U. S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934 (FEE REQUIRED)

                   For the Fiscal year ended December 31, 1997

                                       OR

[ ]  TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
     1934 (NO FEE REQUIRED)

                           Commission File No. 1-12848

                            CROWN LABORATORIES, INC.
                 (Name of small business issuer in its charter)

                 Delaware                                      75-2300995
        (State or other jurisdiction                        (I.R.S. Employer
      of incorporation or organization)                   Identification Number)

             6780 Caballo Street                                 89119
               Las Vegas, NV                                   (Zip Code)
(Address of Principal Executive Offices)

         Issuer's Telephone Number, including area code: (702) 696-9300

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

                        Title of each class:      Common
   Name of each exchange on which registered:     The Pacific Exchange

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

                                 Not Applicable

Check  whether  the issuer  (1) filed all the  reports  required  to be filed by
Section 13 or 15(d) of the  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 in this form, and no disclosure will be contained, to the best of
the  registrant's  knowledge,  in  definitive  proxy or  information  statements
incorporated  by reference  in Part III of this form 10-KSB or any  amendment to
this form 10-KSB. [ X ]

State issuer's revenue for the most recent fiscal year:  $189,070

The aggregate value of the Common Stock held by  non-affiliates  on December 31,
1997 was  $12,580,030.  As of December 31, 1997 there were 25,106,060  shares of
Crown Laboratories, Inc., Common Stock, $.001 par value outstanding.


<PAGE>


                                     PART I


Item 1.  Description of Business

General

The Company is engaged in the  development  of, and intends to  manufacture  and
market, a proprietary  line of  pharmaceutically-balanced  nutritional  products
designed for the special  needs of  residents  in nursing  homes and patients in
hospitals.  Generally,  these individuals are over age 70, and prefer foods that
are easy to ingest, flavorful, easily digestible and nutritionally complete. The
Company's  products  will  be  provided  in  aseptically-sealed,  ready-to-drink
packages. Product formulations are designed to provide a maximum of nutrient and
caloric support in easily  consumable  forms. The Company  currently  intends to
offer four liquid  nutritional  products  and 26  dry-mixed  products for use by
individuals with dietary restrictions, including low sodium and diabetic diets.

The  Company's  liquid  nutritional  product line will consist of both  standard
products for nursing homes (nutritional  supplements and milkshake-type products
in a variety  of  flavors)  as well as  specialized  products  targeted  towards
patients with kidney dysfunction and tube feeding needs.

On June 25, 1996, the Company  received  approval for its aseptic  manufacturing
and  filling  equipment  from  the  U.S.  Food & Drug  Administration  (F.D.A.).
Commissioning  of the  equipment  is  required by the F.D.A.  The  commissioning
process began on April 13, 1995, with the Company working with the National Food
Laboratories  (the Process  Authority)  to review its  manufacturing  equipment,
manufacturing   procedures   and   operating   manuals   and  to   monitor   the
bacteriological  kill tests for compliance with applicable federal  regulations.
The  National  Food  Laboratories  is an  international  food and  research  and
development  organization  with  laboratory  facilities  in Dublin,  California;
Washington,  D.C.; and Seattle,  Washington and is a wholly-owned  subsidiary of
the National Food Processors Association.

Since  that time,  the  Company  has been  involved  in  modifying  its  product
formulation  and  aseptic  packaging   equipment  to  support  commercial  level
production in anticipation of its entry into the market.

The  Company  has  entered  into two  consulting  agreements  which  provide for
customer  introductions to major potential purchasers of the Company's products.
The first  contract  calls for a fixed cash fee of $40,000.  This amount will be
amortized ratably as the customer introductions are made, presently estimated to
cover a 24 month period.  The other  contract  calls for the  consultant to make
introductions and follow-up calls to 7 major potential  accounts over the next 4
years.  The consultant was granted 180,000 shares of the Company's  Common Stock
as compensation for the agreement.  The value of these shares ($225,000),  based
on the market  price of the shares at the time of grant  ($1.25 per  share),  is
being expensed ratably over the life of the contract.

Recent Significant Developments

Crown  Laboratories,  Inc. (the Company),  has suffered  substantial  decline in
financial  performance in recent months and is currently exploring  alternatives
for  maintaining  adequate  liquidity and longer term funding with its principal
financial  advisers.  There can be no assurances that adequate liquidity or long
term  funding  will be  restored  or  secured  or that there will not be further
significant decline in the Company's business and financial condition.  See Item
6 Management's Discussion and Analysis.

Between  September  1, 1997,  and April 30,  1998,  the Company  entered in to a
series of equity and short-term debt financing  transactions designed to improve
the Company's liquidity and financial flexibility.



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<PAGE>

On January 5, 1998,  the  Company  raised  $150,000  in a  Regulation  S sale of
prepaid, mandatory exercisable warrants to purchase Common Stock in two offshore
investors who held similar warrants.  The new warrants may be exercised in whole
or in part in amounts over $10,000 of the principal  amount of the warrants,  at
any time,  until  expiration on September 28, 1999.  The exercise price for each
share of  Common  Stock  shall be equal to the  lower of (x) 80% of the  average
closing price of the Common Stock for the one business day immediately preceding
the issue date of the  warrant or (y) 80% of the  average  closing  price of the
Common Stock for the one business day immediately  preceding the date of receipt
by the Company of the notice of  exercise,  as reported on the  principal  stock
exchange on which the Company's Common Stock is traded.

On January 28,  1998,  the Company  borrowed  $43,000  from  Herbert  Altman,  a
director  of the  Company.  The loan rate is 9%, is due and  payable  on May 27,
1998,  and has been  extended  until June 15, 1998.  Warrant  coverage is 43,000
warrants at 110% of the market price of $.3750.  The warrants expire on June 15,
2001.  Additionally,  the expiration date on 200,000 prior warrants was extended
from September 4, 1999 to September 4, 2004.

On February 9, 1998, the Company  borrowed  $30,000 from Lee Hooker, a director.
The loan rate is 9% per annum.  The original  note due date has been extended to
June 15, 1998.  Warrant  coverage is 30,000 warrants at 110% of the market price
of $.25. The warrants expire in three years.

On February 13, 1998, and February 17, 1998, the Company  received  $30,000 from
UFH Endowment Ltd. and $30,000 from Austost Antalt Schaan, respectively from the
sale  of  Regulation  S  Prepaid  Mandatory   Exercisable  Warrants  which  were
convertible at a discount to the market at the time of conversion.

On February 25, 1998,  the Company  borrowed  $120,000  from Herbert  Altman,  a
director  of the  Company.  The loan rate is 9%, is due and payable on March 24,
1998 and is unsecured.  The note has been extended until June 15, 1998.  Warrant
coverage is 120,000 warrants at 110% of the market price of $.25 on February 25,
1998. The warrants are valid for three years.

On March 18, 1998, the Company borrowed $20,000,  $15,000 and $14,000 from three
directors,  Lee Hooker, Herbert Altman and Arthur Berkowitz,  respectively.  The
loan rate is 9% per annum,  is due and  payable  on April 14,  1998 and has been
extended until June 15, 1998 and has 100% warrant coverage of 20,000, 15,000 and
14,000  warrants,  respectively,  for the loans at 110% of the  market  price of
$.3125 on March 18, 1998. The warrants are valid for three years.

On March 20, and March 27, 1998,  the Company  borrowed  $100,000 and  $250,000,
respectively from Pelican Partners V, a Pennsylvania Partnership. Art Berkowitz,
a director, advanced $50,000 of the above loan and is therefore allocated 50,000
of the 350,000  warrants.  The loan is due and payable no later than July 20 and
July 27,  1998,  respectively.  The rate is 10% per  annum and is  secured  by a
second  lien  position  on  certain  Company  equipment.  The loan  has  warrant
coverage,  350,000 warrants at 110% of the last price quoted of $.25 on March 20
and March 27, 1998, respectively. The warrants expire in three years.

On April 3, 1998,  the  Company  borrowed  $25,000  from  Pelican  Partners V, A
Pennsylvania Partnership.  The loan rate is 10% per annum and is due and payable
on the earlier of 120 days or upon the funding of bridge loan financing. Warrant
coverage  is 25,000  warrants  at 110% of the market  price of $.375 on April 4,
1998. The warrants are valid for three years.

On April 21, 1998, the Company  borrowed $32,000 from Herbert Altman, a director
of the  Company.  The loan rate is 9% and is due and payable on May 24, 1998 and
is unsecured. The note has been extended until June 15, 1998. The Company issued
32,000  warrants at 110% of the market price of $.25. The warrants are valid for
three years with certain registration rights.



                                       3
<PAGE>

On May 4, 1998,  the  Company  borrowed  $14,000  from  Joseph C.  Avitabile,  a
shareholder.  The loan rate is 9% per  annum  and is due on or  before  July 30,
1998. The Company will issue 14,000  warrants for the loan at 110% of the market
price on May 4, 1998, of $.20. The warrants expire three years from May 4, 1998.

On April 1,  1998,  the  audit  committee  of the  Board of  Directors  of Crown
Laboratories,  Inc., upon the  recommendation  of the management of the Company,
voted (I) to  dismiss  the  Company's  independent  public  accountants,  Arthur
Andersen  LLP,  and (II)  engage BDO Seidman  LLP as the  Company's  independent
public accountants for the year ended December 31, 1997.

The reports issued by Arthur Andersen LLP on the Company's financial  statements
for the each of years  ended  December  31,  1996  and 1995 did not  contain  an
adverse opinion or a disclosure of opinion and were not qualified or modified as
to uncertainty,  audit scope, or accounting  principles,  except that the report
for the year ended December 31, 1995 included an explanatory paragraph regarding
the ability of the Company to continue as a going concern.

For each of the Company's two most recent fiscal years and  subsequent  thereto,
the Company  had not  consulted  with BDO  Seidman LLP on any matter  concerning
either (I) the  application of accounting  principles to a completed or proposed
transaction,  or (II) the type of audit  opinion  that might be  rendered on the
Company's financial statement. Form 8K was filed by the Company on April 1, 1998
announcing the appointment of the new auditors.

Additionally  on April 1, 1998,  the  Company  filed Form 12b-25  requesting  an
extension of the  Company's  10K filing date from March 31,  1998,  to April 15,
1998. The extension was required due to the change in the Company's  independent
public  accountant.  Consequently,  the Company has not been able to compile the
requisite financial data necessary to enable the Company to have sufficient time
to complete the Company's  financial  statements and exhibits by March 31, 1998,
which is the required filing date for the Company's annual report on Form 10-KSB
without unreasonable effort and expense.

On April 7, 1998, the Company  reached an agreement with EWE Trust Number 1, the
lessor of certain  production  equipment,  such that the Company  will provide a
waiver of default to the EWE Trust for having  gone  outside the  agreement  and
pledged  the assets in return  for a six month  loan of $77,000 at 9%  interest.
Warrant coverage will be 77,000 warrants at 110% of Crown's Common Stock closing
price on April 3, 1998. The warrants expire in three years.  The proceeds of the
$77,000 was disbursed as follows:  Past due  payments,  to EWE Trust No. 1 as of
December  31,  1997,   and  as  of  April  7,  1998  were  $6,502  and  $19,506,
respectively.  Four payments,  through August 1998,  were prepaid for a total of
$26,008 and $25,000 was advanced to the Company. Craig Nash, the Chief Executive
Officer of Crown,  will  personally  guarantee  $25,000 of the $77,000 loan. Mr.
Nash received no compensation for the risks of such commitment.

Additionally,  the  amount of  warrants  under the  Option  Agreement  may under
certain  circumstances,  if not  converted,  increase up to 1,932,632  warrants.
Secondly,  the  exercise  price of the warrants was reduced to $0.56 per warrant
subject  to the  Company  having a first  right of  refusal  to  repurchase  the
warrants  within a 15 day notice period.  The mandatory  conversion  price would
move from  $3.50 to $0.85,  and would be subject to  mandatory  exercise  if the
price  remained at $0.85 for seven  consecutive  days.  The Company also has the
right to repay the  principal  amount of the lease of $918,000 and reclaim up to
1,080,000 warrants or allow the market to absorb the then registered shares such
that the Trust  recoups its  original  investment  of  $918,000  and retains any
additional  shares as the result of issuing  more lower  price stock so that the
original  investment is recoupled by the Trust, within a six month period, as if
the amount was repaid at a minimum of $0.86 per share.

On May 5, 1998,  the Company signed a three year contract to be part of McKesson
General Medical's  corporate  product strategy and become a program vendor.  The
program  commenced  on April 1, 1998,  and  expires on March 31,  2001.  Crown's
corporate aligned status designates to General Medical's sales organization that
the vendor is in compliance with their terms and conditions,  and will remain as
a 


                                       4
<PAGE>

continued  source of product on their database.  McKesson General Medical is one
of the nations largest nursing home  distributors  serving  approximately  5,200
nursing homes from over 40 distribution warehouses located throughout the United
States.

The Company  concluded  agreements  with vendors on May 11, 1998,  for shares of
common stock concerning past services.

The Private  Securities  Litigation  Reform Act of 1995 provides a "Safe Harbor"
for forward looking statements.  Except for the historical information contained
in this Annual Report on Form 10-KSB for the year ended  December 31, 1997,  the
matters discussed herein include forward-looking information.

Such  forward-looking  statements,  in  addition  to  information  contained  in
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations  and  elsewhere  in this Annual  Report,  are based on the  Company's
current expectations and are subject to a number of risks and uncertainties that
could  cause  actual  results  in the  future to differ  materially  from  those
projected or implied in any forward-looking statements made by, or on behalf of,
the Company.  These risks and uncertainties include, but are not limited to, (i)
the anticipated growth of the Company's  revenues from development,  manufacture
and sale of the  Company's  products,  (ii)  the  anticipated  expansion  of the
Company's international activities, (iii) the impact of competitive products and
pricing, (iv) approval of the Company's products and manufacturing  equipment by
government agencies such as the United States Food and Drug Administration,  (v)
the availability and terms of financing from other financing sources to fund the
Company's operating losses, the willingness of existing creditors to continue to
forbear from  enforcing  available  rights and remedies and to grant  additional
waivers of  potential  defaults.  Given these  uncertainties,  stockholders  and
debtholders  are  cautioned not to place undue  reliance on any  forward-looking
statement  contained  herein,  and (vi) other risks  detailed below and included
from time to time in the Company's other SEC reports and press releases,  copies
of which are available from the Company upon request.  The Company disclaims any
obligation to update such factors or  forward-looking  statements or to publicly
announce the results of any revisions to any of the  forward-looking  statements
contained herein or to reflect future events or developments.

When used in this Annual Report,  the words  "intend",  "estimated",  "believe",
"expect",  and similar  expressions  which are not  historical  are  intended to
identify forward-looking statements. The Company assumes no obligation to update
any forward-looking statements contained herein or that may be made from time to
time by, or on behalf of, the Company.  References  made in the Annual Report on
Form  10-KSB to  "Crown",  the  "Company",  or the  "Registrant"  refer to Crown
Laboratories, Inc.

The Market

The need and demand for nursing home services are  increasing as a direct result
of the overall aging of the United States population.  The result of this longer
life  span has been an  increase  in the  number  of  people  with  debilitating
conditions that make the tasks of day-to-day living difficult to achieve, and an
overall change in the  demographics of the U.S.  population.  In relative terms,
the fastest growing segment of the population is individuals over the age of 85.
This group has tripled  since 1960 and is expected to double again over the next
20 years.

The nursing home  industry has been a primary  beneficiary  of this  demographic
shift.  These trends should continue to increase  annually over the next several
years.  Presently,  there are  approximately  20,000 nursing homes in the United
States with an average of 100 beds per nursing  home.  Today,  the nursing  home
industry is a  multi-billion  dollar  business,  with one of the highest  growth
rates in expenditures among all health services. A nursing home stay is a common
event for the elderly  population  in America.  Although  only 5% of the elderly
reside in nursing  homes at any point in time,  the lifetime  risk of entering a
nursing home is approximately 30%. One out of every five individuals living past
the age of 65 and one of  


                                       5
<PAGE>

three aged 85 or older will spend some time in a nursing home. The median age of
nursing home residents is now 81 years.

As a result of the aging of society  and  changes  in  hospital  practices,  the
character  of  nursing  homes  has  changed  dramatically  in the past 10 years.
Nursing  homes are now complex  institutions  caring for people who,  because of
severe incapacities, need both sub-acute and chronic care.

The costs of nursing home care are increasing faster than inflation. At present,
approximately  65% of the cost of care is paid for by  state  Medicare  programs
with  the  remaining  35%  paid  for  by  private   insurance  or   individuals.
Increasingly,  insurance  providers are  attempting to control costs by limiting
hospital  coverage,  which has resulted in a 40% reduction in the length of stay
at the hospital.  This encourages early transfer from acute care facilities into
long term care  facilities.  The result is that  nursing  home  populations  are
becoming more disabled with increasing  acuity requiring a higher level of care.
As care increases,  the use of  pharmaceutical  food supplements also increases.
The Company  estimates  that over fifty  percent of the nursing home  population
receives a liquid supplement at least two times per day.

Products

The Company has developed and intends to market the following products:

Liquid Products. Upon completion of its manufacturing facility, the Company will
offer a line of liquid specialty  dietary-control  products in an aseptic liquid
packaged form in a variety of flavors.

         WinLac(TM)  -  A  Complete   Supplement.   WinLac  is  a   lactose-free
         nutritional  supplement  which  fulfills  the  general  supplementation
         requirements of long term nursing and acute care facilities.  WinLac is
         high in protein and lactose-free, since most elderly individuals cannot
         break down the sugars found in milk  products  (lactose).  A four-ounce
         serving of WinLac  provides 200 calories and  approximately  20% of the
         United States Recommended Daily Allowance of vitamins and minerals.

         MultiCal(TM) - A Milk Shake Substitute. MultiCal is designed to replace
         the milk shake  which is a staple  food  product in long term and acute
         care health facilities.  Typically,  healthcare  facility kitchens make
         milk  shakes for  patients  since they  contain  most of the  nutrients
         recommended by the government,  have an agreeable taste and are easy to
         ingest.  These milk shakes are usually made from staple  ingredients in
         the facility kitchen.  MultiCal replaces the scratch  preparation shake
         thus   providing  the  healthcare   facility  with  a   ready-to-drink,
         scientifically-tested formulation without the necessary preparation and
         clean  up.  The  Company's  anticipated  production   efficiencies  and
         proprietary  formulation  permit  MultiCal  to be  sold  to  healthcare
         facilities  at a cost  which  is  often  less  than  that of a  scratch
         preparation milk shake.

         Renalite(TM)  -  Kidney-Deficient  Product.  Renalite  is  specifically
         designed as a food supplement for use by patients with decreased kidney
         function.  Decreased kidney function limits the amount of fluids,  salt
         and proteins that can be consumed and eliminated by the body.  Renalite
         is a liquid formulation  designed as a food supplement  containing both
         high caloric  intake and the  necessary  vitamins and  minerals.  Other
         product  benefits  include  limited  volume of fluid devoid of unwanted
         proteins, sodium, potassium and chloride. Renalite is also designed for
         consumption by diabetics, which comprise 50% of all renal patients.

         Entralite(TM) - Tube-Feeding Product under review.

Dry-Mix  Products - The Company has developed 26 dry-mix products to be used for
protein enhancement, caloric enhancement, low sodium and sugar free diets of the
geriatric  population.  These  dry-mix  products  have  been test  marketed  and
clinically  tested . The Company's  dry-mix  nutritional  products,  packaged in
form,  fill and seal bags,  include a protein  and  carbohydrate  supplement,  a
complete instant


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<PAGE>

breakfast supplement,  a full assortment of low sodium, sugar free items as well
as no-bake egg custard, whipped topping and texture enhancement products.

Future  Product  Development.  Management  anticipates  adding new  flavors  and
textures to its nutritionals product line. In addition,  the Company anticipates
developing   additional   formulations   utilizing  its   proprietary   emulsion
technologies to address specific medical situations.  There can be no assurances
that the Company  will be  successful  in  developing  new products or, if it is
successful  in  developing  new  products,  that the  products  will  meet  with
acceptance in the marketplace.

Patient Benefits

The Company's products provide specific patient benefits:

          Scientifically-Formulated. The Company's formulations have been tested
          under controlled conditions for their particular applications. Product
          quality is closely  monitored in the  Company's  laboratory  to assure
          consistently  reliable product performance which generates predictable
          favorable results when prescribed.

          Aseptically-Processed.   All  of  the  Company's  liquid   nutritional
          products  will  be  aseptically  processed  and  packaged,   providing
          extended shelf life without the need for refrigeration.

          Concentrated  Nutrition.  The Company's special  formulations and more
          efficient  nutrient  composition  make it possible  to serve  patients
          smaller,  more compact portions that do not leave them feeling full or
          bloated. As a result,  these supplements  compliment a solid food diet
          rather than interfere with it.

          Ready-to-Drink.  The  Company's  liquid  products  will be packaged in
          ready-to-consume  "Peel and Drink(TM)"  four-ounce  plastic cups which
          need no  refrigeration.  They can then be stored next to patient  care
          stations to be used whenever a patient is hungry or thirsty.

Healthcare Facility Benefits

The  Company's  products  were  designed  to be  efficient  for  the  healthcare
facilities to administer. Specific benefits include:

          Clinically-Proven. The Company has conducted several empirical studies
          working  in  conjunction   with  nursing  homes.   The  study  results
          demonstrated  that patients using the Company's  products receive more
          nutrition  and gained  more  weight  than with  competitive  products.
          Increases in serving intake over competitive  products ranged from 50%
          to 95%. The Company  attributes  this increase to two factors.  First,
          the volume of the  serving is more  closely  aligned to the  patient's
          ability to consume a supplement. Second, the Company's products simply
          taste better. On average,  during the studies,  the patients using the
          Company's  products  gained 4.3 pounds per month  versus a 1 pound per
          month  weight gain for those  consuming  competitive  products.  These
          results are  significant  since weight gain is considered a key factor
          in determining the success of patient nutrition programs.

          Increased  Nutritional  Density.  The Company designed its products to
          provide  increased  nutritional  density since the patients studied in
          their clinical tests could not consume a sufficient  volume of food to
          both support  ongoing  metabolism and maintain  health.  The Company's
          four-ounce  liquid products  contain  essentially the same nutritional
          density in  proteins,  minerals  and  vitamins as eight  ounces of the
          competitive brands.


                                       7
<PAGE>

          Reduced  Waste.  The  Company's  liquid  products  will be packaged in
          convenient  ready-to-drink  four-ounce servings. The Company's studies
          show that,  in most cases,  patients  consistently  consume up to four
          ounces of a liquid food supplement per serving.  Competitive  products
          are generally  packaged in eight ounce  portions with at least half of
          the product going to waste on average.

          Cost  Effective.  In addition to the product waste  issues,  discussed
          earlier,  the Company's  products  will normally be consumed  directly
          from the four ounce disposable cup,  eliminating the need for washing,
          rinsing,   drying   and   storing   additional   serving   containers.
          Additionally,   the  Company's  light-weight  plastic  containers  and
          reduced  serving size will result in lower  freight costs which can be
          passed along to the customer.

          No  Refrigeration  Required.  Government  regulations,  requiring that
          scratch preparation milk-based products be carefully refrigerated, are
          closely  monitored  and  strictly  enforced by the various  regulatory
          agencies. Failure to follow proper temperature requirements can result
          in the imposition of penalties to the facility. The Company's products
          will be  stored  in  aseptically-sealed  containers  that  require  no
          refrigeration during transport, storage or prior to serving.

Marketing Strategy

Unlike the Company's major competitors (Ross Laboratories, Inc. and Mead Johnson
Nutritionals,  who together control an estimated 93% of the market), the Company
will  focus its  primary  efforts on the  nursing  home  segment of the  medical
nutritionals  market.  Management  believes that by concentrating its efforts on
addressing the needs of the nursing home market,  developing appropriate product
formulations,  packaging formats and marketing strategies, it will be successful
in  penetrating  and gaining a  significant  share of this market which has been
under-serviced by competition.

The  Company  also   intends  to  expand  its   business   through  new  product
introductions   utilizing  its   proprietary   production  and  aseptic  filling
technologies as well as through expansion into international  markets. There can
be no assurances that the Company will be successful in either of these areas.

The nursing home market is presently undergoing consolidation with large nursing
home chains  acquiring  one another in an attempt to obtain  economies of scale.
The Company's  management  has a significant  number of  long-standing  business
relationships  with the senior  management of these major accounts.  The Company
believes that this presents  significant  opportunities  for it since  obtaining
only one or two major  accounts or portions of their total business will provide
enough sales volume to achieve  break-even  levels.  There can be no  assurances
that the Company will be successful in obtaining  sufficient  volumes from these
major accounts, or if they are achieved,  that the profit margins resulting from
these sales will be sufficient to provide break-even  operations.  The Company's
future sales may be dependent on a few major accounts.

The  Company  has  signed a major  marketing  and  distribution  agreement  with
McKesson  Corporation's  Health Care Unit. This agreement will allow the Company
not only to penetrate  the nursing  home market,  but also the hospital and home
health care  markets.  The agreement  calls for McKesson to  distribute  Crowns'
products to all three  market  segments  over a  three-year  period with renewal
options.

Competition

The pharmaceutical nutritional product industry's annual revenue is estimated by
the Company to be  approximately  $4 billion in the United States  alone.  Three
companies currently dominate the market: Ross Laboratories,  Inc. (a division of
Abbott Laboratories,  Inc. (NYSE)),  Mead Johnson  Nutritionals,  (a division of
Bristol-Meyers-Squibb,  Inc.  (NYSE)),  and  Novartis,  Inc.,  a  Pharmaceutical
Company.  Clintec,  (a division of Nestle  Foods),  competes  with tube  feeding
products.



                                       8
<PAGE>

All of these  companies  are much larger and better  financed  than the Company,
have established  products and an established customer base, and can, therefore,
devote more  resources to research and  development,  production  and  marketing
activities.  Further,  these  companies may respond  vigorously to the Company's
entry into the market by targeting  products to nursing  homes or  repositioning
their product lines in more concentrated serving sizes.  Therefore,  the Company
may not be a  significant  factor in these  markets for the near or  foreseeable
future.  Further, due to the size of the major nursing home and hospital chains,
the Company may find its sales concentrated initially in a few large accounts.

Manufacturing

Manufacturing  of dry mix products  entails the purchasing of raw materials such
as sugar and non-fat dry milk,  measuring the ingredients based on formulations,
mixing and finally,  packaging.  The Company will check its products for quality
and  moisture  content  at its own  in-plant  laboratory  facility.  The dry mix
packaging process involves using rolls of pre-printed foil which are run through
a special  form,  fill and seal machine that makes the  envelope,  fills it with
product and seals it for shipment.

The liquid packaging process is more complex which has required the construction
of a liquid  processing  facility.  The Company has acquired and  installed  the
major components required for the production of its products in its plant in Las
Vegas, Nevada (see Item 2 - "Description of Property").

Product Protection

The Company  regards the  formulations of its products to be proprietary and has
filed for a patent  covering  the  formulation  and  production  process for its
primary liquid nutritional product, WinLac(TM). The Company has also trademarked
its Company  name,  its liquid  nutritional  product  names as well as "Peel and
Drink(TM)" and "The Nutritional Difference(TM)". There can be no assurances that
any patent will be issued.  Currently, the Company exerts substantial efforts to
protect  trade  secrets  and to  keep  formulas  and  related  process  know-how
confidential.  Currently,  the Company  requires  each of its  employees to sign
confidentiality   agreements  as  a  condition  of  employment  to  protect  its
formulations and production know-how.  However,  there can be no assurances that
the Company will be successful in these efforts.

Regulatory Compliance and Approval Required for Operation

The Company's  operations  are regulated  principally  by the U.S. Food and Drug
Administration,  (F.D.A.),  although  state and local  regulations  also  apply.
Failure to comply with regulatory  requirements  could result in fines and other
penalties,  including  cessation of  production.  Additionally,  there can be no
assurance that regulatory  requirements will not change or that the Company will
be able to comply with changes at an acceptable cost, if they were to occur.

Regulatory approval is required for the manufacturing process, which principally
entails certification of the processor and the aseptic filler/packaging machine.
The manufacturers have warranted that their equipment meets F.D.A.  requirements
for aseptic  machinery.  The  manufacturer  of the  processor  has had  numerous
processors  approved in the United  States.  The filler  manufacturer  has never
received  approval in the United States because this type of filler is the first
of its  kind  made  by it  for a U.S.  manufacturer.  However,  after  extensive
modification  by the  Company,  the  filler  as  well as the  facility  received
complete F.D.A. certification on June 25, 1996.

Failure to meet  regulatory  approval  will  preclude the  Company's  ability to
manufacture and ship its products.


                                       9
<PAGE>

Sources of Supply

There are alternative  sources of supply for the raw materials  required for the
manufacture  of the Company's  products.  The Company  considers the sources and
names of its principal suppliers to be confidential.

Employees

Currently, the Company has 26 full-time employees.  There are presently no labor
contracts in effect with the Company.

Organization

Crown Laboratories,  Inc. ("the Company") was incorporated on February 23, 1989,
in Delaware, as Industrialistics,  Inc. In November 1991, Industrialistics, Inc.
changed its name to Crown Laboratories, Inc.

Item 2.  Description of Property

The Company presently  occupies a 62,000 square foot  manufacturing  facility in
Las Vegas,  Nevada  for the  purpose of  manufacturing  its line of  nutritional
products.  The  Company  selected  its Las Vegas  location  based on a number of
factors. The State of Nevada does not assess either corporate or personal income
taxes and is a "right to work" state.  It has favorable  freight rates resulting
from the large volume of shipments into the casino trade with Las Vegas' limited
manufacturing  providing little outbound trucking demand and the climate is also
very  favorable  for shipping on a year round basis.  The Company had obtained a
twelve  month  option  to  purchase  its  current  manufacturing   facility  for
$3,185,000. As of December 31, 1997, the option expired.  Currently there are no
plans to renew the option.

Item 3.  Legal Proceedings

The  Company is  subject to normal  business  litigation  and claims  concerning
products and services  rendered to the Company.  The Company  believes  that the
outcome  of such  lawsuits,  claims  and  other  legal  matters  will not have a
material impact on the Company's consolidated financial position.

In  addition  to normal  business  litigation,  the  Company is  involved in the
following litigation:

Crown V.  Rolfenade  et al.,  was  filed by the  Company,  in  March  1995,  and
subsequently  amended  to  incorporate  all of the  defendants  "alter  egos" in
September 1995. The action is for breach of contract, misrepresentation,  fraud,
and alter  ego.  Rolfenade  warranted  that the  packaging  machine  would be in
compliance with F.D.A. requirements. The packaging machine was not in compliance
with  the  applicable   regulations,   and  the  Company  has  made  substantial
modifications to the filler to bring it into compliance.  The Company has served
all defendants  under the Hague  Convention.  Other defendants named in the suit
filed a Motion to Quash  Service,  which was lost.  Their  appeal to the  Nevada
Supreme Court was denied.  They have since filed an answer.  The Company  cannot
predict the outcome of its claims.  In January  1998,  an order was filed in the
District  Court  Clark  County  Nevada  granting  a motion for  Partial  Summary
Judgment in favor of Crown  Laboratories  against  International  Packaging  and
Processing  Systems,  Inc., and Karl  Fabricius.  The motion  included  specific
findings of misrepresentation,  fraud and alter ego. The award in favor of Crown
was for $21,664,323  plus costs and attorneys fees. Since that time, the Company
has been evaluating the award and trying to determine how much, if anything, the
Company is likely to recover. Presently, the Company cannot predict the ultimate
collectibility of its claims.


                                       10
<PAGE>

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

The annual meeting of  shareholders  was held on September 16, 1997 at the Monte
Carlo  Resort & Casino in Las Vegas,  Nevada.  At the  meeting,  an  election of
members of the Board of  Directors  of the  Company  was held and the  following
individuals  (comprising the entire membership of the Board) were elected to one
year terms.  Mr. Herbert G. Altman is a new member of the Board.  Mr. Vincent J.
Casella did not stand for reelection.

Member of the Board        Votes For         Votes Against           Abstention
-------------------        ---------         -------------           ----------

Craig E. Nash              14,611,495           35,500                 57,067
Scott O. Nash              14,611,495           35,500                 57,067
Herbert G. Altman          14,557,495           89,500                 57,067
Arthur M. Berkowitz        14,559,495           87,500                 57,067
Linda Carrick, Ph.D.       14,559,495           87,500                 57,067
Christopher Demetree       14,559,495           87,500                 57,067
Lee Allen Hooker           14,556,495           90,500                 57,067

Shareholders  also approved  amendments to the Certificate of  Incorporation  to
remove the  designations of the Company's Series A and Series B Preferred Stock,
Proposal Three.

To approve Proposal Three:

Shares For  14,610,533    Shares Against  65,200      Shares Abstaining   28,328
            ----------                    ------                          ------

Two other proxy items were  adjourned for 20 days pending  receipt of additional
votes by proxy.  These were a proposal to approve  amendments to the Certificate
of Incorporation which creates a classified board of directors and a second item
to approve the Crown Laboratories 1997 Incentive Plan.

On  October  7, 1997 the  Company  concluded  its  adjourned  Annual  Meeting of
Shareholders,  previously held September 16, 1997. As previously disclosed,  the
two proxy items  addressed at the meeting were a proposal to approve  amendments
to the  Certificate  of  Incorporation  which  creates  a  classified  board  of
directors  (Proposal One) and a proposal to approve the Company's 1997 Incentive
Plan (Proposal Four).

Proposal   Four,   the  Company's   1997  Incentive  Plan  was  adopted  by  the
shareholders, receiving majority approval by voting shares.

To approve Proposal Four - the Crown Laboratories, Inc. 1997 Incentive Plan:

Shares For  7,903,972     Shares Against  1,333,411   Shares Abstaining   16,457
            ---------                     ---------                       ------

Although Proposal One, the classified board amendments,  received  approximately
7.6 million  votes in favor,  it did not receive  the  majority  approval by the
shareholders of the Company's outstanding common stock and did not carry.

To approve Proposal One - the Classified Board Amendments:

Shares For  7,692,810     Shares Against  1,516,803   Shares Abstaining   44,227
            ---------                     ---------                       ------


                                       11
<PAGE>


                                     PART II


Item 5.  Market for Common Equity and Related Shareholder Matters

The Company's stock was listed on the American Stock Exchange,  Emerging Company
Marketplace  (AMEX ECM) on March 29, 1994.  It traded  under the symbol  CLL.EC.
Prior to that time, the Company's  stock was listed on the  Electronic  Bulletin
Board  (EBB) of the NASD.  The table below lists the low and high bid prices for
the stock for each quarter over the last two years.

<TABLE>
<CAPTION>
                                     Calendar 1997             Calendar 1996             Calendar 1997
                                     -------------             -------------             -------------
                                    Low        High           Low        High           Low        High
                                    ---        ----           ---        ----           ---        ----
<S>                                 <C>        <C>            <C>        <C>            <C>        <C>
1st Quarter  (AMEX ECM)             $0.81      $0.88          $1.63      $1.75            --         --

2nd Quarter  (AMEX ECM)             $0.56      $1.06          $1.63      $1.69            --         --

3rd Quarter  (AMEX ECM)             $0.75      $1.00          $1.19      $1.25            --         --

4th Quarter  (AMEX ECM)             $0.43      $0.93          $0.63      $0.81            --         --

4th Quarter  (Pacific)                --         --             --         --           $0.50      $0.50
</TABLE>

The source of the information, (summarized above), comes from the American Stock
Exchange for Amex quotes for 1996 and 1st,  2nd and 3rd  Quarters for 1997,  and
The Pacific Exchange quotes for 4th Quarter 1997.

The American  Stock  Exchange has  announced  that it will no longer  accept new
issuers for the Emerging Company Marketplace, but will continue trading existing
shares,  including the Company's.  Therefore,  over time,  the Emerging  Company
Marketplace  will cease to exist. The market for the Company's Common Stock must
be considered  limited and there can be no assurance  that a meaningful  trading
market  will  continue.  Stock sold by the  Company in private  placements  have
generally been below the then trading price on the American Stock Exchange.

On October 16, 1997, the Company's Board of Directors unanimously  determined to
withdraw  the  Company's  common  stock  from  listing on the  Emerging  Company
Marketplace  of the  American  Stock  Exchange  and notified the Exchange of its
intentions.  The Exchange  notified the  Company,  by letter dated  November 11,
1997, that it would not interpose any objection to the Company's application. On
November 17, 1997,  the Company  submitted its  application to the US Securities
and  Exchange  Commission  to  withdraw  its common  stock  from  listing on the
Emerging Company Marketplace.  The Company's stock has continued to trade on The
Pacific  Exchange  where the Company has been fully  listed  since  November 11,
1996.

On April 12, 1998, The Pacific Exchange (Exchange), notified the Company that it
was in violation of the Exchange's  financial  filing policies since the Company
had not filed its Form 10-K for the period ended December 31, 1997, by the March
31, 1998  deadline.  Further,  the Exchange  advised the Company that failure to
file the required  filings by May 15, 1998,  would result in the Company's stock
being suspended from trading on May 18, 1998.

The Company has notified the Exchange of its 8K filing referencing its change of
independent  public  accountants and request for extension of its filing date to
May 15, 1998. The Company is continuing to work with the Exchange to insure full
uninterrupted trading privileges.

During  1996  and  1997 the  Company  raised  $1.9  Million  and $736  Thousand,
respectively, in common equity financing through Private Placements.



                                       12
<PAGE>

There are approximately  2,000 beneficial Common Stock holders.  The Company did
not pay any dividends in the last two years and does not intend to pay dividends
in the foreseeable  future.  All available  working capital will be used to meet
the Company's expected growth.

The Company has entered into agreements with certain employees which provide for
the grant of Common Stock and stock  options (at an 85% discount to market price
as  of  their  date  of  employment)   which  vest  over  a  five  year  period.
Additionally,  the Company has entered into  consulting  agreements for investor
relations and other  services  which provides for the issuance of 50,000 options
to purchase the Company's Common Stock at an 85% discount to the market price of
the stock on the date of signing the agreement, and also the issuance of 180,000
shares of common stock.  Compensation expense relating to these Common Stock and
option grants is approximately $125,413 for the year ended December 31, 1997 and
$550,000 for the year ended December 31, 1996.

On April 9, 1997, the Company  announced that its Board of Directors  authorized
the expenditure of up to $500,000 for purchase of its common stock.  The Company
will make  purchases from time to time as market  conditions  permit and in such
amounts as it deems advisable.  Any Common Stock reacquired would be retained by
the Company as treasury stock. The authorization to make these purchases,  which
may be discontinued at any time, does not constitute a commitment on the part of
the Company to buy any specific  amount of its shares.  As of December 31, 1997,
the  Company  had  repurchased  591,400  shares of Company  stock for a total of
$446,778.

On March 7, 1997,  the Company  raised $3 million  through the sale  pursuant to
Regulation  S under the  Securities  Act of 1933,  as  amended,  of its Series E
Preferred  Stock.  The Series E  Preferred  Stock  imputes an average  effective
interest rate of 6% which is payable in shares of the Company's  Common Stock on
the  "Dividend  Dates",  (August  1, 1997 and  August  1,  1998).  The  Series E
Preferred  Stock is  convertible  into  common  shares at a rate equal to 10,000
divided by the market  value of the Common Stock  adjusted by a discount  factor
which ranges from 15% to 31%  depending on the time the shares are held from the
issuance date (the longer the stock is held, the deeper the discount, unless the
Common Stock price falls below $0.75, in which the discount no longer  applies).
Under this  conversion  formula,  as the Common  Stock price drops the number of
Common Shares into which Series E Preferred  Stock is  convertible  continues to
grow.  The  number is not  subject to a  ceiling.  A total of 200,000  five year
options to purchase the Company's Common Stock at $2.50 per share were issued to
two finders for their role in raising these funds.

Item 6:  Management's Discussion and Analysis and Plan of Operation

Results of Operations

The  Company's   independent  certified  public  accountants  have  included  an
explanatory  paragraph in their audit  report  accompanying  the 1997  financial
statements.  The  paragraph  states  that the  Company's  recurring  losses  and
negative working capital raise  substantial doubt about the Company's ability to
continue as a going  concern and caution that the  financial  statements  do not
include adjustments that might result from the outcome of this uncertainty.

The Company has been extensively engaged in research and development  activities
in order to commercialize its proprietary line of liquid  nutritional  products.
As a  consequence,  the Company has incurred and charged to expense  substantial
start-up costs in the engineering, design, construction, and modification of its
facility, production equipment, processes, and formulations.

The Company had total sales for the year ended  December  31, 1997 of  $189,070.
Dry-mix products represent $165,011 and $24,058 represents liquid products.  For
the year ended 1996 there were no sales.  For the years ended December 31, 1997,
and  December  31,  1996,  the  Company  incurred  losses  of  ($5,179,132)  and
($4,631,905)  respectively.  Higher losses in 1997 are attributable to increased
salaries associated with additional employees and higher operating expenses.  In
addition,  the Company incurred  


                                       13
<PAGE>

start-up expenses totaling ($1,633,720). The accumulated deficit at December 31,
1997, was ($17,631,004).  Losses have continued since such date due primarily to
expenditures of salaries, other operating expenses, and plant start-up expenses.

The Securities & Exchange  Commission (SEC) and Financial  Accounting  Standards
Board  (FASB) have issued  stringent  guidelines  to account  for  research  and
development  and certain other start-up  costs.  The SEC has adopted a view that
they will not accept deferred start-up costs  (capitalization  of start-up costs
on the balance  sheet) if the registrant is not in an industry where deferral is
a readily  accepted  policy.  Deferral  is not a widely  accepted  policy in the
Company's  industry.  Consequently,  Crown  expensed  ($1,633,720)  of  start-up
expense  for the  year  ended  1997.  Start-up  expenses  of  ($1,870,957)  were
similarly expensed in 1996.

On June 25, 1996, the Company received approval of its aseptic manufacturing and
filling equipment from the F.D.A.  Commissioning of the equipment is required by
the F.D.A. The  commissioning  process begins with the Company,  working with an
independent  laboratory,  (the Process  Authority),  to review its manufacturing
equipment,  manufacturing  procedures,  manuals and monitor bacteriological kill
tests.

Although the equipment  manufacturer  warranted that the purchased equipment had
been manufactured to the F.D.A. regulatory  specifications for aseptic packaging
and processing equipment,  the filler was the first of its kind manufactured for
a U.S.  Company  requiring F.D.A.  aseptic  processing  approval.  The delays in
certifying the Company's  production  equipment can be attributed to the aseptic
filling machine.  The machine was unable to pass  certification  testing when it
was originally shipped from Germany in February,  1995.  Numerous  modifications
have  been  made  to the  machinery  at the  request  of the  Process  Authority
primarily related to installing  monitoring  devices which were required to meet
F.D.A.  requirements.  The manufacturer of the aseptic filling machine has filed
for bankruptcy in the German  courts.  The Company has filed a claim against the
manufacturer  of  the  aseptic  filler  for  damages  caused  by the  delays  in
certifying  the filler  and seeks to have  these  damages  applied  against  the
purchase price of the machine. Further, the Company has filed suit in Las Vegas,
Nevada against certain persons and entities involved with the manufacturer, (see
Item 3, "Legal Proceedings"). To further protect its rights to the machinery and
its related technology,  the Company has purchased the blueprints and the rights
to its aseptic filling machine from the German bankruptcy court.

Now that the machinery is certified,  and assuming  there is sufficient  working
capital in place,  the  Company  should be able to  increase  production  of its
liquid nutritional products, to fulfill its agreements with its distributors.

YEAR 2000

The  Company  is  currently  addressing  the  impact  of the  Year  2000  issue.
Expenditures  relating to this are  expensed as  incurred.  The Company does not
expect a significant impact on the Company's ongoing results of operations.

Plan of Operations

In June 1996, the Company received  approval for its aseptic  manufacturing  and
filling  equipment  from the  F.D.A.  to  produce  its  product  line for  adult
nutritional and specialty products. Extensive modifications were required on the
filling  equipment  for the  remainder  of the  year.  Consequently,  no  liquid
nutritional  sales were  produced  for the year ended 1996 and $24,058 of liquid
nutritional products were produced for the year ended 1997.

In the absence of long-term  financial  support,  there can be no assurance that
additional  financing can be obtained from conventional  sources.  Management is
exploring alternatives that include seeking strategic investors,  lenders and/or
technology  partners  or  pursuing  other  transactions  that  could  result  in
substantial  dilution to management and existing  shareholders.  There can be no
assurance that management efforts in


                                       14
<PAGE>

this regard will be successful.  Management  believes that despite the financial
hurdles and funding uncertainties going forward, it has a business plan that, if
successfully  funded and executed can significantly  improve operating  results.
The support of the  Company's  vendors,  customers,  lenders,  stockholders  and
employees  will  continue  to  be  key  to  the  Company's  future  success.  If
negotiations  with its vendors,  landlord,  and lenders are not  successful  and
alternative  financing sources are not available,  the Company may face the loss
of key personnel, cessation of shipping goods, its equipment and its plant.

Funding

During 1995, the Company raised  approximately $2.4 million in additional common
equity financing through a private placement and this amount is reflected in the
accompanying  financial statements.  Each unit was purchased for $50,000. A unit
consisted  of 25,000  shares of Common  Stock and  warrants to  purchase  12,500
shares of Common Stock for $3 per share. The warrants expired two years from the
date of issuance.  Fractional  units have been sold.  In  addition,  the Company
issued to the Placement Agent and brokers 2,500 options to acquire shares of the
Company's  Common Stock at a price of $2.40 per share for each unit sold.  These
options expire five years from the date of issuance.

During 1995, the Company also raised $3.5 million through the issuance of Series
C Preferred Stock. The Series C Preferred Stock pays no dividends, but imputes a
6% effective  annual  interest rate upon conversion into Common Stock which will
be accounted for over the time during which the preferred  stock is outstanding.
The  conversion  rate is  determined by the  acquisition  value of the preferred
stock (plus imputed interest  referred to above) and an 18% discount to the five
day average  market price of the common  shares at the time of exercise.  During
1995, the Company's Board of Directors  authorized  utilizing an alternate price
to the five day average  market price provided for in the conversion of Series C
Preferred  Stock for several  block  trades.  During the quarter ended March 31,
1996, the Company raised an additional  $500,000 through a placement pursuant to
Regulation  S under the  Securities  Act of 1933,  as  amended,  of its Series C
Preferred  Stock,  bringing  the total of Series C Preferred  Stock issued to $4
million. As of July 2, 1996, all of the Series C Preferred Stock issued had been
converted into 3,294,735  shares.  The shareholders had waived their interest in
the conversion for all past,  present,  and future  transactions.  To the extent
that the Company uses equity securities to raise additional funds to satisfy its
working  capital  needs,  there will be  additional  dilution  to the  Company's
existing shareholders.

On February 15, 1996, the Company offered the holders of its warrants (issued in
conjunction  with private  placements in 1994 and 1995) the opportunity to lower
the exercise  price of the warrants from $3.00 to $1.375 per share provided that
they  exercise  at  least  60% of their  holdings.  The  expiration  date of the
remaining  warrants,  if any,  would be  extended  for one year at the  original
exercise price.  This offer was extended on March 12, 1996 until March 28, 1996.
A total of 613,688 warrants representing $843,821 were exercised.

On May 10, 1996, the Company  offered a private  placement of equity  securities
with a minimum of $540,000 to a maximum of  $2,520,000  (the  private  placement
provides  for an  over-subscription  of the  placement up to  $3,000,000  at the
Company's  discretion) in units of $45,000.  Each unit consists of 30,000 shares
of the  Company's  Common Stock and 30,000  warrants to purchase  the  Company's
Common Stock at a price of $1.60 for a period of six months after the closing of
the  private  placement.  The  Company  raised  $1,912,500  through  the private
placement which was closed on July 30, 1996.

On July 31, 1996, the Company raised $1 million through the sale of its Series E
Preferred  Stock to a  "Regulation  S"  investor.  The Series E Preferred  Stock
imputes an average  effective  interest rate of 6% which is payable in shares of
the Company's Common Stock on the "Dividend Dates" (August 1, 1997 and August 1,
1998).  The Series E Preferred Stock is convertible  into common shares based on
discounts to the market price at the time of conversion  which range from 15% to
31% depending on the time they are held from the issuance date,  (the longer the
stock is held, the deeper the discount).  Under this conversion  formula, as the
Common  Stock  price  drops,  the number of Common  Shares  into which  Series E
Preferred 


                                       15
<PAGE>

Stock is convertible  continues to grow. The number is not subject to a ceiling.
As of  December,  31, 1996,  there was  $1,000,000  in Series E Preferred  Stock
outstanding.

On August 11, 1996,  the Company  entered into a term loan agreement with FINOVA
Capital  Corporation which provides for a $3 million,  fixed rate (11.93% annual
percentage rate); (this rate is pegged at a spread of 561 basis points above the
five  year  Treasury  Note  rate at the time of  closing),  five  year term loan
(interest only for the first six months, amortized over the remaining 54 months)
secured by a first lien against the fixed assets and leasehold  improvements  of
the  Company.  The  commitment  provides for the advance of an  additional  $1.5
million  upon  securing  sales  contracts  totaling $7 million on an  annualized
basis. The loan agreement requires that the Company adhere to certain covenants.
Specifically,  they  require  that the Company  maintain a minimum  tangible net
worth of $5 million,  a senior debt to tangible  net worth ratio of 1 to 1 and a
cash flow rate of 2 to 1. The first two  covenants  are effective on the closing
date of the loan while the cash flow ratio took  effect on  December  31,  1997.
Also as part of the terms of the loan agreement, the Company has agreed to issue
300,000 five year warrants to FINOVA to purchase a share of the Company's Common
Stock at the closing  market price of the stock on the date prior to closing the
loan ($1  7/16).  As  reflected  in the  financial  statement  footnotes,  these
covenants were subsequently waived and the loan agreement modified.

On September 19, 1996, the Company's Board of Directors approved a re-pricing of
the May 10,  1996,  Private  Placement.  Under  the  re-pricing,  each  unit was
adjusted to consist of 36,000 shares of Common Stock per unit as compared to the
30,000  shares  per unit  contained  under  the  original  terms of the  Private
Placement.  This  resulted in the issuance of an  additional  255,000  shares of
Common Stock being issued in conjunction with the Private Placement.

On March 7, 1997, the Company  raised an additional $3 million  through the sale
pursuant to Regulation S under the  Securities  Act of 1933, as amended,  of its
Series E  Preferred  Stock.  The  Series E  Preferred  Stock  imputes an average
effective interest rate of 6% which is payable in shares of the Company's Common
Stock on the "Dividend  Dates"  (These  Dividend  Dates have been  waived).  The
Series E Preferred  Stock is  convertible  into common shares at a rate equal to
10,000  divided by the market value of the Common  Stock  adjusted by a discount
factor  which  ranges from 15% to 31%  depending on the time the shares are held
from the issuance  date (the longer the stock is held,  the deeper the discount,
unless the Common Stock price falls below  $0.75,  in which case the discount no
longer applies). Under this conversion formula, as the Common Stock price drops,
the number of Common Shares into which Series E Preferred  Stock is  convertible
continues  to grow.  The number is not subject to a ceiling.  A total of 200,000
five year options to purchase the Company's Common Stock at $2.50 per share were
issued to two finders for their role in raising these funds.

On May 5, 1997, the Company's  Board of Directors  adopted a Shareholder  Rights
Plan designed to protect the shareholders from various abusive takeover tactics,
including attempts to acquire control of the Company at an inadequate price.

The plan is designed to assure that any  acquisition  of the Company  and/or any
acquisition  of control of the Company would take place under  circumstances  in
which the Board of Directors can secure the best available  transaction  for all
of the Company's  stockholders.  Under the plan, each stockholder will receive a
dividend of one right for each share of the Company's  outstanding common stock.
The rights are  designed to protect the  Company  and its  shareholders  against
market  accumulation  programs and other abusive takeover tactics.  They are not
aimed at  preventing a takeover but rather are intended to encourage a potential
buyer to negotiate appropriately with the board prior to attempting a takeover.

Initially,  the rights are  attached to the  Company's  common stock and are not
exercisable.  They become detached from the common stock and become  immediately
exercisable after any person or group that is not a "grandfathered  stockholder"
becomes the beneficial  owner of 15% or more of the Company's common stock or 10
days after any person or group  announces a tender or exchange  offer that would
result  in that  same  beneficial  ownership  level,  subject  only  to  certain
"permitted offers."



                                       16
<PAGE>

If a buyer who is not a "grandfathered  stockholder"  becomes a 15% owner in the
Company,  all rights  holders,  except the buyer,  will be  entitled to purchase
preferred stock in the Company at a price discounted from the then market price.
In addition,  if the Company is acquired in a merger after such an  acquisition,
all rights  holders  except the buyer will also be entitled to purchase stock in
the buyer at a discount in accordance with the plan. The  distribution of rights
was made to common  stockholders  of record  on May 16,  1997.  Shares of common
stock that are  newly-issued  after that date will also carry  rights  until the
rights become detached from the common stock.  The rights will expire on May 15,
2007.  The  Company  may redeem  the rights for $0.01 each at any time  before a
buyer   acquires  a  15%  position  in  the  Company  and  under  certain  other
circumstances.  The  rights  distribution  is not  taxable  to  stockholders.  A
complete  description of the Shareholder Rights Agreement and Series E Preferred
Stock may be found in the Company's Form 8A filed with the SEC on May 13, 1997.

On July 24, 1997,  the Company  issued to one of its creditors  18,000 shares of
restricted  Common Stock for canceling  $15,800 in short term debt.  The Company
agreed to register the shares in the Company's next registration statement.

On July 25, 1997, the Company  entered into an operating  lease for equipment to
be used for the  manufacturing of other  nutritional  products at its production
facility in Las Vegas, Nevada. Under the terms of the operating lease, $550,800,
together with interest  thereon,  is payable  monthly over a 60-month  term. The
remaining  portion  under the  lease,  $367,200,  is  payable  at the end of the
60-month term.  The Company has an option to prepay the financed  amount in full
or in part without  penalty,  and has an option to purchase the equipment at the
end of the 60-month  term, at a price equal to the then fair market value of the
equipment.

In connection  with the financing of the equipment,  the Company granted 734,000
options to the lessor of the equipment exercisable at an exercise price of $1.25
per share, subject to adjustments.  These options may be exercised in whole, but
not in part,  at any time by the lessor,  and are subject to mandatory  exercise
under certain circumstances.

On August 7, 1997, the Company  commenced a private  offering of up to 5,000,000
shares of its common  stock at a price of $.70 per share.  The offering was made
pursuant to the  exemption  for a private  placement  under  Section 4(2) of the
Securities  Act of 1933,  as  amended.  During  August - October 31,  1997,  the
Company  sold a total of  1,338,273  shares of Common  Stock,  for an  aggregate
purchase  price  of  $736,050.  The  Common  Stock  was  sold  to 14  accredited
investors. The Company's private offering concluded on October 31, 1997.

On August 21, 1997, the Board of Directors of the Company  approved the grant of
48,000 shares of the Company's  common stock to Joseph K. Furst, as compensation
for certain services rendered to the Company.

On September 1, 1997, the Company borrowed $100,000 from Christopher Demetree, a
director of the Company,  in order to meet short term working capital needs. The
loan  rate  is 9%  annually  and is due and  payable  on July  30,  1998  and is
unsecured.  The Company issued  100,000  warrants at 110% of the market price of
$.8125. The warrants are valid for three years with certain registration rights.

On September  29, 1997,  the holder of the  Company's  Series E Preferred  Stock
converted 90 shares of this series into  1,600,000  shares of Common  Stock.  In
turn, the holder sold these shares of Common Stock  privately and then acquired,
in a  Regulation  S offering,  1,285,715  shares of Common  Stock and a one-year
warrant from the Company and a one-year  warrant to purchase  648,141  shares of
Common Stock to an offshore investor who holds the Series E Preferred Stock. The
shares  of  Common  Stock  were  sold by the  Company  at $.70 per  share for an
aggregate of $900,000.  There are currently outstanding 172.5 shares of Series E
Preferred Stock.



                                       17
<PAGE>

On September  29, 1997,  the Company  raised  $500,000 in a Regulation S sale of
prepaid,  mandatory  exercisable  warrants  to  purchase  Common  Stock to a new
investor.  The  warrants  may be  exercised  in whole or in part in amounts over
$10,000 of the principal  amount of the warrants,  at any time, until expiration
on September 28, 1999.  The exercise  price for each share of Common Stock shall
be equal to the  lower of (x) 80% of the  average  closing  price of the  Common
Stock for the one  business  day  immediately  preceding  the issue  date of the
warrant or (y) 80% of the average  closing price of the Common Stock for the one
business  day  immediately  preceding  the date of receipt by the Company of the
notice of exercise,  as reported on the  principal  stock  exchange on which the
Company's Common Stock is traded.  At the present time no shares of Common Stock
have been issued under this arrangement.

On November 17, 1997,  the Company sold for $200,000,  363,637  shares of Common
Stock and a two-year  warrant to purchase  181,181  shares of Common Stock to an
offshore investor.  The warrants are exercisable for one year at $0.05 per share
provided the Common Stock is trading at less than $0.6875.

On December 3, 1997,  the Company for $200,000  issued  500,000 shares of Common
Stock and a two-year  warrant to purchase  250,000 shares of Common Stock to two
offshore investors,  both of which previously purchased equity securities of the
Company.  The warrants are  exercisable for one year at $0.05 per share provided
the Common Stock is trading at less than $0.50.

On December 5, 1997, the Company borrowed $50,000 from Vincent Casella, a former
director of the Company.  The loan rate is 8% annually,  is due and payable June
5, 1998, and is unsecured.  The Company issued 75,000  warrants for Crown Common
Stock  exercisable  at $.25 per warrant.  The warrants are valid for three years
with certain registration rights.

On March 21,  1998,  and May 1, 1998,  the Company  borrowed  $8,245 and $3,500,
respectively, from Christopher Demetree, a director. The loans are unsecured and
carry no interest  rate. The loans are due and payable on renewable 30 day terms
or upon funding of bridge financing, whichever is the earlier.

The  issuance  of  securities  in these  transactions  were not  subject  to the
registration under the Securities Act of 1933, as amended (the "Act"), by virtue
of (I)  Section  4(2)  or  Regulations  D  promulgated  thereunder  or  (II)  of
Regulation  S  for  the  sales  sold   "offshore"  to  "non-U.S.   Persons."  No
underwriters  or placement  agents were  involved in any sales unless  otherwise
noted. The  distribution of the Shareholders  Rights did not involve an offer or
sale.

Financial Condition

Working  capital at  December  31,  1997 was  ($1,888,233)  and was based on the
funding the Company has secured, discussed above. To the extent that the Company
uses equity  securities to raise additional funds to satisfy its working capital
needs, there will be additional dilution to the Company's existing shareholders.
There can be no  assurances  that the Company will be able to secure  additional
financing, or, if additional financing is obtained, that it will be on terms and
conditions that are acceptable to the Company.

Item 7.  Financial Statements

See the audited  financial  statements for the years ended December 31, 1997 and
1996.

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

There were no changes or disagreements with the Accountants for the years ending
December 31, 1997, and 1996,  except that on April 1, 1998, the Company's  Board
of Directors  changed the  Company's  independent  public  accountant  firm from
Arthur Andersen to BDO Seidman. Refer to Recent Significant Developments.


                                       18
<PAGE>


                                    PART III


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

As of December 31, 1997,  the current  directors and  executive  officers of the
Company are as follows:

<TABLE>
<CAPTION>
Name                                Age              Position
----                                ---              --------
<S>                                 <C>              <C>
Craig E. Nash                       43               Chairman of the Board of
                                                     Directors and Chief Executive Officer

Scott O. Nash                       43               President and
                                                     Vice Chairman of the Board of Directors

Christopher Demetree*               34               National Account Executive and Director

Herbert G. Altman                   65               Director, Member of the Audit Committee

Lee Allen Hooker                    52               Director, Chairman of the Compensation
                                                     Committee

Arthur M. Berkowitz                 57               Director, Chairman of the Audit Committee
                                                     Member of the Compensation Committee

Linda Carrick, Ph.D.                44               Director, Member of the Audit Committee
</TABLE>



Craig E. Nash has been  Chairman of the Board of Directors  and Chief  Executive
Officer of the  Company  since  September  1991 and has held such  positions  or
similar positions in its predecessors since February 1980. He also is the senior
marketing  executive of the Company.  Mr. Nash has sixteen  years  experience in
pharmaceutical and food-products  marketing. Mr. Nash attended the University of
Southern California.

Scott O. Nash has been  President and Vice Chairman of the Board of Directors of
the Company since September 1991 and has held these or similar  positions in its
predecessors  since  February  1980.  Mr. Nash has sixteen  years  experience in
pharmaceutical and food-products manufacturing and operations. Mr. Nash attended
the  University of Southern  California.  Messrs.  Craig and Scott Nash are twin
brothers.

Christopher  Demetree has been a director of the Company since  December 2, 1992
and prior to that a major  investor in the  Company.  Mr.  Demetree is currently
Vice  President of Demetree  Brothers,  Inc., a  Florida-based  fully-integrated
property management and investment company, and was responsible for many aspects
of the  management  of Demetree  Brothers,  Inc. His duties  primarily  included
planning and developing real estate developments,  including permits,  sales pro
formas and construction  budgets. Mr. Demetree holds a B.S. degree in Industrial
Management  from  Georgia  Institute of  Technology.  *Mr.  Demetree,  effective
February  6, 1998,  resigned  as National  Accounts  Executive  but remains as a
Director.

Herbert G. Altman became a director of the Company in September 1997. Mr. Altman
is a  consultant  and a  retired  private  investor.  He has been  active in the
pharmaceutical  distribution business,  serving as Senior Vice President,  Chief
Financial Officer,  and Director of Spectro Industries,  Inc., an American Stock
Exchange  company  for 17 years.  For five years,  he served as Vice  President,
Finance  of  McKesson  Drug  Company,  Jenkintown,  a division  of the  McKesson
Corporation.  Prior thereto, he was active as a partner in a  Philadelphia-based
Certified  Public  Accounting  Firm.  Mr.  Altman  holds a B.S.  Degree from the
Wharton School of Finance.



                                       19
<PAGE>

Lee Allen Hooker became a director of the Company in February  1994.  Mr. Hooker
is the owner and Chief Executive Officer of American Benefits  Counselors/Hooker
Associates,  a brokerage firm for employee benefits to the healthcare  industry.
He has been involved with the medical industry for more than twenty-five  years.
Mr. Hooker holds a B.S. in Business  Administration  from Columbia Union College
and an M.S. in Business Administration from Pepperdine University.

Arthur M. Berkowitz  became director of the Company in June 1994. Mr.  Berkowitz
has been an agent for the Equitable Life Insurance  Society of the United States
for the past 19 years.  He is  currently  a  Benefits  Consultant  to many large
corporations.  Mr.  Berkowitz was an engineer with The General  Electric Company
for 12 years.  Mr. Berkowitz is a life member of the Million Dollar Round Table,
a Director of the  Philadelphia  Friends of ALS, and Financial  Secretary of the
Germantown  Jewish Centre of  Philadelphia.  Mr.  Berkowitz has a B.S. degree in
Mathematics from St. Lawrence University and a B.Ae. and a M.Ae. in Aeronautical
Engineering from Rensselaer Polytechnic Institute.

Linda Carrick,  Ph.D. became a director of the Company in June 1994. Dr. Carrick
has been in the  nursing  field  since  1975.  She has been  Clinical  Director,
Surgical Nursing for the Hospital of the University of  Pennsylvania,  where she
also served as interim Vice President of Nursing. Subsequently, she served as an
Assistant  Professor  of the  University  of  Pennsylvania.  She is a member  of
several  professional  organizations,  including  the  American  Association  of
Critical Care Nursing, The Nursing Association, Association of Nurse Executives,
and the American Society of Parenteral and Enteral Nutrition. She also completed
a Wharton Nurse Executive Fellowship. Dr. Carrick holds a B.S. degree in Nursing
from  Villanova  University,  and a  M.S.  degree  in  Surgical,  Cardiovascular
Nursing,  and a Ph.D. in Healthcare  from The University of  Pennsylvania.  From
September 1997 to the present,  Dr. Carrick has been Executive Vice President of
Operations and Patient Care Services for Mercy Health Partners, Scranton, PA.

All Directors hold office until the next annual meeting of the  shareholders and
the  election  and  qualification  of their  successors.  Officers  are  elected
annually  and serve at the  pleasure of the Board of  Directors,  subject to any
employment agreements.

Section  16 of the  Securities  Exchange  Act of  1934  requires  the  Company's
directors and  executive  officers and any persons who own more than ten percent
of the  registered  class of the  Company's  equity  securities  to file various
reports with the Securities  Exchange Commission and the American Stock Exchange
concerning the holdings of and transactions in the Common Stock and other equity
securities  of the  Company.  Copies of these  filings  must be furnished to the
Company.  Based solely upon a review of the copies of such reports  furnished to
the Company or written  representations that no other reports were required, the
Company believes that during Fiscal 1997, all filing requirements  applicable to
its directors, executive officers and 10% shareholders were complied with except
that certain  directors may not have filed their Form 5, the Annual Statement of
Changes in Beneficial Ownership, on a timely basis.


                                       20
<PAGE>

Item 10.  Executive Compensation

The following executive officers of the Company earned remuneration in excess of
$100,000 during 1997. The following table shows all  remuneration  earned by the
Chief Executive  Officer during the fiscal years ended December 31, 1997,  1996,
and  1995  for  services  in all  capacities  rendered  to the  Company  and its
subsidiaries.

<TABLE>
<CAPTION>
                                            Annual Compensation                 Long-Term Compensation
                                            -------------------                 ----------------------
                                                                                         Awards
                                                                               ------------------------
                                                                               Restricted    Securities
Name and                                                  Other Annual            Stock      Underlying
Principal Position                       Salary          Compensation (2)         Award       Options
------------------                      -------          ----------------         -----       -------
<S>                        <C>          <C>              <C>          <C>     <C>       <C>      <C>
Craig Nash                 1997         $70,000          $ 0          0       $  0      0        0
Chief Exec. Officer        1996         $70,000            0          0          0      0        0
                           1995         $78,771            0          0          0      0        0
</TABLE>

In 1993, the Company  entered into a five year employment  agreement,  which has
expired, with Craig Nash. He is currently receiving a base salary of $70,000 per
annum,  however,  $110,000  has been  approved by the Board of  Directors.  This
amount may be increased at the discretion of the Board of Directors.  Mr. Nash's
contract  automatically  rolls  over  into  annual  one  year  agreements  until
terminated  by the Board or Mr. Nash upon  60-day  notice by either  party.  The
contract  is in the  initial  year  of the  annual  rollover.  The  Company  can
terminate  such  employment  for cause on 90 days notice.  If the  individual is
terminated by the Company during the term of the employment  agreement,  he will
receive certain  termination  compensation of up to two years of base salary and
the immediate vesting of the stock per his employment agreement.

Mr. Craig Nash's  compensation  includes 1,665,545 shares granted with a nominal
fair market value on the date of his 1993 employment agreement. All Common Stock
issued  to Mr.  Nash  was  ascribed  a  nominal  value  by the  Company  and its
investment  adviser,  given the  inherent  uncertainty  as to the ability of the
Company to raise  capital and  continue in existence as of the dates such shares
were issued. Of the 1,665,548 shares, all shares are vested.
All the shares are eligible to receive dividends.

The  Company  provided  automobile  allowances  to  certain  of  its  employees,
including certain persons who are executive  officers of the Company,  including
the Nashes,  based upon the job  requirements of each employee.  No amounts with
respect to the personal use of  automobiles,  if any,  have been included in the
above  table.  The  Company has  concluded  that the  aggregate  amounts of such
personal benefits which cannot be specifically or precisely ascertained, did not
in any event exceed, as to any executive  officer,  either the lessor of $50,000
or 10% of his  cash  compensation  for  the  last  fiscal  year,  and  that  the
information  set  forth  in  the  foregoing  table  is not  rendered  materially
misleading by virtue of the omission of the value of such personal benefits.

Each of the  executive  officers and certain key  employees  have entered into a
Confidentiality Agreement in which the individual agrees not to disclose, reveal
or  permit  access  to  all  or  any  portion  of  the  "Company's  Confidential
Information" as specified in the agreement.

The following table gives certain information regarding options held on December
31, 1997.

<TABLE>
<CAPTION>
                           Number of Securities Underlying             Value of Unexercised In-The
                            Unexercised Options at FY-End                Money Options at FY-End
Name of Individual           Exercisable    Unexercisable              Exercisable      Unexercisable
------------------           -----------    -------------              -----------      -------------
<S>                          <C>                  <C>                       <C>             <C>
Craig Nash, CEO              768,028              -                         -               -
</TABLE>




                                       21
<PAGE>

Item 11.  Security Ownership of Certain Beneficial Owners and Management

Security Ownership of Certain Beneficial Owners

The following table sets forth certain  information as of December 31, 1997 with
respect to the beneficial ownership of the Company's Common Stock by all persons
known by the  Company  to be the  beneficial  owners of more than 5% of any such
outstanding classes:

Name and Address                    Amount and Nature           Percent
of Beneficial Owner               of Beneficial Ownership       of Class
-------------------               -----------------------       --------

Mr. Craig E. Nash                2,266,014*      Direct           8.2%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119

Mr. Scott O. Nash                2,676,267       Direct           9.7%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119

Imperial Trust Co.               1,916,571       Direct           6.9%


The Gifford Fund, LTD           See Footnote (1)                   N/A
Charlotte House
Charlotte Street
P.O. Box N9204
Nassau, Bahamas


(1)  The Gifford Fund presently holds  $1,725,000 of Series E Preferred Stock of
     Crown  Laboratories,  Inc.  The  Series  E  Preferred  Stock  provides  for
     conversion  into Crown  Laboratories,  Inc.  Common Stock based upon market
     prices.  If converted,  the Gifford Fund,  Ltd. may become a holder of more
     than 5% of the  common  shares  outstanding  of  Crown  Laboratories,  Inc.
     depending upon the market price of the shares at time of conversion.

*    Includes  400,000  shares owned by Yelena Nash, the wife of Craig Nash. Mr.
     Nash disclaims any beneficial interest.




                                       22
<PAGE>

Security Ownership of Management

The following table sets forth certain  information as of December 31, 1997 with
respect  to the  beneficial  ownership  of the  Company's  Common  Stock by each
executive officer and director, and by all executive officers and directors as a
group:
     
Name and Address                       Amount and Nature            Percent
of Beneficial Owner                 of Beneficial Ownership        of Class (1)
-------------------                 -----------------------        ------------
Mr. Craig E. Nash                  2,266,014*      Direct                8.2%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119

Mr. Scott O. Nash                  2,676,267       Direct                9.7%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119

Chris Demetree                       928,765       Direct                3.4%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119

Herbert G. Altman                    420,684       Direct                1.5%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119

Lee Allen Hooker                     191,478       Direct                0.7%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119

Arthur M. Berkowitz                  324,529       Direct                1.2%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119

Dr. Linda Carrick, Ph.D.             143,000       Direct                0.5%
Crown Laboratories, Inc.
6780 Caballo Street
Las Vegas, NV 89119


All Executive Officers and
Directors as a Group               7,069,671                            25.6%


(1)  Percentages  are  calculated  based on  outstanding  shares and options and
     warrants exercisable within 60 days.

*    Includes  400,000  shares owned by Yelena Nash, the wife of Craig Nash. Mr.
     Nash disclaims any beneficial interest.



                                       23
<PAGE>

Directors' Remuneration

In 1994, outside members of the Board of Directors,  Lee Allen Hooker, Arthur M.
Berkowitz,  Dr. Linda Carrick,  Ph.D., and Myles Cane, a former  director,  each
received  options to purchase  50,000 shares of Common Stock at exercise  prices
ranging  from  $1.275 to $2.50 per share.  Of the options  received,  options to
purchase  25,000  shares of common  stock  vested  immediately  and  options  to
purchase 25,000 shares of Common Stock will vest on different  schedules ranging
between the thirteenth to the twenty-third month of their term.  Additionally in
1995, Lee Allen Hooker,  Arthur M. Berkowitz,  Dr. Linda Carrick, and Myles Cane
received  options to purchase 10,000 shares of Common Stock at an exercise price
of $2.44 per share,  and Vincent  Cassella  received  options to purchase 50,000
shares of Common Stock at an exercise price of $1.275 per share.

Vincent Casella,  a former director,  and his associates were granted a total of
230,000  options to  purchase  the  Company's  Common  Stock for their  roles in
assisting  the Company in strategic  planning  issues.  Mr.  Casella was granted
100,000  options at an exercise price of $1.44 per share which expire five years
from the date of grant November 13, 1995.

Outside  members  of the  Board  of  Directors,  Lee  Allen  Hooker,  Arthur  M.
Berkowitz,   Dr.  Linda  Carrick  and  Herbert  G.  Altman  each  have  received
non-qualified  stock  options to  purchase  shares of Common  Stock at  exercise
prices ranging from $0.938 to $2.50 per share, in awards  commencing 1994. As of
December  31,  1997,  stock  options for these  Outside  Board  Members  were as
follows:

                           Options                Board Membership Commenced
                           -------                --------------------------
Lee Allen Hooker           110,000                         1994
Arthur M. Berkowitz        150,000                         1994
Dr. Linda Carrick          110,000                         1994
Herbert G. Altman           25,000                         1997

----------
Includes 50,000 options granted in 1997 according to the Plan.

All Outside members' stock options vest and are exercisable according to various
schedules, which continue to the year 2007.

Arthur M.  Berkowitz  also received  40,000 stock options in 1996 at an exercise
price of  $.90/share  associated  with his  efforts  in the  establishment  of a
marketing consultant agreement for the Company.  Herbert G. Altman also received
200,000  stock  options in 1996,  prior to becoming a  Director,  at an exercise
price of  $.90/share  associated  with his  introduction  to and the  signing of
agreements with distribution sources for Crown's products.

Additionally, in 1995, and continuing to July 1998, Arthur M. Berkowitz receives
$1,500 per month for serving as Chairman of the Audit Committee of the Company's
Board of Directors.  The Company  anticipates  continuing  this agreement at the
same level of compensation in the future.

Additionally, in October 1997, shareholders of the Company approved the issuance
of 50,000  non-qualified  stock options to Outside Board  Members,  to be issued
annually, continuing to the Year 2001.

Item 12.  Certain Relationships and Related Transactions

Effective  during the third  quarter,  the  Company  entered  into an  agreement
regarding a reorganization of its corporate  structure,  under which the Company
transferred  ownership  of 100% of the common  stock of Crown  Russia  OOO,  its
wholly-owned subsidiary ("Crown Russia"), to Yelena Nash in exchange for payment
of $15,000,  adjusted to $37,825,  by Yelena Nash. At the same time, the Company
and Crown Russia entered into a ten-year  distribution  and sales agreement (the
"Distribution  Agreement"),  under


                                       24
<PAGE>

which Crown Russia will become the exclusive  distribution,  marketing and sales
company for the Company's  nutritional  products in Russia and other Central and
Eastern  European  countries  and Crown  USA  agrees  to pay  Crown  Russia  all
reasonable  expenses approved by the Board to develop this customer for a period
of three to five years.  Yelena Nash is a Russian  citizen and the wife of Craig
E. Nash,  the Company's  Chairman of the Board of Directors and Chief  Executive
Officer. Mrs. Nash is also a significant  shareholder of the Company.  Under the
terms of the Distribution  Agreement,  Yelena Nash will receive a 10% commission
on sales of the Company's products to Crown Russia,  exclusive of promotional or
marketing  costs,  after the Company has  received  payment for such sales.  The
Distribution  Agreement  contains  certain  provisions  restricting the right of
Yelena  Nash to transfer  her  interest in Crown  Russia to a third  party.  The
Distribution  Agreement  is subject to automatic  renewal for  ten-year  periods
under certain circumstances.

Under the terms of the agreement to transfer  ownership of Crown Russia,  Yelena
Nash was  required to pay an initial  $1,000  payment of the $15,000  sale price
which has subsequently been adjusted to $37,825. The initial payment was made on
March 16, 1998.  The balance,  plus interest at 2% above prime accrued  monthly,
may be paid over the ensuing 24 months  from  commissions  earned  from  product
sales.

The Company  has the option to  evaluate  this  business  venture and  determine
whether it continues to be of benefit to its shareholders.

Fiscal year 1997 sales,  amounts due to and from,  expenses,  and results of the
sale of the Russian  subsidiary are as follows,  after eliminating  intercompany
transactions: The Company sold $33,732 worth of its products to a non-affiliated
customer in Russia, and $131,279 of its products to New Crown Russia as part of,
and  subsequent to the sale of the  subsidiary on June 1, 1997.  Total  combined
sales to Russia were  $165,011  for 1997.  Included in  accounts  receivable  at
December  31,  1997 was  $105,461  due from New  Crown  Russia.  The sale of the
subsidiary and its assets as of June 1, 1997 resulted in a loss of $9,041,  with
the amount due from  Yelena Nash of $37,825,  reflected  in related  party notes
receivables.  The expenses  incurred and accrued in 1997 for  development of the
Russian market were $181,078.

The Board of  Directors  formed a special  committee of outside  directors  (the
"Crown  Russia"  committee)  to oversee the  Company's  relationship  with Crown
Russia,  including  reviewing all transactions and recommending to the Board for
approval of all transactions  between the Company and Crown Russia.  The members
of the special  committee are Arthur M.  Berkowitz,  Lee A. Hooker and Dr. Linda
Carrick.

During the past two years,  Craig Nash  established  a physical  presence in New
York City in order to manage the  emerging  company  marketplace  affairs of the
Company,  certain  marketing  activities,  and engage in  extensive  fundraising
activities  on  behalf  of the  Company.  The cost of living in New York City is
substantially greater than that of Las Vegas, Nevada. Consequently,  the Company
loaned Mr. Nash $77,183 in order to cover certain expenses  personally  incurred
by Mr. Nash during 1997 while  carrying out his duties on behalf of the Company.
The loan rate is 9% annually and the loan is unsecured and due and payable on or
before  December 31, 1998.  The Company also loaned Scott Nash $8,867.  The loan
rate is 9% annually and the loan amount is  unsecured  and due and payable on or
before December 31, 1998.

On September 1, 1997, the Company borrowed $100,000 from Christopher Demetree, a
director of the Company,  in order to meet short term working capital needs. The
loan  rate is 9%  annually  and is due and  payable  on July  30,  1998,  and is
unsecured.  The Company  issued  100,000  warrants  at 110% of the  market.  The
warrants are valid for three years with certain registration rights.

On December 5, 1997, the Company borrowed $50,000 from Vincent Casella, a former
director of the Company in order to meet short term working  capital needs.  The
loan rate is 8% annually, is due and payable June 5, 1998, and is unsecured. The
Company issued 50,000  warrants for Crown Common Stock  exercisable at $2.50 per
warrant.  The  warrants  are valid for three  years  with  certain  registration
rights.

                                       25
<PAGE>

On January 28,  1998,  the Company  borrowed  $43,000  from  Herbert  Altman,  a
director  of the  Company.  The loan rate is 9% , is due and  payable on May 27,
1998.  Warrant coverage is 43,000 warrants at 110% of the market price of $.375.
The  warrants  expire on June 15, 2001.  Additionally,  the  expiration  date on
200,000 warrants issued prior to becoming a Director was extended from September
4, 1999 to September 4, 2004.

On February 9, 1998, the Company  borrowed  $30,000 from Lee Hooker, a director.
The loan rate is 9% per annum.  The original  note due date has been extended to
June 15, 1998.  Warrant  coverage is 30,000 warrants at 110% of the market price
of $.25 at the date of grant. The warrants expire in three years.

On February 13, 1998, and February 17, 1998, the Company  received  $30,000 from
UFH Endowment Ltd. and $30,000 from Austost Antalt Schaan, respectively from the
sale  of  Regulation  S  Prepaid  Mandatory   Exercisable  Warrants  which  were
convertible at a discount to the market at the time of conversion.

On February 25, 1998,  the Company  borrowed  $120,000  from Herbert  Altman,  a
director  of the  Company.  The loan rate is 9%, is due and payable on March 24,
1998 and is unsecured.  The note has been extended until June 15, 1998.  Warrant
coverage  is 120,000  warrants  at 110% of the  market  price of $.25 on May 25,
1998. The warrants are valid for three years.

On March 18, 1998, the Company borrowed $20,000,  $15,000 and $14,000 from three
directors,  Lee Hooker, Herbert Altman and Arthur Berkowitz,  respectively.  The
loan rate is 9% per annum,  is due and payable on April 14,  1998,  and has been
extended  until June 15, 1998,  and has 100%  warrant  coverage for the loans at
110% of the market price of $.25 on March 18,  1998.  The warrants are valid for
three years.

On March 20, and March 27, 1998,  the Company  borrowed  $100,000 and  $250,000,
respectively from Pelican Partners V, a Pennsylvania Partnership. Art Berkowitz,
a director, advanced $50,000 of the above loan and is therefore allocated 50,000
of the 350,000  warrants.  The loan is due and payable no later than July 20 and
July 27,  1998,  respectively.  The rate is 10% per  annum and is  secured  by a
second  lien  position  on  certain  Company  equipment.  The loan  has  warrant
coverage,  350,000  warrants at 110% of the last price quoted ($.25) on March 20
and March 27, 1998, respectively. The warrants expire in three years.

On April 3, 1998,  the  Company  borrowed  $25,000  from  Pelican  Partners V, a
Pennsylvania Partnership.  The loan rate is 10% per annum and is due and payable
on the earlier of 120 days or upon the funding of bridge loan financing. Warrant
coverage  is 25,000  warrants  at 110% of the market  price of $.375 on April 4,
1998. The warrants are valid for three years.

On April 21, 1998, the Company  borrowed $32,000 from Herbert Altman, a director
of the Company.  The loan rate is 9% and is due and payable on May 24, 1998, and
is unsecured.  The Company issued 32,000 warrants at 110% of the market price of
$.25. The warrants are valid for three years with certain  registration  rights.
The note has been extended until June 15, 1998.

On May 4, 1998,  the  Company  borrowed  $14,000  from  Joseph C.  Avitabile,  a
shareholder.  The loan rate is 9% per  annum  and is due on or  before  July 30,
1998. The Company will issue 14,000  warrants for the loan at 110% of the market
price on May 4, 1998, of $.20. The warrants expire three years from May 4, 1998.


                                       26
<PAGE>

                                     PART IV


Item 13.  Exhibits and Reports on Form 8 K

     (a)  Exhibits

          3(a)    Certificate of Incorporation, as amended (1)

          3(b)    Bylaws, as amended (1)

          4(a)    Form of Warrant  Agreement,  including  Form of  Warrant,  for
                  private placement investors (4)

          4(b)(1) Certificate  of Amendment to  Certificate  of  Designation  of
                  Series E Preferred Stock (6)

          4(b)(2) Certificate of Designation of Series E Preferred Stock (6)

          4(b)(3) Certificate  of Amendment to  Certificate  of  Designation  of
                  Series F Preferred Stock (1)

          4(b)(4) Certificate of Designations of Series F Preferred Stock (8)

          4(c)    Specimen of Common Stock Certificate of Registrant (1)

          4(d)    Regulation S Subscription Agreement, dated July 31, 1996 (2)

          4(e)    Regulation S Subscription Agreement, dated March 7, 1997 (7)

          4(f)    Rights   Agreement   between  the  Registrant  and  Securities
                  Transfer Corporation, dated May 5, 1997 (8)

          10(a)   1992 Stock Option Plan (5)*

          10(b)   Employment Agreement with Craig Nash (3)*

          10(c)   Employment Agreement with Scott Nash (3)*

          10(d)   Employment Agreement with Christopher Demetree (3)*

          10(h)   Lease for Las Vegas, Nevada (2)

          10(j)   Agreement with NME (2)

          10(k)   Agreement with McKesson (6)

          10(l)   Agreement with US FoodService (1)

          21      Subsidiaries, (100% owned): Crown Puerto Rico (1)

          23      Consent of BDO Seidman LLP (+)

          4(g)    Sale of Equity Securities Pursuant to Regulation S (9)

          99      Application for Withdrawal from Listing of Securities (10)

          10(m)   Investment   Banking  Firm   Engagement   (11)  16  Change  of
                  Independent Public Accounting Firm (12)

          10(n)   1997 Stock Option Plan (13)

          10(o)   Agreement with McKesson General Medical (1)

     (b)  Form 8(K)'s:  Filed on: March 24, 1997; November 6, 1997; November 14,
          1997; December 1, 1997; December 31, 1997; April 2, 1998; and April 7,
          1998.

*    Management Compensation Contract or Plan

+    Filed herewith.

(1)  To be filed by Amendment.

(2)  Previously filed in connection with the Registrant's Registration Statement
     on Form SB-2, File No.33-72912.

(3)  Previously filed as an exhibit to the Form 10-KSB for the fiscal year ended
     December 31, 1992.

(4)  Previously filed as an exhibit to the Form 10-KSB for the fiscal year ended
     December 31, 1994.

(5)  Previously  filed as an  exhibit  to the Form 8-K of the  Registrant  filed
     September 24, 1991.

(6)  Previously  filed as an  exhibit to the Form  10QSB for the  quarter  ended
     September 30, 1995.

(7)  Previously  filed as an  exhibit to the Form 8(K) of the  Registrant  filed
     March 25, 1997.

(8)  Previously filed as an exhibit to the Form 8-A12B/A of the Registrant filed
     July 7, 1997.

(9)  Previously  filed as an  exhibit to the Form  10QSB for the  quarter  ended
     September 30, 1997.

(10) Previously  filed  as an  exhibit  to the Form 8K of the  Registrant  filed
     November 6, 1997.

(11) Previously  filed  as an  exhibit  to the Form 8K of the  Registrant  filed
     December 1, 1997.

(12) Previously filed as an exhibit to the Form 8K of the Registrant filed March
     31, 1998.

(13) Previously  filed as an exhibit to the Proxy  Statement  of the  Registrant
     filed August 22, 1997.


                                       27
<PAGE>

Signatures

Pursuant to the  requirements  of Section 12 of the  Securities  Exchange Act of
1934, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereto duly authorized.

                                    CROWN LABORATORIES, INC.


Date:    May 15, 1998               By:  s/ Craig E. Nash
                                        -----------------
                                         Craig E. Nash
                                         Chief Executive Officer
                                         Chairman of the Board of Directors


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the dates indicated.


 s/ Craig E. Nash                        Chief Executive Officer
--------------------------------         Chairman of the Board of Directors  
Craig E. Nash                            (Principal Executive Officer)       
                                         
 s/ Scott O. Nash
--------------------------------         Vice Chairman of the Board of Directors
Scott O. Nash                            President


                                         Director
--------------------------------
Christopher Demetree


 s/ Herber G. Altman                     Director
--------------------------------
Herbert G. Altman


 s/ Lee Allen Hooker                     Director
--------------------------------
Lee Allen Hooker


 s/ Arthur M. Berkowitz                  Director
--------------------------------
Arthur M. Berkowitz


 s/ Linda Carrick                        Director
--------------------------------
Linda Carrick, Ph.D.


                                       28
<PAGE>



                          Crown Laboratories, Inc.
                         Consolidated Balance Sheets

<TABLE>
<CAPTION>
                     ASSETS
                                                            December 31,     December 31,
                                                                1997             1996
                                                            ------------    ------------
<S>                                                         <C>             <C>         
CURRENT ASSETS
   Cash and cash equivalents                                $      7,650    $    579,488
   Accounts Receivable                                           179,257          11,882
   Inventories
          Raw & Packaging Materials                              362,431         243,686
          Work in Process                                          7,882           5,800
          Finished Goods                                          26,241          33,418

   Prepaid expenses                                              310,396         155,806
   Related Party Notes                                           123,875              --
                                                            ------------    ------------
          Total current assets                                 1,017,732       1,030,080

PROPERTY AND EQUIPMENT
   Leasehold improvements                                      1,281,721       1,300,043
   Machinery & Equipment                                       8,888,928       8,410,629
                                                            ------------    ------------
                                                              10,170,649       9,710,672
Accumulated Depreciation & Amortization                         (640,438)       (423,674)
                                                            ------------    ------------
     Net Property and Equipment                                9,530,211       9,286,998
MACHINERY RIGHTS & BLUEPRINTS                                    272,381         242,917
PATENTS PENDING                                                   81,691              --
DEPOSITS & DEFERRED ASSETS                                       331,722         490,700
                                                            ------------    ------------
     Total assets                                           $ 11,233,737    $ 11,050,695
                                                            ============    ============


                  LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
   Accounts payable and accrued expenses                    $  2,020,150    $    480,810
   Related Party Loans                                           150,000              --
   Current Maturities of long-term debt                          630,219       1,285,019
                                                            ------------    ------------
         Total current liabilities                             2,800,369       1,765,829

ACCRUED SALES TAX PAYABLE                                        158,186         288,289
LONG-TERM DEBT                                                 2,018,959       2,558,191

SHAREHOLDERS' EQUITY
   Preferred stock -- $0.001 par value;                        1,725,000       1,024,997
        5,000,000 shares authorized;
        172.5 and 100 shares outstanding in 1997 and 1996

   Common Stock -- $0.001 par value;
       50,000,000 shares authorized;
       25,106,060 and 18,795,488 shares outstanding
        in 1997 and 1996                                          25,106          18,795
   Additional paid-in-capital                                 22,583,899      17,846,466
   Accumulated deficit                                       (17,631,004)    (12,451,872)
   Treasury Stock                                               (446,778)             --
                                                            ------------    ------------
              Total shareholders' equity                       6,256,223       6,438,386
                                                            ------------    ------------
     Total liabilities and shareholders' equity             $ 11,233,737    $ 11,050,695
                                                            ============    ============
</TABLE>


       See Accompanying Notes to the Consolidated Financial Statements


                                     F1

<PAGE>
                            Crown Laboratories, Inc.
                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                             For the Year Ended
                                                December 31, 1997            December 31, 1996
                                                -----------------            -----------------
<S>                                               <C>                          <C>         
Sales-Net of Allowable Discounts                  $    189,070                 $         --
                                                                             
     Cost of Sales                                     (51,544)                          --
                                                  ------------                 ------------
                                                                             
Gross Profit                                           137,526                           --
                                                                             
     Research & Development Start Up Costs           1,633,720                    1,870,957
     General and Administrative Expenses             3,287,741                    2,483,490
                                                  ------------                 ------------
                                                                             
Loss From Operations                                (4,783,935)                  (4,354,447)
                                                                             
     Other Income/(Expense)                                                  
          Other Income                                       0                       75,600
          Other Expense                                (65,980)                    (146,902)
          Interest expense                            (345,111)                    (238,851)
          Interest income                               24,935                       32,695
                                                  ------------                 ------------
                                                                             
                                                    (5,170,091)                  (4,631,905)
                                                                             
Loss From Sale of Subsidiary                            (9,041)                          --
                                                  ------------                 ------------
                                                                             
Net Loss                                          ($ 5,179,132)                ($ 4,631,905)
                                                  ============                 ============
                                                                             
                                                                             
NET LOSS PER SHARE                                ($      0.27)                ($      0.27)
                                                  ============                 ============
                                                                             
                                                                             
                                                                             
WEIGHTED AVERAGE NUMBER OF COMMON                                            
AND COMMON EQUIVALENT SHARES                                                 
OUTSTANDING                                         18,961,292                   17,079,951
                                                  ============                 ============
                                                                   
</TABLE>


         See Accompanying Notes to the Consolidated Financial Statements


                                       F2

<PAGE>
                            Crown Laboratories, Inc.
                 Consolidated Statement of Shareholders' Equity
                      For the year ended December 31, 1997

<TABLE>
<CAPTION>
                                      Shares of    Common    Additional     Accumulated    Treasury      Preferred
                                        Common      Stock  Paid-in-Capital    Deficit        Stock         Stock           Total
                                      ----------   -------   -----------    ------------    ---------    -----------    -----------
<S>                                   <C>          <C>       <C>            <C>             <C>          <C>            <C>        
Balance as of December 31, 1996       18,795,488   $18,795   $17,846,466    ($12,451,872)          --    $ 1,024,997    $ 6,438,386

   Compensation expense for options
      granted to employees
      and consultants                         --        --       125,413              --           --             --        125,413

   Series E Preferred Stock Issued            --        --            --              --           --      3,000,000      3,000,000

   Shares issued on the conversion
      of Series E Preferred Stock      2,818,424     2,819     2,048,982              --           --     (2,299,997)      (248,196)

   Shares sold in private placement    1,338,273     1,338       736,050              --           --             --        737,388

   Fund raising Issuances              1,837,875     1,838     1,576,602              --           --             --      1,578,440

   Fund Raising Expenses                      --        --      (338,616)             --           --             --       (338,616)

   Warrants                                   --        --       452,500              --           --             --        452,500

   Shares Issued for Services            316,000       316       136,502              --           --             --        136,817

   Treasury Stock Buy Back                    --        --            --              --     (446,778)            --       (446,778)

     Net loss for the year ended
        December 31, 1997                     --        --            --      (5,179,132)          --             --     (5,179,132)
                                      ----------   -------   -----------    ------------    ---------    -----------    -----------
Balance as of December 31,1997        25,106,060   $25,106   $22,583,899    ($17,631,004)   ($446,778)   $ 1,725,000    $ 6,256,223
                                      ==========   =======   ===========    ============    =========    ===========    ===========
</TABLE>


        See Accompanying Notes to the Consolidated Financial Statements.

                                       F3
<PAGE>

                            Crown Laboratories, Inc.
                 Consolidated Statement of Shareholders' Equity
                      For the year ended December 31, 1996

<TABLE>
<CAPTION>
                                                 Shares of     Common     Additional      Accumulated     Preferred 
                                                Common Stock    Stock   Paid-in-Capital     Deficit         Stock          Total
                                                ------------    -----   ---------------     -------      -----------    -----------
<S>                                               <C>          <C>       <C>             <C>             <C>            <C>        
Balance as of December 31, 1995                   14,290,513   $14,290   $ 12,163,601    ($ 7,828,203)   $ 2,121,233    $ 6,470,921

   Compensation expense for options        
      granted to employees and consultants           320,000       320        550,651              --             --        550,971

   Series C/Series E Preferred Stock Issued               --        --             --              --    $ 1,500,000      1,500,000

   Shares issued on the conversion
      of Series C Preferred Stock                  2,041,288     2,041      2,585,959              --     (2,588,000)            --

   Shares sold in private placement                1,529,999     1,530      1,910,970              --             --      1,912,500

   Fund raising expenses                                  --        --       (207,922)             --             --       (207,922)

   Warrants converted                                613,688       614        843,207              --             --        843,821

   Imputed interest for Series
      C/Series E Preferred                                --        --             --           8,236         (8,236)            --

   Net loss for the period ended
      December 31, 1996                                   --        --             --      (4,631,905)            --     (4,631,905)
                                                  ----------   -------   ------------    ------------    -----------    -----------
Balance as of December 31, 1996                   18,795,488   $18,795   $ 17,846,466    ($12,451,872)   $ 1,024,997    $ 6,438,386
                                                  ==========   =======   ============    ============    ===========    ===========
</TABLE>



         See Accompanying Notes to the Consolidated Financial Statements

                                       F4
<PAGE>

                              Consolidated Statements of Cash Flow
                        Increase (Decrease) in Cash and Cash Equivalents

<TABLE>
<CAPTION>
                                                                                         For the Year Ended
                                                                               December 31,1997        December 31,1996
                                                                               ----------------        ----------------
<S>                                                                               <C>                    <C>         
CASH FLOWS FROM OPERATING ACTIVITIES

Net Loss                                                                          ($5,170,091)           ($4,631,905)

Adjustments to reconcile net loss to net cash used by operations:
           Depreciation and amortization                                              216,764                214,995
           Loss on Repayment of Debt                                                        0                 53,000
           Issuance of shares to employees                                            125,413                550,971
              and consultants
           Loss on Sale of Subsidiary                                                   9,041                     --
                                                                                  -----------            -----------
Changes in Assets and Liabilities:
           Increase in receivables                                                   (167,375)                48,239
           Increase in inventories                                                    (38,650)              (173,910)
           Increase in prepaid expenses                                              (154,590)              (111,297)
           Increase in accounts payable                                               735,131               (166,614)
                                                                                  -----------            -----------
                   and accrued expenses

Net Cash Used for operations                                                       (4,444,357)            (4,216,521)
                                                                                  -----------            -----------

CASH FLOWS FROM INVESTING ACTIVITIES
           Capital Expenditures and leasehold improvements                           (459,977)              (823,230)
           Increase in rights and blueprints                                          (29,465)               (58,439)
           Increase Patents Pending                                                   (81,691)                    --
           Borrowings from related parties                                           (123,875)                    --
           Decrease in deposits and deferred assets                                  (158,978)                (8,587)
           Increase in accrued sales taxes payable                                   (130,103)               (98,834)

Net Cash Used for investing activities                                               (984,089)              (989,090)
                                                                                  -----------            -----------


CASH FLOWS FROM FINANCING ACTIVITIES
           Proceeds from loans                                                             --              3,000,000
           Proceeds from related party loans                                          150,000                     --
           Repayment of loans payable                                                (149,409)            (1,690,624)
           Proceeds from issuance of common and                                     5,030,940              4,256,321
                preferred stock and the excercise of warrants
           Cost of Debt Financing                                                     163,693               (250,107)
           Equity Fundraising costs                                                  (338,616)              (207,922)
                                                                                  -----------            -----------

Net cash provided by financing activities                                           4,856,608              5,107,668
                                                                                  -----------            -----------

Net decrease in cash and cash equivalents                                            (571,838)               (97,943)

Cash and cash equivalents, beginning of year                                          579,488                677,431
                                                                                  -----------            -----------

Cash and cash equivalents, end of year                                            $     7,650            $   579,488
                                                                                  ===========            ===========
</TABLE>

        See Accompanying Notes to the Consolidated Financial Statements.


                                       F5


<PAGE>

F11

                            CROWN LABORATORIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1996 AND 1995


1.   Background and Organization

Crown Laboratories, Inc. (the "Company" or "Crown") was incorporated on February
23,  1989,   in  Delaware,   as   Industrialistics,   Inc.  In  November   1991,
Industrialistics, Inc. changed its name to Crown Laboratories, Inc.

Since its inception,  the Company has been  principally  engaged in the research
and development of proprietary medical nutritional dry-mix and liquid supplement
products to be sold primarily to nursing homes, hospitals,  and home health care
agencies.

On June 25, 1996,  the Company  received  final U.S. Food & Drug  Administration
(F.D.A.)  approval to commence  manufacturing  its  proprietary  line of aseptic
liquid nutritional  products.  Commissioning of the equipment is required by the
F.D.A.  The  commissioning  process  began on April  13,  1995 and  delays  were
experienced  primarily  as a result of the aseptic  filler's  inability  to meet
F.D.A.  certification  criteria  when it was shipped to the Company.  A panel of
tests  must be passed in order to file with the  F.D.A.  On June 25,  1996,  the
Company received approval for its aseptic  manufacturing and filling  equipment.
Since  that date,  the  Company  has been  involved  in  modifying  its  product
formulation  and  aseptic  packaging   equipment  to  support  commercial  level
production in anticipation of its entry into the market.

The Company has suffered  recurring  losses from  operations and working capital
deficiencies  that raise  substantial  doubt  about its ability to continue as a
going concern.  Management's  explanation and plans to address this issue are as
follows:

As a result of delays in installing the  equipment,  problems  encountered  with
bacteriological  tests which delayed filing with the F.D.A. and the modification
of the  process to support  commercial  level  production,  the Company has been
required to raise  further funds to sustain  operations  until the plant becomes
operational and it may require further funds to support working capital needs as
it begins to enter the market or to provide for normal operating  expenses.  The
Company is  exploring  possible  alternatives  for raising  additional  debt and
equity funds. There can be no assurances that the Company will be able to secure
the  necessary  financing,  or if a source of  funding is  identified,  that the
funding will be on terms and conditions which are favorable to the Company.

The Company and its  operations are subject to the various risks inherent in the
start-up and development of a new business enterprise.  The operating history of
the Company is limited.  There can be no  assurance  the Company will be able to
produce its products  and operate  profitably.  Competitors  of the Company have
substantially  greater  resources  than the  Company.  The  Company  may require
further  financial  resources.  The  Company  will not have any  sales of liquid
nutritional  products  until the Las Vegas  manufacturing  facility  can sustain
commercial  production  levels.  To the  extent  that the  Company  uses  equity
securities to raise additional funds to satisfy its working capital needs, there
will be additional dilution to the Company's existing shareholders.

The Company  regards the  formulations of its products to be proprietary and has
filed for a patent  covering  the  formulation  and  production  process for its
primary  liquid  nutritional  product,   "WinLac(TM)".   The  Company  has  also
trademarked  its Company name, its liquid  nutritional  product names as well as
"Peel  and  Drink(TM)"  and "The  Nutritional  Difference(TM)".  There can be no
assurances  that any  patent  will be  issued.  Currently,  the  Company  exerts
substantial  efforts to protect  trade  secrets and to keep formulas and related
process  know-how  confidential.  Currently,  the Company  requires  each of its
employees to sign 


                                       F6
<PAGE>

confidentiality   agreements  as  a  condition  of  employment  to  protect  its
formulations and production know-how.  However,  there can be no assurances that
the Company will be successful in these efforts.

2.   Significant Accounting Policies

Principles of Consolidation

The   consolidated   financial   statements   include  the   accounts  of  Crown
Laboratories,  Inc.  and its  wholly-owned  subsidiary,  Crown  Russia OOO.  The
Company  transferred  ownership  of 100% of the Common Stock of Crown Russia OOO
effective during the third quarter of 1997. Note 16. All  intercompany  balances
have been eliminated in consolidation.

Uses of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting  principles  requires the use of certain  estimates by  management in
determining  the reported  amounts of assets and  liabilities  and disclosure of
contingent  assets and  liabilities at the date of the financial  statements and
the reported amounts of revenue and expenses during the reported period.  Actual
results could differ from those estimates.

Revenue Recognition

The Company  records sales upon  shipment of product to its  customers  which is
concurrent with the transfer of title.  Sales of $189,070 were recorded in 1997.
The  Company  has sold,  through  its  subsidiary,  product to Eastern  European
customers.

Concentration of Credit Risks

Substantially  all of the Company's dry mix products  sales have been to foreign
customers.

Cash and Cash Equivalents

Cash and cash  equivalents  include  highly  liquid  investments  with  original
maturity dates of three months or less at the date of purchase.

Inventories

Inventories  are  stated  at the  lower of cost or  market  using  the  first-in
first-out method.

Property and Equipment/Machinery Rights and Blueprints

Property  and  equipment  are  stated  at  historical  cost.   Depreciation  and
amortization  are  recorded  using the straight  line method over the  estimated
useful  lives of  assets  which  range  from 5 to 15  years.  Recently  acquired
equipment and improvements for the liquid products  production facility will not
be depreciated until production begins. The Company only capitalizes those costs
directly  related to the equipment and external costs for  installation  and has
not capitalized  any management,  executive or overhead costs except for certain
legal expenses related to machinery rights, blueprints and patents pending. Such
costs are charged to expense as they are incurred.

During  1995,  the Company  obtained  the rights and  blueprints  to its aseptic
filler  machine  from the German  bankruptcy  court.  Costs  incurred  to obtain
intangible  liquid products  machinery rights and blueprints are capitalized and
will  be  amortized  over  the  same  life  as the  underlying  liquid  products
equipment.



                                       F7
<PAGE>

Income Taxes

The Company  accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). SFAS
No. 109 requires the use of the asset and  liability  method,  whereby  deferred
income taxes are recognized for the tax consequences of "temporary  differences"
by  applying  enacted   statutory  tax  rates  applicable  to  future  years  to
differences  between the financial  statement carrying amounts and the tax bases
of existing assets and  liabilities.  Under SFAS No. 109, the effect on deferred
income taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.

Stock-Based Compensation

The Company  accounts for employee stock options in accordance  with  Accounting
Principles  Board  No.  25 ("APB  No.  25")  "Accounting  for  Stock  Issued  to
Employees".  Under APB No. 25, the  Company  values  its  compensation  cost for
stock-based  employee  compensation  plans using the  intrinsic  value method of
accounting.

In 1996,  the Company  adopted for  footnote  disclosure  purposes  Statement of
Financial   Accounting   Standards   No.  123,   "Accounting   for   Stock-Based
Compensation" ("SFAS No. 123") which requires that companies measure the cost of
stock-based  employee  compensation  at the grant date based on the value of the
award and recognize  this cost over the service  period.  The value of the stock
based award is determined using a pricing model whereby compensation cost is the
excess of the fair value of the stock as  determined  by the model at grant date
or other  measurement  date over the amount an employee  must pay to acquire the
stock.

Financial Instruments

The carrying amount for cash and cash equivalents  reported in the balance sheet
approximates  fair value.  The fair value of long-term debt based on the current
rates  at  which  the  Company  could  borrow  funds  with  similar  maturities,
approximates its carrying value as of December 31, 1997.

Reclassification

Certain  reclassifications  have been made to the December  31, 1996,  financial
statements to conform with the current year presentation.

Long-Lived Assets

The Company  accounts for its long-lived  assets in accordance with Statement of
Financial  Accounting  Standards  No. 121,  "Accounting  for the  Impairment  of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" which establishes
guidelines  regarding when impairment losses on long-lived assets, which include
property and equipment and certain  identifiable  intangible  assets,  should be
recognized   and  how  impairment   losses  should  be  measured.   The  Company
periodically reviews such assets for possible impairment and expected losses, if
any,  are recorded  currently.  During the year ended  December  31,  1997,  the
Company provided no reserves of assets for disposal.

New Accounting Pronouncements

Statement of Financial  Accounting  Standard No. 130,  "Reporting  Comprehensive
Income,"  issued by the FASB is effective for financial  statements  with fiscal
years  beginning  after  December  15,  1997.  SFAS  establishes  standards  for
reporting and display of  comprehensive  income and its components in a full set
of general-purpose financial statements. The Company does not expect adoption of
SFAS 130 to have any effect on its financial  position or results of operations.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related  Information,"  issued by the FASB is effective for
financial  statements  with fiscal years beginning after December 15, 1997. SFAS
131 requires



                                       F8
<PAGE>

that public  companies  report certain  information  about  operating  segments,
products,  services and geographical areas in which they operate and their major
customers.  The Company does not expect  adoption of SFAS 131 to have any effect
on its financial  position or results of operations;  however,  disclosures with
respect to the aforementioned items may be increased.

Net Loss Per Common Share

Statements  of Financial  Accounting  Standards  No. 128,  "Earnings  per Share"
issued by the FASB is effective for financial  statements  with fiscal years and
interim  periods  ending  after  December  15,  1997.  SFAS 128 provides for the
calculation  of Basic and Diluted  earnings per share.  Basic earnings per share
includes no dilution  and is computed  by dividing  income  available  to common
stockholders by the weighted average number of common shares  outstanding during
the  periods  presented.  Diluted  earnings  per share  reflects  the  potential
dilution of securities that could share in the earnings,  such as stock options,
warrants or  convertible  debentures.  Stock  options and  warrants  outstanding
during the periods  presented  were not  included in diluted  earnings per share
since their effect would be anti-dilutive.

3.   Debt

The Company obtained debt financing from Finova Capital  Corporation  ("FINOVA")
that provides for a term loan of $3 million which increases to $4.5 million when
the  Company  secures  commitments  for $7 million of sales.  The loan calls for
interest-only  payments  over the course of the first six  months  with the loan
fully amortizing over the remaining 54 months. The interest rate of 11.93% which
was fixed at the time of closing,  was 561 basis  points  higher than the 5 year
treasury note rate at the time of closing.  The loan agreement  contains certain
covenants  and ratios  that must be  maintained.  Specifically,  the  Company is
required to maintain a minimum  tangible net worth of $5 million,  a senior debt
to  tangible  net worth  ratio of 1 to 1, and a cash  flow  ratio of 2 to 1. The
first two covenants  are  effective  with the closing of the loan while the cash
flow ratio is effective  as of December 31, 1997.  The proceeds of the loan were
used to pay off existing debt, trade payables and provide working capital funds.
Additionally,  as part of the loan  agreement,  the Company  issued 300,000 five
year warrants to purchase  shares of the  Company's  Common Stock at the closing
market  price of the shares on the date of  closing.  For  accounting  purposes,
these warrants were deemed to have been issued at fair market value.

In connection  with the loan from FINOVA,  the Company  incurred legal expenses,
for both its attorneys  and for FINOVA's  attorneys (as provided for in the loan
agreement) totaling  approximately  $49,000. These amounts have been capitalized
and are being expensed over the life of the loan.

The Company  paid  $80,000 as a cash fee to a finder and the  finder's  nominee.
Additionally,  100,000  warrants  were issued to purchase the  Company's  Common
Stock at the closing  market  price of the stock on the date of closing the loan
($1.4375 per share).  The cost of the finder's fee is being  amortized  over the
life of the loan (5 years). For accounting purposes,  these warrants were deemed
to have been issued at fair market value.

From the  proceeds  of the  loan,  the  Company  paid off its loans  with  First
Security  Bank of Nevada  (secured term loan and Small  Business  Administration
loan), its lease with G.E. Capital Corporation  financing its aseptic processor,
its  telephone  system  lease,  and its fork lift and pallet  lift  leases.  The
Company paid a pre-payment penalty on its lease with G.E. Capital Corporation of
$53,983, which was expensed during 1996 and included in "Other Income/(Expense)"
in the consolidated statements of operations.

The  Company's  debt  repayments  were  delinquent by $45,719 as of December 31,
1997.  The Company  subsequently  paid the late  payments  and is current on the
loan.  The Company was in  violation of certain of its loan  covenants.  Finova,
however,  has subsequently waived the covenants and modified its loan agreement.
In consideration  for the waiver and  modifications the Company issued to Finova
warrants to purchase an additional  400,000 shares of Company stock at $.375 per
share. The warrants expire August 16, 2001.



                                       F9
<PAGE>

Annual principal payments for future years ending December 31 are as follows:

                 Year                      Principal Due
                 ----                      -------------
                 1998                       $   630,219
                 1999                           659,192
                 2000                           742,279
                 2001                           617,489
                                            -----------
                                            $ 2,649,178
                 Less:  current portion         630,219
                                            -----------
                                            $ 2,018,959
                                            ===========

4.   Income Taxes

The Company has operated at a loss since  inception and has a net operating loss
carry-forward  of  approximately  ($13,500,000)  as of December  31,  1997.  The
Company is  researching  the  availability  of such net operating  losses to the
Company.  The  availability of all loss  carry-forwards  to offset U.S.  taxable
income  may be  limited  as a result of  changes  in  shareholders  and  certain
elections made by the Company. For accounting purposes, the Company has provided
a full valuation allowance for these loss carry-forwards and has not established
a deferred tax asset.

5.   Management Employment and Consulting Contracts

The Company has an  obligation  to make  minimum cash  payments  for  management
employment contracts of $525,000 for 1998, $525,000 for 1999, $525,000 for 2000,
$465,000 for 2001, and $372,000 for 2002.

During 1995,  411,000 options were issued to consultants for services  rendered.
These options  expire 5 years from,  November 13, 1995,  the date of grant.  All
options were  granted at exercise  prices that were equal to or greater than 85%
of the market price of the Company's shares at the time of grant.

Additionally in 1995, the Company issued stock to two employees (total of 40,000
shares) vesting 40%, two years after the date of their employment,  and 60% five
years  after  date of their  employment.  Also in 1995,  the  Company  issued an
additional  141,000  options to employees  at an exercise  price which was based
upon an 85% discount to the market price at the time of grant.  Vesting of these
options  will occur 40%, two years after the date of their  employment  and 60%,
five years after date of their  employment.  Salary expense for these options is
being accrued over the life of the vesting  schedules.  During 1996, the Company
recognized  compensation  expense  of  $182,221  and  recorded  a  corresponding
increase to additional paid-in-capital.

In 1996,  the Company  issued stock to two  employees  (total of 40,000  shares)
which vest 40% two years after the date of their  employment and 60%, five years
after the date of their employment.  During 1996, 180,000 shares of Common Stock
was also  issued to Dr.  Kouri  (refer to Note 12).  Also in 1996,  the  Company
issued an additional 210,000 options to employees at an exercise price which was
based upon 85%  discount  to the market  price at the time of grant.  Vesting of
these options will occur 40%, two years after the date of their  employment  and
60%, five years after their date of employment. Salary expense for these options
is being  accrued over the life of the vesting  schedules.  During 1996,  50,000
options were issued to consultants for services rendered. These options expire 3
years from the dates of grant, June 6, 1996 and October 28, 1996.

6.   1992 Stock Option Plan

In December 1992,  the Company  adopted the 1992 Stock Option Plan (the "Plan").
The Plan provides for the granting of  non-statutory  stock options or incentive
stock  options to certain  key  employees  to  purchase  up to an  aggregate  of
2,100,000 shares of Common Stock.  The option price per share for  non-statutory
options must be at least 85% of the fair market value on the date of grant.  The
Plan terminates in 2003.



                                      F10
<PAGE>

Options  are not  transferable  under the Plan and  terminate  within  specified
periods of time after termination of an optionee's employment.

On November  18, 1993,  options to purchase  2,100,000  shares of the  Company's
Common  Stock were  granted  to the  Company's  employees.  The  schedule  below
outlines  the amount of options  outstanding  as of  December  31,  1997.  These
options have an exercise  price of $1.275 and are fully  vested.  All  1,834,967
options expire in 2003.

                  Name                      Number of Options Granted
                  ----                      -------------------------
                  Craig Nash                         768,028
                  Scott Nash                         768,029
                  Other Employees                    298,910
                                                   ---------
Total Employee Stock Option Plan Options
     Remaining from 1992 Plan                      1,834,967
                                                   =========

7.   1997 Stock Option Plan

On August 21, 1997 the Board  unanimously  adopted the Company's  1997 Incentive
Plan  subject to  shareholder  approval.  On October 7, 1997,  the  shareholders
approved  the  Company's  1997 Plan.  Under the plan,  5,000,000  shares will be
available for the grant of options and awards to eligible individuals.  The 1997
Plan also provides for the  non-discretionary  grant of 50,000 options each year
to each non-employee  Director who becomes a member of the Board after September
16, 1997. The Company's  current 1992 Plan authorizing the issuance of 2,100,000
shares of common stock in respect of option grants has been terminated except to
the extent of 1,834,967 grants of options were made thereunder. The remainder of
the  authorized  shares of common  stock  under the 1992 plan,  outlined  above,
265,033 has been terminated.

8.   Other Stock Options and Warrants

During  1996,  the Company  granted the  following  options to purchase  854,110
shares of its Common Stock (in addition to those in the 1992 stock option plan).
Outstanding  options and vested  options as of December 31, 1996, are summarized
below at the following exercise prices:

<TABLE>
<CAPTION>
                                                                          # shares subject to    dates of
                                                                                forfeiture       vesting
                                                                                ----------       -------
<S>            <C>                                                                <C>           <C>
 30,000        shares at $0.225   per share through June 1999                       -0-           Vested
 50,000        shares at $0.225   per share through August 2006                    50,000       8/96-8/99
140,000        shares at $0.250   per share through June 2006                     120,000       3/96-6/01
150,000        shares at $1.44    per share through August 1999                   150,000       8/96-6/98
 50,000        shares at $1.4375  per share through August 2001                     -0-           Vested
300,000        shares at $1.4375  per share through December 2001                   -0-           Vested
 24,110        shares at $1.625   per share through June 1998                       -0-           Vested
 40,000        shares at $1.75    per share through September 1999                  -0-          see below
 50,000        shares at $2.00    per share through July 2001                       -0-           Vested
 20,000        shares at $2.40    per share through October 1999                    -0-           Vested
</TABLE>

The options to  purchase  40,000  shares of Common  Stock at $1.75 per share has
been  granted to Arthur  Berkowitz  for his  efforts in the  establishment  of a
marketing consulting  agreement for the Company.  These options (20,000 of which
will vest  immediately  with the  remaining  vesting based upon the signing of a
marketing agreement) expire on September 24, 1999.



                                      F11
<PAGE>

During 1997,  the Company  granted the following  options to purchase  1,889,000
shares of its Common  Stock (in  addition to those in the 1992 Stock Option Plan
and  outstanding  options as of  December  31,  1997,  summarized  below) at the
following exercise prices:

<TABLE>
<CAPTION>
                                                                     # shares subject to   dates of
                                                                          forfeiture      vesting
                                                                          ----------       -------
<S>         <C>                                                            <C>           <C>
100,000     shares at $0.25   per share through February 2007               90,000         2/97-2/02
100,000     shares at $0.25   per share through April 2004                  77,500         4/97-4/99
130,000     shares at $0.25   per share through November 2007              130,000        2/99-11/02
200,000     shares at $0.15   per share through January 2004               100,000         9/97-1/99
125,000     shares at $1.01   per share through April 2007                 125,000         4/99-4/02
200,000     shares at $0.938  per share through October 2007               100,000       10/97-10/99
734,000     shares at $1.25   per share through June 2002                      -0-          Vested
300,000     shares at $0.688  per share through November 2002                  -0-          Vested
</TABLE>

In connection with the private  placements of 1,547,975  shares of the Company's
Common  Stock  in  November  1994  and an  additional  1,196,125  shares  of the
Company's  Common Stock in 1995, the Company issued  warrants to acquire 877,500
shares and 598,063  shares,  respectively,  of the Company's  Common Stock at an
exercise  price of $3.00  per  share.  The  Company  has the  right to call such
warrants at a call price of $.10 per warrant if, at any time, the current market
price of the  Company's  Common  Stock has been at least  $4.00 per share for 30
consecutive  days,  ending  within  15 days of the  notice  of  such  call.  All
unexercised  and uncalled  warrants have expired from December 31, 1996 to April
1997  depending on the date of  investment.  On February  15, 1996,  the Company
offered  the  holders  of its  warrants  (issued  in  conjunction  with  private
placements in 1994 and 1995), the opportunity to lower the exercise price of the
warrants from $3.00 to $1.375 per share provided that they exercise at least 60%
of their holdings.  The expiration date of the remaining warrants, if any, would
be extended for one year at the same exercise prices. This offer was extended on
March 12, 1996 until March 28,  1996. A total of 613,688  warrants  representing
$843,821 were exercised.

The Company also issued to its placement  agent and brokers,  options to acquire
165,750  shares of the Company's  Common Stock at an exercise price of $2.40 per
share in the November 1994 private placement and 110,613 shares of the Company's
Common  Stock  at an  exercise  price  of $2.40  per  share in the 1995  private
placement.  These  options will expire in November  1999 and  March/April  2000,
respectively.

9.   Stock Option and Incentive Plan

The Company has stock  option plans and other  arrangements  currently in effect
under which  future  grants of stock  options may be issued to  executives,  key
employees,  and  directors.  Refer to Notes 5 and 6. The Company has adopted the
disclosure  of  provisions  of SFAS  No.  123  and is  continuing  to  recognize
compensation  expense  using  the  intrinsic  value  method  under APB No. 25 as
discussed in Note 2. Had  compensation  expense for the Company's  stock options
been  determined  based on the fair market value at the grant date for awards in
1997 and 1996, consistent with the provisions of SFAS No. 123, the Company's net
loss and primary loss per common share would have been as follows:

<TABLE>
<CAPTION>
                                                                 1997                       1996
                                                                 ----                       ----
<S>                                         <C>               <C>                       <C>         
Net Loss:                                   as reported       ($5,179,132)              ($4,631,905)
Net Loss:                                   pro forma         ($5,919,000)              ($4,636,621)
Primary loss per Common Share:              as reported       ($0.24)                   ($0.27)
Primary loss per Common Share:              pro forma         ($0.31)                   ($0.27)
</TABLE>



                                      F12
<PAGE>

This pro forma impact only takes into account  options  granted since January 1,
1995.  The SFAS No. 123 fair value of each option  granted was  estimated on the
date of the grant  using a number of  factors  that  resulted  in a net value of
approximately 60% of the stock price on the grant date.

                                         Number of            Weighted Average
                                          shares              Exercise Price
                                          ------              --------------
Outstanding at December 31, 1994         2,209,967                 1.31
Granted                                    421,834                 1.69
Exercised                                     -                      -
Forfeited                                     -                      -
                                         ---------

Outstanding at December 31, 1995         2,631,801                 1.40
Granted                                    360,000                 1.50
Exercised                                     -                      -
Forfeited                                 (262,500)                1.50
                                         ---------

Outstanding at December 31,1996          2,729,301                 1.43
Granted                                    675,000                 0.85
Exercised                                     -                      -
Forfeited                                 (260,000)                0.90
                                         ---------

Outstanding at December 31, 1997         3,144,301                 1.25
                                         =========              

10.  Preferred Stock and Potential Anti-Takeover Rights

The  Company  is  authorized  to issue  5,000,000  shares  of  $0.001  par value
preferred  stock  with the  rights,  preferences,  privileges  and  restrictions
thereof to be  determined  by the Board of Directors  of the Company.  Preferred
stock can be issued without the vote of holders of Common Stock. Rights could be
granted to the holders of preferred  stock that could reduce the  attractiveness
of the Company as a potential  takeover  target,  make the removal of management
more difficult, or adversely impact the rights of holders of Common Stock.

During 1995,  the Company  raised $3.5 million  through the issuance of Series C
Preferred Stock.  During the quarter ended March 31, 1996, the Company raised an
additional  $500,000  through a  placement  pursuant to  Regulation  S under the
Securities Act of 1933, as amended,  of its Series C Preferred  Stock,  bringing
the  total of  Series C  Preferred  Stock  issued to $4  million.  The  Series C
Preferred  Stock pays no  dividends,  but imputes a 6% effective  annual rate of
return  upon  conversion  into  Common  Stock.  This  return to holders is being
accounted for as a direct reduction to accumulated  deficit over the time during
which the preferred stock is  outstanding.  The conversion rate is determined by
the acquisition  value of the preferred stock (plus imputed interest referred to
above)  and an 18%  discount  to the 5 day  average  market  price of the common
shares at the time of exercise. As of July 2, 1996 all of the Series C Preferred
Stock issued had been  converted  into  3,294,735  shares of Common  Stock.  The
shareholders had waived their interest in the conversion for all past,  present,
and future transactions.

On July 31, 1996, the Company raised $1 million through the sale of its Series E
Preferred  Stock to a  "Regulation  S"  investor.  The Series E Preferred  Stock
imputes an average  effective  interest rate of 6% which is payable in shares of
the Company's  Common Stock on the "Dividend  Dates" (These  Dividend Dates have
been waived).  The Series E Preferred Stock is convertible into common shares at
a rate equal to 10,000  divided by the market value of the Common Stock adjusted
by a discount  factor  which  ranges from 15% to 31%  depending  on the time the
shares are held from the issuance date (the longer the stock is held, the deeper
the discount, unless the Common Stock price falls below $0.75, in which case the
discount no longer applies).  Under this conversion formula, as the Common Stock
price drops,  the number of common shares into which Series E Preferred Stock is
convertible  grows.  The number is not subject to a 


                                      F13
<PAGE>

ceiling.  As of December 31, 1996,  there was  $1,000,000  in Series E Preferred
Stock  outstanding.  On March 3, 1997,  the  Regulation S investor  notified the
Company of its intention to convert its Series E Preferred  Stock into shares of
the  Company's  Common  Stock.  Under the  conversion  formula  for the Series E
Preferred  Stock,  the Regulation S investor was issued  1,018,424 shares of the
Company's Common Stock on March 7, 1997.

The Company's Certificate of Incorporation  contains certain provisions designed
to require a  beneficial  owner of over 25% of the Common  Stock to comply  with
certain provisions regarding transactions with the Company and membership on the
Board of Directors,  or pay certain prices  (usually the highest price per share
paid) for the Company's  stock in certain  business  combinations  involving the
beneficial owner. These provisions are in addition to those provided by Delaware
law.

11.  Equity

During 1995, the Company raised  approximately $2.4 million in additional common
equity  financing  through  a  private  placement  which  is  reflected  in  the
accompanying  financial statements.  Each unit was purchased for $50,000. A unit
consisted  of 25,000  shares of Common  Stock and  warrants to  purchase  12,500
shares of Common Stock for $3 per share. The warrants expired two years from the
date of  investment.  Fractional  units have also been sold.  In  addition,  the
Company  issued to the  Placement  Agent and  brokers  2,500  options to acquire
shares of the Company's Common Stock at a price of $2.40 per share for each unit
sold. These options expire five years from the date of issuance.

On May 10, 1996, the Company  offered a private  placement of equity  securities
with a minimum of $540,000 to a maximum of  $2,520,000  (the  private  placement
provides  for an  over-subscription  of the  placement up to  $3,000,000  at the
Company's  discretion) in units of $45,000. Each unit consisted of 30,000 shares
of the  Company's  Common Stock and 30,000  warrants to purchase  the  Company's
Common Stock at a price of $1.60 for a period of six months after the closing of
the  private  placement.  The  Company  raised  $1,912,500  through  the private
placement which was closed on July 30, 1996.

On March 7, 1997,  the Company  raised $3 million  through the sale  pursuant to
Regulation  S under the  Securities  Act of 1933,  as  amended,  of its Series E
Preferred  Stock.  The Series E  Preferred  Stock  imputes an average  effective
interest rate of 6% which is payable in shares of the Company's  Common Stock on
the "Dividend  Dates",  (These  Dividend  Dates have been waived).  The Series E
Preferred  Stock is  convertible  into  common  shares at a rate equal to 10,000
divided by the market  value of the Common Stock  adjusted by a discount  factor
which ranges from 15% to 31%  depending on the time the shares are held from the
issuance date (the longer the stock is held, the deeper the discount, unless the
Common  Stock  price  falls below  $0.75,  in which case the  discount no longer
applies).  Under this conversion  formula,  as the Common Stock price drops, the
number of common  shares  into which  Series E  Preferred  Stock is  convertible
continues  to grow.  The number is not subject to a ceiling.  A total of 200,000
five year options to purchase the Company's Common Stock at $2.50 per share were
issued to two finders for their role in raising these funds.

On August 7, 1997, the Company  commenced a private  offering of up to 5,000,000
shares of its common  stock at a price of $.70 per share.  The offering was made
pursuant to the  exemption  for a private  placement  under  Section 4(2) of the
Securities  Act of 1933,  as  amended.  During  August - October 31,  1997,  the
Company  sold a total of  1,338,273  shares of Common  Stock,  for an  aggregate
purchase  price  of  $736,050.  The  Common  Stock  was  sold  to 14  accredited
investors. The Company's private offering concluded on October 31, 1997.

On September  29, 1997,  the holder of the  Company's  Series E Preferred  Stock
converted 90 shares of this series into  1,600,000  shares of Common  Stock.  In
turn, the holder sold these shares of Common Stock  privately and then acquired,
in a Regulation S offering,  1,285,715  shares of Common Stock from the 


                                      F14
<PAGE>

Company.  The shares of Common  Stock were sold by the Company at $.70 per share
for an aggregate of $900,000.  There are currently  outstanding  172.5 shares of
Series E Preferred Stock.

On September  29, 1997,  the Company  raised  $500,000 in a Regulation S sale of
prepaid,  mandatory  exercisable  warrants  to  purchase  Common  Stock to a new
investor.  The  warrants  may be  exercised  in whole or in part in amounts over
$10,000 of the principal  amount of the warrants,  at any time, until expiration
on September 28, 1999.  The exercise  price for each share of Common Stock shall
be equal to the  lower of (x) 80% of the  average  closing  price of the  Common
Stock for the one  business  day  immediately  preceding  the issue  date of the
warrant or (y) 80% of the average  closing price of the Common Stock for the one
business  day  immediately  preceding  the date of receipt by the Company of the
notice of exercise,  as reported on the  principal  stock  exchange on which the
Company's Common Stock is traded.  At the present time no shares of Common Stock
have been issued under this arrangement.

On April 9, 1997, the Company  announced the authorization of expenditures up to
$500,000 for purchases of its common stock to be retained as treasury stock. The
authorization  to make these  purchases may be discontinued at any time and does
not  constitute  a  commitment  by the  Company to buy a specific  amount of its
shares.

During the third quarter ended  September 30, 1997 a total of 1,933,849  shares,
options or warrants were repurchased or expired.

During 1996 and 1997, the Company incurred $207,922 and $269,212,  respectively,
of costs relating to issuances of stock.  These costs have been accounted for as
a reduction of Additional Paid-in Capital.

Please refer to Note 8 for a summary of options and warrants outstanding.

12.  Dividend Policy

Since its inception, the Company has not generated any earnings and has not paid
any dividends on its Common Stock. Payment of future dividends,  if any, will be
determined  by  the  Company's  Board  of  Directors  based  upon  a  number  of
considerations,   including   the   Company's   financial   condition,   capital
requirements,   cash  flow,   profitability,   business   outlook,   contractual
restrictions and other factors.  In the foreseeable  future, the Company intends
to retain all of its earnings to finance the  development  and  expansion of its
business.

13.  Commitments and Contingencies

The Company has entered  into a five year lease for its Las Vegas  manufacturing
facility (with an option to renew the lease for an additional five year period),
which  requires   monthly  payments  of  $26,576  subject  to  annual  inflation
escalations which commenced in September 1996. During 1997 and 1996, the Company
paid $318,912 and $311,946 in lease  payments for the building.  The Company had
obtained a twelve month option to purchase  its current  manufacturing  facility
for $3,185,000 which expired on December 31, 1997.  Currently there are no plans
to renew the option.

The Company  also has a year to year  office  space lease in New York City which
requires  monthly payments of $3,090,  subject to annual  inflation  escalation.
During 1997, the Company paid $33,410 in lease payments for this space.

*On July 25, 1997, the Company  entered into an operating lease for equipment to
be used for the  manufacturing of other  nutritional  products at its production
facility in Las Vegas, Nevada. Under the terms of the operating lease, $550,800,
together  with  interest  thereon,  is payable  monthly over a 60-month  term at
$6,502  per month  from the first 24 months,  escalating  to  $15,000  per month
thereafter.  The remaining portion under the lease,  $367,200, is payable at the
end of the  60-month  term.  The  Company 


                                      F15
<PAGE>

has an option to prepay the financed amount in full or in part without  penalty,
and has an option to purchase the equipment at the end of the 60-month  term, at
a price equal to the then fair market value of the equipment.

In connection  with the financing of the equipment,  the Company granted 734,000
options to the lessor of the equipment exercisable at an exercise price of $1.25
per share, subject to adjustments.  These options may be exercised in whole, but
not in part,  at any time by the lessor,  and are subject to mandatory  exercise
under  certain  circumstances.  During  1997,  the Company paid $19,607 in lease
payments for the equipment.

At December 31, 1997,  the Company was  delinquent  in paying its payroll  taxes
amounting to approximately $206,480.  Through April 9, 1998, the Company has not
paid this  liability or any  additional  payroll tax  liabilities  for 1998. The
Company has not been  assessed any  penalties  related to the failure to pay its
payroll obligations to date.

The  Company  is also  negotiating  with  other  various  parties  to enter into
consulting arrangements. The Company will compensate consultants either in cash,
shares of Common Stock, or a combination  thereof. To the extent the fair market
value of options  issued for services  rendered  exceeds  exercise  prices,  the
Company is required to recognize compensation expense.

Future  minimum  payments  due  under  non-canceled  lease  arrangements  are as
follows:

      Year Ending    Facility and Office
      December 31,         Leases              Equipment              Total
      ------------         ------              ---------              -----

        1998               $357,174            $ 37,080             $  394,254
        1999                367,886              38,192                406,078
        2000                381,468              39,337                420,805
                         ----------            --------             ----------
                         $1,106,528            $114,609             $1,221,137
                         ==========            ========             ==========

14.  Supplemental Consolidated Statements of Cash Flow Information

The following information  supplements the consolidated  statements of cash flow
for the years ended December 31, 1997 and 1996.
                                                       1997             1996
                                                       ----             ----
Interest Paid                                         $345,111        $238,851
Assets acquired through capital lease financing         -0-            $29,755

During 1997 and 1996,  the Company  issued 316 and 320 common  stock  shares for
services.

15.  Legal Proceedings

The  Company is  subject to normal  business  litigation  and claims  concerning
products and services  rendered to the Company.  The Company  believes  that the
outcome  of such  lawsuits,  claims  and  other  legal  matters  will not have a
material impact on the Company's consolidated financial position.

In  addition  to normal  business  litigation,  the  Company is  involved in the
following litigation:

Crown V.  Rolfenade  et al.,  was  filed by the  Company,  in  March  1995,  and
subsequently  amended  to  incorporate  all of the  defendants  "alter  egos" in
September 1995. The action is for breach of contract, misrepresentation,  fraud,
and alter  ego.  Rolfenade  warranted  that the  packaging  machine  would be in
compliance with F.D.A. requirements. The packaging machine was not in compliance
with  the  applicable 


                                      F16
<PAGE>

regulations, and the Company has made substantial modifications to the filler to
bring it into compliance.  The Company has served all defendants under the Hague
Convention.  Other defendants named in the suit filed a Motion to Quash Service,
which was lost.  Their appeal to the Nevada Supreme Court was denied.  They have
since filed an answer.  The Company cannot predict the outcome of its claims. In
January  1998,  an order was filed in the  District  Court Clark  County  Nevada
granting a motion for Partial  Summary  Judgment in favor of Crown  Laboratories
against  International   Packaging  and  Processing  Systems,   Inc.,  and  Karl
Fabricius. The motion included specific findings of misrepresentation, fraud and
alter  ego.  The  award in favor of Crown  was for  $21,664,323  plus  costs and
attorneys  fees.  Since that time, the Company has been evaluating the award and
trying to determine  how much,  if  anything,  the Company is likely to recover.
Presently, the Company cannot predict the ultimate collectibility of its claims.

16.  Related Party Transactions

Effective  during the third  quarter,  the  Company  entered  into an  agreement
regarding a reorganization of its corporate  structure,  under which the Company
transferred  ownership  of 100% of the common  stock of Crown  Russia  OOO,  its
wholly-owned subsidiary ("Crown Russia"), to Yelena Nash in exchange for payment
of $15,000,  adjusted to $37,825,  by Yelena Nash. At the same time, the Company
and Crown Russia entered into a ten-year  distribution  and sales agreement (the
"Distribution  Agreement"),  under which Crown Russia will become the  exclusive
distribution, marketing and sales company for the Company's nutritional products
in Russia and other Central and Eastern European  countries and Crown USA agrees
to pay Crown  Russia all  reasonable  expenses  approved by the Board to develop
this  customer  for a period of three to five  years.  Yelena  Nash is a Russian
citizen and the wife of Craig E. Nash,  the  Company's  Chairman of the Board of
Directors  and  Chief  Executive  Officer.  Mrs.  Nash  is  also  a  significant
shareholder  of the  Company.  Under  the terms of the  Distribution  Agreement,
Yelena Nash will receive a 10% commission on sales of the Company's  products to
Crown Russia, exclusive of promotional or marketing costs, after the Company has
received  payment for such sales. The  Distribution  Agreement  contains certain
provisions  restricting  the right of Yelena  Nash to transfer  her  interest in
Crown  Russia  to a third  party.  The  Distribution  Agreement  is  subject  to
automatic renewal for ten-year periods under certain circumstances.

Under the terms of the agreement to transfer  ownership of Crown Russia,  Yelena
Nash was  required to pay an initial  $1,000  payment of the $15,000  sale price
which has subsequently been adjusted to $37,825. The initial payment was made on
March 16, 1998.  The balance,  plus interest at 2% above prime accrued  monthly,
may be paid over the ensuing 24 months  from  commissions  earned  from  product
sales.

The Company  has the option to  evaluate  this  business  venture and  determine
whether it continues to be of benefit to its shareholders.

Fiscal year 1997 sales,  amounts due to and from,  expenses,  and results of the
sale of the Russian  subsidiary are as follows,  after eliminating  intercompany
transactions: The Company sold $33,732 worth of its products to a non-affiliated
customer in Russia, and $131,279 of its products to New Crown Russia as part of,
and  subsequent to the sale of the  subsidiary on June 1, 1997.  Total  combined
sales to Russia were  $165,011  for 1997.  Included in  accounts  receivable  at
December  31,  1997 was  $105,461  due from New  Crown  Russia.  The sale of the
subsidiary and its assets as of June 1, 1997 resulted in a loss of $9,041,  with
the amount due from  Yelena Nash of $37,825,  reflected  in related  party notes
receivable.  The expenses  incurred and accrued in 1997 for  development  of the
Russian market were $181,078.

The Board of  Directors  formed a special  committee of outside  directors  (the
"Crown  Russia"  committee)  to oversee the  Company's  relationship  with Crown
Russia,  including  reviewing all transactions and recommending to the Board for
approval of all transactions  between the Company and Crown Russia.  The members
of the special  committee are Arthur M.  Berkowitz,  Lee A. Hooker and Dr. Linda
Carrick.



                                      F17
<PAGE>

During the past two years,  Craig Nash  established  a physical  presence in New
York City in order to manage the  emerging  company  marketplace  affairs of the
Company,  certain  marketing  activities,  and engage in  extensive  fundraising
activities  on  behalf  of the  Company.  The cost of living in New York City is
substantially greater than that of Las Vegas, Nevada. Consequently,  the Company
loaned Mr. Nash $77,183 in order to cover certain expenses  personally  incurred
by Mr. Nash during 1997 while  carrying out his duties on behalf of the Company.
The loan rate is 9% annually and the loan is unsecured and due and payable on or
before  December 31, 1998.  The Company also loaned Scott Nash $8,867.  The loan
rate is 9% annually and the loan amount is  unsecured  and due and payable on or
before December 31, 1998.

On September 1, 1997, the Company borrowed $100,000 from Christopher Demetree, a
director of the Company,  in order to meet short term working capital needs. The
loan  rate is 9%  annually  and is due and  payable  on July  30,  1998,  and is
unsecured.  The Company  issued  100,000  warrants  at 110% of the  market.  The
warrants are valid for three years with certain registration rights.

On December 5, 1997, the Company borrowed $50,000 from Vincent Casella, a former
director of the Company in order to meet short term working  capital needs.  The
loan rate is 8% annually, is due and payable June 5, 1998, and is unsecured. The
Company issued 50,000  warrants for Crown Common Stock  exercisable at $2.50 per
warrant.  The  warrants  are valid for three  years  with  certain  registration
rights.

17.  Subsequent Events

Subsequent to December 31, 1997, the following events occurred:

The Company  was in arrears  $45,719 as of December  31,  1997.  The Company has
subsequently  paid the late payments and is current on the loan. The Company was
in violation of certain of its loan covenants. Finova, however, has subsequently
waived the covenants and modified its loan agreement.  In consideration  for the
waiver and  modifications  the Company issued to Finova  warrants to purchase an
additional  400,000  shares of Company  stock at $.375 per share.  The  warrants
expire August 16, 2001.

On January 5, 1998,  the  Company  raised  $150,000  in a  Regulation  S sale of
prepaid, mandatory exercisable warrants to purchase Common Stock in two offshore
investors who held similar warrants.  The new warrants may be exercised in whole
amounts over $10,000 of the principal amount of the warrants, at any time, until
expiration  on September 28, 1999.  The exercise  price for each share of Common
Stock shall be equal to the lower of (x) 80% of the average closing price of the
Common Stock for the one business day  immediately  preceding  the issue date of
the warrant or (y) 80% of the average  closing price of the Common Stock for the
one business day immediately preceding the date of receipt by the Company of the
notice of exercise,  as reported on the  principal  stock  exchange on which the
Company's Common Stock is traded.

On January 28,  1998,  the Company  borrowed  $43,000  from  Herbert  Altman,  a
director  of the  Company.  The loan rate is 9% , is due and  payable on May 27,
1998. Warrant coverage is 43,000 warrants at 110% of market. The warrants expire
on June 15, 2001.  Additionally,  the expiration date on 200,000 warrants issued
prior to becoming a Director was extended from September 4, 1999 to September 4,
2004.

On February 9, 1998, the Company  borrowed  $30,000 from Lee Hooker, a director.
The loan rate is 9% per annum.  The original  note due date has been extended to
June 15, 1998.  Warrant  coverage is 30,000 warrants at 110% of the market price
of $.25 at the date of grant. The warrants expire in three years.

On February 13, 1998, and February 17, 1998, the Company  received  $30,000 from
UFH Endowment Ltd. and $30,000 from Austost Antalt Schaan, respectively from the
sale  of  Regulation  S  Prepaid  Mandatory   Exercisable  Warrants  which  were
convertible at a discount to the market at the time of conversion.



                                      F18
<PAGE>

On February 25, 1998,  the Company  borrowed  $120,000  from Herbert  Altman,  a
director  of the  Company.  The loan rate is 9%, is due and payable on March 24,
1998 and is unsecured.  The note has been extended until June 15, 1998.  Warrant
coverage is 120,000 warrants at 110% of market on May 25, 1998. The warrants are
valid for three years.

On March 18, 1998, the Company borrowed $20,000,  $15,000 and $14,000 from three
directors,  Lee Hooker, Herbert Altman and Arthur Berkowitz,  respectively.  The
loan rate is 9% per annum,  is due and payable on April 14,  1998,  and has been
extended  until June 15, 1998,  and has 100%  warrant  coverage for the loans at
110% of market on March 18, 1998. The warrants are valid for three years.

On March 20, and March 27, 1998,  the Company  borrowed  $100,000 and  $250,000,
respectively from Pelican Partners V, a Pennsylvania Partnership. Art Berkowitz,
a director, advanced $50,000 of the above loan and is therefore allocated 50,000
of the 350,000  warrants.  The loan is due and payable no later than July 20 and
July 27,  1998,  respectively.  The rate is 10% per  annum and is  secured  by a
second  lien  position  on  certain  Company  equipment.  The loan  has  warrant
coverage,  350,000  warrants  at 110% of the last  price  quoted on March 20 and
March 27, 1998, respectively. The warrants expire in three years.

On April 3, 1998, the Company borrowed $25,000 from Joseph Furst, a shareholder.
The loan rate is 10% per annum and is due and payable on the earlier of 120 days
or upon the  funding  of  bridge  loan  financing.  Warrant  coverage  is 25,000
warrants at 110% of the market price of $.375 on April 4, 1998. The warrants are
valid for three years.

On April 7, 1998, the Company  reached an agreement with EWE Trust Number 1, the
lessor of certain  production  equipment,  such that the Company  will provide a
waiver of default to the EWE Trust for having  gone  outside the  agreement  and
pledged  the assets in return  for a six month  loan of $77,000 at 9%  interest.
Warrant coverage will be 77,000 warrants at 110% of Crown's Common Stock closing
price on April 3, 1998. The warrants expire in three years.  The proceeds of the
$77,000 was disbursed as follows:  Past due  payments,  to EWE Trust No. 1 as of
December  31,  1997,   and  as  of  April  7,  1998  were  $6,502  and  $19,506,
respectively.  Four payments,  through August 1998,  were prepaid for a total of
$26,008 and $25,000 was advanced to the Company. Craig Nash, the Chief Executive
Officer of Crown,  will  personally  guarantee  $25,000 of the $77,000 loan. Mr.
Nash received no compensation for the risks of such commitment.

Additionally,  the  amount of  warrants  under the  Option  Agreement  may under
certain  circumstances,  if not  converted,  increase up to 1,932,632  warrants.
Secondly,  the  exercise  price of the warrants was reduced to $0.56 per warrant
subject  to the  Company  having a first  right of  refusal  to  repurchase  the
warrants  within a 15 day notice period.  The mandatory  conversion  price would
move from  $3.50 to $0.85,  and would be subject to  mandatory  exercise  if the
price  remained at $0.85 for seven  consecutive  days.  The Company also has the
right to repay the  principal  amount of the lease of $918,000 and reclaim up to
1,080,000 warrants or allow the market to absorb the then registered shares such
that the Trust  recoups its  original  investment  of  $918,000  and retains any
additional  shares as the result of issuing  more lower  price stock so that the
original  investment is recoupled by the Trust, within a six month period, as if
the amount was repaid at a minimum of $0.86 per share.

On April 21, 1998, the Company  borrowed $32,000 from Herbert Altman, a director
of the Company.  The loan rate is 9% and is due and payable on May 24, 1998, and
is  unsecured.  The Company  issued 32,000  warrants at 110% of the market.  The
warrants are valid for three years with certain  registration  rights.  The note
has been extended until June 15, 1998.

On May 4, 1998,  the  Company  borrowed  $14,000  from  Joseph C.  Avitabile,  a
shareholder.  The loan rate is 9% per  annum  and is due on or  before  July 30,
1998. The Company will issue 14,000  warrants for the loan at 110% of the market
price on May 4, 1998, of $.20. The warrants expire three years from May 4, 1998.



                                      F19
<PAGE>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



To the Board of Directors and Shareholders of Crown Laboratories, Inc.

We  have  audited  the   accompanying   consolidated   balance  sheet  of  Crown
Laboratories,  Inc. (a Delaware  corporation)  and subsidiary as of December 31,
1997, and the related consolidated statement of operations, shareholders' equity
and cash  flows for the year then  ended.  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 conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Crown  Laboratories,  Inc. and
subsidiaries  as of December  31, 1997 and the results of their  operations  and
their cash flows for the year then ended in conformity  with generally  accepted
accounting principles.

The accompanying  financial  statements have been prepared  assuming the Company
will  continue  as a going  concern.  As  discussed  in Note 1 to the  financial
statements,  the Company has  suffered  recurring  losses  from  operations  and
working capital  deficiencies  that raise substantial doubt about its ability to
continue as a going  concern.  Management's  plans in regards to this matter are
also  described  in  Note  1.  The  financial  statements  do  not  include  any
adjustments that might result from the outcome of this uncertainty.



                                                    s/ BDO Seidman, LLP
                                                    ----------------------------
                                                       BDO SEIDMAN,  LLP 

April 9, 1998 (except for Note 17 
for which the date is May 4, 1998)





                                      F20