<PAGE>

                         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
                      For the Fiscal Year Ended December 31, 1997

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

                   For the Transition Period from    N/A    to    N/A

                             Commission File No. 33-97156


                                 WHITEWING LABS, INC.
                    (Name of small business issuer in its charter)

          Delaware                                            95-4437350
    (State or other jurisdiction of                        (I.R.S. Employer
    incorporation or organization)                       Identification Number)

    15455 San Fernando Mission Blvd., #105, Mission Hills, California	  91345
       (Address of principal executive offices)                      (Zip Code)

    Issuer's Telephone Number:  (818) 898-2167

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

                                          None

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

                            Common Stock, $.001 par value
                                    (Title of Class)

    Check whether the issuer (1) filed all reports required to be filed by
Section 12 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 is contained in this form, and no disclosure will be
contained to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB.  [X]

    The issuer's revenue for the year ended December 31, 1997 was $ 3,581,811.

    The aggregate market value of the voting stock held by non-affiliates as
of February 28, 1998, computed by reference to the price at which the stock was
sold, or the average closing bid and asked quotations of such stock, which was
$2,453,207.

DOCUMENTS INCORPORATED BY REFERENCE:  None


<PAGE>








                                   PART I

Item 1.  Description of Business.

General

    Whitewing Labs, Inc. (the "Company") develops, or seeks to acquire through
license, nutritional supplements that can be sold to the over age forty market
primarily in the United States.  The over age forty market is the fastest
growing segment of the population and a population for whom quality of life has
become one of the most important issues associated with aging.  Direct mail,
magazine advertisements and electronic direct marketing of product advertising
are the primary vehicles used by the Company to reach this expanding population
segment.  Utilizing formulations that include only herbs and other natural
ingredients, the Company's products are intended to offer alternatives to
conventional treatments for symptoms associated with the aging process.
Customers confronted with concerns such as a lack of convenient transportation,
unsafe shopping areas, and the loss of personal mobility, also enjoy the added
benefit of ordering and receiving the products in the comfort and security of
their own homes.

    Whitewing Labs was incorporated under the laws of the State of California
on July 29, 1993, initially as a wholly-owned subsidiary of Acacia Research
Corporation, a California corporation ("Acacia").  The Company was incorporated
under the laws of the State of Delaware on December 13, 1995, in order to
participate in the reincorporation of Whitewing Labs in the State of Delaware
(the "Reincorporation").  In connection with the Reincorporation, which became
effective on February 9, 1996, Whitewing Labs merged with and into the Company,
which was the surviving corporation in the merger, and the holders of all of
Whitewing Labs' securities received or became entitled to purchase three shares
of the Company's Common Stock for every two shares of Whitewing Labs' common or
preferred stock outstanding or issuable upon exercise of outstanding stock
options.

    On February 14, 1996, the Company's Registration Statement on Form S-1
became effective under the Securities Act of 1933, pursuant to which the
Company completed its initial public offering, selling 1,035,000 shares of
Common Stock at $5.00 per share and 1,035,000 Common Stock purchase warrants
("Warrants") at $.20 per Warrant, generating aggregate net proceeds of
approximately $4,270,000, after offering costs and broker discounts of
$1,111,752.  Two Warrants entitle the holder to purchase one share of the
Company's Common Stock at a price of $3.00 (reduced from $7.00) during the
three year period ending February 14, 1999, and may be redeemed by the Company
under certain circumstances.  See Item 5, "Market for Registrant's Common Stock
and Related Stockholder Matters."











                                       1

<PAGE>
Market

    Census data indicates that the U.S. population includes more than 40
million men between the ages of 45 and 85.  That number is projected to
increase to 48 million by the year 2000.  Women between the ages of 55 and 85
now number approximately 50 million, and are expected to number more than 54
million by the year 2000.

    According to health experts the human body is capable of living up to 120
years.  Most adults approaching their 80's and 90's experience health
disorders.  The U.S. Food and Drug Administration estimates that 80% of all
men will experience urination difficulty, increased frequency or urgency of
urination or other prostate symptoms.  Moreover, more than half of the men
between the ages of 40 and 70 experience some degree of sexual impotence.
All women experience menopause, although each woman experiences the transition
to middle age individually with different degrees of the symptoms, which
include dizziness, hot flashes and fatigue, experienced over varying time
periods and at different ages.

    The growth of the nutritional supplement industry is due primarily to
heightened public awareness of the positive effects of vitamins and other
nutritional supplements.  Many individuals are now using nutritional
supplements as a means of preventive health care.  Retail sales of nutritional
supplements increased from $3.5 billion in 1991 to approximately $4.2 billion
in 1993, as reported by The Overview of Nutritional Supplement Market prepared
by the Council for Responsible Nutrition.  Furthermore, industry trade sources
estimated that 1994 sales of nutritional supplements were $4.7 billion, and
1995 sales of nutritional supplements were 5.3 billion worldwide.









                                      2

<PAGE>

Marketing Strategy

    The Company's strategic marketing plan utilizes a two-pronged approach.
The first approach (or "front-end" component) entails efforts to capture new
customers from the target population through electronic in-home delivery of
product advertising, direct mail and print advertising.  Selection of airings
for electronic media placements and mailing lists for direct mail, is based
upon response rates to date. The Company determines which of the electronic
media placements or mailing lists tested have the most potential for generating
meaningful sales, and thus should be used on a more extensive basis.  In
addition, the Company has placed display advertisements in a variety of local
and national magazines. Electronic in-home delivery of product advertising
includes use of television and the internet.  Direct mail advertising includes
postcard inserts, tear sheets, holiday special mailers and the Journal of
Natural Health "TM".  During 1997, the Company reacted to declining response
rates in certain segments of its mail order operations by reducing advertising
and selling costs from $4,668,533 in 1996 to $ 3,422,178 in 1997.  The strategy
for 1998 involves a more rigorous selection process in identifying and
implementing advertising programs designed to attract and retain new customers.

    The second part of the Company's approach, and the potentially more
profitable element of its marketing strategy, involves generating repeat orders
from existing customers, since the selling and advertising costs incurred in
these orders are expected to continue to be considerably lower.  Four mailings
per year to its customer base are planned for the Company's in-house Journal
of Natural Health "TM", which promotes products available from the Company.  In
addition, the Company offers two or three holiday sales per year.  The
Company's products are sold with an unconditional, money back guarantee which
alleviates the basis for customer complaints.  Product returns through December
31, 1997, have been less than 3% of sales.

    On February 26, 1998 Whitewing Labs announced the signing of an
international television and retail distribution agreement with Williams
Worldwide Television to distribute Whitewing's best selling products.  The
agreement initially covers fifteen strategically selected countries.  Under
terms of the agreement Whitewing sells its products, at an agreed upon price,
directly to Williams Worldwide.  Williams, in conjunction with its
international distributors, will be responsible for sales and marketing
expenses.

Products

    The Company's two main products, which accounted for 55% and 25%
respectively of the Company's total revenue for the year ended December 31,
1997, are:

    PROSTSAFE "R":  Formulated to alleviate the symptoms associated with
prostatitis and benign prostate hyperplasia ("BPH"). Helps to reduce
troublesome symptoms such as urination difficulties, increased frequency and
urgency of urination, and low back pain.  A blend of natural herbs, vitamins,
minerals and amino acids.

    SEXHILARATE "R": Assists in increasing male virility and decreasing sexual
dysfunction by working to improve blood flow, increase hormone production,
stimulate the libido and restore physical stamina.  A unique combination of
herbs, vitamins and minerals.

    Other products currently available from the Company include the following:

    PROPAUSE "R":  Formulated to ease menopausal symptoms.  Propause( works
Gently and naturally to help regulate hormonal imbalances, reduce hot flashes,
Improve mood, and increase energy level.  A combination of selected vitamins
and herbs.

    ARTHRIVIVE "R":  Addresses the internal problems that cause joint pain and
discomfort.  Arthrivive( contains natural anti-inflammatories that help to
relieve arthritic pain, reduce stiffness and inflammation, and improve
flexibility.  Contains herbs, vitamins and minerals.

    ARTHRIVIVE "R" CREAM:  Applied topically, this cream penetrates the skin
quickly to relieve minor arthritic aches and pains in muscles and joints.
Contains natural pain-relieving agents.

    DE-STRESS "TM":  Helps to ease tension and to meet the increased
Nutritional demands that result from environmental, physical and emotional
stress.  A combination of vitamins, minerals and herbs.

    VIM! "TM":  Provides nutrients needed to create and sustain a high energy
level.  Consists of selected vitamins, minerals and herbs needed to maintain a
feeling of well-being and physical stamina.

    IMMUNE DEFENSE "TM":  Combines important nutrients to help the body's
immune system combat viruses, bacteria, foreign proteins, yeasts and fungi.
Immune Defense can increase immune system activity as well as strengthening
the fundamental organs and glands involved in the body's immune response.

    DIMI-OXIDE "TM":  Formulated to protect the body against free-radical
Damage and associated tissue and cell destruction.  A combination of
Antioxidant vitamins, minerals and herbs.

    COLON PURE "TM":  Formulated to promote proper balance of intestinal
flora, relieve constipation and diarrhea, and guard against hemorrhoids.

    POWER MIND "TM":  Helps to improve concentration and cognition, enhance
memory, sharpen the thinking process, and prevent deterioration of brain
cells.  Includes vitamins, minerals, herbs, and amino acids which work to
restore healthy neurotransmitter levels and optimize brain function.

    CHOLEST-LESS "TM":  Includes plant extracts and vitamins to support control
and lowering of cholesterol levels when added to a low fat, low cholesterol
diet and an exercise program.

    PRESSURE CONTROL "TM":  Formulated from high quality herbal extracts,
minerals and vitamins to promote the prevention of hypertension when used
in conjunction with proper exercise and diet.

    FRUIT MIGHT "TM", VEGGIE MIGHT "TM", and GREEN MIGHT "TM":  Developed to
provide phytochemicals and carotenoids as supplements to a healthy diet which
includes fruits and vegetables.  Includes wheat grass, chlorella and other
natural extracts.

    OSTEO SAFE "R":  Contains bone-supporting minerals, herbs and vitamins to
help ensure healthy bones.  Contains calcium, flaxseed, magnesium and other
ingredients which help preserve bone mass.

    ENERG-EYES "TM":  A nutritional supplement to help protect vision and reduce
free radical production.  Its minerals, plant extracts, amino acids and
vitamins are designed to help protect the strength of the vascular and
capillary walls that supply the eyes.

    SLEEPSAFE "TM":  Uses natural ingredients to help reduce the delay in sleep
onset to help promote a natural, non-addictive restful sleep.

    RESTPIRATION "TM":  Alleviates the symptoms of asthma, hay fever,
allergies, sinusitis and bronchitis by helping the body expel foreign organisms
that cause irritation, inflammation and mucous production.  Also provides
support to the immune system, soothes inflamed sinus tissues and assists the
adrenal glands.

    The following new products were developed during 1997:

    EVENING GLOW "TM":  Contains botanicals and nutrients that have been
studied for their ability to boost the level of hormones that aid in sexual
arousal with the intention of increasing the circulating levels of estrogen
and testosterone.

    VITAMIN AND MINERAL SYSTEM "TM":  A nutrient mix which supports
circulatory, immune, bone, joint and eye health, as well as men's and
women's reproductive health.

    VITAMIN C:  This combination of ascorbic acid and citrus bioflavonoids aids
our body in fighting infection, coping with stress, healing wounds and works as
a powerful anti-oxidant.

   The Company is developing the following new product for introduction by the
end of 1998:

    PROTRANS CREAM "TM":  This is a natural Progesterone Cream to be applied
topically to help increase bone density.

    All products are formulated with natural ingredients, with no
preservatives, synthetics, artificial colors, lactose, starch or sugar. The
average price for a one month supply of any one of the current products is
between $19.95 and $34.95.

    The Company markets a video WHEN SOMEONE YOU LOVE IS AT RISK FOR PROSTATE
DISEASE, which raises awareness about the prostate and prostate diseases,
symptoms, diagnosis and prevention.  The tape is sold for $19.95.  The Company
also has available two audio tapes, both thirty minutes in length.  The first
is for men:  THE NATURAL PATH OF MEN'S HEALTH:  PROSTATE CARE.  The second is
for women:  PASSAGE TO YOUR SECOND LIFE:  FLOURISHING AFTER MENOPAUSE.  Each of
these tapes is sold for $14.95.

Product Planning and Development

    The Company anticipates continuing to expand its product line over the next
two years.  Product development begins with researching medical conditions that
can be affected by herbal remedies utilizing completed current studies from
recognized doctors, pharmacologists, scientists, and experts.  When sufficient
information is accumulated on a specific health problem, the Company summarizes
the information and presents it to a number of experts in the nutritional
field, including Dr. Charles Thomas, Ph.D., an independent consultant to the
Company since its inception, who has formulated a number of nutritional
products sold nationally by other companies.  These experts work with the
Company to develop formulas and compile substantiation for new products to be
offered.  In addition to its product development efforts, the Company intends
to expand its product offerings by obtaining the right to market licensed
products that complement the overall product line and are not currently offered
via direct mail. For example, the Company is currently considering various
cosmetic, hair care, and educational products with established brand names that
could be marketed to its existing customer base.

Production, Order Procurement and Fulfillment

    The Company's nutritional products currently are produced by Vita Minerals,
Inc., which also bottles and labels the products.  Vita Minerals then ships
them to the distribution center where order fulfillment is handled for the
Company by an independent contractor.  Although there is no formal contract
between the Company and Vita Minerals, with all purchases made pursuant to
simple purchase orders, the Company does provide Vita Minerals with an advance
quarterly forecast of the Company's product requirements that is used by Vita
Minerals to procure sufficient quantities of herbs that have a limited growing
season.  Vita Minerals has manufactured drugs, as well as vitamins, for over
75 years, and its operations are subject to regulations of, and monitoring by,
the FDA.  Since the FDA does not monitor the operations of manufacturers who
produce only vitamins, management believes that the Company's use of Vita
Minerals, Inc. for production, packaging and labeling significantly enhances
controls on the quality of the Company's products.  Vita Minerals, Inc. is
also regulated by, and holds a variety of licenses for drug and processed food
manufacture issued by, various state and local regulatory authorities,
including the State of California Department of Consumer Affairs and the County
of Los Angeles.  Although the Company does not engage in the manufacture of any
of the products it markets and sells, the Company could be exposed to product
liability claims.  The Company has not had any such claims to date.  Although
the Company maintains a limited amount of products liability insurance,
additional insurance covering products sold by the Company is also provided by
Vita Minerals, Inc.  There can, however, be no assurance that the Company will
not be subject to claims in the future or that available insurance coverage
will be adequate.

    Independent contractors and outside service agencies are used to perform a
number of tasks under the supervision of management, including advertising
placement, in-bound order taking, and order fulfillment.  The Company also has
entered into an agreement with Professional Marketing Associates, Inc. to
provide warehousing and distribution of the Company's products which
automatically renews for successive six-month periods unless terminated by
either party.

    Outsourcing of production, order taking and order fulfillment to an outside
company and three independent contractors respectively, potentially subjects
the Company to concentration of supplier risk.  In addition, substantially all
printing is handled by an outside company and substantially all advertising
placement including purchase of mailing lists for direct mail programs is
handled by an outside service agency.  Although these services are currently
concentrated with a few key suppliers, management believes that other suppliers
could provide similar services or comparable terms.  A change in suppliers
however could cause delay in manufacturing, shipping, advertising placements
and implementation of direct mail programs and a possible loss of sales which
could affect operating results adversely.


Regulation

    The U.S. Food and Drug Administration ("FDA") and the Federal Trade
Commission ("FTC") are the primary agencies that monitor the health care and
direct marketing industries in the United States.  Because nutritional
supplements are classified as foods, they do not require FDA approval.
However, product labeling and advertising copy must be within FDA established
guidelines.  FTC regulations also address advertising copy, fraud, and specific
guidelines for shipping and refunds.  The Company's promotional literature
presents the effectiveness of ingredients contained in the formula, based on
documented studies conducted by reputable independent health care
professionals, along with testimonials from satisfied users of the products.
In addition, the Company maintains a library of articles and studies cited in
promotional materials as well as original letters from customers' testimonials.

    In November 1991, the FDA issued proposed regulations designed to, among
other things, amend its food labeling regulations.  The proposed regulations
met with substantial opposition.  In October, 1994, the "Dietary Supplement
Health and Education Act of 1994" (the "Dietary Supplement Law") was enacted.
Section 11 of the Dietary Supplement Law provided that the advance notice of
proposed rule making by the FDA concerning dietary supplements was null and
void.  FDA regulations that became effective on June 1, 1994, would require
standard format nutrition labeling on dietary supplements.  However, because
the new Dietary Supplement Law also addresses labeling of dietary supplements,
the FDA has indicated that it will not enforce its labeling regulations until
January 1, 1999.  In the interim, new regulations are expected to be proposed
by the FDA.  Because the FDA has not yet reconciled its existing regulations
with the new Dietary Supplement Law, the Company cannot determine to what
extent any changed or amended regulations will affect its business.

    The Dietary Supplement Law did not affect the July 1, 1994 effectiveness of
the FDA's health claims regulations.  Those regulations prohibit any express or
implied claims for dietary supplements unless such claims are approved in
advance by the FDA through the promulgation of specific authorizing
regulations.  Such approvals are rarely provided by the FDA.  Therefore, no
claim may be made on a dietary supplement label or in printed sales literature,
"that expressly or by implication characterizes the relationship of any
substance to a disease or health-related condition."  The Company cannot
determine what effect currently proposed FDA regulations, when and if
promulgated, will have on its business in the future.  Such regulations could,
among other things, require expanded or different labeling, the recall or
discontinuance of certain products, additional record keeping and expanded
documentation of the properties of certain products and scientific
substantiation.  In addition, the Company cannot predict whether new
legislation regulating its activities will be enacted, which new legislation
could have a material effect on the Company.

    The Company has an ongoing compliance program with assistance from outside
consultants regarding the nature and scope of food and drug legal matters
affecting the Company's business and products.  The Company is unaware of any
legal actions currently pending or threatened by the FDA or any other
governmental authority against the Company.

Proprietary Rights

    The Company has received federal trademark registration for PROSTSAFE "R",
SEXHILARATE "R", PROPAUSE "R", ARTHRIVIVE "R", ARTHRIVIVE "R" CREAM, and OSTEO
SAFE "R", and intends to seek trademark protection for a number of the brand
names under which the Company's products are marketed.  The Company will be
required to rely upon common law concepts of confidentiality and trade secret
laws to protect its product formulations. In addition, each quarterly edition
of the Journal of Natural Health "TM", which promotes products available from
the Company, is copyrighted.  International trademarks are being obtained as
Whitewing enters foreign markets.  European trademarks have already been filed
and other country trademark applications are in progress.


Employees

    In addition to its President, the Company has a total of ten employees,
five of whom are involved in general administration and five of whom are
involved in customer service and order processing and reporting.  The Company's
success also depends to a significant extent upon the continued service of its
President, Cynthia Kolke.  The loss of this individual, who may terminate her
services to the Company at any time, could have a material adverse effect on
the Company.  The Company maintains a $500,000 key-person insurance policy on
the life of Ms. Kolke. The Company also will depend on its ability to retain
its key personnel, and on its ability to attract, retain, train and motivate
additional highly skilled and dedicated employees. The Company is not a party
to any collective bargaining agreement.  The Company has never experienced a
work stoppage and believes that its relations with its employees are excellent.
From time to time, the Company may retain independent third parties to provide
services on a contract, "as needed" basis.

Item 2.  Description of Property.

    The Company leases a 1,754 square foot office in Mission Hills, California,
that management believes is sufficient for the Company's current needs and
future growth.  If needed, a large amount of additional space is available for
rental on a comparable basis within the same complex as the Company's present
location.

Item 3.  Legal Proceedings.

    None

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

    None


                                     PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters.

Recent Market Prices

    The Company's Common Stock and Warrants have traded separately on the
Nasdaq SmallCap Market under the symbols "WWLI" and "WWLI-W", respectively,
since February 14, 1996.  Prior to the Company's initial public offering there
was no public market for the Company's securities, and no assurance can be
given that an active trading market for the Common Stock and Warrants will be
sustained in the future.  The markets for securities such as the Company's
Common Stock historically have experienced extreme price and volume
fluctuations during certain periods.  These broad market fluctuations and other
factors, such as new product developments and trends in the Company's industry
and the investment markets generally, as well as economic conditions and
quarterly variations in the Company's results of operations, may adversely
affect the market price of the Company's Common Stock.  Although the Common
Stock and Warrants currently are traded on the Nasdaq SmallCap Market, there
can be no assurance that they will remain eligible to be included on Nasdaq.
In the event that the Company's Securities were no longer eligible for
quotation on Nasdaq, the Securities could become subject to rules adopted by
the Commission regulating broker-dealer practices in connection with
transactions in "penny stocks."  Penny stock generally are equity securities
with a price of less than $5.00 (other than securities registered on certain
national securities exchanges or quoted on Nasdaq, provided that current price
and volume information with respect to transactions in such securities is
provided by the exchange or the Nasdaq system).  Unless an exemption from the
definition of a "penny stock" were available, any broker engaging in a
transaction in the Company's Securities would be required to provide any
customer with a risk disclosure document, disclosure of market conditions,
if any, disclosure of the compensation of the broker-dealer and its salesperson
in the transaction, and monthly accounts showing the market values of the
Company's Securities held in the customers account.  The bid and offer
quotation and compensation information must be provided prior to effecting the
transaction and must be contained on the customer's confirmation.  It may be
anticipated that a number of brokers may be unwilling to engage in transactions
in the Company's Securities because of the need to comply with the "penny
stock" rules, thereby making it more difficult for holders of securities to
dispose of their shares.

    The following table sets forth the high and low closing bid quotations for
a share of the Company's Common Stock as well as the high and low closing bid
quotations for a Warrant, during the periods presented, as reported by Nasdaq.
Bid quotations represent high and low prices quoted between dealers, do not
include commissions, mark-ups, or mark-downs, and may not represent actual
transactions.
<TABLE>
<CAPTION>

Common Stock                                    1996             1997
                                            High    Low       High      Low
     <S>                                   <C>     <C>       <C>        <C>
     First Quarter ended March 31, (Note)  $7-1/4  $4-5/8    $1-63/64   $1-3/16
     Second Quarter ended June 30,         $5-5/8  $3-3/4    $15/16     $21/32
     Third Quarter ended September 30,     $4-1/8  $1-7/8    $1-3/8     $1-1/4
     Fourth Quarter ended December 31,     $2-3/8  $1-1/2    $13/16     $13/16
     (Note: First quarter 1996 is for the period February 14 - March 31, 1996
      - not the entire quarter.)

    Warrants

     February 14 - March 31,               $2-5/8      $1     $7/16     $9/32
     Second Quarter ended June 30,         $1-1/2    $3/4      $5/32     $1/8
     Third Quarter ended September 30,     $15/16    $1/4      $3/32    $3/32
     Fourth Quarter ended December 31,       $1/2   $3/16      $1/16    $1/32
</TABLE>
    On February 28, 1998, the closing bid and asked quotations for the Common
Stock, as reported on Nasdaq, were $1-1/2 and $1-5/16, respectively, per share.
On that date, the closing bid and asked quotations for the Warrants, as
reported on Nasdaq, were $1/4 and $1/4 respectively, per Warrant.


Description of Securities

    The Company is authorized to issue up to 10,000,000 shares of Common Stock,
$.001 par value, and 500,000 shares of preferred stock, $.001 par value.  As of
February 28, 1998, there were 605 holders of record of shares of the Company's
Common Stock and 370 holders of record of Warrants, including shares and
Warrants held in "street" or "nominee" names for an undetermined number of
beneficial holders.  Prior to the Company's public offering, shares of
preferred stock were sold to raise equity capital.  See Item 6, "Management's
Discussion and Analysis, Liquidity and Capital Resources".  In connection with
the public offering, all of these shares were converted into Common Stock.  No
shares of preferred stock were outstanding as of February 28, 1998.

    Holders of the Company's Common Stock are entitled to one vote per share on
all matters to be voted upon by the stockholders, and there is no cumulative
voting for the election of directors to the Company's classified Board of
Directors.  Holders of the Company's Common Stock will be entitled to receive
ratably such dividends, if any, as may be declared by the Board of Directors
out of funds legally available therefore.  Upon the liquidation, dissolution,
or winding up of the Company, the holders of the Company's Common Stock will be
entitled to share ratably in all assets of the Company which are legally
available for distribution, after payment of all debts and other liabilities.
Holders of the Company's Common Stock have no preemptive, subscription,
redemption or conversion rights.

    Shares of the Company's Preferred Stock may be issued from time to time in
one or more series as may be determined by the Board of Directors.  The voting
powers and preferences, the relative rights of each series, and the
qualifications, limitations and restrictions thereof shall be established by
the Board of Directors without any further vote or action by the Company's
stockholders, except that no holder of Preferred Stock will have preemptive
rights.  Issuance of shares of the Company's Preferred Stock may have the
effect of delaying, deferring or preventing a change in control of the Company.
The Company has no present plan to issue any shares of its Preferred Stock in
the foreseeable future.

    Since November 4, 1997 when the exercise price of the Warrants was reduced,
the holder of two Warrants is entitled to purchase one share of the Company's
Common Stock at a price of $3.00 (previously $7.00) per share during a
three-year period ending on February 14, 1999.  The Company may at any time and
from time to time extend the term of the Warrants or reduce the exercise price
of the Warrants.  Unless exercised during the exercise period, the Warrants
will expire automatically.  The holders of Warrants as such, are not entitled
to vote, to receive dividends or to exercise any of the rights of stockholders
for any purpose.  Since February 9, 1997, the Company has been entitled, at its
discretion, to call all of the Warrants for redemption on 45 days' prior
written notice at a redemption price of $.05 per Warrant.  However the Warrants
cannot be called for redemption unless and until:  (i) the closing bid price of
the Company's Common Stock exceeds the exercise price of the Warrants by at
least 50% during a period of at least 20 of the 30 trading days immediately
preceding the Notice of Redemption; (ii) the Company has in effect a current
registration statement covering the Common Stock issuable upon exercise of the
Warrants; and (iii) the expiration of the 45 day notice period is within the
term of the Warrants.  If the Company elects to exercise its redemption right,
holders of Warrants may either exercise their Warrants, sell such Warrants in
the market or tender their Warrants to the Company for redemption.  Within five
business days after the end of the 45 day period, the Company will mail a
redemption check to each holder of a Warrant who holds unexercised Warrants as
of the end of the 45 day period, whether or not such holder has surrendered the
Warrant certificates for redemption.  The Warrants may not be exercised after
the end of such 45 day period.

    U.S. Stock Transfer Corporation, 1745 Gardena Avenue, Glendale, California
91204-2991, is the appointed Transfer Agent and Registrar for the Common Stock
and the Warrants, and the Warrant Agent under the Warrant Agreement.

Shares Eligible for Future Sale

    All of the issued and outstanding shares of the Company's Common Stock have
been registered under Securities Act of 1933, as amended (the "Securities
Act").  However, 789,709 of these shares are held of record by Acacia, an
"affiliate" of the Company, and therefore are considered "restricted
securities", as those terms are defined under the Securities Act and the rules
and regulations thereunder.  Shares of the Company's Common Stock owned by
"affiliates" (including Acacia) may be publicly sold only by complying with
Rule 144 under the Securities Act (exclusive of the two-year holding period)
unless registered under the Securities Act, or some other exemption from
further registration thereunder is available.  Sales of substantial amounts of
these shares, or even the potential for such sales, could have an adverse
effect on any market price for shares of the Company's Common Stock that could
develop, and could impair the Company's ability to raise capital through the
sale of its equity securities.

Rights to Acquire Shares

    As of February 28, 1998, a total of 534,185 shares of Common Stock have
been reserved for issuance upon exercise of outstanding options granted under
the Company's Stock Option Plan.  All of these shares, together with the
additional 465,815 shares available for the future grant of options under the
Stock Option Plan, have been registered under the Securities Act.  The exercise
price of the outstanding options ranges between $0.089 and $5.00, with a
weighted average exercise price of $.863 per share.  In connection with the
Company's initial public offering, the Representatives of the Underwriters
acquired options to purchase up to 90,000 shares of Common Stock at $6.00 a
share and 90,000 Warrants at $.24 a warrant in connection therewith (the
"Representative's Securities").  The Representative's Securities are through
February 9, 2001.  The Representatives were also granted certain registration
rights with regards to the Representative's Securities which could result in
substantial expense to the Company.  During the terms of the outstanding
options and the Representative's Securities, all of which expire on or before
July 11, 2000, the holders thereof will have the opportunity to profit from an
increase in the market price of the Company's Common Stock with resulting
dilution in the interest of holders of Common Stock.  The existence of such
stock options and the Representative's Securities may adversely affect the
terms on which the Company can obtain additional financing, and the holders
of such options can be expected to exercise or convert such options at a time
when the Company, in all likelihood, would be able to obtain additional capital
by offering shares of its Common Stock on terms more favorable to the Company
than those provided by the exercise or conversion of such options.

Dividend Policy

    The Company has never paid any cash dividends on its Common Stock and does
not anticipate that it will pay dividends in the foreseeable future.  Instead,
the Company intends to apply any earnings to the development and expansion of
its business.


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

General

    The Company formulated its business plans and strategies based on certain
assumptions of the Company's management regarding the size of the market for
nutritional supplements, the products which the Company will be able to offer
to the over age forty market, the Company's anticipated share of the market,
and the estimated prices for and acceptance of the Company's products. Although
these plans and assumptions were based on the best estimates of management,
there can be no assurance that these assessments will prove to be correct.  No
independent marketing studies have been conducted on behalf of or otherwise
obtained by the Company, nor are any such studies planned.  Any future success
that the Company might enjoy will depend upon many factors, including factors
which may be beyond the control of the Company or which cannot be predicted at
this time.  These factors may include product obsolescence, increased levels of
competition, including the entry of additional competitors and increased
success by existing competitors, changes in general economic conditions,
increases in operating costs including costs of supplies, personnel and
equipment, reduced margins caused by competitive pressures and other factors,
and changes in governmental regulation imposed under federal, state or local
laws.

    The Company continues to believe its business plans and the assumptions
upon which they are based are valid.  Accordingly, the Company continued its
plan of expanding its customer database during 1997 by exploring other direct
response media such as electronic in-home delivery of product advertising.
Utilizing a large portion of the net proceeds from its February 1996 initial
public offering, the Company invested approximately $3,534,630 in selling and
advertising expense in furtherance of this strategy during the year ended
December 31, 1997.  These expenditures have not started to produce comparable
increases in revenue, yet the Company reported a decreased loss for the year.
It is anticipated that the Company will continue to stress growth of the
customer database over short-term profits; the Company's management believes
potential net earnings will be driven by continued growth of the customer
database.

    The costs of deferred print advertising placements and direct mailings are
amortized, based upon management's estimates, over the periods in which the
related direct responses are received.  The Company evaluates the realizability
of its direct-response advertising by comparing the carrying amount of prepaid
and deferred advertising at each balance sheet date on a cost-pool-by-cost-pool
basis to the probable remaining future net revenues expected to result from
such advertising.  An excess carrying amount over probable remaining future
revenues is reported as advertising expense in the current period.

    Newspaper and weekly publications are expensed in the month of issue.

    Sales of the Company's PROSTSAFE( product accounted for approximately 86%,
79% and 55% of net sales for the years ended December 31, 1995, 1996 and 1997
respectively.  During the calendar year 1997 SEXHILARATE( accounted for 25% of
net sales.  The Company anticipates that sales of PROSTSAFE( will continue to
contribute a substantial portion of total revenues in subsequent periods.  A
decline in the demand for this product, whether as a result of competition or
other factors, could have a material adverse effect on the Company's results of
operations and financial condition, particularly if not offset by growth in
sales of SEXHILARATE( or other products.  The markets for the Company's
products are characterized by changing customer demand, short product life
cycles, and frequent new product introductions.  The performance of the Company
will depend on the ability of the Company to develop and market new products
that will gain customer acceptance and loyalty, as well as its ability to adapt
its product offerings to meet changing pricing considerations and other market
factors.  The Company's operating performance would be adversely affected if
the Company were to incur delays in developing new products or if such products
did not gain market acceptance.  Therefore, there can be no assurance that the
Company's existing or future products will be sufficiently successful to enable
the Company to effectively compete in its prospective market or, should the
Company's product offerings meet with significant customer acceptance, that one
or more current or future competitors will not introduce products which render
the Company's products noncompetitive.

    Like other distributors of consumer products, the Company encounters the
risk of product returns from its customers.  The Company's products are sold
with an unconditional, money-back guarantee.  Any customer who is not satisfied
with a Company product for any reason may return it or any unused portion for
a full refund of the purchase price.  Although product returns to date have
been approximately 3% of sales, which is substantially less than the national
average of 6%, there can be no assurance that actual levels of returns will not
significantly exceed amounts anticipated by the Company.

    The Company's operating results may vary significantly due to a variety of
factors including changing customer profiles, the availability and cost of raw
materials, the introduction of new products by the Company or its competitors,
the timing of the Company's advertising and promotional campaigns, pricing
pressures, general economic and industry conditions that affect customer
demand, and other factors.  It can be expected that future operating results
will continue to be subject to many of the problems, expenses, delays and
risks inherent in the establishment of a new business enterprise, many of which
the Company cannot control.  There can be no assurance, therefore, that the
Company will be able to achieve or sustain profitability. Even if the Company's
operations prove to be marginally profitable, the value of the Company's common
stock, and the potential return to investors, could be substantially
diminished.  Consequently, an investment in the Company is highly speculative
and no assurance can be given that purchasers of the shares of common stock
will realize any return on their investment or that purchasers will not lose
their entire investment.

    In March 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, "Earnings per Share" (SFAS 128) and Statement 129
"Disclosure of Information about Capital Structure" (SFAS 129).  In June 1997,
the FASB issued Statement No. 130, "Reporting Comprehensive Income" (SFAS 130)
and Statement No. 131, "Disclosures About Segments of an Enterprise and Related
Information" (SFAS 131).  SFAS 128 revises and simplifies the computation for
earnings per share and requires certain additional disclosures.  SFAS 129
requires additional disclosures regarding the Company's capital structure.
SFAS 128 and 129 were adopted in fiscal 1997.  The adoption of these standards
did not have a material effect on the Company's financial position or the
results of operations.  SFAS 130 establishes standards for reporting
comprehensive income and its components (revenues, expenses, gains and losses)
in financial statements.  SFAS 131 established standards for reporting
information about operating segments in annual financial statements and
requires that enterprises report selected information about operating segments
in interim financial reports to shareholders as well as establishes standards
for related disclosures about products and services, geographic areas and major
customers.  SFAS 130 and 131 are effective for fiscal years beginning after
December 15, 1997.  The Company believes the adoption of these standards will
not have a material effect on its financial statements.

    Statements contained herein that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
but not limited to statements regarding the Company's expectations, hopes,
beliefs, intentions or strategies regarding the future.  Actual results could
differ materially from those projected in any forward-looking statements as a
result of a number of factors, including those detailed in this Management's
Discussion and Analysis of Results of Operations and Financial Condition, as
well as those set forth elsewhere herein.  The forward-looking statements are
made as of the date of these financial statements and the Company assumes no
obligation to update the forward-looking statements, or to update the reasons
why actual results could differ materially from those projected in the
forward-looking statements.


Selected Financial Data

    The following table sets forth for the periods indicated selected financial
data for the Company.  The selected statement of operations and balance sheet
items which follow have been derived from the Company's audited financial
statements and notes thereto included elsewhere herein.  This information
should be read in conjunction with the audited financial statements and related
notes, "Management's Discussion and Analysis of Financial Condition and Results
of Operation" and the other financial information included elsewhere in this
Form 10-KSB.


<TABLE>


Statements of Operations Data:
<CAPTION>

                                                     Year ended December 31,
                                                   1996                 1997
<S>                                           <C>                  <C>
Net sales                                     $   3,537,480        $ 3,581,811
Gross profit                                      3,026,266          3,057,314
Operating expenses:
   Selling and advertising expenses               4,668,533          3,422,178
   General and administrative expenses              914,436            764,984
   Total operating expenses                       5,582,969          4,187,162
Income (loss) from operations                    (2,556,703)        (1,129,848)
Interest expense                                      4,259                  -
Other income, net                                  (143,879)          (137,046)
Income (loss) before provision
   for income taxes                              (2,417,083)          (992,802)
Income tax provision (benefit)                          850            (49,150)
Net income (loss)                             $  (2,417,933)       $  (943,652)


Preferred stock dividends
   paid and accrued                           $      10,129        $         -

Net loss attributable
   to common shareholders                     $  (2,428,062)       $  (943,652)

Basic loss per common share                   $       (0.90)       $     (0.33)

Weighted average number of
   common shares outstanding                  $   2,691,149        $  2,864,680


                                                    Year ended December 31,
Balance Sheet Data:                                 1996                 1997

Working capital                               $   2,571,473        $  2,105,059
Total assets                                      3,720,256           2,215,393
Total liabilities                                   561,042              29,988
Shareholders' equity                              3,159,214           2,185,405
</TABLE>


Results of Operations

    The following table sets forth, for the periods indicated, the percentages
of net sales represented by certain items in the Company's statements of
operations.

Percentage of Net Sales
<TABLE>
<CAPTION>

                                                   Year ended December 31,
                                               1996                        1997
<S>                                          <C>                        <C>
Net sales                                      100%                       100%
Gross profit                                  85.5%                      85.4%
Selling and advertising expenses               132%                      95.5%
General and administrative expenses          (25.8%)                    (21.4%)
Loss before income taxes                     (68.3%)                    (27.7%)
Provision for income taxes                     0.0%                      (1.4%)
Net loss                                     (68.4%)                    (26.3%)

</TABLE>

    Net sales.  Increased in 1997 by 1.3% to $3,581,811 compared to $3,537,480
in 1996 as the Company moderated its efforts to attract new customers.  Net
sales were $3,445,085 for the year ended December 31, 1995.  The Company's
customer base had grown to approximately 140,000 customers at December 31, 1997
from approximately 75,000 customers at December 31, 1996.

    Gross Profit.  Cost of goods sold for the Company's products represents
only a small percentage of net sales.  During the years ended December 31, 1996
and 1997, the Company recognized gross profit of $3,026,266 and $3,057,314
respectively, or 85.6% and 85.4% of net sales, respectively.  Although
quantities sold of Prostsafe( and Sexhilarate( are approximately 55% and 25% of
total sales, respectively, sales of the Sexual Energy package (including
Prostsafe( and Sexhilarate() which yield a significantly lower margin, also
increased.

    Selling and Advertising Expense.  During the year ended December 31, 1997,
selling and advertising expense decreased by 26.7% to $3,422,178, representing
95.5% of net sales, compared to $4,668,533 in 1996.  The decrease resulted
primarily from a shift away from print advertising towards other media such as
electronic in-home delivery of product advertising as the Company sought more
favorable response rates for the marketing dollar.  In 1997 and 1996,
advertising expense was $2,223,204 and $2,684,795 respectively, or 62.1% and
75.9% of net sales respectively.

    During the year ended December 31, 1996, selling and advertising expense
was $4,668,533.  Reorders from existing customers accounted for approximately
65% and 70% respectively of net sales generated for the years ended December
31, 1996 and 1997.

    Prepaid advertising, at December 31, 1997, includes approximately $185,461
of costs related to the development of electronic in-home delivery of product
advertising which the Company began airing in July 1997.  Related talent costs
of $43,629 representing 4 percent of gross profits from sales generated in 1997
from such media are due and payable at December 31, 1997. The company is
expensing costs related to the development of electronic in-home delivery of
product advertising beginning in July 1997 over a period not to exceed the
lesser of the revenue earning stream directly related to the electronic in-home
delivery of product advertising or one year, whichever comes first.

    General and Administrative Expense.  With the increasing levels of net
sales generated during the year ended December 31, 1995, general and
administrative expenses increased to $683,093.  However, as a percentage of
net sales, general and administrative expense declined to 19.8% for the year
ended December 31, 1995.  General and administrative expenses increased to
$914,436 or 25.8% of net sales during 1996 primarily as a result of increased
shareholder relations expenses and salaries costs incurred after the Company
completed its initial public offering in February 1996.  General and
administrative expenses decreased 16 % to $764,983 or 21.4% of sales for the
year ended December 31, 1997 as a result of cost cutting efforts.

    Income (Loss) From Operations.  During the year ended December 31, 1996
revenues remained relatively level despite substantial increases in advertising
and selling costs.  As a result the Company reported a loss from operations of
$2,556,703. With the influx of capital following the public offering, the
Company substantially increased its advertising and promotional expenditures in
anticipation of incremental increases in revenue.  Revenues commensurate with
the increased advertising and selling costs did not materialize.  The Company
gained market experience from the results of its product advertising programs
in 1996.  The loss from operations for the year ended December 31, 1997
decreased to $1,129,848, due to the changes in the marketing mix from all print
advertising to print and electronic advertising.

    Management has reviewed its internal software and hardware components and
believes that the Company's systems are Year 2000 compliant.  Management has
also made inquiries of its primary vendors as to the capabilities of their
systems with respect to the Year 2000.  At this time, it has not been
conclusively determined that the systems of these vendors are Year 2000
compliant, however, based on recent discussions with the vendors, management
believes the vendors will be fully capable of meeting the needs of the Company
beyond the year 1999.


Liquidity and Capital Resources

    From inception through September 30, 1995, the Company operated at a loss,
as its efforts were focused on the development of a customer base. Prior to its
initial public offering in February 1996, the Company financed its operations
through the private sale of equity securities and loans from Acacia, its
largest shareholder.

    In connection with the incorporation of the Company in July 1993, an
aggregate of 1,125,000 shares of the Company's Common Stock was issued to
Acacia for $100,000 in cash.  Through December 31, 1994, Acacia also lent the
Company an aggregate of $314,247.  This loan was repayable in full, together
with simple interest at the rate of 8% per annum from the respective dates on
which the funds were advanced to the Company, upon demand by Acacia. During the
second quarter of 1995, the Company repaid $200,000 of the loan principal,
leaving a remaining balance of $114,247 owing to Acacia at December 31, 1995.
All amounts then owing to Acacia were repaid out of the net proceeds to the
Company from its initial public offering.

    In December 1994, the Company completed a private placement of 272,250
shares of its 10% Cumulative Convertible Preferred Stock (the "Preferred
Stock"), at $3.33 per share, resulting in proceeds to the Company before
expenses of $907,500.  At the time of this private placement, one investor
loaned the Company the sum of $200,000, at 10% interest, which was converted
into 60,000 shares of the Company's Common Stock, at $3.33 per share, on
April 1, 1995.  Between February 24 and September 10, 1995, the Company
privately sold an aggregate of 249,626 shares of its Common Stock to a total
of 8 "accredited investors" (as that term is defined in the rules and
regulations of the Securities and Exchange Commission under the Securities
Act of 1933, as amended), raising gross proceeds totaling $1,029,000.  In
addition, options to purchase an aggregate of 526,200 shares of the Company's
Common Stock have been granted to key employees of and consultants to the
Company.

    On December 1, 1997 Whitewing withdrew 95% of its investment in Acacia
Capital Partners amounting to $136,200.  The remaining 5% of this investment
will be withdrawn upon the completion of the Acacia Capital Partners Audit in
the 1st Quarter of 1998.  The Company to date earned approximately $43,000 in
interest on its $100,000 investment in Acacia Capital Partners.  See Item 12,
"Certain Relationships and Related Transactions."

    In its initial public offering in February 1996, the Company raised net
proceeds, after deduction of underwriting discounts and other expenses of the
offering amounting to $1,111,752, of approximately $4,270,000. Of the net
proceeds to the Company, $2,700,000 was used to finance expanded advertising,
marketing and sales activities, with the balance available for use for other
general corporate purposes to support the Company's ongoing operations,
including general administrative costs and expenses.  A portion of these
proceeds was used to pay the principal balance of $114,247, plus accrued
interest of $47,310 owing to Acacia in respect of loans previously made to the
Company by Acacia, the Company's principal stockholder.  In connection with the
Company's initial public offering, all of the outstanding preferred stock was
converted into common stock.

    The Company initiated an open market stock repurchase program in July 1996
in which up to 200,000 shares or 7% of outstanding shares of the Company's
common stock may be acquired in the open market.  The Company acquired 17,600
shares of its common stock for $45,419 during 1996.  The Company acquired an
additional 23,850 shares of common stock for $31,487 in 1997 and may or may not
make future repurchases depending on the availability of cash flows.

    Cash and Liquidity.  During the years ended December 31, 1996 and 1997, the
Company's operations required cash of $2,285,141 and $961,752, respectively.
As of December 31, 1997, the Company had cash and short-term investments on
hand of $1,593,778.  The Company has commitments for placements of electronic
in-home delivery of product advertising and magazine advertisements of
approximately $123,396 as of December 31, 1997.

    Assuming that implementation of the Company's more defined approach to
attracting new customers in 1998 results in revenues which exceed costs,
management expects that the Company will generate sufficient cash flow,
supplemented by the remaining balance of the net proceeds to the Company from
its initial public offering, to finance the Company's operations at currently
anticipated levels at least through the end of 1999.  However, there can be no
assurance that the Company will not encounter unforeseen difficulties that may
deplete its capital resources more rapidly than anticipated.  In addition,
management believes that the Company's growth can be accelerated by continuing
to use the net proceeds to finance various marketing, advertising and
promotional activities.

    The development and expansion of the Company's business that was financed
using the net proceeds from the Company's initial public offering placed
significant demands on the Company's infra-structure, and required the Company
to hire additional personnel, to implement additional operating, manufacturing
and financial controls, install additional reporting and management information
systems for order processing, system monitoring, customer service and financial
reporting, and otherwise to improve coordination between formulation,
manufacturing, marketing, sales and finance functions.  The Company's future
operating results will depend on management's ability to manage future growth,
and there can be no assurance that efforts to manage future growth will be
successful.  Management also believes that the availability of proceeds from
the Company's initial public offering may enhance the Company's ability to
increase the scope of its business more rapidly by taking advantage of
opportunities to acquire additional product offerings, or even complementary
businesses, on a favorable basis.  Although the Company is not currently a
party to any agreement or understanding with respect to any prospective
acquisition, it has explored and continues to evaluate possible opportunities
to license or otherwise acquire the right to market products that complement
the Company's product line.

    If circumstances indicate that the Company should endeavor to expand its
business at a faster rate than that currently planned for, it is likely that
the Company would attempt to raise additional capital to accelerate its growth.
In all events, the Company's ability to continue operations beyond will depend
upon its ability to generate a significant cash flow from its expanded
operations.  If sufficient cash flow is not being generated at the end of this
period, the Company would be required to seek additional funds through equity,
debt or other external financing.  There can be no assurance that any
additional capital resources which the Company may need will be available to
the Company if and when required, or on terms that will be acceptable to the
Company.  If additional financing is required, or desired, the Company may be
required to forego a substantial interest in its future revenues or dilute the
equity interests of existing shareholders, and a change in the control of the
Company may result.

Item 7.  Financial Statements.

    The financial statements and supplemental data required by this Item are
filed as exhibits hereto, as listed in the Index to Financial Statements
included under Item 13(c) of Part IV below, and are incorporated herein by this
reference.

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

    On November 14, 1997, following a board meeting, the Company announced that
the previous auditors, Arthur Andersen LLP had been replaced by Moss Adams LLP.

    Arthur Andersen LLP was dismissed as the Company's independent accountants
by the Company's Board of Directors on November 11, 1997.  Arthur Andersen LLP
had acted as the Company's independent accountants since 1995.  The independent
auditors' reports issued by Arthur Andersen LLP on the Company's consolidated
financial statements for the years ended December 1995, and 1996, did not
contain an adverse opinion or disclaimer of opinion, and such reports were not
modified for any departure from generally accepted accounting principles or for
any limitation of audit scope.  There were no disagreements with Arthur
Andersen LLP, resolved or unresolved, on any matter of accounting principles or
practices, financial disclosure, or auditing scope or procedure, which, if not
resolved to Arthur Andersen LLP's satisfaction, would have caused it to make
reference to the subject matter of the disagreement in connection with its
reports.  Arthur Andersen LLP was not retained to report on the Company's 1997
consolidated financial statements.

    Effective as of November 11, 1997, the Company has engaged Moss Adams LLP
to audit the Company's consolidated financial statements for the year ending
December 31, 1997.  At no time during the Company's two fiscal years ending
December 31, 1996 nor during the subsequent interim period prior to engaging
Moss Adam LLP did the Company, or anyone on its behalf, consult Moss Adams LLP
regarding (i) either: the application of accounting principles to a specified
transaction, either completed or proposed; or the type of audit opinion that
might be rendered on the Company's consolidated financial statements, and
either a written report was provided to the Company or oral advice was provided
that Moss Adams LLP concluded was an important factor considered by the Company
in reaching a decision as to the accounting, auditing or reporting issue; or
(ii) any matter that was either the subject of a disagreement (as defined in
paragraph 304(a)(1)(iv) and the related instruction of Regulation S-K) or was
a reportable event (as described in paragraph 304(a)(1)(iv) of Regulation S-K).


                                     PART III

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

    The directors and executive officers of the Company are as follows:

<PAGE>
<TABLE>
<CAPTION>

    Name                               Age       Positions
<S>                                    <C>       <C>
Cynthia Kolke                           51       President, Assistant Secretary
                                                  and Director

R. Bruce Stewart                        61       Chairman of the Board,
                                                  Secretary and Treasurer

Paul R. Ryan                            53       Director

William D. Fox                          60       Director

</TABLE.


    Ms. Kolke has 26 years experience in sales and marketing.  From 1965
through 1986 she was employed in a number of capacities, including Director
of Marketing, by The Service Bureau Corporation, a division of IBM which was
sold to Control Data in 1973.  Between 1986 and 1989, Ms. Kolke served as the
Vice President of Sales for Light Signatures, and operated as an independent
marketing consultant thereafter until she joined G.B Data Systems, Inc., a
direct mail, nutritional supplement marketing company, in April 1990 as its
Operations Manager.  In July 1993, she left G.B. Data Systems, Inc. to co-found
Whitewing Labs on July 29, 1993, as its President, Assistant Secretary and as a
director.  She holds a Bachelor's degree in Marketing and Data Processing from
the Detroit College of Business.

    R. Bruce Stewart, who served as Chairman, President and Chief Executive
Officer of Acacia Research Corporation, the Company's largest shareholder, from
1993 to January 1997, devoted much of his time to the formation of Whitewing
Labs and the development of its plan of operations.  Mr. Stewart is currently
Acacia Research's Chairman and Chief Financial Officer.  From August 1977 to
March 1991, Mr. Stewart served as President of Annandale Corporation, a
financial consulting firm.

    Paul R. Ryan became a director of the Company in October 1996.  He was
Vice President of Capital Management and a director of Acacia Research since
June 1995.  He was elected President and Chief Executive Officer of Acacia
Research in January 1997.  He received a B.S. degree from Cornell University
and attended New York University Graduate School of Business.  Mr. Ryan was a
general partner of the American Health Care Fund, L.P. until 1993.

    Mr. Fox has owned Classic Tire, an automotive repair and tires retailer
since 1992.  For the previous seven years, he conducted an independent
management consulting business.  He joined the Company's Board of Directors
in February 1996, upon consummation of the Company's initial public offering.
From 1963 through 1984, Mr. Fox held numerous positions with IBM and Control
Data, including Branch Manager and Marketing Program Administrator.  He
graduated from Middlebury College with a B.A. degree in Political Science.

    The Company's Board of Directors has established an audit committee
comprised of Mr. Stewart, Mr. Ryan and Mr. Fox, which will meet to consult with
the Company's independent auditors concerning their engagement and audit plan,
and thereafter concerning the auditor's report and management letter and, with
the assistance of the independent auditors, will also monitor the adequacy of
the Company's internal accounting controls.  The Company's Board of Directors
has established a compensation committee comprised of Mr. Stewart and Mr. Fox.
The compensation committee met in July 1997 to review and determine the
compensation of the Company's executive officers, administer the Company's
Stock Option Plan, adopt compensation policies and practices, review and pass
upon all transactions with affiliates and other persons having a material
financial interest in the Company.  The Board has not established a separate
nominating committee.  Rather, all members of the Company's Board of Directors
meet to nominate the individuals to be proposed by the Board of Directors for
election as directors of the Company.

    Subject to the terms of applicable employment agreements, of which there
currently are none, officers are appointed by and serve at the discretion of
the Board of Directors.  The Company's Articles of Incorporation currently
provide for a Board of Directors divided into two classes of directors serving
staggered terms, with one-half of the total number of authorized directors
(currently four) to be elected at each annual meeting of the Company's
stockholders to serve a 2-year term.  No family relationships exist between any
of the officers or directors of the Company.


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

    Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of the
Company's Common Stock to file reports of ownership and changes in ownership
with the Securities and Exchange Commission ("SEC").  Officers, directors and
greater than ten percent shareholders are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file.
Management believes all such individuals were in compliance with Section 16(a)
as of the filing date of this Annual Report on Form 10-KSB, and that none were
delinquent.


Item 10.  Executive Compensation.

    The following table summarizes the annual and long term compensation paid
by the Company during fiscal years ended December 31, 1995, 1996 and 1997 to
the President of the Company.  No other executive officer of the Company
received an annual salary and bonus exceeding $100,000 during the year ended
December 31, 1997.



</TABLE>
<TABLE>
    Summary Compensation Table
<CAPTION>
                                                Long-Term Compensation
                       Annual Compensation          Awards         Payouts
                                             Restricted
                                                Stock          LTIP
Name and                    Salary Bonus Other Awards Options Payouts All Other
Principal Position     Year   $      $     $     $      #      $   Compensation
<S>                         <C>     <C>    <C>   <C>   <C>    <C>     <C>

Cynthia Kolke,         1995 71,400   -     -     -      -      -        -
President, Assistant   1996 84,200   -     -     -     37,500  -        -
Secretary and Director 1997 82,792   -     -     -      -      -        -

</TABLE>

The Company leases and pays the insurance on an automobile on Ms. Kolke's
behalf at an annual cost of $10,761 in 1997.

    Each director of the Company who is not otherwise employed full-time by the
Company or Acacia Research Corporation will be paid $100 for each Board meeting
attended.  Directors will also be reimbursed for their travel expenses incurred
in attending Board or committee meetings.  Directors have previously not been
compensated for their attendance at Board meetings, except for reimbursement of
travel expenses. On July 15, 1997 it was decided to reduce the excise prices of
Mr. Fox's options to $1.25.

Stock Options

    The Company's 1993 Stock Option Plan, as amended (the "Stock Option Plan"),
authorizes the granting of options to employees that are intended to qualify as
"incentive stock options" under the Internal Revenue Code of 1986 ("Incentive
Stock Options"), as well as stock options that are not intended to so qualify
("Nonstatutory Options") which may be granted to officers, directors, employees,
consultants, and others expected to provide significant services to the Company
or its subsidiaries.  The Stock Option Plan, which is administered by the Board
of Directors, currently covers an aggregate of 534,185 shares.  The maximum
term of a stock option granted under the Stock Option Plan is ten years, but if
the optionee at the time of grant has voting power over more than 10% of the
Company's Stock, the maximum term is five years.  If an option granted expires
or terminates, the shares subject to the unexercised portion of that option
will become available for the grant of future options under the Stock Option
Plan.  If an optionee terminates his or her service to the Company, the
optionee may exercise only those option shares vested as of the date of
termination and must effect such exercise within three months, although the
Board of Directors may set a longer period for exercise of stock options.  The
Stock Option Plan may be amended at any time by the Board of Directors,
although certain amendments would require stockholder approval.  The Stock
Option Plan will terminate in 1998 unless earlier terminated by the Board.

    The exercise price of Incentive Stock Options granted under the Stock
Option Plan must be at least equal to the fair market value of the stock
subject to the option on the date of grant, except that the exercise price of
an Incentive Stock Option granted to an optionee who owns stock possessing more
than 10% of the voting power of the Company's outstanding capital stock must
equal at least 110% of the fair market value of the stock subject to the option
on the date of grant.  The exercise price of Nonstatutory Stock Options granted
under the Stock Option Plan must be at least equal to 85% of the fair market
value of the stock subject to the option on the date of the grant.  Payment of
the exercise price may be made in cash, promissory notes or other consideration
as determined by the Board of Directors.

    As of February 28, 1998, options to purchase an aggregate of 420,500 shares
of Common Stock, at prices ranging from $0.089 to $5.00 per share, under the
Stock Option Plan were outstanding and held by a total of 4 officers,
directors, employees and consultants, including options to purchase 247,500,
143,000, 15,000, and 15,000 shares granted to Ms. Kolke, Mr. Stewart, Mr. Ryan
and Mr. Fox, respectively.  No options were granted by the Company during the
year ended December 31, 1997.

<TABLE>
Option Values as of December 31, 1997
<CAPTION>

                           Number of Unexercised         Value of Unexercised
                                Options at             In-the-Money Options at
                            Fiscal Year-End (#)        Fiscal Year-End ($) (1)
Name                    Exercisable / Unexercisable Exercisable / Unexercisable
<S>                       <C>               <C>         <C>            <C>
Cynthia Kolke             247,500   /       0           $0      /      $0
</TABLE>

(1)    Assumes that a share of Common Stock was valued at $.8125 per share on
       December 31, 1997.  Amounts reflected are based on this assumed price
       minus the exercise price and do not indicate that shares were sold.

Limitation of Directors' and Officers' Liability and Indemnification

    The Company's Certificate of Incorporation limits the liability of
directors to the maximum extent permitted by Delaware law.  Delaware law
provides that directors of a Delaware corporation will not be personally liable
for monetary damages for breach of the fiduciary duties as directors except for
liability as a result of their duty of loyalty to the company for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, unlawful payments of dividends or stock transactions,
unauthorized distributions of assets, loan of corporate assets to an officer or
director, unauthorized purchase of shares, commencing business before obtaining
minimum capital, or any transaction from which a director derived an improper
benefit.  Such limitations do not affect the availability of equitable remedies
such as injunctive relief or rescission. In addition, the Company's Bylaws
provide that the Company must indemnify its officers and directors, and may
indemnify its employees and other agents, to the fullest extent permitted by
Delaware law.  At present, there is no pending litigation or proceeding
involving any director, officer, employee, or agent of the Company where
indemnification will be required or permitted.  Insofar as indemnification for
liabilities arising under the Securities Act of 1933, as amended, may be
permitted to officers, directors or persons controlling the Company pursuant to
the foregoing provisions, the Company has been informed that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933, as amended, and is therefore
unenforceable.

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

    The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of February 28, 1998, by (i) each
director and executive officer of the Company, (ii) each person known to the
Company to be the beneficial owner of more than 5% of the outstanding Common
Stock, and (iii) all directors and executive officers of the Company as a
group.  Except as may be indicated in the footnotes to the table, each of such
persons has sole voting and investment power with respect to the shares owned,
subject to applicable community property laws.  The address of each individual
listed is in care of the Company, 15455 San Fernando Mission Boulevard, Suite
105, Mission Hills, California 91345.
<TABLE>
<CAPTION>

                                                    Shares Beneficially Owned*

                                              Number                   Percent
<S>                                          <C>                        <C>
Acacia Research Corporation (1)
12 S. Raymond Ave., Ste. B
Pasadena, CA 91105                           789,709                    27.6%

R. Bruce Stewart (2)(3)                      960,709                    31.8%

Cynthia Kolke (3)                            262,500                     8.4%

Paul R. Ryan (2)(3)                          797,709                    27.7%

William D. Fox (3)                             6,000                      .1%

All directors and executive
officers as a group (4 persons) (2)(3)     1,229,209                    42.9%

</TABLE>

*   In calculating beneficial and percentage ownership, all shares of Common
Stock which a named stockholder will have the right to acquire from February
28, 1998, upon exercise of stock options are deemed to be outstanding for the
purpose of computing the ownership of such stockholder, but are not deemed to
be outstanding for the purpose of computing the percentage of Common Stock
owned by any other stockholder.  As of February 28, 1998, an aggregate of
2,864,938 shares of Common Stock were outstanding.  Except as otherwise
indicated in the footnotes to the table, this does not take into account
currently exercisable stock options outstanding as of February 28, 1998 to
purchase an aggregate of 548,700 shares, nor the Warrants outstanding as of
February 28, 1998 to purchase up to 517,500 additional shares of Common Stock.

(1)    Includes 267,250 shares held of record by Acacia as security for
       repayment of debts owed to Acacia by third parties.

(2)    Includes in the case of each of Messrs. Stewart and Ryan all shares held
       of record by Acacia Research Corporation, of which they are directors,
       and executive officers.

(3)    Includes shares issuable upon exercise of currently exercisable options,
       including 143,000 shares in the case of Mr. Stewart and 247,500 shares
       in the case of Ms. Kolke.  Twenty percent of the options to purchase
       15,000 shares granted to Mr. Fox became exercisable on January 6, 1997
       and twenty percent of the options to purchase 15,000 shares granted to
       Mr. Ryan became exercisable on October 17, 1997 and are therefore
       included.

Item 12.  Certain Relationships and Related Transactions.

    In April 1995, the Company invested $100,000 to purchase a limited
partnership interest in Acacia Capital Partners, L.P., a California limited
partnership formed by Acacia to manage investments using proprietary software
models.  See Item 6, "Management's Discussion and Analysis or Plan of Operation
- Liquidity and Capital Resources".  Except as described below, all profits and
losses of the partnership will be allocated quarterly among the general
partners and limited partners in proportion to their respective capital
accounts as of the beginning of each quarter.  The general partners will be
allocated on an annual basis (subject to certain exceptions) 20% of the amount
by which profits of the partnership otherwise allocable to each of the limited
partners in that year exceed losses allocated to the limited partners that have
not been recouped.  The general partners of this investment partnership are
entitled to annual management fees payable by each limited partner in an amount
equal to 1% of the value of that limited partner's capital account. Acacia
Research Corporation will receive three-fourths, and the other general partner
will receive one-fourth, of such fees.  These management fees are payable
quarterly in advance at the beginning of each quarter based on the net asset
value of the limited partner's capital account on the first day of the quarter.
The partnership will also pay or reimburse the general partners for all costs
and expenses incurred by or on behalf of the partnership, including all legal
and accounting fees and expenses.  Although the partnership will not be
obligated to reimburse the general partners for any of the general partners'
own operating, general, administrative and overhead costs and expenses, some or
all of these expenses may be paid by securities brokerage firms that execute
securities trades for the partnership.  On December 1, 1997 Whitewing withdrew
95% of its investment in Acacia Capital Partners.

    For a description of the options to purchase shares of the Company's Common
Stock granted to the Company's executive officers and directors, see Item 10,
"Executive Compensation."

    Management of the Company believes that each of the foregoing transactions
was in the Company's best interests.  As a matter of policy, all future
transactions between the Company and any of its executive officers, directors,
or principal shareholders, or any of their affiliates, will be on terms that a
majority of the independent, disinterested members of the Company's Board of
Directors believe to be no less favorable to the Company than those that could
have been obtained from an unaffiliated third party in an arms-length
transaction.


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

    (a)    Exhibits.  The following exhibits are either filed herewith or
           incorporated herein by reference:
<TABLE>
<CAPTION>
           <S>    <C>
            3.1   Certificate of Incorporation*
            3.2   Bylaws*
            3.3   Reincorporation Agreement*
            4.1   Form of Warrant*
            4.2   Agreement Not to Sell*
            10.1  Lease of Company's Executive Offices*
            10.2  Stock Option Plan*
            10.4  Fulfillment Services Agreement with Professional Marketing
                  Associates, Inc.*
            10.5  Consulting Agreement*
            27    Financial Data Schedule*

</TABLE>
*    Incorporated by reference from the Company's Registration Statement on
     Form S-1 (33-97156) which became effective under the Securities Act of
     1933, as amended, on February 9, 1996.

    (b)    Reports on Form 8-K.  On November 4, 1997 the Company filed a Form
           8-K regarding the change in auditors and the repricing of warrants.

<TABLE>

    (c)    Index to Financial Statements.
<CAPTION>

                                                                         Page
<S>                                                                      <C>
Independent Auditor's Report                                             F-1a

Report of Independent Public Accountants                                 F-1b

Balance Sheets as of December 31, 1997                                   F-2

Statements of Operations for the two years ended
   December 31, 1996 and 1997                                            F-3

Statements of Shareholders' Equity for the two years ended
   December 31, 1996 and 1997                                            F-4

Statements of Cash Flows for the two years ended
   December 31, 1996 and 1997                                            F-5

Notes to Financial Statements                                            F-6

</TABLE>

                                     SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

                                   Whitewing Labs, Inc.



                              By:    /s/  Cynthia Kolke
                                   Cynthia Kolke
                                   President, Assistant Secretary and Director

                                   Dated:  March 30, 1998


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/  R. Bruce Stewart     Chairman of the Board               March 30, 1998
R. Bruce Stewart            of Directors, Secretary
                            and Treasurer



  /s/  Cynthia Kolke        Director, Assistant                 March 30, 1998
Cynthia Kolke               Secretary



  /s/  Paul R. Ryan         Director                            March 30, 1998
Paul R. Ryan



  /s/  William D. Fox       Director                            March 30, 1998
William D. Fox




                           INDEPENDENT AUDITOR'S REPORT




To the Shareholders of Whitewing Labs, Inc.

We have audited the accompanying balance sheet of Whitewing Labs, Inc. as of
December 31, 1997 and the related statements 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 Whitewing Labs, Inc. as of
December 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.



                                      /s/  Moss Adams LLP
                                      MOSS ADAMS LLP



Los Angeles, California
January 30, 1998




















                                        F-1a




                       REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




To Whitewing Labs, Inc.:

We have audited the accompanying balance sheet of Whitewing Labs, Inc. (a
Delaware Corporation) as of December 31, 1996, and the related statements 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 Whitewing Labs, Inc. as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.



                                          /s/  Arthur Andersen LLP
                                          ARTHUR ANDERSEN LLP




Los Angeles, California
January 23, 1997















                                        F-1b
<TABLE>



                             WHITEWING LABS, INC.

                               BALANCE SHEETS

                          DECEMBER 31, 1996 AND 1997



                                  ASSETS
<CAPTION>

                                                  1996                 1997
<S>                                           <C>                  <C>
CURRENT ASSETS:
   Cash and cash equivalents                  $2,524,391           $  372,539
   Short-term investments                              -            1,221,240
   Inventories                                   143,519              124,484
   Prepaid Expenses
      Prepaid advertising                        379,095              274,555
      Other prepaid expenses                      38,906               30,079
   Other receivables                              46,604               62,150
   Deferred taxes                                      -               50,000
                                              __________           __________
      Total current assets                     3,132,515            2,135,047
                                              __________           __________

EQUIPMENT:
   Furniture and fixtures                        119,443              135,957
   Accumulated depreciation                      (39,108)             (63,856)
                                              __________           __________
                                                  80,335               72,101
                                              __________           __________

OTHER ASSETS
   Deferred advertising                          182,061                    -
   Investment in related-party partnership,
       at cost                                   100,000                    -
   Deferred taxes                                220,000                    -
   Other                                           5,345                8,245
                                              __________           __________
                                                 507,406                8,245
                                              __________           __________

                                              $3,720,256           $2,215,393
                                              __________           __________

</TABLE>




The accompanying notes are an integral part of this financial statement.




                                        F-2a

<TABLE>

                               WHITEWING LABS, INC.

                                 BALANCE SHEETS

                            DECEMBER 31, 1996 AND 1997


                      LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>

                                                      1996             1997
<S>                                               <C>             <C>

CURRENT LIABILITIES:
   Accounts payable                               $   295,393     $     17,729
   Accounts payable to shareholder                     22,190                -
   Accrued liabilities                                 23,459           12,259
   Deferred taxes                                     220,000                -
                                                  -----------     ------------
      Total current liabilities                       561,042           29,988
                                                  -----------     ------------


COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:
   Preferred Stock, $.001 par value:
      10% cumulative, authorized 500,000 shares,
      no shares issued and outstanding
   Common stock, $.001 par value:
      Authorized-10,000,000 shares
      Issued and outstanding 2,891,388
      shares at December 31, 1996
      and 2,823,488 shares at
      December 31, 1997                                 2,891            2,906
   Paid-in capital                                  6,318,977         6,320,292
   Accumulated deficit                             (3,117,235)      (4,060,887)
   Less - treasury stock, 41,450 shares,
   at cost 17,600 shares at December 31, 1996
   and 41,450 at December 31, 1997                    (45,419)         (76,906)
                                                  -----------     ------------

   Shareholders' equity                             3,159,214        2,185,405
                                                  -----------     ------------

                                                   $3,720,256       $2,215,393
                                                   ==========       ==========

</TABLE>





The accompanying notes are an integral part of this financial statement.




                                        F-2b
<TABLE>
                                 WHITEWING LABS, INC.

                                STATEMENT OF OPERATIONS

                           YEARS ENDED DECEMBER 31, 1996 AND 1997
<CAPTION>

                                                  1996                 1997
<S>                                          <C>                   <C>
NET SALES                                    $ 3,537,480           $3,581,811

COST OF GOODS SOLD                               511,214              524,497
                                              __________           __________
   Gross profit                                3,026,266            3,057,314
                                              __________           __________

OPERATING EXPENSES:
   Advertising                                 2,684,795            2,223,204
   Selling                                     1,983,738            1,198,974
   General and administrative                    914,436              764,984
                                              __________           __________
                                               5,582,969            4,187,162
                                              __________           __________
   Loss from operations                       (2,556,703)          (1,129,848)

INTEREST EXPENSE                                  (4,259)                   -
OTHER INCOME, NET                                143,879              137,046
                                              __________           __________
   Loss before income taxes                   (2,417,083)            (992,802)

INCOME TAX BENEFIT (PROVISION)                      (850)              49,150
                                              __________           __________
NET LOSS                                      (2,417,933)            (943,652)

PREFERRED STOCK DIVIDENDS PAID
   AND ACCRUED                                    10,129                   -
                                              __________           __________

   Net loss attributable to
   common shareholders                       $(2,428,062)           $(943,652)
                                              __________           __________

BASIC LOSS PER COMMON SHARE                  $     (0.90)         $     (0.33)
                                              __________           __________

WEIGHTED AVERAGE NUMBER OF
   COMMON SHARES OUTSTANDING                   2,691,149           2,864,680
                                              __________           __________
</TABLE>


The accompanying notes are an integral part of this financial statement.

                                      F-3

<TABLE>
                             WHITEWING LABS, INC.

                      STATEMENTS OF SHAREHOLDERS' EQUITY

                    YEARS ENDED DECEMBER 31, 1996 AND 1997
<CAPTION>
                                       Cumulative
                                       Convertible
                                       Preferred Stock       Common Stock
                                       ------------------  -----------------
                                        Shares    Amount    Shares    Amount
<S>                                    <C>       <C>       <C>        <C>
BALANCE, December 31, 1995             272,250   $ 732,149  1,434,626 $1,434

  Cancelled stock subscribed          (15,000)         (15)         -      -
  Cancelled note receivable from
    subscription                       15,000           15          -      -
  Three-for-two stock split and
    retirement of preferred stock     (272,250)   (732,149)   272,250    272
  Preferred dividends paid                   -           -          -      -
  Stock offering, net of associated
    offering costs and broker
    discounts of $1,111,752                  -           -  1,035,000  1,035
  Exercise of stock options                  -           -    149,512    150
  Repurchases of common stock                -           -          -      -
  Net loss                                   -           -          -      -
                                       -------    --------  --------- ------
BALANCE, December 31, 1996                   -           -  2,891,388  2,891

  Exercise of stock options                  -           -     15,000     15
  Repurchases of common stock                -           -          -      -
  Net loss                                   -           -          -      -
                                       -------    --------  --------- ------
BALANCE, December 31, 1997                   -   $       -  2,906,388 $2,906
                                       =======    ========  ========= ======
</TABLE>


    The accompanying notes are an integral part of these financial statements.
                                      F4a
<TABLE>
                             WHITEWING LABS, INC.

                      STATEMENTS OF SHAREHOLDERS' EQUITY

                    YEARS ENDED DECEMBER 31, 1996 AND 1997
<CAPTION>
                                         Treasury Stock     Paid-In
                                                            Capital
                                       ------------------  ----------
                                        Shares    Amount
<S>                                    <C>       <C>       <C>
BALANCE, December 31, 1995                   -   $      -   $ 1,177,358

  Cancelled stock subscribed                 -          -       (49,985)
  Cancelled note receivable from
    subscription                             -          -        49,985
  Three-for-two stock split and
    retirement of preferred stock            -          -       731,877
  Preferred dividends paid                   -          -             -
  Stock offering, net of associated
    offering costs and broker
    discounts of $1,111,752                  -          -     4,269,213
  Exercise of stock options                  -          -       140,529
  Repurchases of common stock          (17,600)   (45,419)            -
  Net loss                                   -          -             -
                                       --------  ---------  -----------

BALANCE, December 31, 1996             (17,600)   (45,419)    6,318,977

  Exercise of stock options                  -          -         1,315
  Repurchases of common stock          (23,850)   (31,487)            -
  Net loss                                   -          -             -
                                       --------  ---------  -----------
BALANCE, December 31, 1997             (41,450)  $(76,906)  $ 6,320,292
                                       ========  =========  ===========
</TABLE>


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

                                      F4b
<TABLE>
                             WHITEWING LABS, INC.

                      STATEMENTS OF SHAREHOLDERS' EQUITY

                    YEARS ENDED DECEMBER 31, 1996 AND 1997
<CAPTION>
                                      Accumulated            Total
                                      Deficit
                                      -----------          ----------
<S>                                   <C>                  <C>
BALANCE, December 31, 1995            $ (689,173)          $ 1,221,768

  Cancelled stock subscribed                   -               (50,000)
  Cancelled note receivable from
    subscription                               -                50,000
  Three-for-two stock split and
    retirement of preferred stock              -                     -
  Preferred dividends paid               (10,129)              (10,129)
  Stock offering, net of associated
    offering costs and broker
    discounts of $1,111,752                    -             4,270,248
  Exercise of stock options                    -               140,679
  Repurchases of common stock                  -               (45,419)
  Net loss                           (2,417,933)            (2,417,933)
                                     -----------            -----------
BALANCE, December 31, 1996           (3,117,235)             3,159,214

  Exercise of stock options                   -                  1,330
  Repurchases of common stock                 -                (31,487)

  Net loss                             (943,652)              (943,652)
                                     -----------            -----------
BALANCE, December 31, 1997           $(4,060,887)          $ 62,185,405
                                     ===========           ============
</TABLE>


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


                                      F4c
<TABLE>

                              WHITEWING LABS, INC.

                            STATEMENTS OF CASH FLOWS

                     YEARS ENDED DECEMBER 31,1996 AND 1997
<CAPTION>

                                                     1996         1997
<S>                                                  <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                         $(2,417,933)  $   (943,652)
   Adjustments to reconcile net loss
   to net cash used in operating activities:
      Depreciation and amortization                      20,815         25,211
      Changes in assets and liabilities:
         Inventories                                     49,715         19,035
         Prepaid advertising                            (23,163)       104,540
         Other prepaid expenses                          (7,969)         8,827
         Other receivables                              (29,489)       (15,546)
         Deferred advertising                             8,335        182,061
         Deposits                                           312         (3,364)
         Accounts payable                               198,259       (277,664)
         Accrued liabilities                            (41,072)       (11,200)
         Accrued interest payable                       (43,051)             -
         Deferred taxes                                       -        (50,000)
                                                     ----------        --------
      Net cash used in
      operating activities                           (2,285,241)      (961,752)
                                                     ----------        --------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of furniture and fixtures                    (6,695)       (16,513)
   Purchase of short-term investments                         -     (1,221,240)
                                                     ----------        --------
   Net cash used in investing activities                 (6,695)    (1,237,753)
                                                     ----------        --------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Return of investment in related-party partnership          -        100,000
   Deferred offering costs                              174,261              -
   Payments to stockholder                             (114,247)       (22,190)
   Net proceeds from issuance of common stock         4,090,158              -
   Net proceeds from issuance of common stock warrants  180,090              -
   Net proceeds from issuance of common stock
      upon exercise of options                          140,679          1,330
   Repurchases of common stock                          (45,419)       (31,487)
   Payment of cash dividends                            (32,817)             -
                                                     ----------        --------
      Net cash provided by financing activities       4,392,705         47,653
                                                     ----------        --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS                                  2,100,769      (2,151,852)
                                                     ----------        --------












                                      F5a
<PAGE>

                                                     1996         1997
CASH AND CASH EQUIVALENTS,
   beginning of year                                  423,622        2,524,391
                                                     ----------        --------

CASH AND CASH EQUIVALENTS,
   end of year                                     $2,524,391      $   372,539
                                                   ==========      ===========

SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
   Cash paid for income taxes                      $    3,605      $       800
                                                   ==========      ===========

	Cash paid for interest                      $    47,310      $         -
                                                   ==========      ===========

SUPPLEMENTAL DISCLOSURES OF
NONCASH FINANCING ACTIVITIES:
   Cumulative convertible preferred
   stock converted to common stock                $   732,149     $          -
                                                   ==========      ===========

</TABLE>


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










                                      F5b
                                 WHITEWING LABS, INC.

                            NOTES TO FINANCIAL STATEMENTS

                                 DECEMBER 31, 1997


1.   Summary of Operations

    a.    Organization and Business

    Whitewing Labs, Inc. (the Company) is a Delaware corporation engaged in the
    development and distribution of healthcare products using direct response
    marketing to individuals aged 40 and over throughout the U.S.  Utilizing
    formulas that include only natural ingredients, the Company's products
    offer alternatives to conventional treatments for symptoms associated with
    the aging process.

    b.    Proceeds from Completion of Initial Public Offering

    On February 20, 1996, the Company completed its initial public offering and
    issued 900,000 shares of common stock and 1,035,000 common stock purchase
    warrants.  On March 18, 1996, the Company issued an additional 135,000
    shares of common stock which reflected shares of common stock set aside to
    cover any over-allotments related to the public offering.  Total proceeds
    related to the issuance of the 1,035,000 shares of common stock and common
    stock purchase warrants were approximately $4,270,000 which is net of
    $412,092 in offering costs and $699,660 in broker discounts (See Note 8).

2.   Summary of Significant Accounting Policies

    a.    Estimates Used by Management

    The preparation of financial statements in conformity with generally
    accepted accounting principles requires management to make estimates and
    assumptions that affect the reported amounts of assets and liabilities and
    disclosure of contingent assets and liabilities at the date of the
    financial statements and the reported amounts of revenues and expenses
    during the reported period.  Actual results could differ from those
    estimates.

    b.    Concentration of Risk

    Production, order taking and order fulfillment are outsourced to four
    independent contractors, which potentially subject the Company to a
    concentration of supplier risk.  In addition, substantially all printing is
    handled by an outside company and substantially all advertising placement,
    including purchase of mailing lists for direct mail programs and airing
    time for electronic in-home delivery of product advertising, is handled by
    outside service agencies.  Although these services are currently
    concentrated with a few key suppliers, management believes that other
    suppliers could provide similar services and comparable terms.  A change in
    suppliers, however, could cause delay in manufacturing, shipping,
    advertising placements and implementation of direct mail programs and a
    possible loss of sales which could affect operating results adversely.

    c.    Cash and Cash Equivalents, and Short-Term Investments

    The Company considers cash equivalents to be short-term, highly liquid
    investments that are both readily convertible to known amounts of cash, and
    are so near their maturity that they present insignificant risk of changes
    in value because of changes in interest rates.  Cash equivalents include
    only those investments with original maturities of three months or less.

    Short-term investments consist of certificates of deposit with original
    maturities of greater than three months but less than one year.


    d.    Inventories

    Inventories consist of finished goods and shipping supplies.  Inventories
    are valued at the lower-of-invoiced-cost (determined by the first-in,
    first-out method) or market.
<TABLE>

    The following is a summary of inventories at December 31, 1996 and 1997:
<CAPTION>
                                                 1996                 1997
     <S>                                          <C>                 <C>
     Finished goods                               $139,979            $123,035
     Shipping supplies                               3,540               1,449
                                                  ________            ________
                                                  $143,519            $124,484
                                                  ========            ========
</TABLE>

    e.   Prepaid and Deferred Advertising

    Television infomercials, and direct mailings including magazine postcard
    inserts, tear sheets, holiday special mailers and the Journal of Natural
    Health "TM" comprise the main components of the Company's direct-response
    marketing efforts.  Payments to vendors in advance of the run date are
    included in prepaid advertising.  Respondents are logged into a customer
    database which indicates the source of each customer's response to the
    specific advertisement. The Company's accounting policy for amortizing the
    costs of prepaid and deferred print advertising placements and mailings is
    based upon management's estimates over the periods in which the related
    direct responses are received.  The Company evaluates the realizability of
    its direct-response advertising by comparing the carrying amount of prepaid
    and deferred advertising at each balance sheet date on a cost-pool-by-cost
    -pool basis to the probable remaining future net revenues expected to
    result from such advertising.  Any excess carrying amount over probable
    remaining future revenues is reported as advertising expense in the current
    period.  Newspaper and weekly publications are expensed in the month of
    issue.  Magazines and direct mailings which are available prior to the
    middle of the month preceding the issue date are amortized over a three
    month period.  Magazines which are available subsequent to the middle of
    the month preceding the issue date are amortized over a four month period.
    Costs to develop, edit, and reproduce infomercials for airing at local
    television stations nationwide are amortized over a period of twelve months
    or the estimated revenue earning stream, whichever is less.  Prepaid
    advertising at December 31, 1996 includes approximately $185,461 of costs
    related to the development of electronic in-home delivery of product
    advertising which the Company began airing in July 1997.  In 1996,
    advertising expense was $2,684,795, which includes a write-down to net
    realizable value of $123,396 in 1996.

    In December 1993, the American Institute of Certified Public Accountants
    issued Statement of Position 93-7 (SOP 93-7) entitled "Reporting on
    Advertising Costs".  The Company adopted SOP 93-7 effective January 1,
    1995.


    f.    Furniture and Fixtures

    Furniture and fixtures are recorded at cost.  Major additions and
    improvements are capitalized.  Depreciation is computed using the
    straight-line method over the estimated useful lives which range from 5 to
    7 years.  When assets are sold or otherwise disposed of, the cost and
    related accumulated depreciation are removed from the accounts and any
    resulting gain or loss is included in operations.

    g.    Organization Costs

    Organization costs are recorded at cost and are amortized using the
    straight-line method over a five-year period.


    h.    Income Taxes

    The Company accounts for income taxes using the asset and liability method
    in accordance with Statement of Financial Accounting Standards (SFAS) No.
    109, "Accounting for Income Taxes."  Income taxes are further explained in
    Note 6.

    i.    Revenue Recognition

    Revenue is recorded at the time of shipment.

    j.    Earnings Per Share

    The Financial Accounting Standards Board (FASB) recently issued Statement
    of Financial Accounting Standard No. 128 Earnings Per Share (SFAS No. 128)
    effective for years ending after December 15, 1997.  Earnings per share in
    the accompanying financial statements are calculated in accordance with
    SFAS No. 128.  Earnings per share for 1996, have been restated to reflect
    earnings per share calculated in accordance with SFAS No. 128.  SFAS No.
    128 requires basic earnings per share be calculated based on weighted
    average shares outstanding for the period without giving effect to
    outstanding common stock equivalents while diluted earnings per share
    considers the effect of common stock equivalents on weighted average shares
    outstanding.

    k.    Recently Issued Accounting Pronouncements

    In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
    Income," which establishes standards for reporting comprehensive income and
    its components (revenues, expenses, gains and losses) in financial
    statements.  SFAS 130 requires classification of other comprehensive income
    in a financial statement, and the display of the accumulated balance of
    other comprehensive income separately from retained earnings and additional
    paid-in capital.  SFAS No. 130 is effective for fiscal years beginning
    after December 15, 1997.  The Company believes this pronouncement will not
    have a material effect on its financial statements.

    In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
    Segments of an Enterprise and Related Information."  This pronouncement
    establishes standards for reporting information about operating segments in
    annual financial statements and requires that enterprises report selected
    information about operating segments in interim financial reports to
    shareholders.  SFAS No. 131 also establishes standards for related
    disclosures about products and services, geographic areas and major
    customers.  SFAS 131 is effective for fiscal years beginning after December
    15, 1997.  The Company believes this pronouncement will not have a material
    effect on its financial statements.


3.    Restricted Cash

By agreement with its credit card service organization, the Company is required
to maintain a reserve cash account with a balance less than or equal to 5
percent of the prior six months' gross sales volume for credit card
transactions subject to chargeback and return ratios.  As of December 31, 1997
and 1996, the Company held $20,041 and $31,234, respectively, of such
restricted cash, which is included in cash and cash equivalents on the
accompanying balance sheet.

4.    Due to Shareholder

The Company had an unsecured loan payable to the majority shareholder.  The
loan was due upon successful completion of the initial public offering.  On
February 21, 1996, the remaining loan was paid.  The Company recorded interest
expense related to this loan of $4,000 in 1996.


5.    Commitments and Contingencies

    a.    Lease

<TABLE>

The Company is obligated under an operating lease for the office space it
occupies which expires on October 1, 1998.  The Company is also obligated under
an automobile operating lease which expires February 14, 1999.  The Company's
future minimum lease payments at December 31, 1997 are as follows:

<CAPTION>

                       <S>                   <C>
                       1998                  49,794
                       1999                   1,660
                                            -------
                                            $51,454
                                            =======
</TABLE>

Rent expense in 1996 and 1997 was approximately $39,200 and $41,500,
respectively.

    b.    Service

The Company has a fulfillment services agreement with Professional Marketing
Associates, Inc. (PMA) effective through March 22, 1997 and is subject to
automatic six month extensions, currently extend through March 22, 1998.  Under
the agreement, PMA acts as the Company's independent contractor for the purposes
of order processing, warehousing and distribution of the Company's merchandise.

    c.    Regulation

The U.S. Food and Drug Administration (FDA) is the primary agency that regulates
the healthcare industry.

The Company's products consist of natural ingredients which are considered
nutritional supplements and are classified as foods, thus they do not require
FDA approval.  The Company's product labeling and advertising copy, however,
must be within the FDA's established guidelines.

In November 1991, the FDA issued proposed regulations designed to, among other
things, amend its food labeling regulations.  The proposed regulations met with
substantial opposition.  In October, 1994, the "Dietary Supplement Health and
Education Act of 1994" (the "Dietary Supplement Law") was enacted.  Section 11
of the Dietary Supplement Law provided that the advance notice of proposed rule
making by the FDA concerning dietary supplements was null and void.  FDA
regulations that became effective on June 1, 1994 would require standard format
nutrition labeling on dietary supplements.  However, because the new Dietary
Supplement Law also addresses labeling of dietary supplements, the FDA has
indicated that it will not enforce its labeling regulations until January 1,
1999.  In the interim, new regulations are expected to be proposed by the FDA.
Because the FDA has not yet reconciled its existing regulations with the new
Dietary Supplement Law, the Company cannot determine to what extent any changed
or amended regulations might affect its business, if at all.

The Dietary Supplement Law did not affect the July 1, 1994 effectiveness of the
FDA's health claims regulations.  Those regulations prohibit any express or
implied claims for dietary supplements unless such claims are approved in
advance by the FDA through the promulgation of specific authorizing regulations.
Such approvals are rarely provided by the FDA.  Therefore, no claim may be made
on a dietary supplement label or in printed sales literature, "that expressly or
by implication characterizes the relationship of any substance to a disease or
health-related condition".  The Company cannot determine what effect currently
proposed FDA regulations, when and if promulgated, will have on its business in
the future.  Such regulations could, among other things, require expanded or
different labeling, the recall or discontinuance of certain products, additional
record keeping and expanded documentation of the properties of certain products
and scientific substantiation.  In addition, the Company cannot predict whether
new legislation regulating its activities will be enacted, which new legislation
could have a material effect on the Company.

The Company has an ongoing compliance program with assistance from experienced
FDA counsel regarding the nature and scope of food and drug legal matters
affecting the Company's business and products.  The Company is unaware of any
legal actions pending or threatened by the FDA or any other governmental
authority against the Company.

    d.    Advertising


The Company had commitments for magazine placements of $261,000 at December 31,
1996.

6.    Income Taxes

The asset and liability method requires the Company to provide income taxes for
the tax effect of temporary differences in recognizing certain income and
expenses for financial statement and income tax purposes.

The provision for income taxes is comprised of $850 minimum franchise taxes
payable for state income taxes in each year presented, net of a deferred tax
benefit of $50,000 in 1997.

At December 31, 1997, the Company had net operating loss carryforwards of
approximately $4,400,000 for federal income tax purposes available to reduce
future federal taxable income through 2012 and net operating loss carryforwards
of approximately $5,600,000 for state income tax purposes.  Approximately
$2,000,000 and $3,600,000 are available to reduce future state taxable income in
California and Arizona, respectively.  Such carryforwards expire through 2012.
The Company had approximately $1,000,000 of NOL carryovers ("pre change NOL's")
for federal tax return purposes at December 31, 1995.  During 1995, the
Company's additional issuance of common stock to third parties and the existence
of cumulative convertible preferred stock held by third parties caused a "change
of ownership" of the Company pursuant to Section 382 of the Internal Revenue
Code.  As a result of the ownership change, the Company's utilization of its NOL
carryovers that may be used to offset future income is estimated by the Company
to be approximately $400,000 per year (the "annual limitation").

A reconciliation of statutory tax rates to the Company's effective tax rate for
income tax benefit is:
<TABLE>
<CAPTION>

                                               1996           1997
                                               -------       --------
<S>                                            <C>            <C>

Statutory rate
   Federal                                     (34.0%)        (34.0%)
   State, net of Federal benefit                (6.1%)         (6.1%)

Change in asset valuation allowance             40.1%          42.5%

Other                                              -            2.6%
                                               -------       --------
                                                   -%           5.0%
                                               -------       --------
</TABLE>


Temporary differences and carryforwards as of December 31, 1997 and 1996 which
give rise to the net deferred tax asset are as follows:

<TABLE>
<CAPTION>
                                               1996           1997
                                               ----------    -----------
<S>                                            <C>           <C>
   Deferred tax assets:
      Federal net operating loss carryforwards $1,156,000    $1,449,000
      State net operating loss carryforwards
         --California                              92,000       122,000
      State net operating loss carryforwards
         --Arizona                                165,000       220,000

      Other                                         8,000         4,000

      Less - Valuation allowance               (1,201,000)   (1,623,000)
                                               ----------    -----------
          Total deferred tax assets               220,000       172,000
                                               ==========    ==========


   Deferred tax liabilities:
      Prepaid advertising                        (216,000)     (110,000)
      Other                                        (4,000)      (12,000)
                                               ----------    -----------
   Total deferred tax liabilities                (220,000)     (122,000)
                                               ==========    ==========
   Net deferred tax asset                      $        -    $   50,000
                                               ==========    ==========
</TABLE>


7.    Stock Option Plan

    a.    Qualified Stock Options

    On November 16, 1993, the Board approved a qualified stock option plan (the
    Plan) for officers and key employees.  Under the terms of the Plan,
    Incentive stock options will be granted at the prevailing market rate.
    Shares not exceeding 20 percent of the outstanding common shares of the
    Company will be reserved for the issuance of options under the terms of the
    Plan.  Under the Plan, the options will generally vest and become
    exercisable at the date of the grant and expire five years from the date of
    grant, subject to employee termination.  Upon termination of employment,
    individuals have three months from their termination date to exercise their
    options.


    b.    Nonqualified Stock Options

    In 1993 and 1994, the Company granted 256,200 options to officers, key
    employees, directors, and consultants.  Under the terms of the Plan, options
    will be granted at the prevailing market rate and will generally vest and
    become exercisable at the date of the grant.  The term of any option expires
    five years from the date of grant, subject to the continuation of each
    person's employment or consulting relationship with the Company.  Upon
    termination of relations with the Company, option holders have three months
    from their termination date to exercise their options.

    On June 1, 1995, the Company granted a total of 60,000 options to two
    Employees at $3.40 per share which was the market as determined by the Board
    of Directors.  Options vest at 6,000 per year and expire five years after
    date of grant. On August 28, 1996, 30,000 options expired after an employee
    terminated his employment.  On August 28, 1997, 25,000 options expired after
    an employee terminated her employment.

    c.    Options Granted

    On January 5, 1996, the Company granted 75,000 options to an employee and a
    director at an exercise price of $5.00.  The options vested at the date of
    grant and expire five years from the date of grant. In addition, the Company
    granted 90,000 options to employees, directors and an outside contractor at
    exercise prices ranging from $1.69 to $5.00.  The options vest at various
    dates as defined in the specific stock option agreements and expire five
    years from the date of grant.  All options granted were approved by the
    Board of Directors.

    On January 5, 1996, the Company issued 29,997 options to a consultant at
    $4.33. The consultant entered into an arrangement with the Parent (prior to
    the change in ownership) for which options issued to him would be at
    approximately $1 below market price.  These options were exercised in
    January 1996.

    On November 4, 1997 the Company granted 15,000 options to an employee at the
    exercise price of $1.25.  The options vest over a five year period at the
    rate of 3,000 per year on the anniversary of hire.  The Company also granted
    7,500 options at the exercise price of $1.25 to a consultant.  The options
    vest over a five year period at the rate of 2,500 per year on the
    anniversary of grant.

    On January 21, 1998 the Company granted 15,000 options at the exercise price
    of $1.00 to an outside consultant.  The options vest over a six month period
    of time at the rate of 2,500 per month over the period of February 1998
    through July 1998.

    On February 17, 1998 the Company granted 15,000 options to an employee at
    The exercise price of $1.25.  The options vest over a five year period at
    the rate of 3,000 per year on the anniversary of grant.

The following is a summary of qualified and nonqualified options from December
31, 1995 to December 31, 1997:
[CAPTION]
                                               Exercise
                                                Price       Options    Options
Qualified Options:                            (At Market)   Granted     Vested
[S]                                            [C]          [C]        [C]
Balance, December 31, 1995                     $0.089       210,000    210,000
   Exercised                                   $0.089       (67,000)   (67,000)
                                                            -------    -------

Balance, December 31, 1996                     $0.089       143,000    143,000
                                                            -------    -------
   Exercised                                        -             -          -
                                                            -------    -------

Balance, December 31, 1997                    $ 0.089       143,000    143,000
                                                            =======    =======

Nonqualified Options:

Balance, December 31, 1995                    $0.089 - 4.00 316,200    268,200
   Granted                                    $1.69 - 5.00  194,997    113,000
   Exercised                                  $0.089 - 5.00 (82,512)   (82,512)
   Expired                                    $3.40 - 5.00  (50,000)    (5,000)
                                                            -------    -------
Balance, December 31, 1996                    $0.089 - 5.00 378,685    293,688
                                                            -------    -------

   Granted                                    $1.25          22,500          -
   Exercised                                  $0.089        (15,000)   (15,000)
   Expired                                    $1.25         (25,000)         -
                                                            -------    -------

Balance, December 31, 1997                    $0.089 - 5.00 361,185    278,688
                                                            -------    -------
[/TABLE]


The Company accounts for the Plan with regard to the Company's employees,
officers and directors under Accounting Principles Board Opinion No. 25 and
related Interpretations.  Accordingly, no compensation cost has been recognized
for these individuals under the Plan.  Had compensation cost for these
individuals been determined based on the fair value at the grant dates
consistent with the method under SFAS No. 123, the Company's net loss and
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
                                                     1995            1996
                                                 ------------    ------------
<S>                                              <C>             <C>
Net loss                      As Reported        $(2,417,933)    $  (943,652)
                              Pro Forma          $(2,529,721)    $(1,060,281)

Basic earnings per share:    As Reported         $     (0.90)    $     (0.33)
                             Pro Forma           $     (0.94)    $     (0.37)
Diluted earnings per share:  As Reported         $     (0.90)    $     (0.33)
                             Pro Forma           $     (0.94)    $     (0.37)

</TABLE>

    The fair value of each option grant is estimated on the date of grant using
an option pricing model with the following weighted-average assumptions used
for grants in 1996 and 1997:  risk-free interest rate of 8.0% and 7.25%
respectively; no expected dividend yield; expected lives of 5 years; expected
volatility of approximately 34% and 45% respectively for options granted after
the public offering.


8.    Capitalization

    a.    Capital Stock

    The Board of Directors authorized 500,000 shares of 10 percent cumulative
    convertible preferred stock which converted into one share of the Company's
    common stock upon the completion of the initial public offering on February
    20, 1996.

    On January 16, 1995, the Company filed amended articles of incorporation
    which increased the number of shares of common stock authorized from
    5,000,000 to 10,000,000 shares and changed the par value on its common and
    cumulative convertible preferred stock to $.001.

    b.    Warrants and Stock Options

    In conjunction with the initial public offering in February 1996, the
    Company issued 1,035,000 common stock purchase warrants at $0.20 per share
    which had to be purchased together on the basis of one share of common
    stock and one warrant, but tradable separately thereafter.  Two warrants
    entitle the holder to purchase one share of common stock at a price of
    $7.00 during the three year period commencing on February 14, 1996.  On
    November 7, 1997, the exercise price of the Company's warrants were reduced
    from $7.00 to $3.00.  The holder of two warrants is entitled to purchase
    one share of the Company's Common stock at $3.00 per share prior to
    February 9, 1999.  The warrants may be redeemed by the Company under
    certain  circumstances.  As of December 31, 1996, none had been exercised.
    In connection with the Company's initial public offering, the
    representatives of the underwriters acquired 90,000 warrants.

    In conjunction with the initial public offering in February 1996, the
    Company granted 90,000 options to the representatives of the underwriters
    at an exercise price of $6.00.  The options became exercisable on February
    9, 1997, and expire on February 9, 2001.

    c.    Stock Repurchase


    During 1996, the Company acquired 17,600 shares of its common stock for
    $45,419 in connection with a stock repurchase program in which up to
    200,000 shares or 7% of outstanding shares of the Company's common stock
    may be acquired in the open market.  During 1997, the Company repurchased
    23,850 shares for $31,487.

9.    Investment in Related-Party Partnership

    During 1997 the Company liquidated its $100,000 investment in a Partnership
    whose majority investor is Acacia Research, the Company's largest
    individual shareholder, recognizing a gain of approximately $43,000.
    Approximately $7,400 is receivable from the Partnership as of December 31,
    1997.
                                      F-13