<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   Form 10-KSB

[X]      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2000

[ ]      TRANSITION  REPORT  UNDER  SECTION  13 OR  15(d)  OF THE  SECURITIES
         EXCHANGE ACT OF 1934 For the Transition Period from        to         .
                                                             ------    --------

                                                  Commission File Number 0-24378

                             First Scientific, Inc.
                 (Name of small business issuer in its charter)

          DELAWARE                                               33-0611745
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                            Identification Number)

1877 West 2800 South, Suite 200
Ogden, Utah                                                      84401
(Address of principal executive offices)                       (Zip Code)

                    Issuer's telephone number: (801) 393-5781

                Securities registered under Section 12(b) of the
                                 Exchange Act:


                                                          Name of each exchange
Title of each Class                                         on which registered

         None                                                    None

                Securities registered under Section 12(g) of the
                                 Exchange Act:

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

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

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation  S-B contained in this form and no disclosure  will be contained,  to
the  best  of  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [ ]

Issuer's revenues for the most recent fiscal year were $486,330.

The  aggregate  market  value of the voting stock held by  non-affiliates  as of
January 30, 2001was $3,828,787, based on the average closing bid and asked price
of the issuer's common stock on January 29, 2001.

As of January 30, 2001,  registrant had outstanding  23,045,436 shares of common
stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None

    Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]


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                             FIRST SCIENTIFIC, INC.
                                INDEX-FORM 10-KSB


                                                      PART I
                                                                            Page

Item 1.    Description of Business.............................................1

Item 2.    Description of Property............................................15

Item 3.    Legal Proceedings..................................................15

Item 4.    Submission of Matters to a Vote of Security Holders................16



                                     PART II

Item 5.    Market for Common Equity and Related Stockholder Matters...........16

Item 6.    Management's Discussion or Analysis and Plan of Operation..........18

Item 7.    Financial Statements...............................................20

Item 8.    Changes In and Disagreements With Accountants on
           Accounting and Financial Disclosure................................20


                                    PART III

Item 9.    Directors, Executive Officers, Promoters and Control
           Persons; Compliance with Section 16(a) of the Exchange Act.........21

Item 10.   Executive Compensation.............................................24

Item 11.   Security Ownership of Certain Beneficial Owners and Management ....25

Item 12.   Certain Relationships and Related Transactions ....................27

Item 13.   Exhibits and Reports on Form 8-K...................................29

Signatures ...................................................................31

Index to Financial Statements................................................F-1





                                        i

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                                     PART I

Item 1.  Description of Business

Forward-Looking Statements and Information May Prove Inaccurate

         This report contains  forward-looking  statements within the meaning of
Section 27A of the  Securities  Act of 1933 and  Section  21E of the  Securities
Exchange  Act of  1934.  When  used  in this  report,  the  words  "anticipate,"
"believe,"   "estimate,"  "will,"  "may,"  "intend"  and  "expect"  and  similar
expressions identify forward-looking  statements.  Forward-looking statements in
this report include,  but are not limited to,  statements,  trend analysis,  and
other  information  relative to markets for our  products and trends in revenues
and anticipated expense levels.  Although we believe that our plans,  intentions
and expectations  reflected in these forward-looking  statements are reasonable,
we can give no assurance that these plans,  intentions or  expectations  will be
achieved.  Actual results,  performance or achievements  could differ materially
from those contemplated, expressed or implied, by the forward-looking statements
contained in this report.  Important  factors that could cause actual results to
differ  materially  from our  forward-looking  statements  are set forth in this
report,  including those set forth in "Certain  Significant Risk Factors." These
factors are not intended to represent a complete list of the general or specific
factors  that may  affect  us. It  should  be  recognized  that  other  factors,
including general economic factors and business strategies,  may be significant,
presently or in the future,  and the factors set forth in this report may affect
us  to  a  greater  extent  than  indicated.   All  forward-looking   statements
attributable  to us or persons  acting on our behalf are expressly  qualified in
their entirety by the cautionary  statements set forth in this report. Except as
required  by law,  we  undertake  no  obligation  to update any  forward-looking
statements  after the date of this report to conform such  statements  to actual
results or to change our expectations.

Introduction

         We are a Utah-based  development stage company engaged in the research,
development and commercialization of break-through, patent-pending technologies,
as well as  personal  skin  care  and  disinfectant  products.  Our  subsidiary,
PureSoft  Solutions,  LLC ("PureSoft"),  is based in New Hampshire.  We sell our
technologies  and  products  in the  United  States  into four  active  markets:
professional health care, food service,  hospitality, and janitorial/sanitation.
We have also targeted market opportunities in retail and health and fitness.

Corporate Development

         In September 1998, we acquired the business operations and intellectual
property of Linco Industries, Inc. ("Linco"), a Utah corporation.  Prior to that
time, we had not conducted any substantive  business  operations.  In connection
with this  acquisition,  we  changed  our  corporate  name  from SPPS  Financial
Corporation to First Scientific, Inc. Linco changed its name to First Scientific
Corporation  and  remained  as our wholly  owned  subsidiary.  In June 2000,  we
acquired PureSoft.

Mission

         We are dedicated to developing  and  marketing  break-through  products
that advance healthy living, exceed customer expectations and create exceptional
shareholder value.

We expect to achieve this corporate mission by:

          o    leveraging  exceptional research and development  capabilities to
               continue the development of  break-through  products that address
               unmet market needs of significant potential;

          o    taking our  products  through a  structured  new product  process
               driven by marketing in close cooperation with sales, research and
               development, and manufacturing;

          o    managing and partnering with contract  manufacturers that deliver
               the highest quality products on time;

          o    building upon the "customer  first" attitude  necessary to exceed
               customer expectations and maintain long-lasting relationships;

                                       -1-

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          o    generating  product  awareness,  high performance image and brand
               insistence.

Technology Platforms and Products

         We are primarily engaged in  commercializing  the following  technology
platforms and products:

Antimicrobial Technology

         MicrobNZ(TM).  We  believe  this  product  to  be  highly  efficacious,
long-lasting with a high degree of persistence,  and fast-acting against a broad
spectrum of  pathogens,  including  Escherichia  coli,  Pseudomonas  aeruginosa,
Staphylococcus  aureus and drug resistant bacteria such as Methicillin resistant
Staphylococcus  aureus (MRSA) and Vancomycin  resistant  Enterococcus (VRE). The
MicrobNZ  formulation  does not  contain  any  irritating  or  degrading  active
ingredients  such  as  Triclosan(R),   CHG   (Chlorhexidine   Gluconate),   PCMX
(Chloroxlyenol),  iodine,  or  alcohol.  Unlike  these  other  degrading  active
ingredients,   products  formulated  with  MicrobNZ  significantly  improve  and
moisturize the skin.

         Our antimicrobial  formulation exceeds the Food and Drug Administration
protocols required for classification as a Health Care Personnel Handwash and as
a First-Aid Antiseptic (21 CFR 333).

         MicrobNZ  can be used  facility-wide  and is  appropriate  for patient,
public  and  staff   handwashing.   This   technology  can  be  packaged  as  an
antimicrobial handwash, antimicrobial First-Aid Antiseptic lotion, antimicrobial
First-Aid Antiseptic spray, and antimicrobial  First-Aid Antiseptic  towelettes.
We market our  antimicrobial  technology  under the  MicrobNZ  brand to domestic
professional health care, food service,  hospitality,  and janitorial/sanitation
markets.

Skin Healing Technology

         Our patent-pending, skin healing technology brings together Dimethicone
with  skin-conditioning  emollients  and  botanical  oils  to  create  a  unique
formulation  for the  treatment  and  prevention  of  rashes.  Our  testing  has
demonstrated  shelf life of this stable  Dimethicone  oil-in-water  emulsion for
periods in excess of two years.  This  technology  meets FDA  requirements to be
considered an over-the-counter  drug product. This formulation in towelette form
is used for the  treatment  and  prevention  of skin rashes caused by infant and
adult  incontinence.  We  currently  supply  a  version  of  this  skin  healing
technology as a waterless,  rinse-free,  patient-bathing  product to ConvaTec, a
division of Bristol-Myers Squibb Company.

Institutional Care

         Available  through our PureSoft  subsidiary  are products  that address
trends  in  the   geriatric   and  physical   therapy   communities,   including
PureSound(TM),  a hydrosonic  bath  additive;  PureCleanse(TM),  a  hard-surface
disinfectant;  PureMoisture(TM)  bath  oil;  and  PureBathe(TM)  body  wash  and
shampoo.

Product Testing

         Independent  FDA-compliant  laboratories  have tested our antimicrobial
formulations and demonstrated their ability to surpass FDA testing protocols (21
CFR 333) for health care handwash  in-vivo  efficacy,  in-vitro  time kill,  and
in-vitro minimum  inhibitory  concentration  (MIC). In addition,  transepidermal
moisture gain/loss, skin irritation and virucidal studies have been conducted to
support product claims.

         We believe that these tests clearly  demonstrate that our antimicrobial
technology delivers:

          o    High pathogenic  efficacy by removing  99.99% of  disease-causing
               bacteria,  yeast, fungi and viruses (HIV, Herpes,  Influenza, and
               Tuberculosis) in 15 seconds or less.

          o    Improved skin condition with high frequency of product use versus
               the  skin  degrading  actives  found  in  leading   antimicrobial
               products that contain Triclosan(R), CHG, PCMX, iodine or alcohol.

          o    Continued bacteria-killing efficacy for hours after use.

                                       -2-

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          o    Fast-acting  efficacy against a broad spectrum of microorganisms,
               including the antibiotic resistant bacteria MRSA and VRE.

          o    Long-lasting protection against the leading culprits of foodborne
               illness,  including:  E.  coli  O157:H7,  Staphylococcus  aureus,
               Salmonella,    Campylocbacter   jejuni,   Clostridium,   Listeria
               monocytogenes,    Shigella,    Vibrio    vulnificus,    Yernsinia
               enterocolitica and Bacillus subtilis.

         Independent   laboratories   have  also   tested  and   validated   our
Dimethicone-based   skin  protection  products  with  exceptional  results.  The
PureCleanse hard-surface disinfectant is also an EPA-registered formulation.

Patents, Licenses and Proprietary Technology

         We rely upon a  combination  of patents,  copyright  protection,  trade
secrets,   know-how,   continuing   technological   innovation   and   licensing
opportunities  to develop and  maintain  our  competitive  position.  Our future
prospects  depend in part on our  ability to obtain  patent  protection  for our
products and  formulations.  We need to preserve our copyrights,  trademarks and
trade secrets. We also need to operate without infringing the proprietary rights
of third parties. Product patents are pending with the U.S. Patent and Trademark
Office for the antimicrobial protection and skin healing technologies.  We claim
as  trademarks  the marks  "First  Scientific,"  "MicrobNZ,"  "ProCleanse,"  and
"Protection at the Microbial Level."

         The patent positions of  pharmaceutical  and  biotechnology  companies,
which are similar to ours, are generally uncertain and involve complex legal and
factual  questions.   We  cannot  guarantee  that  any  of  our  pending  patent
applications  will  result in  issued  patents,  nor can we assure  that we will
develop more proprietary technologies that are patentable. Patents issued to our
strategic  partners  or us may not  provide  a  basis  for  commercially  viable
products or may not provide any  competitive  advantages.  Our patents  could be
challenged  by third  parties.  The patents of others could limit our ability to
use certain processes or technologies.  Any of these preceding  situations could
have a  material  adverse  effect on our  ability to do  business.  Furthermore,
patent law relating to the scope of claims is still  evolving in the  technology
fields in which we operate. As a result, the degree of future protection for our
proprietary  rights is uncertain.  We cannot prevent  others from  independently
developing  similar  or  alternative   technologies,   duplicating  any  of  our
technologies,  or, if patents are issued to us,  designing  around our  patented
technologies.  We could incur substantial costs in litigation if we are required
to defend  ourselves in patent suits  brought by third parties or if we initiate
such suits.

         Others  may have  filed and in the  future  are  likely to file  patent
applications that are similar or identical to ours. To determine the priority of
inventions,  we may have to participate in interference  proceedings declared by
the United States Patent and Trademark Office.  Such proceedings could result in
substantial  cost to us.  We  cannot  ensure  that any such  third-party  patent
application will not have priority over ours. Additionally,  the laws of certain
foreign  countries  may not protect our patent and other  intellectual  property
rights to the same extent as the laws of the United States.

         Our future  prospects  also  depend in part on our  neither  infringing
patents or  proprietary  rights of third parties nor breaching any licenses that
may relate to our  technologies  and products.  We cannot guarantee that we will
not infringe the patents, licenses or other proprietary rights of third parties.
We could in the future receive notices claiming  infringement from third parties
as well as  invitations to take licenses under  third-party  patents.  Any legal
action  against  our  strategic  partners  or us that claim  damages and seek to
enjoin  commercial  activities  relating to the affected  products and processes
could subject us to potential  liability  for damages.  Such legal actions could
also  require  our  strategic  partners  or us to obtain a  license  in order to
continue to manufacture or market the affected products and processes. We cannot
ensure that our strategic  partners or we would  prevail in any such action.  We
cannot ensure that any license,  including  licenses  proposed by third parties,
required under any such patent would be available on terms that are commercially
acceptable,  if at all. We have not conducted an exhaustive patent search and we
cannot  ensure that patents do not exist or could not be filed that would have a
material adverse effect on our ability to develop and market our products. If we
become involved in such  litigation,  it could consume a substantial  portion of
our  managerial  and financial  resources,  which could have a material  adverse
effect  on  our  business,  financial  condition,  results  of  operations,  and
relationships with corporate partners.

         The  enactment of  legislation  implementing  the General  Agreement on
Trade and Tariffs,  effective  June 8, 1995,  has changed  certain United States
patent laws. Most notably, the term of patent protection for patent

                                       -3-

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applications  filed on or after that date is no longer a period of 17 years from
the date of grant.  The new term of United States  patents begins on the date of
issuance and terminates 20 years after the effective date of filing. This change
in the law could substantially shorten the term of our patent protection,  which
may adversely affect our patent position.

         We  attempt  to  control  the  disclosure  and  use of our  proprietary
technology,  know-how  and  trade  secrets  under  agreements  with the  parties
involved.  However,  we cannot ensure that others will honor all confidentiality
agreements.  We cannot prevent others from  independently  developing similar or
superior technology, nor can we prevent disputes that could arise concerning the
ownership of intellectual property.

Government Regulation and Product Testing

         Our current and potential products,  and our manufacturing and research
activities,  are or may become subject to varying  degrees of regulation by many
government authorities in the United States and other countries. Such regulatory
authorities  could include the State of Utah Department of Health,  the U.S. FDA
and  comparable  authorities  in foreign  countries.  Each existing or potential
antimicrobial  or  topical  product  intended  for human use that we  develop or
market, either directly or through licensees or strategic partners,  may present
unique regulatory  problems and risks.  Relevant  regulations  depend on product
type, use and method of manufacture.  The FDA regulates,  in varying degrees and
in different ways,  medical  devices and  pharmaceutical  products.  Regulations
govern manufacturing, testing, exporting, labeling and advertising.

         Prescription  pharmaceuticals  and certain types of medical devices are
regulated more vigorously  than foods.  Any products we develop for use in human
pharmaceuticals  or cosmetics could require that we develop and adhere to GMP as
suggested  by the FDA,  ISO  standards  as  suggested  in Europe,  and any other
applicable  standards  mandated  by  federal,  state,  local  or  foreign  laws,
regulations and policies. Our current facilities and procedures and those of our
contract manufacturers fully comply with GMP and ISO standards.

         We are or may become subject to other federal,  state and foreign laws,
regulations and policies with respect to labeling  products,  importing products
and improving  occupational  safety,  among others.  Federal,  state and foreign
laws,  regulations  and policies are always subject to change and depend heavily
on  administrative  policies  and  interpretations.  We  are  working  with  our
distributors  and potential  customers to achieve  compliance with foreign laws,
regulations  and policies  pertaining to our products,  We are also working with
certain  consultants  regarding  compliance  with FDA,  GMP and ISO policies and
regulations.  We cannot ensure that any of our products will satisfy  applicable
regulatory requirements. Changes could occur in federal, state and foreign laws,
regulations and policies and, particularly with respect to the FDA or other such
regulatory bodies, such changes could be retroactive.  Such changes could have a
material  adverse  effect  on our  business,  financial  condition,  results  of
operations and relationships with corporate partners.

         We are also  subject to  numerous  environmental  and  safety  laws and
regulations,  including  those  governing  the use  and  disposal  of  hazardous
materials.  Any violation of, and the cost of compliance with, these regulations
could have a  material  adverse  effect on our  business,  financial  condition,
results of operations and relationships with corporate partners.

Industry

         According  to the U.S.  Centers  for  Disease  Control  and  Prevention
("CDC"), handwashing is the single most important means of preventing the spread
of infection.  Harmful and sometimes  deadly  infectious  bacteria,  viruses and
fungi are a growing threat to the world.  Germs are becoming  impervious to just
about everything  doctors throw at them. The infection  control battle lines are
drawn.  Regulatory  agencies are increasing  requirements for cleanliness across
industries.  Contamination  control has become a major concern in protecting our
health in public  and  workplace  environments,  and at home.  School  children,
health  care  workers,   money-handlers,   travelers,   food  service   workers,
hospitality providers, and cosmetologists are at particular risk.

         Several major  manufacturers have responded to this demand by marketing
antimicrobial and antibacterial  products to consumer and professional  markets.
However,  independent  testing  reveals  that  virtually  all of these  products
contain  skin  irritating  and  skin  degrading  active  ingredients,   such  as
Triclosan(R),  CHG (Chlorhexidine Gluconate),  PCMX (Chloroxlyenol),  iodine, or
alcohol.  Moreover,  none of these  active  ingredients  provides  long-lasting,
efficacious protection,  nor have they been proven to improve and moisturize the
skin. Recently Triclosan

                                       -4-

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has come under FDA scrutiny and review by the American Medical Association (AMA)
and industry  professionals for its potential to cause "superbugs" or antibiotic
resistant bacteria.

         We believe that our unique and proprietary  formulations position us to
deliver to health care  providers at every level,  food handlers and consumers a
break-through technology that provides demanding efficacy and persistence, while
posing  no  risk  in  the  creation  of  superbugs.   Unlike   degrading  active
ingredients,   products  formulated  with  MicrobNZ  significantly  improve  and
moisturize the skin.

         Our  Dimethicone-based  skin healing  technology  sales are targeted at
hospitals  and  long-term  care  facilities,  as well as the  adult  and  infant
incontinent care markets. With people living longer, professional and/or in-home
care becoming  more common due to  skyrocketing  health care costs,  predictable
market  growth is  anticipated  for our products  targeted to markets with these
demographics.

Market Category Potential

Professional Health Care

         The CDC  notes  several  major  forces  are  behind  the  emergence  of
hospital-acquired or "nosocomial" infections:

         o        Antibiotic  use is increasing in hospitals and long-term  care
                  facilities.   Use  of  antibiotic   drugs  in  long-term  care
                  facilities and transfer of patients  between these  facilities
                  and  hospitals  has  created a large  reservoir  of  resistant
                  strains in nursing homes.

         o        Hospital  personnel  generally fail to follow basic  infection
                  control  precautions,  such  as  handwashing  between  patient
                  contact  due to  patient  load and their  general  dislike  of
                  currently  available  handwash  products.  In ICUs, asepsis is
                  often overlooked in the rush of crisis care.

         o        Patients in hospitals are increasingly immuno-compromised. The
                  shift of surgical care to outpatient  centers typically leaves
                  the sickest  patients in  hospitals,  which are becoming  more
                  like large ICUs. This shift has led to the greater  prevalence
                  of  vascular  access-associated   bloodstream  infections  and
                  ventilator-associated pneumonias.

         The professional health care market in the U.S. comprises approximately
5,000 hospitals, 17,500 long-term care facilities and numerous ancillary clinics
and specialty rehab centers.  Health care workers are the leading  vehicles with
which  "nosocomial"  or  hospital-acquired  infections are spread through direct
patient  contact.  In the case of  Hepatitis  B, health care workers are between
five and 15 times  more  likely to  contract  the virus  than the  general  U.S.
population   (Association  of  Infection   Control   Professionals).   Moreover,
nosocomial infection is the most common immediate cause of death in nursing home
patients,  and the leading cause of patient  hospitalization.  The CDC estimates
over 2 million cases of  nosocomial  infections  in  hospitals,  long-term  care
facilities  and  nursing  homes occur each year,  resulting  in 80,000 - 100,000
deaths.  According to the American  Journal of  Infection  Control  (June/August
1991),  between 5% and 18% of all  patients  have active  infection at any given
time.

         The large,  fast-growing  professional  health care market  comprises a
small group of dominant manufacturers and medical supply distribution companies.
They sell to hospitals,  nursing/long-term care facilities, physician and dental
offices,  laboratories  and  other  health-related  organizations  and to  group
purchasers.   The  manufacturers,   distribution  companies  and  group-purchase
organizations  control  product flow to the market.  We expect that  marketplace
success in the professional  health care category will be driven by establishing
strategic private label alliances with manufacturers and distribution  companies
to get First  Scientific's  products  to the end user.  In  addition,  an annual
industry  study  conducted by Kovach & Associates  for 2000  confirms the market
opportunity for handwash  products in the professional  health care market to be
just over $313.5 million.

Food Service

         The CDC reports  that in the U.S.,  each week,  1.5 million  people get
food poisoning,  10,000 deaths occur annually from food poisoning, and foodborne
illness can cost food service  operations  thousands of dollars in fees, claims,
wages, and supplies per incidence.



                                       -5-

<PAGE>



         Foodborne   illness   is   a   common,   distressing,   and   sometimes
life-threatening  problem for millions of people in the United States and around
the world. Over 70% of all outbreaks  originate in food service  operations;  as
many as 40% are the  result of poor  handwashing  and  cross-contamination.  The
National Institute of Allergy and Infectious  Diseases estimates that the annual
cost of all foodborne diseases in the U.S. is $5 to $6 billion in direct medical
expenditures and lost productivity.

         Properly  cleansed hands are particularly  important in controlling the
transmission  of foodborne  pathogens.  Food  employees  with dirty hands and/or
fingernails can contaminate the food being prepared.  According to the U.S. Food
and Drug  Administration's  1999 Food Code,  employee  handwashing is a critical
control point under food safety plan and prevention guidelines.  Therefore,  the
FDA  recommends  that any  activity  which may  contaminate  the  hands  must be
followed by thorough  handwashing in accordance with the procedures  outlined in
the Code.

         The food service  category has a similar  distribution  chain to health
care with  specialized  distribution  companies  providing  consumable goods and
supplies to food service companies and restaurants.  Dine-in  restaurants (29%),
fast food restaurants  (28%) and food service companies (14%) account for 71% of
the  annual  handwashes  in the food  service  arena.  Sources  confirm a market
opportunity  for handwash  products in the food  service  market to be just over
$187 million.

Other Markets

         Although we have not yet specifically  quantified  international market
potential, our current due diligence confirms that our technologies and products
can be sold  into the  same  markets  that we sell  into in the  United  States.
Registration and regulatory issues must be dealt with in most foreign markets to
begin  selling  products.  However,  once we  have  completed  the  registration
process,  we will pursue  markets  within the country  where speed to market and
acceptable margins can be achieved.

         We  believe  that  there  is  additional   market   potential  for  our
technologies  and products in other markets.  We have  identified the retail and
health and  fitness  categories  as "target"  markets  where the market size and
opportunity   justifies  sales   consideration  and  discussion.   We  are  also
researching  opportunities in government,  non-profit  organizations  and select
niche industries and sectors.

Active End User Markets

         Our  current  and  near-term  sales  revenue  will be derived  from the
following "active" end user markets.

Antimicrobial Technology:

         Professional  Health Care  includes  personnel  at  hospitals,  nursing
homes/long-term care facilities and medical clinics, as well as lab technicians,
infection control practitioners,  nurses, homecare agency personnel, physicians,
dentists and dermatologists.

         Food Service  includes  food  processing  plant  personnel,  restaurant
workers,  central  commissary  personnel,  school cafeteria  personnel,  service
providers and their patrons.

         Hospitality includes entertainment and travel personnel and customers.

         Janitorial/Sanitation includes janitorial and sanitation personnel.

Skin Healing Technology:

         Professional  Health Care  includes  personnel  at  hospitals,  nursing
homes/long-term  care facilities and homecare agency and  professional  pharmacy
personnel.

Institutional Skin Care:

         Professional  Health Care  includes  personnel  at  hospitals,  nursing
homes/long-term care facilities, and homecare agencies and personnel.



                                       -6-

<PAGE>



Marketing Plan

         Our marketing  plan  addresses the  development of awareness and demand
for our technologies to create product insistence and generate sales.  Marketing
campaigns  during  the  latter  half of 2000 and the first  quarter  of 2001 are
directed toward  establishing  and building a superior market position for First
Scientific with an emphasis on our antimicrobial technology -- MicrobNZ.

         In addition to mitigating common risks associated with granting private
label contractual  arrangements with new customers, the brand promotes and grows
acceptance of our antimicrobial  technology across several markets. Through this
branding program,  we require that all products containing a formulation derived
from the  MicrobNZ  technology  include  the  "MicrobNZ"  logo on their  product
labels.

         Supporting this marketing plan, we have engaged outside consultants.

Sales Approach

         We anticipate that near-term  domestic  revenue growth will result from
private-label  agreements  within the identified  active markets.  This approach
provides quick market  penetration with lower capital  requirements.  Due to the
large  cash  investment  required  to  launch,  penetrate  and  sustain  branded
products,  we have elected to align with market leaders that have an established
sales force,  distribution  and customer base. We believe these  advantages make
private labeling a compelling  business sales strategy for us. Moreover,  we can
offer  proprietary  products to a number of  customers  by  altering  botanical,
fragrance, and packaging options while maintaining required FDA protocols.

         Additionally, as opportunities arise, we provide our ProCleanse(TM) and
PureCleanse(TM)   house   brands.   We   carefully   qualify  our   distribution
relationships,  choosing  those  with an  established  market  presence.  We are
pursuing distribution  agreements in the professional health care, food service,
hospitality, and janitorial/sanitation markets.

         In international  markets,  we expect private label  relationships will
dominate sales. However,  various foreign distributors may want to capitalize on
using our brand label as it  develops  market  presence  in the U.S.  Use of our
brand  label  in  foreign  countries  will  be  reviewed  and  considered  on  a
case-by-case basis.

         In support of this plan,  we  continue to assemble a sales team that is
organized in alignment with the end consumer  markets  outlined above. The sales
team  concentrates  its  efforts on  securing  significant  market  share in its
identified target markets.

Research and Development

         We have established a talented, respected and results-oriented research
and  development  team,  with the  proven  ability  to  develop  unique  product
formulations  that fulfill user needs.  Edward Walker,  Ph.D., who developed our
antimicrobial  protection and skin healing technologies,  leads our research and
development  efforts.  As a  market-driven  company,  significant  unmet product
opportunities  continue to be identified  through market  research.  New product
endeavors  are  facilitated   through  product  analysis,   market   opportunity
assessment,  product testing and user validation. Product concepts are qualified
by marketing through interaction with customers, end users, and several internal
sources before research and development begins.

Manufacturing and Raw Materials

         Our  depth  in  manufacturing  capabilities  ensures  that we meet  the
required  volumes,  market  demands,  and  various  packaging  formats  for  our
products.  We  currently  contract  the  manufacturing  of products to carefully
chosen and qualified production and co-packaging  organizations that comply with
both GMP and FDA  guidelines.  These  providers  have a depth of  experience  in
manufacturing  for various  customers who require high quality products produced
in FDA-compliant and registered facilities.  Strict  confidentiality  agreements
and  protocols  are imposed to protect our interests  when  qualifying  contract
manufacturers.





                                       -7-

<PAGE>



Competition

         Our  primary   competitors  are  those  companies   already   providing
antimicrobial  and  antibacterial  products,  and the promise of a bacteria-free
environment,   to  the   professional   health  care,   foodhandling  and  other
workplace/consumer environments. The speed to market and demonstrated capability
of designing unique products to address market  opportunities and customer needs
provides  us  a  competitive   edge  to  compete  against   larger,   entrenched
competitors.   However,  our  principal   competitors  are  mostly  large,  well
established marketers that have recognized brands and customer bases that pose a
significant barrier to our achieving our sales and marketing plans.

         We have not been able to identify a competitor  that  provides a single
product that simultaneously eliminates bacteria,  improves skin condition and is
effective for hours after use.  Additionally,  independent  testing reveals that
competitive products  incorporating skin irritating active ingredients,  such as
alcohol,  PCMX, CHG, Triclosan and iodine, cause skin degradation.  This product
landscape provides us with a critical competitive  advantage.  We believe we are
well  positioned  to  deliver  products  that   specifically   address  problems
associated  with  degradation  of the skin caused by the  irritating  aspects of
competitors'  products,  while also improving the skin's  overall  condition and
providing antimicrobial persistence at higher levels.

                        Certain Significant Risk Factors

Our short- and long-term  success is subject to certain risks, many of which are
substantial in nature and outside our control. You should consider carefully the
following risk factors, in addition to other information contained herein.

Our limited working  capital and limited  operating  history,  combined with our
accumulated deficit and potential anticipated losses, raise substantial doubt as
to our ability to continue as a going concern.

         As  of  December  31,  2000,   we  had  limited   working   capital  of
approximately $632,000. We also have a limited operating history.  Historically,
our revenues have been related to product sales,  product testing, and licensing
fees.  We  are a  development  stage  company.  As of  December  31,  2000,  our
accumulated  deficit since  inception was  approximately  $14,360,000,  of which
approximately   $3,776,000  was  attributable  to  a  non-recurring  charge  for
purchased research and development and approximately $3,246,000 was attributable
to dividends and the  beneficial  conversion  features on preferred  stock.  The
remaining  approximately   $7,338,000  deficit  resulted  primarily  from  costs
incurred  in  connection  with  research  and  development;  compliance  of  our
proprietary products with Food and Drug Administration ("FDA") requirements; and
operating expenses related to startup sales,  marketing and administration.  Our
ability to become  profitable  largely  depends on  successfully  marketing  our
products and developing new formulations and products. The problems and expenses
frequently  encountered in developing new products and the competitive  industry
in which we operate will impact whether we are successful.  We may never achieve
profitability.  Furthermore,  we may encounter substantial delays and unexpected
expenses related to research,  development,  production,  marketing,  regulatory
matters, or unforeseen difficulties.

The audited  consolidated  financial  statements that accompany this report have
been prepared on the assumption that we will continue as a going concern.

         Our  independent  public  accountants  have issued  their  report dated
January 26,  2001,  that  includes an  explanatory  paragraph  stating  that our
recurring losses and accumulated deficit,  among other things, raise substantial
doubt  about our ability to  continue  as a going  concern.  Our sales have been
limited and it has been  necessary to rely upon  financing  from the sale of our
equity securities to sustain operations.  Additional  financing will be required
if we are to continue as a going  concern.  If  additional  financing  cannot be
obtained,  we may be required to scale back or discontinue  operations.  Even if
additional financing is available,  there can be no assurance that it will be on
favorable  terms.  In any event,  such  financing  will result in immediate  and
possibly substantial dilution to existing shareholders.

Current working capital will not be sufficient to meet our future capital needs.

         We may  require  substantial  funds  for  various  reasons,  including:
continuing  research  and  development;  expanded  testing,  primarily  efficacy
testing;  and  manufacturing and marketing our existing  products.  In the short
term,  based on past  financial  needs and on  currently  planned  programs,  we
anticipate that the funds on hand,


                                       -8-

<PAGE>



together with funds generated from future product sales,  will not be sufficient
to satisfy our capital  requirements  through  2001.  Adequate  funds may not be
available  when  needed or on terms  acceptable  to us.  Insufficient  funds may
require us to delay,  scale back or eliminate certain or all of our research and
development  programs or to license third parties to  commercialize  products or
technologies  that we would  otherwise  seek to  develop  ourselves,  which  may
materially adversely affect our continued operations.

Additional financing will be necessary to provide sufficient working capital.

         While we have  recently  completed  financings  through the sale of our
common and  preferred  stock,  we may not be able to fully expand or operate our
business as planned without obtaining  additional financing during 2001. If such
financing  is not  available or  obtainable,  investors  may lose a  substantial
portion or all of their  investment and our business may be inadequately  funded
to satisfy our capital  requirements,  fund our  research and  development,  and
sustain  the  marketing,  sales,  and  contract  manufacturing  of our  existing
products.  We currently have no immediate  means for obtaining  this  additional
financing.  Consequently,  we cannot assure investors that additional financing,
when necessary, will be available on acceptable terms, or at all.

We are in the early stage of product  development and the science and technology
underlying our products are relatively new.

         The science and technology of products for the health care and personal
hygiene markets, including antimicrobial preparation,  are rapidly evolving. Our
products may require significant  further research,  development,  testing,  and
regulatory  compliance  efforts.  They are also  subject to the risks of failure
inherent in the development of products based on innovative technologies.  These
risks include the possibility  that any or all of the future products will prove
to be ineffective or unsafe,  that the proposed products are uneconomical,  that
others hold  proprietary  rights which preclude us from marketing such products,
or that others market  better  products.  Accordingly,  we are unable to predict
whether  our  research  and  development  activities  will  result  in  any  new
commercially  profitable products.  Further, due to the extended testing process
required,  we may be unable to sell certain new products in the future. There is
also no guarantee  that we will be able to sell our  proprietary  formulation in
sustained, profitable volumes.

We have no business  experience with large product volumes connected with growth
from sales and marketing efforts.

         We may encounter scale-up  difficulties as anticipated sales require us
to produce  larger  commercial  volumes of our  products.  If we were to receive
sales orders larger than we or our contract  manufacturers  and suppliers  could
fill within a reasonable  time, we would face the  alternative of either turning
down such  orders,  being  late in  fulfilling  them,  or being  constrained  to
subcontract the production on terms less favorable to us. In either of the first
two events,  we could lose  credibility  with  existing or potential  customers,
which could result in the loss of future business.  Our anticipated revenues and
earnings would be materially adversely affected if any of these events occurred.

We are subject to numerous government  regulations and we are required to comply
with FDA standards and guidelines.

         We are  subject to certain  United  States and  international  laws and
regulations regarding the development,  production,  transportation, and sale of
our products. As a result, we may be required to comply with certain restrictive
regulations,  or  potential  future  regulations,  rules,  or  directives.  Such
potential regulatory conditions or compliance with such regulations may increase
our cost of operations or decrease our ability to generate income.

         We are  subject to  regulation  by the FDA and other  federal and state
regulatory  agencies.  FDA  standards  and  guidelines  require  us to use  only
approved ingredients, and to conduct efficacy, shelf-life and stability testing.
Any changes in existing FDA requirements may materially adversely affect us.

Rapid  technological  change could cause our  technology  and products to become
obsolete.

         Our market is subject to rapid  technological  change.  Development  by
others of new or improved products,  formulation,  processes or technologies may
make our products obsolete or less competitive. Accordingly, we must


                                       -9-

<PAGE>



continue  investing in research  and  development  of our existing  products and
developing  new  products.  Despite  such  investment,  our  current or proposed
products may be unsuccessful.

Competition within the hand cleansing products industry is a significant barrier
to entry into the hand cleansing  products market which could  adversely  impact
our performance.

         Our  products  compete  with   antimicrobial  and  antibacterial   skin
protection  products currently on the market.  The professional  health care and
personal  hygiene  industry is dominated by a small number of large com petitors
that are well established in the marketplace,  have experienced management,  are
well financed,  and have well recognized trade names related to their respective
product lines.  We may be unable to penetrate the existing  market and acquire a
sufficient market share to be profitable.  Significant competitive factors which
will affect future sales include performance,  pricing, timely product shipment,
safety, customer support, convenience of use and general market acceptance.

         Competition  among hand  cleansing  products  is strong and  presents a
significant  barrier  to entry  by new  products  such as the  ones we  produce.
Consumers  tend  to  purchase  and  use  products  produced  or  distributed  by
manufacturers  with  recognizable  names.  We have  not yet  developed  a highly
recognizable name in the marketplace.  In addition,  we have identified a number
of  competitors  who offer products that appear to be  substantially  similar to
ours, a number of which are  significantly  larger and more  experienced  in the
marketplace  than we are.  Furthermore,  we face competition from companies that
currently market or are developing  products similar to those we offer.  Many of
these companies have significantly greater marketing,  financial, and managerial
resources than we do. In the face of such  competition,  our products may become
obsolete.

Because we are a development stage business with limited operating  history,  we
face  risks   associated  with  emerging   companies  such  as  failure  of  our
technologies and  formulations,  unexpected costs related to quality control and
production, and an inability to achieve full-scale production.

         Because we are a new venture  involved in highly  technical  industries
such as healthcare and personal  hygiene,  we have  substantial  inherent risks.
Notwithstanding any pre-production  planning,  our products may incur unexpected
problems in full-scale production, which cannot always be foreseen or accurately
predicted or planned for. Our  formulas may become  unworkable  for  unpredicted
reasons.  Quality control and component sourcing failures may occur from time to
time.  Our  business  is  substantially  dependent  upon  the  capabilities  and
performance  of both  management  and sales  personnel.  Mistakes in judgment or
performance by our management or sales personnel could be costly and, in certain
instances, disabling. These risks present significant challenges to our business
and our ability to generate  revenue,  and there is no guarantee that we will be
able to meet these challenges and generate revenues.

We depend heavily on key management,  consultants, and sales personnel, the loss
of whom could adversely impact our business.

         Due to the highly technical nature of our business, we are dependent on
certain key  personnel.  Our success will be largely  dependent on the decisions
made by members of  management.  The loss of services of one or more  members of
our  management  team  could  have a  material  adverse  effect on our  Company,
including the further development and sale of proprietary  formulations.  We are
especially  dependent  upon the efforts and  abilities of our senior  technology
consultant,  Dr.  Edward B. Walker.  Dr. Walker is also a member of our board of
directors.  We have a consulting  agreement with  Pharmulations,  LLC, an entity
controlled by Dr.  Walker.  The loss of any of our key  executives  could have a
material  adverse effect on us and our  operations  and prospects,  although the
loss of the personal services of Dr. Walker under the consulting agreement could
have a more  significant  adverse  effect.  We have a  $2,000,000  key man  life
insurance policy on Dr. Walker.

         Furthermore,  we believe that our future success will depend,  in part,
upon our  ability to  attract,  retain,  and  motivate  qualified  personnel  by
offering competitive  compensation  packages,  equity  participation,  and other
benefits  which may reduce the working  capital  available  for our  operations.
Management may also seek to obtain outside  independent  professionals to assist
in assessing  the merits and risks of business  proposals we consider as well as
assisting in the development and operation of our business projects. There is no
assurance,  however, that we will be successful in attracting and retaining such
personnel.



                                      -10-

<PAGE>



Because our approach to hand washing and cleansing is different from  approaches
currently on the market,  there is no assurance of market  acceptance of our new
approach to handwashing which could materially adversely impact our revenues.

         Because our formulations and products approach handwashing  differently
from other products currently on the market, our products may not be accepted in
the marketplace.  Such acceptance will depend on a number of factors,  including
demonstrating  the efficacy  and  advantages  of our products  over those of our
current and future competitors. Further, we may be unable to successfully market
our products even though they perform successfully in independent laboratory and
clinical testing. Our inability to market our products, either alone or combined
with the market's refusal to accept our products,  would significantly adversely
impact our business and our ability to generate revenues.

We depend heavily on our patents and the  protection of proprietary  technology,
and any loss of such  intellectual  property  protection  could  have a negative
impact on our business.

         We depend on our  ability to  license  and  obtain  patents  and on the
adherence to confidentiality agreements executed by employees,  consultants, and
third  parties to  maintain  the  proprietary  nature of our  technology  and to
operate without  infringing on the proprietary rights of others. We have applied
for a United States patent for protection on our antimicrobial formulation,  and
our rash treatment and prevention  formulations.  The pending patents may not be
granted.  Also, our present or future products may be found to infringe upon the
patents of others.  If our  products  are found to infringe on the  patents,  or
otherwise to utilize the intellectual property of others without authority,  our
development, manufacture, and sale of such products could be severely restricted
or prohibited.  In such case we might be required to obtain  licenses to utilize
such patents or proprietary  rights of others, for which acceptable terms may be
unavailable.  If we were not able to  obtain  such  licenses,  the  development,
manufacture  or sale of products  requiring  such  licenses  would be materially
adversely affected.  In addition,  we could incur substantial costs in defending
ourselves against challenges to our patents or infringement claims made by third
parties, or in bringing actions to enforce any patents we may obtain.

Because patents and intellectual property laws provide limited protection, there
is a risk that our proprietary  information and formulations may be lost through
challenges to our rights.

         Other companies may sell products  similar to ours before we can market
our products adequately. We rely on the protections we hope to realize under the
United  States  and  foreign  patent  laws.  However,  patents  provide  limited
protection.  We have  applied for a United  States  patent on the  antimicrobial
formulation and on our rash treatment and prevention formulations.  Applications
for various other  domestic and foreign  patents are either  pending or planned.
Similar  formulations  and  products,  however,  could be  designed  that do not
infringe on our patent rights, but which may be similar enough in formulation or
effect to compete against our patented products.  Moreover,  it is possible that
unpatented formulations and products which were created prior to ours may exist.
Such  unpatented  formulations  and products may have never been made public and
therefore  are not known to us or the industry in general.  Such a product could
be introduced into the market without  infringing on our future patents.  If any
such  competing,  non-infringing  products  were produced and  distributed,  our
profit potential would be materially  limited,  which would seriously impair the
viability of our business.

         In addition,  there can be no assurance that any intellectual  property
rights eventually  issued or exerted by us will not be challenged,  invalidated,
or  circumvented,  or that our  competitors  will not  independently  develop or
patent  technologies  that are  substantially  equivalent  or  superior to ours.
Furthermore, a court may find that we have infringed on patents owned by others.
We may be required to go to court to defend our rights or products, to prosecute
infringements,  or to defend  ourselves  from  infringement  claims  by  others.
Although we are not aware of any such  litigation at this time,  there can be no
assurance that such claims will not be brought in the future.

         Patent  litigation is expensive  and  time-consuming,  and  well-funded
adversaries  can use  such  actions  as part of a  strategy  for  depleting  the
resources of a small company such as ours. We cannot  assure  investors  that we
will have sufficient resources to successfully protect our interests in any such
litigation that may be brought.



                                      -11-

<PAGE>



Potential  limitations on Medicare  reimbursement  for our products could have a
negative impact on our revenues.

         A major  market for our products  could also be  adversely  affected by
federal  legislation  that may  reduce  reimbursements  under the  capital  cost
pass-through system utilized in connection with the Medicare program. Failure by
hospitals  and  other  users  of  our  products  to  obtain  reimbursement  from
third-party  payors,  or changes in government and private  third-party  payors'
policies toward  reimbursement for medical  procedures could result in reduction
of revenues to  hospitals  and other users of our  products.  Such  reduction of
revenues could result in the hospitals'  reducing  spending for products such as
our  formulations,  especially  if our  products  are  not the  least  expensive
products on the market. Such reduction in spending would have a material adverse
effect on our business.

Disruption  of  service  or  insufficient  production  capacity  by our  outside
suppliers or manufacturers could have a detrimental effect on our business.

         We currently  purchase all of our chemical  components,  supplies,  and
contract  manufacturing  from third-party  suppliers.  Substantially  all of our
current  products  are mixed and  packaged  by outside  companies  under  supply
agreements.  If we were required to locate other suppliers or manufacturers,  we
could  experience  increased costs and  significant  delays in both locating and
switching  to new vendors.  Although we have access to adequate  supplies of raw
materials for our current and  foreseeable  needs,  a significant  disruption in
this  supply  could have a  short-term  material  adverse  impact on our revenue
production  and  financial  results.  We have  sought to  mitigate  this risk by
entering into contracts with our suppliers to assure a continuing  supply of raw
materials for our product.  However,  long-term  hedging  opportunities  against
price increases for these items are generally not available.

         Similarly,  because we depend so heavily on  third-party  suppliers and
manufacturers,  an increase in demand beyond  predicted  capacity  levels of our
suppliers or manufacturers  could require us to locate additional  suppliers and
manufacturers  to help us meet the increased  demand.  There can be no assurance
that we would be able to locate such additional  suppliers or  manufacturers  at
costs and rates that would  allow us to  realize a profit  from such  additional
production.  Finally,  if we are unable to locate such  additional  suppliers or
manufacturers,  and our demand  exceeds our ability to provide our products,  we
could lose current and potential customers,  which would have a material adverse
impact on our business.

If a successful  product  liability claim or series of claims is brought against
us for uninsured  liabilities or in excess of insured  liabilities,  we could be
forced to pay substantial damage awards.

         We  have a  limited  operating  history  upon  which  to  evaluate  the
performance  and  effects of our  products  in actual use on  consumers.  We can
provide no absolute  assurance that our product line will operate as designed or
that no injury to persons will result from the use of our products. For example,
there is potential that someone may have an allergic  reaction or sustain injury
in  some  other  way  after  using  our  antimicrobial  hand  cleansing  or rash
prevention  products.   Such  individuals  may  subsequently  seek  to  hold  us
responsible for any losses incurred. In such a case, we may experience losses or
other material  adverse  consequences,  which may, in severe cases,  cause us to
cease operations.

         The  manufacture,  development,  and  marketing of  antimicrobial  hand
cleansing  products  exposes us to the  potential  risk from  product  liability
claims  and there can be no  assurance  that we can  avoid  significant  product
liability  exposure.  We maintain product liability insurance providing coverage
up to $1,000,000 per claim with an aggregate  policy limit of $2,000,000.  There
is  substantial  doubt that this amount of insurance  would be adequate to cover
potential  liabilities in the event that we were to face  significant  claims. A
successful  product  liability  claim  brought  against us could have a material
adverse  effect on our  business,  operating  results and  financial  condition.
Further,  product liability insurance is becoming  increasingly  expensive,  and
there can be no assurance that we will  successfully  maintain  adequate product
liability  insurance  at  acceptable  rates,  or at all.  Should we be unable to
maintain  adequate  product  liability  insurance,  our  ability  to market  our
products  would be  significantly  impaired.  The  financial  losses that we may
suffer from future liability claims or a voluntary or involuntary  recall of our
products and the damage that any product liability  litigation or a voluntary or
involuntary  recall may do to the reputation and  marketability  of our products
would have a material  adverse  effect on our  business,  operating  results and
financial condition.




                                      -12-

<PAGE>



Our  dependence  on  domestic  markets  could  limit our  potential  growth  and
profitability.

         While a number of our competitors have diversified  their customer base
to include a strong international component, we are currently dependent on sales
generated in U.S. markets.  To sustain growth in the domestic  markets,  we will
depend on increased usage of our products by health care professionals, the food
handling industry, hospitality,  government,  education,  e-commerce, retail and
other  niche  markets.  In  addition,  we will need to  promote  innovation  and
expansion  of our  product  line  as well  as  capture  market  share  from  our
competitors.  There can be no assurance that we will succeed in implementing our
strategies to achieve such domestic growth.

Our international expansion efforts may prove unsuccessful.

         In order to reduce our dependence on domestic revenues, we have adopted
a strategy to begin  penetrating  international  markets.  In implementing  this
strategy,  we face barriers to entry and the risk of competition  from local and
other  companies  that already have  established  global  businesses.  The risks
generally associated with conducting business internationally include:  exposure
to  currency  fluctuations,  limitations  on foreign  investment,  import/export
controls,  nationalization,  unstable  governments  and  legal  systems  and the
additional  expense  and risks  inherent  in  operating  in  geographically  and
culturally  diverse  locations.  Because  we plan to develop  our  international
business  through joint  ventures,  co-packaging  arrangements,  agent and other
alliances,  we may also be subject to risks  associated  with such joint venture
arrangements  and  alliances,  including  those  relating  to the  combining  of
different corporate cultures and shared decision-making.  In addition, since our
current international  distribution  capabilities are extremely limited, we will
also  need to  acquire a  distribution  network  or enter  into  alliances  with
existing  distributors  before  we can  effectively  conduct  operations  in new
markets.  There can be no  assurance  that we will succeed in  establishing  our
international  business  in a  profitable  manner,  and a failure to expand this
business  may have a material  adverse  effect on our  business  and  results of
operations.

         At the present time, we do not have any registered  foreign  trademarks
or any pending foreign trademark applications. There can be no assurance that we
will successfully  register any foreign  trademarks.  Furthermore,  in the event
that we are  successful in  registering  foreign  trademarks on our products and
formulations there can be no assurance that such trademarks will be protected in
the foreign markets in which they are used.

Our projected  expansion  into  international  markets could include many of the
risks we currently face in domestic markets.

         We  intend  to  establish  and  expand  our   operations  to  encompass
international  sales and marketing  efforts.  In order to maximize our expansion
abroad with minimum capital outlay,  we may recruit business partners in various
foreign markets to conduct  operations,  establish local networks and coordinate
sales and marketing  efforts.  Our success in such markets is directly dependent
on locating good business partners and their dedication of sufficient  resources
to our business relationships.

         International  expansion will subject us to foreign  currency  exchange
risk and will require  management  attention and resources.  We expect to pursue
expansion through a number of international alliances and to rely extensively on
these business partners initially to conduct operations, register web sites, and
coordinate sales and marketing efforts. Our success in these markets will depend
on the  success of our  business  partners  and their  willingness  to  dedicate
sufficient resources to our business relationships. We cannot provide assurances
to investors that we will be successful in our efforts internationally.

         International operations are subject to other inherent risks including:
the impact of  recessions  in economies  outside the United  States;  changes in
domestic  regulatory  requirements,  as well as differences between domestic and
foreign regulatory requirements; export restrictions,  including export controls
relating to product  formulas,  reduced  protection  for  intellectual  property
rights in some countries; potentially adverse tax consequences; difficulties and
costs of staffing  and  managing  foreign  operations;  political  and  economic
instability;  tariffs and other  trade  barriers;  and  seasonal  reductions  in
business  activity during the summer months in Europe and certain other parts of
the world.

         Our failure to address  these risks  adequately  could  materially  and
adversely affect our business, results of operations and financial condition.



                                      -13-

<PAGE>



The terms of our outstanding  preferred stock limit our ability to raise capital
from the sale of our common stock or securities  convertible into or that may be
exchanged for our common stock.

Introduction

         We have one series of preferred stock outstanding: the Series 2000-B 8%
Convertible  Preferred Stock ("Series B preferred stock").  All of the presently
outstanding  preferred  stock is  convertible  into  shares of our common  stock
according  to a formula  based in part on the market  price of our common  stock
during the 15 trading days prior to the conversion date. For additional  details
on  these  transactions,   see  Item  12  "Certain   Relationships  and  Related
Transactions - Financing Arrangement with Aspen Capital Resources, LLC."

         Given the structure of the conversion formulas applicable to the Series
B preferred stock, there effectively is no limitation on the number of shares of
common  stock into  which the  Series B  preferred  stock may be  converted.  In
addition,  under certain circumstances,  the sale or issuance of common stock or
common stock  equivalents  at prices below the current  conversion  price at the
time of such  sale or  issuance  might  result in a  further  adjustment  of the
conversion  price of the preferred stock and an increase in the number of shares
of common stock issuable upon  conversion to prevent  dilution of the holders of
the preferred stock.

Overall Dilution to Market Price of Previously Issued Common Stock

         The  conversion  of  the  Series  B  preferred   stock  may  result  in
substantial  dilution  to the equity  interests  of other  holders of our common
stock. Specifically,  public resales of common stock following the conversion of
the Series B preferred stock likely would depress the prevailing market price of
our common stock.  Even prior to the time of actual  conversions,  exercises and
public resales,  the market "overhang"  resulting from the mere existence of our
obligation to honor such conversions or exercises could depress the market price
of the common stock.

Increased Dilution With Decreases in Market Price of Common Stock

         The outstanding shares of Series B preferred stock are convertible at a
floating  price that may and likely will be below the market price of our common
stock prevailing at the time of conversion or exercise.  As a result,  the lower
the  market  price of our  common  stock  at and  around  the  time the  selling
stockholder  converts,   the  more  shares  of  our  common  stock  the  selling
stockholder  receives.  Any  increase  in the  number of shares of common  stock
issued  upon  conversion  or put of  shares  as a  result  of  decreases  in the
prevailing  market price would  compound the risks of dilution  described in the
preceding paragraph of this risk factor.

Voting Rights of Preferred Stock

         The purchase  agreement and the certificate of designation of the terms
and conditions of the Series B preferred stock provide that the voting rights of
the Series B preferred  stock are equal to the rights of the number of shares of
common  stock  into  which  the  Series B  preferred  stock is  convertible.  No
conversion is required for the selling  stockholder  to have such voting rights.
If the market price of our common  stock  falls,  the number of shares of common
stock issuable on conversion of the Series B preferred stock increases,  and the
preferred  stockholder's voting power increases  proportionately.  Consequently,
should an issue come  before  our  stockholders  for a vote while the  preferred
stock  remains  outstanding,  the  preferred  stockholder  would have  effective
control of that vote.

Increased Potential for Short Sales

         Downward  pressure on the market  price of our common stock that likely
would  result from sales of common stock  issued on  conversion  of the Series B
preferred  stock could  encourage  short sales of common stock by holders of the
Series B preferred stock or others. Material amounts of such short selling could
place further downward pressure on the market price of the common stock.

Payment of Dividends in Additional  Shares of Common Stock May Result in Further
Dilution

         Under  the  terms  of the  Series  B  preferred  stock,  the  preferred
stockholder has the option to receive  dividends on the Series B preferred stock
in shares of common stock. The dividends accrue from the date of the issuance of
the Series B preferred  stock,  subject to any intervening  payments in cash. As
such,  a decision by the  preferred  stockholder  to receive  such  dividends in
shares of common stock could result in a substantial increase in


                                      -14-

<PAGE>



the number of shares  issued and  outstanding  and could result in a decrease of
the relative voting control of common stock issued and outstanding prior to such
payment of dividends and interest.

         These, and other preferred rights  associated with the preferred stock,
may make it impossible for us to raise additional  financing through the sale of
our securities.

The Board of  Directors'  right to issue  additional  series of preferred  stock
could result in further dilution of the rights of present shareholders.

         Our  certificate  of  incorporation  authorizes  the  issuance of up to
1,000,000  shares  of  "blank  check"  preferred  stock,  which  will  have such
designations,  rights and  preferences as may be determined from time to time by
the board of  directors.  Accordingly,  the  board of  directors  is  empowered,
without stockholder  approval (but subject to applicable  government  regulatory
restrictions), to issue preferred stock with dividend, liquidation,  redemption,
conversion, voting or other rights which could adversely affect the voting power
or other rights of the holders of our common stock.  Those terms and  conditions
may  include  preferences  on an equal or prior  rank to the  existing  Series B
preferred  stock.  Those  shares  may be  issued  on such  terms  and  for  such
consideration  as the board of directors  then deems  reasonable  and such stock
shall then rank equally in all aspects of the series and on the  preferences and
conditions  so  provided,  regardless  of  when  issued.  In the  event  of such
issuance, the preferred stock could be used, under certain  circumstances,  as a
method of discouraging, delaying or preventing a change in control.

We face substantial  penalties for any failure to maintain the  effectiveness of
the registration  statement registering the resale of the shares of common stock
underlying the Series B preferred stock.

         We are subject to a registration  rights  agreement that requires us to
register  certain  shares of our common stock with the  Securities  and Exchange
Commission.  Under  this  agreement,  we must  also  maintain  the  registration
statements  and any others filed under the  agreement  current  until all of the
covered  securities  are sold or can be sold  publicly  without  benefit  of the
registration.  If we fail to maintain this  registration,  we will be subject to
substantial penalties. Those penalties would include an increase in the dividend
rate on the Series B preferred  stock from 8% to 21% per year and an increase in
the number of shares issuable upon conversion equal to 5% of the total number of
shares of common  stock  issued or  issuable  upon  conversion  of the  Series B
preferred stock for every 30 days that the noncompliance  continues,  any one of
which may adversely affect our financial condition or results of operations.

Item 2.  Description of Property

         Our corporate  headquarters are located in  approximately  5,000 square
feet at 1877 West 2800 South, Suite 200, Ogden, Utah 84401.  Located adjacent to
the corporate  offices is a recently  completed,  state-of-the-art  research and
development  facility occupying  approximately 2,000 square feet. Lease payments
total approximately $7,400 per month. The lease expires on February 28, 2003 and
annual rental increases are at the greater of CPI or 5%. A second location is at
2711 Midland Drive,  Ogden, Utah 84401.  Research and development,  warehousing,
mixing,   and  records   storage  are   performed  at  this  2,200   square-foot
FDA-compliant  facility, as well as the management of environmental chambers for
product stability testing. This facility is leased on a month-to-month basis for
$875 per month.

         PureSoft  operates from space  occupying 4,000 square feet in an office
building located at 167 Exeter Rd., Newfield, New Hampshire.  This office serves
primarily as a sales and marketing  location and  facilitates our interface with
several key  manufacturing  suppliers.  East and West facilities serve strategic
objectives in putting forth a national image,  access to international  shipping
ports through an East Coast distribution warehouse,  and for sales opportunities
emanating from the federal government. The lease term expires December 31, 2004,
with  monthly  rent  payments of  approximately  $5,400.  We paid rent for eight
months in advance when the lease was entered into in January  2001,  which gives
PureSoft  the last two months  rent free under the  lease.  PureSoft  also rents
approximately  10,000 square feet of product storage space in a public warehouse
in Nashua,  New Hampshire for $4,000 per month.  The lease on this facility runs
through December 31, 2001.

Item 3.  Legal Proceedings

         We are not involved in any material legal proceedings.


                                      -15-

<PAGE>



Item 4.  Submission of Matters to a Vote of Security Holders.

         We held our 2000 Annual Meeting of  Shareholders  on November 15, 2000,
at  which  15,223,645  shares  were  represented  in  person  or by  proxy.  The
shareholders  elected eight  directors by the following  votes (in each instance
there were no abstentions and no broker "non-votes"):

          Randall L. Hales: 15,159,979 shares FOR; 63,666 shares AGAINST.

          Gary L. Crittenden: 15,159,979 shares FOR; 63,666 shares AGAINST.

          Douglas R. Warren: 15,055, 187 shares FOR; 168,458 shares AGAINST.

          Dan C. Jorgensen: 15,159,979 shares FOR; 63,666 shares AGAINST.

          Edward B. Walker: 15,159,979 shares FOR; 63,666 shares AGAINST.

          E. Todd Heiner: 15,159,979 shares FOR; 63,666 shares AGAINST.

          Peter J. Sundwall,  Jr., M.D.:  15,159,979  shares FOR;  63,666 shares
          AGAINST.

          Frank A. Cereska: 15,159,979 shares FOR; 63,666 shares AGAINST.

         Additionally,  the  shareholders  voted to ratify  the  appointment  of
Arthur  Andersen LLP as the  independent  public  accountants for the year ended
December 31, 2000, as follows:

         15,211,645  shares  FOR;  10,000  shares  AGAINST;   and  2,000  shares
ABSTAINED, and there were no broker "non-votes."

                                     PART II

Item 5.  Market for Common Equity and Related Stockholder Matters

     Our common stock is traded in the over-the-counter market on the NASD's OTC
Electronic Bulletin Board under the trading symbol "FSFI." Trading of the common
stock  commenced on October 26, 2000. The following table shows the high and low
bid  quotations  for our common  stock as reported by our market  makers.  These
quotations are believed to represent inter-dealer  quotations without adjustment
for retail  mark-up,  mark-down  or  commissions  and may not  represent  actual
transactions.

                  Quarter Ended                      High Bid          Low Bid

                  December 31, 2000                  $2.00             $0.1875

         As of January 30, 2001 we had  approximately 370 shareholders of record
and 23,045,436 outstanding shares of common stock.

Dividend Policy

         We have never paid cash dividends on our common stock.  During the year
ended December 31, 2000, we paid dividends on preferred  stock at an annual rate
of 8%, which totaled $160,480.  We currently intend to retain future earnings to
operate and expand our business.  We do not anticipate paying any cash dividends
with respect to our common stock in the foreseeable  future.  As of December 31,
2000, we had an accumulated deficit from inception of approximately  $14,360,000
and  until  this  deficit  is  eliminated  we can pay  dividends  to our  common
shareholders only out of net profits.







                                      -16-

<PAGE>



Recent Sales of Unregistered Securities

Year Ended December 31, 2000

         On May 16, 2000, we entered into a private placement purchase agreement
with Aspen  Capital  Resources,  LLC for the  purchase of up to 4,000  shares of
Series 2000-A Convertible Preferred Stock for net proceeds of $3,600,000. The we
also granted Aspen Capital warrants to purchase up to 2,000,000 shares of common
stock in connection with the purchase agreement.

         On December 29, 2000, we entered into a subsequent agreement with Aspen
Capital  pursuant to which Aspen  Capital  agreed to exchange  each share of its
unconverted  Series A preferred stock for one share of Series 2000-B Convertible
Preferred Stock.

         The sale of the  Series A  Preferred  Stock  and the  warrants  and the
exchange of shares of Series A Preferred Stock for Series B Preferred Stock were
undertaken  pursuant to Rule 506 of  Regulation  D under the  Securities  Act of
1933, as amended.  For  additional  details on these  transactions,  see Item 12
"Certain  Relationships  and Related  Transactions - Financing  Arrangement with
Aspen Capital Resources, LLC."

         During the year ended  December  31, 2000,  we sold  825,666  shares of
common stock to accredited investors for $2,477,000 in cash, or $3.00 per share.
These  transactions  were  part  of a  private  placement  of  common  stock  to
accredited  investors  pursuant to Rule 506 of Regulation D under the Securities
Act.

         In each of these  transactions,  the  offer  and sale of the  shares of
common  stock  issued  in  connection  with  the  private  placements  were  not
registered  under the  Securities Act or under any state  securities  "blue sky"
laws in  reliance  upon  exemptions  from  the  registration  provisions  of the
Securities Act and those laws for transactions  involving  non-public offers and
sales of restricted securities to accredited investors. All shares sold in these
transactions   are  restricted   securities  and  their  resale  is  subject  to
restrictions and limitations under applicable law.  Certificates  evidencing the
shares sold to these  investors  were marked with a restrictive  legend and each
holder was required to execute a representation  and warranty to the effect that
the  shares  were  acquired  for  investment  purposes  and  not  with a view to
distribution or resale of the securities.

Year Ended December 31, 1999

         On November 8, 1999,  we issued 40,000 shares of common stock to Kinara
Graphics,   Inc.  as  compensation  for  creative  services  in  developing  and
presenting  promotional and other materials  regarding us and our products.  The
shares were valued at $70,000,  or $1.75 per share, which the parties agreed for
purposes  of the  issuance  was the  fair  market  value of the  shares  and the
services for which they were issued. The shares were issued without registration
under the Securities Act in reliance upon the exemptions  from  registration  in
Section  4(2) of the Act and Rule 506 of  Regulation D  promulgated  thereunder.
Based on  information  provided by the investor,  we have reason to believe that
Kinara Graphics, Inc., through its representatives,  is a sophisticated investor
and possesses such knowledge and experience in business and financial matters as
to be able to  evaluate  the  merits  and risks of an  investment  in the common
stock.

         On November 8, 1999,  we issued 10,000 shares of common stock to Weldon
and Maureen  Phillips as compensation  for marketing  services  performed for us
during 1997 and 1998. The shares and the services were valued at $10,000,  which
the parties  agreed for purposes of the  agreement  was the fair market value of
the shares at the date the  agreement  was  reached to accept  shares in lieu of
cash. The shares were issued without  registration in reliance upon Section 4(2)
of the Securities Act and Rule 506 of Regulation D promulgated thereunder. Based
on information provided by the investor,  we have reason to believe that Mr. and
Mrs.  Phillips,   alone  or  with  their   representatives  and  advisors,   are
sophisticated  investors and possess such  knowledge and  experience in business
and  financial  matters  as to be able to  evaluate  the risks and  merits of an
investment in the common stock.

Year Ended December 31, 1998

         During the year ended December 31, 1998, we issued  8,798,080 shares of
our common stock in exchange for all of the issued and outstanding  common stock
of Linco to three  accredited and seven  non-accredited  Linco  shareholders  in
reliance upon the exemptions from registration  contained in Section 4(2) of the
Securities Act.  Simultaneously,  we issued  5,201,920 shares of common stock to
Dr. Edward Walker, an officer and director of the


                                      -17-

<PAGE>



Company,  in reliance on Section 4(6) of the Securities Act in consideration for
the cancellation of a royalty agreement and for rights to technology relating to
an instant chemical skin sanitizer formulation.

         We also issued a total of 2,666,659 shares of common stock in a private
offering  to 30  accredited  and eight  non-accredited  investors  for $0.75 per
share.  The  purchase  price  was  paid in cash or  marketable  securities  or a
combination  of cash  and  securities.  In this  offering,  we  relied  upon the
exemptions  from  registration  under  Section 4(2) of the  Securities  Act. All
investors received a private placement memorandum that included disclosure about
our business,  financial results,  and financial  condition and the risks of the
investment.  Investors  also  signed  a  subscription  agreement  that  included
representations  and  warranties  regarding  the  investor's  intent and status,
including,  among other things,  representations that the investor was acquiring
the shares for its own  account and not for resale,  and that the  investor  was
experienced  in  financial  matters  and  could  bear  the  economic  risk of an
investment in the common stock.

Item 6.  Management's Discussion and Analysis or Plan of Operation

Outlook

         Our cash  requirements  through  the end of 2001 will vary based upon a
number of  factors  including,  but not  limited  to,  continuing  research  and
development  levels,   increased  market  development   activities,   facilities
enhancement,  additional  personnel,  travel,  and  other  expenses  related  to
projected growth.  With respect to the year 2001, we expect that additional cash
funding will be needed.  Efforts are  currently  under way to secure  additional
financing of approximately $2 million, which we believe will be sufficient until
cash flows from operations meet future operating needs.

         Product  research  and  development  is an  ongoing  process.  Existing
products are  continuously  being refined and new technology  developed to solve
unmet market needs.  Ongoing  spending is anticipated in future quarters for lab
equipment, furniture and fixtures.

         Our existing facilities and equipment are projected to be sufficient to
meet most of our  growth  needs.  However,  should  we be  required  to  perform
expanded   testing  for  our   customers   or  should  we   undertake   in-house
manufacturing,   additional   capital  would  be  required  to  establish   such
activities.  Management is actively pursuing additional outsourced manufacturing
capacity.

         We benefit from an experienced executive management team and a board of
directors comprising several senior-level business executives. We have assembled
an  in-house  team of  respected,  results-oriented  research  and  development,
marketing,  sales and operations professionals,  as well as outside advertising,
public  relations and  healthcare  market  consultants  to advise  management on
business strategy and product innovation.

         During the last four months of the year ended  December  31,  2000,  we
shipped $473,000 of product to Alliegence Corporation and Bergan-Brunswig,  both
of which are large distributors that serve the professional  medical market. The
shipments were initial  stocking  orders of  MicrobNZ(TM)  technology  products.
These  shipments are the beginning of a stream of shipments  that we expect will
represent  significant sales in 2001. The transaction terms were FOB destination
and contained certain rights of return by the distributor.  As a result of these
terms and with  limited  sell-through  history for  MicrobNZ(TM)  products,  the
recording  of revenue on  $440,000  was  deferred.  The  balance of $33,000  was
included in revenue for the year ended December 31, 2000.

PureSoft  Solutions, LLC  Acquisition

     On March 15, 2000, we entered into an agreement (the "PureSoft  Agreement")
to acquire 100% of the equity interests of PureSoft  Solutions LLC ("PureSoft"),
a New Hampshire  limited  liability  company involved in the  manufacturing  and
distribution  of health care products.  As  consideration  for the purchase,  we
agreed to pay $50,000 in cash, issue options to purchase 87,534 common shares at
$0.01 per share and issue a $450,000  promissory  note bearing  interest at 8.5%
per year with a $300,000 payment due on June 15, 2000, and quarterly payments of
$50,000  thereafter  through  March  15,  2001.  The  PureSoft   Agreement,   as
subsequently amended, also provides that we will issue additional  consideration
either  in the form of cash or shares  of our  common  stock on July 1, 2001 and
2002. The amount of additional consideration to be issued is contingent upon the
net income before income taxes of PureSoft generated from April 2000 to June 30,
2002,  and  will  vary in  proportion  to any  over-  or  under-achievements  of
established  performance milestones stated in the PureSoft Agreement,  provided,
however, that the aggregate minimum value of additional consideration be no less
than $190,000.  In addition,  the PureSoft Agreement required us to make working
capital  advances of $300,000  to PureSoft on each of March 15,  2000,  June 15,
2000 and August 15, 2000. All of the working capital


                                      -18-

<PAGE>



advances  were  paid on or before  the  respective  due  dates  and the  $50,000
quarterly payments have been made on schedule.

         The  principal  significance  of the  acquisition  of  PureSoft  is the
introduction of our products into new markets,  which might provide  significant
revenue to us in future periods.

Results of Operations

Year ended December 31, 2000, compared to the year ended December 31, 1999

     During the twelve months ended  December 31, 2000, we recorded  revenues of
$486,000,  reflecting  a decrease of $68,000,  or 12%,  compared to the previous
year.  Revenues in 1999  included  $295,000,  or 53% of the total  revenues from
licenses and contracts to qualify and test products for customers, while in 2000
the source of revenue shifted to the sale of products, representing 83% of total
revenues.  Product  revenue in 2000 totaled  $403,000 and was 55% higher than in
1999.

     Gross  profit  decreased  from  $405,000 in 1999 to $207,000 in 2000.  This
decrease  was  primarily  the result of lower  revenue;  a mix shift from higher
margin rate service  revenues in 1999 to lower  margin rate  product  revenue in
2000; and higher product cost of revenues and associated  transportation  costs.
The 2000 gross  profit  rate of 38% on product  revenues  is lower than the 1999
rate of 72%.  The  1999  product  revenue  gross  profit  rate  benefitted  from
favorable pricing and terms on one large order and is not representative of what
is expected in future periods.

         Selling,  general  and  administrative  expenses  were  $4,424,000  and
$1,577,000  for the  years  ended  December  31,  2000 and  1999,  respectively,
representing  an increase of  $2,847,000,  or 181%,  from 1999 to 2000. The June
2000  acquisition  of PureSoft  provided  sales and marketing  capabilities  and
accounted for $980,000 of the increase in expenses.  The increase over the prior
year was also due to growth and development related expenses in marketing, sales
and travel of $344,000;  the  expansion of  operations  reflecting  increases in
payroll  expenses  of $743,000  due to the  addition  of sales,  operations  and
administrative  support personnel;  an increase in non-cash compensation charges
associated  with  the  issuance  of  stock  options  of  $100,000;   and  higher
consulting, legal and professional fees of $456,000.

         We incurred  research and  development  expenses of $459,000 during the
year ended  December 31, 2000, an increase of $364,000  over the previous  year.
This increase was due to the expansion of our testing facilities including a new
lab and  personnel to support the testing at the lab. We  anticipate an increase
in research and development expenses for future periods as we expand our product
offerings.

         We recorded a loss of $112,000  related to the decrease in market value
of our marketable  securities.  The value has decreased  consistently  since the
time of purchase and we have no reason to believe that the  near-term  prospects
of the issuer will change.

         Net  interest  income  was  $67,000  and  $28,000  for the years  ended
December 31, 2000 and 1999, respectively. This represents an increase of $39,000
and is due primarily to interest income that we have realized from a higher cash
balance  generated  from the issuance of common and preferred  stock,  partially
offset by interest expense incurred through capital lease  obligations that have
been entered into primarily for office equipment.

Selected Quarterly Reports of Operations

     The following tables set forth selected  unaudited  statement of operations
data for each of the  quarters  in the years ended  December  31, 1999 and 2000.
This data has been derived from our  unaudited  financial  statements  that have
been prepared on the same basis as the audited  financial  statements and in the
opinion  of our  management,  include  all  adjustments,  consisting  of  normal
recurring adjustments, necessary for a fair presentation of the information when
read in connection  with the financial  statements  and the related  notes.  Our
quarterly  operating results have varied  substanitally in the past and may vary
substantially  in the  future.  You  should not draw any  conclusions  about our
future  results  for  any  period  from  the  selected  unaudited  statement  of
operations data for any particular quarter.

                                      -19-




<TABLE>
<CAPTION>
                                                           For the Quarter Ended
                         ---------------------- ---------------------- ---------------------- ----------------------
                            March 31, 2000          June 30, 2000          September 30,          December 31,
                              (Unaudited)            (Unaudited)               2000                   2000
                                                                            (Unaudited)            (Unaudited)
                         ---------------------- ---------------------- ---------------------- ----------------------
Revenues:
<S>                      <C>                    <C>                    <C>                    <C>
   Product               $               2,969  $              72,634  $             226,489  $             101,222
   Services                             62,206                 18,810                      0                      0
                         ---------------------- ---------------------- ---------------------- ----------------------
      Total Revenues                    65,175                 91,444                226,489                101,222

Gross Profit                            35,377                 27,449                 99,685                 44,366
                         ---------------------- ---------------------- ---------------------- ----------------------
Net loss                             (699,066)            (1,121,018)            (1,390,444)            (1,672,385)

Net loss
Attributable to
Common
Shareholders                         (699,066)            (3,260,939)            (2,417,430)            (1,751,421)
                         ---------------------- ---------------------- ---------------------- ----------------------
Basic and Diluted
Net Loss Per
Common
Shareholder                             (0.03)                 (0.16)                 (0.12)                 (0.08)
                         ---------------------- ---------------------- ---------------------- ----------------------
</TABLE>


<TABLE>
<CAPTION>
                                                           For the Quarter Ended
                         ---------------------- ---------------------- ---------------------- ----------------------
                            March 31, 1999          June 30, 1999          September 30,          December 31,
                              (Unaudited)            (Unaudited)               1999                   1999
                                                                            (Unaudited)            (Unaudited)
                         ---------------------- ---------------------- ---------------------- ----------------------
Revenues:
<S>                      <C>                    <C>                    <C>                    <C>
   Product               $                 370  $               7,019  $             147,447  $             103,848
   Services                                  0                114,910                156,337                 23,700
                         ---------------------- ---------------------- ---------------------- ----------------------
      Total Revenues                       370                121,929                303,784                127,548

Gross Profit                               123                 97,880                254,134                 53,271
                         ---------------------- ---------------------- ---------------------- ----------------------
Net loss                             (280,573)              (144,724)              (507,052)              (535,968)

Net loss
Attributable to
Common
Shareholders                         (280,573)              (144,724)              (507,052)              (535,968)
                         ---------------------- ---------------------- ---------------------- ----------------------
Basic and Diluted
Net Loss Per
Common
Shareholder                             (0.01)                 (0.01)                 (0.03)                 (0.03)
                         ---------------------- ---------------------- ---------------------- ----------------------
</TABLE>


                                      -20-

Liquidity and Capital Resources

         We had cash of  $1,232,000  as of December  31, 2000,  representing  an
increase of $1,024,000 from December 31, 1999.  Working capital,  as of December
31,  2000,  increased  to $632,000  compared  to working  capital of $297,000 at
December 31, 1999. We had an accumulated  deficit of $14,360,000 at December 31,
2000,  most of which had been funded out of proceeds  received from the issuance
of stock. This deficit includes $3,776,000 attributable to non-recurring charges
for the purchase of research and  development  and  $3,246,000  attributable  to
dividend and beneficial  conversion  features on preferred  stock. The remaining
$7,338,000  deficit  resulted  primarily from costs incurred in connection  with
research  and  development;  compliance  of our  proprietary  products  with FDA
requirements;  and operating  expenses  related to startup sales,  marketing and
administration.

         Historically,  we have  financed  our  operations  principally  through
loans,  private placements of equity  securities,  and minimal product sales. We
used net cash of $3,834,000 in operating activities during the year ended
December  31,  2000.  In the short  term,  we will be  dependent  on a few large
customers  for the bulk of our  revenue.  Until a broader  base of  customers is
established,  the loss of one  such  customer  could  have a  serious,  material
adverse  effect on our operating  viability.  Because we presently  have limited
revenue,  we will rely primarily on cash balances and the sale of our equity and
debt  securities  to  satisfy  future  capital  requirements  until such time as
sufficient  revenue  can  satisfy our  operating  requirements.  There can be no
assurance  that we will be able to secure this funding or that the terms of such
financing will be favorable to us.  Furthermore,  the issuance of equity or debt
securities which are or may become  convertible  into our equity  securities may
result in substantial dilution to the holders of our stock.

         During the year ended  December 31, 2000,  we received cash proceeds in
the amount of $2,477,000 by issuing 825,666 investment units, at $3.00 per unit.
Each  investment unit consists of one share of our common stock and a warrant to
purchase  one-half share of common stock at $4.50 per share. The warrants expire
December 31, 2001.

         During the year ended  December 31, 2000,  we granted  761,000  options
under the 1998 Stock Option Plan. Of the options  granted,  300,000 options have
an exercise price of $0.19 per share,  155,000 options have an exercise price of
$1.75 per share and 306,000  options have an exercise  price of $3.00 per share.
The options are exercisable as follows:  40% on the date of grant and 60% over a
two-year  period from the date of grant.  All options granted during this period
expire on the fifth  anniversary of their  respective  grant dates.  We recorded
$193,750 of deferred  compensation  related to options that have exercise prices
below the related stock's  estimated fair market value on the measurement  date.
Additionally,  we granted  options to purchase 87,534 common shares at $0.01 per
share  in  connection  with the  acquisition  of  PureSoft.  These  options  are
exercisable immediately and have no expiration date.

         We estimate a need for  approximately  $2,000,000 in new financing over
the next twelve months. In addition, we intend to seek financing to exercise the
optional redemption right under the designation of rights and preferences of the
preferred stock to repurchase the outstanding preferred stock from Aspen Capital
for $6.5  million.  We will need to raise this  capital  through the sale of our
securities or through  borrowings.  At this time we do not have a line of credit
or other credit facility sufficient to provide this capital. We cannot guarantee
success in raising future capital necessary to sustain or expand our operations,
nor are we certain  that such  capital  will be  available on terms that prevent
substantial  dilution  to  existing  investors.  If we cannot  raise  sufficient
capital,  then we might be  forced  to  significantly  curtail  operations.  Any
reduction  in operating  activity  could have a material  adverse  effect on our
business,  financial  condition,  results of operations and  relationships  with
corporate partners.

Item 7.  Financial Statements

         The  financial  statements  are set  forth  immediately  following  the
signature page.

Item  8.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
          Financial Disclosure

         Subsequent  to the year ended  December 31, 1999, on August 1, 2000, we
appointed  Arthur  Andersen  LLP to  replace  Hansen  Barnett &  Maxwell  as our
independent auditors for the fiscal year ended December 31, 2000.

         The report of Hansen  Barnett & Maxwell on our  consolidated  financial
statements for the year ended December 31, 1999 contained no adverse  opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principle.

                                      -21-

<PAGE>


         The decision to engage Arthur Andersen as our independent  auditors was
approved by our board of directors,  and later approved by our  shareholders  at
the Annual Meeting of Shareholders held in 2000.

         In connection  with the audit for the year ended December 31, 1999, and
through  August 1, 2000,  we have had no  disagreements  with  Hansen  Barnett &
Maxwell on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure,  which disagreements if not resolved
to the  satisfaction  of Hansen  Barnett & Maxwell  would have caused it to make
reference  thereto in its report on the  consolidated  financial  statements for
such year.

         Through  January 26,  2001,  there have been no  reportable  events (as
defined in Item 304(a)(1)(v) of Regulation S- B).


                                    PART III

Item 9. Management and Certain Security  Holders;  Compliance with Section 16(a)
        of the Exchange Act


Directors and Executive Officers

The following table sets forth certain  information  regarding our directors and
executive officers as of January 29, 2001.

         Name                      Age     Position

Randall L. Hales                   33      President, CEO, Chairman of the Board
Bradley K. Andrews                 45      Chief Operating Officer
John L. Theler                     53      Chief Financial Officer
Douglas R. Warren                  67      Director
Edward B. Walker, Ph.D.            48      Director
Peter J. Sundwall, Jr., M.D. (1)   36      Director
Gary L. Crittenden (2)             47      Director
Dan C. Jorgensen (2)               62      Director
E. Todd Heiner (1)                 39      Director
Frank A. Cereska (2)               60      Director
Frank J. Wilich, Jr.               48      Director
Joe K. Johnson                     42      Director


(1)      Member of the Compensation Committee
(2)      Member of the Audit Committee


         Randall L. Hales was  appointed  as our  Chairman in August  2000.  Mr.
Hales has  served as our Chief  Executive  Officer  and as a member of the board
since November 1999.  From May 1999 until November 1999, Mr. Hales served as our
Vice  President  of Sales and  Marketing.  Prior to joining  us,  Mr.  Hales was
managing  director of the glazed wall tile division of Daltile  International in
Dallas,  Texas from March 1995 until May 1999.  From 1990 until 1995,  Mr. Hales
was  employed by David  Weekley  Homes,  where he held  various  operations  and
management positions, including general manager of operations. Mr. Hales holds a
B.S. degree in engineering from Brigham Young University.

         Bradley  K.  Andrews  joined  us in May  2000.  He has been  our  Chief
Operating  Officer since August 2000. He has more than 20 years of  professional
management  experience.  In September  1996, he founded the Ptarmigan  Group,  a
healthcare  consulting  firm.  While  at  the  Ptarmigan  Group,  he  co-founded
Patientcom,  an internet medical services  company,  and consulted for companies
such as Aqualine  Health  Resources,  NeighborCare,  Inc., and OakCare,  Inc. In
1993, Mr.  Andrews was one of the three  principal  founders of Symphony  Health
Services, a wholly owned subsidiary of Integrated Health Services.  He served as
the senior vice president of operations and business  development  for Symphony.
Mr.  Andrews  currently  serves on the advisory  board for  SurfPartner.com,  an
online  website review  service.  Mr. Andrews is a graduate of the University of
Utah, where he earned a Bachelor of Science degree.

                                      -22-
<PAGE>


         John L. Theler has been our Chief  Financial  Officer  since July 2000.
From January 1997 to March 2000, Mr. Theler was the Chief  Financial  Officer of
Franklin  Covey.  From 1992 through 1996, Mr. Theler was employed by Rubbermaid,
initially as Vice President of the Home Products  Division and then as Corporate
Controller.  Mr.  Theler held  progressive  financial  management  positions for
General Electric from 1971 until 1992. He holds a bachelor's degree from Brigham
Young University in Business Management,  and an MBA from Rensselaer Polytechnic
Institute.

         Douglas R. Warren joined the board in September  1998.  From  September
1998 until November 1999, Mr. Warren was our President. Prior to that, he served
as the President of Linco from 1990 until its merger with us in September  1998.
Before  joining  Linco,  Mr.  Warren  was the  founder  and  owner  of  Warren's
Restaurants  in Ogden,  Utah and was engaged in real estate  development in Park
City, Utah.

         Dr.  Edward B. Walker  joined the board in September  1998.  He holds a
B.S. degree from Weber State University and a doctorate degree in chemistry from
Texas Tech  University.  After  completing  a  post-doctoral  fellowship  in the
Stanford University Department of Biochemical Pharmacology,  Dr. Walker returned
to  Weber  State  University  in 1981,  where he is  currently  a  professor  of
chemistry and director of the Utah Center of Excellence for Chemical Technology.
Dr. Walker has received the Utah  Governor's  Medal for Science and  Technology,
Weber State University's  Master Teacher Award, and is a Cortez Professor in the
Honors  Program at Weber  State  University.  He has  authored  many  scientific
publications and two university-level chemistry textbooks.

         Dr. Peter J. Sundwall, Jr. joined the board in September 1998. He holds
a degree in  Psychology  and a master's  degree in  Educational  Psychology  and
Doctor of Medicine  degree from the University of Utah. Dr.  Sundwall  completed
his family practice residency at St. Peters Hospital in Olympia, Washington, and
entered  private  practice in June 1997. He is currently an associate  physician
with the American Fork Clinic, American Fork, Utah.

         Gary L. Crittenden  joined the board in March 2000. He is currently the
Executive Vice President and Chief Financial Officer of American Express.  Prior
to joining  American  Express  in June  2000,  Mr.  Crittenden  was senior  vice
president and CFO of Monsanto  Chemical  Company,  executive  vice president and
chief financial officer of Sears Roebuck and Company from 1996 through 1998, and
senior vice president and chief financial officer of Melville Corporation,  Rye,
New York from 1994 to 1996.  Mr.  Crittenden  has also served as a consultant to
Bain &  Company  in  Boston,  where  he held  senior  management  and  marketing
positions.  Mr. Crittenden serves on the board of directors for Ryerson-Tull and
Wilson's The Leather  Expert.  Mr.  Crittenden  earned a bachelor's  degree from
Brigham Young University and an MBA degree from Harvard University.

         Dan C.  Jorgensen  joined  the board in March  2000.  Since  1994,  Mr.
Jorgensen  has  been  president  of  Jorgensen  Associates,  a  consulting  firm
specializing in energy, financial services and investment projects in developing
countries and Russia. From 1986 to 1994, Mr. Jorgensen was a senior executive at
AIG working on debt recovery projects in third world nations and director of AIG
business in the former  Soviet  Union,  where he founded  the  Russian  American
Investment  Bank.  From 1965 to 1986,  Mr.  Jorgensen was a senior  executive at
Citicorp working in corporate lending, foreign exchange,  investment banking and
risk  management.  He founded  Citicorp  Insurance  USA and  Citicorp  Insurance
Bermuda.  Mr. Jorgensen serves on several boards including  Conseco Bank (Utah),
The Utah Symphony,  Snow College  Foundation  (Utah), and Foundation Jean Monnet
pour l' Europe  (Switzerland).  Mr.  Jorgensen  holds a  bachelor's  degree from
Brigham Young University and an MBA degree from Harvard University.

         E. Todd Heiner  joined the board in March 2000.  He is Vice  President,
National Sales and Operations,  of Voicestream Wireless  Corporation.  As one of
that  company's  first 10  employees,  Mr.  Heiner  has also held  positions  of
director of sales,  managing director and executive director.  A former employee
of McCaw Cellular,  Mr. Heiner was  instrumental in launching the first cellular
services in Utah and Idaho in 1986. He received a B.A.
in Communications from Utah State University in 1985.

         Frank A. Cereska  joined the board in March 2000.  He is presently  the
president of Canaan  Enterprises,  Inc.,  an  operations  management  consulting
group.  He was vice  president  and general  manager of feminine  care and adult
incontinence  care  products  for  Paragon  Trade  Brands,  Inc.,  prior  to his
retirement from Paragon in June 2000. He also  previously  worked as senior vice
president of infant care  products  manufacturing  for Paragon.  Before  joining
Paragon,  Mr. Cereska held senior management  positions with Thiokol Corporation
(Cordant   Technologies)  and  managed  several  manufacturing   facilities  for
Kimberly-Clark  Corporation.  He received a B.S.  Degree from  Western  Michigan
University in 1965 and a M.S. in Physical and Biological  Sciences from Syracuse
University in 1969.

                                      -23-

<PAGE>

         Frank J. Wilich, Jr. joined the board in November 2000.  Mr. Wilich  is
one of the original  founders of our subsidiary,  PureSoft,  and currently works
with  PureSoft as a consultant  focusing on  government  relations  and the food
service  industry.  Since 1996, Mr. Wilich has worked as a private investor with
FW Associates, where he founded three other companies: Incon Development,  Inc.,
Continuum Care Technologies,  Inc., and Embrace Healthcare,  Inc. Prior to 1996,
Mr. Wilich served as President and Treasurer of Polychem Corporation,  a medical
products company. He also worked as Chief Executive Officer of Pharmco Products,
Inc. and Director of Marketing at American Hospital Supply (currently Allegiance
Corporation).  He holds a B.A.  Degree in English from Dartmouth  College and an
MBA from the  University  of New  Hampshire  Whittemore  School of Business  and
Economics.

     Joe  K.  Johnson   joined  the  board  in  January  2001,  as  the  nominee
representative of Aspen Capital Resources, LLC. He has been the Manager of Aspen
Capital since June 1999.  Since 1996,  Mr. Johnson has engaged on his own behalf
in private business investment activity.  This activity consists of investing in
debt and equity securities of various public and private companies.  Mr. Johnson
is also a director  of  Flexpoint  Sensor  Systems,  Inc.  and an  affiliate  of
E-Automate Corporation.

Board of Directors Committees and Other Information

         All directors hold office until the next annual meeting of shareholders
and until their  successors  have been duly elected and qualified.  Officers are
elected by and serve at the  discretion of the board of directors.  There are no
family relationships among our directors or officers.  We have agreed with Aspen
Capital that so long as Aspen  Capital owns 5% or more of our common  stock,  it
may nominate and have a representative appointed to the board.
Joe K. Johnson presently serves as Aspen Capital's board representative.

         The  board  of  directors  currently  has  an  Audit  Committee  and  a
Compensation  Committee.  The Audit Committee  oversees the actions taken by our
independent  auditors and reviews our internal financial and accounting controls
and  policies.   The  Compensation  Committee  is  responsible  for  determining
salaries,  incentives  and other  forms of  compensation  for our  officers  and
administers our stock option plan.

Director Compensation

         Members of the board of directors who are not also serving as executive
officers  receive a fee of $500 per meeting for attendance or  participation  in
regular  meetings of the board.  We also reimburse  their  expenses  incurred in
connection  with that attendance or  participation.  In 1998, 1999 and 2000, new
outside  directors were also granted  options to purchase common stock when they
joined the  board.  During  2000,  there were four  regular  meetings  and seven
special  meetings  of the  board.  No  director  attended  fewer than 75% of the
meetings.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

         Section  16(a) of the Exchange Act requires our directors and executive
officers,  and persons who own more than 10% of a registered class of our equity
securities,  to file with the Securities and Exchange Commission initial reports
of  ownership  and reports of changes in ownership of our common stock and other
equity  securities.  Officers,  directors and greater than 10%  shareholders are
requested by the applicable government  regulations to furnish us with copies of
all Section 16(a) reports they file. Based solely upon a review of the copies of
such reports furnished to us and written  representations  that no other reports
were  required,  we believe that there was  compliance for the fiscal year ended
December 31, 2000 with all Section 16(a) filing  requirements  applicable to our
officers,  directors  and  greater  than 10%  beneficial  owners  except for the
following:

     Frank A. Cereska  became a director in March 2000.  Additionally,  on April
17, 2000, Mr.  Cereska  received  35,000 options under the 1998 Stock  Incentive
Plan. His beneficial  ownership was first reported on a Form 3 filed January 30,
2001.

     Gary L.  Crittenden  became a  director  in March  2000.  Additionally,  on
November 22, 1999, Mr.  Crittenden  received 35,000 options under the 1998 Stock
Incentive Plan. Mr.  Crittenden's  beneficial  ownership was first reported on a
Form 3 filed January 30, 2001.

                                      -24-

<PAGE>

     Randall L. Hales  became an  executive  officer on  November  1, 1999.  His
beneficial ownership was first reported on a Form 3 filed September 29, 2000.

     On November 22, 2000,  John L. Theler  received  150,000  options under the
1998 Stock  Incentive  Plan.  The  transaction  was  reported  on a Form 5 filed
January 30, 2001.

     On November 22, 2000, Bradley K. Andrews received 150,000 options under the
1998 Stock  Incentive  Plan. The  transaction  was reported on a Form 5 filed on
January 30, 2001.

     E. Todd  Heiner  became a director in March 2000.  On April 17,  2000,  Mr.
Heiner  received 35,000 options under the 1998 Stock Incentive Plan. On February
16,  2000,  Mr.  Heiner  purchased  333,333  shares of common stock and received
166,667  warrants.  On June 26, 2000,  Mr. Heiner  purchased  166,667  shares of
common  stockand  received  83,334  warrants.  On August 31,  2000,  Mr.  Heiner
purchased  133,333 shares of common stock and received 66,667 warrants.  Each of
these transactions was reported on a Form 5 filed on January 30, 2001.

     Dan C. Jorgensen became a director in March 2000. Additionally, on November
22, 1999, Mr.  Jorgensen  received 35,000 options under the 1998 Stock Incentive
Plan. Mr. Jorgensen's  beneficial ownership was first reported on a Form 5 filed
January 30, 2001.

     Dr. Peter V. Sundwall Jr. became a director in September 1998. On September
30, 1998, he received  options to purchase  50,000  shares of common stock.  The
transaction was reported on a Form 5 filed January 30, 2001.

     Dr. Edward B. Walker became a director in September  1998. On September 12,
2000,  Edward B. Walker made gifts 2,940,000 shares to a minor child sharing the
same household as Dr. Walker, a trust of which Dr. Walker is the  administrator,
a trust of which Dr. Walker's spouse is the administrator,  and to a third party
entity of which Dr. Walker is a managing partner. Each of these transactions was
reported on a Form 5 filed on January 30, 2001.

     Douglas R. Warren  became a director in  September  1998.  On December  31,
1998, Mr. Warren  received  120,000 options under the 1998 Stock Incentive Plan.
On August 25, 1999,  Mr. Warren  received  100,000  options under the 1998 Stock
Incentive  Plan. On August 4, 2000, Mr. Warren  disposed of 100,000  shares.  On
August 16, Mr. Warren disposed of 312,500 shares.  On July 19, 2000, Mr. Douglas
disposed of 100,000 shares.  Each of these transactions was reported on a Form 5
filed on January 30, 2001.

     Frank J. Wilich Jr. became a director in November  2000.  Additionally,  on
March 15, Mr. Wilich  received  29,175  options in the Puresoft  Solutions,  LLC
acquisition.  His  beneficial  ownership  was first  reported  on a Form 5 filed
January 30, 2001.

Item 10.                   Executive Compensation

Summary Compensation Table

         The  following  table sets  forth,  for the three  fiscal  years  ended
December 31, 2000, the  compensation  paid to our Chief  Executive  Officer (the
"named executive  officer").  No other executive officer serving at December 31,
2000  received  salary and bonus for all services in all  capacities  during the
year then ended in excess of $100,000.

<TABLE>
<CAPTION>
                                                                                                                   Long-Term
                                                                                                                 Compensation
                                                                                                                    Awards
                                                                                                              -------------------
                                                                  Annual Compensation
                                           ----------------------------------------------------------------   -------------------
         Name
         and                                                                               Other Annual           Securities
       Principal                                 Salary                 Bonus          Compensation               Underlying
       Position               Year               ($)(1)                  ($)                    ($)               Options (#)
---------------------- - ---------------   ------------------   ------------------   --------------------   -------------------
<S>                            <C>         <C>                                <C>                <C>              <C>
Randall L. Hales               2000        $     123,322                      -                  -                      -
President, CEO                 1999        $      58,650                      -                  -                500,000
                               1998        $           -                      -                  -                      -
</TABLE>

                                      -25-

<PAGE>

         (1)      This table does not include John L.  Theler,  who was hired in
                  July  2000 as our  Chief  Financial  Officer,  or  Bradley  K.
                  Andrews,  who  became  our Chief  Operating  Officer in August
                  2000.  Each of Messrs.  Theler and Andrews were initially paid
                  at an annual  salary rate of $110,000.  Their annual  salaries
                  were increased to an annual rate of $140,000  each,  effective
                  November 1, 2000.

Option Grants in the Last Fiscal Year

         No  options  were  granted to the named  executive  officer in the last
fiscal year. John L. Theler, our Chief Financial Officer and Bradley K. Andrews,
our Chief Operating Officer, were each granted options to acquire 100,000 shares
at an exercise price of $3.00 per share after joining us in 2000. They were also
each granted options on an additional 150,000 shares on November 22, 2000, at an
exercise  price of  $0.1875  per  share.  For each of these  grants,  options to
purchase  the  first  40% of shares  vested  at the date of  grant;  options  to
purchase the next 30% will vest on the first  anniversary  of the date of grant;
and options to purchase the final 30% will vest on the second anniversary of the
date of grant.

Aggregated Option Exercises in Last Fiscal Year and Year End Option Values

The following table sets forth information concerning the exercise of options to
acquire  shares of our common stock by the named  executive  officer  during the
fiscal year ended  December 31, 2000, as well as the aggregate  number and value
of unexercised options held by the named executive officer on December 31, 2000.
No options indicated were in the money at December 31, 2000.


<TABLE>
<CAPTION>
                                                                                                        Value of
                                                                               Underlying             unexercised
                                                                              unexercised             in-the-money
                                                                                options                options at
                                                                            at December 31,        December 31, 2000
                             Shares Acquired                                    2000 (#)                     ($)
                                    on                                        Exercisable/            Exercisable/
          Name                 Exercise (#)        Value Realized ($)        Unexercisable            Unexercisable
------------------------- ---------------------- ----------------------- ---------------------- ------------------------
<S>                                <C>                     <C>               <C>                          <C>
Randall L. Hales                   None                    N/A               350,000/150,000              $0/$0
</TABLE>



Item 11. Security Ownership of Certain Beneficial Owners and Management

         The  following  table sets forth certain  information  known to us with
respect to the beneficial  ownership of our common stock as of January 29, 2001,
for: (i) each entity, group or person that is known by us to beneficially own 5%
or more of our outstanding common stock, (ii) each of our directors,  (iii) each
of our executive  officers,  and (iv) our directors and executive  officers as a
group.  To the best of our  knowledge,  each  shareholder  identified  below has
voting and  investment  power with  respect to all shares of common stock shown,
unless community property laws or footnotes to this table are applicable. Unless
otherwise  indicated,  the  address  of the  shareholder  is c/o  our  principal
executive offices, 1877 West 2800 South, Suite 200, Ogden, Utah 84401.



<TABLE>
<CAPTION>
                                                                     Amount and
                                                                     Nature of           Percent of
                                                                     Beneficial         Common Stock
             Name and Address of Beneficial Owner                   Ownership(1)         Outstanding

<S>                                                                 <C>                     <C>
Darrell J. Saunders                                                  2,181,450               9.5%
   998 Fifth Street
   Ogden, Utah 84401

Charles L. Crittenden (2)                                            1,991,452               8.6%
   2334 Filmore
   Ogden, Utah 84401

Aspen Capital Resources, LLC (3)                                    18,728,205              44.8%
   8989 S. Schofield Cir.
   Sandy, Utah 84093

Joe K. Johnson (4)                                                  18,728,205              44.8%
   Director

Edward B. Walker(5)                                                  5,323,670              23.1%
   Director



                                      -26-

<PAGE>



Douglas R. Warren(6)                                                 1,369,785               5.9%

E. Todd Heiner (7)                                                     965,000               4.1%
   Director

Randall L. Hales(8)                                                    350,000               1.5%
   Chief Executive Officer, Chairman

Peter Sundwall(8)                                                       50,000                  *
   Director

Bradley K. Andrews (8)                                                 100,000                  *
   Chief Operating Officer

John L. Theler (8)                                                     100,000                  *
   Chief Financial Officer

Frank J. Wilich, Jr. (8)                                                29,175                  *
    Director

Gary Crittenden(8)                                                      24,500                  *
    Director

Dan C. Jorgensen(8)                                                     24,500                  *
   Director

Frank Cereska (8)                                                       15,000                  *
   Director

All directors and executive officers as a group (12 persons)(9)     27,079,835              63.0%
</TABLE>

* Less than one percent.

(1)      Beneficial  ownership is determined in accordance with the rules of the
         Securities and Exchange  Commission.  In computing the number of shares
         beneficially  owned by a person and the  percentage  ownership  of that
         person,  shares of common stock subject to options,  warrants, or other
         convertible  instruments  held by that person that are  exercisable  or
         convertible   within  60  days  of  December  31,   2000,   are  deemed
         outstanding.  Such  shares,  however,  are not deemed  outstanding  for
         purposes of computing the ownership of any other person.

(2)      Charles  Crittenden,   a  former  director,   is  the  father  of  Gary
         Crittenden,  and  disclaims  beneficial  ownership of any shares of our
         common stock held by Gary Crittenden.

(3)      Consists of 18,728,205  shares of common stock issuable upon conversion
         of  3,652  shares  of  Series B  preferred  stock,  assuming  immediate
         conversion at a price of $0.195. Excludes certain shares pledged to Mr.
         Johnson  and/or Aspen Capital by a third party as collateral for a loan
         and which may be  acquired  under  the terms of the  applicable  pledge
         agreement if a default occurs after March 10, 2001.

(4)      Consists of 18,728,205  shares of common stock issuable upon conversion
         of preferred stock assuming  immediate  conversion at $0.195 per share.
         Excludes  certain shares pledged to Mr. Johnson and/or Aspen Capital by
         a third party as collateral  for a loan and which may be acquired under
         the terms of the applicable  pledge agreement if a default occurs after
         March 10, 2001.

(5)      Includes  2,620,000  shares  held by  Cbar E LC,  a  limited  liability
         company of which Dr.  Walker is a managing  partner;  2,463,670  shares
         held jointly by Dr. Walker and his wife; 100,000 shares held by a trust
         of which Dr.  Walker is the  administrator;  100,000  shares  held by a
         second  trust of which Dr.  Walker  is the  administrator;  and  40,000
         shares held by Edward Brian Walker,  Dr.  Walker's adult son, who lives
         at the


                                      -27-

<PAGE>



         same residence as Dr. Walker. Dr. Walker disclaims beneficial ownership
         of the shares held by the two trusts and his adult son.

(6)      Consists of  1,179,785  shares of common  stock and  190,000  shares of
         common  stock  issuable  upon  exercise  of  stock  options  which  are
         exercisable currently or within 60 days of January 29, 2001.

(7)      Consisting of 633,333  shares of common stock,  15,000 shares of common
         stock  issuable upon  exercise of stock  options which are  exercisable
         currently or within 60 days of January 29, 2001,  and 316,667 shares of
         common  stock   issuable  upon  the  exercise  of  warrants  which  are
         exercisable currently or within 60 days of January 29, 2001.

(8)      Consisting  of shares of common stock  issuable  upon exercise of stock
         options  which are  exercisable  currently or within 60 days of January
         29, 2001.

(9)      Based on a total of 23,045,436 shares issued and outstanding,  together
         with  shares  issuable  upon  the  exercise  of  options,  warrants  or
         conversion  rights  held by the  members  of the group  exercisable  or
         becoming  exercisable  within 60 days of January  29,  2001.  Duplicate
         entries eliminated.

Item 12.                   Certain Relationships and Related Transactions

Consulting Agreements

         In September 1998, we entered into a private consulting  agreement with
Jerral  R.  Pulley,  then  a  director,  to  consult  on  marketing  and  market
development.  The  agreement  originally  was for $10,000  per month,  and had a
one-year  initial term,  renewable for additional  one-year  terms. On August 1,
2000, the  compensation  under Mr. Pulley's  agreement was reduced to $7,500 per
month.  In October 2000,  Mr.  Pulley joined us as a full-time  employee and his
private consulting agreement was terminated.

         In September  1998,  we entered into an agreement  with  Pharmulations,
LLC, an entity owned and  controlled  by Dr.  Edward B. Walker,  a director,  to
consult on product  research and development for a period of three years.  Under
this  agreement,  Dr. Walker was to be paid $7,000 per month for the first year,
$8,000 per month for the second year, and $9,000 per month for the third year of
the agreement, with the changes occurring in October of each successive year. An
amended  consulting  agreement and a master  development  agreement were entered
into on January 4, 2001.  Under these  agreements,  Pharmulations is paid $9,000
per month, with annual increases of $1,000 per month in October of each year the
agreements  continue in effect.  We may also pay cash or stock  bonuses based on
the value of  Pharmulations'  services as determined in our  discretion.  We may
terminate  the  consulting  agreement  for cause or in the event that Dr. Walker
becomes  permanently  disabled,  dies, or otherwise  ceases to provide  personal
services or to own less than 66% of the equity of Pharmulations. In the event of
disability,  the  consulting  fee would  continue  to be paid for a period of 12
months from the date of termination of the consulting agreement.  The consulting
agreement, as amended, also contains covenants against competition and covenants
of confidentiality and nondisclosure  binding  Pharmulations and its affiliates,
including Dr. Walker.

         In November  1999,  we entered into an agreement  with our former Chief
Executive  Officer,  Douglas R. Warren, for general business  consulting.  Under
this  agreement,  Mr. Warren was to be paid $5,000 per month,  and the agreement
was for a period of two  years,  subject to an early  termination  of six months
following the  commencement  of public  trading of our common stock.  Our shares
began trading on October 26, 2000.
Accordingly, Mr. Warren's agreement may be terminated on April 26, 2001.

Financing Arrangement with Aspen Capital Resources, LLC

         On May 16, 2000, we signed a securities  purchase  agreement with Aspen
Capital Resources,  LLC ("Aspen Capital").  Under the purchase agreement,  Aspen
Capital  purchased  1,000 shares of Series 2000-A  Convertible  Preferred  Stock
("Series A Preferred  Stock") for  $1,000,000,  less a 10% placement fee paid to
Aspen Capital, and warrants exercisable for the purchase of additional shares of
common stock by Aspen Capital.  The purchase  agreement  provided for subsequent
purchases  of an  additional  3,000  shares of Series A  Preferred  Stock,  with
accompanying warrants,  for an aggregate purchase price of $3,000,000,  less the
10% placement fee. From May through  September  2000, we issued a total of 4,000
shares of Series A Preferred Stock in exchange for net proceeds of $3,600,000.



                                      -28-

<PAGE>



         In  connection  with  the  purchase  agreement,  we  agreed  to  file a
registration  statement  to  register  the resale of the shares of common  stock
issuable to Aspen Capital upon  conversion of the Series A Preferred  Stock.  On
June 14,  2000,  we filed a  registration  statement  with  the  Securities  and
Exchange  Commission  to register the resale by Aspen  Capital of (i)  2,000,000
shares of common stock issuable upon conversion of the Series A Preferred Stock,
(ii)  2,000,000  shares of common stock  issuable  upon  exercise of the related
warrants,  and (iii) all additional shares of common stock issued or issuable to
Aspen Capital pursuant to the purchase  agreement.  That registration  statement
was declared effective on July 7, 2000. Aspen Capital subsequently converted 348
shares of Series A Preferred Stock into 2,000,000 shares of common stock,  which
it then sold.

         On November 13, 2000, we entered into an amendment agreement with Aspen
Capital to amend the terms of the purchase agreement and the warrants. Under the
amendment  agreement,  Aspen Capital was granted the right to convert the stated
value and any accrued and unpaid  dividends on the Series A Preferred Stock into
shares  of  common  stock by  dividing  the  stated  value of such  shares to be
converted  together  with  any  accrued  but  unpaid  dividends  thereon  by the
conversion  price,  which is 80% of the average of the three lowest  closing bid
prices for our common stock quoted on the Nasdaq Stock Market system or reported
on the NASD  Electronic  Bulletin Board during the 15 trading days preceding the
conversion date, subject to a maximum conversion price of $1.20 per share. Aspen
Capital  also  waived any  penalty or event of  noncompliance  arising  from our
failure to cause the common  stock to be  included  in the Nasdaq  Stock  Market
System or the NASD  Electronic  Bulletin Board on or before  September 30, 2000.
Our common stock began trading on the NASD Electronic  Bulletin Board on October
26, 2000.

         As of December  29,  2000,  we entered  into a second  amendment to the
purchase  agreement,  which modified the terms of the purchase agreement and the
amendment agreement.  Under the second amendment agreement, we agreed to adopt a
certificate of  designation  for a new series of preferred  stock,  the Series B
Preferred Stock. Under the second amendment  agreement,  Aspen Capital exchanged
its  remaining  3,652 shares of Series A Preferred  Stock for an equal number of
shares of Series B Preferred Stock. Further,  Aspen Capital agreed that prior to
April 3, 2001,  it would not (i) offer or sell any shares of our common stock or
enter into any swap or other similar  arrangement  at prices less than $0.25 per
share,  or (ii)  convert any shares of Series B Preferred  Stock.  Additionally,
Aspen Capital agreed to surrender for cancellation all of the warrants  received
in connection with the purchase agreement, provided that (i) all of the terms of
the second  amendment  agreement have been met; (ii) we have redeemed all of the
Series B Preferred  Stock as provided in the certificate of designation for such
series,  and (iii) no event of  noncompliance  has  occurred  under the purchase
agreement, as amended,  including the failure to have the registration statement
declared effective by April 2, 2001.

         Under the second  amendment  agreement  we acquired the right to redeem
all, but not less than all of the outstanding shares of Series B Preferred Stock
on or before April 2, 2001, for $6.5 million.  Aspen Capital  acquired the right
to require that we redeem the Series B Preferred Stock at a mandatory redemption
price of 125% of the  stated  value of the Series B  Preferred  Stock per share,
plus accrued and unpaid  dividends and  penalties,  if any,  through the date of
redemption.  The mandatory redemption may be exercised on or after April 3, 2001
by Aspen  Capital or before April 3, 2001 if an event of  noncompliance  occurs.
Aspen Capital may exercise the mandatory redemption right prior to April 3, 2001
if either  Randall L. Hales  ceases to be employed by us or  Pharmulations,  LLC
(specifically,  Dr.  Edward  B.  Walker)  ceases  to  provide  services  as  our
consultant.

         Under the second amendment  agreement,  we also agreed to appoint Aspen
Capital's  nominee to our board of  directors.  On January 8, 2001, we appointed
Joe K. Johnson,  the manager of Aspen Capital, to serve as a member of the board
of directors as provided by our bylaws,  the laws of  Delaware,  and  applicable
rules and regulations of the Securities and Exchange Commission.

         We filed a registration  statement on January 16, 2001, to permit Aspen
Capital to resell to the public any common stock it acquires upon  conversion of
the preferred stock.  Aspen Capital may be entitled to indemnification by us for
lawsuits based on language in the registration  statement.  We will also prepare
and file such amendments and supplements to the registration statement as may be
necessary in accordance  with the Securities  Act and the rules and  regulations
promulgated under it, in order to keep the registration  statement  effective so
that we may comply with the registration  rights granted to Aspen Capital in the
purchase  agreement.  In connection with the purchase  agreement as amended,  we
agreed to pay certain  expenses of Aspen Capital,  including  legal fees for the
preparation of the second amendment agreement of $4,500.



                                      -29-

<PAGE>





                                     PART IV

                              EXHIBITS AND REPORTS

Item 13.                   Exhibits and Reports on Form 8-K

         (a)      Exhibits

         The  following  Exhibits  are filed  herewith  pursuant  to Rule 601 of
Regulation S-B or are incorporated by reference to previous filings.

<TABLE>
<CAPTION>
Exhibit
Number            Description

<S>               <C>
2.1               Agreement and Plan of Reorganization, dated August 10, 1998, between the Registrant, Linco,
                  Linco Acquisition Corp. and Edward Walker(1)
2.2               Purchase Agreement dated as of March 15, 2000 among the Registrant and David Wilich, Frank
                  Wilich, Jr., Gene Dubois and PureSoft Solutions, LLC, a New Hampshire limited liability
                  company. (7)
3.1               Articles of Incorporation(2)
3.2               Bylaws(2)
3.3               Amendment to Articles of Incorporation changing name to First Scientific, Inc. and effecting a
                  forward stock split.(1)
4.1               Certificate of Designation creating Series 2000-A Convertible Preferred Stock (8)
4.2               Warrant Certificate for Series 2000-A Warrants (8)
4.3               Certificate of Designation creating Series 2000-B Convertible Preferred Stock (9)
10.1              Non-qualified Stock Option Agreement with Jerral R. Pulley(3)
10.2              Non-qualified Stock Option Agreement with Peter Sundwall, M.D.(3)
10.3              1998 Stock Incentive Plan(4)
10.4              Agreement with Weldon Phillips(5)
10.5              Employment Agreement with Randy Hales(5)
10.6              Consulting Agreement with Jerral R. Pulley(5)
10.7              Consulting Agreement with Pharmulations LLC (5)
10.8              Exclusive License and Supply Agreement with Convatec (Confidential Testament Requested for
                  Certain Portions) (6)
10.9              Employment Agreement with David Wilich (7)
10.10             Stock Options Agreement with David Wilich, Frank Wilich and Gene Dubois.(6)
10.11             Purchase Agreement dated as of May 16, 2000 between First Scientific, Inc. and Aspen Capital
                  Resources, LLC, a Utah limited liability company(8)
10.12             Amendment Agreements dated November 13, 2000, between First Scientific, Inc. and Aspen
                  Capital Resources, LLC (9)
10.13             Agreement dated as of December 29, 2000, between First Scientific, Inc. and Aspen Capital
                  Resources, LLC (9)
10.14             Amended and Restated Consulting Agreement, dated December 29, 2000, First Scientific, Inc.
                  and Pharmulations LLC (10)
10.15             Master Development Agreement, dated December 29, 2000, between First Scientific, Inc. and
                  Pharmulations LLC (10)
</TABLE>


(1)  Incorporated  by  reference  to the  same-numbered  exhibit to the Form 8-K
     filed with the Securities and Exchange Commission October 2, 1998.

(2)  Incorporated by reference to the same-numbered  exhibit to the Registration
     Statement on Form 10-SB, file No. 0-24378.



                                      -30-

<PAGE>



(3)  Incorporated by reference to the  same-numbered  exhibit to the Form 10-QSB
     filed with the Securities and Exchange Commission November 16, 1998.

(4)  Incorporated  by reference from Quarterly  Report on Form 10-QSB,  filed on
     June 15, 1999.

(5)  Incorporated  by reference to the same numbered  exhibit to the form 10-QSB
     filed November 16, 1999.

(6)  Incorporated  by reference  from Amended  Quarter  Report on Form  10-QSB/A
     filed on March 8, 2000.

(7)  Incorporated by reference from Report on Form 8-K, filed on March 30, 2000.

(8)  Incorporated by reference from Report on Form 8-K, filed on May 31, 2000.

(9)  Incorporated  by  reference  from Report on Form 8-K,  filed on January 12,
     2001.

(10) Filed herewith.

     (b)     Reports on Form 8-K

     A Current Report on Form 8-K was filed on March 30, 2000, to report,  under
Item 2, the  acquisition  of PureSoft  Solutions,  LLC, a New Hampshire  limited
liability company. The purchase agreement, an employment agreement,  and a stock
option  agreement  relating  to the  transaction  were filed as exhibits at that
time.  Financial  statements of PureSoft were filed in a Current  Report on Form
8-K on June 8, 2000,  and again by an amendment  to the March 30, 2000,  Current
Report on June 14, 2000.

     A Current  Report on Form 8-K was filed on May 31, 2000,  to report,  under
Item 5, the sale of Series  2000-A  Convertible  Preferred  Stock (the "Series A
Preferred  Stock") and related  common  stock  warrants  to Aspen  Capital.  The
securities  purchase  agreement,  the form of warrant,  and the  certificate  of
designation of terms and  conditions of the Series A Preferred  Stock were filed
as exhibits.

     A Current Report on Form 8-K was filed on August 7, 2000, to report,  under
Item 4, a change in the certifying  public  accountants  from Hansen,  Barnett &
Maxwell to Arthur Andersen LLP. A letter from Hansen, Barnett & Maxwell, stating
its agreement with the information set forth in the Current Report, was filed as
an exhibit.

     A Current  Report on Form 8-K was filed on  January  12,  2001,  to report,
under Item 5, certain amendments to the Series A Preferred Stock transaction and
the issuance of the Series 2000-B 8% Convertible  Preferred Stock (the "Series B
Preferred Stock"),  in exchange for the Series A Preferred Stock. The amendments
to the  securities  purchase  agreements  and the  certificate of designation of
terms and conditions of the Series B Preferred Stock were filed as exhibits.




                                      -31-

<PAGE>



                                   SIGNATURES

     In  accordance  with  Section  13 or 15  (d)  of  the  Exchange  Act ,  the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.

                                        FIRST SCIENTIFIC, INC.




DATED:   January 30, 2001               By: /s/ Randall L. Hales
                                           -------------------------------------
                                        Randall L. Hales, President, Chief
                                        Executive Officer and Chairman


DATED:   January 30, 2001               By: /s/ John L. Theler
                                           -------------------------------------
                                        John L. Theler
                                        CFO (Principal Financial and Accounting
                                        Officer)

In  accordance  with the Exchange  Act, this report has been signed below by the
following  persons on behalf of the  registrant and in the capacities and on the
dates indicated.


<TABLE>
<CAPTION>
Signature                                Title                                   Date

<S>                                 <C>                                         <C>
/s/ Randall L. Hales
--------------------------          Chief Executive Officer, President,         January 30, 2001
Randall L. Hales                    (Principal Executive Officer)

/s/ Bradley K. Andrews
--------------------------          Chief Operating Officer                     January 30, 2001
Bradley K. Andrews

/s/ John L. Theler
--------------------------          Chief Financial Officer                     January 30, 2001
John L. Theler                      (Principal Financial Officer and
                                    Principal Accounting Officer)

/s/ Douglas R. Warren
--------------------------          Director                                    January 29, 2001
Douglas R. Warren

/s/ Edward B. Walker, Ph.D.
--------------------------          Director                                    January 31, 2001
Edward B. Walker, Ph.D.

/s/ Peter J. Sundwall, Jr., MD
--------------------------          Director                                    January 29, 2001
Peter J. Sundwall, Jr., MD

/s/ Frank J. Wilich, Jr.
--------------------------          Director                                    January 31, 2001
Frank J. Wilich, Jr.

/s/ Gary L. Crittenden
--------------------------          Director                                    January 30, 2001
Gary L. Crittenden


/s/ Dan C. Jorgensen
--------------------------          Director                                    January 30, 2001
Dan C. Jorgensen




                                      -32-

<PAGE>

/s/ E. Todd Heiner
--------------------------          Director                                    January 30, 2001
E. Todd Heiner

/s/ Frank A Cereska
--------------------------          Director                                    January 29, 2001
Frank A Cereska


--------------------------          Director                                    January ___, 2001
Joe K. Johnson
</TABLE>





                                      -33-

<PAGE>

                     FIRST SCIENTIFIC, INC. AND SUBSIDIARIES
                          (A Development Stage Company)


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            Page

Report of Independent Public Accountants (Arthur Andersen LLP)               F-2

Report of Independent Certified Public Accountants
  (Hansen, Barnett & Maxwell)                                                F-3

Consolidated Balance Sheet as of December 31, 2000                           F-4

Consolidated Statements of Operations and Comprehensive Loss for the Years Ended
    December 31, 2000 and 1999 and for the Cumulative Period from April 30, 1990
    (Date of Inception) through December 31, 2000                            F-5

Consolidated  Statements of  Stockholders'  Equity (Deficit) for the Years Ended
    December 31, 2000 and 1999 and for the Cumulative Period from April 30, 1990
    (Date of Inception) through December 31, 2000                            F-6

Consolidated  Statements of Cash Flows for the Years Ended December 31, 2000 and
    1999, and for the Cumulative Period from April 30, 1990 (Date of Inception)
    through December 31, 2000                                                F-8

Notes to Consolidated Financial Statements                                  F-10



                                      F-1

<PAGE>


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To First Scientific, Inc.:

We have audited the accompanying consolidated balance sheet of First Scientific,
Inc. (a Delaware  corporation in the development  stage) and  subsidiaries as of
December 31, 2000 and the related  consolidated  statements  of  operations  and
comprehensive loss,  stockholders'  equity (deficit) and cash flows for the year
then ended and for the period from  inception  (April 30,  1990) to December 31,
2000.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements  based on our  audit.  We did not  audit the  consolidated  financial
statements  of First  Scientific,  Inc.  and  subsidiaries  for the period  from
inception to December 31, 1999.  Such  statements are included in the cumulative
inception  to December  31,  2000 totals of the  statements  of  operations  and
comprehensive  loss,  stockholders'  equity(deficit)  and cash flows and reflect
total revenues and net loss of 62 percent and 56 percent,  respectively,  of the
related cumulative totals. Those statements were audited by other auditors whose
reports  have been  furnished  to us and our  opinion,  insofar as it relates to
amounts  for the period from  inception  to  December  31, 1999  included in the
cumulative totals, is based solely upon the reports of the other auditors.

We conducted our audit in accordance with auditing standards  generally accepted
in the United States. 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 audit  provides a  reasonable  basis for our
opinion.

In our  opinion,  based on our  audit and the  reports  of other  auditors,  the
financial statements referred to above present fairly, in all material respects,
the financial position of First Scientific, Inc. and subsidiaries as of December
31, 2000 and the results of their  operations  and their cash flows for the year
then ended and for the period from inception to December 31, 2000, in conformity
with accounting principles generally accepted in the United States.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated  financial  statements,  the Company has  generated no  significant
recurring  revenues  through  December  31,  2000 and has  incurred  significant
recurring  losses  since its  inception.  The Company  expects  these  losses to
continue at least  through  December  31, 2001.  As of December  31,  2000,  the
Company has an accumulated  deficit of $14,359,918,  a stockholders'  deficit of
$1,024,079 and limited  working capital of $631,665.  Additionally,  the Company
used cash in operating  activities of $3,833,616  during the year ended December
31, 2000. These matters raise  substantial  doubt about the Company's ability to
continue as a going  concern.  Management's  plans with respect to these matters
are described in Note 2. The accompanying  consolidated  financial statements do
not  include  any  adjustments  that  might  result  from  the  outcome  of this
uncertainty.


ARTHUR ANDERSEN LLP


Salt Lake City, Utah
January 26, 2001


<PAGE>



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of
   First Scientific, Inc. :

We have audited the  accompanying  consolidated  statements  of  operations  and
comprehensive  loss,  stockholders'  equity  (deficit)  and cash  flows of First
Scientific,  Inc. and subsidiaries,  a development  stage company,  for the year
ended December 31, 1999 and for the cumulative  period from April 30, 1990 (date
of inception)  through  December 31, 1999.  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 auditing standards generally accepted
in the United States. 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 consolidated  financial statements referred to above present
fairly,  in all material  respects,  the results of operations and cash flows of
First Scientific, Inc. and subsidiaries for the year ended December 31, 1999 and
for the  cumulative  period  from  April 30,  1990 (date of  inception)  through
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.


HANSEN, BARNETT & MAXWELL


Salt Lake City, Utah
March 2, 2000





<PAGE>


                     FIRST SCIENTIFIC, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
                           CONSOLIDATED BALANCE SHEET


<TABLE>
<CAPTION>
                                                                                 As of December 31,
                                                                                        2000
                                                                                ---------------------
ASSETS:
   Current Assets:
<S>                                                                             <C>
     Cash                                                                       $    1,232,303
     Accounts receivable, net of allowance for doubtful accounts of $30,000            136,912
     Inventory                                                                         321,901
     Prepaid expenses and other assets                                                 118,700
                                                                                ---------------------
       Total Current Assets                                                          1,809,816
                                                                                ---------------------

   Property and Equipment:
     Equipment                                                                         620,115
     Leasehold improvements                                                             83,763
     Less: accumulated depreciation and amortization                                  (109,305)
                                                                                ---------------------
       Net Property and Equipment                                                      594,573
                                                                                ---------------------

   Goodwill and Other Intangible Assets, net                                         1,087,723
                                                                                ---------------------

   Other Assets                                                                         22,541
                                                                                =====================
                                                                                $    3,514,653
                                                                                =====================
LIABILITIES AND STOCKHOLDERS' DEFICIT:
   Current Liabilities:
     Accounts payable                                                           $      338,723
     Accrued liabilities                                                               232,928
     Deferred revenue                                                                  351,689
     Related-party promissory notes payable                                             50,000
     Capital lease obligations, current portion                                         14,811
     PureSoft purchase obligation                                                      190,000
                                                                                ---------------------
       Total Current Liabilities                                                     1,178,151
                                                                                ---------------------

   Capital Lease Obligations, net of current portion                                    29,545
                                                                                ---------------------

   Commitments and Contingencies (Notes 2, 3, 6, 8 and 9)

   Convertible Redeemable Preferred Stock Series 2000-B, $1,000 stated value;
     4,000 shares authorized; 3,652 shares outstanding
     (aggregate liquidation preference of $3,731,036)                                3,331,036
                                                                                ---------------------

   Stockholders' Deficit:
     Common stock, $0.001 par value; 50,000,000 shares authorized, 23,045,436
        shares outstanding                                                              23,045
     Additional paid-in capital                                                     13,356,477
     Deficit accumulated during the development stage                              (14,359,918)
     Deferred compensation                                                             (43,683)
                                                                                ---------------------
        Total Stockholders' Deficit                                                 (1,024,079)
                                                                                =====================
                                                                                $    3,514,653
                                                                                =====================
</TABLE>








          See accompanying notes to consolidated financial statements.

                                      F-4

<PAGE>


                     FIRST SCIENTIFIC, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
          CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS


<TABLE>
<CAPTION>
                                                                                                 Period from April
                                                                                                 30, 1990 (Date of
                                                                    Years Ended                    Inception) to
                                                                   December 31,                    December 31,
                                                       --------------------------------------
                                                             2000                 1999                 2000
                                                       ------------------    ----------------   --------------------

Revenues:
<S>                                                    <C>                   <C>                <C>
  Products                                             $       403,314       $       258,684    $           897,994
  Services and licenses                                         83,016               294,947                377,963
                                                       ------------------    ----------------   --------------------
    Total Revenues                                             486,330               553,631              1,275,957
                                                       ------------------    ----------------   --------------------

Cost of Revenues:
  Products                                                     249,937                72,647                477,237
  Services                                                      29,516                75,576                105,092
                                                       ------------------    ----------------   --------------------
    Total Cost of Revenues                                     279,453               148,223                582,329
                                                       ------------------    ----------------   --------------------
Gross Profit                                                   206,877               405,408                693,628
                                                       ------------------    ----------------   --------------------

Operating Expenses:
  Selling, general and administrative                        4,423,530             1,576,555              6,811,167
  Research and development                                     458,894                94,982                766,986
  Amortization of goodwill and other intangibles               162,409                90,000                278,659
  Acquired in-process research and development                       -                     -              3,776,440
                                                       ------------------    ----------------   --------------------
    Total Operating Expenses                                 5,044,833             1,761,537             11,633,252
                                                       ------------------    ----------------   --------------------

Loss from Operations                                        (4,837,956)           (1,356,129)           (10,939,624)
                                                       ------------------    ----------------   --------------------

Other Income (Expense):
  Interest income                                               89,462                32,643                136,787
  Interest expense                                             (22,705)               (4,485)              (120,959)
  Realized loss on available-for-sale marketable
    securities                                                (111,714)             (140,346)              (252,060)
                                                       ------------------    ----------------   --------------------
    Total Other Expense, net                                   (44,957)             (112,188)              (236,232)
                                                       ------------------    ----------------   --------------------

Loss before Income Tax Benefit                              (4,882,913)           (1,468,317)           (11,175,856)
Income Tax Benefit                                                   -                     -                 61,881
                                                       ------------------    ----------------   --------------------
Net Loss                                                    (4,882,913)           (1,468,317)            11,113,975)
Preferred Stock Dividends                                   (3,245,943)                    -             (3,245,943)
                                                       ==================    ================   ====================
Net Loss Attributable to Common Stockholders           $   (8,128,856)       $   (1,468,317)    $       (14,359,918)
                                                       ==================    ================   ====================

Basic and Diluted Net Loss Per Common Share            $         (0.39)      $         (0.07)
                                                       ==================    ================

Weighted Average Number of Common
   Shares Outstanding                                       20,947,879            20,182,373
                                                       ==================    ================

Comprehensive Loss:
   Net loss                                            $   (4,882,913)       $   (1,468,317)
   Unrealized losses on marketable securities                       -             (149,974)
   Realized losses on marketable securities included
     in net loss                                                16,903               140,346
                                                       ==================    ================
   Comprehensive loss                                  $   (4,866,010)       $   (1,477,945)
                                                       ==================    ================
</TABLE>


          See accompanying notes to consolidated financial statements.

                                      F-5


<PAGE>


                     FIRST SCIENTIFIC, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)


<TABLE>
<CAPTION>
                                                                                                          Unrealized
                                                                             Deficit                       Loss on
                                                                           Accumulated                    Available       Total
                                                            Additional      During the                      -for-      Stockholders'
                                        Common  Stock         Paid-in      Development       Deferred        Sale         Equity
                                   -----------------------
                                     Shares      Amount       Capital         Stage        Compensation   Securities    (Deficit)
                                   ------------ ---------- -------------- --------------- --------------- -----------  -------------
<S>                                <C>          <C>        <C>            <C>             <C>             <C>          <C>
Balance - April 30, 1990 (Date
   of Inception)                             -  $       -  $           -  $            -  $            -  $      -     $         -
Issuance of shares for $15,000 in
   April 1990                        7,114,350      7,114         7,886                -               -           -        15,000
Issuances of shares for services:
  April 1990, at less than $0.01
   per share                          2,371,450     2,371         2,629                -               -           -         5,000
  January 1993, $0.07 per share        284,574        285        19,070                -               -           -        19,355
  January 1995, $0.02 per share      2,371,450      2,371        47,629                -               -           -        50,000
Issuances of shares for cash:
  October 1993, $0.07 per share        514,605        515        34,485                -               -           -        35,000
  March 1996, $0.12 per share            83,001        83         9,917                -               -           -        10,000
  October 1996, $0.25 per share         99,601        100        24,900                -               -           -        25,000
  May 1998,  $0.29 per share            21,343         21         6,229                -               -           -         6,250
  July 1998, $0.34 per share            87,744         88        29,912                -               -           -        30,000
  September through December
   1998, $0.75 per share             1,860,203      1,860     1,393,293                -               -           -     1,395,153
Issuance upon conversion of debt:
  September 1998, $0.75 per share       66,667         67        49,933                -               -           -        50,000
  September 1998, $0.34 per share      169,781        170        57,880                -               -                    58,050
Issuance of shares to acquire
   SPPS, September 1998              3,333,330      3,333        (3,333)               -               -           -             -
Issuance of shares in exchange
   for available-for-sale
   securities, (less $48,460 in
   deferred income taxes)
   September and November 1998,        673,123        673       455,713                -               -           -       456,386
   $0.75 per share before tax
Issuance for restricted equity
   securities, November 1998,
   $0.75 per share                      66,666         67        49,933                -               -           -        50,000
Issuance of shares for
   cancellation of royalty
   agreement and contribution of
   technology (less $13,421
   deferred income tax) September    5,201,920      5,202      3,882,817               -               -           -     3,888,019
   1998, $0.75 per share
Redemption of shares in exchange
   for release of personal
   guarantee of Company debt,      (2,371,450)     (2,371)         2,371               -               -           -             -
   December 1994
Redemption of shares in exchange
   for release of personal
   guarantee of Company debt upon
   execution of license and
   royalty agreement, June 1998    (1,778,588)     (1,779)         1,779               -               -           -             -
Conversion of shareholder loans
   and a liability for deferred
   salaries to capital without
   issuance of additional shares,
   September 1998                            -          -        181,877               -               -           -       181,877
                                   ------------ ---------- -------------- --------------- --------------- -----------  -------------
         Subtotals                  20,169,770  $  20,170  $   6,254,920  $            -  $            -  $        -   $ 6,275,090
</TABLE>


          See accompanying notes to consolidated financial statements.

                                      F-6


<PAGE>


                     FIRST SCIENTIFIC, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - (continued)

<TABLE>
<CAPTION>
                                                                             Deficit                      Unrealized
                                                                           Accumulated                    Loss on         Total
                                                            Additional      During the                    Available    Stockholders'
                                        Common  Stock         Paid-in      Development       Deferred     -for-Sale       Equity
                                   -----------------------
                                     Shares      Amount       Capital         Stage        Compensation   Securities    (Deficit)
                                   ------------ ---------- -------------- --------------- --------------- -----------  -------------
<S>                                <C>          <C>        <C>            <C>             <C>              <C>           <C>
 Subtotals from previous page       20,169,770  $  20,170  $   6,254,920  $            -  $           -    $      -      $6,275,090
Compensation related to grant of
   stock options, September 1998             -          -        174,194              -        (174,194)         -               -
Amortization of deferred
   compensation                              -          -             -                -         90,138          -          90,138
Unrealized loss on
   marketable       securities
   for the period from April 30,
   1990 (Date of Inception)                  -          -             -               -               -       (7,275)       (7,275)
   through December 31, 1998
Net loss for the period from
   April 30,1990 (Date of
   Inception) through December               -          -             -      (4,762,745)              -          -      (4,762,745)
   31, 1998
                                   ------------ ---------- -------------- --------------- --------------- -----------  -------------
Balance - December 31, 1998         20,169,770     20,170     6,429,114      (4,762,745)        (84,056)      (7,275)    1,595,208
Issuance of shares for services:
  April 1999, $1.00 per share            10,000        10         9,990               -               -            -        10,000
  September 199, $1.75 per share        40,000         40        69,960               -               -            -        70,000
Compensation related to grant of
   stock options                             -          -       492,500               -        (492,500)           -             -
Amortization of deferred
   compensation                              -          -             -               -         302,957            -       302,957
Unrealized loss on marketable
   securities                                -          -             -               -               -     (149,974)     (149,974)
Realized losses on marketable
   securities included in net loss           -          -             -               -               -      140,346       140,346
Net loss                                     -          -             -      (1,468,317)              -            -    (1,468,317)
                                   ------------ ---------- -------------- --------------- --------------- -----------  -------------
Balance - December 31, 1999         20,219,770     20,220     7,001,564      (6,231,062)       (273,599)     (16,903)      500,220
Issuances of shares for cash:
   February to June 2000, $3.00
   per share                           825,666        825     2,476,174               -               -            -     2,476,999
Conversion of Series 2000-A
   convertible preferred stock
   into common stock                 2,000,000      2,000       346,000               -               -            -       348,000
Preferred stock dividends and
   beneficial conversion features            -          -     3,085,463      (3,245,943)              -            -      (160,480)
Issuance of options in connection
   with the acquisition of
   PureSoft Solutions, LLC                   -          -       261,779               -               -            -       261,779
Compensation related to grant of
   stock options                             -          -       193,750               -        (193,750)           -             -
Amortization of deferred
   compensation                              -          -             -               -         403,032            -       403,032
Forfeiture of stock options                  -          -       (20,634)              -          20,634            -             -
Compensation related to grant of
   stock options by executive                -          -        12,381               -               -            -        12,381
Realized loss on marketable
   securities                                -          -             -               -               -       16,903        16,903
Net loss                                     -          -             -      (4,882,913)              -            -    (4,882,913)
                                   ============ ========== ============== =============== =============== ===========  =============
Balance - December 31, 2000          23,045,436 $  23,045  $ 13,356,477   $ (14,359,918)  $     (43,683)  $        -   $(1,024,079)
                                   ============ ========== ============== =============== =============== ===========  =============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-7


<PAGE>


                     FIRST SCIENTIFIC, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                               Period from
                                                                                                April 30,
                                                                                              1990 (Date of
                                                                                              Inception) to
                                                               Years Ended December 31,        December 31,
                                                            --------------------------------
                                                                 2000             1999             2000
                                                            ----------------  --------------  ---------------
Cash Flows From Operating Activities:
<S>                                                         <C>               <C>             <C>
   Net loss                                                 $   (4,882,913)   $ (1,468,317)   $ (11,113,975)
   Adjustments to reconcile net loss to net cash used in
     operating activities:
       Realized loss on marketable securities                      111,714         140,346          252,060

       Depreciation and amortization                               220,786         114,034          364,052

       Loss on disposal of property and equipment                    5,573               -            5,573

       Non-cash compensation                                       415,413         302,957          808,508

       Common stock issued for services                                 -           50,000          124,355

       Common stock issued for purchased research and
           development                                                  -                -        3,766,440

       Deferred income tax benefit                                      -                -          (61,881)

       Changes in assets and liabilities, net of effects
        of the acquisition of PureSoft Solutions, LLC:

         Accounts receivable, net                                 (19,143)         (94,319)        (114,076)

         Inventory                                                (267,837)         (8,643)        (303,099)

         Prepaid expenses and other current assets                (72,149)           12,805         (88,700)

         Other assets                                              19,342          (41,884)         (22,542)

         Accounts payable                                         182,086            69,018         305,438

         Accrued liabilities                                      101,823          (45,321)         264,913

         Deferred revenue                                         351,689          (33,750)         351,689
                                                            ----------------  --------------  ---------------
           Net Cash Used In Operating Activities               (3,833,616)      (1,003,074)      (5,461,245)
                                                            ----------------  --------------  ---------------

Cash Flows From Investing Activities:
   Purchases of property and equipment                           (453,846)         (68,154)        (609,661)

   Acquisition of PureSoft Solutions, LLC, net of
     cash acquired                                               (202,422)               -         (202,422)

   Proceeds from sale of marketable securities                          -                -          302,847
                                                            ----------------  --------------  ---------------

           Net Cash Used In Investing Activities                 (656,268)         (68,154)        (509,236)
                                                            ----------------  --------------  ---------------

Cash Flows From Financing Activities:
   Proceeds from issuance of notes payable                              -           19,590          275,565

   Principal payments on notes payable                            (69,590)               -         (225,565)

   Proceeds from loans from stockholders                                -                -          158,934

   Principal payments on loans from related parties              (400,000)         (22,693)        (486,500)

   Principal payments on capital lease obligations                (11,712)          (4,034)         (16,608)

   Proceeds from the issuance of Series 2000-A
     Preferred Stock                                            3,600,000                -        3,600,000

   Payment of preferred stock dividends                           (81,444)               -          (81,444)

   Proceeds from issuance of common stock                       2,476,999                -        3,978,402
                                                            ----------------  --------------  ---------------
           Net Cash Provided By (Used In)
              Financing Activities                              5,514,253           (7,137)       7,202,784
                                                            ----------------  --------------  ---------------
Net Increase (Decrease) In Cash                                 1,024,369       (1,078,365)       1,232,303

Cash at Beginning of the Period                                   207,934        1,286,299                -
                                                            ================  ==============  ===============
Cash at End of the Period                                   $   1,232,303     $    207,934    $   1,232,303
                                                            ================  ==============  ===============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-8



<PAGE>


                     FIRST SCIENTIFIC, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
               CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)






<TABLE>
<CAPTION>
                                                               Years Ended December 31,
                                                            --------------------------------
                                                                 2000             1999
                                                            ----------------  --------------
Supplemental Disclosure of Cash Flow Information:
<S>                                                         <C>               <C>
   Cash paid during the period for interest                 $      22,484     $      5,213

Supplemental Schedule of Non-cash Investing and Financing
   Activities:
     Acquisition of PureSoft Solutions, LLC:
       Fair value of assets acquired                            1,735,509                -             -
       Liabilities assumed                                        183,730                -
       Related-party promissory notes payable                     450,000                -
       Fair value of stock options issued                         261,779                -
       PureSoft purchase obligation                               190,000                -
     Preferred stock dividends                                  3,245,943                -
     Equipment acquired through capital lease obligations          33,021           20,478
     Stock option grants at less than fair value                  193,750          492,500
     Stock option forfeitures                                      20,634                -

</TABLE>




          See accompanying notes to consolidated financial statements.

                                      F-9





<PAGE>



                     FIRST SCIENTIFIC, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
           ACCOUNTING POLICIES

Nature of Business- First Scientific, Inc. and subsidiaries  (collectively,  the
"Company") are engaged in the research,  development  and  commercialization  of
break-through,  patent-pending  technologies,  as well as personal skin care and
disinfectant  products.  The Company is in the  development  stage.  The Company
sells its  technologies  and  products  in the  professional  health-care,  food
service, hospitality and janitorial/sanitation markets in the United States.

Corporate History and Reorganization- On April 30, 1990, Linco Industries,  Inc.
("Linco") was incorporated under the laws of the state of Utah. Linco developed,
manufactured  and  distributed a linseed oil based soap on a very limited basis.
On September 15, 1998, Linco entered into a  reorganization  agreement with SPPS
Financial Corporation ("SPPS"), a publicly held Delaware corporation,  whereby a
newly formed,  wholly owned subsidiary of SPPS was merged into Linco.  Under the
terms of the reorganization  agreement,  the Linco stockholders exchanged all of
the then issued and  outstanding  shares of common stock of Linco for  8,798,080
shares of SPPS common stock.  SPPS had no assets,  liabilities or operations and
had  3,333,330  common  shares  outstanding  at the  date of the  reorganization
agreement.  The transaction has been accounted for as a reorganization of Linco,
with a related 2,371.45 -for-1 stock split, and the issuance of 3,333,330 common
shares to the SPPS shareholders.  The accompanying  financial statements reflect
the  effects of this stock  split and  reorganization.  In  connection  with the
reorganization, SPPS changed its name to First Scientific, Inc.

Principles of Consolidation- The accompanying  consolidated financial statements
include  the  accounts  and  transactions  of  First  Scientific,  Inc.  and its
predecessors  for all periods  presented  and the accounts and  transactions  of
PureSoft Solutions,  LLC ("PureSoft") since its acquisition on June 2, 2000 (see
Note  3).  Intercompany  accounts  and  transactions  have  been  eliminated  in
consolidation.

Use of Estimates-  The  preparation of financial  statements in conformity  with
U.S.  generally  accepted  accounting  principles  requires  management  to make
estimates and  assumptions  that affect the amounts  reported in these financial
statements  and  accompanying  notes.  Actual  results  could  differ from those
estimates.

Financial  Instruments-  The  amounts  reported  as cash,  accounts  receivable,
accounts  payable,   and  debt  instruments  are  considered  to  be  reasonable
approximations  of their fair values  based on market  information  available to
management at the time of preparation of the financial statements.

Concentration  of Risk-  Through  December  31,  2000,  the Company has sold its
products  primarily to a small number of distributors in the United States.  The
Company  performs  ongoing  credit  evaluations  of  its  customers'   financial
condition but requires no collateral from its customers.  The Company  maintains
an  allowance  for  uncollectable  accounts  receivable  based upon the expected
collectability of all accounts receivable.

During the year ended December 31, 2000, three customers  accounted for 17%, 15%
and 10% of the  Company's  total  revenues.  During the year ended  December 31,
1999, two customers accounted for 55% and 37% of the Company's  revenues.  As of
December 31, 2000,  four  customers  accounted  for 17%, 12%, 11% and 11% of the
Company's total accounts receivable.

                                      F-10

<PAGE>


Investments - Investments in marketable  equity  securities were  categorized as
available-for-sale securities. Available-for-sale securities were stated at fair
value, with unrealized gains and losses, net of deferred income taxes,  reported
as a component of other comprehensive loss.

Inventory - Inventory, which is primarily finished goods, is stated at the lower
of cost or  market  value.  Cost is  determined  using the  first-in,  first-out
method.

Property and  Equipment - Property  and  equipment  are  recorded at cost,  less
accumulated   depreciation  and  amortization.   Depreciation  of  property  and
equipment is computed using the  straight-line  method over the estimated useful
lives of three to seven years.  Leasehold  improvements  are amortized  over the
shorter  of the  estimated  useful  life of the asset or the term of the  lease.
Maintenance  and repairs are charged to expense as incurred  while  renewals and
major improvements are capitalized.  Upon retirement, sale or other disposition,
the  cost and  accumulated  depreciation  are  eliminated  from  the  respective
accounts and a gain or loss is included in the results of operations.

Intangible Assets - Intangible assets consist of goodwill and acquired completed
technology.  Goodwill  represents  the excess of the purchase price over the net
assets  acquired  in the  acquisition  of  PureSoft  (see Note 3).  Goodwill  is
amortized  on  a  straight-line  basis  over  a  five-year  period.  Accumulated
amortization  of goodwill  totaled  $143,659 as of December 31,  2000.  Acquired
completed technology  represents the value of scientific  formulations  acquired
from a director in 1998 (see Note 4). The acquired completed technology totaling
$135,000 was amortized over a period of 18 months,  and as of December 31, 2000,
has been fully amortized.

Impairment of Long-Lived  Assets - The Company  reviews its  long-lived  assets,
including  intangibles,  for impairment when events or changes in  circumstances
indicate  that  the book  value  may not be  recoverable.  The  Company  uses an
estimate of future  undiscounted net cash flows of the related asset or group of
assets over the remaining life in measuring  whether the assets are recoverable.
As of December  31, 2000,  the Company  does not consider any of its  long-lived
assets to be impaired.

Revenue  Recognition - Product  revenue is recognized  upon shipment of products
except where rights of return exist or where no evidence  exists of channel sell
through. In these cases revenue is deferred until the rights of return expire or
there is evidence of the product being sold through the channel. Service revenue
is  recognized  as the services are  performed.  Amounts  received in advance of
performance of the services or the delivery of products are recorded as deferred
revenue.

Research and Development Expense - All research and product development expenses
are charged to operations as incurred.

Advertising - Advertising costs are expensed as incurred. During the years ended
December 31, 2000 and 1999,  advertising expense was approximately  $391,000 and
$161,000, respectively.

Income Taxes - The Company recognizes  deferred income tax assets or liabilities
for the expected future tax  consequences of events that have been recognized in
the financial  statements or income tax returns.  Deferred  income tax assets or
liabilities  are  determined  based upon the  difference  between the  financial
statement and income tax bases of assets and  liabilities  using enacted  income
tax rates expected to apply when the  differences  are expected to be settled or
realized.

Stock-Based  Compensation  Plans - The  Company  accounts  for  its  stock-based
compensation issued to employees and directors under Accounting Principles Board
("APB") Opinion No. 25,  "Accounting  for Stock Issued to Employees".  Under APB
Opinion No. 25, compensation related to stock options, if any, is recorded if an
option's  exercise price on the measurement  date is below the fair value of the
Company's  common  stock,  and  amortized  to expense  over the vesting  period.


                                      F-11
<PAGE>

Compensation expense for stock awards or purchases, if any, is recognized if the
award or purchase price on the  measurement  date is below the fair value of the
Company's  common  stock,  and is  recognized  on the date of award or purchase.
Statement of Financial  Accounting  Standards ("SFAS") No. 123,  "Accounting for
Stock Based Compensation",  requires pro forma information  regarding net income
(loss) and net income  (loss) per common  share as if the Company had  accounted
for its stock  options  granted  under  the fair  value  method.  This pro forma
disclosure is presented in Note 11.

The Company  accounts for its stock-based  compensation  issued to non-employees
using  the fair  value  method  in  accordance  with  SFAS  No.123  and  related
interpretations.  Under SFAS No. 123, stock-based  compensation is determined as
either the fair  value of the  consideration  received  or the fair value of the
equity  instruments  issued,   whichever  is  more  reliably   measurable.   The
measurement  date for these issuances is the earlier of either the date at which
a commitment for performance by the recipient to earn the equity  instruments is
reached or the date at which the recipient's performance is complete.

Basic and  Diluted  Net Loss Per Common  Share - Basic and  diluted net loss per
common  share  are  calculated  by  dividing  net loss  attributable  to  common
stockholders  by  the  weighted   average  number  of  shares  of  common  stock
outstanding  during  the  period.  At  December  31,  2000 and 1999,  there were
outstanding common stock equivalents of 23,953,280 and 2,205,000,  respectively,
that were not included in the  computation  of diluted net loss per common share
as their effect would have been  anti-dilutive,  thereby decreasing the net loss
per common share.

Recent  Accounting  Pronouncements  - SFAS No. 133,  "Accounting  for Derivative
Instruments  and  Hedging  Activities"   establishes  accounting  and  reporting
standards  requiring  that  every  derivative   instrument   (including  certain
derivative  instruments  embedded in other contracts) be recorded in the balance
sheet as  either  an asset or  liability  measured  at its fair  value  and that
changes in the fair value be recognized  currently in operations unless specific
criteria are met.  SFAS No. 133 is effective  for fiscal years  beginning  after
June 15, 2000.  The Company does not expect the  adoption of the  provisions  of
SFAS No.  133 to have a material  impact on the  Company's  financial  position,
results of operations or liquidity.

Reclassifications  -  Certain  reclassifications  have  been  made in the  prior
periods'  consolidated  financial  statements to conform with the current period
presentation.

NOTE 2 - DEVELOPMENT STAGE STATUS

Since  inception,  the Company has spent most of its efforts in  developing  and
marketing  various  products and is considered to be in the  development  stage.
Although  the Company has  generated  revenues,  the Company  continues to incur
significant losses. The Company incurred net losses for the years ended December
31,  2000  and  1999 of  $4,882,913  and  $1,468,317,  respectively,  and has an
accumulated deficit of $14,359,918 and a stockholders'  deficit of $1,024,079 at
December  31,  2000.  Additionally,  the Company  used cash flows for  operating
activities of $3,833,616  and  $1,003,074  for the years ended December 31, 2000
and 1999,  respectively.  These factors,  as well as the risk factors set out in
the Company's Annual Report on Form 10-KSB,  raise  substantial  doubt about the
Company's  ability to continue as a going concern.  The  accompanying  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty. Management plans to fund the operations of the Company through
proceeds from sales of debt and equity securities and, if necessary, the sale of
certain of its technologies.  There can be no assurance that management's  plans
will be successful.


                                      F-12
<PAGE>

NOTE 3 - ACQUISITION OF PURESOFT SOLUTIONS, LLC

On March  15,  2000,  the  Company  entered  into an  agreement  (the  "PureSoft
Agreement")  to acquire 100% of the common stock of  PureSoft,  a New  Hampshire
limited  liability  company  involved in the  manufacturing  and distribution of
health care  products.  The  transaction  was  consummated  on June 2, 2000.  As
consideration for the purchase, the Company agreed to pay $50,000 in cash, issue
options to purchase  87,534  shares of the  Company's  common stock at $0.01 per
share and issue a $450,000  promissory  note (see Note 6). The Company agreed to
issue  additional  consideration  either  in the form of cash or  shares  of its
common  stock  on July 1,  2001 and  July 1,  2002.  The  amount  of  additional
consideration to be issued is contingent upon the pre-tax net income of PureSoft
generated  from April 1, 2000 to June 30, 2002,  and varies in proportion to any
over- or under-achievements of established  performance milestones stated in the
PureSoft  Agreement,  provided,  however,  that the  aggregate  minimum value of
additional consideration be no less than $190,000.

The  PureSoft  Agreement  also  required  the  Company to make  working  capital
advances of $300,000 to PureSoft on each of March 15, 2000,  June 15, 2000,  and
August 15, 2000. All of the working capital  advances were paid on or before the
respective due dates.

The  acquisition  was  accounted for as a purchase.  The purchase  price totaled
$1,551,779 and consisted of $50,000 paid in cash to the former PureSoft  owners,
$600,000  paid in cash as working  capital  advances  prior to the  purchase,  a
$450,000  promissory  note,  stock  options  with an  estimated  fair  value  of
$261,779,  and  $190,000  representing  the  minimum  value  of  the  additional
consideration.  The contingent shares will be recorded at the then fair value of
the shares issued and will, accordingly,  affect the amount of goodwill recorded
to the extent the fair value of the shares issued exceeds $190,000.

The estimated fair value of the options to purchase  common stock was determined
using the  Black-Scholes  option  pricing model with the following  assumptions:
expected  exercise life of one year, risk free interest rate of 6.18%,  expected
dividend yield of 0% and volatility of 40%.

The purchase  price  allocation to tangible  assets  included  $447,578 of cash,
$22,836 of accounts  receivable,  $18,802 of inventory,  and $14,911 of property
and equipment.  The purchase price  allocation to liabilities  assumed  included
$33,285 of accounts  payable,  $100,445 of accrued  liabilities,  and $50,000 of
related-party notes payable. The excess of the purchase price over the estimated
fair value of the net assets  acquired was  $1,231,382  and was  capitalized  as
goodwill to be amortized over five years.

The following  unaudited pro forma financial statement data presents the results
of operations of the Company as if the  acquisition  of PureSoft had occurred on
February 10, 1999,  the date of inception of PureSoft.  The  unaudited pro forma
results have been prepared for illustrative  purposes only and do not purport to
represent what the Company's results of operations  actually would have been had
the acquisition been made when assumed, nor is it indicative of actual or future
operating results that may occur.

<TABLE>
<CAPTION>
                                               Pro Forma for the
                                           Years Ended December 31,
                                    ----------------------------------------
                                          2000                  1999
                                    -----------------     ------------------
                                                 (unaudited)

<S>                                 <C>                     <C>
Revenues                            $     536,177           $     643,850
Net Loss                               (5,116,176)             (1,761,021)
Net loss attributable to
   common stockholders                 (8,395,452)             (2,539,884)
Basic and diluted net loss
   per common share                 $       (0.40)          $       (0.13)
</TABLE>


                                      F-13
<PAGE>


NOTE 4 - ACQUIRED RESEARCH AND DEVELOPMENT

In connection with the reorganization  agreement with SPPS during 1998 (see Note
1), the Company issued 5,201,920 shares of its common stock valued at $3,901,440
to a director  of the  Company  for the rights to and  ownership  of  technology
related  to  scientific  formulations  and  the  cancellation  of the  Company's
obligation under a royalty agreement  related to the use of the technology.  The
value of the technology  was determined  based upon the fair value of the common
stock issued.  The technology  consists of two non-alcohol  based  antibacterial
sanitizing  formulations that remove bacteria while  moisturizing the skin and a
dimethicone-based   topical  rash  prevention  and  treatment  formulation  that
cleanses  and  moisturizes  the skin for  treatment  of skin  rashes  caused  by
incontinence and other  irritations.  All of the technology was considered to be
in  process  except  for one  formulation  valued at  $135,000.  The cost of the
completed  technology  was  capitalized  and was  amortized  over a period of 18
months.  The  in-process  technology was valued at $3,766,440 and was charged to
operations on the date of  acquisition.  Amortization  expense for the completed
technology  for the years  ended  December  31,  2000 and 1999 was  $18,750  and
$90,000,  respectively.  As of December 31, 2000,  the completed  technology was
fully amortized.


NOTE 5 -LOSS ON MARKETABLE SECURITIES

During 1999,  the Company had  investments  in marketable  securities  that were
classified  as  available-for-sale   securities.   The  market  value  of  these
securities  declined  during  1999  and,  at  September  30,  1999,   management
determined that the decline was other than temporary.  Accordingly, a write-down
of $140,346  was recorded to adjust the carrying  value of these  securities  to
their  market  value of  $111,714.  At  December  31,  1999,  available-for-sale
securities consisted of the following:

   Cost                                                $    111,714
   Gross unrealized losses                                  (16,903)
                                                       --------------
                                                       --------------
   Estimated fair value                                $     94,811
                                                       --------------

During the year ended  December 31, 2000,  the market value of these  securities
continued to decline and management  determined that the securities had no value
and that the decline was other than  temporary.  Accordingly,  a  write-down  of
$111,714 (including a previously unrealized loss of $16,903) was recorded during
the year ended December 31, 2000.


NOTE 6 - RELATED-PARTY TRANSACTIONS

The Company believes the terms of the related-party transactions are at least as
favorable as the terms that could have been obtained from an unaffiliated  third
party in similar transactions.

Promissory  Notes Payable - In connection  with the acquisition of PureSoft (see
Note 3), the Company  issued three  promissory  notes  totaling  $450,000 to the
former stockholders of PureSoft.  The notes bear interest at 8.5% with aggregate
payments of $300,000 due on June 15, 2000, and aggregate  quarterly  payments of
$50,000  thereafter  through  March 15, 2001.  As of December 31, 2000,  $50,000
remains outstanding on these notes.

Additionally,  in  connection  with the  acquisition  of  PureSoft,  the Company
assumed a $50,000  note payable to two of the former  stockholders  of PureSoft.
This note,  together with accrued interest  thereon,  was paid off in connection
with the acquisition.

Consulting  Agreements - In August 1998,  the Company  entered into a consulting
agreement with an individual who was then a director of the Company,  to consult
on marketing and market development.  The agreement provided for compensation of


                                      F-14
<PAGE>

$10,000 per month, had a one-year initial term, and was renewable for additional
one-year  terms.  On August 1, 2000,  the  compensation  under the agreement was
reduced to $7,500 per month.  On August 7, 2000,  the  individual  resigned as a
director of the Company.  On October 1, 2000, the individual  became an employee
of the Company and the consulting agreement was terminated.

In October 1998, the Company entered into an agreement with  Pharmulations,  LLC
("Pharmulations"),  an entity owned and  controlled by Dr.  Edward B. Walker,  a
shareholder  and  director of the  Company,  to consult on product  research and
development  for a period of six years.  Under this  agreement,  compensation of
$7,000 per month was to be paid for the first year, with increases of $1,000 per
month in  October of each year the  agreement  continued  in effect.  An amended
consulting  agreement and a master  development  agreement  were entered into on
January 4, 2001. Under these agreements, Pharmulations is paid $9,000 per month,
with annual  increases of $1,000 per month in October of each year the agreement
continues in effect. The Company may also pay cash or stock bonuses based on the
value of Pharmulations'  services as determined by the Company.  The Company may
terminate  the  consulting  agreement  for cause or in the event that Dr. Walker
becomes  permanently  disabled,  dies, or otherwise  ceases to provide  personal
services or to own less than 66% of the equity of Pharmulations. In the event of
disability, the compensation would continue to be paid for a period of 12 months
from the date of termination of the amended  consulting  agreement.  The Company
may terminate the consulting agreement without cause provided the Company pay an
amount equal to the monthly  compensation  multiplied by the lesser of 12 months
or the number of months  remaining  under the term of the contract.  The amended
consulting  agreement also contains covenants against  competition and covenants
of confidentiality and nondisclosure  binding  Pharmulations and its affiliates,
including Dr. Walker.

In November 1999, the Company  entered into an agreement with a company owned by
the Company's former chief executive officer,  whereby the Company agreed to pay
$5,000 per month for general business consulting.  The agreement is for a period
of two  years,  subject to an early  termination  of six  months  following  the
commencement  of public  trading of the Company's  common  stock.  The Company's
stock  began  trading  on the  over-the-counter  market  on the NASD  Electronic
Bulletin Board on October 26, 2000. Accordingly, the agreement may be terminated
on or after April 26, 2001. The Company may terminate the agreement for cause or
in the event that the individual becomes permanently  disabled.  In the event of
disability, the compensation would continue to be paid for a period of 12 months
from the date of termination of the consulting  agreement.  The Company may also
pay cash or stock bonuses based on the value of services performed as determined
by the Company.


NOTE 7 - SHORT-TERM NOTES PAYABLE

As of December  31,  1999,  the  Company had a note  payable of $19,590 due to a
finance  company.  The note bore interest at 12.75% per year and was  unsecured.
The balance of this note,  together with interest  thereon,  was paid during the
year ended December 31, 2000.


NOTE 8 - COMMITMENTS AND CONTINGENCIES

Capital  Leases - The Company  leases  various  equipment  under  capital  lease
agreements. Equipment held under capital leases as of December 31, 2000 and 1999
was as follows:

                                                  2000          1999
                                               ------------ -------------
Equipment                                      $  60,965    $   20,478
Less: accumulated depreciation                   (17,903)       (1,971)
                                               ============ =============
                                               $  43,062    $   18,507
                                               ============ =============

                                      F-15
<PAGE>

 The  following is a schedule by year of future  minimum  lease  payments  under
 capital  leases  together  with  the  present  value of the net  minimum  lease
 payments as of December 31, 2000:

Year Ending December 31,
           2001                                             $  19,440
           2002                                                13,962
           2003                                                 8,824
           2004                                                 8,824
           2005                                                 3,677
                                                            -------------
Total minimum lease payments                                   54,727
Less: amount representing interest                            (10,371)
                                                            -------------
Present value of net minimum lease payments                    44,356
Less: current portion                                         (14,811)
                                                            =============
Capital lease obligations, net of current portion           $  29,545
                                                            =============

Operating  Leases - The  Company  leases  its  physical  facilities  and  office
equipment under  operating  leases with remaining lease terms ranging from 26 to
48 months as of December 31, 2000. Rent expense for the years ended December 31,
2000 and 1999 was $88,501 and  $42,229,  respectively.  As of December 31, 2000,
the  expected  future  minimum  lease  payments due under the  operating  leases
described above are as follows:

Year Ending December 31,
            2001                                          $   160,503
            2002                                              164,318
            2003                                               88,297
            2004                                               64,749
                                                          ===============
                                                          $   477,867
                                                          ===============

Employment Agreements - In connection with the acquisition of PureSoft (see Note
3), the Company entered into an agreement with a former PureSoft  stockholder to
serve as the President of the  subsidiary.  The agreement  provides that, if the
individual is terminated without cause, the individual will receive compensation
equal to the  individual's  base  salary  multiplied  by the  number  of  months
remaining  under the term of the contract.  The agreement is scheduled to expire
on September 15, 2002.

In November 2000, the Company  entered into  employment  agreements with two key
employees  which provide for the Company to pay as severance two years of salary
should the employees be terminated without cause.

Commission  Agreements  -  The  Company  has  entered  into  various  commission
agreements with third parties. Under these agreements, the third parties receive
commissions ranging from 0.5% to 15.0% of net sales to referred customers.

Legal Matters - The Company is involved in one lawsuit arising from the ordinary
course of business. In the opinion of management,  after consultation with legal
counsel,  the ultimate disposition of this matter will not materially affect the
Company's financial position or results of operations.

Insurance - The manufacture,  development,  and marketing of antimicrobial  hand
cleansing  products  exposes  the  Company to the  potential  risk from  product
liability  claims  and  there can be no  assurance  that the  Company  can avoid
significant product liability exposure.  The Company maintains product liability
insurance providing coverage up to $1,000,000 per claim with an aggregate policy


                                      F-16
<PAGE>

limit of $2,000,000.  There is  substantial  doubt that this amount of insurance
would be adequate to cover  potential  liabilities in the event that the Company
were to face significant  claims. A successful  product  liability claim brought
against  the  Company  could have a  material  adverse  effect on the  Company's
business, operating results and financial condition.

NOTE 9 - PREFERRED STOCK

The Company's  authorized  capital stock includes  1,000,000 shares of preferred
stock,  $0.001 par value per share.  The  Company  has  created  two  classes of
preferred stock: Series 2000-A Convertible  Preferred Stock ("Series A preferred
stock")  and Series  2000-B  Convertible  Preferred  Stock  ("Series B preferred
stock").  As of December 31, 2000, there were no outstanding  shares of Series A
preferred  stock and there were 3,652 shares  outstanding  of Series B preferred
stock.

On May 16, 2000,  the Company  executed a  securities  purchase  agreement  (the
"Series A Purchase Agreement") with Aspen Capital Resources,  L.L.C.  ("Aspen"),
whereby  Aspen  purchased,  through a series of  transactions,  4,000  shares of
Series A preferred stock from the Company for  $4,000,000,  less a 10% placement
fee payable to Aspen,  and warrants  exercisable  for the purchase of additional
shares of Company  common stock by Aspen.  The placement fee was netted  against
the proceeds received under the Series A Purchase Agreement.

On August 17,  2000,  the Company  agreed to allow Aspen to convert  into common
stock up to $1,000,000 in stated value of Series A preferred  stock at a reduced
conversion  price of $2.00 per share and recorded an additional  preferred stock
dividend of $250,000 related to this reduction in the conversion price.

On November 13, 2000, the Company  entered into an agreement (the  "Modification
Agreement")  with Aspen,  whereby Aspen and the Company agreed to modify certain
terms of the Series A Purchase  Agreement.  As  modified,  the Series A Purchase
Agreement provided that the Company may have been requested to redeem all of the
outstanding  shares of Series A preferred  stock at a price equal to 125% of the
stated value per share, plus accrued and unpaid dividends and penalties, if any,
through the date of  redemption  if (i) an event of  noncompliance  occured (see
below);  (ii) after  January 31,  2001,  the  average of the closing  quoted bid
prices for the Company's  common stock for 22 consecutive  trading days was less
than or  equal  to $1.00  per  share,  or (iii)  the  aggregate  balance  of the
Company's cash and cash  equivalents  was less than $1,000,000 at any time after
November 13, 2000 and on or before January 31, 2001 and at any time  thereafter,
the average closing bid price for the Company's common stock for the previous 22
consecutive  trading  days was less  than or equal to $1.00  per  share.  If the
Company opted not to make the redemption  payment when due, dividends would have
accrued  on all  outstanding  Series  A  preferred  stock  from  and  after  the
redemption  date at 21% per year  until  paid in full and the  conversion  price
would have been reduced by $0.50 per share.

Under the terms of the Modification  Agreement,  the Company waived its right to
redeem  after  May 16,  2001 all or some of the  outstanding  shares of Series A
preferred  stock by paying 125% of the stated value per share,  plus accrued and
unpaid dividends and penalties, if any, through the date of redemption. Further,
as modified,  the Series A Purchase Agreement granted Aspen the right to convert
the stated value and any accrued and unpaid dividends thereon into shares of the
Company's common stock based on a formula subject to a maximum  conversion price
of $1.20 per  share,  rather  than the  $4.00  maximum  conversion  price in the
original Series A Purchase Agreement.

As of December 29, 2000, the Company entered into an agreement with Aspen, which
modified the terms of the Series A Purchase  Agreement and the related amendment
agreement.  Under this  agreement,  the Company agreed to adopt a certificate of
designation for a new series of preferred  stock,  the Series B preferred stock.
In connection with the agreement,  Aspen exchanged all of the outstanding shares
of Series A preferred  stock for an equal number of shares of Series B preferred
stock.



                                      F-17
<PAGE>

The rights and  preferences of the Series A and Series B preferred stock include
the following:

Optional Redemption - The Company has the right to redeem all of the outstanding
shares of Series B preferred  stock by paying  $6,500,000 to Aspen.  The Company
must  exercise  this right  before the close of business  on April 2, 2001.  The
Company may not redeem any Series B preferred stock unless all dividends accrued
on the outstanding  Series B preferred stock through December 31, 2000 have been
paid in full.  Dividends  on the  outstanding  Series B preferred  stock for the
period  January 1, 2001  through  the date of the  optional  redemption  will be
deemed included in the optional  redemption  price and the warrant  certificates
received in connection with the issuance of the Series A preferred stock will be
cancelled,  provided  that (i) the  Company  has  redeemed  all of the  Series B
preferred stock; (ii) all of the terms of the Series B preferred stock have been
met and (iii) no event of noncompliance has occurred.

If the Company does not make the redemption  payment when and if due,  dividends
will accrue from and after the  redemption  date at a rate of 21% per year until
paid in full and the conversion price for any subsequent conversion of preferred
stock will be reduced by $0.50 per share.

Mandatory  Redemption  - Aspen may  require  the  Company  to redeem  all of the
outstanding  shares of Series B preferred  stock at a price equal to 125% of the
stated value per share,  plus accrued and unpaid dividends and penalties,  if an
event of noncompliance occurs (see below),  provided however, that Aspen may not
exercise  its  mandatory  redemption  right  prior to April 3, 2001,  unless the
Company's  chief  executive  officer  ceases  to  be  employed  by  the  Company
full-time, or Pharmulations, LLC (specifically, Dr. Edward Walker) ceases to act
as a consultant to the Company.

If Aspen exercises its mandatory  redemption right, and the Company fails to pay
the  redemption  price,  dividends  will  accrue  on the  outstanding  Series  B
preferred  stock from the date the payment was  required to be made at a default
rate of 21%  per  year  until  paid in full  and the  conversion  price  for any
subsequent  conversion of Series B preferred  stock will be reduced by $0.50 per
share.

Event of Noncompliance - With respect to the Series A and the Series B preferred
stock, an event of noncompliance shall have occurred if (i) the Company fails to
pay on any dividend payment date the full amount of dividends then accrued, (ii)
the Company fails to make any  redemption  payment which it is required to make,
(iii) the Company breaches or otherwise fails to perform or observe any material
provision  of the purchase  agreements,  and such failure is not cured within 15
days after the occurrence thereof, (iv) any representation or warranty contained
in the purchase agreements or required to be furnished to any holder is false or
misleading in any material respect,  (v) the Company makes an assignment for the
benefit  of  creditors  or  admits in  writing  its  inability  to pay its debts
generally  as they  become  due,  or an order,  judgment  or  decree is  entered
adjudicating the Company bankrupt or insolvent,  (vi) any material  provision of
the  purchase  agreement  shall at any time or for any reason be  declared to be
null and void, (vii) (A) any registration  statement required to be filed by the
Company and declared  effective by the Securities and Exchange  Commission  (the
"SEC") shall not become  effective or shall cease to be  effective,  (B) the SEC
shall issue any stop order suspending the effectiveness under the Securities Act
of any registration  statement  required to be filed by the Company and declared
effective by the SEC pursuant to the Purchase  Agreement or any state securities
commission  suspends the  qualification  of the securities  covered  thereby for
offering for sale in any jurisdiction, (C) any proceeding for purposes of either
(A) or (B) above is  initiated,  or, (D) for the Series A preferred  stock,  the
common stock is  suspended  from trading on or the price for the common stock is
not quoted or  reported  on the  NASDAQ  Stock  Market  System or the NASD's OTC
Bulletin  Board after  September 18, 2000,  (viii) the Company at any time shall
not have the required  number of reserved and available  authorized but unissued
shares of common stock, or (ix) the occurrence of any material adverse change in
the  business  condition  (financial  or  otherwise),  prospects,  or results of
operations of the Company taken as a whole.



                                      F-18
<PAGE>

As of September 30, 2000, the Company's  common stock was not listed and trading
on the NASDAQ Stock Market System or the NASD OTC Bulletin Board. However, Aspen
waived all penalties associated with this event of non-compliance. The Company's
common stock began trading on the NASD OTC Bulletin Board on October 26, 2000.

Conversion  - Aspen has the right but not the  obligation  to convert the stated
value of Series A and  Series B  preferred  stock  and any  accrued  and  unpaid
dividends  thereon  into shares of the  Company's  common  stock by dividing the
stated value of such shares to be converted together with any accrued but unpaid
dividends  thereon by the conversion  price,  which is 80% of the average of the
three lowest  closing bid prices for the common stock quoted on the NASDAQ Stock
Market System or reported on the NASD's OTC Bulletin Board during the 15 trading
days  preceding the conversion  date. The conversion  price for the Series A and
Series B preferred  stock can not exceed $1.20 per share,  subject to adjustment
(see  below).  The  number of shares of Series B  preferred  stock  which can be
converted  is limited to 42% of the fully  diluted  capital  stock,  as defined,
during the period April 3, 2001 through December 31, 2001, if there has not been
an event of noncompliance.  In addition, Aspen has agreed that prior to April 3,
2001, it will not (i) offer or sell any shares of the Company's  common stock or
enter into any swap or other similar  arrangement  at prices less than $0.25 per
share, or (ii) convert any shares of Series B preferred  stock.  This conversion
right  may be  exercised  any time  from  April 3, 2001  through  and  including
December 31, 2001. However, upon an event of noncompliance,  all of the Series B
preferred stock becomes  immediately  convertible  notwithstanding any timing or
other restrictions.

As of  December  31,  2000,  348  shares  of Series A  preferred  stock had been
converted into 2,000,000 shares of common stock.

During the year ended December 31, 2000, the Company  recorded  preferred  stock
dividends of $1,000,000 related to the above beneficial  conversion  features of
the Series A and Series B preferred stock.

Adjustment of the Conversion  Price - If after the date of issuance for Series A
preferred stock or after April 3, 2001 for Series B preferred stock, the Company
issues or sells any  shares of common  stock or grants  any rights or options to
purchase  common  stock or any  stock or other  securities  convertible  into or
exchangeable for common stock or issues or sells any convertible securities, and
the value per share for such common stock  issuable is less than the fair market
value per share,  the  conversion  price of the Series A and Series B  preferred
stock is reduced according to a defined formula. Upon the occurrence of an event
of  noncompliance,  the  minimum  conversion  price  shall not be subject to any
limitations.

Registration  Rights - In connection with the issuance of the Series B preferred
stock,  the Company  agreed to register the shares of common stock issuable upon
conversion with the SEC.

If any registration statement filed by the Company in connection with the Series
A or Series B preferred  stock  ceases to remain  effective,  as  provided,  the
Company is required  to issue to Aspen,  on such date and on every date which is
30 days or a  multiple  thereof  after such date,  until such  registrations  or
qualifications  shall become effective,  additional shares of common stock equal
in number to 5% of the total number of shares of common stock issued or issuable
upon  conversion  of all  outstanding  shares of Series A and Series B preferred
stock and cause the resale of all such  additional  shares to be included in the
registrations or qualifications.

Dividends - Aspen is entitled to receive  cumulative  dividends  equal to 8% per
year on the stated value of the Series A and Series B preferred  stock provided,
however, that if there is an event of noncompliance,  Aspen shall be entitled to
receive  cumulative  dividends  equal to 21% per year. The dividends are payable
quarterly.  Aspen may, at its option,  elect to receive  payment of dividends in
cash or in shares of the  Company's  common stock at the  conversion  price.  If
Aspen  chooses to receive  payment of  dividends in the form of shares of common


                                      F-19
<PAGE>

stock,  Aspen is required to give written notice of such election to the Company
at least five business days before the last business day of the quarter.

The  Company  has  recorded  $160,480  in  preferred  stock  dividends  from the
respective  date of issuance  through  December 31, 2000. This is in addition to
the $1,250,000 of dividends related to the beneficial conversion features of the
preferred stock and the $1,835,463 in preferred stock dividends  associated with
the warrants. As of December 31, 2000, $81,444 had been paid in cash and $79,036
was paid in cash subsequent to December 31, 2000.

Warrants  - The  Series A  Purchase  Agreement,  as  amended,  provides  for the
issuance of  2,000,000  warrants  in  connection  with the  purchase of Series A
preferred  stock.  Each  warrant  entitles  the holder to purchase  one share of
common  stock  at an  exercise  price of  $2.25  per  share.  The  warrants  are
exercisable from November 1, 2001, or earlier upon the occurrence of an event of
default, as defined in the warrants,  or a change in control of the Company, and
may be  exercised  through May 16,  2004.  The warrants are not subject to early
redemption by the Company.  The Company  recorded  $1,835,463 in preferred stock
dividends related to the potential issuance of the warrants. This is in addition
to the $1,250,000 of dividends related to beneficial conversion features and the
$160,480  related  to the 8%  dividend  rate.  The  estimated  fair value of the
warrants to purchase common stock was determined using the Black-Scholes  option
pricing model with the following assumptions: expected exercise life of 2 years,
risk free interest rate of 5.65%,  expected  dividend yield of 0% and volatility
of 60%.

Voting Rights - Each share of Series A and Series B preferred stock  outstanding
has the number of votes equal to the number of shares of common stock into which
the shares of Series A and Series B preferred stock is convertible.

Reserved  Shares - The Company is required to reserve shares of its common stock
solely for the purpose of issuance upon the conversion of all outstanding Series
A and Series B preferred stock.


NOTE 10 - COMMON STOCK

On April 30, 1999,  the Company agreed to issue 10,000 shares of common stock to
an  individual  for  marketing  services  rendered  during  1997 and  1998.  The
marketing services were valued at $10,000 based upon the estimated fair value of
the common stock issued. The shares were issued on September 30, 1999. On August
7, 1999,  the Company  agreed to issue 40,000  shares of common stock to a third
party for  services.  The  services  were  valued  at  $70,000,  based  upon the
estimated fair value of the common stock issued.

During the year ended December 31, 2000,  the Company  received cash proceeds in
the amount of  $2,476,999  under the terms of a private  placement  offering  by
issuing  825,666  investment  units,  at $3.00 per unit.  Each  investment  unit
consisted of one share of the  Company's  common stock and a warrant to purchase
one-half  share of common  stock at $4.50 per share (see Note 12).  The warrants
expire on December 31, 2001.


NOTE 11 - STOCK OPTIONS

During December 1998, the Company's  board of directors  approved the 1998 Stock
Option Plan (the "Plan") for  directors,  employees and other persons  acting on
behalf of the Company  under which the number of common  shares  authorized  for
issuance is 2,500,000.  The Plan is  administered  by a committee  consisting of
independent  directors.  As of December 31, 2000, the number of shares available
for grant under the Plan is 584,000.



                                      F-20
<PAGE>

In addition to the option  grants under the Plan, in 1998,  the Company  granted
options to two  outside  directors  to purchase a total of  1,050,000  shares of
common  stock at an  exercise  price of $0.75 per share and  issued  options  to
purchase a total of 87,534 shares of common stock at an exercise  price of $0.01
in connection with the acquisition of PureSoft (see Note 3).

A summary of stock  option  activity  for the years ended  December 31, 2000 and
1999 is presented below:

<TABLE>
<CAPTION>
                                                              2000                        1999
                                                   --------------------------- ----------------------------
                                                                  Weighted-                   Weighted-
                                                                   Average                      Average
                                                                   Exercise                     Exercise
                                                      Shares        Price         Shares         Price
                                                   ------------- ------------- -------------- -------------
<S>                                                <C>           <C>           <C>            <C>
     Outstanding at beginning of year                2,205,000   $   0.85        1,315,000    $   0.75
     Granted                                           848,534       1.47          890,000        0.99
     Forfeited                                         (60,000)      1.75                -        -
                                                   -------------               --------------
     Outstanding at end of year                      2,993,534       1.00        2,205,000        0.85
                                                   =============               ==============
     Options exercisable at end of year              2,011,034       0.92          928,250        0.75
                                                   =============               ==============
</TABLE>

The following table summarizes  information  about stock options  outstanding at
December 31, 2000:

<TABLE>
<CAPTION>
         Exercise      Number Outstanding      Weighted Average Remaining      Number Exercisable
           Price                                    Contractual Life
       -------------- --------------------- --------------------------------- ----------------------
<S>    <C>            <C>                            <C>                            <C>
       $  0.01                 87,534                No expiration                     87,534
          0.1875              300,000                  5.8 years                      120,000
          0.75              1,785,000                  4.0 years                    1,331,500
          1.25                420,000                  4.8 years                      294,000
          1.75                 95,000                  4.6 years                       62,000
          3.00                306,000                  5.4 years                      116,000
</TABLE>

During the years ended December 31, 2000 and 1999, the Company  granted  options
to purchase  155,000  and 890,000  shares of common  stock,  respectively,  with
exercise  prices  below  the  estimated  market  value on the  measurement  date
resulting in $193,750 and $492,500, respectively, of deferred compensation. This
deferred  compensation has been recorded as a component of stockholders' deficit
and will be  amortized  over  the  vesting  period  of the  underlying  options.
Amortization of deferred  compensation expense totaled $403,032 and $302,957 for
the years ended December 31, 2000 and 1999, respectively.

Had  compensation  cost for the  Company's  options  granted to  employees  been
determined  based  on the fair  value at the  grant  dates  consistent  with the
alternative method set forth under SFAS No. 123, net loss and net loss per share
would have  increased  to the pro forma  amounts  indicated  below for the years
ended December 31, 2000 and 1999:


                                      F-21
<PAGE>


<TABLE>
<CAPTION>
                                                                 2000                  1999
                                                           ------------------ ------------------------
Net Loss:
<S>                                                        <C>                <C>
    As reported                                            $  (4,882,913)     $      (1,468,317)
    Pro forma                                                 (5,474,889)            (1,631,892)
Basic and diluted net loss per common share:
    As reported                                            $       (0.23)     $           (0.07)
    Pro forma                                                      (0.26)                 (0.08)
</TABLE>


The fair market  value of the stock  options was  estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions  for  grants  during the years  ended  December  31,  2000 and 1999:
risk-free  interest rate of 6.5% and 5.0%; expected dividend yield of 0% and 0%;
volatility  of 60% and 0%; and an expected exercise life of 5 years and 5 years,
respectively.  The expected  volatility  for the option  grants  during the year
ended  December 31, 1999 was assumed to be 0% because the Company was  privately
held and there was no market for its common stock.

During the year ended  December 31,  2000,  the chief  executive  officer of the
Company  granted  a right to an  employee  to 6,000  options  held by the  chief
executive  officer.  The right has an  expiration  date of June 15,  2004 and is
exercisable  after June 15,  2001 at an exercise  price of $1.25 per share.  The
Company  recorded a capital  contribution  and  compensation  expense of $12,381
related to the grant of this right.  The estimated  fair value of the options to
purchase  common stock was  determined  using the  Black-Scholes  option pricing
model with the  following  assumptions:  expected  exercise life of three years,
risk free interest rate of 5.92%,  expected  dividend yield of 0% and volatility
of 60%.


NOTE 12 - WARRANTS

In connection  with a private  placement  offering (see Note 10) during the year
ended December 31, 2000, the Company issued warrants to purchase  412,834 shares
of common stock at an exercise  price of $4.50 per share.  The  warrants  became
exercisable on the date of issuance and expire on December 31, 2001.

In connection  with the issuance of the Series A preferred stock during the year
ended  December  31, 2000,  the Company  issued  warrants to purchase  2,000,000
shares of common stock at an exercise price of $2.25 per share. The warrants are
exercisable  from November 16, 2001, or earlier upon the  occurrence of an event
of default or a change in control  and are  exercisable  through  May 16,  2004.
Aspen has agreed to surrender  all of the warrants  for  cancellation,  provided
that (i) the Company has redeemed  all of the Series B preferred  stock (ii) all
of the terms of the second amendment agreement have been met; and (iii) no event
of noncompliance  has occurred.  The warrants may be exercised by paying for the
underlying  shares of common  stock in cash or by means of a cashless  exercise,
whereby,  if  applicable,  the requisite  number of shares of common stock to be
issued on such exercise would be reduced as if they had been sold and the excess
proceeds  applied to cover the exercise price of the remaining  shares of common
stock.  Additionally,  the warrants contain  provisions that protect the holders
thereof  against  dissolution  by adjustment of the exercise price per share and
the number of shares  issuable  upon  exercise  thereof upon the  occurrence  of
certain  events  including  issuances of common stock (or options or  securities
convertible,  exchangeable or exercisable into common stock) at less than market
value, stock dividends,  stock splits, mergers, sale of substantially all of the
Company's assets, and for other extraordinary events; provided, however, that no
such  adjustment  shall be made upon,  among  other  things (i) the  issuance or
exercise of options or other  securities  under employee  benefit plans (ii) the
sale or exercise of outstanding  warrants,  or (iii) the conversion of shares of
the Company's preferred stock to common stock.



                                      F-22
<PAGE>

The Company is required to reserve  shares of its common  stock,  solely for the
purpose of issuance upon the exercise of all outstanding warrants.


NOTE 13 - INCOME TAXES

The following  presents the components of the Company's net deferred  income tax
assets and liabilities at December 31, 2000:


<TABLE>
<CAPTION>
Deferred Income Tax Assets:
<S>                                                             <C>
  Net operating loss carryforwards                                 1,998,569
  Loss on investment in marketable securities                         94,018
  Non-cash stock based compensation                                  301,573
  Accrued liabilities and allowances                                  47,120
                                                                ----------------
     Gross Deferred Income Tax Assets                              2,441,280
                                                                ----------------
  Valuation allowance
                                                                  (2,342,715)
                                                                ================
        Net Deferred Income Tax Assets                          $     98,585
                                                                ================
Deferred Income Tax Liabilities:
    Depreciation                                                $      8,803
    Contributed securities                                            89,762
                                                                ----------------
     Total Deferred Income Liabilities                                98,565
                                                                ================


</TABLE>

The valuation  allowance for deferred income tax assets  increased by $1,736,945
and $543,372  during the years ended December 31, 2000 and 1999. The Company has
net operating  loss carry forwards of  approximately  $5,407,000 at December 31,
2000 that, if unused, expire in years 2013 through 2015.

The benefit from income taxes  consisted  of the  following  for the years ended
December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                 2000            1999
                                                            --------------- ---------------
             Deferred Income Tax Benefit:
<S>                                                         <C>             <C>
                 Federal                                    $  1,601,796    $    470,534
                 State                                           135,149          72,838
                 Change in valuation allowance                (1,736,945)       (543,372)
                                                            =============== ===============
                    Net Deferred Income Tax Benefit         $          -    $          -
                                                            =============== ===============
</TABLE>

The  following  is a  reconciliation  of the income tax benefit  computed at the
federal  statutory  tax rate with the  provision  for income taxes for the years
ended December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                 2000             1999
                                                            ---------------- ----------------
<S>                                                         <C>              <C>
             Statutory federal income taxes                 $  1,660,190     $    499,228
             State income taxes, net of federal income
               tax benefit                                       127,002           48,454
             Non-deductible goodwill amortization                (48,844)               -
             Other                                                (1,403)           4,310
             Change in valuation allowance                    (1,736,945)         543,372
                                                            ================ ================
                    Benefit for income taxes                $          -     $          -
                                                            ================ ================
</TABLE>