<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

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

                                   FORM 10-Q

         (Mark One)

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

For the quarterly period ended  March 31, 1998
                                --------------

                                      OR

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

For the transition period from __________________  to  _________________

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

                 CHROMATICS COLOR SCIENCES INTERNATIONAL, INC
-------------------------------------------------------------------------------
            (Exact Name of Registrant as Specified in Its Charter)

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

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

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

-------------------------------------------------------------------------------
            (Former Name, Former Address and Former Fiscal Year, if
                          Changed Since Last Report)

Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes  X   No
                                       ---    ---

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

Indicate by check whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by
court. Yes    No   N/A
          ---    --

                     APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date: 14,820,604.

                                      1

<PAGE>

PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements

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

<TABLE>
<CAPTION>

                                                                                March 31, 1998     December 31, 1997
                                                                                --------------     -----------------
                                                                                 (unaudited)           (Note 1)
<S>                                                                           <C>                 <C>
ASSETS
CURRENT ASSETS:
     Cash and equivalents                                                       $  9,758,600         $  9,225,400
     Accounts receivable                                                              92,400               92,400
     Inventories                                                                     149,100              148,100
     Prepaid expenses and other assets                                                92,200               76,400
                                                                                ------------         ------------
        Total Current Assets                                                      10,092,300            9,542,300

COLORMATE(TM)UNITS, LESS ACCUMULATED                                                 764,900              715,700
     DEPRECIATION OF $35,100 (1998) AND $28,200 (1997)

PROPERTY AND EQUIPMENT, LESS ACCUMULATED                                             337,200              344,900
     DEPRECIATION OF $247,300 (1998) AND $177,500 (1997)

SOFTWARE DEVELOPMENT COSTS                                                           177,700              124,200

PATENT APPLICATION COSTS                                                             140,000                   --

OTHER ASSETS                                                                          27,800               25,500
                                                                                     -------               ------
                                                                               $  11,539,900         $ 10,752,600
                                                                               =============         ============


LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:

     Notes payable - collateralized by equipment                               $       3,300         $     4,700
     Amounts payable to related party                                                299,800             293,200
     Accounts payable and accrued expenses:

        Attorneys and accountants                                                    594,100             361,900
        Consultants                                                                   65,000              54,900
        Trade                                                                        266,900             127,800
                                                                                     -------             -------
        Total Current Liabilities                                                  1,229,100             842,500
                                                                                   ---------             -------



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                                    13,800              13,800
                                                                                      ------              -------
           at par and redemption value

SHAREHOLDERS' EQUITY:
     Undesignated Class B Preferred Stock, No Par Value
        Authorized - 10,000,000 shares
        Issued and outstanding - None                                                     --                  --


    Common Stock, par value $.001 per share:
        Authorized - 50,000,000 shares
        Issued and outstanding - 14,744,851 (1998) and
        13,814,859 (1997) shares                                                      14,700              13,800
    Capital in excess of par value                                                26,541,500          24,370,900
    Accumulated deficit                                                          (16,259,200)        (14,488,400)
                                                                                 ------------        -----------
      Total Shareholders' Equity                                                  10,297,000           9,896,300
                                                                                 ------------        -----------
                                                                                $ 11,539,900        $ 10,752,600
                                                                                 ============       ============

</TABLE>

         See accompanying notes to consolidated financial statements.

                                      2

<PAGE>


         CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
                     CONSOLIDATED STATEMENT OF OPERATIONS
                                  (UNAUDITED)

                                                           THREE MONTHS ENDED 
                                                                MARCH 31,
                                                           ------------------

                                                              1998        1997
                                                              ----        ----
  Revenues:
     Lease, license and service contracts                $      --      $ 1,500
     Interest income                                       120,900       56,900
   Other                                                        --          300
                                                      ------------ ------------
                                                           120,900       58,700
                                                      ------------ ------------
  COSTS AND EXPENSES:

  Food and Drug Administration ("FDA")                     
     regulatory expenses                                   521,200      344,200
  Patent application costs                                 124,300      123,100
  Research and development costs                           253,300       55,100
  General and administrative:
     Compensation - officers and employees                 204,100      192,800
     Consultants (including $136,490 in compensation
       costs relating to options granted to consultants)   200,500       45,500
     Legal fees                                            108,200       53,000
     Accounting fees                                        25,300       13,600
     Rent and storage                                       48,500       52,900
     Insurance                                              50,100       52,500
     Travel and entertainment                               32,000        4,000
     Repairs and maintenance                                20,700       28,500
     Depreciation and amortization                          25,900       25,200
     Payroll taxes                                          20,500       31,200
     Stock administrative fees                              32,900        9,100
     Employee benefit plan                                  93,200           --
     Promotional expenses                                   65,100       10,500
     Other                                                  65,900       60,900
                                                      ------------ ------------
                                                         1,891,700    1,102,100
                                                      ------------ ------------
  NET LOSS                                            $ (1,770,800) $(1,043,400)
                                                      ============ ============
  WEIGHTED AVERAGE NUMBER OF                             4,273,467   10,880,936
                                                      ============ ============
  COMMON SHARES AND EQUIVALENTS 
  OUTSTANDING
  BASIC AND DILUTED LOSS PER SHARE                    $     (0.12)        (0.10)
                                                      ============ ============


         See accompanying notes to consolidated financial statements.

                                      3

<PAGE>

         CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
    CONSOLIDATED STATEMENTS 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, 1997                13,814,859           $  13,800       $  24,370,900        $  (14,488,400)
     Three Months Ended March 31, 1998:
         Net Loss                                       --                  --                  --            (1,770,800)
         Exercise of stock options and warrants    929,992                 900           1,879,600                    --
         Compensation cost relating to options          --                  --             291,000                    --
         granted to consultants                 ----------           ---------       -------------        --------------
     Balances, March 31, 1998                   14,744,851           $  14,700       $  26,541,500        $  (16,259,200)
                                                ==========           =========       =============        ==============

</TABLE>

         See accompanying notes to consolidated financial statements.

                                      4

<PAGE>

         CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
<TABLE>
<CAPTION>

                                                                             Three Months Ended March 31,
                                                                             ----------------------------
                                                                             1998                   1997
                                                                             ----                   ----
<S>                                                                   <C>                    <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                             $(1,770,800)           $(1,043,400)
   Adjustments to reconcile net loss to net
     cash flows from operating activities:
     Depreciation and amortization                                           25,900                 25,200
     Compensation cost relating to options granted to consultants           291,000                     --
     Changes in operating assets and liabilities:                                                       --

       Accounts receivable                                                       --                 (5,000)
       Inventories                                                           (1,000)                  (200)
       Prepaid expenses and other current assets                            (15,800)                (5,200)
       Other assets                                                          (3,400)                (3,900)
       Accounts payable and accrued expenses                                381,400                 61,400
                                                                        -----------             ----------
         Net cash flows from operating activities                        (1,092,700)              (971,100)
                                                                        -----------             -----------

CASH FLOWS FROM INVESTING ACTIVITIES:

   Software development costs                                               (53,500)                    --
   Capitalized patent costs                                                (140,000)                    --
   Purchases of property and equipment                                      (66,300)               (72,000)
                                                                           ---------               --------
         Net cash flows from investing activities                          (259,800)               (72,000)
                                                                           ---------               --------

CASH FLOWS FROM FINANCING ACTIVITIES:

   Proceeds from issuance of common stock net of related costs            1,880,500                 380,500
   Proceeds (payments) of amounts payable to related party                    6,600                 (14,200)
   Payments of notes payable                                                 (1,400)                 (1,200)
                                                                             -------                 -------
     Net cash flows from financing activities                             1,885,700                 365,100
                                                                          ---------                 -------

NET CHANGE IN CASH AND EQUIVALENTS                                          533,200                (678,000)

CASH AND EQUIVALENTS, BEGINNING OF PERIOD                                 9,225,400               5,352,400
                                                                          ---------               ---------

CASH AND EQUIVALENTS, END OF PERIOD                                     $ 9,758,600             $ 4,674,400
                                                                        ===========             ===========

SUPPLEMENTAL CASH FLOW INFORMATION
   Interest Paid                                                        $       100             $       200
                                                                        ===========             ===========
   Income Taxes Paid                                                    $        --             $        -- 
                                                                        ===========             ===========

         See accompanying notes to consolidated financial statements.

                                      5
</TABLE>

<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-K for the fiscal year ended December 31,
1997 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-K for the
fiscal year ended December 31, 1997.

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.

Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary. All significant
intercompany transactions have been eliminated in consolidation.

Patent Application Costs - Patent application costs had been expensed previously
because the Company was unable to determine the future recoverability of such
costs. In the first quarter of 1998, the Company was able to determine future
recoverability of such costs, due to marketing plans and potential business
proposals. Accordingly, the Company has begun capitalizing certain patent
application costs, commencing January 1, 1998, and will amortize the costs over
the remaining patent lives, generally 10 to 15 years. The Company will assess
the continuing carrying value of these assets when events and circumstances
warrant.

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 further
commercialize its proprietary technology and products and the Company's
ability to obtain adequate revenues and/or outside financing.

Operating Difficulties -- Since 1989, the Company has incurred losses from
operations and net cash outflows from operations, and has owned Colormate(TM)
System units since June 1991 whose ultimate recoverability depends upon the
Company's future marketing success. 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) System units and related proprietary technology are not
successfully leased/licensed and/or the products are not successfully marketed
in the future, the principal effect may be a substantial write-down of the
book value of such units.

On July 31, 1997, the Company was granted marketing clearance by the FDA. Since
that date, the Company has had discussions with several companies interested in
distributing the Colormate(TM) Bilirubin Device and is currently

                                      6

<PAGE>

negotiating with certain of these companies to reach a definitive agreement.
It is not possible at the present time to determine the impact of this
development on future cash flows.

Management expects that the Company will have sufficient liquidity at least
until April 1, 1999, even if no revenues from operations are generated and as
additional financing is obtained. If the Company is able to profitably market
its Intellectual Properties, Colormate(TM) units, 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) System units for all applications
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) Systems -- 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.

Following the FDA approval in 1997, the Company has decided to use certain
components from the existing Colormate(TM) units for use in the Colormate(TM)
Bilirubin Device. The costs will be expensed as incurred, remaining components
will not be valued and the cost currently assigned to the existing

Colormate(TM) units ($500 per unit) will be assigned to the Colormate(TM)
Bilirubin Device, as the current replacement cost of these components exceeds
the book value of the Colormate(TM) units.

Item 2.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations

                  The following is intended to update the information
contained in the Company's Form 10-K for the year ended December 31, 1997 (the
"Form 10-K") and presumes that readers have access to, and will have read,
Management's Discussion and Analysis contained in the Form 10-K.

                  EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS
QUARTERLY REPORT ON FORM 10-Q CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934. WHEN USED IN THIS REPORT, THE
WORDS "BELIEVE," "ANTICIPATE," "THINK," "INTEND," "PLAN," "WILL BE," "EXPECT"
AND SIMILAR EXPRESSIONS IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. SUCH
STATEMENTS REGARDING FUTURE EVENTS AND/OR THE FUTURE FINANCIAL PERFORMANCE OF
THE COMPANY ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE
DISCUSSED IN "RISK FACTORS" BELOW AT PAGES - TO -, WHICH COULD CAUSE ACTUAL
EVENTS OR THE ACTUAL FUTURE RESULTS OF THE COMPANY TO DIFFER MATERIALLY FROM
ANY FORWARD-LOOKING STATEMENT. SUCH RISKS AND UNCERTAINTIES INCLUDE, AMONG
OTHER THINGS, THE AVAILABILITY OF ANY NEEDED FINANCING, THE COMPANY'S ABILITY
TO IMPLEMENT ITS BUSINESS PLAN FOR VARIOUS APPLICATIONS OF ITS TECHNOLOGIES,
INCLUDING MEDICAL AND INDUSTRIAL APPLICATIONS, THE OBTAINING OF AND COMPLIANCE
WITH REGULATORY APPROVALS APPLICABLE TO 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. IN LIGHT
OF THE SIGNIFICANT RISKS AND UNCERTAINTIES INHERENT IN THE 

                                      7

<PAGE>

FORWARD-LOOKING STATEMENTS INCLUDED HEREIN, THE INCLUSION OF SUCH STATEMENTS
SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON
THAT THE OBJECTIVES AND PLANS OF THE COMPANY WILL BE ACHIEVED.

Overview

                  Chromatics Color Sciences International, Inc., (the
"Company") was formed in 1984 to research and develop and to commercialize
certain intellectual property rights, proprietary technology and
instrumentation in the field of color science (collectively, the "Intellectual
Properties") for marketing to a variety of industries, including, but not
limited to, the medical, dental, biological, cosmetic, hair color, beauty-aid
and fashion industries. The Intellectual Properties relate to the application
of color science technology to the scientific measurement and analysis of
human skin, tissue, fluid, hair, teeth or biological subject, the
classification of such measurements, the detection and monitoring of
conditions affecting the coloration of such human skin, tissue, fluid, hair,
teeth or biological subjects and the scientific classification and

color-oriented organization of various consumer-sensitive products such as
cosmetics, tooth enamel, hair color, hosiery, fashion, textiles, etc. The
Company has incorporated certain of the Intellectual Properties into a
proprietary color measurement system and software marketed for various
commercial applications as the Colormate(TM) System (the "Colormate(TM)
System"). The Company has developed Intellectual Properties which it believes
are capable of detecting and monitoring certain chromogenic diseases and
disorders which are defined by the Company as those which are diagnosed or
monitored by the coloration of human skin, tissue or fluid being affected
("Chromogenic Diseases"). In this regard, the Company developed a
Colormate(TM) device to measure the incremental change of the yellow content
of the skin color in newborns to monitor bilirubin infant jaundice. On July
30, 1997 the Company received U.S. Food and Drug Administration ("FDA")
clearance for commercial marketing of the Colormate(TM) device for the
non-invasive monitoring of bilirubin infant jaundice in newborns by health
care professionals in hospitals, pediatricians' offices or by home healthcare
agencies (the "Colormate(TM) Bilirubin Device"). The Company's efforts are
currently focused on seeking to commercialize this medical application of its
Intellectual Properties for non-invasive detection and monitoring of bilirubin
infant jaundice.

                  The Company also has developed its own line of
scientifically color coordinated proprietary cosmetics ("My Colors by
Chromatics(TM)") and scientifically color coordinated proprietary color charts
and material swatchpacks for use in the cosmetics, beauty and dental and
fashion industries. The Company's Colormate(TM) System products, cosmetic line
and material swatchpacks for the cosmetic beauty and fashion industries are
referred to herein collectively as the "Beauty-Aid Products."

                  To date, the Company's marketing activities have principally
involved licensing the Intellectual Properties, including conducting
laboratory product chromaticity studies ("Chromaticity Studies"), leasing the
Colormate(TM) System and marketing the Beauty-Aid Products in the cosmetic,
hair color, beauty aid and fashion industries (i) in a national sales program
(the "Avon Project") with Avon Products, Inc. ("Avon"), and in limited test
markets with Clairol, Inc. ("Clairol") and Hanes Hosiery, Inc. ("Hanes"), all
conducted prior to June 1991, and (ii) under a current agreement with Gordon
Laboratories, Inc. ("Gordon Laboratories") and under certain leases and
licenses to beauty-related businesses and beauty salons. Although the Company
from time to time is engaged in preliminary discussions (including limited
consumer testing and laboratory Chromaticity Study activities) for use of its
technology in the cosmetics, dental and beauty aid fields, there can be no
assurance that any final agreements will be reached. In this regard, the
Company has recently completed research and development for the working
prototype of a hand-held less expensive light-emitting diode ("LED") model of
the Colormate(TM) System (the "Colormate(TM) LED Device") which the Company
anticipates will enhance its marketing efforts.

                  In 1997, the Company furthered implementation of its
long-range plans to exploit certain medical applications for its technology.
In this regard, the Company submitted a marketing application for its
Colormate(TM) unit for a certain medical applications with the FDA on November
14, 1996. The application, known as a premarket notification or 510(k)
submission, was accepted officially for filing and review by the FDA on

November 18, 1996. The application requested, and on July 30, 1997, the
Company received from the FDA's Center for Devices and Radiological Health
("CDRH"), marketing clearance pursuant to a "substantial equivalence"
determination order, in the form of a letter dated July 24, 1997, authorizing
the Company to commercially distribute its Colormate(TM) Bilirubin Device for
non-invasive detection and monitoring of bilirubin infant jaundice in the
United States. The

                                      8

<PAGE>

"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. See
"Risk Factors."

                  Since inception the Company has financed its operations
through (i) private placements of its securities, (ii) collaborative research
and development arrangements with licensees, (iii) cash receipts from lease
and licensing agreements, (iv) loans from private investors and certain
shareholders, (v) the February 1993 initial public offering (the "IPO") and
(vi) the proceeds of exercise of stock options and warrants. Over the past two
years, the Company has used substantial portions of the proceeds of such
exercise and from the private placement in 1995 and 1996 of its securities to
further its long-range business plan with respect to the medical application
of its technologies and for the development of the Colormate(TM) units,
including a transcutaneous bilirubinometer.

                  The Company has incurred significant research and
development and marketing expenses since inception, resulting in losses from
operations since 1990 and, prior to its IPO, negative shareholders' equity. In
particular, over the past two years, the Company has incurred significant FDA
related expenses and research and development and marketing start-up expenses
relating to the Colormate(TM) Bilirubin Device. The Company also has not
achieved significant operating revenues from marketing its Intellectual
Properties, Beauty-Aid Products and Colormate(TM) units in the cosmetic and
beauty aid industries since termination of the Avon Project in 1991, and has
never generated any revenue from licensing its Intellectual Properties or the
Colormate(TM) System in any industry other than the cosmetics, haircolor,
beauty aid and fashion industries. See Note 1 of Notes to Financial
Statements. Pending completion of its new line of cosmetics, the Company has
ceased active marketing of its prior existing cosmetics line and swatch
packs. See "Risk Factors."

                  Since 1990 limited revenues have been derived from licenses,
leases, service contracts and Beauty-Aid 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. ("IMS"). In 1997 and the first
quarter of 1998, the Company did not generate any 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. From December 31,
1990 until the IPO, the Company had been primarily engaged in (a) pursuing the
Company's litigation against Avon, (b) developing and testing further
applications of the Intellectual Properties and Colormate(TM) units, such as
the clinical research studies for medical applications, and (c) obtaining
additional financing to support marketing of the Company's Intellectual
Properties, systems, Beauty-Aid Products and related services.

                  The Company's ability to generate revenues in the future
will depend on its success in marketing its Intellectual Properties, the
related Chromaticity Studies capabilities, the Colormate(TM) Bilirubin Device,
the Colormate(TM) units and the Beauty-Aid Products. In addition, the
Company's future ability to generate revenues from its 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 would be a write-down of the book value of the Colormate(TM) units and
an impairment of the Company's ability to obtain future financing, which could
result in 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 or
identify alternative markets.

Results of Operations

                  The Company incurred net losses of $1,770,800 and $1,043,400
for the three-month periods ended March 31, 1998 and 1997, respectively, as
revenues received have not been significant relative to the Company's expenses
incurred in implementing its business plan. Loss per share increased by $0.02
in the 1998 period compared to the 1997 period, and the 1998 period was
favorably impacted by an increase of 3,392,531 weighted 

                                      9

<PAGE>

average number of shares outstanding attributable to the exercise of options
and Warrants. The dollar increase in such losses in the 1998 period as
compared to the 1997 period is primarily attributable to the Company
continuing 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
expenses, patent applications, research and development, software development
costs, consultants expenses, contributions to the new employee benefit plan,
travel and entertainment and promotional expenses, primarily attributable to the
Company's preparation for the manufacturing of its Colormate(TM) Bilirubin
Device and its presentation at the Annual Convention of the Pediatric Academic
Societies. Since the Company received confirmation of marketing clearance by the
FDA as described above, the Company believes that any future expenses incurred
in connection with its FDA application for its Colormate(TM) Bilirubin Device
and related patent application costs should be less than the amount incurred
since such FDA clearance, although no assurance can be given of such result.

However, the Company has in the past incurred, and expects to incur in the
future, significant 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 significant 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.

                In the first three months of 1998, the Company focused its
resources on implementation of its long-range business plan for medical
applications of its technologies and received no revenues from operations. The
Company believes that sales in the 1998 three-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 market in the third quarter of
1998 although there can be no assurance of this.

                  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.

Liquidity and Capital Resources

                  Current assets increased by $550,000 in the first quarter
of 1998 as compared to fiscal 1997, primarily attributable to an increase in
cash and cash equivalents, which is primarily attributable to the exercise of
options and Warrants.

                  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 three months of 1998. The 1998
increase in cash outflows from operating activities is primarily attributable
to the increase in the Company's net loss,  offset by an increase in accounts

payable and accrued expenses. Cash flows from financing activities during the
1998 period principally represent $1,880,500 from the issuance of Common Stock
(net of related costs). Cash flows from financing activities in the 1997
quarter principally represent the receipt of proceeds from the exercise of
Warrants 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
continue its implementation of its long-range business plan for
commercialization of its technologies for medical applications in diagnosing
certain diseases, including the completion of the FDA 

                                      10

<PAGE>

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 marketing regulatory clearances for such medical
applications and is currently applying for foreign regulatory approvals of
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) Bilirubin Device. The Company
anticipates that any initial penetration of the medical marketplace will be
through relationships with specialized distributors, rather than through a
direct sales force.

                  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 the
first quarter of 1998, such licensing, leasing and sales yielded no 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 April 1999, 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.

Risk Factors

                  Limited Operating History. Until 1986, the Company was
principally engaged in research and development relating to the Intellectual
Properties, Colormate(TM) units and the Company's Beauty-Aid Products. From
early 1986 through October 1987, the Company was engaged in limited
test-marketing of certain of the Intellectual Properties and Beauty-Aid
Products through its former licensees. From October 1987 until June 1991, the
Company was principally engaged in the Avon Project. Since 1991, the Company
has been engaged in the research and development of its Colormate(TM)
Bilirubin Device for the monitoring of bilirubin infant jaundice, the
development of prototypes of additional versions of the Colormate(TM) unit and
the refinement of its technologies for other applications. 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, many of
which are beyond the Company's control, such as unanticipated development,
manufacturing and regulatory delays and expenses. 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 and
marketed by the Company.

                  Operating Losses. The Company has incurred significant
losses from operations for the year ended December 31, 1997 and the three
months ended March 31, 1998, ($5,053,100 and  $1,770,800, respectively), as
well as in prior periods. 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
business plan for medical applications involving the monitoring of
hyperbilirubinemia. There can be no 

                                      11

<PAGE>

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 remaining
proceeds from the previous exercise of its Placement Agent Warrants and
Warrants will be sufficient to fund operations beyond April 1, 1999, 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 Beauty-Aid Products, and in particular, its
Colormate(TM) Bilirubin Device for monitoring of bilirubin infant jaundice, 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
Beauty-Aid Products and/or licensing and leasing fees from its Intellectual
Properties and the Colormate(TM) units, the successful marketing of the
Colormate(TM) Bilirubin Device and the availability of future financing. The
Company expects that additional financing will be required to commercialize any
additional medical application of its technologies. 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
Colormate(TM) Bilirubin Device. The Company's current ability to generate
revenues and to achieve profitability and positive cash flow in the immediate
future substantially will depend on the successful introduction of the medical
application of its technology to monitor bilirubin infant jaundice. The
Colormate(TM) Bilirubin Device provides a new alternative for the monitoring
and screening of bilirubin infant jaundice, but there can be no assurance that
it will gain market acceptance. There is no assurance that the Company's
Colormate(TM) Bilirubin Device for monitoring bilirubin infant jaundice, or
other future medical applications of the Company's technology, will be capable
of being produced in commercial quantities at acceptable costs, or even if all
regulatory and reimbursement approvals are obtained, be successfully marketed
or achieve any significant degree of market acceptance among physicians,
health care payors and others. To date, except for the FDA clearances,
clinical studies and related information regarding the Company's Colormate(TM)
Bilirubin Device, and the Company's presentation in May 1998 of the
Colormate(TM) Bilirubin Device at the Annual Convention of the Pediatric
Academic Societies, the medical community generally has had no exposure to the
Company or its proposed medical application. 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 application.

                  Physicians and other health care professionals will not
recommend or use the Colormate(TM) Bilirubin Device unless they determine,
based on experience, clinical data, relative cost, and other factors, that the
Colormate(TM) Bilirubin Device is an attractive alternative to current
traumatic blood 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. The Company believes that recommendations
by physicians and clinicians will be essential for the market acceptance of
these products, and there can be no assurance that any such recommendations
will be obtained. To the extent the Company is able to market and distribute

its Colormate(TM) Bilirubin Device for non-invasive monitoring of bilirubin
infant jaundice, broad market acceptance of the Company's device may require
the training of numerous physicians and clinicians, and the time required to
complete such training could result in a delay of such market acceptance.
Moreover, continued health care payors' approval of reimbursement for the
Company's products will be an important factor in establishing market
acceptance. 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, pediatrician's
offices and home health care facilities, also might 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.

                                      12

<PAGE>

                  User acceptance of these products will depend on many
factors, including physician recommendations, the degree, rate and severity of
potential complications, the cost and benefits compared to competing products
or alternative medical treatments, available reimbursement and other
considerations. In addition, the Company's pricing policies could adversely
impact market acceptance of these products as compared to competing products
and alternative treatments. 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.

                  Presently, the Company conducts its research and development
through its Spokane, Washington office. There can be no assurance that the
Company will be able to successfully address any problems that may arise
during the commercialization process of its Colormate(TM) Bilirubin Device. In
addition, there can be no assurance that any of the Company's products will be
successfully developed, continue to meet applicable regulatory standards, be
capable of being produced in commercial quantities at acceptable costs,
continue to be eligible for third-party reimbursement from governmental or
private insurers, be successfully marketed or achieve market acceptance. If
any of the Company's products for which regulatory approvals or clearances are
obtained are not commercially successful, the Company's business, financial
condition and results of operations would be materially adversely affected.

                  Early Stage of Development of Other Potential Medical
Applications. Although the Company has received FDA clearance to commercially
market its Colormate(TM) Bilirubin Device, 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 other
medical applications of its technology have not effectively commenced, and
substantial additional research and development and clinical trials will be
necessary before commercial prototypes of any additional proposed products are
FDA-cleared and produced for other such medical applications. 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/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.

                  Lack of Marketing and Sales Experience. In order to
successfully market and sell its Colormate(TM) units, including the
Colormate(TM) Bilirubin Device, the Company must either develop a medical
marketing and sales force or enter into arrangements with third parties to
market and sell the devices. Prior to licensing the Company's Intellectual
Properties in any other industry, including 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. 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 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. In addition, the
Company's Colormate(TM) Bilirubin Device, as well as any future medical
applications marketed by the Company, 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, pediatrician's offices and home health care services). While
the Company believes its Colormate(TM) Bilirubin Device for monitoring
bilirubin infant jaundice is 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. If the Company enters into a
marketing arrangement with a third party for the marketing and sale of its
Colormate(TM) Bilirubin Device, any revenues to be received by the Company
from these products will be dependent on this third party.

                  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 

                                      13

<PAGE>

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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." 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, 1997, most of the inventory of the Company's
cosmetics products was in excess of requirements based on the recent level of
sales. After giving effect to the $100,000 write off in 1996 and the $75,000
write off in 1997, 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 completed its
inventory of a new line of chromatically balanced and color coordinated
cosmetics in the first quarter of 1998, and although there can be no
assurance, expects to commence marketing through Gordon Laboratories its new
line of custom blended foundations in the third quarter of 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 incur significant expenses on sales
and marketing activities, including hiring finders, new personnel and
consultants, and entering into arrangements with retailers and distribution
companies having a regional or national presence. There can be no assurance
the Company's marketing plan will be successful.

                  Potential International Operations. The Company believes
that sales of products to customers outside of the United States represents a
significant potential source of growth. Following compliance with applicable
foreign regulatory requirements, the Company expects to market its medical
products internationally through affiliates and distributors. The primary
targeted markets for the Company's products outside the United States are
Western Europe, Canada, Asia and South America. The Company also expects to
contract with a number of foreign manufacturers to provide certain of its
sourcing needs for its medical device.

                  Foreign operations are subject to special risks that can
materially affect potential sales, including currency exchange rate
devaluations and fluctuations, the impact of inflation, exchange controls,
labor unrest, political instability, export duties and quotas, domestic and
international customs and tariffs, unexpected changes in regulatory
environments, potentially adverse tax consequences and other risks. Changes in
certain exchange rates could have a material adverse effect on the Company.

                  Prior Marketing Attempts. Other than the Company's marketing
efforts with Avon, its current 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
Beauty-Aid 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
Beauty-Aid 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 Beauty-Aid Products or for any medical applications of its
technologies.

                  Competition. To the extent the Company implements its
business plan to commercialize a medical application for its Intellectual
Properties, it will be entering a field characterized by rapidly changing
technology, intense competition and extensive research and development. The
medical products market in general is highly competitive. The Company's
ability to compete in the bilirubin infant jaundice market depends primarily
on the acceptance by the medical community of the Company's new technology,
which can be influenced by factors such as price, product quality and
features, technical capability, breadth of product line and distribution
capabilities. 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 Co.,
Ltd., 

                                      14

<PAGE>

Healthdyne Technologies, Inc. and SpectRx, Inc., among others), which have
actively pursued development of non-invasive monitoring of bilirubin infant
jaundice. In addition, there will be other companies with which the Company
will compete regarding other potential medical applications which the Company
may pursue. Furthermore, the monitoring methods currently in use for bilirubin
infant jaundice, dermatological diseases and tuberculosis, the principle
diseases for which the Company intends to market or 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.

                  Furthermore, many of the Company's competitors have
substantially greater financial, research, technical, manufacturing, marketing
and distribution resources than the Company and have greater name recognition
and lengthier operating histories in the health care industry. There can be no
assurance that the Company will be able to effectively compete against these
and other competitors, including those competitors who intend to promote their
versions of non-invasive devices. Additionally, 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 products, devices
and technologies that permit more efficient, less expensive non-invasive
detection and monitoring of bilirubin infant jaundice. It is also possible
that one or 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
products obsolete. 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.

                  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's products. In addition, many medical supply
companies with which the Company's proposed medical application and device
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 application, such as pediatricians and
hospitals. In addition, many of the Company's competitors offer broader
product lines than the Company, which may be a competitive advantage in
obtaining contracts with health care purchasing groups. No assurance can be
given that the Company will successfully and effectively market its medical
products against these and other competitors or contract with health care
providers.

                  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
Beauty-Aid 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.

                                      15

<PAGE>


                  Protection of Intellectual Property. The Company's success
may depend in part on its ability to obtain patent protection for its products
and processes, to preserve its trade secrets, and to operate without
infringing upon the proprietary rights of third parties. The validity and
breadth of claims covered in medical technology patents involve complex legal
and factual questions and therefore, may be highly uncertain. No assurance can
be given that the scope of any patent protection under the Company's current
patents, or under any patent the Company might obtain in the future, will
exclude competitors or provide competitive advantages to the Company; that any
of the Company's patents will not be held invalid if subsequently challenged;
or that others will not claim rights in or ownership of the patents and other
proprietary rights held by the Company.

                  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; the
Company's U.S. Patent No. 5,671,735 expires in 2014; 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. The Company has developed
intellectual property rights in color analysis, calibration and verification
in a number of fields including medical, biological, dental, cosmetic and
materials testing. The intellectual property rights include trade secrets,
know how and 14 pending United States 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 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 litigation 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 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 coloration,
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 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 European Patent No. 0446512, nationalizations of that
European Patent in Austria, Belgium, France, Germany, Great Britain, Italy,
Luxembourg, The Netherlands, Spain, Sweden and Switzerland and Liechtenstein,
a Singapore registration of that European Patent, as well as Australian and
Mexican Patents corresponding, at least in part, to its U.S. Patent No.
4,909,632, Taiwanese and Colombian Patents corresponding, at least in part, to
its U.S. Patent No. 5,313,267 and two Taiwanese Patents corresponding, at
least in part, to its U.S. Patent No. 5,671,235. 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 

                                      16

<PAGE>

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 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 to accurately measure skin tone categories and conduct comparative
color analysis.

                  The medical device industry has been characterized by
extensive litigation regarding patents and other intellectual property rights,
particularly with respect to newly developed technology. 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
re-examination and 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 the Company and 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, disputed rights to be licensed from such third parties or prevent the
Company from selling its products in certain markets, or at all. If
third-party patents containing claims affecting the Company's technology were
issued, and such claims were determined to be valid, there can be no assurance
that the Company would be able to obtain licenses to such patents at costs
reasonable to the Company, if at all, or be able to develop or obtain
alternate technology. 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.

                                      17

<PAGE>

                  The Company is aware that others have obtained or are
pursuing patent protection for various aspects of the design, production and
manufacturing of bilirubin infant jaundice products. There can be no assurance
that the Company's technology, current or future products or activities will
not be deemed to infringe upon the rights of others.

                  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 manufacturing, 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
manufacturing, 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 a material
adverse effect upon the Company's business, financial condition and results of
operations.

                  The Company does not itself manufacture the Colormate(TM)
units, the Colormate(TM) Bilirubin Device or the Beauty-Aid Products, and in
the past has been wholly dependent on third-party OEMs of parts, assemblers,
cosmetics suppliers and textile suppliers. The Company will have to establish
relationships with such third-party suppliers, manufacturers and assemblers,
for the production of its devices. Although the Company is negotiating with
certain manufacturers/assemblers, the Company does not have any current
arrangements with such suppliers, parts manufacturers or assemblers for the
mass production of any additional Colormate(TM) devices, 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 estimates of its costs of parts for the
Colormate(TM) units are based on original mass manufacturing costs for the
devices manufactured in connection with 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, the Company could be required to make significant advance
payments, obtain letters of credit, cause potential customers or licensees to

                                      18

<PAGE>

advance funds under their agreements entered into with the Company or
otherwise secure its payment obligations to third-party 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.

                  Failure to Maintain 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 Colormate(TM) Bilirubin Device or other products to market, there can no
assurance that such products will be considered cost effective and that
reimbursement to the consumer will continue to be available, pursuant to the
Company's recent permission from the American Medical Association for
third-party reimbursement under PCT 8220, or sufficient to allow the Company
to sell its medical device products on a competitive basis. The Company is
unable to predict what changes will be made in the reimbursement methods
utilized by third-party health care payors. Furthermore, the Company could be
adversely affected by changes in reimbursement policies of governmental or
private health care payors.

                  Since receiving FDA marketing clearance in the United
States, the Company has undertaken the procedures to obtain required
international regulatory clearances for its monitoring technology for
bilirubin infant jaundice. If the Company obtains the necessary foreign
regulatory approvals, market acceptance of the Company's products in
international markets will be dependent in part, upon the availability of
reimbursement within prevailing health care payment systems. Reimbursement and
health care payment systems in international markets vary significantly by
country and include both government sponsored health care and private
insurance. Although the Company intends to seek international reimbursement
approvals, there can be no assurance that such approvals will be obtained in a
timely manner, if at all.

                  Failure to maintain third-party reimbursement coverage for
use of the Colormate(TM) Bilirubin Device will have a material adverse effect
on the Company's ability to commercialize its technology for medical
applications.

                  Government Regulations. The Company's advertising, sales
practices and cosmetics and medical 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, and 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 regulation by comparable foreign authorities
if the Company markets its products abroad. The Company will also be subject
to regulation by various governmental agencies that regulate direct selling
activities.

                  Although the Company has received FDA clearance on its
Colormate(TM) Bilirubin Device pursuant to a "substantial equivalence"
determination order, in the form of a letter dated July 24, 1997 from the
FDA's CDRH, authorizing the Company to commercially distribute its
Colormate(TM) Bilirubin Device for monitoring bilirubin infant jaundice in the
United States, the Company also must comply with the other applicable rules
and regulations, promulgated by the FDA, in order to legally market the
device. 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 (QSR
requirements), labeling, and the statutory prohibitions against adulteration
and misbranding. The order also states that the Colormate(TM) Bilirubin 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 is unaware of
any applicable special controls at this time.

                  In the United States, the FDA regulates the introduction of
medical devices as well as, among other things, manufacturing, labeling and
recordkeeping procedures for such products. The process of obtaining marketing
clearance for new medical products from the FDA can be costly and time
consuming, and there can be no assurance that such clearance will be granted
for the Company's future products on a timely basis, if at all, or that FDA
review will not involve delays that would adversely affect the Company's
ability to commercialize additional products or to expand permitted uses of
existing products. Regulatory clearance to market a product from the FDA

                                      19

<PAGE>

may entail limitations on the indicated uses of the product. Marketing
clearance can also be withdrawn by the FDA due to failure to comply with
regulatory standards or the occurrence of unforeseen problems following
initial clearance. The Company may be required to file further marketing
applications with the FDA under certain circumstances, such as the addition of
product claims or product redesign. The FDA also could limit or prevent the
manufacture or distribution of the Company's products, and has the power to
require the recall of such products, given certain circumstances. FDA
regulations depend heavily on administrative interpretation, and there can be
no assurance that future interpretation made by the FDA or other regulatory
bodies, will not adversely affect the Company. The FDA will and various state
agencies may inspect the Company and its facilities from time to time to
determine whether the Company is in compliance with regulations relating to
medical device manufacturing companies, including regulations concerning
manufacturing, testing, quality control and product labeling practices. A
determination that the Company is in material violation of such regulations
could lead to the imposition of civil penalties, including fines, product
recalls, product seizures, or, in extreme cases, criminal sanctions.

                  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, among other things, governing product
standards, packaging requirements, labeling requirements, import restrictions,
tariff regulations, duties and tax requirements. These regulations vary from
country to country. After mid-1998, the Company will be prohibited from
selling its Colormate(TM) Bilirubin Device in Europe until such time as the
Company receives the right to affix the CE mark, which is a symbol of quality
and compliance with applicable European medical device directives. ISO 9001/EN
46001 certification is one option for pursuing the CE mark under the CE mark
certification process requirements. There can be no assurance that the Company
will be successful in obtaining ISO 9001/EN 46001 certification or CE mark
rights. Failure to receive ISO 9001/EN 46001 certification, CE mark rights 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 or 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 may rely on its
third-party foreign distributors to comply with certain foreign regulatory
requirements. The inability or failure of the Company or such foreign
distributors to comply with varying foreign regulations or the imposition of
new regulations could restrict the sale of the Company's products
internationally and thereby adversely affect 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,
including the QSR requirements and similar regulations in other countries,
which include testing, control, and documentation requirements. Ongoing
compliance with QSR requirements and other applicable regulatory requirements
will be strictly enforced in the United States through periodic inspections by
federal and possibly state 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,
injunctions, civil monetary 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, rescission or withdrawal of
clearances or approvals previously obtained and criminal prosecution. The
restriction, suspension or revocation of regulatory clearances or 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.

                  If the FDA believes that any of its legal requirements have
not been fulfilled, it has extensive enforcement powers, including but not
limited to 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 seek civil monetary or criminal penalties.

                  Product Liability and Malpractice. The medical products
industry is subject to substantial product liability litigation, and the
Company faces an inherent business risk of exposure to product liability
claims in the event that the use of its products is alleged to have resulted
in adverse effects to a patient or product user. Any 

                                      20

<PAGE>

such claims could have a material adverse effect on the Company, including on
market acceptance of its Colormate(TM) Bilirubin Device. When the Company
implements its business plan for its medical application for its Intellectual
Properties, it will be entering a field where it may become subject to product
liability claims by patients and/or users 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
application. Even if the Company obtains such insurance, there can be no
assurance that it will be able to maintain such insurance or that such
insurance would be sufficient to protect the Company against any such
liabilities.

                  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 Beauty-Aid Products.

                  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 Beauty-Aid 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 Series A
and preferred stock, par value $0.001 per share (the "Preferred Stock")
aggregating 2,266,220 (excluding currently exercisable stock options) of the
shares eligible to vote on matters presented to the shareholders, which amount
is sufficient to permit her to significantly influence 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 and 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 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.

                  Exercise of Private Placement Warrants. The price which the
Company will receive for the Common Stock issued upon exercise of the

remaining Warrants issued to the placement agent in the 1995 Private Placement
is expected to be substantially less than the market price of the Common Stock
at the time such Private Placement Warrants are exercised. For the life of
such Private Placement 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
Private Placement Warrants remain unexercised, the terms under which the
Company could obtain additional equity financing may be adversely affected.
Moreover, the holders of such Private Placement 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 Private Placement Warrants. To the
extent of any exercise of the Private Placement 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 for any two consecutive
calendar years ending on December 31, 2000 exceed $20,000,000 or 

                                      21

<PAGE>

(ii) the closing bid price of the Common Stock has been at least $31.11 on 30
consecutive trading days at any time ending on December 31, 2000. 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.

                  Additional Authorized Preferred Stock. The Company's Amended
Certificate of Incorporation (the "Certificate of Incorporation") authorizes
the Board of Directors to issue, without shareholder approval, up to
10,000,000 shares of Preferred Stock with voting, conversion and other rights
and preferences that could adversely affect the voting power or other rights
of the holders of Common Stock. The issuance of Preferred Stock or of rights
to purchase Preferred Stock could be used to discourage an unsolicited
acquisition proposal. In addition, the possible issuance of Preferred Stock
could discourage a proxy contest, make more difficult the acquisition of a
substantial block of the Company's Common Stock or limit the price that
investors might be willing to pay in the future for shares of the Company's
Common Stock.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

         No disclosure is required under this Item 3.

                                      22

<PAGE>


PART II -- OTHER INFORMATION

Item 1. Legal Proceedings

         None.

Item 2. Changes in Securities and Use of Proceeds.

         (a) On December 23, 1997, the Board of Directors passed a resolution
to effect a three-for-two forward split (the "Stock Split") of the Company's
issued and outstanding shares of common stock, par value $0.001 (the "Common
Stock"), which Stock Split was approved by majority vote of the shareholders
on February 13, 1998. The Company promptly filed a Certificate of Amendment of
the Company's Certificate of Incorporation, which provides for, among other
things, the Stock Split, with the Secretary of State of the State of New York.
As a result of the Stock Split, on February 13, 1998, each holder of record of
a certificate for one or more shares of Common Stock as of such date was
entitled to receive, as soon as practicable, upon surrender such certificate,
a certificate or certificates representing one and one-half shares of Common
Stock for each share of Common Stock represented by the certificate, and any
fractional shares resulting would be rounded up to the next whole share.
Accordingly, upon surrender of any existing certificates representing shares
of Common Stock, holders of record of shares of Common Stock as of February
13, 1998 were entitled to receive one additional share of Common Stock for
every two shares of Common Stock held on such date. Until so surrendered, the
outstanding stock certificates as of February 13, 1998 will represent such
additional shares issuable pursuant to the Stock Split.

         The purpose of the Stock Split was to increase the marketability and
liquidity of the Common Stock through greater availability of shares for
purchase and sale and a wider distribution among a larger number of
shareholders. The Board and management believe that an increase in the number
of shares outstanding, along with the anticipated lower trading price per
share, would encourage and facilitate trades in the Common Stock which would,
it is believed, establish a more liquid market in the Common Stock and result
in a wider distribution of the Common Stock.

         No proceeds were earned by the Company as a result of the Stock
Split.

         (b) On January 9, 1998, after approval on May 27, 1997 by vote of 
a majority of the Company's shareholders, the Company amended its 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
Preferred Stock, par value $0.01 per share (the "Class A Preferred Stock") can
become convertible into Common Stock upon the Corporation's achieving certain
stock performance or earnings goals and to likewise extend the date by which the
Corporation is to call the Class A Preferred Stock for redemption if such goals
are not met.

         No proceeds were earned by the Company as a result of the changes to
the Company's Class A Preferred Stock.

         (c) On February 20, 1998, after approval on February 13, 1998 by a 
vote of a majority of

the Company's shareholders, the Company amended its Certificate of
Incorporation (i) to extend for two years from December 31, 1998 to December
31, 2000 the expiration date of the period during which the Company's
outstanding Class A Preferred Stock can become convertible into Common Stock
upon the Company's achieving certain stock performance or earnings goals, (ii)
to extend the date by which the Company is to call the Class A Preferred Stock
for redemption from December 31, 1998 to December 31, 2000, (iii) to revise
the market price conversion feature of the Class A Preferred Stock to provide
for adjustment upon the occurrence of certain events involving the Common
Stock, including stock splits, reclassifications and the payment of stock
dividends, and (iv) to delete from the formula for the calculation of the
earnings goal that needs to be satisfied to trigger the conversion feature of
the Class A Preferred Stock, extraordinary items and revenues generated by
businesses acquired by the Company.

         No proceeds were earned by the Company as a result of the changes to
the Company's Class A Preferred Stock.

                                      23

<PAGE>

Item 3. Defaults Upon Senior Securities.

         None.

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

         (a) On February 13, 1998, the Company held a Special Meeting of
shareholders.

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

         (1) The resolution adopting an amendment to the Company's Certificate
         of Incorporation to effect a three-for-two forward split of the
         Company's issued and outstanding shares of Common Stock was adopted
         by the following vote, the same being majority of the votes cast by
         the holders of the shares entitled to vote thereon:

                     FOR                     AGAINST              ABSTAIN
                     ---                     -------              -------

                  7,058,144                   20,020               7,784



         (2) The resolution adopting an amendment to the Company's Certificate
         of Incorporation (i) to extend for two years from December 31, 1998
         to December 31, 2000 the expiration date of the period during which
         the Company's outstanding Class A Preferred Stock can become
         convertible into Common Stock upon the Company's achieving certain
         stock performance or earnings goals, (ii) to extend the date by which
         the Company is to call the Class A Preferred Stock for redemption

         from December 31, 1998 to December 31, 2000, (iii) to revise the
         market price conversion feature of the Class A Preferred Stock to
         provide for adjustment upon the occurrence of certain events
         involving the Common Stock, including stock splits, reclassifications
         and the payment of stock dividends, and (iv) to delete from the
         formula for the calculation of the earnings goal that needs to be
         satisfied to trigger the conversion feature of the Class A Preferred
         Stock, extraordinary items and revenues generated by businesses
         acquired by the Company was adopted by the following vote, the same
         being majority of the votes cast by the holders of the shares
         entitled to vote thereon:

                     FOR                     AGAINST              ABSTAIN
                     ---                     -------              -------

                  6,822,665                  129,893              42,174



         (3) The resolution adopting an amendment to the Company's 1992 Stock
         Option Plan to increase the number of shares of Common Stock with
         respect to which options may be granted from 2,000,000 to 3,000,000
         was adopted by the following vote, the same being majority of the
         votes cast by the holders of the shares entitled to vote thereon:

                     FOR                     AGAINST              ABSTAIN
                     ---                     -------              -------

                 6,644,555                   326,248              23,929

Item 5. Other Information.

         None.

                                      24

<PAGE>

Item 6. Exhibits and Reports on Form 8-K.

         (a) 3.1.4 - Certificate of Amendment to Certificate of Incorporation
(i) increasing the number of authorized shares of the Company from 10,000,000
to 25,000,000 shares and (ii) extending the expiration date of the Class A
Preferred Stock from December 31, 1996 to December 31, 1997.

         (b) 3.1.5 - Certificate of Amendment to Certificate of Incorporation
extending the expiration date of the Class A Preferred Stock from December 31,
1997 to December 31, 1998.

         (c) 15 - Letter on unaudited interim financial information.

         (d) 27 - Financial Data Schedule.

         (e)      Reports on Form 8-K.


         The Company's Current report on Form 8-K ("Form 8-K"), dated February
13, 1998 heretofore filed by the Company with the Securities Exchange
Commission, is incorporated by reference in this Form 10-Q. The Form 8-K was
filed in connection with the Company's effectuation of a three-for-two forward
split of the Company's issued and outstanding Common Stock.

                                      25
<PAGE>

<TABLE>
<CAPTION>

                                EXHIBIT INDEX A

             Exhibit No.            Document                                                     Page
             -----------            --------                                                     ----
           <S>                    <C>                                                          <C>
             3.1.4                  Certificate of Amendment to Certificate of Incorporation      27
             3.1.5                  Certificate of Amendment to Certificate of Incorporation      29
             15                     Letter on Unaudited Interim Financial Information             32
             27                     Financial Data Schedule                                       33


</TABLE>

                                      26

<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:  May 15, 1998
                                                /s/ Darby S. Macfarlane
                                                -------------------------------
                                                Darby S. Macfarlane
                                                Chief Executive Officer


               
Date:  May 15, 1998 
                                                /s/ Leslie Foglesong
                                                -------------------------------
                                                Leslie Foglesong
                                                Treasurer and Chief Financial
                                                and Principal Accounting Officer

                                      27