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

                                   FORM 10-KSB

                  Annual Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

For the fiscal year ended June 30, 1999         Commission File Number 000-28876

                            CHEM INTERNATIONAL, INC.
            (Exact name of small business registrant in its charter)

              Delaware                                          13-3035216
    (State or other jurisdiction of                          (I.R.S. Employer
     incorporation or organization)                         Identification No.)

   201 Route 22, Hillside, New Jersey                             07205
(Address of principal executive offices)                        (Zip code)

Registrant's telephone number: (973) 926-0816

Securities registered under Section 12(b) of the Exchange Act: None.

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

                     Common Stock $.002 par value per share
                Class A Redeemable Common Stock Purchase Warrants
                              (Title of each class)

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

                           Yes [X]         No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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.

                           Yes [X]         No [_]

Registrant's revenues for the fiscal year ended June 30, 1999 were $12,274,448.

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant based on the trading price of the Registrant's Common Stock on August
31, 1999 was $2,654,063.

The number of shares  outstanding of each of the Registrant's  classes of common
equity, as of the latest practicable date:

                 Class                            Outstanding at August 31, 1999
       Common Stock $.002 par value                      5,178,300 Shares
      Class A Redeemable Common Stock                   1,265,000 Warrants
             Purchase Warrants
      Class C Redeemable Common Stock
             Purchase Warrants                           150,000 Warrants

                       DOCUMENTS INCORPORATED BY REFERENCE

The  information  required  by part III will be  incorporated  by  reference  to
certain  portions of a definitive  Proxy Statement which is expected to be filed
by the Registrant within 120 days after the close of its fiscal year.


<PAGE>


                    CHEM INTERNATIONAL, INC. AND SUBSIDIARIES

                            FORM 10-KSB ANNUAL REPORT

                                      INDEX
<TABLE>
<CAPTION>
Part I                                                                                   Page
<S>              <C>                                                                      <C>
  Item 1.        Description of Business                                                  1

  Item 2.        Description of Properties                                                3

  Item 3.        Legal Proceedings                                                        4

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

Part II

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

  Item 6.        Management's Discussion and Analysis of Financial Condition
                 And Results of Operations                                                6

  Item 7.        Financial Statements                                                     8

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

Part III

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

  Item 10.       Executive Compensation                                                   9

  Item 11.       Security Ownership of Certain Beneficial
                 Owners and Management                                                    9

  Item 12.       Certain Relationships and Related Transactions                           9

  Item 13.       Exhibits and Reports on Form 8-K                                         9

Signatures
</TABLE>


<PAGE>


                                     PART I

Disclosure Regarding Forward-Looking Statements

All statements  other than  statements of historical  fact, in this Form 10-KSB,
including without limitation,  the statements under "Management's Discussion and
Analysis of Financial  Condition and Results of Operations" and  "Description of
Business"  are,  or may be  deemed  to be,  forward  looking  statements.  These
statements  represent the Company's  current  judgement and are subject to risks
and  uncertainties  that could cause actual results to differ  materially.  Such
risks  and  uncertainties  include,  without  limitation:  (i)  loss  of a major
customer, (ii) competition, and/or (iii) government regulation.

Item 1. Description of Business

Chem International Inc. [the "Company"] a Delaware corporation,  is the survivor
of a merger of Chem International,  Inc. a Delaware  Corporation,  with and into
Frog Industries, Ltd. a New York corporation, which was effected on December 27,
1994 with Frog  Industries,  Ltd.  renamed  Chem  International  Inc.  after the
merger.  The Company  was  reincorporated  in Delaware on February 2, 1996.  The
Company is engaged primarily in manufacturing,  marketing and sales of vitamins,
nutritional  supplements and herbal products,  including vitamins sold as single
entity supplements,  in multi-vitamin combinations and in varying potency levels
and in different  packaging  sizes.  The Company's  subsidiary,  Manhattan  Drug
Company,  Inc.  ["Manhattan  Drug"],  manufactures  the vitamins and nutritional
supplements  for sale to  distributors,  multilevel  marketers  and  specialized
health-care  providers.  The Company also  manufactures  such  products for sale
under its own private brand, "Vitamin Factory", at its retail store in Hillside,
New Jersey or through mail order.

Development and Supply Agreement

On April 9, 1998,  the Company  signed a development  and supply  agreement with
Herbalife  International of America, Inc. ["Herbalife"] whereby the Company will
develop,  manufacture  and supply  certain  nutritional  products  to  Herbalife
through December 31, 2000.

Manufacturing Agreement

On February 14, 1998,  the Company signed a  manufacturing  agreement with Pilon
International,  PLC., a company that supplies Zepter International, a world-wide
sales distributor of consumer products. The Company will manufacture and develop
dietary supplements through the year 2001.

Risk of Reduction of Significant Revenues from Major Customer

The Company derives a significant portion of its sales from one customer, Rexall
Sundown,  Inc.  ["Rexall"],  for which it manufactures  vitamins and nutritional
supplements.  Sales to Rexall  expressed as a percentage of the Company's  total
sales, were approximately 55% and 44%, respectively,  for the fiscal years ended
June 30, 1999 and 1998. The loss of this customer  would have a material  affect
on the Company's operations.

Dependence on Key Personnel

The Company is highly  dependent  on the  experience  of its  management  in the
continuing  development of its manufacturing and retail operations.  The loss of
the services of these certain individuals,  particularly E. Gerald Kay, Chairman
of the Board, and director of the Company,  would have a material adverse effect
on the Company's  business.  The Company has entered into employment  agreements
with each of its four executive  officers,  which expire on June 30, 2002.  Such
agreements  may be  terminated  by the  employees at any time upon 30 days prior
written notice without penalty,  subject to a one year non-compete  clause.  The
Company has obtained  key-man life  insurance in the amount of $1,000,000 on the
life of Mr. Kay, with the Company as the named beneficiary.


                                       1
<PAGE>


In February 1999, Mr. Ronald Smalley,  Vice President of Technology resigned his
position with the Company,  and was replaced  with Mr.  Abdulhameed  Mirza.  Mr.
Mirza is the Vice President of Technical Affairs and has spent the last 25 years
in the vitamin and nutritional industry.

In May 1999,  Mr.  E.  Gerald  Kay,  Chairman  of the Board and Chief  Executive
Officer,  resigned as President  of the Company and was replaced by Mr.  Seymour
Flug. Mr. Flug will serve as President and Chief Executive Officer.  Mr. Flug is
the former  chairman  of Diners  Club  International  and  managing  director of
mergers and acquisitions for Citygroup/Citibank.

Raw Materials

The principal raw materials  used in the  manufacturing  process are natural and
synthetic  vitamins,  minerals,  herbs,  and  related  nutritional  supplements,
gelatin  capsules  and  coating  materials  and  the  necessary  components  for
packaging the finished  products.  The raw materials are available from numerous
sources within the United States. The gelatin capsules and coating materials and
packaging materials are similarly widely available.  Raw materials are generally
purchased by the Company  without  long term  commitments,  on a purchase  order
basis. The Company's principal suppliers are Roche Vitamins, Inc., Triarco Inc.,
M.W. International, Inc. and BASF Corporation.

Employees

As of June 30, 1999, the Company had 88 full time employees, of whom 53 belonged
to a  local  unit  of the  Teamsters  Union  and  are  covered  by a  collective
bargaining  agreement,  which  expires  August 30,  1999.  The contract has been
renewed through August 31, 2002.

Seasonality

The Company's results of operations are not  significantly  affected by seasonal
factors.

Trademarks

The Company owns the  registration  in the United  States  Patent and  Trademark
offices for "Oxitiva."  Oxitiva is the Company's  brand of chewable  antioxidant
formula.

Government Regulations

The manufacturing,  processing, formulation, packaging, labeling and advertising
of the  Company's  products  are  subject to  regulation  by a number of federal
agencies,  including the Food and Drug  Administration  [the "FDA"], the Federal
Trade  Commission [the "FTC"],  the United States Postal  Service,  the Consumer
Product Safety Commission and the Untied States  Department of Agriculture.  The
FDA is primarily  responsible for the regulation of the manufacturing,  labeling
and sale of the Company's products.  The Company's activities are also regulated
by various state and local  agencies in which the  Company's  products are sold.
The  operation of the  Company's  vitamin  manufacturing  facility is subject to
regulation by the FDA as a food manufacturing  facility. In addition, the United
States Postal  Service and the FTC regulate  advertising  claims with respect to
the Company's products sold by solicitation through the mail.

The Dietary Supplement Health and Education Act of 1994 [the "Dietary Supplement
Act"] was  enacted on October  25,1994.  The Dietary  Supplement  Act amends the
Federal  Food,  Drug and Cosmetic  Act by defining  dietary  supplements,  which
include vitamins, minerals,  nutritional supplements and herbs, and by providing
a regulatory  framework  to ensure safe,  quality  dietary  supplements  and the
dissemination of accurate  information about such products.  Dietary supplements
are regulated as foods under the Dietary Supplement Act and the FDA is generally
prohibited from regulating the active ingredients in dietary supplements as food
additives, or as drugs unless product claims trigger drug status.

The  Dietary   Supplement  Act  provides  for  specific   nutritional   labeling
requirements for dietary supplements effective


                                        2
<PAGE>


January 1, 1997. The Dietary Supplement Act permits substantiated,  truthful and
non-misleading statements of nutritional support to be made in labeling, such as
statements   describing  general  well  being  from  consumption  of  a  dietary
ingredient  or the role of a nutrient  or dietary  ingredient  in  affecting  or
maintaining  structure  or  function  of the  body.  In  addition,  the  Dietary
Supplement Act also authorizes the FDA to promulgate  Current Good Manufacturing
Practices  ["cGMP"]  specific to the manufacture of dietary  supplements,  to be
modeled  after  food  cGMP.  The  Company  currently  manufactures  its  dietary
supplement  products  pursuant  to food cGMP.  The Company  believes  that it is
currently in compliance with all applicable government regulations. The FDA will
be proposing and  promulgating  regulations to implement the Dietary  Supplement
Act.  The  Company  cannot   determine  what  effect  such   regulations,   when
promulgated, will have on its business in the future or what cost it will add to
manufacturing the product.  Such regulations could, among other things,  require
expanded or different labeling,  the recall,  reformulation or discontinuance of
certain products,  additional  record keeping and expanded  documentation of the
properties  of  certain   products  and  scientific   substantiation   regarding
ingredients, product claims and safety of efficacy.

Competition

The  business  of  manufacturing,   distributing  and  marketing   vitamins  and
nutritional supplements is highly competitive. Many of the Company's competitors
are  substantially  larger and have greater  financial  resources  with which to
manufacture and market their products.  In particular,  competition is fierce in
the retail  segment.  Many direct  marketers not only focus on selling their own
branded  products,  but  offer  national  brands  at  discounts  as  well.  Many
competitors have established brand names recognizable to consumers. In addition,
major  pharmaceutical   companies  offer  nationally   advertised   multivitamin
products.  The  Company  also  competes  with  certain of its  customers.  These
customers also have their own manufacturing capabilities.

Many of the Company's  competitors  in the retailing  segment have the financial
resources  to  advertise  freely to promote  sales and to produce  sophisticated
catalogs. In many cases, such competitors are able to offer price incentives for
retail  purchasers and offer  participation  in frequent buyers  programs.  Some
retail  competitors  also  manufacture  their own products whereby they have the
ability and financial incentive to sell their own product.

Product Liability Insurance

The Company  intends to compete by  stressing  the quality of its  manufacturing
product,  providing  prompt  service,  competitive  pricing of  products  in its
marketing segment and by focusing on niche products in the international  retail
markets.

The Company,  like other manufacturers,  wholesalers and distributors of vitamin
and  nutritional  supplement  products,  faces an  inherent  risk of exposure to
product liability claims if, among other things,  the use of its products result
in injury.  Accordingly,  the  Company  currently  maintains  product  liability
insurance  policies,  which  provides  a total of $10  million of  coverage  per
occurrence and $10 million of coverage in the aggregate.  Although the Company's
product  liability  insurance  policies do not  currently  provide  coverage for
claims  with  respect to products  containing  L-tryptophan  manufactured  after
September 1992, the Company  discontinued  manufacturing  such products in 1989.
Based upon indemnification  arrangements with its supplier of L-tryptophan,  the
Company's product liability insurance and the product liability insurance of its
suppliers, the Company believes that its product liability insurance is adequate
to cover  any  product  liability  claims.  There can be no  assurance  that the
Company's  current  level of product  liability  insurance  will  continue to be
available or, if available, will be adequate to cover potential liabilities.

Item 2. Description of Properties

On  January  10,  1997,  the  Company   entered  into  a  lease   agreement  for
approximately 84,000 square feet of factory,  warehouse and office facilities in
Hillside,  New Jersey. The facilities are leased from Vitamin Realty Associates,
L.L.C., a limited liability company, which is owned by the Company's Chairman of
the Board, and principal stockholder and certain family members and 10% owned by
the Company's  chief financial  officer.  The lease has a term of five years and
expires on January 10,  2002.  The lease  provides  for a base annual  rental of
$346,000  plus  increases  in real estate taxes and  building  expenses.  At its
option, the Company has the right to renew the lease for an additional five year
period.  The space is utilized for the retail mail order  business,  warehousing
and packaging operations and also houses the Company's corporate offices.

The  Company  also leases  40,000  square feet of  manufacturing  facilities  in
Hillside, New Jersey from Gerob Realty


                                       3
<PAGE>


Partnership,  of which E. Gerald Kay, Chairman of the Board of the Company, is a
general  partner.  The lease which  expires on December  31,1999  provides for a
minimum  annual  rental of $60,000  plus payment of all real estate  taxes.  The
space is utilized for Manhattan Drug's tablet manufacturing operations.

Item 3. Legal Proceedings

Numerous  unrelated  manufacturers,   distributors,   suppliers,  importers  and
retailers of  manufactured  L-tryptophan  are or were defendants in an estimated
2,000  lawsuits  brought in federal and state courts  seeking  compensation  and
punitive  damages  for  alleged  personal  injury  from  ingestion  of  products
containing  manufactured  L-tryptophan.  A number  of these  lawsuits  have been
settled or discontinued.  Additional suits may be filed. Prior to a request from
the FDA in November 1989 for a national,  industry-wide  recall,  Manhattan Drug
halted  sales  and  distribution  and  also  ordered  a recall  of  L-tryptophan
products. Subsequently, the FDA indicated that there is a strong epidemiological
between the ingestion of the  allegedly  contaminated  L-tryptophan  and a blood
disorder known as eosinophilia  myalgia syndrome  ["EMS"].  Investigators at the
United  States  Centers for  Disease  Control  suspect  that a  contaminant  was
introduced  during the  manufacture  of the  product in Japan.  While  intensive
independent investigations are continuing, there has been no indication that EMS
was caused by any formulation or manufacturing fault of Manhattan Drug or any of
the  other  firms  that   manufactured   tablets  and/or   capsules   containing
L-tryptophan.

On July 7, 1997, the Company was informed by one of its suppliers of a recall of
the supplier's raw material,  which was used in manufacturing of tablets sold by
the Company.  On July 17, 1997, the Company  issued a voluntary  recall to three
customers  affected by this and,  accordingly,  reduced  its sales and  accounts
receivable  at June 30, 1997 by $127,000.  On February  10,  1999,  the suit was
settled.

Manhattan  Drug  and  certain  companies  in  the  vitamin  industry,  including
distributors,  wholesalers  and  retailers,  have entered into an agreement [the
"Indemnification Agreement"] with Showa Denko America, Inc. ["SDA"]. Under which
SDA, a U.S.  subsidiary  of a Japanese  corporation,  Showa Denko K.K.  ["SDK"],
which  appears  to have been the  supplier  of all of the  alleged  contaminated
L-tryptophan  products,  has assumed the defense of all claims against Manhattan
Drug arising out of the ingestion of L-tryptophan products and has agreed to pay
the legal fees and  expenses in that  defense,  and SDK has agreed to  guarantee
SDA's  obligation  therein.  SDA has posted a  revolving  irrevocable  letter of
credit, in the amount of $20,000,000,  to be used for the benefit of the Company
and other  indemnified  parties if SDA is unable or  unwilling  to  satisfy  any
claims or  judgements.  SDA has agreed to indemnify  Manhattan  Drug against any
judgements and to fund settlements arising out of those actions and claims if it
is determined  that a cause of the injuries  sustained by the  plaintiffs  was a
constituent in the bulk material sold by SDA to Manhattan Drug or its suppliers,
except  to the  extent  that  Manhattan  Drug is  found  to have any part of the
responsibility  for those  injuries  and except for certain  claims  relating to
punitive damages. There is no assurance that SDA will have the financial ability
to perform under the Indemnification Agreement.

Manhattan  Drug has product  liability  insurance,  which the  Company  believes
provides coverage for all of its L-tryptophan  products subject to these claims,
including  legal  defense  costs.  Due  to  the  multitude  of  defendants,  the
probability  that some or all of the total  liability  will be assessed  against
other  defendants  and the fact that discovery in these actions is not complete,
it is  impossible  to  predict  the  outcome  of these  actions or to assess the
ultimate  financial  exposure  of the  Company.  Based  upon the  aforementioned
indemnification arrangements,  the Company's product liability insurance and the
product liability insurance of its suppliers, the Company does not believe these
actions will have a material adverse effect on Manhattan Drug, and, accordingly,
no provision has been made in the Company's  Consolidated  Financial  Statements
for any loss that may be incurred by the Company as a result of these actions.

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

No  matters  were  submitted  to a vote of  security  holders  during the fourth
quarter ended June 30, 1999.


                                       4
<PAGE>


                                     PART II

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


Set forth below are the high and low closing  prices of the Common Stock and the
Class A  Redeemable  Warrant as reported on the Nasdaq  National  Market for the
periods indicated:




                                                            HIGH            LOW
COMMON STOCK [CXIL]

FISCAL YEAR ENDED JUNE 30, 1998
First Quarter                                               3 7/8          1 7/8
Second Quarter                                              3 5/16         13/32
Third Quarter                                               2 1/4          1/2
Fourth Quarter                                              3 3/8          1 5/8


FISCAL YEAR ENDED JUNE 30, 1999
First Quarter                                               3 3/8          1 3/8
Second Quarter                                              1 7/8          3/4
Third Quarter                                               1 1/4          5/8
Fourth Quarter                                              2 5/8          11/16

CLASS A REDEEMABLE WARRANTS [CXILW]

FISCAL YEAR ENDED JUNE 30, 1998
First Quarter                                               1              3/8
Second Quarter                                              1              1/16
Third Quarter                                               7/16           1/16
Fourth Quarter                                              3/4            5/16


FISCAL YEAR ENDED JUNE 30, 1999
First Quarter                                               3/4            3/8
Second Quarter                                              7/16           3/16
Third Quarter                                               1/4            1/16
Fourth Quarter                                              11/16          1/16


As of June 30,  1999  there  were  approximately  115  holders  of record of the
Company's Common Stock.

The Company has not declared or paid a dividend with respect to its Common Stock
nor does the Company anticipate paying dividends in the foreseeable future.


                                       5
<PAGE>


Item 6.

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

The following discussion should be read in conjunction with the historical
financial statements of the Company and notes thereto.

Results of Operations

Year Ended June 30, 1999 Compared to the Year ended June 30, 1998

The  Company's net [loss] for the year ended June 30, 1999 was  $(2,628,433)  as
compared to the net loss of  $(97,438)  for the year ended June 30,  1998.  This
increase in net loss of  approximately  $2,500,000  is primarily the result of a
$2,600,000 increase in operating loss and an increase in the federal tax benefit
of approximately $130,000. The $2,600,000 decrease in operating loss is due to a
gross profit decrease of approximately $2,500,000 and an increase in selling and
administrative  expense of approximately  $100,000. The decrease in gross profit
is due to an increase in manufacturing  expenses as the Company hired additional
direct labor and increased its  production  capacity for the year ended June 30,
1999 in anticipation of increased  orders.  Product launches expected during the
year in  eastern  Europe  have been  delayed  because  of  uncertainties  in the
European markets. The Company cannot anticipate when these product launches will
eventually occur.

Sales  for the  years  ended  June  30,  1999  and  1998  were  $12,274,448  and
$16,011,049,  respectively,  a decrease of $3,736,601 or 23%. For the year ended
June 30, 1999,  the Company had sales to one customer,  who accounted for 55% of
net sales in 1999 and 44% of net sales in 1998.  The loss of this customer would
have an adverse affect on the Company's operations.

Retail and mail order sales for the year ended June 30, 1999 totaled $713,962 as
compared to $1,090,854  for the year ended June 30, 1998, a decrease of $376,892
or 35% due primarily to the closing of the retail store on November 13, 1998 for
approximately  9 weeks for  renovations.  The store reopened on January 7, 1999.
The Company  anticipates  retail and mail order sales  returning to their fiscal
1998 levels in the coming year.

On February 17, 1997,  the Company  signed a  distribution  agreement with Roche
Vitamins,  Inc. to service  and supply  Roche  products  to a select  segment of
Roche's food, nutrition and cosmetic accounts. The agreement had an initial term
of two years and shall be renewable  for an additional  term of one year.  Sales
for the year ended June 30, 1999 totaled  $1,607,092  as compared to  $1,250,480
for the year ended June 30, 1998, an increase of $356,612 or 29%.

Cost of sales  decreased to $11,655,173  in 1999 as compared to $12,841,937  for
1998. Cost of sales increased as a percentage of sales to 95% as compared to 80%
for 1998.  The increase in cost of sales is due to an increase in  manufacturing
costs and fixed overhead costs.

Selling  and  administrative  expenses  for the year  ended  June 30,  1999 were
$3,275,723  versus  $3,197,047  for the same period a year ago.  The increase of
$78,676 was primarily attributable to a decrease of advertising of approximately
$110,000,  a decrease in travel and  entertainment of approximately  $93,000,  a
decrease in pension and profit sharing plan expenses of approximately  $330,000,
the writeoff of the balance of goodwill of approximately 276,000 and an increase
in the allowance for doubtful accounts of $315,000.

Other  income  (expense)  was  $(136,159)  for the year ended  June 30,  1999 as
compared  to  $(105,789)  for the same period a year ago.  This  increase in net
expense of $30,370 is attributable to an increase in interest expense of $50,578
due to an increase in borrowings,  a decrease in interest and investment  income
of  $19,350,  a decrease  in  partnership  loss of $5,000,  a decrease in a loss
resulting  from the writeoff of a note  receivable  of 33,058 and an increase in
gains on the sale of equipment.


                                       6
<PAGE>


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
Results of Operations

Year ended June 30, 1998 Compared to the Year Ended June 30, 1997

The  Company's  net [loss] for the year ended  June 30,  1998 was  $(97,438)  as
compared to the net loss of  $(654,304)  for the year ended June 30, 1997.  This
decrease  in net loss of  approximately  $557,000 is  primarily  the result of a
$865,000 decrease in operating loss and a decrease in the federal tax benefit of
approximately  $200,000.  The $865,000  decrease in  operating  loss is due to a
gross profit increase of approximately $1,500,000 and an increase in selling and
administrative expense of approximately $650,000.

Sales  for the  years  ended  June  30,  1998  and  1997  were  $16,011,049  and
$11,126,860,  respectively,  an increase of approximately $5,000,000 or 44%. For
the year  ended  June 30,  1998,  the  Company  had sales to one  customer,  who
accounted for 44% of net sales in 1998 and 48% of net sales in 1997. The loss of
this customer would have an adverse affect on the Company's operations.

Retail and mail order sales for the year ended June 30, 1998 totaled  $1,090,854
as  compared  to  $983,749  for the year ended June 30,  1997,  an  increase  of
$107,105 or 11%.

On February 17, 1997,  the Company  signed a  distribution  agreement with Roche
Vitamins,  Inc. to service  and supply  Roche  products  to a select  segment of
Roche's food, nutrition and cosmetic accounts. The agreement has an initial term
of two years and shall be  renewable  for an  additional  term of one year each.
Sales for the year ended June 30, 1998 totaled $1,250,480.

Cost of sales  increased to  $12,841,937  in 1998 as compared to $9,475,624  for
1997. Cost of sales decreased as a percentage of sales to 80% as compared to 85%
for 1997. The decrease in cost of sales is due to greater operating efficiencies
because of the extensive  renovation of the blending  department and an increase
in sales to customers of bottled products.

Selling  and  administrative  expenses  for the year  ended  June 30,  1998 were
$3,197,047  versus  $2,546,972  for the same period a year ago.  The increase of
$650,075  was  primarily   attributable   to  an  increase  of   advertising  of
approximately $170,000, an increase in travel and entertainment of approximately
$85,000, a decrease in professional fees of approximately $55,000, a decrease in
consulting  fees  of  approximately   $124,000,   an  increase  in  pension  and
profit-sharing  plan  expenses  of  approximately  $400,000,  and an increase in
office salaries of approximately $49,000.

Other  income  [expense]  was  $(105,789)  for the year ended  June 30,  1998 as
compared  to  $(4,588)  for the same  period a year ago.  This  increase  in net
expense of  $101,201  is  attributable  to a  decrease  in  interest  expense of
$12,128,  a decrease in interest and investment income of $48,491, a decrease in
sales of fixed assets of $25,000,  a loss resulting from the write off of a note
receivable of $33,058, and a decrease in partnership income of $6,780.

Liquidity and Capital Resources

At June 30, 1999 the  Company's  working  capital was  $2,497,461  a decrease of
$2,264,050 over working capital at June 30, 1998. Cash and cash equivalents were
$299,030 at June 30, 1999 a decrease of $657,373 from June 30, 1998. The Company
utilized  $483,206 and $414,153 for operations for the years ended June 30, 1999
and 1998,  respectively.  The primary  reasons for the increase in cash utilized
for  operations  are (a) an  increase  in  refundable  Federal  income  taxes of
approximately $50,000 and (b) a decrease in accounts receivable of approximately
$1,000,000.  The Company  believes that the anticipated  sales for the first two
quarters  of next year will meet the cash needs for  operations  in the next six
months.  The Company  has drawn down its entire line of credit and  consequently
will be looking for additional sources of financing to meet liquidity needs.


                                       7
<PAGE>


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

Liquidity and Capital Resources [Continued]

The Company utilized $297,744 and $740,216 in investing activities for the years
ended June 30, 1999 and 1998,  respectively.  The Company  generated net cash of
$123,577  from debt  financing  activities  for the year ended June 30, 1999 and
$1,100,516 for the year ended June 30, 1998.

The Company's total annual  commitments at June 30, 1999 for the next five years
of $971,159  consists of obligations  under operating  leases for facilities and
lease  agreements for the rental of warehouse  equipment,  office  equipment and
automobiles.

The Company has spent approximately $55,000 through June 30, 1999 to modify it's
computer information systems enabling proper processing of transactions relating
to the year 2000 ("Y2K") and beyond.  The Company installed a new network system
in  October  of 1998 at a cost  of  approximately  $20,000  whose  hardware  and
software is Y2K  compliant.  The  Company has also spent  $35,439 to provide the
necessary  upgrades and  modifications to the Company's  existing  manufacturing
program to insure Y2K compliance.  The new software  program is installed and is
currently  being  tested.  The  Company  intends  to be fully Y2K  compliant  by
September 30, 1999. The Company's suppliers and vendors have been contacted, and
most have  responded  with their intent to be Y2K compliant by the year 2000. At
this time, the Company believes based on their responses,  that there will be no
disruption of their business.  The Company does not expect the amounts  required
to be  expended  over the next  twelve  months to have a material  effect on its
financial position or results of operations.

New Accounting Pronouncement

In June  1998,  the  FASB  issued  SFAS  No.  133,  "Accounting  for  Derivative
Instruments and Hedging  Activities".  Statement No. 133 establishes  accounting
and reporting  standards for derivative  instruments and for hedging activities.
It  requires  that an entity  recognize  all  derivatives  as  either  assets or
liabilities  and measure them at fair value.  Under certain  circumstances,  the
gains or losses from  derivatives may be offset against those from the items the
derivatives  hedge  against.  The Company  will adopt SFAS No. 133 in the fiscal
year  ending  June 30,  2001.  SFAS No. 133 is not  expected  to have a material
impact on the financial statements.

Impact of Inflation

The Company  does not believe  that  inflation  has  significantly  affected its
results of operations.

Item 7. Financial Statements

For a list of financial  statements  filed as part of this report,  see index to
financial statement at F-1.

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

NONE


                                        8
<PAGE>


                                    PART III


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

Incorporated by reference to the Company's Proxy Statement for Annual Meeting of
Stockholders to be filed with the Securities and Exchange  Commission within 120
days after the close of the fiscal year ended June 30, 1999.

Item 10. Executive Compensation

Incorporated by reference to the Company's Proxy Statement for Annual Meeting of
Stockholders to be filed with the Securities and Exchange  Commission within 120
days after the close of the fiscal year ended June 30, 1999.

Item 11. Security Ownership of Certain Beneficial Owners and Management

Incorporated by reference to the Company's Proxy Statement for Annual Meeting of
Stockholders to be filed with the Securities and Exchange  Commission within 120
days after the close of the fiscal year ended June 30, 1999.

Item 12. Certain Relationships and Related Transactions

Incorporated by reference to the Company's Proxy Statement for Annual Meeting of
Stockholders to be filed with the Securities and Exchange  Commission within 120
days after the close of the fiscal year ended June 30, 1999.

Item 13. Exhibits and Reports on Form 8-K

(a)  The following documents are filed as part of this report:

     (1) A list of the financial  statements filed as part of this report is set
     forth in the index to financial  statements at Page F-1 and is incorporated
     herein by reference.

     (2) Exhibits

             Number                        Description

              3.1       Restated Certificate of Incorporation of Registrant (1)

              3.2       By-Laws of Registrant (1)

              4.1       Form of Amended  Warrant  Agreement among the Registrant
                        and  Continental  Stock  Transfer  & Trust  Company,  as
                        Warrant Agent (1)

              4.2       Specimen Common Stock Certificate of Registrant (2)

              4.3       Specimen Class A Warrant Certificate of Registrant (2)

              10.1      Employment Agreement, effective January 1, 1996, between
                        the Registrant and Ronald G. Smalley (1)

              10.2      Employment  Agreement,  effective July 1, 1996,  between
                        the Registrant and E. Gerald Kay (1)

              10.3      Employment  Agreement,  effective July 1, 1996,  between
                        the Registrant and Eric Friedman (1)

              10.4      Employment  Agreement,  effective July 1, 1996,  between
                        the Registrant and Riva L. Kay (1)

              10.5      Employment  Agreement,  effective July 1, 1996,  between
                        the Registrant and Christina M. Kay (1)

              10.6      Lease  Agreement,  dated  January 1, 1996,  between  the
                        Registrant and Gerob Realty Partnership (1)

              10.7      Stock Option Plan (2)

              10.8      Amended Employment  Agreement,  effective  September 20,
                        1996, between the Registrant and E. Gerald Kay (3)


                                       9
<PAGE>


              10.9      Lease  Agreement,   dated  August  3,1994,  between  the
                        Registrant and Hillsdie 22 Realty Associates, L.L.C. (2)

              10.10     Exclusive  License  Agreement between the Registrant and
                        International   Nutrition  Research  Center,   Inc.  and
                        amendments,  dated April 29, 1997 and  November 27, 1996
                        (4)

              10.11     Lease  Agreement  between  the  Registrant  and  Vitamin
                        Realty Associates, dated January 10, 1997 (4)

              10.12     Manufacturing Agreement between Chem International, Inc.
                        and Herbalife International of America, Inc. dated April
                        9, 1998 (5)

              10.13     Manufacturing Agreement between Chem International, Inc.
                        and Pilon  International,  PLC.  dated February 14, 1998
                        (5)

              10.14     Stock  Sale  Agreement  between  the  Company  and Gerob
                        Realty Partnership (5)

              10.15     Promissory  note  between  the Company and E. Gerald Kay
                        dated March 12, 1998 (5)

              10.16     Class C Warrant to purchase common stock dated March 12,
                        1998 (5)

              10.17     Consulting  Agreement  with  Buttonwood  Advisory  Group
                        dated March 20, 1998 (5)

              10.18(a)  Employment  Agreement,  effective July 1, 1999,  between
                        the Registrant and Eric Friedman (7)

              10.18(b)  Employment  Agreement,  effective July 1, 1999,  between
                        the Registrant and Riva Sheppard (7)

              10.18(c)  Employment  Agreement,  effective July 1, 1999,  between
                        the Registrant and Christina Kay (7)

              10.18(d)  Employment  Agreement,   effective  February  16,  1999,
                        between the Registrant and Abdulhameed Mirza (7)

              16.1      Letter on changes in certifying accountants (6)

              21        Subsidiaries of the Registrant

              27        Financial Data Schedule

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

              (1)       Incorporated  herein by reference  to the  corresponding
                        exhibit number to the Registrants Registration Statement
                        of Form SB-2, Registration No. 333-5240-NY.

              (2)       Incorporated  herein by reference  to the  corresponding
                        exhibit number to the Registrants Registration Statement
                        Amendment   No.  1  on  Form  SB-2,   Registration   No.
                        333-5240-NY.

              (3)       Incorporated  herein by reference  to the  corresponding
                        exhibit number to the Registrants Registration Statement
                        Amendment   No.  2  on  Form  SB-2,   Registration   No.
                        333-5240-NY.

              (4)       Incorporated  herein by reference  to the  corresponding
                        exhibit number to the Registrants  Annual Report on Form
                        10-KSB for the fiscal year ended June 30, 1997, filed on
                        September 29, 1997, Commission File No. 000-28876.

              (5)       Incorporated  herein by reference  to the  corresponding
                        exhibit number to the Registrants  Annual Report on Form
                        10-KSB for the fiscal year ended June 30, 1998, filed on
                        September 23, 1998, Commission File No. 000-28876.

              (6)       Previously filed.

              (7)       Filed herewith.


(b)     Form 8-K filed May 10, 1999 reported change in accounting firm on May 5,
        1999.


                                       10
<PAGE>


CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Item 7:   Consolidated Financial Statements


<S>                                                                     <C>         <C>
   Independent Auditors' Reports ........................................F-2 ........F-3


   Consolidated Balance Sheet as of June 30, 1999 .......................F-4 ........F-5

   Consolidated Statements of Operations for the years
   ended June 30, 1999 and 1998 .........................................F-6


   Consolidated Statements of Stockholders' Equity for the years
   ended June 30, 1999 and 1998 .........................................F-7


   Consolidated Statements of Cash Flows for the years ended
   June 30, 1999 and 1998 ...............................................F-8 ........F-9


   Notes to Consolidated Financial Statements ..........................F-10 .......F-19
</TABLE>


                                   ----------


                                       F1
<PAGE>


                          INDEPENDENT AUDITOR'S REPORT


To the Stockholders and Board of Directors of
Chem International, Inc.


     We  have  audited  the  accompanying  consolidated  balance  sheet  of Chem
International,  Inc. and its  subsidiaries  as of June 30, 1999, and the related
consolidated statements of operations,  stockholders' equity, and cash flows for
the  year  then  ended.   These  consolidated   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material respects, the consolidated financial position of
Chem  International,  Inc. and its  subsidiaries  as of June 30,  1999,  and the
consolidated  results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.


                                       /s/

Edison, New Jersey
August 31, 1999


                                       F2
<PAGE>


                          INDEPENDENT AUDITOR'S REPORT


To the Stockholders and Board of Directors of
  Chem International, Inc.


     We  have  audited  the  accompanying  consolidated  balance  sheet  of Chem
International,  Inc. and its  subsidiaries  as of June 30, 1998, and the related
consolidated statements of operations,  stockholders' equity, and cash flows for
each of the two  fiscal  years in the  period  then  ended.  These  consolidated
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audit.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material respects, the consolidated financial position of
Chem  International,  Inc. and its  subsidiaries  as of June 30,  1998,  and the
consolidated  results of their  operations  and their cash flows for each of the
two fiscal years in the period then ended in conformity with generally  accepted
accounting principles.




                                             MOORE STEPHENS, P. C.
                                             Certified Public Accountants.

Cranford, New Jersey
August 14, 1998



                                       F3
<PAGE>


CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999
--------------------------------------------------------------------------------


Assets:
Current Assets:
   Cash and Cash Equivalents                                          $  299,030
   Accounts Receivable-Net                                             2,003,220
   Inventories                                                         3,478,627
   Prepaid Expenses and Other Current Assets                              94,788
   Deferred Income Taxes                                                 244,000
   Refundable Federal Income Taxes                                        41,645
                                                                      ----------


   Total Current Assets                                                6,161,310
                                                                      ----------

Property and Equipment-Net                                             1,538,268
                                                                      ----------
Other Assets:
      Security Deposits and Other Assets                                 103,056
                                                                      ----------
      Total Assets                                                    $7,802,634
                                                                      ==========


The  Accompanying  Notes are an Integral  Part of These  Consolidated  Financial
Statements.


                                       F4
<PAGE>


CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999
--------------------------------------------------------------------------------


Liabilities and Stockholders' Equity:
Current Liabilities:
   Accounts Payable                                                 $ 2,654,811
   Notes Payable                                                        550,087
   Accrued Expenses and Other Current Liabilities                       346,690
   Accrued Expenses-Related Party                                        75,000
   Capital Lease Obligation                                              37,261
                                                                    -----------

   Total Current Liabilities                                          3,663,849
                                                                    -----------
Non-Current Liabilities:
   Notes Payable                                                        138,829
   Notes Payable-Related Party                                          711,174
   Capital Lease Obligation                                              30,290
                                                                    -----------

   Total Non-Current Liabilities                                        880,293
                                                                    -----------

Commitments and Contingencies [14]                                           --

Stockholders' Equity:
   Preferred Stock-Authorized 1,000,000 Shares,
   $.002 Par Value, No Shares Issued                                         --

   Common Stock-Authorized 25,000,000 Shares,
   $.002 Par Value, 5,178,300 Shares Issued and Outstanding              10,357

   Additional Paid-in Capital                                         4,847,405

   (Deficit)/Retained Earnings                                       (1,599,270)
                                                                    -----------
   Total Stockholders' Equity                                         3,258,492
                                                                    -----------
   Total Liabilities and Stockholders' Equity                       $ 7,802,634
                                                                    ===========


The  Accompanying  Notes are an Integral  Part of These  Consolidated  Financial
Statements.


                                       F5
<PAGE>


CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                           Years ended
                                                           -----------
                                                             June 30,
                                                           -----------

                                                       1999            1998
                                                       ----            ----
<S>                                                <C>             <C>
Sales                                              $ 12,274,448    $ 16,011,049

Cost of Sales                                        11,655,173      12,841,937
                                                   ------------    ------------

  Gross Profit                                          619,275       3,169,112

Selling and Administrative Expenses                   3,275,723       3,197,047
                                                   ------------    ------------

  Operating [Loss]                                   (2,656,448)        (27,935)
                                                   ------------    ------------


Other Income [Expense]:
  Gain on Sale of Equipment                               1,500              --
  Interest Expense                                      (63,018)        (80,616)
  Interest Expense-Related Party                        (75,227)         (7,051)
  Interest and Investment Income                            586          19,936
  [Loss] on Investment in Partnership                        --          (5,000)
  [Loss] on Note Receivable                                  --         (33,058)
                                                   ------------    ------------

  Other [Expense]-Net                                  (136,159)       (105,789)
                                                   ------------    ------------

 [Loss] Before Income Taxes                          (2,792,607)       (133,724)

Federal and State Income Tax [Benefit]                 (164,174)        (36,286)
                                                   ------------    ------------

  Net [Loss]                                       $ (2,628,433)   $    (97,438)
                                                   ============    ============

  Net [Loss] Per Common Share
    Basic and Diluted                              $       (.51)   $       (.02)
                                                   ============    ============

  Weighted Average Common Share Outstanding           5,178,300       4,725,460
                                                   ============    ============
</TABLE>


The  Accompanying  Notes are an Integral  Part of These  Consolidated  Financial
Statements.


                                       F6
<PAGE>


CHEM INTERNATIONAL, AND SUBSIDIARIES
--------------------------------------------------------------------------------

CONSOLIDATED  STATEMENTS  OF  STOCKHOLDERS'  EQUITY FOR THE YEARS ENDED JUNE 30,
1999 AND

<TABLE>
<CAPTION>

                                                                                       Additional                      Total
                                                                                       ----------                      -----
                                                     Common Stock        Preferred      Paid-in        Retained    Stockholders'
                                                     ------------        ---------      -------        --------    -------------
                                                  Shares      Par Value    Stock        Capital        Earnings       Equity
                                                  ------      ---------    -----        -------        --------       ------

<S>                                             <C>           <C>         <C>         <C>            <C>            <C>
   Balance-July 1, 1997                         4,335,000     $   8,670   $    --     $ 4,196,072    $ 1,126,601    $ 5,331,343

Imputed Interest on Note Payable-
   Related Party                                     --            --          --           7,051           --            7,051

Common Stock Issued in Payment
   of Debt                                        843,300         1,687        --         571,757           --          573,444

Issuance of Stock Options                            --            --          --           4,343           --            4,343

Fair Value of Stock Purchase
   Warrant [6B]                                      --            --          --          68,182           --           68,182

Net [Loss]                                           --            --          --            --          (97,438)       (97,438)
                                                                          -------     -----------    -----------    -----------

   Balance-June 30, 1998                        5,178,300        10,357        --       4,847,405      1,029,163      5,886,925

Net [Loss]
                                                                                                      (2,628,433)    (2,628,433)
                                                -----------   ---------   -------     -----------    -----------    -----------
   Balance-June 30, 1999                        5,178,300     $  10,357   $    --     $ 4,847,405    $(1,599,270)   $ 3,258,492
                                                ===========   =========   =======     ===========    ===========    ===========
</TABLE>


                                       F7
<PAGE>


CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                          Years ended
                                                                          -----------
                                                                            June 30,
                                                                            --------

                                                                 1999                      1998
                                                              -----------               -----------
<S>                                                           <C>                       <C>
Operating Activities:
  Net [Loss]                                                  $(2,628,433)              $   (97,438)
                                                              -----------               -----------
  Adjustments to Reconcile Net [Loss] to Net Cash
  [Used for] Operating Activities:
  Depreciation and Amortization                                   403,198                   413,060
  Write-off of Goodwill                                           275,891                        --
  Amortization of Discount on Note Payable                         22,727                     6,629
  Deferred Income Taxes                                          (144,000)                  (83,000)
  Imputed Interest on Note Payable-Related Party                       --                     7,051
  Loss on Investment in Partnership                                    --                     5,000
  Interest Income on Note Receivable                                   --                   (12,368)
  Write-off of Note Receivable                                         --                    33,058
  Bad Debt Expense                                                336,450                    13,240
  Consulting Expense                                                   --                     4,343

Changes in Assets and Liabilities:
  [Increase] Decrease in:
    Accounts Receivable                                         1,121,267                (1,031,469)
    Inventories                                                    43,183                (1,435,444)
    Prepaid Expenses and Other Current Assets                      82,569                    97,032
    Prepaid Pension Costs                                              --                   340,291
    Security Deposits and Other Assets                             (3,433)                   11,868
    Refundable Federal Income Taxes                               (41,645)                  240,000

Increase [Decrease] in:
    Accounts Payable                                             (182,231)                1,075,080
    Federal and State Income Taxes Payable                        (40,000)                   (1,416)
    Accrued Expenses and Other Liabilities                        271,251                       330
                                                              -----------               -----------

   Total Adjustments                                            2,145,227                  (316,715)
                                                              -----------               -----------

  Net Cash-Operating Activities-Forward                          (483,206)                 (414,153)
                                                              -----------               -----------

Investing Activities:
   Investment in Officers Life Insurance                               --                   (20,375)
   Purchase of Property and Equipment                            (290,111)                 (974,385)
   Loans to Stockholders                                           (7,633)                       --
   Repayment of Loans by Stockholders                                  --                     2,044
   Repayment of Note Receivable                                        --                   250,000
   [Loan to] Repayment of Loan to Related Party                        --                     2,500
                                                              -----------               -----------

  Net Cash-Investing Activities-Forward                       $  (297,744)              $  (740,216)
                                                              -----------               -----------
</TABLE>


The  Accompanying  Notes are an Integral  Part of These  Consolidated  Financial
Statements.


                                       F8
<PAGE>


CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                  Years ended
                                                                                  -----------
                                                                                    June 30,
                                                                                    --------

                                                                        1998                     1999
                                                                     -----------              -----------
<S>                                                                  <C>                      <C>
   Net Cash-Operating Activities-Forwarded                           $  (483,206)             $  (414,153)
                                                                     -----------              -----------

   Net Cash-Investing Activities-Forwarded                              (297,744)                (740,216)
                                                                     -----------              -----------

Financing Activities:
   Proceeds from Notes Payable                                           670,000                  581,886
   Proceeds from Notes Payable-Related Party                                  --                  750,000
   Repayment of Notes Payable                                           (546,423)                (231,370)
                                                                     -----------              -----------

   Net Cash-Financing Activities                                         123,577                1,100,516
                                                                     -----------              -----------

   Net [Decrease] Increase in Cash and Cash Equivalents                 (657,373)                 (53,853)

Cash and Cash Equivalents-Beginning of Years                             956,403                1,010,256
                                                                     -----------              -----------

   Cash and Cash Equivalents-End of Years                            $   299,030              $   956,403
                                                                     ===========              ===========

Supplemental Disclosures of Cash Flow Information:
   Cash paid during the years for:
      Interest                                                       $    89,000              $    55,000
      Income Taxes                                                        62,000                   75,000
</TABLE>


The  Accompanying  Notes are an Integral  Part of These  Consolidated  Financial
Statements.


                                       F9
<PAGE>


CHEM INTERNATIONAL, INC.
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


[1]  Business

Chem   International,   Inc.  [the  "Company"]  is  engaged   primarily  in  the
manufacturing,  marketing  and sales of vitamins,  nutritional  supplements  and
herbal  products.  Its customers  are located  primarily  throughout  the United
States and Europe.

[2]  Liquidity

During July 1999, Chem International and Subsidiaries [the "Company"] refinanced
its current debt with a financial  institution  (see Note 17) to provide working
capital.

Although the Company  anticipates  operating losses during the 2000 fiscal year,
the Company  believes that the available cash on hand and the operating plan for
1999 will provide  sufficient  working capital to meet its needs for the current
year.

Current operating plans include an enhanced marketing focus on an identified new
customer group with higher anticipated margins.

[3]  Summary of Significant Accounting Policies

Principles of Consolidation- The accompanying  consolidated financial statements
include  the  accounts of the  Company  and its  subsidiaries,  all of which are
wholly-owned.  Intercompany  transactions  and balances have been  eliminated in
consolidation.

Fair Value of Financial Instruments

Generally  accepted  accounting  principles require disclosing the fair value of
financial  instruments to the extent practicable for financial instruments which
are  recognized  or  unrecognized  in the balance  sheet.  The fair value of the
financial instruments disclosed herein is not necessarily  representative of the
amount  that  could be  realized  or  settled,  nor does the fair  value  amount
consider the tax consequences of realization or settlement.

In assessing the fair value of financial instruments, the Company uses a variety
of methods and  assumptions,  which are based on estimates of market  conditions
and risks existing at the time. For certain instruments, including cash and cash
equivalents,  accounts  receivable,  notes  receivable,  accounts  payable,  and
accrued  expenses,  it was estimated that the carrying amount  approximated fair
value because of the short maturities of these instruments. All debt is based on
current  rates at which the Company  could borrow  funds with similar  remaining
maturities and approximates fair value.

Cash and Cash  Equivalents-  Cash  equivalents  are comprised of certain  highly
liquid investments with a maturity of three months or less when purchased.

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

Depreciation- The Company follows the general policy of depreciating the cost of
property and equipment over the following estimated useful lives:

Leasehold Improvements                                                  15 Years
Machinery and Equipment                                                  7 Years
Machinery and Equipment Under Capital Leases                             7 Years
Transportation Equipment                                                 5 Years


                                      F10
<PAGE>


CHEM INTERNATIONAL, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
--------------------------------------------------------------------------------


[3]  Summary of Significant Accounting Policies [Continued]

Machinery  and  equipment  are  depreciated  using  accelerated   methods  while
leasehold  improvements  are amortized on a  straight-line  basis.  Depreciation
expense was  $397,205  and  $401,072  for the years ended June 30,1999 and 1998,
respectively.  Amortization  of equipment  under capital leases is included with
depreciation expense.

Goodwill-  At December  31, 1998,  goodwill  with a carrying  value of $275,891,
which  arose in  connection  with the  acquisition  of the  Company's  principal
operating business subsidiary,  was written down to zero due to impairment.  The
write-off of goodwill is included in the June 30, 1999 income  statement as part
of selling and administrative expenses.

Amortization  expense  was $5,993 and  $11,987 for the years ended June 30, 1999
and 1998.

Estimates- 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
reporting period. Actual results could differ from those estimates.

Revenue  Recognition-  The  Company  recognizes  revenue  upon  shipment  of the
product.

Impairment-  Certain  long-term  assets of the Company  including  goodwill  are
reviewed  at least  annually  as to  whether  their  carrying  value has  become
impaired,  pursuant to guidance established in Statement of Financial Accounting
Standards ["SFAS"] No. 121,  "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of". Management  considers assets to be
impaired if the  carrying  value  exceeds the future  projected  cash flows from
related operations.  Management also re-evaluates the periods of amortization to
determine whether subsequent events and circumstances  warrant revised estimates
of useful  lives.  As of June 30, 1999,  management  expects  these assets to be
fully recoverable.

Advertising-  Costs  incurred for producing and  communicating  advertising  are
expensed when  incurred.  Advertising  expense was $335,232 and $447,516 for the
years ended June 30, 1999 and 1998, respectively.

[4]  Inventories

Raw materials                   $  1,859,870
Work-in-Process                      847,134
Finished Goods                       771,623
                                ------------

      Total                      $ 3,478,627
                                ============

[5]  Property and Equipment

Leasehold Improvements                                         $ 1,157,960
Machinery and Equipment                                          2,455,065
Machinery and Equipment Under Capital Leases                       109,545
Transportation Equipment                                            32,152
                                                               -----------
                                                                 3,754,722
Total
Less: Accumulated Depreciation and Amortization                  2,216,454
                                                               -----------
      Total                                                    $ 1,538,268
                                                               ===========


                                      F11
<PAGE>


CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
--------------------------------------------------------------------------------

[6]  Notes Payable

<TABLE>
<CAPTION>
                                                                     Related Party
                                                                     -------------
                                              Notes Payable           Note Payable               Total
                                              -------------           ------------               -----
<S>                                           <C>                    <C>                    <C>
Notes Payable:
   Bio Merieux Vitek, Inc. (a)                $   50,083             $       --             $   50,083
   Chairman of the Board and
   Chief Executive Officer (b)                        --                711,174                711,174
   First Union Bank:
      Revolving Line-of -Credit (c)              500,000                     --                500,000
      Equipment Term Loan (d)                    138,833                     --                138,833
                                              ----------             ----------             ----------

   Totals                                        688,916                711,174              1,400,090
   Less: Current Portion                         550,087                     --                550,087
                                              ----------             ----------             ----------

      Noncurrent Portion                      $  138,829             $  711,174             $  850,003
                                              ==========             ==========             ==========
</TABLE>


(a) Five year 10%  equipment  note dated  April 1, 1997  providing  for  monthly
payments of $1,698 for  principal and interest.  The note is  collateralized  by
laboratory equipment.

(b) Three year  non-collateralized  7% promissory note for $750,000 with related
party providing for quarterly payments of $4,725 representing interest only. The
note matures on March 12, 2001. As additional  consideration for the loan and in
the light of the below market interest rate and  uncollateralized  nature of the
loan,  the  Corporation  issued a Class C Warrant to purchase  150,000 shares of
common stock at the  aggregate  purchase  price of $1.75 per share.  The note is
recorded net of $68,182, which represents the fair value of the Class C Warrant.
The amortization at June 30, 1999 and 1998 was $22,727 and $6,629  respectively,
and is classified as interest expense in the Company's financial statements. The
warrant is  exercisable  for a four year  period  commencing  one year after the
issuance of the note and expires on March 12, 2003.

(c) Under the terms of a revolving line of credit which expired on July 27,1999,
the Company may borrow up to $500,000 at 1% above the bank's prime lending rate.
The loan was  collateralized by assets of Manhattan Drug Company,  Inc. The loan
has been guaranteed by the Company's  principal  stockholder.  At June 30, 1999,
the interest rate was 8.75 %.

(d) Under the terms of a five year equipment term loan, dated July 27, 1998, the
Company may borrow up to $395,000 at 1.5% above the bank's prime  interest rate.
The term loan provides for monthly  payments of $2,834 for principal and monthly
payments of interest. The loan is collateralized by the assets of Manhattan Drug
Company,   Inc.  The  loan  has  been  guaranteed  by  the  Company's  principal
stockholder. At June 30, 1999, the interest rate was 9.25%.

The loan agreement with First Union Bank contains  certain  financial  covenants
relating to the  maintenance  of  specified  liquidity,  debt to equity and debt
coverage  ratios  and  requires  that  the  Company's  president  and  principal
stockholder  maintain a minimum stock ownership  percentage of the Company.  The
Company was not in  compliance  with its debt coverage  ratio on a  consolidated
basis at June 30, 1999.


                                      F12
<PAGE>


CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
--------------------------------------------------------------------------------

[6]  Notes Payable [Continued]


The following are maturities of long-term debt for each of the next five years:


                                         Related Party
                     Notes Payable        Note Payable             Total
                     -------------        ------------             -----
June 30,
2000                  $  550,087           $       --           $  550,087
2001                      51,773                   --               51,773
2002                      50,223              711,174              761,397
2003                      34,000                   --               34,000
2004                       2,833                                     2,833
                      ----------           ----------           ----------

Totals                $  688,916           $  711,174           $1,400,090
------                ==========           ==========           ==========



[7]  Capital Lease

Certain operating  equipment is under a long-term lease,  which expires in March
2001.  This equipment as of June 30, 1999 had a cost of $109,545 and accumulated
depreciation of $42,722 with a net book value of $66,823.

The future minimum lease payments under capital leases and the net present value
of the future minimum lease payments at June 30, 1999 are as follows:

Total Minimum Lease Payments                          $    104,900
Amount Representing Interest                                37,349
                                                      ------------

Present Value of Net Minimum Lease Payments                 67,551
Current Portion                                            (37,261)
                                                      ------------

   Long-Term Capital Lease Obligation                 $     30,290
                                                      ============


                                      F13
<PAGE>


CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
--------------------------------------------------------------------------------


[8]  Income Taxes

Deferred tax attributes  resulting from differences between financial accounting
amounts and tax bases of assets and liabilities at June 30, 1999 follow:

Current assets and liabilities
         Allowance for doubtful accounts                              $  75,000
         Inventory overhead capitalization                               25,000
         Reserve for slow moving inventory                               70,000
         Net operating loss carryforward                                288,000
         Other accruals                                                  79,000
                                                                      ---------
                                                                        537,000
         Valuation allowance                                           (293,000)
                                                                      ---------
Net current deferred tax asset (liability)                            $ 244,000
                                                                      =========

Non-current assets and liabilities
         Depreciation                                                 $  24,000
         Other accruals                                                   6,000
                                                                      ---------
                                                                         30,000
         Valuation Allowance                                            (30,000)
                                                                      ---------
Net noncurrent deferred tax asset (liability)                         $      --
                                                                      =========

The provision for income taxes consists of the following:

                                                       June 30,
                                                 1999           1998
                                                 ----           ----

Deferred tax (benefit)                        $(467,000)      $(83,000)
Current tax expense                             (20,174)        46,714
Net change in valuation allowance               323,000             --
                                              ---------       --------
                                              $(164,174)      $(36,286)

A partial  valuation  reserve has been established for those loss  carryforwards
and deductible  temporary  differences  which are not presently  considered more
likely than not to be fully realized.

The  statutory  income tax rate differs from the  effective tax rate used in the
financial  statements  as a  result  of the  permanent  differences,  change  in
statutory tax rate and current year net operating  losses,  the benefit of which
is not being recognized in the current year.

As of  June  30,  1999,  the  Company  has  the  following  net  operating  loss
carryforwards for tax purposes:

  Expiration Date:

For the Year Ending
       June 30,                     Federal                    State
       --------                     -------                    -----
         2003                      $     --                 $    13,000
         2004                            --                     375,000
         2005                            --                     231,000
         2007                            --                   1,514,000
         2019                     1,237,000


                                      F14
<PAGE>


CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
--------------------------------------------------------------------------------

[9]  Profit-Sharing Plan

The Company  maintains a  profit-sharing  plan,  which  qualifies  under Section
401(k) of the Internal Revenue Code, covering all nonunion employees meeting age
and service requirements.  Contributions are determined by matching a percentage
of employee  contributions.  The total expense for the years ended June 30, 1999
and 1998 was $56,930 and $43,257, respectively.

[10] Significant Risks and Uncertainties

[A]  Concentrations  of Credit  Risk-Cash-  The  Company  maintains  balances at
several financial institutions.  Accounts at each institution are insured by the
Federal  Deposit  Insurance  Corporation  up to $100,000.  At June 30, 1999, the
Company's uninsured cash balances totaled  approximately  $263,856.  The Company
does not require collateral in relation to cash credit risk.

[B]  Concentrations of Credit  Risk-Receivables-  The Company routinely assesses
the financial strength of its customers and, based upon factors  surrounding the
credit  risk  of its  customers,  establishes  an  allowance  for  uncollectible
accounts and, as a  consequence,  believes that its accounts  receivable  credit
risk exposure  beyond such  allowances is limited.  The Company does not require
collateral in relation to its trade accounts  receivable credit risk. The amount
of the allowance for uncollectible accounts at June 30, 1999 is $350,750.

[11] Major Customer

For the years ended June 30, 1999 and 1998,  approximately 55% or $6,700,000 and
44% or $7,000,000  of revenues were derived from one customer.  The loss of this
customer would have an adverse affect on the Company's operations.  In addition,
for the years ended June 30, 1999 and 1998,  an aggregate of  approximately  11%
and 19%,  respectively,  of revenues were derived from two other  customers;  no
other customers  accounted for more than 10% of consolidated sales for the years
ended June 30, 1999 and 1998. Accounts receivable from these customers comprised
approximately  61% and 48% of total  accounts  receivable  at June 30,  1999 and
1998, respectively.

[12] Commitments and Contingencies

[A]  Leases

Related Party Leases-  Certain  manufacturing  and office  facilities are leased
from Gerob Realty  Partnership  ["Gerob"] whose partners are stockholders of the
Company.  The lease,  which expires on December  31,1999  provides for a minimum
annual rental of $60,000,  plus payment of all real estate taxes.  Rent and real
estate tax  expense for the years ended June 30, 1999 and 1998 on this lease was
approximately $68,000 and $116,000, respectively.  Unpaid rent of $75,000 due to
Gerob at June 30, 1999 has been separately  disclosed as accrued expenses on the
consolidated balance sheet.

Other warehouse and office facilities are leased from Vitamin Realty Associates,
L.L.C.,  a  limited  liability  company,  which is 90%  owned  by the  Company's
chairman and principal  stockholder  and certain family members and 10% owned by
the Company's  Chief Financial  Officer.  The lease was effective on January 10,
1997 and provides for minimum annual rental of $346,000 through January 10, 2002
plus  increases  in real estate taxes and building  operating  expenses.  At its
option, the Company has the right to renew the lease for an additional five year
period.  Rent  expense  for the years ended June 30, 1999 and 1998 on this lease
was approximately $460,000 and $450,000.

Other Lease Commitments- The Company leases warehouse  equipment for a five year
period providing for an annual rental of $15,847 and office equipment for a five
year period providing for an annual rental of $8,365.

The Company leases automobiles under non-cancelable  operating lease agreements,
which expire through 2001.


                                      F15
<PAGE>


CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
--------------------------------------------------------------------------------

[12] Commitments and Contingencies [Continued]

The minimum rental commitment for long-term non-cancelable leases is as follows:

                                          Related
Year Ending               Lease         Party Lease
 June 30,               Commitment       Commitment          Total
 --------               ----------       ----------          -----
  2000                   $ 48,923         $346,000         $394,923
  2001                     28,072          346,000          374,072
  2002                     19,553          182,611          202,164
  2003                         --               --               --
  2004                         --               --               --
  Thereafter                   --               --               --
                         --------         --------         --------

  Total                  $ 96,548         $874,611         $971,159
  -----                  ========         ========         ========

Total rent expense,  including real estate taxes and  maintenance  charges,  was
approximately  $527,000 and $568,000 for the years ended June 30, 1999 and 1998,
respectively.  Rent  expense is stated net of sublease  income of  approximately
$18,000 and $16,000 for the years ended June 30, 1999 and 1998, respectively.

[B] Employment  Agreements-  Effective  July 1, 1999,  the Company  entered into
three year employment  agreements with its four executive officers which provide
for aggregate annual salaries of $485,000 for the year ending June 30, 2000, and
$495,000  for the  years  ending  June 30,  2001 and 2002,  respectively.  These
agreements are subject to annual increases equal to at least the increase in the
consumer price index for the Northeastern area.

[C]  Investment in and Royalties  Receivable  from Martin Health Care  Products,
Inc.- On  February  10,  1998,  the  Company  signed an  exclusive  manufacturer
agreement with Martin Health Care Products, Inc. (MHC) to provide to MHC certain
products for a ten year period.  In connection  with the agreement,  the Company
also agreed to forgive from MHC outstanding invoices totaling $22,000. In return
for the  forgiveness,  MHC  agreed to pay to the  Company a royalty  on sales of
certain  products and to issue to the Company  15,000  shares of common stock at
$1,000.  The Company has recorded the  royalties as a  non-current  asset in the
amount of $21,000.

[D] Litigation- The Company is unable to predict its ultimate financial exposure
with  respect  to its prior sale of certain  products  which may have  contained
allegedly  contaminated  Tryptophan  which is the subject of  numerous  lawsuits
against  unrelated  manufacturers,   distributors,   suppliers,   importers  and
retailers of that product.  However,  management does not presently  believe the
outcome of these actions will have a material adverse effect on the Company.

On July 7, 1997, the Company was informed by one of its suppliers of a recall of
the supplier's raw material which was used in  manufacturing  of tablets sold by
Manhattan Drug Company.  On July 17, 1997, the Company issued a voluntary recall
to three  customers  affected  by this and,  accordingly,  reduced its sales and
accounts receivable at June 30, 1997 by $127,000. The Company believes they have
recourse  against the supplier for the full value of the tablets sold containing
the  recalled  raw  material.  The Company  does not  believe  there will be any
significant additional costs relating to this recall. On September 30, 1997, the
Company instituted suit to recover all damages. On February 10, 1999 the Company
settled the suit and filed a Stipulation of Dismissal.

[E] Consulting  Agreements- The Company entered into a consulting agreement with
a financial  advisory group  ["Consultants"]  commencing on March 20, 1998 until
February 28, 1999. The Company is obligated to pay $2,500 for services  rendered
at the end of each month that  services  are  provided  during the terms of this
agreement.  In addition, the Company has issued to the Consultants three options
for 45,000 shares of common stock.  Each option is exercisable for 15,000 shares
at exercise prices of $1.125, $2.50 and $4.00,  respectively.  These options are
exercisable until March 20, 2003.


                                      F16
<PAGE>


CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
--------------------------------------------------------------------------------

[F]  Development  and Supply  Agreement- On April 9, 1998,  the Company signed a
development and supply agreement with Herbalife  International of America,  Inc.
["Herbalife"]  whereby the Company will develop,  manufacture and supply certain
nutritional products to Herbalife through December 31, 2000.

[G]  Manufacturing  Agreement-  On  February  14,  1998,  the  Company  signed a
manufacturing agreement with Pilon International,  PLC., a company that supplies
Zepter  International,   a  world-wide  direct  sales  distributor  of  consumer
products.  The Company will manufacture and develop dietary  supplements through
the year 2001.

[13] Related Party Transactions

During the year ended June 30,  1997,  the  Company  entered  into a  consulting
agreement with the brother of the Company's  Chairman of the Board on a month to
month  basis for $1,100 per month for 1999,  and $1,000 per month for 1998.  The
total consulting  expense recorded per this verbal agreement for the years ended
June 30, 1999 and 1998, by the Company was $13,200 and $12,000, respectively.

[14] Equity Transactions

[A] Stock  Option Plan - The  Company  has  adopted a stock  option plan for the
granting of options to employees,  officers,  directors and  consultants  of the
Company to purchase up to 2,000,000 shares of common stock, at the discretion of
the Board of Directors.  Stock option grants are limited to a total of 1,000,000
shares for  "incentive  stock options" and 1,000,000  shares for  "non-statutory
options" and may not be priced less than the fair market value of the  Company's
common stock at the date of grant.  Options  granted are  generally for ten year
periods,  except that  options  granted to a 10%  stockholder  [as  defined] are
limited to five year terms.  On October 16,  1996,  options to purchase  573,597
shares at the offering  price  [$3.50] and 25,974 shares at 110% of the offering
price were granted.  Such options  became  exercisable  on October 16, 1997. The
weighted average grant date fair value of the above options was $3.50.

During the year ended June 30, 1999 the Company issued to its employees  219,998
stock options at an exercise price equal to the market price ($1.50) on the date
of grant and 60,606  stock  options at an  exercise  price  equal to 110% of the
market price ($1.65). Additionally, the Company issued to members of its medical
advisory board 40,000 stock options equal to the market price ($1.50).  The cost
of issuing these stock options to the medical  advisory  board is  approximately
$50,000.  The weighted  average fair value of the stock  options  granted to the
medical  advisory  board is  estimated at $1.25 using the  Black-Scholes  option
pricing model and using a risk-free interest rate of 6%, expected  volatility of
167%,  and an expected  life of 10 Years.  No dividends  are expected to be paid
during the life of the options.

Pro forma  information  regarding  net  income and  earnings  per share has been
determined as if the Company had accounted for its employees stock options under
the  fair-value  method.  The fair value for these  options was estimated at the
date of grant using a  Black-Scholes  option  pricing  model with the  following
weighted-average assumptions for June 30:

                                             1999                     1998
                                             ----                     ----
Risk-free interest rate                        6.0%                    6.0%
Expected volatility                          167.0%                  124.1%
Dividend yield                                  --                      --
Expected life                              7.0 years               6.5 years

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options,  which have no vesting  restrictions and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective  assumptions  including the expected stock price volatility.  Because
the  Company's  employee  stock  options  have   characteristics   significantly
different from those of traded  options,  and because  changes in the subjective
input assumptions can materially affect the fair-value estimate, in management's
opinion,  the  existing  models do not  necessarily  provide a  reliable  single
measure of the fair value of its employee stock options.


                                      F17
<PAGE>


CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
--------------------------------------------------------------------------------

[14] Equity Transactions [Continued]

For purposes of pro forma  disclosures,  the estimated fair value of the options
is  amortized  to  expense  over the  option's  life.  The  Company's  pro forma
information follows:

                                         1999             1998
                                         ----             ----
Pro forma net loss                  $ (2,993,088)      $ (97,438)
                                    ============       =========

Pro forma loss per share
   Basic                            $       (.58)      $   (0.02)
                                    ============       =========
   Diluted                          $       (.58)      $   (0.02)
                                    ============       =========

There was no  compensation  expense  recorded  from stock  options for the years
ended June 30, 1999 and 1998.

A summary of the Company's stock option  activity,  and related  information for
the years ended June 30, follows:


<TABLE>
<CAPTION>
                                                                                                 Remaining
                                                                                                 ---------
                                                                                                Contractual
                                                                                                -----------
                                                                      Weighted Average             Life
                                                                      ----------------             ----
                                                                       Exercise Price           of Options
                                                                       --------------           ----------
                                                    Options              Per Share              Outstanding
                                                    -------              ---------              -----------
<S>                                                 <C>                  <C>                     <C>
Options Outstanding-June 30, 1996                        --                     --                      --

Granted:
   Exercise Price Equals Market Price               573,597              $    3.50               7.3 Years
   Exercise Price is Greater Than Market Price       25,974                   3.85               2.3 Years
Options Exercised                                        --                     --                      --
Options Canceled                                         --                     --                      --
                                                   --------              ---------               ---------

   Options Outstanding-June 30, 1997                599,571                   3.52               6.4 Years

Granted:
   Exercise Price is Greater Than Market Price       45,000                   2.54               3.8 Years
Options Exercised                                        --                     --                      --
Options Canceled                                         --                     --                      --
                                                   --------              ---------               ---------
 Options Outstanding-June 30, 1998                  644,571                   3.45               6.5 Years

Granted:
   Exercise Price Equals Market Price               259,998                   1.50               9.3 Years
   Exercise Price is Greater Than Market Price       60,606                   1.65               4.3 Years
Options Exercised                                        --                     --                      --
Options Canceled                                    (25,000)                  3.50                      --
                                                   --------              ---------               ---------

Options Outstanding and Exercisable-
June 30, 1999                                       940,175                   2.82               7.0 Years
                                                   ========              =========               =========
</TABLE>


[B]  Consultant   Agreement/Stock  Options-  In  connection  with  a  consulting
agreement  dated March 20, 1998, the Company has issued three options for 45,000
shares of common  stock [See Note 12E].  Each option is  exercisable  for 15,000
shares at exercise price of $1.125, $2.50 and $4.00, respectively. These options
are exercisable until five years following the date of this agreement.


                                      F18
<PAGE>


CHEM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
--------------------------------------------------------------------------------

[14] Equity Transactions [Continued]

[C] Related Party Debt  Conversion-  On January 12, 1998,  the Company  signed a
Stock Sale Agreement with Gerob.  Under the terms of the agreement,  the Company
sold 843,300  shares of common stock to Gerob.  The issuance of the stock was in
consideration  of $297,000 of past due rent and the satisfaction of a promissory
note of 276,444.

[D] Related Party Promissory  Note- On March 12, 1998, the Company  negotiated a
three year  promissory  note for $750,000 with its Chairman and then  President.
The note bears  interest at 7% and is due on March 12, 2001.  The note  provides
for interest only to be paid quarterly. As additional consideration for the loan
and in the light of the below market interest rate and  uncollateralized  nature
of the loan, the Corporation issued a Class C Warrant to purchase 150,000 shares
of common stock at the aggregate  purchase price of $1.75 per share. The note is
recorded  net of  $68,182,  which  represents  the  fair  value  of the  Class C
Warrants.  Amortization  of $22,727 and $6,629 was  recorded for the warrants at
June 30, 1999 and 1998, respectively. The warrant is exercisable for a four year
period  commencing  one year after the issuance of the note and expires on March
12, 2003. [See Note 6B].

[15] New Accounting Pronouncement

In June  1998,  the  FASB  issued  SFAS  No.  133,  AAccounting  for  Derivative
Instruments and Hedging  Activities@.  Statement No. 133 establishes  accounting
and reporting  standards for derivative  instruments and for hedging activities.
It  requires  that an entity  recognize  all  derivatives  as  either  assets or
liabilities  and measure them at fair value.  Under certain  circumstances,  the
gains or losses from  derivatives may be offset against those from the items the
derivatives  hedge  against.  The Company  will adopt SFAS No. 133 in the fiscal
year  ending  June 30,  2001.  SFAS No. 133 is not  expected  to have a material
impact on the financial statements.

[16] Year 2000 Issue

The Company has spent approximately  $55,000 through June 30, 1999 to modify its
computer information systems enabling proper processing of transactions relating
to the year 2000 ("Y2K") and beyond.  The Company installed a new network system
in  October  of 1998 at a cost  of  approximately  $20,000  whose  hardware  and
software is Y2K  compliant.  The  Company  has also spent  35,439 to provide the
necessary  upgrades and  modifications to the Company's  existing  manufacturing
program to insure Y2K compliance.  The new software  program is installed and is
currently  being  tested.  The  Company  intends  to be fully Y2K  compliant  by
September 30, 1999. The Company's suppliers and vendors have been contacted, and
most have  responded  with their intent to be Y2K compliant by the year 2000. At
this time, the Company believes based on their responses,  that there will be no
disruption of their business.  The Company does not expect the amounts  required
to be  expended  over the next  twelve  months to have a material  effect on its
financial position or results of operations.

[17] Subsequent Events

On July 27, 1999, the Company  renewed its financing  agreement with First Union
Bank providing for a $500,000 revolving line of credit with interest at 1% above
the bank's prime lending rate and expiring on July 31, 2000, and a $138,833 four
equipment  loan with  interest  at 1.50%  above the bank's  prime  lending  rate
expiring June 30, 2003.  The financing is personally  guaranteed by the Chairman
of the Board of the Company, and is collateralized by a security interest in all
the assets of  Manhattan  Drug  Company,  Inc.  As  additional  collateral,  the
Chairman of the Board of the Company has granted the bank a security interest in
his securities account maintained by First Union Brokerage Services.


                                      F19
<PAGE>


                                   SIGNATURES


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


                                   CHEM INTERNATIONAL, INC. AND SUBSIDIARIES


Date:  September 23, 1999          By: /s/ Seymour Flug
                                       -----------------------------------------
                                           Seymour Flug,
                                           President and Chief Executive Officer

Date:  September 23, 1999          By: /s/ Eric Friedman
                                         ---------------------------------------
                                             Eric Friedman,
                                             Chief Financial Officer