<PAGE>

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

                                 FORM 10-QSB

(Mark One)

[X]      QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
                  SECURITIES EXCHANGE ACT OF 1934

         For the quarterly period ended  June 30, 1997
                                         -------------
[ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
                            EXCHANGE ACT

     For the transition period from __________________ to _________________

                       Commission file number 0-21168
                                              -------

                CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
-----------------------------------------------------------------------------
      (Exact name of small business issuer as specified in its charter)

      
            NEW YORK                                   13-3253392
-----------------------------------------------------------------------------
(State or Other Jurisdiction of          (I.R.S. Employer Identification Number)
Incorporation or Organization)         

                 5 East 80th Street, New York, New York 10021
-----------------------------------------------------------------------------
                    (Address of principal executive offices)


                                (212) 717-6544
-----------------------------------------------------------------------------
                (Issuer's Telephone Number, Including Area Code)


-----------------------------------------------------------------------------
            (Former name, former address and former fiscal year, if
                           changed since last report)

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


              APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                 PROCEEDINGS DURING THE PRECEDING FIVE YEARS

         Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by court.  Yes    No 
N/A

                     APPLICABLE ONLY TO CORPORATE ISSUERS

         State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
         
         Common Stock:     7,448,987
         Warrants:         1,159,815

<PAGE>

                       PART I -- FINANCIAL INFORMATION

Item 1. Financial Statements

         CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
                         CONSOLIDATED BALANCE SHEETS

                                             June 30, 1997    December 31, 1996
                                             -------------    -----------------
                                              (unaudited)          (Note 1)

                 ASSETS

CURRENT ASSETS:
  Cash and equivalents                         $  3,790,200        $  5,352,400
  Accounts receivable, less allowance for
   doubtful accounts of $0 and $10,000 in
   1997 and 1996, respectively                       92,400              87,400
  Inventories                                       223,300             223,400
  Prepaid expenses and other assets                 122,600              89,200
                                               -------------       -------------
     Total Current Assets                         4,228,500           5,752,400

COLORMATE(TM) UNITS, LESS ACCUMULATED
  DEPRECIATION OF $30,500 (1997) AND
  $26,000 (1996)                                    669,500             674,000

PROPERTY AND EQUIPMENT, AT COST LESS
  ACCUMULATED DEPRECIATION OF $201,500 (1997)
  AND $155,300 (1996)                               330,700             293,700

OTHER ASSETS                                         27,800              27,400
                                               -------------       -------------
                                               $  5,256,500        $  6,747,500
                                               =============       =============

       LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

  Notes payable - collateralized by equipment  $      7,600        $     10,000
  Notes payable to related party                    310,100             326,000
  Accounts payable and accrued expenses:
   Attorneys and Accountants                        483,800             269,700
   Consultants                                       46,500              65,600
   Trade                                            145,000             109,700
  Security deposits                                   9,000              10,500
                                               -------------       -------------
     Total Current Liabilities                    1,002,000             791,500
                                               -------------       -------------

COMMITMENTS AND CONTINGENCIES


REDEEMABLE CLASS A PREFERRED STOCK,
 PAR VALUE $.01 PER SHARE:

   Authorized - 1,400,000 Shares
    Issued and outstanding - 1,380,000  Shares
     At par and redemption value                     13,800              13,800
                                               -------------       -------------

STOCKHOLDERS' EQUITY (DEFICIENCY):
 Common Stock, par value $.001 per share:
   Authorized - 50,000,000 shares
    Issued and outstanding - 7,385,004 (1997)
     and 7,168,730 (1996)                             7,400               7,200
    
 Capital in excess of par value                  15,931,600          15,370,300
 Accumulated deficit                            (11,698,300)         (9,435,300)
                                               -------------       -------------
     Total Stockholders' Equity                   4,240,700           5,942,200
                                               -------------       -------------
                                               $  5,256,500        $  6,747,500
                                               =============       =============

         See accompanying notes to consolidated financial statements.

                                      1

<PAGE>

         CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY

                    CONSOLIDATED STATEMENTS OF OPERATIONS

                                 (UNAUDITED)

<TABLE>
<CAPTION>
                                                                  Three Months Ended                Six Months Ended
                                                                      June 30,                          June 30,
                                                                ------------------                ----------------
                                                                  1997        1996                1997         1996
                                                                  ----        ----                ----         ----
<S>                                                      <C>             <C>               <C>            <C>
REVENUES:
  Lease, license and service contracts                    $        --    $    28,200        $     1,500    $    64,600
  Interest income                                              48,700         50,700            105,700         69,000
  Other                                                           500           (600)               800           (500)
                                                          ------------   ------------       ------------   ------------
                                                               49,200         78,300            108,000        133,100
                                                          ------------   ------------       ------------   ------------
COSTS AND EXPENSES:
  Food and Drug Administration ("FDA")
   medical application expenses                               464,900        194,600            809,100        412,300

  Patent application costs (including
   $154,900 of FDA related costs and
   $4,100 of research and development
   costs for the three months ended
   June 30, 1997 and $221,100 of FDA
   related costs and $61,000 of research
   and development costs for the six months
   ended June 30, 1997)                                       159,000         61,900            282,100         83,000
  Research and development costs                               62,300         64,900            117,400        110,400
  General and administrative:
   Compensation of officers and employees                     155,500        188,300            348,300        380,000
   Compensation of consultants                                 49,500         55,000             95,000         99,700
   Legal fees                                                 102,800         91,700            155,800        196,600
   Accounting fees                                              8,000         21,900             21,600         40,000
   Rent and storage                                            49,700         48,000            102,600        102,800
   Insurance                                                   59,800         44,700            112,400         96,400
   Travel and entertainment                                        --         11,100              4,000         24,100
   Repairs and maintenance                                     29,800         29,600             58,300         56,700
   Depreciation and amortization                               27,400        114,700             52,800        132,000
   Payroll taxes                                               22,400         17,700             53,600         50,300
   Stock administration fees                                   15,700         35,000             24,700         42,600
   Other                                                       54,900         63,900            119,600        126,600
   Interest                                                     6,800          9,700             13,700         16,700
                                                          ------------   ------------       ------------   ------------
                                                            1,268,500      1,052,700          2,371,000      1,970,200
                                                          ------------   ------------       ------------   ------------
NET LOSS                                                   (1,219,300)      (974,400)       $(2,263,000)   $(1,837,100)

                                                          ============   ============       ============   ============
WEIGHTED AVERAGE NUMBER OF
  COMMON SHARES AND EQUIVALENTS OUTSTANDING                 7,344,938      4,908,234          7,284,454      5,006,591
                                                          ============   ============       ============   ============
NET LOSS PER SHARE                                        $     (0.17)   $     (0.20)       $     (0.31)   $     (0.37)
                                                          ============   ============       ============   ============
</TABLE>

         See accompanying notes to consolidated financial statements.

                                      2

<PAGE>

         CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY

    CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)

                                 (UNAUDITED)
<TABLE>
<CAPTION>
                                                         Common Stock
                                           -----------------------------------
                                                Number of                                  Capital in Excess       Accumulated
                                            Shares Outstanding       Par Value               of Par Value            Deficit
                                            ------------------       ---------             -----------------       -----------
<S>                                         <C>                      <C>                   <C>                    <C>
Balances, December 31, 1996                     7,168,730              $7,200                 $15,370,300         $ (9,435,300)
 
 Six Months Ended June 30, 1997:

  Net Loss                                             --                  --                          --           (2,263,000)

  Exercise of warrants at $2.50 per share         194,374                 200                     485,800                   --

  Exercise of warrants at $5.00 per share             400                  --                       2,000                   --

  Exercise of options at $2.6875 per share         11,500                  --                      30,900                   --

  Exercise of options at $2.50 per share           10,000                  --                      25,000                   --

  Gain on account of "short swing" profits
   under Section 16 of the Securities
   Exchange Act of 1934                                --                  --                      17,600                   --
                                                ---------              ------                 -----------         ------------
Balances, June 30, 1997                         7,385,004              $7,400                 $15,931,600         $(11,698,300)
                                                =========              ======                 ===========         ============
</TABLE>

         See accompanying notes to consolidated financial statements.

                                      3

<PAGE>

         CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY

                    CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (UNAUDITED)

                                                      Six Months Ended June 30,
                                                     ---------------------------
                                                         1997           1996
                                                     ------------   ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net Loss                                            $(2,263,000)   $(1,837,100)
 Adjustments to Reconcile Net Loss to Net
  Cash Flows From Operating Activities:

   Depreciation and Amortization                          52,800        132,000

   Stock Issuance in Lieu of Interest Payments                --          2,700
   Changes in Operating Assets and Liabilities:
    Accounts Receivable                                   (5,000)       (60,500)
    Inventories                                              100        (32,400)
    Prepaid Expenses and Other Assets                    (33,400)       (66,100)
    Other Assets                                          (2,300)        30,100
    Accounts Payable and Accrued Expenses                230,300        208,000
    Security Deposits                                     (1,500)            --
                                                     ------------   ------------
      Net Cash Flows From Operating Activities        (2,022,000)    (1,623,300)
                                                     ------------   ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchases of Property and Equipment                     (83,200)      (114,300)

CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds From Issuance of Convertible Debentures             --      5,000,000
 Proceeds from Exercise of Options                        55,900        207,500
 Proceeds from Exercise of Warrants                      487,800      2,596,400
 Short Swing Profits                                      17,600        260,600
 Payments of Notes Payable to Related Party              (15,900)            --
 Deferred Offering Costs                                      --       (792,400)
 Notes Payable - Collateralized by Equipment              (2,400)        (2,100)
                                                     ------------   ------------
      Net Cash Flows from Financing Activities           543,000      7,270,000
                                                     ------------   ------------

NET CHANGE IN CASH AND EQUIVALENTS                    (1,562,200)     5,532,400

CASH AND EQUIVALENTS, BEGINNING OF
 PERIOD                                                5,352,400      1,827,400
                                                     ------------   ------------

CASH AND EQUIVALENTS, END OF PERIOD                  $ 3,790,200    $ 7,359,800
                                                     ============   ============


SUPPLEMENTAL CASH FLOW INFORMATION

 Interest Paid                                       $     4,300    $    16,700
                                                     ============   ============
 Income Taxes Paid                                   $        --    $    16,141
                                                     ============   ============

SUPPLEMENTAL NON-CASH FLOW INFORMATION
 Conversion Of Outstanding Debt To Common Stock      $        --    $   625,000
                                                     ============   ============

         See accompanying notes to consolidated financial statements.

                                      4

<PAGE>

         CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 -- Basis of Presentation:

         Nature of Report -- The consolidated balance sheet at the end of the
         preceding fiscal year has been derived from the audited consolidated
         balance sheet contained in the Company's Form 10-KSB for the fiscal
         year ended December 31, 1996 and is presented for comparative purposes.
         All other financial statements are unaudited. In the opinion of
         management, all adjustments, which include only normal recurring
         adjustments necessary to present fairly the financial position, results
         of operations and changes in cash flows, for all periods presented have
         been made. The results of operations for interim periods are not
         necessarily indicative of the operating results for the full year.

         Footnotes -- Certain footnote disclosures normally included in
         financial statements prepared in accordance with generally accepted
         accounting principles have been omitted in accordance with the
         published rules and regulations of the Securities and Exchange
         Commission. These consolidated financial statements should be read in
         conjunction with the financial statements and notes thereto included in
         the Company's Form 10-KSB for the fiscal year ended December 31, 1996.

         Estimates and Uncertainties -- 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, as determined at a later date, could differ from those
         estimates.

         At June 30, 1997, most of the inventory of the Company's products is in
         excess of current requirements based on the recent level of sales. In
         addition, the Company has not sold its new line of cosmetics because
         the manufacturer has experienced difficulties in color matching certain
         shades to be scientifically claimable for the Company's scientifically
         color coordinated cosmetics line. Pending availability of the new line,
         the Company has ceased active marketing of its prior existing cosmetics
         line and Swatch Packs. The Company believes the new cosmetics will be
         ready to ship in the first quarter of 1998, although there can be no
         assurance. Management believes a $100,000 loss will be incurred on the
         disposition of inventory and provided for such loss in 1996.

Note 2 -- Commitments and Contingencies:

         Business Risks -- The Company's business encompasses all of the risks
         inherent in the establishment of a new business enterprise, including a
         limited operating history with significant competition possessing
         substantially greater resources. Current and future operations also

         depend upon the continued employment of certain key executives, the
         ability to commercialize its proprietary technology and products and
         the Company's ability to obtain adequate revenues and/or outside
         financing.

         Possible Impairment -- Depreciation on a straight-line basis over five
         years commences upon initial rental of the Colormate(TM) units. The
         Company continually evaluates the life and carrying amount of such
         equipment in light of current conditions. Given present conditions, it
         is reasonably possible that the Company's estimate that it will recover
         the carrying amount from future operations may change in the near term,
         but the Company currently believes it is more likely than not that
         write-down for impairment will not be necessary. For assessing whether
         a write-down is necessary, management compares the greater of the
         estimated undiscounted net future revenues and an annual appraisal with
         the carrying amount of this specialized equipment.

         Operating Difficulties -- Since 1989, the Company has incurred losses
         from operations and net cash outflows from operations and has owned
         Colormate(TM) units since June 1991 whose ultimate recoverability
         depends upon the Company's future marketing success. Having obtained
         confirmation of clearance for

                                      5

<PAGE>

Note 2 -- Commitments and Contingencies (continued):

         commercial marketing by the United States Food and Drug Administration
         ("FDA") in July 1997, the Company expects to license its patents and
         proprietary technology, rent its equipment and market its related
         services and products to ultimately overcome these difficulties. In the
         event the Colormate(TM) units and related proprietary technology are
         not successfully leased/licensed and/or the products (pending
         completion of the new cosmetics line) are not successfully marketed in
         the future, the principal effect may be a substantial write-down of the
         book value of such units.

         Management expects that the Company will have sufficient liquidity at
         least until July 1, 1998, even if no revenues from operations are
         generated. If the Company is able to profitably market its Intellectual
         Properties, Colormate(TM) units and new cosmetics line and products,
         the Company would use any cash flow obtained from operations, and may
         seek additional debt or equity financing, to further support and expand
         its operations. The Company's Colormate(TM) units will be marketed
         interchangeably as the only differences between the different models
         are design, power supply improvements and software systems. There can
         be no assurance that the Company will not require additional funding.
         If the Company has not been able to attract additional future financing
         or generate significant revenue from operations, at such point in time,
         it may have to cease operations.

         Colormate(TM) Units for Beauty Aid and Fashion Industries -- In

         connection with a license with Avon Products, Inc. ("Avon"), Avon paid
         approximately $4,600,000 to purchase color measurement instruments and
         related equipment for its use during the term of the license period.
         Due to missing and damaged units, Avon and the Company executed mutual
         releases at the termination of the lease on June 24, 1991 with the
         principal effect that the Company received 1,947 units of which 1,400
         were useable and not in need of significant repair. For accounting
         purposes, the $700,000 estimated fair value of the nonproprietary
         equipment (based upon an independent appraisal of the complete units
         with allowances for the lack of a verifiable used equipment market,
         varying usage, the need for refurbishment and similar factors) was
         recorded as an asset. The 1,700 useable units of nonproprietary
         equipment were received in the form of (i) 1,400 complete units valued
         at $500 per unit and (ii) 300 complete units in need of significant
         repair that were assigned zero value. No valuation of the proprietary
         portion of the units or of the additional 247 unusable units returned
         by Avon was performed.

Item 2.  Management's Discussion and Analysis

         The following is intended to update the information contained in the
Company's Form 10-KSB for the year ended December 31, 1996 (the "Form 10-KSB")
and presumes that readers have access to, and will have read, Management's
Discussion and Analysis contained in the Form 10-KSB.

         Except for the historical information contained herein, certain of the
matters discussed are forward-looking statements that are subject to material
risks and uncertainties which may cause actual results to differ materially from
those anticipated by the statements made below. Such risks and uncertainties
include, among other things, the availability of any needed financing, the
Company's ability to operate as a going concern, the Company's ability to
implement its long range business plan for various applications for its
technologies, including medical and industrial applications, the obtaining of
and compliance with regulatory approvals applicable to proposed applications of
the Company's technology, the impact of competition, the management of growth,
and other risks and uncertainties that may be detailed from time to time in the
Company's reports filed with the Securities and Exchange Commission, including
those set forth in this Form 10-QSB.

Overview

         Since inception, the Company has been principally engaged in the
research and development of the Intellectual Properties and the Colormate(TM)
units for the application of scientific color measurement principles to the
classification of human skin and the classification and color-oriented
organization of various color sensitive consumer products such as cosmetics,
hair color, hosiery, fashion, print and textiles. The Company from time to time
has also

                                      6

<PAGE>

been engaged in test marketing the Intellectual Properties and Colormate(TM)

units in the beauty aid and fashion industries, marketing them in the cosmetics
industry, and in cooperation with Mt. Sinai Hospital, New York, New York, since
1988 has conducted clinical research studies for the non-invasive detection and
monitoring of bilirubin infant jaundice. Since December 31, 1990, the Company
has been primarily engaged in developing and testing further applications of the
Intellectual Properties and Colormate(TM) units, such as the clinical research
studies for medical applications, and obtaining additional financing to support
marketing of the Company's Intellectual Properties, systems, products and
related services.

         The Company has furthered implementation of its long-range plans to
exploit certain medical applications for its technology. In this regard, on
November 14, 1996, the Company filed its application with the FDA for certain
medical applications of its technologies and in 1996 developed the working
prototype of the Colormate(TM) unit for such medical applications. On July 30,
1997, the Company received confirmation of marketing clearance pursuant to a
"substantial equivalence" determination order, in the form of a letter dated
July 24, 1997 from the FDA's Center for Devices and Radiological Health,
authorizing the Company to commercially distribute its Colormate(TM) device for
non-invasive monitoring of bilirubin infant jaundice in the United States. The
"substantial equivalence" order states that the Company must comply with the
medical device "general controls," e.g., device establishment registration,
medical device listing, good manufacturing practices (quality system regulation)
("GMP"), labeling, and the statutory prohibitions against adulteration and
misbranding. The order also states that the Colormate(TM) device is a Class II
device which may be subject to additional "special controls." The Company
intends to comply with any applicable "general controls" and "special controls"
for purposes of commercial distribution.

         The Company has incurred significant losses from operations since 1990.
The Company has incurred significant FDA related expenses and research and
development and marketing expenses and, prior to consummation of its IPO in
February 1993, negative shareholders' equity. The Company also has not achieved
significant operating revenues since the conclusion in 1991 of marketing its
intellectual properties and Colormate(TM) units in the cosmetic and beauty aid
industries in a national sales program (the "Avon Project") with Avon. Pending
completion of its new line of cosmetics, the Company has ceased active marketing
of its prior existing cosmetics line and Swatch Packs. See Note 1 of Notes to
Financial Statements. The foregoing factors raise substantial doubt as to the
Company's ability to continue as a going concern.

         The Company has financed its operations through (i) private placements
of its securities, which generated an aggregate of $1,167,500 (including
$620,400 from Darby Simpson Macfarlane) from 1988 through 1992 (excluding the
Bridge Financing, which was repaid with proceeds of the IPO), (ii) collaborative
research and development arrangements with licensees, (iii) cash receipts from
lease and licensing agreements, which generated in the aggregate $8,386,200 from
inception through December 31, 1992, including $6,944,200 in the period from
January 1, 1988 to December 31, 1992 (primarily attributable to the Avon
Project), (iv) loans from private investors and certain shareholders which
aggregated $549,000 in 1991 and 1992 (excluding $775,000 in a bridge financing
effected in September and October 1992 (the "Bridge Financing")), (v) the IPO,
(vi) private placements of securities from October 1994 to June 1995 (which have
generated gross proceeds of $4,500,000 and net proceeds of $3,729,800), and

(vii) the 1996 Debenture Offering which raised net proceeds of approximately
$4,200,000. In addition, during 1996, the Company received an aggregate of
$2,738,925 from exercise of its Warrants and $207,500 from the exercise of stock
options. From January 1, 1997 to June 30, 1997, the Company received an
aggregate of $487,800 from exercise of Placement Agent Warrants and Public
Warrants.

         Since 1990 (with the exception of the second quarter of 1997 in which
insignificant operating revenues were generated), limited revenues have been
derived from licenses, leases, service contracts and product sales to several
beauty-related businesses, testing and laboratory fees from potential licensees
evaluating the Company's technology, and from an exclusive licensing and lease
contract with IMS Cosmetics Inc. In 1996, the Company generated approximately
39% of its lease, license and service contract revenues from IMS. The Company
receives payments from licensees, distributors or other sources at various times
during the year. Accordingly, these payments have had, and payments that may be
received in the future will have, a significant impact on quarter-to-quarter
comparisons inasmuch as the Company has not developed stable sources of repeat
revenues.

         The Company's ability to generate revenues in the future will depend on
its success in marketing its Intellectual Properties, the related Chromaticity
Study capabilities, the Colormate(TM) units and (pending completion of the new
cosmetics line) its products. In addition, the Company's future ability to
generate revenues from its

                                      7

<PAGE>

technologies and its Colormate(TM) units will depend on, among other
things, the Company's ability to establish marketing, distribution and
manufacturing arrangements with third parties. If these efforts are not
successful in the future, the principal effect may be a substantial write-down
of the book value of the Colormate(TM) units and a substantial impairment of
the Company's capital resources and ability to obtain any future financing,
which would result in a substantial diminution in the value of an investment
in the Company. There can be no assurance the Company will be able to timely
place such units, establish such arrangements or identify alternative markets.
See Note 2 of Notes to Financial Statements.

Results of Operations

         The Company incurred net losses of $2,263,000 and $1,837,100 for the
six-month periods ended June 30, 1997 and 1996, respectively, as revenues
received have not been significant relative to the Company's expenses incurred
in implementing its business plan. Loss per share decreased by $0.06 in the 1997
period compared to the 1996 period, and the 1997 period was favorably impacted
by an increase of 2,277,863 weighted average number of shares outstanding. The
dollar increase in such losses in the 1997 period as compared to the 1996 period
is primarily attributable to the Company commencing implementation of its
long-range business plan to seek commercial applications of its intellectual
properties and technologies in the medical field including an increase in costs
and expenses regarding FDA regulatory applications, patent applications and

other general costs and expenses. Since the Company has received confirmation of
marketing clearance by the FDA as described above, the Company believes that the
level of future expenses relating to the FDA application filed and the related
patent application costs will not be recurring at the levels experienced to date
and that any future expenses incurred in connection with regulatory marketing
clearances should be less than the amount incurred in 1996 and the first six
months of 1997, although no assurance can be given of such result. However,
the Company may have to incur additional costs and expenses in connection with
FDA marketing clearances and state regulatory requirements for the home health
care and pediatric office market, as well as foreign market clearances. In
addition, the Company expects to incur increased expenses relating to products
liability insurance, manufacturing expenses, legal and regulatory compliance,
including GMP quality system compliance, as well as research and development for
new potential applications as it implements the next phase of its efforts to
commercialize medical applications of its technology.

         The Company estimates that research and development expenses (excluding
compensation expenses for officers, employees and long-term consultants but
including patent application costs) for fiscal 1997 will approximate $700,000
although there can be no assurance that such expenses will not exceed that
amount. Of such amount, approximately $300,000 will be applied to developing the
mass manufacture housing prototype for the medical application of the Company's
technology in the detection and monitoring of infant jaundice, approximately
$100,000 will be applied to completing the hand held, less expensive version of
the Colormate(TM) units, approximately $100,000 will be applied to fabricate
molds for each of the foregoing prototypes, and approximately $200,000 will be
applied to the Company's ongoing research and development efforts. There can be
no assurance that such amounts will be sufficient to accomplish completion of
such projects.

         In the first six months of 1997, the Company derived almost no revenue
from lease, license and service contracts, which is attributable to its focusing
its resources on implementation of its long-range business plan for medical
applications of its technologies. The Company believes that sales in the 1997
six-month period were also adversely affected by ongoing delays in manufacturing
certain color shades of the Company's new line of cosmetic products for its
Colormate(TM) system (which delays were attributable to finalizing color
formulations). The Company anticipates the new cosmetics will be ready to ship
in the first quarter of 1998 although there can be no assurance of this. See
Note 1 of Notes to Financial Statements.

         The Company anticipates that it will continue to incur substantial and
increasing net losses for the foreseeable future as increased expenses are
incurred in implementing its long-range business plan for medical applications
of its technologies and as revenues from the Company's existing activities in
the cosmetics, beauty aid and fashion areas are anticipated to continue to be
insignificant relative to its anticipated expenses in the foreseeable future.

                                      8

<PAGE>

Liquidity and Capital Resources


         Assets decreased by $1,491,000 in the first two quarters of 1997 as
compared to fiscal 1996, primarily attributable to a decrease in cash and cash
equivalents, which is primarily attributable to the expenses incurred pursuant
to the Company's FDA application. Current liabilities increased by $210,500 in
the first two quarters of 1997 compared to fiscal 1996, primarily attributable
to increased accounts payable to attorneys and accountants, as well as increased
trade payables. The decrease in notes payable to related party is attributed to
the payment of past due royalty payments of $15,900 in connection with a note to
Peach & Pink Computer Corp. that matured in 1996.

         As indicated in the Company's Statements of Cash Flows, the Company
continued to experience significant negative net cash flows from operating and
investing activities in the first six months of 1997. The 1997 increase in cash
outflows from operating activities is primarily attributable to the increase in
the Company's net loss. Cash flows from financing activities during the 1997
quarter principally represent $55,900 from the exercise of certain of the
Company's outstanding options, $487,800 from the exercise of Warrants and
$17,600 of "short swing" profits paid to the Company in accordance with the
Securities Exchange Act of 1934. Cash flows from financing activities in the
1996 period principally represent the receipt of proceeds from the issuance of
Convertible Debentures the exercise of Warrants and certain of the Company's
outstanding options and "short swing" profits paid to the Company in accordance
with the Securities Exchange Act of 1934.

         The Company has applied a substantial portion of the proceeds from the
1995 Private Placement and 1996 Debenture Financing to begin implementation of
its long-range business plan for commercialization of its technologies for
medical applications in diagnosing certain diseases, including the preparation
of the FDA application and the related patent applications. In this regard, the
Company hired FDA and governmental regulatory consultants (in addition to legal
counsel) to assist in obtaining regulatory clearances for commercial use of its
technology for the detection and monitoring of bilirubin infant jaundice. As
described above, the Company received confirmation of clearance by the FDA on
July 30, 1997 pursuant to a "substantial equivalence" determination order, in
the form of a letter dated July 24, 1997 from the FDA's Center for Devices and
Radiological Health, authorizing the Company to commercially distribute its
Colormate(TM) device for non-invasive monitoring of bilirubin infant jaundice in
the United States. The Company anticipates that any initial penetration of the
medical marketplace will be through the use of specialized distributors, rather
than a direct sales force.

         In addition, the Company applied proceeds of the 1995 Private Placement
and 1996 Debenture Financing to the ongoing development of a mass manufacture
prototype for medical applications and development of a mass manufacture
prototype for a hand held Colormate(TM) device, salaries of new personnel
including a new president, salespersons and support staff marketing expenses,
working capital, additional prototype research and development and to fund
ongoing operations.

         Management believes that if its proposed marketing plans for nonmedical
applications of its technology are successful, then it will generate revenues
from fees from the licensing of the Intellectual Properties and leasing of the
Colormate(TM) units, consulting fees, and sales of cosmetics, although there can

be no prediction or assurance as to which or whether any of these potential
revenue sources will be successful. In 1996 and for the first two quarters of
1997, such licensing, leasing and sales yielded an immaterial level of revenue,
primarily because the Company devoted its resources to the commercialization of
its technologies for medical applications and because the Company's new
cosmetics line is not yet available.

         Management expects that the Company will have sufficient liquidity at
least until July 1, 1998, even if no revenues from operations are generated. If
the Company is able to profitably market its Intellectual Properties,
Colormate(TM) units, the Company would use any cash flow obtained from
operations, and may seek additional debt or equity financing, to further support
and expand its operations. The Company's Colormate(TM) units will be marketed
interchangeably as the only differences between the different models are design
and power supply improvements and software systems. There can be no assurance
that the Company will not require additional funding. If the Company has not
been able to attract additional future financing or generate significant revenue
from operations at such point in time and/or successfully market its products
and technologies, it may have to cease operations.

                                      9

<PAGE>

Risk Factors

         Accountant's Report; Going Concern Considerations. The report of Wiss &
Company, LLP, independent auditors for the Company, with respect to the year
ended December 31, 1996, includes an explanatory paragraph relating to doubt as
to the ability of the Company to continue as a going concern. The Company has
suffered significant losses from operations since 1990, as well as other factors
impacting the viability of the Company as a going concern. A "going concern"
explanatory paragraph could have a material adverse effect on the Company's
ability to obtain bank financing or to raise capital in the future.

         Limited Operating History. Until 1986, the Company was principally
engaged in research and development relating to certain intellectual property
rights, proprietary technology and instrumentation in the field of color science
(collectively the "Intellectual Properties") and the Company's cosmetics line
and material swatch packs (the "Products"). From early 1986 through October
1987, the Company was engaged in limited test-marketing of certain of the
Intellectual Properties and Products through its former licensees. From October
1987 until June 1991, the Company was principally engaged in the Avon Project.
From October 1990 to date, the Company has not conducted any material revenue
producing operations and there can be no assurance it will be able to do so in
the future. The Company's business is subject to the risks inherent in the
development of new products using new technologies and approaches. There can be
no assurance that unforeseen problems will not develop with these technologies
or applications, that the Company will be able to successfully address
technological challenges it encounters in its research and development program
or that commercially feasible products will ultimately be developed by the
Company.

         Operating Losses. The Company has incurred significant losses from

operations for the years ended December 31, 1996 and 1995 ($4,442,300 and
$2,494,300, respectively) and for the six months ended June 30, 1997
($2,263,000). The Company anticipates incurring increased operating expenses as
the Company attempts to expand its marketing and sales activity and otherwise
continues to implement its business plan, including its long-range business plan
for potential medical applications of its technology, including its device for
bilirubin infant jaundice. There can be no assurance the Company will not
continue to incur such losses or will ever generate revenues at levels
sufficient to support profitable operations.

         Need for Additional Financing; Cessation of Operations. The Company has
limited resources and has not been able to finance its activities with cash flow
from operations since fiscal 1989. There can be no assurance that the Company
will not continue to incur operating losses, that it will receive any additional
proceeds from exercise of Warrants, that remaining proceeds of the 1996
Debenture Offering will be sufficient to fund operations beyond July 1998, that
sufficient sales levels, if any, will be achieved thereafter to fund operations
or that the Company will not incur additional unanticipated expenses. In this
regard, if the Company is unable to successfully market its Intellectual
Properties, Colormate(TM) units and Products, it is extremely doubtful it will
be able to obtain additional future financing and, at such point, may have to
cease operations. The Company's continued operation will depend on its ability
to obtain significant commercial sales of the Products and/or licensing and
leasing fees from its Intellectual Properties and the Colormate(TM) units, the
successful marketing of the Colormate(TM) units in medical applications and the
availability of future financing. There can be no assurance that the Company
will be able to obtain additional financing, such commercial sales or fees, in
which case the Company's operations would be materially adversely affected and
it may be forced to cease operations.

         No Assurance of Successful Commercialization of Medical Device for
Monitoring Bilirubin Disease; Early Stage of Other Medical Product Development.
There is no assurance the Company's technology for monitoring bilirubin infant
jaundice, or other medical applications of the Company's technology, will be
capable of being produced in commercial quantities at acceptable costs, be
eligible for third-party reimbursement from governmental or private insurers or
be successfully marketed or achieve market acceptance. If any of the Company's
marketing or development programs are not successfully completed, required
regulatory approvals or clearances are not obtained, or products for which
approvals or clearances are obtained are not commercially successful, the
Company's business, financial condition and results of operations would be
materially adversely affected. Although the Company has received FDA clearance
to commercially market its Colormate(TM) device to monitor bilirubin infant
jaundice, as described above, and has conducted early stage research with
respect to certain other chromogenic diseases identified by the Company, the
Company's clinical and research development programs for any other medical
application of its technology have not effectively commenced, and substantial
additional research and development and clinical trials

                                      10

<PAGE>

will be necessary before commercial prototypes of the Company's products are

produced for any such other medical application. The Company could encounter
unforeseen problems in the development of such other products such as delays in
conducting clinical trials, delays in the supply of key components or delays in
overcoming technical hurdles. There can be no assurance that the Company will be
able to successfully address the problems that may arise during the development
and commercialization process. In addition, there can be no assurance that any
of the Company's products for any such other medical application will be
successfully developed, proven safe and efficacious in clinical trials or meet
applicable regulatory standards and requirements.

         Uncertainty of Medical Market Acceptance and Lack of Medical Marketing
and Sales Experience. The Company's Colormate(TM) system is a new device for the
monitoring and screening of bilirubin infant jaundice, and there can be no
assurance that it will gain market acceptance. To date, except for the clinical
studies and related information regarding the Company's bilirubin infant
jaundice device, the medical community generally has had no exposure to the
Company or its proposed medical applications and methods. Because the medical
community is generally relatively slow to adopt new technologies, procedures or
devices, the Company might be unable to gain access to potential customers in
order to attempt to demonstrate the operation and efficacy of its Intellectual
Properties in the medical field. Even if the Company gains access to potential
customers, no assurance can be given that members of the medical community will
perceive a need for or accept the Company's proposed medical applications and
methods. Physicians and individuals will not recommend or use the Company's
device unless they determine, based on experience, clinical data, relative cost,
and other factors, that these products are an attractive alternative to current
blood-based tests that have a long history of safe and effective use. The
Company may need to conduct additional independent studies in order to achieve
acceptance in the medical community. In addition, purchase decisions for the
device will be greatly influenced by health care administrators who are subject
to increasing pressures to reduce costs. Some purchasers, such as hospitals,
pediatricians and independent medical supply and home health care distributors,
might also be reluctant to purchase products from a company that has not
demonstrated the ability to satisfy ongoing delivery requirements. In addition,
hospitals, clinics and pediatricians may be unwilling or unable to commit funds
to the purchase of the Company's proposed medical applications due to
institutional budgetary constraints, particularly in a slower economy. Failure
of the Company's device to achieve significant market acceptance would have a
material adverse effect on the Company's business, financial condition and
results of operations.

         In addition, the Company's proposed medical applications will compete
with existing devices, technologies and methods in achieving acceptance in the
medical community and in attracting support from independent medical device
distribution organizations which sell medical equipment to the anticipated
target market (i.e., hospitals, pediatricians and home health care services).
While the Company believes its medical applications are superior to the existing
devices, technologies and methods, no assurance can be given that the medical
community will accept and support the Company's medical device.

         The Company has recently initiated research regarding the market size,
market share, pricing and profit margins related to the monitoring methods
currently in use with which the Company's proposed medical applications and
methods would compete. There can be no assurance that the Company will be able

to successfully market its proposed medical applications and methods to the
anticipated target customers, or that the market for such applications and
methods will be large enough to support profitable operations. There can be no
assurance that the Intellectual Properties or Colormate(TM) systems will be
found to have commercial medical applications.

         Once the Company obtains all necessary regulatory approvals and
clearances to market its Colormate(TM) unit in the medical industry, in order to
successfully market and sell its Colormate(TM) unit, the Company must either
develop a marketing and sales force or enter into arrangements with third
parties to market and sell this product. There can be no assurance that the
Company will be able to successfully develop a marketing and sales force or that
it will be able to enter into marketing and sales agreements with third parties
on acceptable terms, if at all. If the Company develops its own marketing and
sales capabilities, it will compete with other companies that have experienced
and well-funded marketing and sales operations. If the Company enters into a
marketing arrangement with a third party for the marketing and sale of its
bilirubin infant jaundice product, any revenues to be received by the Company
from this product will be dependent on this third party and the Company will
likely be required to pay a sales commission or other compensation to this
party.

                                      11

<PAGE>

         Lack of Market Penetration in Other Industries. The Company has not yet
achieved commercial market penetration in any industry, and there can be no
assurance the Company will be able to do so in the future. The Company currently
has a limited number of Colormate(TM) units in commercial use. The Company has
not achieved significant levels of cosmetics sales from its Colormate(TM) unit
locations, and expects based on the cosmetics sales levels achieved per location
to date, that it will have to greatly increase the number of Colormate(TM) unit
installations to achieve significant levels of cosmetics sale revenues. The
Company has collected insignificant cosmetic revenues from its salon
installations in the second quarter of 1997. See "Management's Discussion and
Analysis." The Company also believes, based on its operating history since
February 1993, that obtaining such increased cosmetic sales revenue will take
significantly longer to achieve than was originally anticipated. At December 31,
1996, most of the inventory of the Company's products was in excess of
requirements based on the recent level of sales. After giving effect to the
$100,000 write off in 1996 actual inventory, Management believes no further
significant loss will be incurred on the disposition of inventory. No estimate
can be made of a range of amounts of loss that are reasonably possible should
the Company's expectations not be met. There can be no assurance that no such
loss will be incurred upon the disposition of inventory. However, the Company
has begun to provide hair color analysis in certain salons, expects to complete
its inventory of a new line of chromatically balanced and color coordinated
cosmetics in the first quarter of 1998, and expects to commence marketing of its
new line of custom blended foundations in 1998. Although there can be no
assurance, the Company believes these factors may enhance revenues from its
beauty-related operations. In order to implement its marketing plans in the
United States and abroad, including in industries in which the Company does not
have prior experience, the Company will have to develop additional marketing

skills and spend proceeds from additional financing and from the exercise of its
outstanding Warrants on sales and marketing activities, including hiring finders
and new personnel including consultants, and entering into arrangements with
distribution companies having a national presence. There can be no assurance the
Company's marketing plan will be successful.

         Prior Marketing Attempts. Other than the Avon Project, its more recent
arrangements with IMS and its beauty salon placements, the Company's own
attempts to license and/or lease its Intellectual Properties and the
Colormate(TM) units and to market its Products independently and/or through
licensees never proceeded beyond the test marketing stage. There can be no
assurance the Company will in the future achieve commercial leasing of its
Colormate(TM) units and commercial licensing of the Intellectual Properties or
the sale of the Products. In addition, other than its installation of
Colormate(TM) units in beauty salons and beauty related businesses, the
Company's revenue generating activities have been primarily conducted in
conjunction with its former licensees (i.e., Clairol, Hanes and Avon), that
provided substantial economic, administrative, marketing and advertising
support. There can be no assurance that without the support of a marketing
partner with financial resources, an advertising budget, market presence and
consumer recognition, the Company will be able to achieve successful operations.
Further, there can be no assurance the Company will ever develop a commercial
market for the licensing or leasing of its Colormate(TM) units and Intellectual
Properties, for the sale of the Products or for any medical applications of its
technologies.

         Competition. To the extent the Company implements its business plan to
commercialize medical applications for its Intellectual Properties, it will be
entering a field characterized by rapidly changing technology, intense
competition and extensive research and development. The Company will be
competing with established companies which have greater financial, technical,
manufacturing, marketing, research and development and management resources
(including companies such as Minolta Camera Co. Ltd., Healthdyne Technologies,
Inc. and SpectRx Inc., among others), which have actively pursued development of
noninvasive monitoring of bilirubin infant jaundice. In addition, there will be
other companies with which the Company will compete regarding other medical
applications which the Company may pursue. Furthermore, the monitoring methods
currently in use for bilirubin and tuberculosis, the principle diseases for
which the Company intends to develop commercial applications for its
technologies, have already achieved acceptance by and are in widespread use in
the medical community, unlike the Company's proposed methods. There can be no
assurance that the Company's proposed methods will be accepted by the medical
community.

         Further, technological developments by others could result in the
Company's proposed medical applications and devices becoming obsolete even
before the expenses of bringing the proposed applications to market, if ever,
are recouped. There can be no assurance that the Company will be able to upgrade
its medical applications and devices to compete with such competitors or with
persons who may in the future develop products or detection methods competitive
with the Company's proposed medical applications and devices.

                                      12


<PAGE>

         Independent medical supply distributors who may be retained by the
Company will distribute other products which may compete with those of the
Company or which would provide greater revenues to such distributors than would
be provided by the Company. In addition, many medical supply companies with
which the Company's proposed medical applications and devices will compete, and
which have significantly greater financial research, technical, manufacturing,
and distribution resources and broader product lines than the Company, have
their own in-house marketing and distribution capabilities and have established
relationships with potential customers for the Company's proposed medical
applications, such as pediatricians and hospitals. Some competitors have greater
name recognition and lengthier operating histories in the health care industry.
No assurance can be given that the Company will successfully and effectively
market its medical products against these and other competitors.

         Furthermore, there can be no assurance that the Company's competitors
will not succeed in developing, either before or after the development and
commercialization of the Company's Colormate(TM) units, devices and technologies
that permit more efficient, less expensive non-invasive bilirubin infant
jaundice monitoring. It is also possible that one of more pharmaceutical or
other health care companies will develop therapeutic drugs, treatments or other
products that will substantially reduce the prevalence of bilirubin infant
jaundice or otherwise render the Company's Colormate(TM) unit obsolete in the
medical industry. Such competition could have a material adverse effect on the
Company's business, financial condition and results of operation.

         The cosmetics industry and fashion industry are particularly sensitive
to changing consumer preferences and demands, which are difficult to predict and
beyond the Company's control. Competition in the cosmetics industry is diverse
and fragmented, but is nevertheless dominated by a number of large, established,
well-known corporations having, among other things, significantly greater
financial, marketing and human resources than the Company. Virtually all of such
companies have in the past marketed, and continue to market, their products
based on their own color analysis system and advertised claims of "color
compatibility" with the personal color and/or wardrobe of the consumer. These
competitors also have established presence in the market and their own cosmetic
manufacturing facilities, unlike the Company. There can be no assurance that
consumers will prefer products based on the Company's scientifically based color
determinations, rather than the products sold by the Company's competitors based
on subjective techniques.

         The Company has not previously licensed its Intellectual Properties for
use in any industry other than the beauty aid, hosiery and cosmetics industries.
In addition, management of the Company has not had any experience in marketing
the Intellectual Properties, Colormate(TM) units or Products in any other field.
To the extent the Company commences marketing activities in other industries,
specifically in the medical industry, the Company will compete with established
companies and technologies in such industries, which companies may have, among
other things, significantly greater financial, marketing and human resources
than the Company, as well as an established presence in their own industries. In
fact, the Company would be competing in these industries with suppliers of
components for the Colormate(TM) units.


         Protection of Intellectual Property. The Company's U.S. Patents Nos.
4,909,632 and 5,311,293 expire in 2007; the Company's U.S. Patent No. 5,313,267
expires in 2011; after the respective expiration date of each, the proprietary
technology and instrumentation disclosed in each Patent will be available for
use by others without compensation to the Company, unless protected by the
claims of other U.S. patents that may be issued to the Company in the future.
The Company has developed intellectual property rights in color analysis in a
number of fields including medical, biological, dental, cosmetic and materials
testing. The intellectual property rights include trade secrets, know how and a
pending United States patent application Serial No. 08/239,733, filed May 9,
1994 entitled "Method and Apparatus for Detecting and Measuring Conditions
Affecting Color," and seven additional U.S. patent applications. These rights
also include various foreign patent applications corresponding, at least in
part, to the U.S. Patents and the U.S. patent applications. There can be no
assurance that patents will issue based on these patent applications or that any
patent claims will provide sufficient protection to exclude others from the
Company's proprietary technology and instrumentation. There can be no assurance
that the Company will not be involved in litigation to protect its trade secrets
and know how or that the Company will prevail in such litigation. There can be
no assurance that challenges will not be instituted against the validity or
enforceability of any patents owned by or issued in the future to the Company,
or that such challenges will not be successful. There can be no assurance that
patent infringement claims will not be asserted against the Company and found to
have merit, that the Company will not be enjoined from using its proprietary
technology and instrumentation and from manufacturing and selling certain of its
Products, or would not be forced to obtain a license and pay future royalty fees
as well as past damages

                                      13

<PAGE>

to the party claiming infringement in amounts not presently determinable. There
can be no assurance that any such license will be available to the Company.
Conversely, to the extent third parties infringe upon the Company's patented
Intellectual Properties, the Company may have to litigate against such third
parties in order to prevent further infringement. There can be no assurance the
Company will have the resources to prosecute any such litigation, or that any
such litigation would be resolved in favor of the Company. In the event it is
unable to bring such litigations or obtain a favorable outcome, the Company's
operations could be materially adversely affected in that the Company's failure
to enforce its Patents could result in increased competition. If the Patents are
declared invalid, the Company would lose patent protection for certain of its
Intellectual Properties, which could have a material adverse effect on its
operations.

         There can be no assurance that the Company's Intellectual Properties
will provide it with a competitive advantage in that it may be possible for a
competitor independently to develop similar non-infringing technologies,
independently duplicate the Company's unpatented technology through reverse
engineering, design around the patented aspects of the Company's technology, or
otherwise independently develop scientifically accurate processes, instruments
or color charts to measure skin tone color categories and conduct comparative
color analysis without infringing the Company's Patents.


         The Company's U.S. Patents apply only to the United States. The Company
has filed corresponding patent applications in a number of foreign jurisdictions
which correspond, at least in part, to the Company's U.S. Patents. The Company
has been granted a European Patent No. 0446512, an application for a Singapore
registration of that European patent, Australian and Mexican patents
corresponding, at least in part, to its U.S. Patent No. 4,909,632 and Taiwanese
and Colombian patents corresponding, at least in part, to its U.S. Patent No.
5,313,267. The Company has not yet been granted any other foreign patents for
its Intellectual Properties and there can be no assurance it will be granted any
such patents. Consequently, wherever the Company does not have foreign patents,
third parties currently could exploit outside the United States, the technology
disclosed in the U.S. Patents, thereby increasing competition in such foreign
markets. In addition, persons gaining access to the Company's unpatented
proprietary information and technology and who are not bound by confidentiality
agreements with the Company would have the ability to exploit the Company's
unpatented proprietary information and technology both inside and outside the
United States, thereby increasing competition.

         There can be no assurance that one or more of the patents held by the
Company will not be successfully challenged or circumvented or that the Company
will otherwise be able to rely on such patents. In addition, there can be no
assurance that competitors, many of whom have substantial resources and have
made substantial investments in competing technologies, will not seek to apply
for and obtain patents that prevent, limit or interfere with the Company's
ability to make, use and sell its products either in the United States or in
foreign markets. If any of the Company's patents are successfully challenged or
circumvented or the Company's right or ability to manufacture its products were
to be proscribed or limited, the Company's ability to continue to manufacture
and market its products could be adversely affected, which would likely have a
material adverse effect upon the Company's business, financial condition and
results of operations.

         The Company has not applied for patent protection for many aspects of
the Intellectual Properties (i.e., its proprietary trade secrets and other
confidential information). The Company typically imposes on its consultants, key
employees and advisers confidentiality obligations in connection with their
employment, consulting or advisory relationship with the Company. There can be
no assurance that such confidentiality obligations will be observed or that the
Company will have adequate remedies if those obligations are breached. To the
extent that consultants, key employees or other advisors apply technological
information taken from the Company in violation of confidentiality obligations,
disputes may arise as to the proprietary rights to such information which may
not be resolved in favor of the Company. There can be no assurance that others
will not independently develop technology that is substantially equivalent or
superior to that included in the Company's Intellectual Properties which are not
protected by patents.

         There can be no assurance that the Company's copyright protection for
the software used in the Colormate(TM) systems will provide it with a
competitive advantage in that it may be possible for a competitor independently
to develop similar software, design around the Company's copyrighted software or
otherwise independently develop software with the capacity accurately to measure
skin tone categories and conduct comparative color analysis.


                                      14

<PAGE>

         The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights. In
addition, the United States Patent and Trademark Office ("USPTO") may institute
re-examination or interference proceedings. There can be no assurance that the
Company will not become subject to patent infringement claims brought by third
parties, or re-examination of previously issued patents by the USPTO or
interference proceedings instituted by the USPTO to determine the priority of
inventions. The defense and prosecution of intellectual property suits, USPTO
interference proceedings and related legal and administrative proceedings are
both costly and time consuming. Litigation may be necessary to enforce patents
issued to the Company, to protect trade secrets or know how owned by the Company
or to determine the enforceability, scope and validity of the proprietary rights
of others. Any litigation or interference proceedings brought against, initiated
by or otherwise involving the Company may require the Company to incur
substantial legal and other fees and expenses and may require some of the
Company's employees to devote all or a substantial portion of their time to the
prosecution or defense of such litigation or proceedings. An adverse
determination in litigation or interference proceedings to which the Company may
become a party, including any litigation that may arise against the Company,
could subject the Company to significant liabilities to third parties, require
the Company to seek licenses from third parties or prevent the Company from
selling its products in certain markets, or at all. Although patent and
intellectual property disputes regarding medical devices are often settled
through licensing or similar arrangements, there can be no assurance that the
Company would be able to reach a satisfactory settlement of such a dispute that
would allow it to license necessary patents or other intellectual property. Even
if such a settlement were reached, the settlement process may be expensive and
time consuming, and the terms of the settlement may require the Company to pay
substantial royalties. An adverse determination in a judicial or administrative
proceeding or the failure to obtain a necessary license could prevent the
Company from manufacturing and selling its products, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.

         Need for Arrangements with Third Parties. The Company's business
strategy for the commercialization of its medical products depends upon the
Company's ability to selectively enter into and maintain arrangements with
leading marketing and distribution companies in the medical field. There can be
no assurance that the Company will be able to do so. The obligation of any
potential third party to fund or undertake the marketing, distribution and/or
sale of the product covered by any arrangements with the Company may be
dependent upon the satisfaction of certain goals or "milestones" by certain
specified dates, some of which are outside the Company's control. To the extent
that the obligations of any third party to fund or undertake the foregoing
activities are not contingent upon the satisfaction of certain goals or
milestones, a third party may retain a significant degree of discretion
regarding the timing of these activities and the amount and quality of
financial, personnel and other resources that they devote to these activities.
Furthermore, there can be no assurance that disputes will not arise between the

Company and any third party regarding their respective rights and obligations
under the arrangements. Finally, there can be no assurance that a third party
will not be unable, due to financial, regulatory or other reasons, to satisfy
its obligations under its collaborative arrangement with the Company or will not
intentionally or unintentionally breach its obligations under the arrangement.

         There can be no assurance that any third party will not, for
competitive reasons, support, directly or indirectly, a company or product that
competes with the Company's business. Furthermore, any dispute between the
Company and a third party might require the Company to initiate or defend
expensive litigation or arbitration proceedings.

         Any significant dispute with or breach, inability to perform, or
termination of any arrangement with such third party would likely require the
Company to seek and reach an agreement with another third party or to assume, to
the extent possible and at its own expense, all the responsibilities being
undertaken by the first such third party. There can be no assurance that the
Company would be able to reach an agreement with a replacement third party. If
the Company were not able to find a replacement third party, there can be no
assurance that the Company would be able to perform or fund the activities for
which the first such third party would be responsible. Even if the Company were
able to perform and fund these activities, the Company's capital requirements
would increase substantially. In addition, the further development and
marketing, distribution and sale of the product covered by such arrangement
would be significantly delayed.

         Any of the foregoing circumstances could have material adverse effect
upon the Company's business, financial condition and results of operations.

                                      15

<PAGE>

         To the extent the Company develops and markets production units for
medical applications, the Company initially will use the nonproprietary and
proprietary components of the existing Colormate(TM) units in its inventory to
manufacture a limited number of such devices for commercial use and early stage
marketing and sales efforts. Thereafter, the Company will need to source such
components from suppliers for additional manufacturing needs, if any. All
manufacturers' units must comply with GMP regulations.

         The Company does not itself manufacture the Colormate(TM) units or the
Products, and in the past has been wholly dependent on third party original
equipment manufacturers of parts, assemblers, cosmetics suppliers and textile
suppliers. To the extent the Company completes development of the mass
manufacture prototypes for the hand-held Colormate(TM) devices or for medical
applications, the Company will have to establish relationships with such third
party suppliers, manufacturers and assemblers, for the production of such
devices. The Company does not have any current arrangements with such suppliers,
parts manufacturers or assemblers for the building of any additional
Colormate(TM) units or the mass production of such prototype devices (or of the
hand held device or modified devices for medical application), and there can be
no assurance the Company will be able to enter into future arrangements with
these or other parts manufacturers or assemblers on terms satisfactory to the

Company. The manufacturer's warranties covering certain parts incorporated in
the Colormate(TM) units are renewable but, if not renewed for any reason, the
costs of any repairs of such parts, or of any uncovered parts, would be borne by
the Company.

         The Company's costs of parts for the Colormate(TM) units are based on
original mass manufacturing costs in connection with the Avon Project. There can
be no assurance that the Company can arrange for manufacture of additional
comparable quantities at costs of parts comparable to those manufactured in the
Avon Project. Costs of parts in manufacturing smaller quantities of
Colormate(TM) units could involve significantly greater costs to the extent the
Company does not use existing components from its existing inventory of
Colormate(TM) units.

         In connection with any future manufacturing of the Colormate(TM) units
including the medical device, the Company could be required to make significant
advance payments, obtain letters of credit, cause potential customers or
licensees to advance funds under their agreements entered into with the Company
or otherwise secure its payment obligations to manufacturers. There can be no
assurance the Company will be able to enter into such agreements on acceptable
terms, be able to secure its payment obligations itself or by having customers
and/or licensees advance funds, or otherwise be able to manufacture the
Colormate(TM) units or obtain further manufacture of the Colormate(TM) units or
its Products.

         Uncertainty of Third-Party Reimbursement. In the United States and
elsewhere, sales of medical products are dependent, in part, on the ability of
consumers of these products to obtain reimbursement for all or a portion of
their cost from third-party payors, such as government and private insurance
plans. Third-party payors are increasingly challenging the prices charged for
medical products and services. If the Company succeeds in bringing its bilirubin
monitoring product or other products to market, there can no assurance that such
products will be considered cost effective and that reimbursement to the
consumer will be available or sufficient to allow the Company to sell its
medical device products on a competitive basis.

         Future Developments; Further Development and Marketing Activities
Required. Prior to licensing the Company's Intellectual Properties in any
industry other than the cosmetic, beauty aids and fashion industries, the
Company will be required to develop additional marketing skills relevant to such
industries and conduct significant further marketing activity, and in certain of
these industries, overcome regulatory hurdles, professional skepticism and
develop specific practical applications therefor, which to date has not been
achieved. Accomplishing the foregoing will require the Company to incur
significant additional expenses. The Company is subject to the risks of failure
inherent in the commercialization of products based on innovative technologies,
many of which are beyond the Company's control, such as unanticipated
development, manufacturing and regulatory delays and expenses. The Company
expects that additional financing will be required to commercialize medical
applications of its technologies.

         Government Regulations. The Company's advertising, sales practices and
cosmetics products (including the labeling and packaging thereof) are and will
be subject to applicable federal, state and local regulation (including

regulation by the FDA, the Federal Trade Commission, the Federal Communications
Commission, under the Fair Packaging and Labeling Act and/or any comparable
state authority, agency or statute) and will be subject to

                                      16

<PAGE>

regulation by comparable foreign authorities if the Company markets its cosmetic
products abroad. The Company will also be subject to regulation by various
governmental agencies that regulate direct selling activities.

         Since the Company has received FDA clearance on its Colormate(TM)
device pursuant to a "substantial equivalence" determination order, in the form
of a letter dated July 24, 1997 from the FDA's Center for Devices and
Radiological Health, authorizing the Company to commercially distribute its
Colormate(TM) device for non-invasive monitoring of bilirubin infant jaundice in
the United States, the Company must comply with the rules and regulations
promulgated by the FDA. The "substantial equivalence" order states that the
Company must comply with the medical device "general controls," e.g., device
establishment registration, medical device listing, good manufacturing practices
(quality system regulation), labeling, and the statutory prohibitions against
adulteration and misbranding. The order also states that the Colormate(TM)
device is a Class II device which may be subject to additional "special
controls." The Company intends to comply with any applicable "general controls"
and "special controls" for purposes of commercial distribution. In this regard,
there may be additional marketing clearance required by the FDA for the
marketing of the Company's Colormate(TM) unit in pediatrician's offices and home
health care markets. There may also be additional FDA marketing clearances
required for the Company's hand-held Colormate(TM) system when final prototype
development is completed.

         In order for the Company to market its products in Europe and certain
other foreign jurisdictions, the Company and its distributors and agents must
obtain required regulatory registrations or approvals and otherwise comply with
extensive regulations regarding safety, efficacy and quality in those
jurisdictions. Specifically, certain foreign regulatory bodies have adopted
various regulations governing product standards, packaging requirements,
labeling requirements, import restrictions, tariff regulations, duties and tax
requirements. These regulations vary from country to country. In order to
commence sales in Europe, the Company will be required to obtain ISO 9001
certifications and after mid-1998, the Company will be prohibited from selling
its products in Europe until such time as the Company receives CE mark
certification, which is an international symbol of quality and compliance with
applicable European medical device directives. There can be no assurance that
the Company will be successful in obtaining ISO 9001 or CE mark certification.
Failure to receive ISO 9001 or CE mark certification or other foreign regulatory
approvals could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will obtain any other required regulatory registrations or approval
in such countries or that it will not be required to incur significant costs in
obtaining or maintaining such regulatory registrations or approvals. Delays in
obtaining any registrations of approvals required to market the Company's
products, failure to receive these registrations or approvals, or future loss of

previously obtained registration or approvals could have a material adverse
effect on the Company's business, financial condition and results of operations.

         The Company and any third party with which it has made arrangements
will be required to adhere to applicable FDA regulations regarding GMP and
similar regulations in other countries, which include testing, control, and
documentation requirements. Ongoing compliance with GMP and other applicable
regulatory requirements will be strictly enforced in the United States through
periodic inspections by state and federal agencies, including the FDA, and in
foreign jurisdictions by comparable agencies. Failure to comply with applicable
regulatory requirements could result in, among other things, warning letters,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, refusal of the government to grant premarket
clearance or premarket approval for devices, withdrawal of approvals previously
obtained and criminal prosecution. The restriction, suspension or revocation of
regulatory approvals or government enforcement actions due to any other failure
to comply with regulatory requirements would have a material adverse effect on
the Company's business, financial condition and results of operations.

         The Company's products created from its proposed medical applications
and methods constitute "medical devices" as defined under the Act, and will be
subject to regulation by the FDA and the corresponding agencies of the states in
which the Company may in the future sell its proposed medical applications and
methods. Accordingly, the Company is required to comply with FDA statutes and
regulations governing the manufacture, distribution and labeling of its products
and any third party manufacturers with which it may reach agreement must comply
with certain GMP regulations and other relevant laws and regulations in the
processing or manufacture of the products as medical devices. In addition,
manufacturers of medical devices are obligated to report to the FDA whenever
they obtain information reasonably suggesting that one of their products may
have caused or contributed to serious injury or death or has malfunctioned and
is likely to cause death or serious injury if the malfunction recurs. The
Company

                                      17

<PAGE>

must register its facilities as a device establishment and list its devices with
the FDA. If the FDA believes that its legal requirements have not been
fulfilled, it has extensive enforcement powers, including the ability to bar or
seize products from the market, to prohibit the operation of manufacturing
facilities, to require recalls of devices from customer locations and to impose
civil monetary or criminal penalties.

         Product Liability. The development, manufacture and sale of medical
products entail significant risks of product liability claims. The Company
maintains its own product liability insurance with respect to cosmetic and
beauty aid applications. There can be no assurance that such insurance will be
adequate to protect the Company from claims that may be brought against it by
users of the Colormate(TM) units or its Products. When the Company implements
its business plan for medical applications for its Intellectual Properties, it
will be entering a field where it may become subject to product liability claims
by patients and/or doctors and might become a defendant in product liability

and/or malpractice litigation. The Company does not have malpractice insurance
for such applications and does not intend to obtain such insurance prior to
achieving commercialization of such proposed medical applications. Even if the
Company obtains such insurance, there can be no assurance that it could retain
such insurance or that such insurance would be sufficient to protect the Company
against any such liabilities.

         The Company has not established, and the Company does not intend to
establish, any reserves against any of the foregoing liabilities. In the event
of an uninsured or inadequately insured product liability or malpractice claim
in the future based on the performance of the Company's Colormate(TM) units or
Products, the Company's business and financial condition could be materially
adversely affected and the Company could be forced to cease operations.

         Control; Dependence on Management. Darby Simpson Macfarlane, Chief
Executive Officer of the Company, owns shares of Common Stock and Preferred
Stock aggregating 2,080,793 of the shares eligible to vote on matters presented
to the shareholders which amount is sufficient to permit her to significantly
influence, if not control, the election of directors or to approve any matter
submitted to a vote of shareholders, and otherwise be in control of the Company.
The Company is dependent primarily on the services of Darby Simpson Macfarlane
and David Kenneth Macfarlane, Vice President, Research & Development. The loss
of either of their services could have a material adverse effect on the Company.
Although the Company has purchased key-man life insurance policies in the
amounts of $1,000,000 on the lives of both Mrs. and Mr. Macfarlane, there can be
no assurance that the proceeds from such policies would enable the Company to
retain suitable replacements for them.

         Lack of Public Market; Possible Volatility of Stock Price. There is no
assurance that a regular trading market for the Company's securities will be
sustained. The market price for the Company's Warrants and Common Stock may be
significantly affected by such factors as the Company's financial performance,
the results of the Company's efforts to license its Intellectual Properties and
to market its Products, and various factors affecting the color science industry
and the beauty aid and cosmetics industries generally. Additionally, in recent
years, the stock market has experienced a high level of price and volume
volatility for many companies, particularly small and emerging growth companies
traded in the over-the-counter market, and these wide price fluctuations are not
necessarily related to the operating performance of these companies.
Accordingly, there may be significant volatility in the market for the Company's
securities.

         Possible Adverse Effect of Redemption of Warrants. Warrants may be
redeemed by the Company with the prior consent of Investors Associates Inc.
("IAI"), the managing underwriter of the IPO, at a price of $0.001 per Warrant,
at any time they are exercisable, subject to 60 days prior written notice to the
holders thereof, provided that the closing bid quotation of the Common Stock of
the Company on NASDAQ (or the last sales price or the average of the bid and
asked price if there is no reported sale, if principally traded on an exchange)
has been at least 200% of the then exercise price of the Warrants on each of the
20 consecutive trading days ending on the third day prior to the day on which
notice is given. Notice of redemption of the Warrants could force the holders to
exercise the Warrants and pay the exercise price at a time when it may be
disadvantageous for them to do so, to sell the Warrants at the current market

price when they might otherwise wish to hold the Warrants, or to accept the
redemption price which is likely to be substantially less than the market value
of the Warrants at the time of redemption.

         Current Prospectus and State Blue Sky Restrictions. The Company will be
able to issue shares of Common Stock upon exercise of the Warrants only if there
is then a current prospectus relating to the Common Stock issuable upon the
exercise of the Warrants under an effective registration statement filed with
the Securities and Exchange

                                      18

<PAGE>

Commission, and only if such Common Stock is qualified for sale or exempt from
qualification under applicable state securities laws of the jurisdictions in
which the various holders of Warrants reside. Although the Company has filed and
maintained the effectiveness of such registration statement with the Securities
and Exchange Commission and qualified such Common Stock for sale under the laws
of a number of such jurisdictions, such Common Stock is not so qualified and may
not be exempt in every jurisdiction where holders of the Warrants may reside.
The Warrants may be deprived of any value and the market for the Warrants may be
limited if the shares of Common Stock issuable upon exercise of the Warrants do
not remain registered pursuant to an effective registration statement or if such
Common Stock is not qualified or exempt from qualification in the jurisdictions
in which the holders of the Warrants reside, and Common Stock may not be sold to
a holder of the Warrants upon exercise thereof residing in any such unqualified
or non-exempt jurisdiction.

         Exercise of Warrants. The price which the Company may receive for the
Common Stock issued upon exercise of the Warrants issued in respect of the
Bridge Financing, the IPO and to the placement agent in the 1995 Private
Placement may be less than the market price of the Common Stock at the time such
Warrants are exercised. For the life of such Warrants, the holders thereof are
given, at little or no cost, the opportunity to profit from a rise in the market
price of the Common Stock, if any, without assuming the risk of ownership. So
long as such Warrants remain unexercised, the terms under which the Company
could obtain additional equity financing may be adversely affected. Moreover,
the holders of such Warrants may be expected to exercise them at a time when the
Company would, in all likelihood, be able to obtain any needed capital by a new
offering of securities on terms more favorable than those provided by such
Warrants. To the extent of any exercise of the Warrants, the interests of the
Company's shareholders will be diluted proportionately.

         Outstanding Voting Preferred Stock. The Company has outstanding
1,380,000 shares of Series A Convertible Preferred Stock. Each share of
Preferred Stock has voting rights equivalent to each share of Common Stock and
is convertible to Common Stock if (i) the Company's earnings (i.e. pre tax
operating income, before interest expense, but excluding extraordinary items and
revenues or earnings generated by acquired businesses) for any two consecutive
calendar years ending on December 31, 1998 exceed $20,000,000 or (ii) the
closing bid price of the Common Stock has been at least $46.67 on 30 consecutive
trading days at any time ending on December 31, 1998. Further, the Preferred
Stock has a $13,800 liquidation preference and earns an annual non-cumulative

dividend of $0.001 per share. The voting rights, conversion rights, dividend
rights and liquidation preference of the Preferred Stock may adversely affect
the trading value or the market price of the Common Stock and the Warrants.

                                      19

<PAGE>

                         PART II -- OTHER INFORMATION

Item 1. Legal Proceedings

         None.


Item 2. Changes in Securities

         None.


Item 3. Defaults Upon Senior Securities

         None.


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

     (a) On May 27, 1997, the Company held its Annual Meeting of Shareholders.

     (b) An election of directors was held, during which Darby Simpson
         Macfarlane, David Kenneth Macfarlane and Leslie Foglesong were
         re-elected.

     (c) The following resolutions of the Board of Directors were passed by
         the vote of the shareholders:

         (1)  The following named persons received the number of votes set
              forth opposite their respective names, the same being the
              plurality of the votes cast by the holders of shares entitled
              to vote thereon, and were declared duly elected directors of
              the Company for the ensuing year:

                                             For        Against      Abstain
                                             ---        -------      -------  

              Darby Simpson Macfarlane     6,964,459     17,750         0
              David Kenneth Macfarlane     6,964,459     17,750         0
              Leslie Foglesong             6,964,459     17,750         0

                                      20

<PAGE>

         (2)  The resolution adopting an amendment to the Company's

              Certificate of Incorporation to extend for one year from
              December 31, 1997 to December 31, 1998 the expiration date of
              the period during which the Company's outstanding Class A
              Convertible Preferred Stock, par value $.01 per share (the
              "Preferred Stock") can become convertible into Common Stock
              upon the Company's achieving certain stock performance or
              earnings goals and to likewise extend the date by which the
              Company is to call the Preferred Stock for redemption if such
              goals are not met was adopted by the following vote, the same
              being a majority of the votes cast by the holders of the shares
              entitled to vote thereon:

                                             For        Against      Abstain
                                             ---        -------      -------  
                                           4,549,522    51,850        21,825

         (3)  The resolution ratifying the appointment of Wiss & Company LLP
              as independent auditors to audit the books of the Company for
              the fiscal year ending December 31, 1997 was adopted by the
              following vote, the same being a majority of votes cast by the
              holders of shares entitled to vote thereon:

                                             For        Against      Abstain
                                             ---        -------      -------  
                                           6,933,709    35,700        12,800

Item 5. Other Information

         None.

Item 6. Exhibits and Reports on Form 8-K

     (a)  (1)   15 - Letter on unaudited interim financial information.

          (2)   27 - Financial Data Schedule.

     (b)  Reports on Form 8-K.

          The Company's Current Reports on Form 8-K ("Form 8-K"), dated
          April 30, 1997 and May 29, 1997, heretofore filed by the Company with
          the Securities Exchange Commission, are incorporated by reference in
          this Form 10-QSB. The Form 8-K filed on April 30, 1997 was filed in
          connection with the Company's receipt of a request for supplementary
          information and clarifications from the FDA on its premarket
          notification (510(k)) submission regarding the Company's
          Colormate(TM) device for the non-invasive monitoring of bilirubin
          infant jaundice. The Form 8-K filed on May 29, 1997 was filed in
          connection with the filing of its response to such request by
          the FDA.
                                      21

<PAGE>

                                EXHIBIT INDEX

    Exhibit No.     Document                                            Page
    -----------     ---------                                           ----
    15              Letter on Unaudited Interim Financial Information    24
    27              Financial Data Schedule                              25


                                      22


<PAGE>
                                  SIGNATURES

         In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.

Date:  August 14, 1997                           
                                             /s/ Darby S. Macfarlane
                                             --------------------------
                                             Darby S. Macfarlane
                                             Chief Executive Officer

Date:  August 14, 1997
                                             /s/ Leslie Foglesong
                                             --------------------------
                                             Leslie Foglesong
                                             Treasurer and Chief Financial and
                                             Principal Accounting Officer

                                      23