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                       SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C. 20549-1004

                                   ----------

                                    FORM 10-K
(Mark One)
[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934

                   For the fiscal year ended December 31, 1999

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

                           Commission File No. 0-27646

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

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

                             246 East Watkins Street
                                Phoenix, AZ 85004
                                 (602) 252-1617
                    (Address of principal executive offices,
                 Issuer's Telephone Number, Including Area Code)

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

                            No Par Value Common Stock

                             Nasdaq National Market

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

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

     As of March 24, 2000,  8,866,017  shares of the  Registrant's  Common Stock
were  outstanding.  As of March 24, 2000,  the market value of the  Registrant's
Common Stock, excluding shares held by affiliates, was $154.4 million based upon
a closing bid price of $17.6875 per share of Common Stock on the Nasdaq National
Market.

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<PAGE>
                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----
PART I......................................................................   1

  ITEM 1.   BUSINESS........................................................   1

  ITEM 2.   DESCRIPTION OF PROPERTY.........................................   5

  ITEM 3.   LEGAL PROCEEDINGS...............................................   5

  ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............   6

PART II.....................................................................   7

  ITEM 5.   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........   7

  ITEM 6.   SELECTED FINANCIAL DATA.........................................   8

  ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
            AND RESULTS OF OPERATIONS.......................................   9

  ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................  17

  ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
            AND FINANCIAL DISCLOSURE........................................  17

PART III....................................................................  17

  ITEM 10.  INFORMATION CONCERNING DIRECTORS, NOMINEES, AND EXECUTIVE
            OFFICERS........................................................  17

  ITEM 11.  EXECUTIVE COMPENSATION..........................................  19

  ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.................  21

  ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................  22

PART IV.....................................................................  22

ITEM 14.    EXHIBITS, LIST AND REPORTS ON FORM 8-K..........................  22

Unless  otherwise  indicated in this  filing,  "Gum Tech," "us," "we," "our" and
similar terms refer to Gum Tech  International,  Inc. and its subsidiaries.  The
Gum Tech name and logo and Zicam are trademarks of Gum Tech International,  Inc.
Other brands,  names and trademarks contained in this filing are the property of
their respective owners.

                                       -i-
<PAGE>
                                     PART I

ITEM 1. BUSINESS

INTRODUCTION

GUM OPERATIONS

     We develop and manufacture  specialty  chewing gum products for branded and
private  label  customers,  as well as  products  marketed  under our own brand.
Specialty chewing gums include vitamins,  herbals,  and active  over-the-counter
drug ingredients formulated to provide specific  health-related  benefits to the
user. We  manufacture  and continue to develop  specialty  chewing gums that are
formulated  to:

     *    promote oral hygiene and breath freshness;
     *    promote weight management;
     *    reduce pain;
     *    relieve indigestion;
     *    contribute to energy and endurance;
     *    reduce the risk of osteoporosis; and
     *    reduce tobacco cravings.

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

     Most of our  sales  from  gum  operations  are  currently  attributable  to
products developed,  manufactured,  and packaged by us for marketing and sale by
five consumer products companies:  Breath Asure, Inc., Ranir/DCP, Inc., Heritage
Consumer Products,  Herbalife International,  Inc., and Pharma-Green Ltd. We are
also  actively  involved  in  discussions  with  other  major  consumer  product
companies  regarding the  development and formulation of a variety of additional
specialty chewing gum products.

     In December  1999,  we reached an  agreement  in  principle to form a joint
venture  with  Swedish  Match AB.  The joint  venture  will be  organized  as an
independent company for the purpose of developing, manufacturing, marketing, and
distributing  non-tobacco  nicotine products worldwide.  Under the terms of this
agreement,  Swedish Match will own 51% and we will own 49% of the joint venture.
We will  contribute  intellectual  property  related  to  chewing  gum  products
containing  nicotine and Swedish Match will  contribute  $10 million in start-up
capital.  Swedish Match, based in Stockholm,  Sweden, is an international  group
which  develops,  manufactures,   markets,  and  distributes,  through  its  own
subsidiaries  worldwide, a broad range of tobacco products within the OTP (Other
Tobacco  Products)  category,  with smokeless tobacco as its core business along
with cigars and pipe tobacco,  as well as matches and lighters.  Swedish Match's
extensive range of products is sold in 140 countries, with annual sales totaling
approximately $1 billion.

                                       1
<PAGE>
     ZICAM OPERATIONS

     Through a joint venture with BioDelivery  Technologies,  Inc. (formerly Gel
Tech,  Inc.),  a  California  corporation,  we are  engaged in the  manufacture,
marketing,  and distribution of health-related  products using a patent-pending,
nasal gel  technology.  The initial  product  marketed by this joint  venture is
Zicam,  a nasal gel formula that has been  formulated to reduce the severity and
duration  of the  common  cold.  An  initial  internal  study  and a  subsequent
independent   clinical   study  of  Zicam  have  indicated  that  use  of  Zicam
significantly reduces the duration and severity of the common cold when taken at
the onset of a cold. To conduct clinical studies and develop,  manufacture,  and
market  Zicam,  we  entered  into  an  operating   agreement  with   BioDelivery
Technologies under which both parties transferred their respective  interests in
the  patent  rights to the nasal  gel  technology  in  exchange  for  membership
interests in Gel Tech LLC, an Arizona limited liability  company.  We have a 60%
interest in the capital and profits of the joint venture and parties  affiliated
with BioDelivery Technologies collectively own a 40% interest in the capital and
profits of the joint  venture.  In addition,  as  contemplated  by the operating
agreement, we contributed $3.5 million to the joint venture.

     We were  incorporated in Utah in 1991. Our principal  executive offices are
located at 246 E. Watkins Street,  Phoenix,  Arizona and our telephone number is
(602) 252-1617.

STRATEGY

     We are pursuing the following business strategies:

     *    CONTINUE  TO  RESEARCH  AND DEVELOP NEW  SPECIALTY  GUM  PRODUCTS.  We
          possess considerable gum formulation expertise,  and together with our
          existing and potential  customers,  are developing new products in the
          specialty chewing gum market.

     *    PARTNER WITH MAJOR CONSUMER PRODUCT COMPANIES TO INCREASE SALES. Since
          early  1998,  we have  pursued a  strategy  of  partnering  with major
          consumer  products  companies  that have the  financial  resources and
          distribution capability to market and distribute specialty chewing gum
          products  on a national  and  international  scale.  Most  recently in
          December  1999,  we announced a joint  venture  with Swedish  Match to
          produce, market and distribute nicotine products throughout the world.

     *    IMPROVE  MANUFACTURING  OPERATIONS TO ENHANCE  EFFICIENCY AND INCREASE
          PROFIT  MARGINS.  In  1998  and  1999,  we  expanded  our  operations,
          including  adding  personnel  and  additional  packaging  and  coating
          equipment,  to meet  expected  increases  in demand  for  several  gum
          products.

     *    CONTINUE TO  EFFECTIVELY  MARKET GUM TECH BRANDED  PRODUCTS.  While we
          have changed our principal strategy to focus on contract manufacturing
          for others, we continue to support several of our own branded products
          and believe that these products and related  marketing efforts provide
          a showcase for new product  concepts and  demonstrate our expertise in
          developing new gum formulations.

     *    EFFECTIVELY  MANAGE  THE  DEVELOPMENT  AND  GROWTH OF THE GEL TECH LLC
          JOINT VENTURE AND THE MANUFACTURING AND MARKETING OF ZICAM. Zicam is a
          new product that we believe  represents an opportunity for substantial
          growth in our  revenue.  In order to realize  this  growth in revenue,
          however,  we must effectively manage the development and growth of our
          joint  venture with  BioDelivery  Technologies  and Zicam must achieve
          significant market acceptance.  In addition,  we are exploring product
          line extensions that would utilize GelTech's nasal gel technology.

                                       2
<PAGE>
PRODUCT INFORMATION

     The table below describes certain  information  related to specific chewing
gum products currently manufactured by us for other consumer products companies.

<TABLE>
<CAPTION>
         Product                        Intended Benefits to User                  Market              Distributed By
         -------                        -------------------------                  ------              --------------
<S>                             <C>                                          <C>                  <C>
Breath Asure Dental Gum(TM)     Promotes oral hygiene and breath freshness   Oral Care            Breath Asure
Private label dental gums       Promote oral hygiene and breath freshness    Oral Care            Ranir/DCP
AcuTrim(R)                      Promotes weight management                   OTC drug             Heritage Consumer Products
Aspergum(R)                     Pain relief                                  OTC drug             Heritage Consumer Products
Chooz                           Antacid and prevents osteoporosis            OTC drug             Heritage Consumer Products
Herbalife NRG(R)                Improves energy & endurance                  Dietary supplement   Herbalife
Herbalife Chew Slim(R)          Promotes weight management                   Dietary supplement   Herbalife
Pharma-Green (seven varieties)  Various                                      Dietary supplement   Pharma-Green Ltd.
Brain Gum                       Improves brain function                      Dietary supplement   KR Research, Inc.
</TABLE>

MANUFACTURING AND PACKAGING

     We  manufacture  all of our gum  products,  including  those  marketed  and
distributed by others. The manufacture of specialty chewing gums involves:

     *    storing bulk raw materials and "fine" raw  materials,  such as flavor,
          colors and active ingredients;
     *    producing and mixing the gum base in large stainless steel mixers;
     *    extruding the gum into selected sizes and shapes;
     *    coating the gum, generally with a sugarless coating solution;
     *    branding the product if required;
     *    packaging the gum in blister packages; and
     *    packaging  the  blisters,  according to customer  specifications,  for
          shipment.

     All of our gum products  contain one or more active  ingredients  which are
added  either to the gum center in the mixing  stage or  included in the coating
solution.

     Prior to  commencing  production  of the chewing gum, we record lot numbers
for all  ingredients,  examine and file  certificates  of  ingredients,  perform
quality  control  tests,  and sanitize  equipment  and  utensils.  Our personnel
conduct additional  quality control tests throughout the manufacturing  process.
We  manufacture  our products in  compliance  with  current  good  manufacturing
procedures requiring written standard operating procedures.

     Zicam is currently  manufactured  and  packaged by Botanical  Laboratories,
Inc. of Ferndale,  Washington  in  accordance  with  current good  manufacturing
processes.  The finished product is shipped to our warehouse facility in Phoenix
for warehousing and shipment to customers.

COMPETITION

     Although the specialty gum market is emerging as a market category distinct
from the traditional, established chewing gum market, Gum Tech and the companies
to whom we sell face  significant  competition in each of the four categories in
which we  operate.  These  categories  include  oral care  products,  OTC drugs,

                                       3
<PAGE>
smoking cessation products,  and dietary supplements.  In the oral care products
market,  we manufacture  products for Breath Asure and Ranir/DCP,  which compete
directly with Arm & Hammer dental gum, Trident Advantage, and V-6 dental gum. We
manufacture OTC drug-related  gum products,  including  Aspergum,  an analgesic,
Chooz, an antacid/calcium  supplement, and AcuTrim, a dietary gum. Each of these
products  competes  generally with  analgesics,  antacids,  and dietary products
produced and marketed by major consumer products companies.  We will be pursuing
opportunities  in the smoking  cessation  market  through our joint venture with
Swedish Match, which is currently dominated by the Nicorette product marketed by
Pharmacia and Upjohn. In the dietary supplement market, our various gum products
compete with a large number of non-gum dietary supplement products.

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

     We face significant competition from a large number of major drug companies
involved in selling a variety of cough and cold remedies  that compete  directly
with Zicam.  Most of these  competitors  have  greater  name  recognition,  more
established  brands,  wider distribution  capabilities and greater financial and
marketing resources than we do.

FDA AND OTHER GOVERNMENT REGULATION

     We are  subject to various  Federal,  state and local  laws  affecting  our
business. All of our chewing gum and Zicam products are subject to regulation by
the FDA, including regulations with respect to labeling of products, approval of
ingredients in products,  claims made regarding the products,  and disclosure of
product ingredients.  In addition,  some of our products are considered "drugs."
Consequently, manufacture of these products must comply with "good manufacturing
practices"  mandated by the FDA,  which  prescribes  specific  requirements  and
procedures for the  manufacture of  FDA-regulated  drug products.  If we fail to
comply with these requirements and procedures, the FDA has the right to restrict
the sale of or remove such products from the market.  We believe that all of our
products comply with all regulatory requirements including the FDA manufacturing
standards and practices for drug products.

     Our  advertising  claims made with  respect to all of our products are also
subject to the jurisdiction of the FDA and the Federal Trade Commission. In both
cases,  we are required to obtain  scientific data to support any advertising or
labeling of health claims we make concerning our products.

     In addition,  our chewing gum manufacturing  facility and the facilities of
Botanical  Laboratories  are  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  our
manufacturing  operations.  We are  also  subject  to  federal  and  state  laws
establishing minimum wages and regulating overtime and working conditions.

                                       4
<PAGE>
TRADEMARKS, TRADE NAMES, AND PROPRIETARY RIGHTS

     We  own  a   perpetual   non-exclusive   license   to  use   Microdent,   a
plaque-reducing  agent,  in our coated  chewing gum  products.  Microdent is the
critical  ingredient  in the chewing  gums that we  manufacture  and package for
Breath Asure and Ranir/DCP.

     We routinely seek trademark protection from the United States Patent Office
("USPO") and from similar  agencies in foreign  countries for chewing gum brands
and Zicam. Despite these protections,  we may not be able to successfully defend
any  trademarks  granted to us against  claims  from or use by  competitors.  In
addition,  trademark applications may not be approved by the USPO or any similar
foreign agency.

     We consider  some of our  chewing  gum  formulations  and  processes  to be
proprietary in nature and rely upon a combination of  nondisclosure  agreements,
other  contractual  restrictions,   and  trade  secrecy  laws  to  protect  this
proprietary  information.  Despite  these  precautions,  these  steps may not be
adequate to prevent  misappropriation  of our  proprietary  information  and our
competitors could  independently  develop chewing gum formulations and processes
that are substantially equivalent or superior to those that we develop.

EMPLOYEES

     As of December  31,  1999,  our gum  operations  employed  75  individuals,
including three executive  officers,  56 manufacturing and warehouse  personnel,
four research and development personnel, and 12 administrative/sales  personnel.
As of December 31, 1999,  Gel Tech  employed six  executive  and  administrative
personnel.

ITEM 2. DESCRIPTION OF PROPERTY

     We lease an  approximately  28,000  square foot  building for our principal
executive offices and chewing gum manufacturing  facilities at 246 East Watkins,
Phoenix, Arizona 85004. Our ten-year lease (with two three-year renewal options)
for this building  expires on December 2005. The monthly rental expense for this
property is  approximately  $12,000.  In September 1998, we leased an additional
31,000 square foot building  located near our  principal  executive  offices and
manufacturing  facility to house our warehouse and  packaging  operations.  This
lease provides for monthly rent of  approximately  $12,000 and a five year term,
subject to a five year renewal option.

ITEM 3. LEGAL PROCEEDINGS

LITIGATION

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

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

                                       5
<PAGE>
     On June 2, 1999,  we filed a complaint  in the  Superior  Court of Maricopa
County,  Arizona against DJ Ltd. ("DJ"),  CIV  99-1136-PHX-PGR  (D. Ariz.).  Our
complaint  sought a  declaratory  judgment that DJ was not owed any fee under an
agreement  entered into  between the parties  pursuant to which DJ was to act as
our financial  advisor.  DJ removed the case to the United States District Court
for the District of Arizona and filed a counterclaim.  In its  counterclaim,  DJ
alleges that we breached the contract  between the parties and that Gum Tech has
been unjustly enriched. DJ seeks damages in the amount of $480,000,  plus costs,
expenses and warrants to purchase  50,000  shares of Gum Tech common  stock.  DJ
also seeks a declaratory judgment confirming its version of its rights under the
agreement.

     On October 21, 1999, an action was filed  against us in the Superior  Court
of the State of California in and for the County of Los Angeles,  case number BC
218 878, by International Interest Group, Inc. ("IIG") The complaint alleges the
breach of an alleged oral finder's fee agreement between the parties relating to
the introduction of certain individuals  associated with BioDelivery  Technology
to a former chief executive officer of Gum Tech in 1996.  BioDelivery Technology
and  Gum  Tech  formed  a joint  venture  in 1999  to  manufacture,  market  and
distribute  Zicam. The complaint seeks  unspecified  general  contract  damages,
declaratory  relief,  and an  accounting.  We  removed  the action to the United
States  District  Court for the Central  District of  California  on February 2,
2000.  We deny the  existence,  as well as the  validity,  of the  alleged  oral
agreement, and intend to vigorously defend the action.

     On  November  9, 1999,  The Quigley  Corporation  commenced a civil  action
against Gum Tech, Inc., Gel-Tech Industries,  Inc., and Gel-Tech,  L.L.C. in the
United  States  District  Court for the Eastern  District of  Pennsylvania.  The
complaint alleges  infringement of a patent by the defendants' use of Zicam. The
complaint  seeks  compensatory  damages  and  injunctive  relief.  Each  of  the
defendants  denies  infringement  of the patent and  alleges  that the patent is
invalid. The defendants filed a motion for summary judgment on January 21, 2000,
seeking to dismiss  the  lawsuit as a matter of law.  This  motion was denied on
March 9, 2000. Quigley filed a motion for preliminary injunction on February 25,
2000,  seeking an injunction  against the defendants  regarding  future sales by
Zicam.  A hearing on the motion is  scheduled  to be heard by the court on March
31, 2000.  The  defendants  assert that the claim by Quigley is totally  without
merit and intend to continue vigorously defending this lawsuit.

     We are not  involved  as a party in any other legal  proceeding  other than
various  claims and lawsuits  arising in the normal course of business,  none of
which,  in the  opinion  of our  management,  is  individually  or  collectively
material to our business.

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

     Not applicable.

                                       6
<PAGE>
                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Our common stock has traded on the Nasdaq  National Market under the symbol
"GUMM" since April 24,  1996.  The  following  table sets forth for the quarters
indicated the range of high and low closing prices of the Company's common stock
as reported by the Nasdaq National  Market,  but does not include retail markup,
markdown or commissions.

                                                                Market Price
                                                            --------------------
                                                              High        Low
                                                            --------    --------
     FISCAL YEAR 1998
     First Quarter ......................................   $ 7.3750    $ 4.8125
     Second Quarter .....................................   $ 7.5625    $ 5.2500
     Third Quarter ......................................   $10.7500    $ 7.1875
     Fourth Quarter .....................................   $ 8.0000    $ 5.4375

     FISCAL YEAR 1999
     First Quarter ......................................   $14.6719    $ 8.3750
     Second Quarter .....................................   $11.8750    $ 9.5625
     Third Quarter ......................................   $13.5625    $10.7500
     Fourth Quarter .....................................   $20.3750    $12.5000

     FISCAL YEAR 2000
     First Quarter (through March 24, 1999) .............   $33.8750    $16.3125

     As of  March  20,  1999,  Gum  Tech  had  approximately  5,482  record  and
beneficial stockholders.

DIVIDEND POLICY

     We have paid only  limited  cash  dividends on our common stock in the past
and intend to retain earnings, if any, for use in the operation and expansion of
the business. The amount of future dividends,  if any, will be determined by the
board  of  directors   based  upon  earnings,   financial   condition,   capital
requirements and other conditions.

                                        7
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

     The following  sets forth selected  historical  financial data for Gum Tech
for each of the years in the  five-year  period ended  December  31,  1999.  The
selected annual historical statement of income and balance sheet data is derived
from Gum Tech's  financial  statements  audited  by  independent  auditors.  For
additional  information,  see the financial statements of Gum Tech and the notes
thereto included elsewhere in this report. The following table should be read in
conjunction  with Item 7,  "Management's  Discussion  and  Analysis of Financial
Condition and Results of Operations"  and is qualified by reference  thereto and
to Gum Tech's financial statements and notes thereto.

<TABLE>
<CAPTION>
                                                          Year
                                --------------------------------------------------------
                                        (in thousands, except per share amounts)
                                  1999        1998        1997        1996        1995
                                --------    --------    --------    --------    --------
<S>                             <C>         <C>         <C>         <C>         <C>
Net sales                       $ 15,500    $  5,273    $  3,777    $  3,116    $  4,344
Net income (loss) applicable
  to common stock               $ (1,012)   $ (6,261)   $ (5,399)   $ (3,388)   $    497
Net income (loss) per share
  of common stock               $  (0.14)   $  (0.97)   $  (1.02)   $  (0.77)   $   0.11
Dividends per share             $     --    $     --    $     --    $     --    $   0.01
Shares outstanding at year end     8,321       6,858       5,856       4,949       3,437
Total assets                    $ 20,028    $  7,900    $  9,685    $  7,458    $  4,592
Long term obligations           $  2,241    $  2,380    $  3,785    $  1,488    $  2,507
Stockholders' equity            $ 12,702    $  3,718    $  4,673    $  5,283    $  1,623
</TABLE>

                                       8
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

OVERVIEW

     Gum Tech  develops  and  manufactures  specialty  chewing gum  products for
branded and private label customers,  as well as products marketed under its own
brand  labels.  Specialty  chewing  gums  include  vitamins,  herbals and active
over-the-counter drug ingredients formulated to provide specific  health-related
benefits to the user. Gum Tech  currently  targeted four market  segments:  oral
care, smoking cessation,  dietary supplement, and over-the-counter (OTC) drug. A
substantial  majority of Gum Tech's sales from its gum operations  currently are
attributable to products  developed,  manufactured  and packaged by Gum Tech for
marketing  and  sale  by  five  branded  and  private  label  consumer  products
companies.

     In January  1999,  Gum Tech entered into a joint  venture with  BioDelivery
Technologies,  Inc. to  manufacture,  market and  distribute  Zicam, a nasal gel
formula.  Under an  operating  agreement  signed  on May 6,  1999,  Gum Tech and
BioDelivery  Technologies  transferred their respective  interests in the patent
rights to the nasal gel  technology  used in Zicam in  exchange  for  membership
interests in Gel Tech LLC, an Arizona limited liability company.  Gum Tech has a
60%  interest in the capital and profits of the joint  venture and has  provided
$3.5 million of capital to the joint venture. Gum Tech reports financial results
of Gel Tech LLC on a consolidated  basis, but identifies certain  information by
its two business segments--chewing gum operations and Zicam operations.

RESULTS OF OPERATIONS  FOR THE YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1998

     The following table details certain  financial  information for our chewing
gum and Zicam operations for the year ended December 31, 1999:

                                       Chewing Gum       Zicam      Consolidated
                                       -----------    -----------   -----------
Net sales                              $ 5,910,221    $ 9,589,803   $15,500,024
Cost of sales                            4,806,544      2,534,818     7,341,362
                                       -----------    -----------   -----------
Gross profit                             1,103,677      7,054,985     8,158,662
Operating expenses                       2,277,263      3,428,227     5,705,490
Research and development                   422,555        241,893       664,448
                                       -----------    -----------   -----------
Income (Loss) from operations           (1,596,141)     3,384,865     1,788,724
Interest and other income                   73,136         50,428       123,564
Interest expense                         1,311,792              0     1,311,792
                                       -----------    -----------   -----------
Income (loss) before income tax        $(2,834,797)   $ 3,435,293   $   600,496
                                       -----------    -----------   -----------

                                       9
<PAGE>
CHEWING GUM OPERATIONS

     Certain  information  is set forth  below for our  chewing  gum  operations
expressed in dollars and as a percentage of net sales for the periods indicated:

                                             Year Ended December 31
                                    ------------------------------------------
                                           1999                   1998
                                    -------------------    -------------------
Net sales                           $ 5,910,221     100%   $ 5,272,547     100%
Cost of sales                         4,806,544      81      4,357,010      83
                                    -----------   -----    -----------   -----
Gross profit                          1,103,677      19        915,537      17
Operating expenses                    2,277,263      39      6,164,022     117
Research and development                422,555       7        667,067      12
                                    -----------   -----    -----------   -----
Income (Loss) from operations        (1,596,141)    (27)    (5,915,552)   (112)
Interest and other income                73,136       1        127,947       2
Interest expense                      1,311,792      22        473,811       9
Provision (benefit)
  for income taxes                           --      --             --      --
                                    -----------   -----    -----------   -----
Net income (loss)                   $(2,834,797)    (48)%  $(6,261,416)   (119)%
                                    ===========   =====    ===========   =====

     NET SALES.  Net sales  increased to  approximately  $5.9 million for the 12
months  ended  December  31, 1999,  or 12% above the prior year.  This  increase
reflects the addition of several new customers  and/or  products in mid- to late
1998.  Among these were Ranir DCP,  Breath Asure,  Heritage  Consumer  Products'
AcuTrim(R)  gum and  Pharmagreen  Ltd.  Sales in the prior year largely  reflect
sales of Cigarest's  smoking  cessation gum,  Herbalife's  diet and energy gums,
Aspergum(R) and Chooz(R) and initial  deliveries of Breath Asure Dental Gum(TM).
Although   sales  to  our  five   principal  gum  customers   have   contributed
significantly  to our  growth  in  sales  over the  past  two  years,  we do not
anticipate additional growth in sales to these customers in the coming year, and
sales to these  customers may in fact decline.  We expect that any future growth
in our chewing gum  operations  will result  primarily  from the addition of new
contract  relationships  with new  partners,  including  the recently  announced
relationship with Swedish Match. We cannot assure you, however,  that we will be
able to  attract  any new  partners,  or that  any  joint  venture  with any new
partners will ultimately prove successful.

     COST OF SALES.  Cost of sales increased to approximately  $4.8 million,  or
approximately $450,000 above the prior year, due to the higher level of sales.

     GROSS PROFIT.  Gross profit  increased to $1.1 million  reflecting both the
higher level of sales and improvement in our manufacturing processes.

     OPERATING  EXPENSES.  Operating  expenses  declined by  approximately  $3.9
million  from the 1998  level to $2.3  million  in  1999.  The  amount  for 1998
includes  unusual  one-time  charges of  $1,478,750  to  reflect  the cost of an
extension  of options  to a former  officer,  $732,000  for  options  granted to
another individual,  and $618,230 representing a severance compensation expense.
Exclusive  of these  charges,  operating  expenses in 1998 were  $3,335,042,  or
approximately $1.06 million greater than the 1999 level. The reduction in normal
recurring  operating  expenses in 1999 was  principally  due to a  reduction  in
advertising,  trade show and travel  expense  of  $522,000  due to the change in
corporate  strategy  in 1998,  lower legal  expenses  of  $157,000  due to costs
associated with the management  restructuring  in early 1998, and the allocation
of administrative and warehousing expenses to Gel Tech LLC of $167,000 in 1999.

                                       10
<PAGE>
     INTEREST AND OTHER  INCOME.  Interest and other income  decreased  due to a
lower cash balance.

     INTEREST  EXPENSE.  Interest  expense  increased  from 1998 by  $837,981 to
approximately $1.3 million primarily due to interest charges associated with the
Citadel  financing  in June 1999.  Included  in these  amounts  were a number of
non-cash  interest  charges  associated  with this  financing.  This  financing,
together with the Company's  outstanding  term loan  facility,  were redeemed in
full in the first quarter of 2000, which we anticipate will virtually  eliminate
interest expense in subsequent quarters.

     INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST.  Net
loss decreased by  approximately  $3.4 million  primarily due to the substantial
decrease  in  operating  expenses  offset  in part by higher  interest  expense.
Despite the  anticipated  reduction in interest  charges,  gum  operations  will
continue  to  record  a net  loss in the  future  until  sales  of gum  products
increase.

ZICAM OPERATIONS

     Zicam  sales and  operations  began  January  1,  1999.  As a  result,  the
financial results for Zicam operations cannot be compared to the prior period.

     For the year ended December 31, 1999, Zicam  operations  recorded net sales
of  approximately  $9.6  million.  The bulk of Zicam sales  occurred late in the
fourth  quarter of 1999 after  widespread  national  publicity in November  1999
resulted in unexpectedly high demand for this new product. Initially, production
of Zicam could not be increased  sufficiently to meet this high level of demand.
Consequently,  deliveries  of Zicam were  delayed.  Due to the  highly  seasonal
nature of cold remedies such as Zicam and a relatively short cold season,  these
delays  limited our ability to realize the full potential of Zicam sales for the
1999-2000 cold season.

     Gross  profit  on Zicam  for the 12  months  ended  December  31,  1999 was
approximately  $7.1  million,  or 74% of net sales.  Operating  expenses of $3.4
million were recorded for this period, of which  approximately $2.25 million was
spent, or accrued for advertising, sales commissions, public relations and other
sales expenses.  Research and  development  expenses of $241,892 for this period
largely  reflect  the cost of  on-going  clinical  work  associated  with Zicam.
Interest and other income  largely  reflects  interest  income  associated  with
invested cash. Gel Tech did not have any debt outstanding during this period and
consequently did not record any interest expense.

                                       11
<PAGE>
RESULTS OF OPERATIONS  FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1997

     The following table presents  certain  statement of operations  information
expressed in dollars and as a percentage of net sales for the periods indicated:

                                             Years Ended December 31
                                    ------------------------------------------
                                           1998                   1997
                                    -------------------    -------------------
Net sales                           $ 5,272,547     100%   $ 3,776,562     100%
Cost of sales                         4,357,010      83      4,197,777    (111)
                                    -----------   -----    -----------   -----
Gross profit                            915,537      17       (421,215)    (11)
Operating expenses                    6,164,022     117      3,881,238     103
Research & development                  667,067      12        209,783       5
                                    -----------   -----    -----------   -----
Income (Loss) from operations        (5,915,552)   (112)    (4,512,236)   (119)
Interest and other income               127,947       2        204,220       5
Interest expense                        473,811       9      1,090,618      29
Provision (benefit)
  for income taxes                           --      --             --      --
                                    -----------   -----    -----------   -----
Net income (loss)                   $(6,261,416)   (119)%  $(5,398,634)   (143)%
                                    ===========   =====    ===========   =====

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

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

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

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

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

                                       12
<PAGE>
     INTEREST AND OTHER INCOME.  Interest  income declined in 1998 from 1997 due
to a decrease in the Company's invested cash position during the year.

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

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

LIQUIDITY AND CAPITAL RESOURCES

     As of December 31, 1999, Gum Tech's working capital was approximately $12.5
million  compared to $2.2  million at December  31,  1998.  During the 12 months
ended  December  31,  1999,  Gum Tech  experienced  a  decrease  in cash used by
operating  activities of  approximately  $3.2  million,  versus $3.9 million the
prior  year.  The  decrease  in cash for  1999 is  largely  attributable  to the
increase in accounts receivable  primarily associated with sales of Zicam in the
fourth  quarter  ($6.8  million)  offset  in part by the  minority  interest  in
earnings  of  consolidated  affiliates  and a  provision  for sales  returns and
allowances.

     Investing  activities used $230,000 of cash for the year ended December 31,
1999 compared to $864,000 for the same period in 1998. The 1998 amount  reflects
expenditures to expand our gum operations.

     Financing  activities  provided  approximately $8.5 million of cash for the
year ended  December 31, 1999  compared to $1.7  million in 1998.  Approximately
$5.5 million of the 1999 amount reflects net proceeds  realized from the Citadel
financing in June 1999.  Details of the Citadel  financing  are contained in our
Current  Report on Form 8-K filed on June 9, 1999.  Proceeds  realized  from the
exercise of options and warrants  contributed  approximately $3.7 million versus
$2.0 million in 1998.  Gum Tech issued 249,867 shares of Common Stock to Citadel
Investment Group in 1999 to redeem $2.0 million of Senior Secured Notes and $1.0
million of Series A Preferred  Stock and issued an additional  193,447 shares of
Common Stock in early 2000 to redeem the remaining  $3.0 million of Citadel debt
and preferred stock.

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS AND FINANCIAL CONDITION

     This report contains  forward-looking  statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including statements regarding
our  anticipated  growth in business  and future  results of  operations.  These
forward-looking  statements are based on our  expectations  and are subject to a
number  of  risks  and  uncertainties,  many of which  cannot  be  predicted  or
quantified  and are beyond our control.  Future events and actual  results could
differ  materially from those set forth in,  contemplated  by, or underlying the
forward-looking  statements.  Factors that could cause actual  results to differ
materially from our expectations  include less than  anticipated  demand for our
chewing gum or nasal gel products,  such as Zicam, lack of market acceptance for
or  uncertainties  concerning  the efficacy of Zicam,  fluctuations  in seasonal
demand  for  Zicam  relative  to the cold  season,  difficulties  in  increasing
production to meet unexpectedly high demand in the short term, a decrease in the
level of reorders from existing customers, financial difficulties encountered by

                                       13
<PAGE>
one or more of our principal  customers,  difficulties  in obtaining  additional
capital  for  marketing,  research  and  development,  and other  expenses,  the
possibility  of  material  charges  incurred  as a result  of prior  activities,
aggressive   pricing  and   marketing   efforts  by  rival  gum   manufacturers,
unavailability of third-party material products at reasonable prices,  inventory
obsolescence due to shifts in market demand, and material  litigation  involving
patent and contractual claims,  product  liabilities and consumer issues.  These
potential  risks and  uncertainties,  together  with those  mentioned  below and
elsewhere in this report,  could affect our future operating results,  financial
condition, and the market price of its common stock.

     Information contained in this report includes "forward-looking statements",
which can be identified by the use of forward-looking  words such as "believes",
"expects",  "may",  "should",  or  "anticipates"  or by discussions of trends or
strategy.   We  may  not  achieve  the  future   results   discussed   in  these
forward-looking statements.

     The  following  matters  constitute   cautionary   statements   identifying
important factors that relate to the forward-looking statements.

WE INCURRED SIGNIFICANT LOSSES IN PREVIOUS YEARS

     We began operations in February 1991 and have a limited  operating  history
upon which  potential  investors  may  evaluate  our  performance.  We  reported
significant losses for the last four years.  Although we earned a profit for the
fourth quarter of 1999, we incurred a loss for the year ended December 31, 1999.
In  addition,  despite  achieving  a profit in the fourth  quarter of 1999,  our
future  operations may not be profitable.  The likelihood of our success must be
considered  relative to the problems,  difficulties,  complications,  and delays
frequently encountered in connection with the development and operation of a new
business,  the significant change in strategy in early 1998, and the development
and marketing of Zicam, a relatively new product.

IF ZICAM DOES NOT GAIN MARKET WIDESPREAD  ACCEPTANCE,  OUR ANTICIPATED SALES AND
RESULTS OF OPERATIONS WILL SUFFER

     In 1999,  Gel Tech LLC, a joint  venture in which we hold a 60% interest in
profits and  capital,  launched a new  homeopathic  cold remedy  known as Zicam.
Although studies have indicated that Zicam can significantly reduce the duration
and  severity of the common cold,  there is no  guarantee  that the product will
achieve widespread acceptance by the market. If any unanticipated problem arises
concerning  the  efficacy  of Zicam or the product  fails to achieve  widespread
market acceptance for any reason, our prospects for our future operating results
would be adversely affected.  In addition,  although initial sales of Zicam were
significant, there is no assurance that demand for this product will continue to
grow,  especially  following the peak of the cold season.

WE MAY BE UNABLE TO MEET DEMAND FOR OUR NEW PRODUCTS

     To the  extent  Zicam  or any  other  new  product  we  introduce  achieves
widespread market acceptance and generates  significant demand, we may be unable
to  produce  and  deliver  sufficient  quantities  of the  product  to meet  our
customers' demands on a timely basis. If so, we could lose opportunities to sell
larger  quantities  of the product and damage  relationships  with  distributors
whose orders could not be timely filled. This problem, if encountered,  could be
particularly damaging if we are not able to meet customer demand during the cold
season, when we expect demand for sales of Zicam to peak.

                                       14
<PAGE>
UNANTICIPATED PROBLEMS ASSOCIATED WITH PRODUCT DEVELOPMENT COULD DELAY OR HINDER
INTRODUCTION OF NEW PRODUCTS

     We may  experience  unanticipated  difficulties  in developing new products
that could  delay or  prevent  the  introduction  of those  products.  We may be
dependent in the near future upon chewing gum products that are currently  being
developed.  If we are unable to develop  new  chewing  gum  products on a timely
basis,  our  business,  operating  results,  and  financial  condition  could be
materially adversely affected.

OUR  RELIANCE  UPON A FEW GUM  CUSTOMERS  MAY  NEGATIVELY  IMPACT OUR  FINANCIAL
RESULTS

     The shift in our chewing gum  strategy in early 1998 to a focus on contract
manufacturing has made our chewing gum operations dependent for sales and future
growth on a few customers.  These  customers  include  Herbalife,  Breath Asure,
Ranir, Heritage Consumer Products and PharmaGreen. While the decision to partner
with these firms relieves us of the direct responsibility to market products, we
become dependent on the financial resources and marketing  capabilities of third
parties.  Further,  we are at risk for their  non-payment  or late  payment  for
amounts  owed to us.  While we intend to add to this  portfolio  of customers to
reduce the risk of non-performance by any single customer,  we have not yet been
successful in that effort.

OUR  INABILITY  TO PROVIDE  SCIENTIFIC  PROOF FOR PRODUCT  CLAIMS MAY  ADVERSELY
AFFECT OUR SALES

     The  marketing  of  certain  of our  chewing  gum and nasal  gel  products,
including  Zicam,  involves  claims that these  products  assist in weight loss,
promote  dental  hygiene,  and reduce the  duration  of the common  cold,  among
others.  Under FDA and FTC rules,  we are required to obtain  scientific data to
support any health claims we make concerning our products.  Although we have not
provided nor been requested to provide any scientific data to the FDA in support
of claims  regarding our products,  we have obtained  scientific data for all of
our  products.  There  can be no  assurance  that  the  scientific  data we have
obtained in support of our claims will be deemed  acceptable  to the FDA or FTC,
should either agency request any such data in the future.  If the FDA or the FTC
requests any supporting  information,  and we are unable to provide support that
is acceptable to the FDA or the FTC, either agency could force us to stop making
the claims in question or restrict us from selling the affected products.

FDA AND  OTHER  GOVERNMENT  REGULATION  MAY  RESTRICT  OUR  ABILITY  TO SELL OUR
PRODUCTS

     We are  subject to various  federal,  state and local  laws  affecting  our
business.  Our chewing gum and nasal gel products are subject to  regulation  by
the FDA, including regulations with respect to labeling of products, approval of
ingredients in products,  claims made regarding the products,  and disclosure of
product ingredients.  If we do not comply with these regulations,  the FDA could
force us to stop selling the  affected  products or incur  substantial  costs in
adopting measures to maintain compliance with these regulations.

     Our  advertising   claims   regarding  our  products  are  subject  to  the
jurisdiction  of the FTC as well as the FDA.  In both cases we are  required  to
obtain  scientific  data to support any advertising or labeling health claims we
make concerning our products, although no pre-clearance or filing is required to
be made with either agency. If we are unable to provide the required support for
such  claims,  the FTC may stop us from making such claims or require us to stop
selling the related product.

                                       15
<PAGE>
WE MAY BE UNABLE TO SUCCESSFULLY EXPAND OUR OPERATIONS

     We intend to continue expanding our manufacturing and marketing operations.
Expansion will place substantial  strains on our management and our operational,
accounting,  and  information  systems.  Successful  management  of growth  will
require  us  to  improve  our  financial  controls,  operating  procedures,  and
management   information  systems,  and  to  train,  motivate,  and  manage  our
employees.

     In  addition,  to the extent  that  actual  demand for our  products in the
future is less than  anticipated,  we may incur higher than  necessary  costs in
preparing  for an  anticipated  growth  in sales  that does not  materialize  or
materializes more slowly than expected.

     Failure to manage growth  effectively  would have a material adverse effect
on the  results  of our  operations  and our  ability to  execute  our  business
strategy.

WE MAY BE UNABLE TO PREVENT OTHERS FROM DEVELOPING SIMILAR PRODUCTS

     We routinely  seek trademark and patent  protection  from the United States
Patent  Office and from similar  agencies in foreign  countries  for chewing gum
brands and have done so for  Zicam.  There can be no  assurance  that we will be
able to  successfully  defend any  trademarks,  trade  names or patents  against
claims  from or use by  competitors  or that  trademark,  trade  name or  patent
applications will be approved by the USPO or any similar foreign agency.

     We consider  some of our  chewing  gum  formulations  and  processes  to be
proprietary in nature and rely 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 our proprietary information or that our
competitors  will  not  independently   develop  chewing  gum  formulations  and
processes that are substantially equivalent or superior to our own.

THE LARGE NUMBER OF SHARES  ELIGIBLE FOR  IMMEDIATE AND FUTURE SALES MAY DEPRESS
THE PRICE OF OUR STOCK

     Sales of  substantial  amounts  of common  stock in the open  market or the
availability  of a large number of  additional  shares for sale could  adversely
affect  the  market  price  for  the  common  stock.  Substantially  all  of our
outstanding  shares of common stock, as well as the shares underlying vested but
as yet unexercised warrants and options,  have either been registered for public
sale or may be sold  under  Rule  144  promulgated  under  the  Securities  Act.
Therefore,  all of  these  shares  may be  immediately  sold by the  holders.  A
substantial increase in the volume of trading in our stock may depress the price
of our common stock.

THE PRICE OF OUR STOCK MAY CONTINUE TO BE VOLATILE

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

WE MAY INCUR SIGNIFICANT COSTS RESULTING FROM PRODUCT LIABILITY CLAIMS

     We are subject to  significant  liability  should use or consumption of our
products  cause injury,  illness or death.  Although we carry product  liability
insurance,  there can be no  assurance  that our  insurance  will be adequate to
protect us against  product  liability  claims or that  insurance  coverage will
continue to be available on reasonable terms.

                                       16
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     None.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The Independent  Auditors' Report and Consolidated  Financial Statements of
Gum Tech,  including the Notes to those  statements,  are set forth on pages F-1
through F-21.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     Gum  Tech has had no  disagreements  with its  independent  accountants  in
regard  to  accounting  and  financial   disclosure  and  has  not  changed  its
independent accountants during the two most recent fiscal years.

                                    PART III

ITEM 10. INFORMATION CONCERNING DIRECTORS, NOMINEES, AND EXECUTIVE OFFICERS

     The  following  sets forth certain  information  with respect to Directors,
nominees to the Board of Directors, and executive officers of the Company.

       Name             Age    Position With Company and Tenure
       ----             ---    --------------------------------
Gary S. Kehoe            41    President since 1998 and Chief Operating Officer
                               and Director since 1995

W. Brown Russell, III    44    Chairman of the Board of Directors since 1999,
                               Director of Investor Relations and Legal and
                               Director since 1998

William D. Boone         52    Director since 1998

William A. Yuan          39    Director since 1998

William J. Hemelt        46    Secretary, Treasurer, and Chief Financial Officer
                               since 1998 (Principal Financial Officer)

     Gary S. Kehoe  joined  Gum Tech in 1995 as Chief  Operating  Officer  and a
Director.  He was responsible for construction and start-up of our manufacturing
facility and research and  development  of gum products.  In February  1998, the
Board of  Directors  elected Mr.  Kehoe as our  President.  Prior to joining Gum
Tech, Mr. Kehoe was employed by Planters/LifeSavers,  a division of Nabisco Food
Group, in various capacities,  including Senior Food Technologist,  where he was
responsible  for  functional  and  nutriceutical  products in the  confectionery
division. He developed or co-developed several new technologies,  processes, and
products  involving  CareFree,  Bubble Yum, Fruit Stripe,  and Beech Nut chewing
gums and is  listed as  inventor  or  co-inventor  on 22 U.S.  patents  filed by
Nabisco and Gum Tech.

                                       17
<PAGE>
     W. Brown  Russell,  III was elected to the Board of  Directors  in February
1998 and  appointed as Chairman of the Board in August 1999.  He joined Gum Tech
as a Special  Advisor to the  President  in February  1998 before  assuming  his
current position as Director of Investor Relations and Legal. Before joining Gum
Tech, Mr. Russell operated Brown Russell  Investment  Services,  Inc., a private
money  management  firm.  From 1987 to 1994,  Mr.  Russell was the  President of
Capital Investment Properties,  a real estate and property management firm based
in Athens,  Georgia. During this time, Mr. Russell was also a partner in the law
firm of Russell & Russell.  Mr. Russell earned a Juris Doctorate and Bachelor of
Arts from the University of Georgia.

     William D. Boone was elected to the Board of  Directors  in February  1998,
and served as a  manufacturing  consultant to Gum Tech in early 1998.  Mr. Boone
has 30 years experience in small business management and sales growth, including
co-founding and  co-managing  Trade  Printers,  Inc., a Phoenix-based  wholesale
printing manufacturer, which he subsequently sold.

     William A. Yuan has been a Director  since 1998.  Mr. Yuan is President and
Chief Executive Officer of Reliance  Management,  LLC. From 1985 until 1996, Mr.
Yuan was  employed  by  Merrill  Lynch  and  Salomon  Smith  Barney  in  various
positions.  Mr.  Yuan  earned a Bachelor of Science in  Economics  from  Cornell
University.

     William J. Hemelt  joined us in June 1998 as our Chief  Financial  Officer,
Treasurer,  and  Secretary.  From 1980 to 1997,  Mr.  Hemelt  held a variety  of
financial  positions  with Arizona  Public Service  Company,  Arizona's  largest
utility,  including 6 years as Treasurer and 4 years as  Controller.  Mr. Hemelt
earned  a Master  of  Business  Administration  and a  Bachelor  of  Science  in
Electrical Engineering from Lehigh University.

     Bruce A. Jorgenson,  M.D.,  resigned from the Board of Directors  effective
February 17, 2000. We intend to add at least one additional  board member in the
future.

     All Directors terms are on an annual basis.

MEETINGS OF THE BOARD OF DIRECTORS

     During the fiscal year ended December 31, 1999, our Board of Directors held
7 meetings, either in person or by consent resolution. All Directors attended or
participated  in at least 75% of those meetings and the total number of meetings
held by all committees of the Board on which they served.

AUDIT COMMITTEE

     In 1998,  our Board of Directors  elected Dr. Bruce A.  Jorgenson,  William
Boone,  William  A.  Yuan,  and W. Brown  Russell  to the Audit  Committee.  The
functions  of the Audit  Committee  are to receive  reports with respect to loss
contingencies,  the public disclosure or financial  statement  notation of which
may be legally  required;  annually review and examine those matters that relate
to a financial and  performance  audit of our employee  plans;  recommend to our
Board of Directors the selection,  retention, and termination of our independent
accountants; review the professional services, proposed fees and independence of
such  accountants;  and  provide  for the  periodic  review and  examination  of
management  performance  in selected  aspects of corporate  responsibility.  The
Audit Committee did not meet in 1999.

COMPENSATION COMMITTEE

     In 1998 our Board of Directors  elected Dr. Bruce A.  Jorgenson and William
Boone to the Compensation Committee. The functions of the Compensation Committee
are to  review  annually  the  performance  of the  President  and of the  other
principal   officers   whose   compensation   is   subject  to  the  review  and

                                       18
<PAGE>
recommendation  by  the  Compensation  Committee  to  our  Board  of  Directors.
Additionally,  the Compensation  Committee is to review  compensation of outside
directors for service on our Board of Directors and for service on committees of
our Board of  Directors,  and to  review  the  level  and  extent of  applicable
benefits provided by us with respect to automobiles,  travel, insurance,  health
and medical  coverage,  stock  options and other stock plans and  benefits.  The
Compensation Committee held two meetings during fiscal 1999.

DIRECTOR COMPENSATION

     The Company's nonemployee 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.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Securities  Exchange Act of 1934 (the "Exchange  Act")
requires Gum Tech's  officers and  directors,  and persons who own more than ten
percent of a registered class of Gum Tech's equity  securities,  to file reports
of  ownership  and  changes  in  ownership  with  the  Securities  and  Exchange
Commission ("SEC").  These officers,  directors and shareholders are required by
SEC  regulation  to furnish Gum Tech with copies of all Section 16(a) forms they
file.

     Based  solely on its review of the copies of such forms  received by it, or
written  representations  from  certain  reporting  persons  that no Forms  were
required for such  persons,  Gum Tech believes that during the fiscal year ended
December  31,  1999,  all  filing  requirements   applicable  to  its  officers,
directors,  and greater than ten percent  beneficial  owners were  complied with
except as set forth below.

     Messrs.  Russell,  Kehoe,  Jorgenson,  Boone, and Yuan reported the October
1999 grant of options to each of them on a Form 5 filing in February 2000.

ITEM 11. EXECUTIVE COMPENSATION

     The following table discloses, for the years ended December 31, 1997, 1998,
and 1999,  certain  compensation paid to the Company's Chief Executive  Officer,
and to each other  executive  officer whose total  compensation in 1999 exceeded
$100,000.  No other executive officer of the Company at December 31, 1999 earned
more than $100,000 in annual  compensation during the fiscal year ended December
31, 1999.

                                       19
<PAGE>
                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                        Long Term Compensation
                                                                        -----------------------
                                          Annual Compensation                   Awards           Payouts
                                  -----------------------------------   -----------------------  -------
                                                                       Restricted   Securities
Name and Principal                                       Other Annual    Stock      Underlying    LTIP      All Other
Position                   Year    Salary     Bonus      Compensation   Award(s)   Options/SARS  Payouts  Compensation(1)
--------                   ----   --------   --------    ------------   --------   ------------  -------  ---------------
<S>                        <C>    <C>        <C>              <C>         <C>        <C>           <C>       <C>
Gary S. Kehoe              1999   $132,292   $ 50,000          0           0          80,000        0        $ 3,965
  President, Chief         1998   $ 95,000   $ 30,000(2)       0           0         188,000(3)     0        $ 2,847
  Operating Officer        1997   $ 84,333   $ 20,000(4)       0           0          88,000(5)     0        $   880

William J. Hemelt          1999   $100,000   $      0          0           0          24,000        0        $ 3,000
  Chief Financial          1998   $ 58,333   $      0          0           0          50,000        0        $ 1,750
  Officer, Treasurer
  and Secretary

W. Brown Russell           1999   $ 96,667   $      0          0           0          60,000        0        $ 2,821
  Chairman of the Board    1998   $ 44,000   $      0          0           0          70,000        0        $     0
  and Director of Legal
  and Investor Relations
</TABLE>

(1)  Includes  matching  contributions  under our SRA/IRA  defined  contribution
     program.
(2)  Includes $10,000 that was accrued in 1998 but paid in 1999.
(3)  Represents  options originally granted in prior years that were repriced in
     1998. (See footnote 5 below).  In accordance with SEC rules,  these options
     are reported as options  granted during the fiscal year 1998 as a result of
     the repricing of these options in April 1998.
(4)  Includes $10,000 that was accrued in 1997 but paid in 1998.
(5)  Each option was  repriced  to $5.625 per share in April 1998,  equal to the
     fair market value on the date of repricing.

                      OPTION/SAR GRANTS IN LAST FISCAL YEAR

         The following  table  provides  information on option grants during the
year ended December 31, 1999 to the named executive officers:

<TABLE>
<CAPTION>
                     Number of      Percent of
                     Securities    Total Options/   Exercise
                     Underlying     Sars Granted     Price                  Grant Date
                    Options/sars  to Employees in    (Per      Expiration    Present
      Name            Granted      Fiscal Year (1)   Share)       Date       Value(1)
      ----            -------      ---------------   ------       ----       --------
<S>                   <C>               <C>         <C>        <C>           <C>
Gary S. Kehoe         70,000(2)         15%         $11.7500   08/10/2002    $384,090
                      10,000(3)          2%         $12.5625   10/07/2002    $ 58,680
William J. Hemelt     24,000(4)          5%         $11.7500   08/10/2004    $131,688
W. Brown Russell      50,000(5)         11%         $11.7500   08/10/2002    $274,350
                      10,000(3)          2%         $12.5625   10/07/2002    $ 58,680
</TABLE>

(1)  The grant  date  present  values per option  share were  derived  using the
     Black-Scholes  option  pricing  model  in  accordance  with SEC  rules  and
     regulations  and are not intended to forecast  future  appreciation  of our
     stock  price.  The  options  granted  on August  10,  1999 had a grant date

                                       20
<PAGE>
     present  value of $5.487 per option and the  options  granted on October 7,
     1999 had a grant date present value of $5.868 per option. The Black-Scholes
     model was used with the following assumptions: volatility of 63.1% based on
     a historical  weekly average;  dividend yield of 0%; risk-free  interest of
     5.90% based on a U.S. Treasury rate of three years; and a three year option
     life.

(2)  30,000  vested upon the  completion  of the second  clinical  test of Zicam
     efficacy,  20,000 vest upon  completion of a major dental gum contract,  as
     determined by the Compensation  committee of the Board and 20,000 vest upon
     completion  of  a  major  nicotine  gum  contract,  as  determined  by  the
     Compensation committee of the Board

(3)  5,000  vested  upon the  completion  of the second  clinical  test of Zicam
     efficacy,  2,500 vest upon  completion of a major dental gum  contract,  as
     determined by the Compensation  commmittee of the Board and 2,500 vest upon
     completion  of  a  major  nicotine  gum  contract,  as  determined  by  the
     Compensation committee of the Board.

(4)  12,000  vested upon the  completion  of the second  clinical  test of Zicam
     efficacy, 4,000 vest on each of August 10, 2000, August 10, 2001 and August
     10, 2002.

(5)  30,000  vested upon the  completion  of the second  clinical  test of Zicam
     efficacy,  10,000 vest upon  completion of a major dental gum contract,  as
     determined by the Compensation  committee of the Board and 10,000 vest upon
     completion  of  a  major  nicotine  gum  contract,  as  determined  by  the
     Compensation committee of the Board.

         AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
                                OPTION/SAR VALUES

     The  following  table  provides  information  on the value  realized by the
exercise of options by the named executive officers during 1999 and the value of
the named executive officer's unexercised options at December 31, 1999.

<TABLE>
<CAPTION>
                                               Number of Securities
                                              Underlying Unexercised        Value of Unexercised
                     Shares                      Options/sars At            In-the-money Options/
                    Acquired                     Fiscal Year-end           Sars At Fiscal Year-end
                       On        Value      --------------------------   --------------------------
       Name         Exercise    Realized    Exercisable  Unexercisable   Exercisable  Unexercisable
       ----         --------    --------    -----------  -------------   -----------  -------------
<S>                 <C>        <C>            <C>           <C>            <C>           <C>
Gary S. Kehoe       100,000    $1,191,250     88,000        80,000         $913,000      $331,875
William J. Hemelt    18,000    $  218,812      7,000        49,000         $ 73,500      $364,500
W. Brown Russell     10,000    $  111,250     60,000        60,000         $597,400      $246,875
</TABLE>

     Gum Tech has entered into  employment  agreements  with  Messrs.  Kehoe and
Hemelt.  Mr. Kehoe's  agreement,  which was  originally  signed on June 1, 1995,
expires on December 31, 2000. Mr. Kehoe's salary has been increased by the Board
to an annual rate of $150,000, which is above the level required in the contract
to reflect the additional responsibilities Mr. Kehoe has assumed as President of
Gum Tech.  The contract  agreement  provides a bonus payment  structure  that is
related to annual sales levels of new gums developed by Mr. Kehoe.  Mr. Hemelt's
agreement,  which  expires at the end of May 31,  2000,  provides  for an annual
salary of $100,000.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

     The  following  table sets forth  information,  as of March 15, 2000,  with
respect to the number of shares of GumTech's Common Stock  beneficially owned by
the named  executive  officers,  by individual  directors,  by all directors and
officers  as a group,  and by persons  known by Gum Tech to own more than 5% its
outstanding  Common Stock. The address of all persons (unless otherwise noted in
the footnotes  below) is in care of Gum Tech at 246 E. Watkins Street,  Phoenix,
Arizona 85004. The indicated  percentages are based upon the number of shares of
Common Stock  outstanding  as of March 15, 2000,  plus,  where  applicable,  the
number  of shares  that the  indicated  person  or group had a right to  acquire
within 60 days of that date.

                                       21
<PAGE>
                                                                Percent of
     Name of Beneficial                         Number of      Common Stock
     Owner and Address                           Shares           Owned
     -----------------                           ------           -----
     Gary S. Kehoe(1)                            269,400           3.0%
     William D. Boone(2)                          80,200           0.9%
     William A. Yuan(3)                           20,071           0.2%
     W. Brown Russell, III(4)                    133,500           1.5%
     William J. Hemelt (5)                        40,000           0.5%
     All directors and                           543,171           5.9%
     officers as a group
     (5 persons)

----------
(1)  Includes  options to  purchase  88,000  shares at $5.625 per share,  70,000
     shares at $11.75 per share and 10,000 shares at $12.5625 per share.
(2)  Includes  options to  purchase  50,000  shares at $5.625 per share,  20,000
     shares at $6.88 and 10,000 shares at $12.5625 per share.
(3)  Includes  options to purchase  10,000  shares at $5.81 per share and 10,000
     shares at $12.5625 per share.
(4)  Includes  options to  purchase  20,000  shares at $6.88 per  share,  40,000
     shares at $5.625  per share,  50,000  shares at $11.75 per share and 10,000
     shares at $12.5625.
(5)  Includes  options to  purchase  4,000  shares at $5.50 per share and 12,000
     shares at $11.75 per share..

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     NONE.

                                     PART IV

ITEM 14. EXHIBITS, LIST AND REPORTS ON FORM 8-K

EXHIBITS

     Exhibit No.    Title
     -----------    -----
     3.01           Certificate of Incorporation  and Amendments  thereto of the
                    Registrant(1)

     3.02           Bylaws of the Registrant(1)

     10.01          1995 Stock Option Plan(1)

     10.02          Amendment to Stock Option Plan(1)

     10.03          Employment Contract with Gary S. Kehoe(1)

     10.04          Employment Contract with William J. Hemelt(2)

                                       22
<PAGE>
     10.05          Lease Agreement - Phoenix, Arizona manufacturing facility(1)

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

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

     10.09          Registration Rights Agreement(4)

     10.10          Installment Loan with Textron Financial Corporation(3)

     10.11          Form of Manufacturing Agreement(5)

     10.12          Operating Agreement of Gel Tech, L.L.C.(6)

     10.13          Securities Purchase Agreement with Citadel Investment
                    Group(7)

     10.14          Credit Agreement between Gel Tech LLC and Imperial Bank

     23             Consent of Angell & Deering

     27             Financial Data Schedule

----------
(1)  Incorporated  by reference to the  Registrant's  Registration  Statement on
     Form SB-2  declared  effective by the  Commission  on April 24, 1996,  file
     number 333-870.
(2)  Incorporated by reference to the Registrant's Report on Form 10-QSB for the
     quarter ending September 30, 1998, file number 000-27646.
(3)  Incorporated by reference to the Registrant's Report on Form 10-KSB for the
     year ending December 31, 1997, file number 000-27646.
(4)  Incorporated by reference to the Registrant's Form 8-K filed March 6, 1997.
(5)  Incorporated by reference to the  Registrant's  Form 10-KSB filed March 31,
     1999.
(6)  Incorporated by reference to the Registrant's Report on Form 10-QSB for the
     quarter ending March 31, 1999, file number 000-27646.
(7)  Incorporated by reference to the Registrant's Form 8-K filed June 9, 1999.

REPORTS ON FORM 8-K

     Gum Tech  filed a report on Form 8-K on  November  8, 1999  announcing  the
withdrawal from publication by the American Journal of Infection  Control of the
manuscript  "The effects of direct  application of ionic zinc nasal spray gel on
the duration of the common cold."

                                       23
<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 30, 2000.

                                       GUM TECH INTERNATIONAL, INC.


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

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


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

/s/ W. Brown Russell, III     Chairman of the Board of            March 30, 2000
-------------------------     Directors, Director of
W. Brown Russell, III         Legal and Investor Relations


/s/ William D. Boone          Director                            March 30, 2000
-------------------------
William D. Boone


/s/ William J. Hemelt         Secretary, Chief Financial          March 30, 2000
-------------------------     Officer (Principal Financial
William J. Hemelt             Officer), Principal Accounting
                              Officer

/s/ William A. Yuan           Director                            March 30, 2000
-------------------------
William A. Yuan

                                       24
<PAGE>
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

  Consolidated Balance Sheets as of December 31,
   1999 and 1998                                                             F-3

  Consolidated Statements of Operations for the
   years ended December 31, 1999, 1998 and 1997                              F-5

  Consolidated Statements of Changes in Stockholders'
   Equity for the years ended December 31, 1999, 1998
   and 1997                                                                  F-6

  Consolidated Statements of Cash Flows for the years
   ended December 31, 1999, 1998 and 1997                                    F-7

  Notes To Consolidated Financial Statements                                 F-8

                                       F-1
<PAGE>
                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors
Gum Tech International, Inc.

We have  audited  the  accompanying  consolidated  balance  sheets  of Gum  Tech
International,  Inc.  and  Subsidiary  as of December  31, 1999 and 1998 and the
related consolidated  statements of operations,  changes in stockholders' equity
and cash flows for the years  ended  December  31,  1999,  1998 and 1997.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Gum Tech  International,  Inc.
and  Subsidiary  as of  December  31,  1999 and 1998  and the  results  of their
operations and their cash flows for the years ended December 31, 1999,  1998 and
1997 in conformity with generally accepted accounting principles.

                                        Angell & Deering
                                        Certified Public Accountants

Denver, Colorado
February 5, 2000

                                       F-2
<PAGE>
                   GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1999 AND 1998


                                     ASSETS

                                                      1999             1998
                                                  ------------     ------------
Current Assets:
  Cash and cash equivalents                       $  5,595,075     $    517,852
  Restricted cash                                      270,878           20,149
  Accounts receivable:
   Trade, net of allowance for doubtful
    accounts of $50,482 and $35,000                  8,197,180        1,462,639
   Employees                                            56,237               --
  Inventories                                        1,966,819        1,896,161
  Prepaid expenses                                     155,281           60,851
                                                  ------------     ------------
     Total Current Assets                           16,241,470        3,957,652
                                                  ------------     ------------
Property and Equipment, at cost:
  Machinery and equipment                            4,455,694        4,272,746
  Office furniture and equipment                       295,577          238,371
  Leasehold improvements                               383,854          332,452
                                                  ------------     ------------
                                                     5,135,125        4,843,569
  Less accumulated depreciation                     (1,724,276)      (1,295,342)
                                                  ------------     ------------
     Net Property and Equipment                      3,410,849        3,548,227
                                                  ------------     ------------
Other Assets:
  Deposits                                             214,936          279,131
  Intangible assets, net of accumulated
   amortization of $548,744 and $156,526               160,659          114,855
                                                  ------------     ------------
     Total Other Assets                                375,595          393,986
                                                  ------------     ------------
     Total Assets                                 $ 20,027,914     $  7,899,865
                                                  ============     ============

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

                                       F-3
<PAGE>
                   GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1999 AND 1998


                      LIABILITIES AND STOCKHOLDERS' EQUITY

                                                        1999           1998
                                                    ------------   ------------
Current Liabilities:
  Accounts payable and accrued expenses             $  2,078,358   $  1,309,067
  Accrued interest                                            --         42,449
  Customer deposits                                       10,500         34,763
  Sales returns and allowances                         1,202,100         35,000
  Current portion of long-term debt                      420,043        381,280
                                                    ------------   ------------
     Total Current Liabilities                         3,711,001      1,802,559
                                                    ------------   ------------
Long-Term Debt, net of current portion above:
  Financial institutions and other                     2,646,897      2,736,525
  Obligations under capital leases                        14,105         24,256
  Less current portion above                            (420,043)      (381,280)
                                                    ------------   ------------
     Total Long-Term Debt                              2,240,959      2,379,501
                                                    ------------   ------------
Minority interest in consolidated affiliate            1,374,117             --
                                                    ------------   ------------
Commitments and Contingencies                                 --             --

Stockholders' Equity:
  Preferred stock: no par value, 1,000,000 shares
   authorized:
    Series A preferred stock, $1,000 stated value,
     2,000 shares authorized, 1,000 shares issued
     and outstanding                                   1,000,000             --
  Common stock: no par value, 20,000,000 shares
   authorized, 8,320,705 and 6,857,999 shares
   issued and outstanding                             23,687,579     15,145,037
  Additional paid in capital                           3,551,766      2,915,152
  Accumulated deficit                                (15,537,508)   (14,342,384)
                                                    ------------   ------------
     Total Stockholders' Equity                       12,701,837      3,717,805
                                                    ------------   ------------
     Total Liabilities and Stockholders' Equity     $ 20,027,914   $  7,899,865
                                                    ============   ============

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

                                       F-4
<PAGE>
                   GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997


<TABLE>
<CAPTION>
                                                   1999            1998            1997
                                               ------------    ------------    ------------
<S>                                            <C>             <C>             <C>
Net sales                                      $ 15,500,024    $  5,272,547    $  3,776,562

Cost of sales                                     7,341,362       4,357,010       4,197,777
                                               ------------    ------------    ------------
     Gross Profit                                 8,158,662         915,537        (421,215)

Operating expenses                                5,705,490       6,164,022       3,881,238
Research and development                            664,448         667,067         209,783
                                               ------------    ------------    ------------
     Income (Loss) From Operations                1,788,724      (5,915,552)     (4,512,236)
                                               ------------    ------------    ------------
Other Income (Expense):
  Interest and other income                         123,564         127,947         204,220
  Interest expense                               (1,311,792)       (473,811)     (1,090,618)
                                               ------------    ------------    ------------
     Total Other Income (Expense)                (1,188,228)       (345,864)       (886,398)
                                               ------------    ------------    ------------
Income (Loss) Before Provision For
 Income Taxes and Minority Interest                 600,496      (6,261,416)     (5,398,634)

Provision for income taxes                               --              --              --
Minority interest in earnings of
 consolidated affiliate                           1,374,117              --              --
                                               ------------    ------------    ------------
Net Income (Loss)                                  (773,621)     (6,261,416)     (5,398,634)

Preferred stock dividends                           238,466              --              --
                                               ------------    ------------    ------------
Net Income (Loss) Applicable to
 Common Shareholders                           $ (1,012,087)   $ (6,261,416)   $ (5,398,634)
                                               ============    ============    ============
Net Income (Loss) Per Share of Common Stock:
  Basic                                        $       (.14)   $       (.97)   $      (1.02)
  Diluted                                      $       (.14)   $       (.97)   $      (1.02)
Weighted Average Number of Common Shares
 Outstanding:
  Basic                                           7,412,959       6,427,815       5,294,099
  Diluted                                         7,412,959       6,427,815       5,294,099
</TABLE>

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

                                       F-5
<PAGE>
                   GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997


<TABLE>
<CAPTION>
                                                Series A
                                             Preferred Stock                 Common Stock           Additional
                                       ---------------------------   ---------------------------     Paid In      Accumulated
                                          Shares         Amount         Shares         Amount        Capital        Deficit
                                       ------------   ------------   ------------   ------------   ------------   ------------
<S>                                    <C>            <C>            <C>            <C>            <C>            <C>
Balance at December 31, 1996                     --   $         --      4,948,740   $  7,965,060   $         --   $ (2,682,334)

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

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

Net loss                                         --             --             --             --             --     (5,398,634)
                                       ------------   ------------   ------------   ------------   ------------   ------------
Balance at December 31, 1997                     --             --      5,856,460     12,088,150        665,790     (8,080,968)

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

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

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

Net loss                                         --             --             --             --             --     (6,261,416)
                                       ------------   ------------   ------------   ------------   ------------   ------------
Balance at December 31, 1998                     --             --      6,857,999     15,145,037      2,915,152    (14,342,384)

Issuance of common stock upon
 exercise of stock options and
 warrants                                        --             --        890,800      3,672,044             --             --

Conversion of convertible notes
 payable into common stock                       --             --        317,046      1,505,972             --             --

Issuance of Series A preferred
 stock (net of costs of $519,011)             2,000      2,000,000             --             --       (519,011)            --

Issuance of common stock for
 repayment of senior notes,
 including prepayment penalty                    --             --        163,704      2,200,000             --             --

Issuance of common stock for
 redemption of Series A preferred
 stock, including prepayment penalty         (1,000)    (1,000,000)        86,163      1,100,000             --             --

Issuance of common stock for payment
 of interest on senior notes                     --             --          4,993         64,526             --             --

Compensation from issuance of
 stock options                                   --             --             --             --         64,275             --

Issuance of warrants in connection
 with financing                                  --             --             --             --      1,091,350             --

Payment of Series A preferred stock
 dividends                                       --             --             --             --             --       (238,466)

Dividend distribution of subsidiary              --             --             --             --             --       (183,037)

Net loss                                         --             --             --             --             --       (773,621)
                                       ------------   ------------   ------------   ------------   ------------   ------------
Balance at December 31, 1999                  1,000   $  1,000,000      8,320,705   $ 23,687,579   $  3,551,766   $(15,537,508)
                                       ============   ============   ============   ============   ============   ============
</TABLE>

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

                                       F-6
<PAGE>
                   GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997


<TABLE>
<CAPTION>
                                                                             1999           1998           1997
                                                                          -----------    -----------    -----------
<S>                                                                       <C>            <C>            <C>
Cash Flows From Operating Activities:
 Net income (loss)                                                        $  (773,621)   $(6,261,416)   $(5,398,634)
 Adjustments to reconcile net income (loss) to net cash
  (used) by operating activities:
    Depreciation                                                              430,223        304,277        551,404
    Amortization                                                              392,218        108,816         47,710
    Amortization of discount on notes payable                                 387,500             --             --
    Provision for bad debts                                                    45,000         34,613         94,500
    (Gain) loss on disposal of assets                                           1,544         (2,699)        10,633
    Interest expense from beneficial conversion feature
      of notes payable                                                             --             --        665,790
    Compensation from forgiveness of note receivable                               --        114,012             --
    Compensation from extension and issuance of stock options                  64,275      2,249,362             --
    Common stock issued for payment of interest                               264,526             --             --
    Minority interest in earnings of consolidated affiliate                 1,374,117             --             --
    Changes in assets and liabilities:
     Accounts receivable                                                   (6,779,541)      (415,018)      (648,527)
     Employee receivables                                                     (56,237)        61,054        (61,054)
     Inventories                                                              (70,658)      (862,779)       333,562
     Income tax receivable                                                         --             --        234,440
     Prepaid expenses and other                                              (345,159)        92,254        (55,106)
     Interest receivable                                                           --         60,164        (60,164)
     Deposits and other                                                            --          7,291        128,602
     Accounts payable and accrued expenses                                    726,842        551,058        470,600
     Customer deposits                                                        (24,263)        19,763        (50,500)
     Sales returns and allowances                                           1,167,100         35,000             --
                                                                          -----------    -----------    -----------
          Net Cash (Used) By Operating Activities                          (3,196,134)    (3,904,248)    (3,736,744)
                                                                          -----------    -----------    -----------
Cash Flows From Investing Activities:
 Capital expenditures                                                        (294,389)      (990,557)      (134,083)
 Proceeds from disposal of equipment                                               --         16,122          6,363
 Receipt of principal on notes receivable                                          --        250,000        177,653
 Deposits and other                                                            64,195       (139,358)       (10,598)
                                                                          -----------    -----------    -----------
          Net Cash Provided (Used) By Investing Activities                   (230,194)      (863,793)        39,335
                                                                          -----------    -----------    -----------
Cash Flows From Financing Activities:
 Proceeds from borrowing                                                    4,000,000             --      2,530,000
 Principal payments on notes payable                                         (381,307)      (343,184)      (204,871)
 Issuance of common stock                                                   3,672,054      2,032,897      4,311,768
 Issuance of preferred stock                                                2,000,000             --             --
 Offering costs incurred                                                     (155,231)            --       (188,678)
 Debt issuance costs incurred                                                (310,462)       (11,733)      (259,648)
 Dividend distribution of subsidiary                                         (183,037)            --             --
 Dividends paid on preferred stock                                           (138,466)            --             --
                                                                          -----------    -----------    -----------
          Net Cash Provided By Financing Activities                         8,503,551      1,677,980      6,188,571
                                                                          -----------    -----------    -----------
          Net Increase (Decrease) in Cash and Cash Equivalents              5,077,223     (3,090,061)     2,491,162

          Cash and Cash Equivalents at Beginning of Year                      517,852      3,607,913      1,116,751
                                                                          -----------    -----------    -----------
          Cash and Cash Equivalents at End of Year                        $ 5,595,075    $   517,852    $ 3,607,913
                                                                          ===========    ===========    ===========
Supplemental Disclosure of Cash Flow Information:
 Cash paid during the year for:
  Interest                                                                $   509,997    $   392,693    $   306,972
  Income taxes                                                                    150            150            150

Supplemental Disclosure of Non-cash Investing and Financing Activities:
  Conversion of account receivable to a note receivable                   $        --    $        --    $   225,665
  Note payable incurred for purchase of equipment under a capital
    lease                                                                          --             --      1,564,457
  Conversion of convertible notes payable into common stock                 1,505,972      1,023,990             --
  Issuance of warrants in connection with financing                         1,091,340             --             --
  Issuance of common stock to repay senior notes and redeem
     preferred stock                                                        3,000,000             --             --
  Issuance of common stock for payment of dividends                           100,000             --             --
</TABLE>

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

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


1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     ORGANIZATION

     Gum Tech  International,  Inc. (the "Company") was  incorporated in Utah on
     February 4, 1991 to develop,  market and distribute  specialty  chewing gum
     products  for  branded  and private  label  customers,  as well as products
     marketed  under the Company's  brand.  The Company  currently  targets four
     market segments:  oral care, smoking  cessation,  dietary  supplement,  and
     over-the-counter (OTC) drug.

     The Company also is developing,  marketing and selling homeopathic remedies
     utilizing a nasal gel technology through a majority owned subsidiary.

     PRINCIPLES OF CONSOLIDATION

     The consolidated  financial  statements include the accounts of the Company
     and its  majority  owned  subsidiary,  Gel  Tech,  L.L.C.  All  significant
     intercompany accounts and transactions have been eliminated.

     INVENTORIES

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

     PROPERTY AND EQUIPMENT

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

           Classification                                   Useful Life in Years
           --------------                                   --------------------
     Machinery and equipment                                        5-30
     Office furniture and equipment                                    5
     Leasehold improvements                                           10

     Depreciation  of property and equipment  charged to operations is $430,223,
     $304,277 and $551,404 for the years ended December 31, 1999, 1998 and 1997,
     respectively.

     INTANGIBLE ASSETS

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

     REVENUE RECOGNITION

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

     STOCK-BASED COMPENSATION

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

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


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

     LONG-LIVED ASSETS

     In  accordance  with  SFAS  No.  121,  "Accounting  for the  Impairment  of
     Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company
     reviews for the  impairment of long-lived  assets and certain  identifiable
     intangibles,  whenever events or changes in circumstances indicate that the
     carrying value of an asset may not be recoverable. An impairment loss would
     be  recognized  when the  estimated  future  cash  flows  is less  than the
     carrying amount of the assets. No impairment losses have been identified by
     the Company.

     INCOME TAXES

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

     ADVERTISING

     The Company  advertises  primarily through  television and print media. The
     Company's  policy is to expense  advertising  costs,  including  production
     costs,  as  incurred.  Advertising  expense was  $1,343,492,  $421,363  and
     $1,140,386  for  the  years  ended  December  31,  1999,   1998  and  1997,
     respectively.

     BARTER CREDITS

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

     NET INCOME (LOSS) PER SHARE OF COMMON STOCK

     The Company adopted SFAS No. 128, "Earnings Per Share", which specifies the
     method of computation,  presentation and disclosure for earnings per share.
     SFAS No. 128 requires the  presentation  of two earnings per share amounts,
     basic and diluted.

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

     The basic and diluted earnings per share are the same since the Company had
     a net loss in 1999,  1998 and 1997 and the  inclusion of stock  options and
     other  incremental  shares would be  antidilutive.  Consequently,  options,
     warrants and other incremental shares to purchase 1,540,168,  1,554,968 and
     2,502,680  shares of common  stock at  December  31,  1999,  1998 and 1997,
     respectively  were excluded from the  computation  of diluted  earnings per
     share.

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


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

     CASH AND CASH EQUIVALENTS

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

     ESTIMATES

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

     RECLASSIFICATIONS

     Certain  prior period  amounts have been  reclassified  to conform with the
     current period presentation.

2.   RESTRICTED CASH

     Cash of $270,878 and $20,149 at December  31, 1999 and 1998,  respectively,
     was held as collateral by a bank for letters of credit issued to the lessor
     of the Company's manufacturing and warehouse facilities and to a lender.

3.   INVENTORIES

     Inventories consists of the following:

                                                           1999         1998
                                                        ----------   ----------
     Raw materials and packaging                        $1,140,713   $1,216,070
     Work in process                                       541,886      731,686
     Finished goods                                        284,220      178,405
     Less reserve for obsolescence                              --     (230,000)
                                                        ----------   ----------
        Total                                           $1,966,819   $1,896,161
                                                        ==========   ==========

4.   LONG-TERM DEBT

     Long-term debt consists of the following:

                                                           1999         1998
                                                        ----------   ----------
     FINANCIAL INSTITUTIONS AND OTHER

     9.73% installment note due in 2001 with monthly
     principal and interest payments of $39,550,
     collateralized by machinery and equipment and
     a $250,000 letter of credit.                       $  859,397   $1,230,525

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

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


4.   LONG-TERM DEBT (CONTINUED)

     OBLIGATIONS UNDER CAPITAL LEASES

     9.4% installment notes due in 2001 with monthly
     principal and interest payments of $1,000,
     collateralized by equipment.                       $   14,105   $   24,256

     SENIOR NOTES

     8% senior notes due in 2001 with interest payable
     quarterly. One half of the notes must be repaid
     within one year with a 10% prepayment penalty,
     collateralized by substantially all assets of the
     Company and the notes may be repaid in shares of
     the Company's common stock. Any repayments of
     the notes must be accompanied by a redemption of
     the Series A preferred stock on a prorata basis
     of two thirds notes and one third preferred
     stock (Note 6). The notes are subject to
     financial covenants regarding net revenue,
     EBITDA, and cash balances with all covenants
     calculated on the Company's operations excluding
     its majority owned subsidiary. The Company was
     in default on the EBITDA covenant at December
     31, 1999. The Company repaid the entire amount
     of the notes in January and February 2000
     through the issuance of common stock.               2,000,000           --

     Less debt discount                                   (212,500)          --
                                                        ----------   ----------
     Net Senior Notes                                    1,787,500           --
                                                        ----------   ----------
     Total Long-Term Debt                                2,661,002    2,760,781

     Less current portion of long-term debt               (420,043)    (381,280)
                                                        ----------   ----------
     Long-Term Debt                                     $2,240,959   $2,379,501
                                                        ==========   ==========

     Installments  due on debt  principal,  including  the  capital  leases,  at
     December 31, 1999 are as follows:

     Year Ending
     December 31,
     ------------
         2000                                                        $  420,043
         2001                                                         2,453,459
                                                                     ----------
         Total                                                       $2,873,502
                                                                     ==========

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


5.   INCOME TAXES

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

                                                          1999    1998    1997
                                                          ----    ----    ----
     Current:
     Federal                                              $ --    $ --    $ --
     State                                                  --      --      --
                                                          ----    ----    ----
       Total                                                --      --      --
                                                          ----    ----    ----
     Deferred:
     Federal                                                --      --      --
     State                                                  --      --      --
                                                           ---    ----    ----
       Total                                                --      --      --
                                                          ----    ----    ----
     Total Provision For Income Taxes                     $ --    $ --      --
                                                          ====    ====    ====

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

                                                          1999    1998    1997
                                                          ----    ----    ----
     Federal statutory rate                                (34)%   (34)%   (34)%
     State income taxes, net of federal benefits            (5)     (5)     (5)
     Valuation allowance                                    39      39      39
                                                          ----    ----    ----
     Total                                                  --%     --%     --%
                                                          ====    ====    ====

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

<TABLE>
<CAPTION>
                                                      1999           1998           1997
                                                   -----------    -----------    -----------
<S>                                                <C>            <C>            <C>
     Income taxes at the federal statutory rate    $  (263,031)   $(2,128,881)   $(1,835,536)
     State income taxes, net of federal benefits       (38,681)      (330,603)      (294,204)
     Nondeductible expenses                              3,836          8,864         20,969
     Valuation allowance                               297,876      2,450,620      2,108,771
                                                   -----------    -----------    -----------
     Total                                         $        --    $        --    $        --
                                                   ===========    ===========    ===========
</TABLE>

     Significant components of deferred income taxes as of December 31, 1999 and
     1998 are as follows:

     Net operating loss carryforward                 $10,521,400    $ 8,745,000
     Reserve for bad debts                                10,700         14,700
     Reserve for obsolete inventory                           --         96,600
                                                     -----------    -----------
     Total deferred tax asset                         10,532,100      8,856,300
                                                     -----------    -----------
     Depreciation                                       (496,400)      (373,300)
     Stock option compensation                        (3,577,600)    (2,338,000)
     Other                                                (5,700)            --
                                                     -----------    -----------

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


5.   INCOME TAXES (CONTINUED)

     Total deferred tax liability                     (4,079,700)    (2,711,300)
     Less valuation allowance                         (6,452,400)    (6,145,000)
                                                     -----------    -----------
     Net Deferred Tax Asset                          $        --    $        --
                                                     ===========    ===========

     The Company  has  assessed  its past  earnings  history  and trends,  sales
     backlog,  budgeted sales,  and expiration  dates of  carryforwards  and has
     determined that it is more likely than not that no deferred tax assets will
     be  realized.  The  valuation  allowance of  $6,452,400  is  maintained  on
     deferred tax assets which the Company has not  determined to be more likely
     than not realizable at this time. The net change in the valuation allowance
     for  deferred  tax assets was an increase  of  $307,400.  The Company  will
     continue to review this valuation on a quarterly basis and make adjustments
     as appropriate.

     At December 31, 1999,  the Company had federal and state net operating loss
     carryforwards of approximately  $24,900,000 and $25,600,000,  respectively.
     Such  carryforwards  expire in the years 2011 through 2019 and 2001 through
     2004 for federal and state purposes, respectively.

6.   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.

     In June 1999, the Company designated a new class of preferred stock "Series
     A  Preferred  Stock" and the number of shares  constituting  such series is
     2,000 shares with no par value. The new series was authorized in connection
     with a Securities  Purchase  Agreement for the sale of $4,000,000 of senior
     notes (Note 4) and $2,000,000 of Series A preferred  stock.  Each preferred
     share  shall  bear  dividends  at a rate of 14% per  year,  which  shall be
     cumulative,  and  are  payable  on  a  quarterly  basis.  Upon  the  second
     anniversary of the issuance date (June 2, 2001) each  preferred  share will
     automatically  convert  into shares of common  stock by dividing the stated
     value of the preferred shares ($1,000) by 80% of the average of the closing
     bid price of the  Company's  common  stock for the 20 days  preceding  such
     date.  Until all of the preferred  shares have been  converted  into common
     stock or redeemed, the Company may not declare or pay any cash dividends on
     its common stock without the written  consent of at least two thirds of the
     holders of the preferred  shares.  One half of the preferred shares must be
     redeemed within one year with a 10% prepayment penalty.  Any redemptions of
     the preferred  shares must be  accompanied  by a repayment of the Company's
     senior notes on a prorata basis of one third preferred stock and two thirds
     senior notes.  Any redemptions of the preferred stock prior to June 2, 2001
     are based on 95% of the average of the  closing bid price of the  Company's
     common stock for the 20 days prior to the date of redemption.

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


6.   PREFERRED STOCK (CONTINUED)

     The company may redeem the preferred  stock in cash,  solely at its option.
     The Company redeemed all of the outstanding preferred shares in January and
     February 2000 through the issuance of common stock.

7.   STOCK OPTIONS AND WARRANTS

     STOCK OPTION PLAN

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

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

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

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

     The following  table  contains  information  on the stock options under the
     Company's  Plan for the years ended  December 31, 1997,  1998 and 1999. The
     outstanding agreements expire from June 2000 to October 2004.

                                                    Number of   Weighted Average
                                                     Shares      Exercise Price
                                                   ----------        ------
     Options outstanding at December 31, 1996       1,318,000        $ 4.00
       Granted                                        565,000          9.81
       Exercised                                     (184,000)         1.72
       Cancelled                                      (15,000)         6.38
                                                   ----------        ------
     Options outstanding at December 31, 1997       1,684,000          6.18
       Granted                                        912,000          5.79
       Exercised                                     (600,250)         2.78
       Cancelled                                   (1,298,750)         7.65
                                                   ----------        ------

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


7.   STOCK OPTIONS AND WARRANTS (CONTINUED)

     STOCK OPTION PLAN (CONTINUED)

     Options outstanding at December 31, 1998         697,000          5.86
      Granted                                         315,000         11.90
      Exercised                                      (333,500)         5.62
      Cancelled                                       (14,000)         5.63
                                                   ----------        ------
     Options outstanding at December 31, 1999         664,500        $ 8.85
                                                   ==========        ======

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

     NON-QUALIFIED STOCK OPTIONS

     The  Company  has  granted  non-qualified  stock  options  to  consultants,
     distributors and other individuals.  The outstanding agreements expire from
     June 2000 to January 2004.

     The  following   table  contains   information  on  all  of  the  Company's
     non-qualified stock options for the years ended December 31, 1997, 1998 and
     1999.

                                                   Number of    Weighted Average
                                                     Shares      Exercise Price
                                                   ----------        ------
     Options outstanding at December 31, 1996         360,000        $ 1.80
       Granted                                        100,000          4.75
       Exercised                                     (180,000)         1.80
       Cancelled                                           --            --
                                                   ----------        ------
     Options outstanding at December 31, 1997         280,000          2.85
       Granted                                         25,000         11.44
       Exercised                                     (180,000)         1.80
       Cancelled                                           --            --
                                                   ----------        ------
     Options outstanding at December 31, 1998         125,000          6.09
       Granted                                        215,000          9.63
       Exercised                                     (100,000)         4.75
       Cancelled                                           --            --
                                                   ----------        ------
     Options outstanding at December 31, 1999         240,000        $ 9.82
                                                   ==========        ======

     PROFORMA DISCLOSURES

     The Company  adopted SFAS No. 123 during the year ended  December 31, 1996.
     In accordance  with the provisions of SFAS No. 123, the Company applies APB
     Opinion No. 25,  "Accounting  for Stock Issued to  Employees,"  and related
     interpretations  in  accounting  for  its  plans  and  does  not  recognize
     compensation expense for its stock-based

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


7.   STOCK OPTIONS AND WARRANTS (CONTINUED)

     PROFORMA DISCLOSURES (CONTINUED)

     compensation plans other than for options granted to non-employees.  If the
     Company had elected to recognize  compensation  expense based upon the fair
     value at the grant date for awards  under these plans  consistent  with the
     methodology  prescribed  by SFAS No.  123,  the  Company's  net  income and
     earnings per share would be reduced to the following pro forma amounts:

                                         1999           1998           1997
                                      -----------    -----------    -----------
     Net income (loss) applicable to
     common shareholders:

          As reported                 $(1,012,087)   $(6,261,416)   $(5,398,634)
          Pro forma                   $(1,654,447)   $(7,299,820)   $(5,881,867)

     Net income (loss) per share of
     common stock:

          As reported                 $      (.14)   $      (.97)   $     (1.02)
          Pro forma                   $      (.22)   $     (1.14)   $     (1.11)

     These pro forma  amounts may not be  representative  of future  disclosures
     since the  estimated  fair value of stock  options is  amortized to expense
     over the  vesting  period and  additional  options may be granted in future
     years.  The fair value for these options was estimated at the date of grant
     using the Black-Scholes option pricing model with the following assumptions
     for the years ended December 31, 1999, 1998 and 1997.

                                                    1999       1998       1997
                                                    ----       ----       ----
     Risk-free interest rate                         5.90%      5.45%      5.88%
     Expected life                                 3 years    2 years    2 years
     Expected volatility                             63.1%     61.82%     63.51%
     Expected dividend yield                            0%         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 weighted  average fair value price of options granted was $5.56,  $1.56
     and $3.82 in 1999, 1998 and 1997, respectively.

     The following table summarizes  information about stock-based  compensation
     plans outstanding at December 31, 1999:

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


7.   STOCK OPTIONS AND WARRANTS (CONTINUED)

     Options Outstanding and Exercisable by Price Range as of December 31, 1999:

                              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
     --------------     -------        ----       ------    --------     ------
     $  5.50 - 6.88     329,500        1.02       $ 5.78     329,500     $ 5.82
     $11.44 - 12.56     335,000        3.67       $11.88     143,000     $11.44
     --------------     -------        ----       ------    --------     ------
     $ 5.50 - 12.56     664,500        2.36       $ 8.85     472,500     $ 6.00
     ==============     =======        ====       ======    ========     ======

     COMPENSATION EXPENSE

     The Company recorded  compensation expense of $64,275,  $2,249,362 and $-0-
     for the years ended December 31, 1999, 1998 and 1997,  respectively for the
     value of certain  options granted to  non-employees  of the Company and for
     the extension of options  previously  granted to an Officer and Director of
     the Company. The valuation of the options and warrants granted to employees
     is based on the difference  between the exercise price and the market value
     of the stock on the measurement  date. The valuation of the options granted
     to non-employees is estimated using the Black-Scholes option pricing model.

     WARRANTS

     1995 BRIDGE LOAN

     In 1995,  the  Company  borrowed  $1,550,000  from a group of four  lenders
     ("1995 Bridge Loan"). As additional consideration for the 1995 Bridge Loan,
     the Company issued an aggregate of 465,000  common stock purchase  warrants
     to the lenders.  Each warrant is  exercisable  to purchase one share of the
     Company's  common stock at $2.00 per share in perpetuity.  In 1997,  75,000
     warrants were exercised and 390,000 warrants were exercised in 1999.

     UNDERWRITER'S WARRANTS

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

     In 1999,  1998 and 1997,  16,825,  1,428 and  2,830,  respectively,  of the
     Underwriter's  warrants  were  exercised and 18,917 are  outstanding  as of
     December 31, 1999.

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


7.   STOCK OPTIONS AND WARRANTS (CONTINUED)

     MARKETING AND DEVELOPMENT OPTIONS

     In 1998, the Company agreed to issue 200,000 stock options to an individual
     in  consideration  for a joint  venture  opportunity  to develop and market
     various gum  products.  The options are  exercisable  at $9.00 per share at
     anytime until October 30, 2000 and all 200,000  options are  outstanding at
     December 31, 1999.

     FINANCING WARRANTS

     In connection with the Company's Securities Purchase Agreement for the sale
     of senior notes and Series A preferred stock the Company issued warrants to
     the lenders.  The Company  issued a total of 300,000  common stock purchase
     warrants.  Each  warrant  is  exercisable  to  purchase  one  share  of the
     Company's  common stock at $12.44 per share at anytime  until June 1, 2002.
     All of the warrants are outstanding at December 31, 1999.

     The Company also issued a total of 60,000 common stock purchase warrants as
     a finders fee in connection with the financing. Each warrant is exercisable
     to purchase one share of the Company's  common stock,  30,000 at $11.70 per
     share  through June 1, 2002 and 30,000 at $15.00 per share  through June 1,
     2004. All of the warrants are outstanding at December 31, 1999.

8.   COMMITMENTS AND CONTINGENCIES

     LEASES

     The Company leases its office and packaging  facilities,  manufacturing and
     warehouse   facilities  and  certain   equipment  under  long-term  leasing
     arrangements.  The Company's  manufacturing and warehouse  facilities lease
     contains two three-year renewal options. In addition,  the Company's office
     and packaging facilities contains a five year renewal option. The following
     is a schedule of future  minimum lease  payments at December 31, 1999 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
     ------------                         -------     ----------     ----------
     2000                                 $12,004     $  277,950     $  289,954
     2001                                   3,001        287,310        290,311
     2002                                      --        303,426        303,426
     2003                                      --        252,383        252,383
     2004                                      --        145,188        145,188
     Thereafter                                --        133,089        133,089
                                          -------     ----------     ----------
     Total Minimum Lease Payments          15,005     $1,399,346     $1,414,351
                                                      ==========     ==========
     Less amount representing interest        900
                                          -------
     Present Value of Net
     Minimum Lease Payments               $14,105
                                          =======

     Rental expense  charged to operations  was $323,173,  $193,152 and $187,826
     for the years ended December 31, 1999, 1998 and 1997, respectively.

                                      F-18
<PAGE>
                   GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


8.   Commitments and Contingencies (Continued)

     Leased  equipment  under capital leases as of December 31, 1999 and 1998 is
     as follows:

                                                             1999        1998
                                                           --------    --------
     Equipment                                             $ 47,727    $ 47,727
     Less accumulated depreciation                          (35,795)    (26,250)
                                                           --------    --------
     Net Property and Equipment Under Capital Leases       $ 11,932    $ 21,477
                                                           ========    ========

     MINORITY INTEREST

     The Company has an option to purchase the 40% minority interest in Gel Tech
     at the Company's  discretion at any time after January 27, 2001 or the date
     on which cumulative sales of Gel Tech's products have exceeded $50,000,000.
     If the Company exercises its option,  the Company shall issue shares of the
     Company's  common stock in exchange for the minority  interest in Gel Tech.
     The fair market  value of the shares of the  Company's  common  stock to be
     issued shall be equal to the fair market value of the minority  interest in
     Gel Tech at the time the Company exercises its option.

9.   RELATED PARTY TRANSACTIONS

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

10.  EMPLOYEE BENEFIT PLAN

     Effective  September  1,  1997,  the  Company  adopted a Simple  Retirement
     Account Plan for employees who are not covered by any collective bargaining
     agreement. The Company shall make a matching contribution for each employee
     in an amount equal to each employees Salary Reduction Contributions for the
     Plan year of up to 3% of the employees  compensation for the Plan year. The
     Company made matching contributions of $28,250, $33,353 and $20,059 for the
     years ended December 31, 1999, 1998 and 1997,  respectively.  Each employee
     shall be fully vested at all times in his  contribution  and the  Company's
     matching contributions.

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 cash in its banks exceeds the federally insured
     limits.  The Company  provides  credit in the normal  course of business to
     many of the nation's top drug stores,  mass  merchandisers  and health food
     chains and major private label companies. The Company's accounts receivable
     are due from  customers  located  throughout  the United States and various
     foreign countries.  The Company performs periodic credit evaluations of its
     customers'  financial  condition and generally requires no collateral.  The
     Company  obtains  letters of credit from many of its foreign  customers  to
     limit its exposure to credit risk on its accounts  receivable.  The Company
     maintains  reserves for potential  credit losses,  and such losses have not
     exceeded management's expectations.

     Sales to major customers, which comprised 10% or more of net sales, for the
     years ended December 31, 1999, 1998 and 1997 were as follows:

                                                    1999       1998       1997
                                                    ----       ----       ----
     Customer A                                       *        23.8%        *
     Customer B                                       *        38.3%      15.0%
     Customer C                                     10.1%        *        10.2%
     Customer D                                       *          *        15.0%

     * Less than 10%

                                      F-19
<PAGE>
                   GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


12.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     Disclosures  about Fair Value of Financial  Instruments  for the  Company's
     financial  instruments are presented in the table below. These calculations
     are subjective in nature and involve  uncertainties and significant matters
     of judgment and do not include income tax  considerations.  Therefore,  the
     results cannot be determined with precision and cannot be  substantiated by
     comparison to  independent  market values and may not be realized in actual
     sale or settlement of the instruments.  There may be inherent weaknesses in
     any calculation  technique,  and changes in the underlying assumptions used
     could  significantly  affect the results.  The following  table  presents a
     summary of the Company's financial  instruments as of December 31, 1999 and
     1998:

                                          1999                    1998
                                 ----------------------   ----------------------
                                  Carrying   Estimated     Carrying   Estimated
                                   Amount    Fair Value     Amount    Fair Value
                                 ----------  ----------   ----------  ----------
     Financial Assets:
      Cash and cash equivalents  $5,595,075  $5,595,075   $  517,852  $  517,852
      Restricted cash               270,878     270,878       20,149      20,149
     Financial Liabilities:
      Long-term debt              2,661,002   2,661,002    2,760,781   2,760,781

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

13.  SEGMENT INFORMATION

     Segment  information  has been  prepared in  accordance  with SFAS No. 131,
     "Disclosure  about Segments of an Enterprise and Related  Information." The
     Company's  operating  segments  are  organized on the basis of products and
     include gum products and nasal gel cold remedies.  The gum products include
     gum products for private label customers as well as products marketed under
     the Company's  brand. The nasal gel cold remedies  currently  consists of a
     single   product,   Zicam(TM).   There  are  no  significant   intersegment
     transactions.  The table below contains  information utilized by management
     to evaluate its operating segments.

                                      F-20
<PAGE>
                   GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.  SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
                                                             1999
                                           ------------------------------------------
                                           Gum Products      Zicam       Consolidated
                                           ------------   ------------   ------------
<S>                                        <C>            <C>            <C>
     Net sales                             $  5,910,221   $  9,589,803   $ 15,500,024
     Income (loss) before provision for
      income taxes and minority interest     (2,834,797)     3,435,293        600,496
     Interest income                             73,136         50,428        123,564
     Interest expense                        (1,311,792)            --     (1,311,792)
     Depreciation                               425,484          4,739        430,223
     Total assets                            10,209,095      9,818,819     20,027,914
</TABLE>

     The  1997 and 1998  operations  consisted  of one  operating  segment,  gum
     products.  Sales and  operations  of Zicam did not commence  until  January
     1999.

14.  JOINT VENTURE AGREEMENT

     The Company entered into a letter of intent with Swedish Match AB ("SM") to
     form a joint  venture.  The joint venture will be organized for the purpose
     of developing, manufacturing,  marketing and distributing nicotine products
     The Board of Directors of the joint  venture will consist of four  members:
     two members  designated  by SM, one of which will act as chairman,  and two
     members  designated  by the  Company.  SM will  make a cash  commitment  of
     $10,000,000 to the joint venture of which  $3,500,000 will be funded at the
     closing of the  formation of the joint  venture and the  remainder  will be
     funded on an as needed basis and in exchange SM will receive a 51% interest
     in the joint venture.  The Company will  contribute  intellectual  property
     relating to all of its gum products containing nicotine (except chewing gum
     products  containing  leaf tobacco) to the joint venture and will receive a
     49% interest in the joint venture.

15.  SUBSEQUENT EVENTS

     FINANCING ARRANGEMENT

     In January 2000,  the Company's  majority owned  subsidiary  entered into a
     financing  agreement (the "Agreement") with a Bank for a $1,000,000 line of
     credit with interest at 3% above the prime rate. Advances under the line of
     credit are limited to 50% of the eligible accounts  receivable plus cash on
     deposit with the Bank. The loan is collateralized  by accounts  receivable,
     inventory,  property and equipment  and  intangible  assets.  The loan also
     contains various financial covenants  regarding  liquidity  percentages and
     the  Company's  majority  owned  subsidiary  must  maintain  a profit  on a
     quarterly basis.

                                      F-21