SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

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


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

For the fiscal year ended December 31, 1997

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

For the transition period from ______________ to _______________

Commission File No. 0-27646


                          GUM TECH INTERNATIONAL, INC.
                  --------------------------------------------
                 (Name of Small Business Issuer in its Charter)


             Utah                                       87-0482806
   (State or other jurisdiction                      (I.R.S. Employer
 of incorporation or organization)                 Identification Number)


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



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

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

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

                          $.001 Par Value Common Stock
                          ----------------------------
                                (Title of Class)



<PAGE>



     Check whether the Registrant (1) filed all reports  required to be filed by
Section 13 or 15(d) of the Securities  Exchange Act of 1934 during the preceding
12 months (or for such shorter  period that the  Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.

                              Yes      X      No
                                    -------       -------

     As of March 24, 1998,  5,856,460  shares of the  Registrant's  no par value
Common Stock were  outstanding.  As of March 24,  1998,  the market value of the
Registrant's no par value Common Stock, excluding shares held by affiliates, was
$31,372,505  based upon a closing bid price of $5.688 per share of Common  Stock
on the NASDAQ National Market.

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

     The  Registrant's  revenues  for its year  ended  December  31,  1997  were
$3,776,562.

     The following  documents are incorporated by reference into Part III, Items
9 through 12 hereof: Portions of the Registrant's Definitive Proxy Statement for
its  forthcoming  annual  meeting of  shareholders  are  incorporated  herein by
reference.




                                      -2-

<PAGE>



                                     PART I


ITEM 1.  DESCRIPTION OF BUSINESS


Introduction

     The  Company  was  organized  in 1991 to  develop,  market  and  distribute
specialty  chewing gum products under its own brand names and on a private label
basis for other  chewing  gum  marketers.  The  Company's  current  chewing  gum
products contain ingredients which it claims (i) reduces tobacco cravings (under
the "CigArrest" brand name which is licensed to Bancroft Pharmaceuticals),  (ii)
may reduce the risk of osteoporosis  (under the "Calcium Gum" brand name), (iii)
contribute to energy and endurance  (under the "Ginseng  Gum," "Love Gum," "High
Gear" and "Buzz Gum" brand names),  (iv) promotes weight  management  (under the
"ChromaTrim" and "CitrusSlim" brand names), (v) reduces free radicals (under the
"Complete  Antioxidant  Formula"  brand name) and (vi) promotes oral hygiene and
breath freshness (under the "DentaHealth" brand name). The Company also produces
gum under the "Chew and  Sooth  Zinc"  brand  name for the cold and flu  season.
Sales of CigArrest,  Calcium Gum, High Gear, Ginseng Gum and Chew and Sooth Zinc
Gum, commenced in 1997. Sales of Buzz Gum, ChromaTrim,  Love Gum, CitrusSlim and
DentaHealth  commenced in 1991,  1993,  1994, 1995 and 1996,  respectively.  The
Complete  Antioxidant  Formula Gum will be introduced  in mid-1998.  In 1998 the
Company also plans to include its DentaHealth  product in a line with other oral
care products marketed as an OTC anti-plaque oral care regimen.

     The Company  contracted  with others for the manufacture of all its chewing
gum products until February 1996 when it completed  leasehold  improvements  and
began  manufacture of chewing gum products in its 28,000 square foot facility in
Phoenix,  Arizona.  The  facility  employs 37 workers  and  produces  all of the
Company's chewing gum products. See "Item l - Manufacturing and Packaging."

     The Company's  business strategy is to: (i) manufacture its own chewing gum
products  and the  private  label  chewing  gum  products  of other  chewing gum
marketers in greater  quantities and at lower costs;  (ii) increase  revenues by
(a)  expanding  its marketing  efforts for existing  chewing gum  products,  (b)
developing  new chewing gum products  through its own  research and  development
facilities,  (c) developing further its private label business,  and (d) forming
marketing alliances and joint ventures with multinational companies which market
consumer  packaged goods; and (iii) expand its distribution and customer base by
adding over-the-counter ("OTC") non-prescription  medications, such as antacids,
cough suppressants and pain relievers to its chewing gum products. See "Item 1 -
Strategy."

     The Company markets its branded  chewing gum products  directly and through
wholesale  distributors  who distribute  primarily to drug store and convenience
chains (Duane Reade, Genovese,  CVS, Rite Aid, Drug Emporium,  Long's,  Thrifty,
Payless,  Phar-Mor,  Eckard and 7-11),  mass market  chains  (Kmart and Pamida),
major supermarket chains (Smith's, Randall's,  H.E.Butt, Pathmark and Fry's) and
to various natural foods stores. In addition,  the Company sells its branded and
private label gum in a number of international  markets,  including Europe, Asia
and Canada.  The Company  also  manufactures  product for sale to private  label
customers who market under their own brand names.

                                      -3-

<PAGE>


     The Company's  chewing gum products are subject to regulation by the United
States Food and Drug Administration  ("FDA").  The FDA may conclude that certain
of  the  Company's  chewing  gum  products  are  "drugs"  under  applicable  FDA
regulations.  Further,  if the Company  commences  marketing  of OTC chewing gum
products,  such products will be considered  "drugs" under such regulations.  In
either case, the FDA may restrict or remove any or all of the Company's  chewing
gum products from the market if such products  violate  applicable  FDA rules or
regulations.

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

     In October  1995,  the  Company  borrowed  $1,550,000  from a group of four
lenders (the "1995 Bridge Loan"). As additional compensation for the 1995 Bridge
Loan, the Company issued an aggregate of 465,000 common stock purchase  warrants
to the  lenders,  each such  warrant  exercisable  to purchase  one share of the
Company's Common Stock at $2.00 per share exercisable in perpetuity.  The Bridge
Loan bore  interest at 8% per annum and was repaid in April 1996 using  proceeds
from a public offering in April,  1996,  which is further  described  below. The
Bridge Loan lenders included Brett Bouchy, a former principal stockholder of the
Company, who received 165,000 warrants, and Robert H. Wood, a former director of
the Company, who received 75,000 warrants.

     In March 1996, Brett Bouchy sold the 165,000 warrants  acquired pursuant to
the Bridge Loan for $5.00 per  warrant.  100,000  warrants  were sold to Gary S.
Kehoe and 65,000 to Robert H. Wood,  both of whom were officers and directors of
the  Company.  Messrs.  Kehoe  and Wood  paid  the  purchase  price  by  issuing
promissory  notes to Mr. Bouchy bearing  interest at 9% per annum.  The warrants
were not collateral for the promissory  notes.  The promissory notes are due the
earlier of (i) six months after the warrants  are  exercised,  or (ii) if during
the period from April 24,  1997 until  April 24,  2000 the closing  price of the
Company's  Common  Stock  on  NASDAQ  is  $10.00  or more  per  share  for  five
consecutive  trading days, then the promissory notes are due six months from the
last such trading day. If neither event occurs, the promissory notes become void
and of no value on April  24,  1999 and the  warrants  remain  the  property  of
Messrs.  Kehoe  and  Wood.  Under  no  circumstances  will the  warrants  become
returnable to Mr. Bouchy.  In July,  1997,  Mr. Kehoe sold the 100,000  warrants
acquired  from Mr.  Bouchy to Andrew  Lessman for $6.88 per warrant and used the
proceeds to satisfy  the  promissory  note to Mr.  Bouchy.  Mr.  Lessman has not
exercised the warrants.

     In December 1995, Dale Holdings,  Inc. ("Dale"), a principal shareholder of
the Company  owned by Riverlux  Trust REG and Mr. Brett  Bouchy,  dissolved  and
transferred  51% and 49%,  respectively,  of its Common Stock in the Company and
its  loans  receivable  due from the  Company  to  Riverlux  Trust REG and Brett
Bouchy.  Riverlux Trust REG and Brett Bouchy received 665,265 shares and 639,175
shares,  respectively,  of Dale's  stockholdings in the Company and $433,500 and

                                      -4-

<PAGE>


$416,500, respectively, of Dale's loans receivable from the Company. The loans
were  repaid  out of  proceeds  of the 1996  Public  Offering,  which is further
described  below.  Subsequently,  Riverlux  Trust REG and Mr.  Bouchy  each sold
20,000 shares of the Company's Common Stock to Mr. Kehoe for $2.00 per share.

     Through a private  equity  placement in January  1996,  the Company  raised
$3,095,875 to repurchase and retire 619,175 shares of the Company's Common Stock
held by a former principal stockholder.

     In April 1996,  the Company sold 460,000  Units to the public at $18.00 per
Unit, for gross  proceeds of $8,280,000.  Each Unit consisted of three shares of
Common Stock and one Common  Stock  Purchase  Warrant (the "Public  Warrant") to
purchase an additional share of Common Stock at any time until April 14, 2001 at
$7.50 per share (the "1996  Public  Offering").  At the same time,  the  Company
registered  the  619,115  shares  which were sold in the  January  1996  private
placement.  The 1996 Public Offering was underwritten by Kensington  Securities,
Inc.

     In June of 1997, the Company called for the redemption of all of the Public
Warrants at the redemption  price of $.01 per share.  Prior to the July 21, 1997
redemption date, in excess of 99% of the Public Warrants were exercised at $7.50
per share.

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

Strategy

     The Company pursues the following business strategy:

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

     (ii)  Increase  revenues by expanding  its  marketing  efforts for existing
chewing gum products,  developing new chewing gum products,  further  developing
its private label  business and forming  marketing  alliances.  The Company will
continue to expand marketing efforts for existing  products,  both in the United
States and internationally, and to further develop its private label business in
order to manufacture  more chewing gum products for other chewing gum marketers.

                                      -5-

<PAGE>

The Company  will  continue to develop new  specialty  chewing gum  products for
itself and its private label  customers.  Because of the Company's  expertise in
formulating  chewing  gum,  the Company has been able to attract  private  label
customers  that are  looking  for an  alternative  delivery  system to pills and
capsules.  The Company also seeks to form marketing  alliances and joint venture
arrangements with  multinational  companies which market consumer packaged goods
to promote and distribute the Company's existing and future gum products.

     (iii) Expand its  distribution and customer base by adding OTC medications,
such as antacids,  cough  suppressants,  and pain relievers,  to its chewing gum
products.  The Company has certain OTC chewing gum products in  development  and
plans to  explore  the market  potential  for a number of such  products  in the
future,  given sufficient  capital and market  acceptance for the products.  The
Company believes that OTC chewing gum products may appeal to certain  retailers,
such as drug stores and health food stores,  and offer the Company the potential
to develop new consumer  niche  markets.  Certain OTC chewing gum products  will
require FDA  permission  prior to their being  introduced  to market and, in any
event, will be subject to ongoing FDA marketing and  manufacturing  regulations.
See "FDA and Other Government Regulation."

Marketing

     The Company markets its chewing gum products directly and through wholesale
distributors  which  distribute  primarily to drug store and convenience  chains
(Duane Reade, Genovese, CVS, Rite Aid, Drug Emporium,  Long's, Thrifty, Payless,
Phar-Mor,  Eckard and 7-11),  mass  market  chains  (Kmart  and  Pamida),  major
supermarket  chains (Smith's,  Randall's,  H.E.Butt,  Pathmark and Fry's) and to
various  natural  foods  stores.  In addition,  the Company sells in a number of
international  markets,  including  Europe,  Asia and Canada.  The Company  also
manufactures  product for sale to private label customers who market under their
own brand  names,  including  Herbalife's  "Chew Slim,"  GNC's  "Optibolic"  and
"Ginseng Gold," Kevis' "BrainGum,"  NuCare's  "Chewtrition,"and  GEN's "Creatine
Gum."

     The Company  manufactures  for, and is continually  working on research and
development projects with, over 35 private label customers which intend to bring
their  products  to  market.   Included  in  these  projects  is  the  Company's
development  of certain OTC chewing gum  products,  including  both nicotine and
non-nicotine alternatives in the smoking cessation category. Under private label
arrangements, the Company supplies chewing gum products, including formulas used
by the  Company and its  customers,  labeled  with brand  names  selected by its
private label customers or otherwise  includes the private label customer's name
on the gum product  packaging.  Some of these  private label  customers  include
Nabisco,  Herbalife,  General Nutrition Centers (GNC), NuCare, Kevis, Pro Health
and Genetic Evolutionary Nutrition (GEN).

     The Company  intends to continue  to expand its  marketing  efforts by: (i)
retaining  personnel to further develop the Company's private label business and
seek other forms of contract  manufacturing  business;  (ii)  forming  marketing
alliances and joint ventures with multinational  companies which market consumer

                                      -6-
<PAGE>


packaged goods; (iii) hiring additional sales personnel to obtain and manage new
brokers and distributors;  and (iv) developing media  advertising  materials for
use by the Company and its brokers and  distributors.  The Company  plans to use
its private label business to expand its branded product in 1998.

Manufacturing and Packaging

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

     Prior to commencing  production of the chewing gum, the Company records lot
numbers for all  ingredients,  examines and files  certificates  of ingredients,
performs quality control tests and sanitizes equipment and utensils. It conducts
additional  quality  control tests  throughout the  manufacturing  process.  All
processes are done under strict common good manufacturing  procedures  requiring
written standard operating procedures.

     In  December of 1997,  the Company  refinanced  its lease  obligation  with
Textron  Financial   Corporation  relating  to  its  chewing  gum  manufacturing
equipment  by  entering  into an  installment  note in the  principal  amount of
$1,564,000  payable over a 48 month term.  The note bears  interest at 9.73% per
annum,  is  payable  at a rate of  $39,550  per  month,  and is  secured  by the
equipment.

     The Company's  manufacturing facility produces all of the Company's chewing
gum products and  provides  the  capacity to meet all of the  Company's  private
label product requirements for the foreseeable future.  During 1997, the Company
doubled its coating  capacity and in 1998 the Company  anticipates  doubling its
blister packaging capabilities.

Competition

     The distribution  and sale of chewing gum products are highly  competitive.
The Company  currently  markets its products in three  categories  at the retail
level.  These  categories  are OTC drug,  dietary  supplements  and  traditional
chewing gums with value added features.  The Company's principal OTC competition
is Smith-Kline Beecham, which markets the smoking cessation product,  Nicorette.
Its  principal  competition  in the dietary  supplement  market is Twin Labs,  a
leader in that  industry.  Wrigley,  Warner Lambert and Ford Gum and Machine are
the Company's main competition in the value added market.

     Competitive  factors in the chewing gum industry include price,  flavor and
name recognition resulting from media advertising. The Company does not have the
capital   resources,   marketing  and   distribution   networks,   manufacturing
facilities, personnel, product name recognition or advertising budget to produce

                                      -7-
<PAGE>


or  introduce  chewing  gum  brands  which  compete  or will  compete  with  the
multinational  chewing  gum  manufacturers  or the large  specialty  chewing gum
marketers.  However,  although  there can be no assurances  in this regard,  the
Company believes that it can develop and market  specialty  chewing gum products
in  niche  markets,   such  as  the  weight  loss,   vitamin,   dental  hygiene,
anti-smoking,  zinc and  calcium  markets,  that are  considered  too  small for
exploitation by many of the Company's competitors.

FDA and Other Government Regulation

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

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

     The Company's chewing gum  manufacturing  facility is subject to regulation
by various governmental agencies,  including state and local licensing,  zoning,
land  use,  construction  and  environmental  regulations  and  various  health,

                                      -8-


<PAGE>

sanitation, safety and fire codes and standards.  Suspension of certain licenses
or approvals, due to failure to comply with applicable regulations or otherwise,
could interrupt the Company's manufacturing operations. If the Company commences
marketing  OTC chewing gum  products,  its  manufacturing  facility will also be
subject to inspection and  regulation by the FDA as a drug  producing  facility.
The Company is subject to federal and state laws establishing  minimum wages and
regulating  overtime  and  working  conditions.  Because  many of the  Company's
personnel  are paid at rates based on the federal  minimum  wage, an increase in
such minimum wage will result in an increase in the Company's labor costs.

Barter Agreements

     The Company entered into barter  agreements (the "Barter  Agreements") with
Active Media Services,  Inc. ("Active") in December 1996 and with SKR Resources,
Inc.  ("SKR") in May 1997 under which it  exchanged  certain of its gum products
with  Active  and SKR for  advertising,  printing  and travel  credits  totaling
$3,550,000 and $750,000,  respectively. Under the Barter Agreements, the Company
must pay for approximately 75% of the advertising,  printing and travel expenses
in cash and may pay the remaining 25% using its bartered credits.  Further,  any
unused  credits on February 28, 2000 expire and will be  valueless.  The Company
shipped  product in the fourth  quarter of calendar year 1996 as a result of the
Barter Agreement with Active and the balance of product during the 1997 calendar
year under the Barter  Agreement  with SKR.  The Company has recorded the barter
credits in an amount equal to the  carrying  value of the  inventory,  which was
reduced to zero prior to the exchange (as more fully  described in Note 2 to the
financial  statements  "Restatement of Financial  Information").  Therefore,  no
amounts have been recorded for the barter credits.

Trademarks, Trade Names and Proprietary Rights

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

     The Company considers some of its chewing gum formulations and processes to
be  proprietary  in  nature  and  relies  upon a  combination  of  nondisclosure
agreements,  other  contractual  restrictions  and trade secrecy laws to protect
such proprietary information. There can be no assurance that these steps will be
adequate to prevent misappropriation of the Company's proprietary information or
that the  Company's  competitors  will not  independently  develop  chewing  gum
formulations  and  processes  that are  substantially  equivalent or superior to
those of the Company.

Employees

     As of March 26, 1998, the Company employed 46 individuals including its two
executive  officers,  26 manufacturing and warehouse  personnel,  3 research and
development personnel, 4 sales personnel, and 11 administrative personnel.

     On February  10, 1998 the Company  accepted  the  resignation  of Gerald N.
Kern, the Chairman,  Chief Executive  Officer and President of the Company.  Mr.
Kern's  severance  package  includes a payment of $200,000,  the  forgiveness of
$116,000 of debt and officer's advances owed to the Company, and 100,000 Company
stock options which are  exercisable by Mr. Kern for up to one year at $5.81 per

                                      -9-


<PAGE>


share upon  cancellation  of all of his  existing  options.  $50,000 of the cash
payment  to Mr.  Kern is being  held in trust for 120 days  subject  to a mutual
non-disparagement clause.

     Gary Kehoe was named the interim  President,  and Bruce Jorgenson was named
the Chairman.


ITEM 2.  DESCRIPTION OF PROPERTY
--------------------------------

     The Company  leases  3,345  square  feet of office  space at 4205 North 7th
Avenue, Phoenix,  Arizona 85013 on a three-year lease expiring December 31, 1998
for an average rental of approximately $3,000 per month. The Company also leases
an approximately  28,000 square foot building for its chewing gum  manufacturing
facilities at 246 East Watkins, Phoenix, Arizona 85004 on a ten-year lease (with
two three-year  renewal options)  expiring  December 2005 at a monthly rental of
approximately  $12,000.  The  Company has  combined  its  executive  offices and
manufacturing  plant at the  Watkins  property,  and plans to  sublease  the 7th
Avenue office space.

     The Company  believes  its  facilities  are  adequate  for its needs in the
foreseeable future.  However,  the Company's capacity needs could increase based
on the Joint  Development  Agreement  entered into with Nabisco,  Inc. in August
1997,  although no assurances can be offered in this regard. If the Company does
need additional capacity, it believes that such space is available at reasonable
rates.


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

Litigation

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

     On December  11,  1996,  a complaint  was filed by Moira  Cervi-Skinner,  a
former  employee  of the  Company,  with  the  United  States  Equal  Employment
Opportunity  Commission  (EEOC) in  Phoenix,  Arizona  naming the Company and an
officer and director of the Company.  The  complaint  alleges  unwelcome  sexual
conduct and sex  discrimination as a condition of employment at the Company.  In
addition,  a demand  letter has been received  from the  complainant's  attorney
demanding  $825,000.  The  complaint  was  settled  in  November,  1997 prior to
litigation being filed.

     On August 27,  1997,  an action was filed  against  the Company and certain
other  parties  in  a  Superior  Court  in  and  for  the  County  of  Maricopa,
CV-97-15896,  by Paul Janssens Lens. As it relates to the Company, the Complaint
alleges  intentional  interference  with business  relations,  securities fraud,
consumer fraud and  misrepresentation.  The plaintiff seeks compensatory damages
of $1.7  million  plus  unspecified  punitive  damages.  The Company  denies the
plaintiff's allegations and intends to vigorously defend the Action. The Company
believes that the plaintiff and other  defendants have settled the suit and that
the Company will be dismissed from the  litigation.

                                      -10-

<PAGE>


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


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

         Not applicable.




                                      -11-

<PAGE>



                                     PART II


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

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

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


                                                             Price
                                                  -------------------------
Year Ended December 31, 1997                       High                Low
----------------------------                       ----                ---

Fourth Quarter                                    11-3/4              6-3/4

Third Quarter                                     15-1/8             10-3/4

Second Quarter                                    11-7/8             7-4/16

First Quarter                                      8-3/4              5-1/2



                                                             Price
                                                  --------------------------
Year Ended December 31, 1996                        High                Low
----------------------------                        ----                ---

Fourth Quarter                                     7-3/4              5-3/4

Third Quarter                                      6-1/8                  6

Second Quarter (beginning April 24, 1996)          6-7/8              6-3/8


     As of March 24,  1998,  the  Company  had  approximately  2,501  record and
beneficial stockholders.

Dividend Policy

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

                                      -12-

<PAGE>

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

Overview

     The  Company  was  organized  in 1991 to  develop,  market  and  distribute
specialty  chewing gum products under its own brand names and on a private label
basis for other chewing gum marketers.  The Company's  first chewing gum product
included a natural  caffeine  substance  marketed to runners and other  exercise
enthusiasts  as a source  of energy  and  carbohydrates.  In 1994 and 1995,  the
Company raised funds through debt and equity financings.  The funds were used to
establish a new management team, develop additional chewing gum products,  build
inventories and purchase chewing gum  manufacturing  equipment for the Company's
28,000 square foot manufacturing  facility. The facility commenced operations in
late March, 1996. The facility currently has 37 employees and by the end of 1996
the Company produced 100% of its chewing gum products.

     The Company's  current chewing gum products  contain  ingredients  which it
claims (i) reduce tobacco  cravings (under the  "CigArrest"  brand name which is
licensed to Bancroft Pharmaceuticals),  (ii) may reduce the risk of osteoporosis
(under the "Calcium  Gum" brand name,  (iii)  contribute to energy and endurance
(under the "High Gear" "Ginseng  Gum",  "Love Gum", and "Buzz Gum" brand names),
(iv) promote weight  management  (under the "ChromaTrim" and "CitrusSlim"  brand
names),  (v) reduces free  radicals  (under the "Complete  Antioxidant  Formula"
brand name,  and (vi)  promotes  oral  hygiene and breath  freshness  (under the
"DentaHealth"  brand name).  The Company  also  produces gum under the "Chew and
Sooth Zinc" brand name for the cold and flu season. Sales of CigArrest,  Calcium
Gum, Ginseng Gum, High Gear and Chew and Sooth Zinc Gum commenced in 1997. Sales
of Buzz Gum, ChromaTrim, Love Gum, CitrusSlim and DentaHealth commenced in 1991,
1993, 1994, 1995 and 1996,  respectively.  The Complete  Antioxidant Formula Gum
will be introduced in mid-1998.  In 1998,  the Company also plans to include its
DentaHealth  product in a line with other oral care products  marketed as an OTC
anti-plaque  oral care  regimen.  These  dental  technologies  will be shared by
several  other market  leaders in 1998-99.  The Company is also involved in many
private  label  endeavors,  including  the research and  development  of various
nicotine and non-nicotine  smoking cessation  products.  Private label customers
market under their own brand names.

     The Company markets its branded  chewing gum products  directly and through
wholesale  distributors  who distribute  primarily to drug store and convenience
chains (Duane Reade, Genovese,  CVS, Rite Aid, Drug Emporium,  Long's,  Thrifty,
Payless,  Phar-Mor,  Eckard and 7-11),  mass market  chains  (Kmart and Pamida),
major supermarket chains (Smith's, Randall's, H.E. Butt, Pathmark and Fry's) and
to various natural food stores. In addition, the Company sells its products in a
number of international markets including Europe, Asia and Canada.

                                      -13-


<PAGE>



Results of Operations  for the Year Ended December 31, 1997 Compared to the Year
Ended December 31, 1996.

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


                                                               Years Ended December 31,
                                                               ------------------------
                                                       1997                                1996
                                                       ----                                ----
<S>                                         <C>               <C>               <C>              <C>
Net sales                                   $3,776,562        100%              $3,116,130       100%
Cost of sales                                4,197,777       (111)               2,070,443        66
Gross profit                                  (421,215)       (11)               1,045,687        34
Operating expenses                           3,881,238        103                4,199,288       135
Research and development                       209,783          5                  364,728        12
Income (Loss) from operations               (4,512,236)      (119)              (3,518,329)     (113)
Interest and other income                      204,220          5                  117,219         4
Interest expense                             1,090,618         29                  219,668         7
Provision (benefit) for income taxes                 -          -                 (232,371)       (7)
Net income (Loss)                           (5,398,634)      (143)              (3,388,407)     (109)
</TABLE>

     Net Sales.  Net sales increased by $660,432,  or 21%, to $3,776,562 for the
year ended  December 31, 1997 compared to $3,116,130 for the year ended December
31, 1996.  Private label sales  increased 657% to $1.59 million in 1997 compared
to $210,000  for 1996.  Additionally,  the Company saw an increase of 41% in net
sales of its branded  products to $1.17  million in 1997 compared to $824,000 in
1996.  The  Company  experienced  a decrease in  international  sales of 52% and
completely  eliminated its dependence on National  Distributing  Group, a former
major customer.

     Cost of Sales.  Cost of sales, as a percentage of net sales,  increased 45%
to  $4,197,777  or  (111%) of net sales for the year  ended  December  31,  1997
compared  to  $2,070,443  or 66% of net sales for the same  period in 1996.  The
Company  recorded the sales under its barter  agreements  at a zero value with a
cost of sales  of  $715,000  in 1997.  With the  exception  of  December,  1997,
production at the manufacturing  facility was below optimum capacity,  resulting
in a higher price per pound of gum. Approximately  $1,193,683 of plant operating
expenses were  allocated to cost of sales for the year ended  December 31, 1997,
of  which  $530,000  was  directly   related  to  depreciation  of  the  plant's
manufacturing  equipment.  Also, the Company wrote off approximately $350,000 of
obsolete inventory in the fourth quarter in 1997.

     Gross Profit. Gross profit, as a percentage of net sales,  decreased by 45%
to  $(421,215)  or (11%) of net  sales for the year  ended  December  31,  1997,
compared  to  $1,045,687  or 34% of net sales for the same  period in 1996.  The
decrease in gross profit percentage was directly related to the increase in cost
of sales.

     Operating  Expenses.  Operating  expenses  were  $3,881,238,  a decrease of
$318,050  for the year ended  December  31, 1997  compared to the same period in
1996.  Significant  non-manufacturing  operating  expenses  for the  year  ended
December 31, 1997, were advertising ($984,783),  administrative management labor
($778,626),  accounting,  legal and  professional  consulting  fees  ($549,390),
travel and trade shows ($421,140),  general  administrative labor ($216,468) and
sales labor ($154,557).

                                      -14-

<PAGE>


     Research  and  Development.  Research  and  Development  expenditures  were
$209,783 for the year ended  December 31, 1997 compared to $364,728 for the same
period in 1996.  The majority of these costs were related to the  formulation of
the following:  a Ginseng gum, which helps  maintain  overall good health;  High
Gear, an energy gum; an  Antacid/Calcium  gum, which prevents,  helps and treats
osteoporosis  and prevents upset stomachs;  a newly  reformulated  Love Gum; and
other various private label projects.  These private label products consisted of
dental gums,  OTC antacid and analgesic  gums,  diet gums,  multi-vitamin  gums,
ginseng gum, nicotine and non-nicotine  smoking cessation gums and body-building
cube gums.

     Interest and Other Income and Interest  Expense.  Interest and other income
was  $204,220  an  increase of $87,001  for the year ended  December  31,  1997,
primarily as a result of an increase in working  capital from equity  financings
that were invested in short-term investments. Interest expense was $1,090,618 an
increase of $870,950 for the year ended December 31, 1997, primarily as a result
of the Company issuing  $2,530,000 of subordinated  convertible  notes in March,
1997.  These  debentures had a beneficial  conversion  feature to the individual
investors that resulted in a $665,790 non-cash charge to interest expense.

     Net Loss. Net loss increased to $5,398,634 for year ended December 31, 1997
compared to a net loss of $3,388,407 for the same period in 1996.

Liquidity and Capital Resources

     As of December 31, 1997,  the Company's  working  capital was $5.09 million
compared to $2.90 million at December 31, 1996.  For the year ended December 31,
1997, the Company experienced a decrease in cash used by operating activities of
$3.74 million primarily as a result of the net loss for the period.

     Investing  activities  provided $39,335 in cash for year ended December 31,
1997,  compared to $1,037,009 of cash used in the same period of 1996.  The cash
provided for 1997 was  primarily  from the repayment of a note  receivable  from
National  Distributing  Group, which is controlled by an officer and director of
the Company.

     Financing activities provided $6.19 million in cash for year ended December
31,  1997,  compared to $5.35  million in cash  provided  for the same period in
1996.  The cash  provided  for  1996  was  primarily  a  result  of the  Company
successfully  completing its Initial Public  Offering on April 24, 1996 less the
repayment of notes  payable.  The cash provided for 1997 was primarily  from the
exercise of the Company's Common Stock Purchase Warrants issued in the Company's
Initial  Public  Offering . The Company  called the Warrants for  redemption  in
July,  1997, and 457,400 of its 460,000  (99.43%)  Warrants were exercised at an
exercise price of $7.50 per share prior to the date set for redemption for total
gross  proceeds to the Company of $3,430,500.  In addition,  the Company sold an
aggregate  of $2.53  million of  convertible  debentures  in February and March,
1997.

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

                                      -15-



<PAGE>


ITEM 7.  FINANCIAL STATEMENTS





                                      -16-



<PAGE>



                          INDEX TO FINANCIAL STATEMENTS




Financial Statements                                                      Page
--------------------                                                      ----

  Independent Auditors' Report                                             F-2

  Balance Sheet as of December 31, 1997                                    F-3

  Statements of Operations for the years ended
   December 31, 1997 and 1996                                              F-5

  Statements of Changes in Stockholders' Equity for the
   years ended December 31, 1997 and 1996                                  F-6

  Statements of Cash Flows for the years ended
   December 31, 1997 and 1996                                              F-7

  Notes To Financial Statements                                            F-8

























                                       F-1


<PAGE>

                          INDEPENDENT AUDITORS' REPORT





To the Board of Directors
Gum Tech International, Inc.


We have audited the accompanying  balance sheet of Gum Tech International,  Inc.
as of December 31, 1997 and the related  statements  of  operations,  changes in
stockholders'  equity and cash flows for the years ended  December  31, 1997 and
1996.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Gum Tech International, Inc. as
of December  31, 1997 and the results of its  operations  and its cash flows for
the years ended December 31, 1997 and 1996 in conformity with generally accepted
accounting principles.




                                                Angell & Deering
                                                Certified Public Accountants

Denver, Colorado
March 16, 1998













                                       F-2


<PAGE>



                          GUM TECH INTERNATIONAL, INC.
                                  BALANCE SHEET
                                DECEMBER 31, 1997



                                     ASSETS
                                     ------


Current Assets:
  Cash and cash equivalents                                         $ 3,607,913
  Restricted cash                                                        57,049
  Accounts receivable:
   Trade, net of allowance for doubtful accounts of $129,500          1,082,234
   Employees                                                             61,054
  Inventories                                                         1,033,382
  Notes receivable                                                      298,012
  Interest receivable                                                    60,164
  Prepaid expenses                                                      116,205
                                                                    -----------

     Total Current Assets                                             6,316,013
                                                                    -----------

Property and Equipment, at cost:
  Machinery and equipment                                             3,613,141
  Office furniture and equipment                                        142,864
  Leasehold improvements                                                190,526
                                                                    -----------
                                                                      3,946,531
  Less accumulated depreciation                                      (1,002,754)
                                                                    -----------

     Net Property and Equipment                                       2,943,777
                                                                    -----------
Other Assets:
  Deposits                                                              139,773
  Note receivable                                                        66,000
  Intangible assets, net of accumulated
   amortization of $47,710                                              211,938
  Other                                                                   7,291
                                                                    -----------

     Total Other Assets                                                 425,002
                                                                    -----------

     Total Assets                                                   $ 9,684,792
                                                                    ===========












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

                                       F-3


<PAGE>



                          GUM TECH INTERNATIONAL, INC.
                                  BALANCE SHEET
                                DECEMBER 31, 1997



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


Current Liabilities:
  Accounts payable                                                 $    798,718
  Accrued interest                                                       70,147
  Customer deposits                                                      15,000
  Current portion of long-term debt                                     343,174
                                                                   ------------

     Total Current Liabilities                                        1,227,039
                                                                   ------------

Long-Term Debt, net of current portion above:
  Financial institutions and other                                    4,094,457
  Obligations under capital leases                                       33,498
  Less current portion above                                           (343,174)
                                                                   ------------

     Total Long-Term Debt                                             3,784,781
                                                                   ------------

Commitments and Contingencies                                              --

Stockholders' Equity:
  Preferred stock: no par value, 1,000,000 shares
   authorized, none issued or outstanding                                  --
  Common stock: no par value, 10,000,000 shares
   authorized, 5,856,460 shares issued and outstanding               12,088,150
  Additional paid in capital                                            665,790
  Retained earnings (deficit)                                        (8,080,968)
                                                                   ------------

     Total Stockholders' Equity                                       4,672,972
                                                                   ------------

     Total Liabilities and Stockholders' Equity                    $  9,684,792
                                                                   ============















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

                                       F-4


<PAGE>

                          GUM TECH INTERNATIONAL, INC.
                            STATEMENTS OF OPERATIONS
                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996



                                                         1997           1996
                                                     -----------    -----------

Net sales                                            $ 3,776,562    $ 3,116,130

Cost of sales                                          4,197,777      2,070,443
                                                     -----------    -----------

     Gross Profit                                       (421,215)     1,045,687

Operating expenses                                     3,881,238      4,199,288
Research and development                                 209,783        364,728
                                                     -----------    -----------

     Income (Loss) From Operations                    (4,512,236)    (3,518,329)
                                                     -----------    -----------

Other Income (Expense):
  Interest and other income                              204,220        117,219
  Interest expense                                    (1,090,618)      (219,668)
                                                     -----------    -----------

     Total Other Income (Expense)                       (886,398)      (102,449)
                                                     -----------    -----------

Income (Loss) Before Provision For Income Taxes       (5,398,634)    (3,620,778)

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

Net Income (Loss)                                    $(5,398,634)   $(3,388,407)
                                                     ===========    ===========

Net Income (Loss) Per Share of Common Stock:
  Basic                                              $     (1.02)   $      (.77)
  Diluted                                            $     (1.02)   $      (.77)

Weighted Average Number of Common Shares
 Outstanding:
  Basic                                                5,294,099      4,423,402
  Diluted                                              5,294,099      4,423,402













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

                                       F-5


<PAGE>
<TABLE>
<CAPTION>
                                                GUM TECH INTERNATIONAL, INC.
                                       STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                       FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996



                                                         Common Stock                 Additional          Retained
                                                  ----------------------------          Paid In            Earnings
                                                   Shares             Amount            Capital           (Deficit)
                                                  ---------        -----------        -----------        -----------

<S>                                               <C>              <C>                <C>                <C>
Balance at December 31, 1995                      3,436,740        $   917,117        $      --          $   706,073

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

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

Net loss                                               --                 --                 --           (3,388,407)
                                                -----------        -----------        -----------        -----------

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)
                                                ===========        ===========        ===========        ===========




















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

                                                             F-6

</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                                          GUM TECH INTERNATIONAL, INC.
                                            STATEMENTS OF CASH FLOWS
                                  FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996


                                                                           1997                     1996
                                                                           ----                     ----
<S>                                                                    <C>                       <C>
Cash Flows From Operating Activities:
 Net income (loss)                                                     $(5,398,634)             $(3,388,407)
 Adjustments to reconcile net income (loss) to net cash
   (used) by operating activities:
    Depreciation                                                           551,404                  454,654
    Amortization                                                            47,710                     --
    Provision for bad debts                                                 94,500                   20,111
    Loss on disposal of assets                                              10,633                   11,036
    Interest expense from beneficial conversion
     feature of notes payable                                              665,790                     --
    Changes in assets and liabilities:
     (Increase) decrease in accounts receivable                           (648,527)                 161,348
     (Increase) in employee receivables                                    (61,054)                    --
     (Increase) decrease in inventories                                    333,562                 (468,279)
     (Increase) decrease in income tax receivable                          234,440                 (234,440)
     (Increase) in prepaid expenses and other                              (55,106)                 (73,660)
     (Increase) in interest receivable                                     (60,164)                    --
     (Increase) decrease in deposits and other                             128,602                  (80,401)
     Increase (decrease) in accounts payable and
      accrued expenses                                                     470,600                 (133,330)
     Increase (decrease) in customer deposits                              (50,500)                  28,541
                                                                       -----------              -----------

          Net Cash (Used) By Operating Activities                       (3,736,744)              (3,702,827)
                                                                       -----------              -----------

Cash Flows From Investing Activities:
 Capital expenditures                                                     (134,083)                (572,602)
 Proceeds from disposal of equipment                                         6,363                     --
 Increase in notes receivable                                                 --                   (216,000)
 Receipt of principal on notes receivable                                  177,653                     --
 Deposits on purchase of equipment and other                                  --                   (248,407)
 Increase in deposits and other                                            (10,598)                    --
                                                                       -----------              -----------

          Net Cash (Used) By Investing Activities                           39,335               (1,037,009)
                                                                       -----------              -----------

Cash Flows From Financing Activities:
 Proceeds from borrowing                                                 2,530,000                  706,397
 Principal payments on notes payable                                      (204,871)              (2,589,330)
 Issuance of common stock                                                4,311,768                8,514,000
 Offering costs incurred                                                  (188,678)              (1,277,807)
 Debt issuance costs incurred                                             (259,648)                    --
                                                                       -----------              -----------

          Net Cash Provided By Financing Activities                      6,188,571                5,353,260
                                                                       -----------              -----------

          Net Increase in Cash and Cash Equivalents                      2,491,162                  613,424

          Cash and Cash Equivalents at Beginning of Year                 1,116,751                  503,327
                                                                       -----------              -----------

          Cash and Cash Equivalents at End of Year                     $ 3,607,913              $ 1,116,751
                                                                       ===========              ===========

Supplemental Disclosure of Cash Flow Information:
 Cash paid during the year for:
  Interest                                                             $   306,972              $   327,031
  Income taxes                                                                 150                   24,409

Supplemental Disclosure of Non-cash Investing and
 Financing Activities:
  Capital lease obligations incurred for new equipment                 $      --                $ 1,194,544
  Conversion of account receivable to a note receivable                    225,665                     --
  Note payable incurred for purchase of equipment under
   a capital lease                                                       1,564,457                     --




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

                                                      F-7
</TABLE>


<PAGE>



                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS


1.   Organization and Summary of Significant Accounting Policies
     -----------------------------------------------------------

     Organization
     ------------
          Gum Tech International,  Inc. (the "Company") was incorporated in Utah
          on  February  4, 1991 to  develop,  market  and  distribute  specialty
          chewing gum products  under its own brand names and on a private label
          basis for other chewing gum marketers.  The Company  currently markets
          chewing gum products with certain  ingredients added to promote weight
          control,  energy  endurance,  oral hygiene and breath  freshness.  The
          Company also markets  chewing gum products which include  anti-oxidant
          vitamins, zinc, calcium and anti-smoking preparations.

     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
          $551,404 and $454,654 for the years ended  December 31, 1997 and 1996,
          respectively.

     Intangible Assets
     -----------------
          Debt issuance costs are being amortized using the straight-line method
          over the 59 month term of the convertible notes.

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

     Stock-Based Compensation
     ------------------------
          During the year ended December 31, 1996, the Company adopted Statement
          of  Financial  Accounting  Standard  (SFAS) No. 123,  "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 8 for pro forma
          disclosures  of net  income  and  earnings  per  share  as if the fair
          value-based  method  prescribed  by SFAS No.  123 had been  applied in
          measuring compensation expense.

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

                                       F-8


<PAGE>



                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS


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

     Deferred Offering Costs
     -----------------------
          In  connection  with the  Company's  public  offering  (Note 7), costs
          incurred to complete the offering  have been  deferred and were offset
          against the proceeds of the offering.

     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
          (Note 2) 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 (Loss) Income Per Share of Common Stock
     -------------------------------------------
          As of December 31, 1997,  the Company  adopted  Statement of Financial
          Accounting  Standards  (SFAS) No. 128,  "Earnings  Per  Share",  which
          specifies the method of computation,  presentation  and disclosure for
          earnings  per share.  SFAS No. 128 requires  the  presentation  of two
          earnings per share amounts, basic and diluted.

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

     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.

                                       F-9


<PAGE>



                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS


2.   Restatement of Financial Information
     ------------------------------------
          The Company has restated its financial  statements  for the year ended
          December 31, 1996 to eliminate the  financial  impact of barter credit
          transactions.  The Company  took this action as a result of an inquiry
          by The  Nasdaq  Stock  Market  and  subsequent  discussions  with  the
          Securities and Exchange Commission concerning the Company's accounting
          for its barter transactions.

          The Company entered into barter agreements with Active Media Services,
          Inc. in December 1996 and with SKR  Resources,  Inc. in May 1997.  The
          barter credits were to be used for  advertising,  packaging and travel
          expenses,  among other items, to launch the Company's branded products
          in several retail  markets.  These credits would have reduced the cash
          portion of the Company's  obligations for these services.  The Company
          recorded the barter  transactions  as revenue  based on the  wholesale
          price of each  product  bartered.  By  September  30, 1997  cumulative
          revenues  attributable  to barter  sales for fiscal 1996 and 1997 were
          approximately $4.3 million.

          Under the restatement,  the Company has recorded the barter credits in
          an amount  equal to the  carrying  value of the  inventory,  which was
          reduced to zero prior to the exchange. Therefore, no amounts have been
          recorded for the barter credits.

          In the opinion of management,  all material  adjustments  necessary to
          correct the financial  statements  have been  recorded.  The impact of
          these  adjustments  on the Company's  financial  results as originally
          reported is summarized below:
<TABLE>
<CAPTION>

                                                             Year Ended December 31, 1996
                                                             ----------------------------
                                                            As reported       As restated
                                                            -----------       -----------

<S>                                                         <C>               <C>
          Net sales                                         $3,868,642        $3,116,130
          Net income (loss)                                 (2,635,895)       (3,388,407)
          Net income (loss) per share                             (.60)             (.77)
          Retained earnings (deficit) end of year           (1,929,822)       (2,682,334)
</TABLE>

3.   Restricted Cash
     ---------------
          Cash of  $57,049  was held as  collateral  by a bank  for a letter  of
          credit  issued  to the  lessor  of  the  Company's  manufacturing  and
          warehouse facilities.

4.   Inventories
     -----------
          Inventories at December 31, 1997 consist of the following:

          Raw materials and packaging                                $  583,652
          Work in process                                               280,483
          Finished goods                                                169,247
                                                                     ----------

                Total                                                $1,033,382
                                                                     ==========






                                      F-10


<PAGE>



                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS


5.   Long-Term Debt
     --------------

             Long-term debt consists of the following:

             Financial Institutions and Other
             --------------------------------
             9.73% installment note due in 2001 with monthly
             principal  and  interest  payments  of $39,550,
             collateralized by machinery and equipment.              $1,564,457

             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.                              2,530,000

             Obligations Under Capital Leases
             --------------------------------
             9.4% installment notes due in 2002 with monthly
             principal  and  interest  payments  of  $1,000,
             collateralized by equipment.                                33,498
                                                                     ----------

             Total Long-Term Debt                                     4,127,955

             Less current portion of long-term debt                    (343,174)
                                                                     ----------

             Long-Term Debt                                          $3,784,781
                                                                     ==========


             Installments  due on debt principal,  including the capital leases,
             at December 31, 1997 are as follows:

                         Year Ending
                        December 31,
                        ------------
                            1998                                     $  343,174
                            1999                                        381,280
                            2000                                      1,685,043
                            2001                                      1,718,458
                                                                     ----------

                            Total                                    $4,127,955
                                                                     ==========

6.   Income Taxes
     ------------
             The components of the provision for income taxes are as follows:

                                                   1997            1996
                                                   ----            ----
             Current:
             Federal                             $   --          $(232,371)
             State                                   --                --
                                                 -------         ---------
               Total                                 --           (232,371)
                                                 -------         ---------

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

             Total Provision For Income Taxes    $   --          $(232,371)
                                                 =======         =========

                                      F-11


<PAGE>



                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS


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

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

                                                             1997       1996
                                                             ----       ----

             Federal statutory rate                          (34)%      (34)%
             State income taxes, net
               of federal benefits                            (5)        (5)
             Valuation allowance                              39         32
             Other                                            --         (1)
                                                             ----       ----

             Total                                            --%        (8)%
                                                             ====       ====

             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%.

                                                     1997                1996
                                                     ----                ----
             Income taxes at the
              federal statutory rate             $(1,835,536)         $(975,210)
             State income taxes, net
              of federal benefits                   (294,204)          (135,712)
             Nondeductible expenses                   20,969              6,550
             Valuation allowance                   2,108,771            912,512
             Other                                       --             (40,511)
                                                 -----------          ---------

             Total                               $       --           $(232,371)
                                                 ============         =========

          Significant  components  of deferred  income  taxes as of December 31,
          1997 are as follows:

             Net operating loss carryforward                        $ 3,295,354
             Reserve for bad debts                                       43,154
             Other                                                       41,842
                                                                    -----------

             Total deferred tax asset                                 3,380,350
                                                                    -----------

             Depreciation                                              (180,350)
                                                                    -----------

             Total deferred tax liability                              (180,350)
             Less valuation allowance                                (3,200,000)
                                                                    -----------
             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 $3,200,000 is maintained
          on deferred tax assets which the Company has not determined to be more
          likely  than  not  realizable  at this  time.  The net  change  in the
          valuation  allowance  for  deferred  tax  assets  was an  increase  of
          $2,287,488.  The Company will  continue to review this  valuation on a
          quarterly basis and make adjustments as appropriate.


                                      F-12


<PAGE>



                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS


6.   Income Taxes (Continued)
     ------------------------

          At December 31, 1997,  the Company had federal and state net operating
          loss   carryforwards  of  approximately   $7,800,000  and  $8,500,000,
          respectively. Such carryforwards expire in the years 2011 and 2012 and
          2001 and 2002 for federal and state purposes, respectively.

7.   Stockholders' Equity
     --------------------
       Private Offering of Common Stock
       --------------------------------
          In January 1996,  the Company sold 619,175  shares of its common stock
          at $5.00 per share  through an  Underwriter.  The Company paid a sales
          commission of 10% of the gross  proceeds of the common stock sold. All
          of the  net  proceeds  of  the  offering  ($2,786,288)  were  used  to
          repurchase from Brett Bouchy, a principal  stockholder of the Company,
          and retire,  619,175 shares of the Company's  common stock held by Mr.
          Bouchy at a repurchase price of $4.50 per share. Other expenses of the
          offering,  including legal fees,  accounting fees,  printing and other
          expenses were paid by Mr. Bouchy.

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

          In June  1997,  the  Company  called the  warrants  and  457,400  were
          exercised resulting in gross proceeds to the Company of $3,430,500 and
          the remaining 2,600 warrants expired unexercised.

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

          In 1997, 2,830 of the Underwriter's warrants were exercised and 37,170
          are outstanding as of December 31, 1997.

8.   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  1,200,000  shares of common stock
          have been reserved for issuance  under the Plan.  The Plan was amended
          in  May  1996  to  increase  the  shares  available  for  issuance  to
          1,500,000.


                                      F-13


<PAGE>



                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS


8.   Stock Options and Warrants (Continued)
     -------------------------------------
       Stock Option Plan (Continued)
       -----------------------------
          The Plan was amended in June 1997 to increase the shares available for
          issuance to  2,000,000.  Incentive  stock options are issuable only to
          eligible  officers,  directors,  key employees and  consultants of the
          Company. The Plan is administered by a committee selected by the Board
          of Directors,  which  determines  those  individuals who shall receive
          options,  the time period  during which the options may be  exercised,
          the number of shares of common stock that may be purchased  under each
          option, and the option price. Unless sooner terminated, the Plan shall
          remain in effect until January 1, 2005.

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

          The exercise date of an option  granted under the Plan cannot be later
          than three years from the date of grant. All options granted under the
          Plan  provide for the payment of the  exercise  price in cash or, with
          the prior written  consent of the Company,  by delivery to the Company
          of shares of common stock already owned by the optionee  having a fair
          market  value  equal  to  the  exercise  price  of the  options  being
          exercised, or by a combination of such methods of payment.

          The following  table  contains  information on the stock options under
          the Company's Plan for the years ended December 31, 1996 and 1997. The
          outstanding  agreements  expire  from  March 1998 to  September  2000.

                                               Number of      Weighted  Average
                                                Shares          Exercise Price
                                                ------          --------------
          Options outstanding at
            December 31, 1995                   750,000              $1.64
           Granted                              700,000               6.11
           Exercised                           (132,000)              1.77
           Cancelled                               --                  --
                                                -------              -----

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

       Non-qualified Stock Options
       ---------------------------
          The Company has granted  non-qualified  stock options to  consultants,
          distributors and other individuals.  The outstanding agreements expire
          from  April  1998 to  November  1999.  The  following  table  contains
          information  on all of the stock  options,  except those granted under
          the Company's stock option plan, for the years ended December 31, 1996
          and 1997.


                                      F-14


<PAGE>



                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS


8.   Stock Options and Warrants (Continued)
     --------------------------------------
       Non-qualified Stock Options (Continued)
       ---------------------------------------
                                                Number of      Weighted Average
                                                  Shares        Exercise Price
                                                ---------      ----------------
             Options outstanding at
              December 31, 1995                   500,000            $2.98
               Granted                                 --               --
               Exercised                               --               --
               Cancelled                         (140,000)            6.00
                                                 --------            -----

             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
                                                 ========            =====

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

                                                     1997               1996
                                                     ----               ----
          Net income (loss):
            As reported                           $(5,398,634)      $(3,388,407)
            Pro forma                             $(5,881,867)      $(4,937,720)

          Net income (loss) per share
           of common stock:
            As reported                                $(1.02)           $ (.77)
            Pro forma                                  $(1.11)           $(1.12)

          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,
          1997 and 1996.

                                                        1997            1996
                                                        ----            ----

          Risk-free interest rate                        5.88%           5.88%
          Expected life                                2 years         2 years
          Expected volatility                           63.51%          58.73%
          Expected dividend yield                           0%              0%

          The  Black-Scholes  option  valuation  model was  developed for use in
          estimating  the fair  value of traded  options  which  have no vesting
          restrictions and are fully transferable. In addition, option valuation
          models require the input of highly  subjective  assumptions  including


                                      F-15


<PAGE>



                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS


8.   Stock Options and Warrants (Continued)
     --------------------------------------
          the expected stock price  volatility.  Because the Company's  employee
          stock options have characteristics  significantly different from those
          of traded options, and because changes in subjective input assumptions
          can  materially  affect  the fair  value  estimates,  in  management's
          opinion,  the existing  models do not  necessarily  provide a reliable
          single  measure  of  the  fair  value  of  its  employee  stock  based
          compensation plans.

          The  following  table   summarized   information   about  stock  based
          compensation plans outstanding at December 31, 1997:

          Options  Outstanding and Exercisable by Price Range as of December 31,
          1997:
<TABLE>
<CAPTION>


                                             Options Outstanding                           Options Exercisable
                                             -------------------                           -------------------

                                                   Weighted
                                                    Average          Weighted                            Weighted
                Range of                           Remaining          Average                             Average
                Exercise           Number         Contractual        Exercise            Number          Exercise
                 Prices          Outstanding      Life-Years           Price           Exercisable         Price
                 ------          -----------      ----------           -----           -----------         -----

<S>         <C>                  <C>               <C>              <C>                <C>              <C>
             $ 1.50 -  2.00        434,000           .25               $ 1.57            434,000           $ 1.57
             $ 6.00 -  6.38        817,500          1.95               $ 6.15            758,750           $ 5.64
             $10.75 - 11.44        432,500          2.68               $10.86            216,250           $10.86
             --------------      ---------          ----               ------          ---------           ------

             $ 1.50 - 11.44      1,684,000          1.70               $ 6.18          1,409,000           $ 5.19
             ==============      =========          ====               ======          =========           ======
</TABLE>

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

9.   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.

10.  Commitments and Contingencies
     -----------------------------
       Leases
       ------

          The Company leases its office facilities,  manufacturing and warehouse
          facilities and certain equipment under long-term leasing arrangements.
          The Company's  manufacturing  and warehouse  facilities lease contains
          two three year renewal options. In addition, the  Company's  executive

                                      F-16


<PAGE>



                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS


10.  Commitments and Contingencies (Continued)
     -----------------------------------------
       Leases (Continued)
       ------------------
          offices  contains  a two  year  renewal  option.  The  following  is a
          schedule of future  minimum lease  payments at December 31, 1997 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:

<TABLE>
<CAPTION>

              Year Ending                              Capital
              December 31,                             Leases           Facilities           Total
              ------------                            --------          ----------          -----
              <S>                                     <C>               <C>                <C>
               1998                                   $ 12,004          $  163,832         $  175,836
               1999                                     12,004             125,915            137,919
               2000                                     12,004             131,976            143,980
               2001                                      3,001             132,527            135,528
               2002                                         --             138,576            138,576
               Thereafter                                   --             417,404            417,404
                                                      --------          ----------         ----------

             Total Minimum Lease Payments               39,013          $1,110,230         $1,149,243
                                                                        ==========         ==========

             Less amount representing interest           5,515
                                                      --------
             Present Value of Net
              Minimum Lease Payments                  $ 33,498
                                                      ========
</TABLE>

          Rental expense charged to operations was $187,826 and $176,994 for the
          years ended December 31, 1997 and 1996, respectively.

          Leased  equipment  under capital  leases as of December 31, 1997 is as
          follows:

          Equipment                                                    $ 47,727
          Less accumulated depreciation                                 (16,704)
                                                                       --------

          Net Property and Equipment Under Capital Leases              $ 31,023
                                                                       ========

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

                                      F-17


<PAGE>



                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS


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

          In February  1995,  Dale sold an aggregate of 367,150 shares of common
          stock of the  Company  held by it to a group of eleven  investors  for
          $560,000,  or $1.53 per share.  After paying  commissions  of $56,000,
          Dale loaned the  remaining  $504,000 to the  Company,  evidenced  by a
          promissory  note.  In May 1995 the Company and Dale each sold  420,000
          shares of the Company's  common stock through an  Underwriter at $1.80
          per share and paid a  commission  of 10% of the gross  proceeds of the
          common  stock.  Dale loaned the Company  $346,000 from the proceeds of
          the common stock sold by it, which is evidenced by a promissory  note.
          Both  loans  from Dale  were  collateralized  by all of the  Company's
          accounts   receivable,   inventory  and  equipment.   The  notes  were
          distributed to Dale's two partners in December 1995 and the notes were
          subordinated to the Company's equipment lease and were repaid in 1996.

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

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

          Richard Bernstein,  a director of the Company, is an executive officer
          and  director of  National  and a principal  stockholder  of UMI.  The
          Distribution  Agreements,  which  primarily  relate  to the  Company's
          ChromaTrim  chewing gum,  represented  3.5% and 21.0% of the Company's
          total  sales  for  the  years  ended   December  31,  1997  and  1996,
          respectively. Trade accounts receivable from National and UMI combined
          were $46,851 and $227,047 at December 31, 1997 and 1996, respectively.
          Payments are generally due within 30 days of the invoice date.






                                      F-18


<PAGE>



                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS


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

          The Company has notes  receivable  from  officers and  directors as of
          December 31, 1997, as follows:

          8% unsecured  note due from the  Company's  Senior
          Vice President, with principal and interest due in
          December 1997. The note was paid in January 1998.           $ 100,000

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

          8% unsecured note due from the Company's President
          and CEO, with  principal and interest  payable out
          of stock sale  profits,  if stock sale profits are
          not sufficient to repay the loan by November 1999,
          then the balance will be converted to compensation
          (Note 15).                                                     66,000

          10%  note  due  from  NDG on  December  31,  1997,
          collateralized  by substantially all of the assets
          of NDG.                                                        48,012
                                                                      ---------

          Total                                                       $ 364,012
                                                                      =========

          The interest  receivable  on the above notes  receivable is $67,455 at
          December 31, 1997.

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

12.  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.   Employee  and  Company  matching
          contributions   are   discretionary.   The   Company   made   matching
          contributions  of $20,059 for the year ended  December 31, 1997.  Each
          employee  shall be fully vested at all times in his  contribution  and
          the Company's matching contributions.

13.  Concentration of Credit Risk and Major Customers
     ------------------------------------------------

          Financial   instruments  which  potentially  subject  the  Company  to
          concentrations  of credit risk consist  principally  of temporary cash
          investments  and  accounts  receivable.  The  Company  places its cash
          equivalents  and  short  term  investments  with high  credit  quality
          financial  institutions  and limits its credit  exposure  with any one
          financial  institution.  The  Company  provides  credit in the  normal
          course of  business  to many of the  nation's  top drug  stores,  mass
          merchandisers   and  health  food  chains  and  major   private  label
          companies.  The Company's  accounts  receivable are due from customers
          located  throughout the United States and various  foreign  countries.


                                      F-19


<PAGE>



                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS


13.  Concentration of Credit Risk and Major Customers (Continued)
     ------------------------------------------------------------
          The Company  performs  periodic  credit  evaluations of its customers'
          financial condition and generally requires no collateral.  The Company
          obtains  letters of credit  form its  foreign  customers  to limit its
          exposure  to  credit  risk on its  accounts  receivable.  The  Company
          maintains  reserves for potential credit losses,  and such losses have
          not exceeded management's expectations.

          Sales to major customers, which  comprised 10%  or more  of net sales,
          for the years ended December 31, 1997 and 1996 were as follows:


                                                     1997         1996
                                                     ----         ----

           Customer A                                             17.5%
           Customer B                                15.0%
           Customer C                                             13.8%
           Customer D                                10.2%        10.2%
           Customer E                                15.0%

14.  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,
          1997:

                                                               1997
                                                   ----------------------------
                                                     Carrying         Estimated
                                                      Amount         Fair Value
                                                      ------         ----------
           Financial Assets:
           Cash and cash equivalents               $3,607,913        $3,607,913
           Restricted cash                             57,049            57,049
           Notes receivable                           364,012           364,012

           Financial Liabilities:
           Long-term debt                           4,127,955         4,127,955

          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 carrying amount of
          notes receivable approximates fair value because of the market rate of
          interest on the notes  receivable.  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.




                                      F-20


<PAGE>


                          GUM TECH INTERNATIONAL, INC.
                          NOTES TO FINANCIAL STATEMENTS


15.  Subsequent Events
     -----------------
          On  February  10, 1998 Gerald Kern  resigned  his  employment  as CEO,
          President  and  Chairman  of the Board.  The  Company  entered  into a
          Settlement  Agreement  and  Release  (the  "Agreement")  with Mr. Kern
          effective  February 10, 1998.  The  Agreement  terminates  Mr.  Kern's
          employment  agreement with the Company. As a part of the Agreement the
          Company agreed to pay Mr. Kern $200,000 of which $50,000 is to be held
          in a trust  account for 120 days.  The Company  also agreed to forgive
          any salary advances  ($48,027 at December 31, 1997) and to forgive the
          $66,000 note  receivable  from Mr. Kern plus  accrued  interest on the
          note owed by Mr. Kern which was to become due on November 1, 1999.  In
          addition,  the Company agreed to assign  ownership of a life insurance
          policy to Mr. Kern that it held on Mr. Kern.

          The Company  also agreed to issue Mr. Kern a stock  option to purchase
          100,000  shares of the  Company's  common  stock at $5.81 per share at
          anytime through February 10, 1999 and to cancel all stock options held
          by Mr. Kern in excess of the 100,000 shares.  Mr. Kern held options on
          456,500  shares of common  stock at the time of issuing  the  restated
          stock option which  results in  cancellation  of 356,500 stock options
          effective February 10, 1998.






















                                      F-21

<PAGE>


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

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



                                      -17-


<PAGE>



                                    PART III

     As  indicated  in the  following  table,  the  information  required  to be
presented in Part III of this report is hereby  incorporated  by reference  from
the  Company's  definitive  Proxy  Statement  for its  1998  Annual  Meeting  of
Stockholders  to be prepared in accordance  with the Schedule 14A and filed with
the Securities and Exchange  Commission within 120 days of the end of the fiscal
year covered by this report:

               Material in Proxy Statement for 1998 Annual Meeting
                    which is incorporated herein by reference
<TABLE>
<CAPTION>


   Item No.      Item Caption                                   Proxy Statement Caption
   --------      ------------                                   -----------------------
     <S>        <C>                                           <C>
       9       Directors and Executive Officers of the        "Directors and Executive Officers"
               Registrant
      10       Executive Compensation                         "Executive Compensation"
      11       Security Ownership of Certain Beneficial       "Security Ownership of Principal
               Owners and Management                          Stockholders and Management"
      12       Certain Relationships and Related              "Certain Transactions"
               Transactions
</TABLE>


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

Exhibits


    Exhibit No.                       Title

       1.07      Form of Warrant Agreement(1)

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

       2.02      Bylaws of the Registrant(1)

       10.01     1995 Stock Option Plan(1)

       10.02     Lease Agreement - Phoenix Executive Office Facility(1)

       10.05     Employment Contract with Mr. Kehoe(1)

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

                                      -18-

<PAGE>


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

       10.09     Amendment to Stock Option Plan(1)

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

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

       10.16     Employment Agreement with Mr. Bernstein(1)

       10.20     Form of Convertible Note Dated February 20, 1997(2)

       10.21     Registration Rights Agreement(2)

       10.25     Employment Agreement with Mr. Bouchy

       10.28     Installment Loan with Textron Financial Corporation

       10.29     Settlement Agreement and Release with Gerald N. Kern

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

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

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

Reports on Form 8-K

     The  Company  filed no reports  on Form 8-K during the last  quarter of the
fiscal year ended December 31, 1997.

                                      -19-
<PAGE>

                                   SIGNATURES

     In accordance  with Section 13 or 15(d) of the Exchange Act, the Registrant
has duly  caused  this  Report to be signed  on its  behalf by the  undersigned,
thereunto duly authorized, in Phoenix, Arizona, on March 31, 1998.

                                          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 the  dated
indicated.

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


/s/ Bruce Jorgenson            Chairman of the Board             March 31, 1998
----------------------------   of Directors
Bruce Jorgenson


/s/ Gary S. Kehoe              President and Chief               March 31, 1998
----------------------------   Operating Officer and
Gary S. Kehoe                  Director

/s/ Jeffrey L. Bouchy          Secretary, Treasurer, Chief       March 31, 1998
----------------------------   Financial Officer (Principal
Jeffrey L. Bouchy              Accounting Officer)

/s/ Richard Ratcliff           Director                          March 31, 1998
----------------------------
Richard Ratcliff


/s/ William Yuan               Director                          March 31, 1998
----------------------------
William Yuan


/s/ William Boone              Director                          March 31, 1998
----------------------------
William Boone


/s/ W. Brown Russell           Director                          March 31, 1998
----------------------------
W.    Brown Russell




                                       20