by
UMI solely in the United States through direct response  television  infomercial
advertising.   There  are  no  minimum  sales  requirements  imposed  under  the
agreement.  The Company  considers the product  prices  offered to UMI under the
agreement to be fair,  reasonable and consistent with product prices which would
be offered to unaffiliated distributors.  Sales by UMI of ChromaTrim chewing gum
under a prior  distribution  agreement with the Company  accounted for 26.7% and
2.8% of the  Company's  total  sales for the years ended  December  31, 1995 and
1996,  respectively.  In December 1994, the Company loaned National Distributing
$100,000  bearing  interest  at 8% per annum.  The loan was repaid  with  $3,000
interest in March 1995.

     In January  1996,  Earl K. Manhold  III, a former  director of the Company,
exercised  options to purchase  60,000 shares of the  Company's  Common Stock at
$2.00 per  share and sold such  shares  to John E.  Epert,  the  Company's  then
Chairman for the same price per share.

     The Company has purchased,  since 1994, an ingredient in its ChromaTrim gum
product from Interhealth Nutritionals, Inc., ("Interhealth"), a company in which
Mr.  Ratcliff was formerly a member of the Board of  Directors.  The Company did
not pay a different price for the ingredient  during the time Mr. Ratcliff was a
member of  Interhealth's  Board of Directors  and the Company  believes that the
price it has paid and currently pays for the ingredient is fair,  reasonable and
consistent with prices charged by unaffiliated suppliers.


                                       30

<PAGE>

     In January  1996,  the  Company  loaned  Mr.  Epert (a former  officer  and
director) $150,000 bearing interest at 8% per annum due January 29, 1998.

     In August  1996,  the  Company  loaned  Mr.  Kern  $66,000 as a part of his
employment contract. See "Item 10."

     In August 1996, Mr. Ratcliff  granted Mr. Kern the option to purchase up to
50,000 shares of the Company's  Common Stock held or purchasable by Mr. Ratcliff
for $6.00 per share at any time  between  February 1, 1998 and February 28, 1998
so long as Mr. Kern is employed by the Company at that time.

     The Company believes that the terms of all agreements described above which
involve the Company's officers, directors,  principal stockholders or affiliates
are fair,  reasonable  and  consistent  with terms that the Company could obtain
from unaffiliated third parties. All future agreements with officers, directors,
principal  stockholders  and  affiliates  will be  approved by a majority of the
Company's disinterested directors.

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

         a.       Exhibits:

   Exhibit No.              Title
   -----------              -----

      1.01      Form of Underwriting Agreement(1)

      1.02      Form of Selling Agreement(1)

      1.03      Form of Representative's Warrants(1)

      1.04      Amended Form of Underwriting Agreement(1)

      1.05      Amended Form of Selling Agreement(1)

      1.06      Form of Representative's Unit Warrant(1)

      1.07      Form of Warrant Agreement(1)

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

      2.02      Bylaws of the Registrant(1)


                                    31

<PAGE>



      5.01      Opinion of Gary A. Agron, regarding legality of the Common
                Stock (includes Consent)(1)

     10.01      1995 Stock Option Plan(1)

     10.02      Lease Agreement - Phoenix Executive Office Facility(1)

     10.03      Employment Contract with Mr. Ratcliff(1)

     10.04      Employment Contract with Mr. Manhold(1)

     10.05      Employment Contract with Mr. Kehoe(1)

     10.06      Employment Contract with Mr. Bouchy(1)

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

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

     10.09      Amendment to Stock Option Plan(1)

     10.10      Lease with Textron Financial Corporation(1)

     10.11      Memorandum of Understanding with Universal Merchants, Inc.
                (U.S.A.)(1)

     10.12      Memorandum of Understanding with Bernstein Bros. Marketing
                Corporation(1)

     10.13      Waiver Under Employment Agreement (Mr. Ratcliff)(1)

     10.14      LaLanne License Agreement(1)

     10.15      Manufacturing Agreement with Ford Machine Company, Inc.(1)

     10.16      Employment Agreement with Mr. Bernstein(1)

     10.17      Engagement Agreement (Mayday, Inc.)(1)

     10.18      Employment Agreement with Mr. Epert(1)

     10.19      Employment Agreement with Mr. Kern(2)

     10.20      Revised Employment Agreement with Mr. Ratcliff(3)


                                       32

<PAGE>


    10.20(a)    Form of Convertible Note Dated February 20, 1997(4)
  
    10.21       Revised Employment Agreement with Mr. Epert (3)

    10.21(a)    Registration Rights Agreement (4)

    10.22       Agreement with Active Media Services, Inc.

    10.23       Employment Agreement with Mr. Goldstein

    10.24       Employment Agreement with Mr. Kaplan

    10.25       Employment Agreement with Mr. Bouchy

    10.26       Termination of Mayday, Inc. Agreeemnt

    23.01       Consent of Angell & Deering (1)

    23.02       Consent of Gary A. Agron (See 5.01, above)(1)

    23.03       Consent of Angell & Deering (1)

    23.04       Consent of Angell & Deering (1)

    23.05       Consent of Angell & Deering (1)

    23.06       Consent of Gary A. Agron (3)

    23.07       Consent of Angell & Deering (3)


----------

(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  Form 8K dated August 26,
     1996, file number 0-27646.
(3)  Incorporated  by reference to the  Registrant's  Registration  Statement on
     Form SB-2 declared  effective by the  Commission on November 8, 1996,  file
     number 333-14667.
(4)  Incorporated by reference to the Registrant's Form 8K filed March 6, 1997.



                                       33

<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 25, 1997.

                                          GUM TECH INTERNATIONAL, INC.



                                          By: /s/ Gerald N. Kern
                                              ----------------------------------
                                                     Gerald N. Kern
                                                Chief Executive Officer

     Pursuant to the  requirements  of the  Securities  Act of 1933, as amended,
this  Report  has  been  signed  below by the  following  persons  on the  dates
indicated.

<TABLE>
<CAPTION>

              Signature                               Title                                  Date
              ---------                               -----                                  ----

<S>                                         <C>                                           <C>    
/s/ Richard Ratcliff                        Chairman of the Board of                    March 25, 1997
------------------------------------        Directors and Senior Vice
Richard Ratcliff                            President

/s/ Gerald N. Kern                          Chief Executive Officer,                    March 25, 1997
------------------------------------        President and Director
Gerald N. Kern                              

/s/ Lester Goldstein                        Vice President of Operations                March 25, 1997
------------------------------------
Lester Goldstein

/s/ Gary S. Kehoe                           Chief Operating Officer and                 March 25, 1997
------------------------------------        Director
Gary S. Kehoe                               

                                            Vice President of Sales and
------------------------------------        Marketing and Director
Richard Bernstein                           

/s/ Jeffrey L. Bouchy                       Secretary, Treasurer, Chief                 March 25, 1997
------------------------------------        Financial Officer (Principal
Jeffrey L. Bouchy                           Accounting Officer)

/s/ William G. Meris                        Director                                    March 25, 1997
------------------------------------
William G. Meris

 -----------------------------------        Director
Robert J. Kwait
</TABLE>