<PAGE>

================================================================================

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

                                    FORM 10-K


(Mark One)
/X/ Annual report under Section 13 or 15(d) of the Securities Exchange Act of
    1934

         For the fiscal year ended December 31, 1998

/_/ Transition report under 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)


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

              5 East 80th Street, New York, New York                                         10021
--------------------------------------------------------------------       -------------------------------------------
             (Address of Principal Executive Offices)                                      (Zip Code)

</TABLE>
                                 (212) 717-6544
     ----------------------------------------------------------------------
              (Registrant's Telephone Number, Including Area Code)

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

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

                    Common Stock, par value $0.001 per share
                    ----------------------------------------
                                (Title of Class)


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

                                Yes   X         No
                                    -----           -----

         Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.|_|

         As of April 13, 1999, 15,477,471 shares of Common Stock, par value
$0.001 per share (the "Common Stock") of the registrant were outstanding and the
aggregate market value of the voting stock (computed based on the average of the
last bid and asked price on such date) held by non-affiliates was approximately
$77,138,355.

================================================================================


<PAGE>


                                TABLE OF CONTENTS



<TABLE>
<S>                                                                                                             <C>
PART I...........................................................................................................1

   Item 1.    Business...........................................................................................1

   Item 2.    Properties........................................................................................38

   Item 3.    Legal Proceedings.................................................................................39

   Item 4.    Submission of Matters to a Vote of Security Holders...............................................39


PART II.........................................................................................................40

   Item 5.    Market For the Company's Common Equity and Related Stockholder Matters............................40

   Item 6.    Selected Financial Data...........................................................................41

   Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.............41

   Item 7A.   Quantitative and Qualitative Disclosures about Market Risk........................................42

   Item 8.    Financial Statements and Supplemental Data........................................................49

   Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure..............63


PART III........................................................................................................64

   Item 10.   Directors and Executive Officers of the Company...................................................64

   Item 11.   Executive Compensation............................................................................66

   Item 12.   Security Ownership of Certain Beneficial Owners and Management....................................70

   Item 13.   Certain Relationships and Related Transactions....................................................72


PART IV.........................................................................................................72

   Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................72
</TABLE>


                                     - i -

<PAGE>


                                     PART I


         THIS ANNUAL REPORT ON FORM 10-K, INCLUDING ITEM 1 ("BUSINESS") AND ITEM
7 ("MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS"), 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 25 TO 38, 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 COMPANY'S ABILITY TO ENTER INTO AGREEMENTS WITH MARKETING AND
DISTRIBUTION PARTNERS, THE OBTAINING AND MAINTAINING OF AND COMPLIANCE WITH ANY
NECESSARY REGULATORY APPROVALS OR CLEARANCES 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 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.

Item 1.  Business

General

         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 the analysis and classification of the
measurements, of human skin, tissue, fluid, hair, teeth or biological subject,
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(Registered) 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(Registered) device
to measure the incremental change of the yellow content of the skin color in
newborns to monitor newborn bilirubinemia (infant jaundice) (defined as
bilirubin levels or infant jaundice in a range above that which would be
considered average in a newborn). On July 30, 1997 the Company received U.S.
Food and Drug Administration ("FDA") clearance for commercial marketing of the
ColorMate(Registered) device for the non-invasive monitoring of newborn
bilirubinemia (infant jaundice) in infants by health care professionals in the
hospital, institutional, pediatricians' office or home setting (the
"ColorMate(Registered) TLc BiliTest(Trademark) System"); the Company's efforts
are currently focused on successfully commercializing this medical application
of its Intellectual Properties.


<PAGE>


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

         In 1998, the Company took significant steps to implement its business
plan for medical applications, including expansion of the multicenter hospital
studies of the ColorMate(Registered) TLc BiliTest(Trademark) System to three new
institutions, participation in a number of United States and international
presentations of the ColorMate(Registered) TLc BiliTest(Trademark) System to the
medical community, and the opening of a medical marketing, sales, distribution
and training support division for the ColorMate(Registered) 
TLc BiliTest(Trademark) System. The Company also entered into manufacturing
arrangements for the production of the ColorMate(Registered) 
TLc BiliTest(Trademark) System. Following the positive response to the device
from the medical community, the Company arranged for the mass manufacture of the
ColorMate(Registered) TLc BiliTest(Trademark) System, and in February 1999,
after substantial compliance with applicable regulations, began shipping the
device (together with the TLc Lensette, the disposable calibration and
verification standard for the system) to U.S. hospitals and physicians and
conducting inservicing and training at the hospitals through the Company's new
medical support division. See "Proposed Marketing Plan" and "Manufacturing." The
Company has also completed feasibility studies and commenced ongoing clinical
trials of the ColorMate(Registered) System for certain dermatological
applications. See "Other Potential Medical and Dental Applications."

         The Company has agreed on definitive basic terms with two potential
marketing and distribution partners for the exclusive distribution of the
Colormate(Registered) TLc Bilitest(Trademark) System in the hospital,
pediatrician and home healthcare markets. Both of these proposals include terms
requiring minimum annual placements of the Colormate(Registered) TLc
Bilitest(Trademark) System and TLc Lensette(Trademark) calibration standards
and/or charges per use. The Board is reviewing both sets of terms as well as
recommendations of its advisors and the Company anticipates selecting one of
these distributors shortly.

         In April 1999, the Company raised gross proceeds of $5 million from the
private placement of 14% Senior Convertible Debentures due April 15, 2002, the
proceeds of which the Company intends to use to support its marketing efforts
and obligations under the arrangements with the marketing and distribution
partner selected.

         Prior to marketing the Colormate(Registered) TLc BiliTest(Trademark)
System, the Company's marketing activities principally involved licensing the
Intellectual Properties, including conducting laboratory product chromaticity
studies, leasing the ColorMate(Registered) System and marketing the Beauty-Aid
Products in the cosmetic, hair color, beauty aid and fashion industries (i) in a
national sales program 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, (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 the
Intellectual Properties in the cosmetics, dental and beauty aid fields, there
can be no assurance that any agreements will be reached. In this regard, the
Company has completed research and development for the working prototype of a
hand-held, less expensive light-emitting diode ("LED") model of the
ColorMate(Registered) System (the "ColorMate(Registered) LED Device") which the
Company anticipates will enhance its marketing efforts in the Beauty-Aid field
as well as in medical applications, including for newborn bilirubinemia (infant
jaundice) (the "Bilirubin LED Device"), and in other applications. The Company
is currently preparing the mass-manufacturing prototype of the
ColorMate(Registered) LED Device in compliance with applicable manufacturing
regulatory requirements for medical applications.

         In September 1998, the Company entered into a lease and license
agreement with Nordstrom, Inc. ("Nordstrom") granting Nordstrom a license to use
the ColorMate(Registered) System to formulate and recommend Nordstrom's "C20
Color to Order" line of proprietary cosmetic products in four Nordstrom flagship
department stores. The products will be introduced and evaluated over a three
month period (commencing upon delivery of packaging materials from Nordstrom and
final cosmetic formulations) for potential extended use, including additional
store locations. In connection with this license agreement, the Company is
collaborating with a consultant to provide training, marketing, sales,
promotional and liaison services (including assisting in development of all
applicable non-color product formulas, manuals, promotional materials and
training aids) at each of the four Nordstrom's stores.

Color Science

         The field of color science involves the objective standardized
analysis, description and scientific measurement by instrument of the colors
comprising the visible color spectrum and their related physical properties in
relation to each other. Historically, analysis of all aspects of color could
only be performed in a subjective manner through the visual perception of the
observer. By the 1930s, the first photoelectric instruments for objectively
measuring colors had been developed, and since that time increasingly precise
methodologies and instruments have been developed and refined.



                                       2
<PAGE>


         Based on its research in the field of color science, the Company has
determined that all people fall within one of approximately 200 scientifically
measurable human skin tone color categories and that each of these categories is
most compatible with specific ranges of various product color. Over the years,
the Company has developed its Intellectual Properties and ColorMate(Registered)
System for the (i) scientific measurement and classification of human skin
color, (ii) scientific measurements of human hair, tooth, tissue and/or fluid
color, (iii) scientific color coordination of such skin, hair, tooth and/or
fluid color classification in relation to products, (iii) scientific
measurement, classification and color-oriented organization of various color
sensitive consumer products, such as cosmetics, hair coloring, hosiery,
clothing, tooth enamel, paint, and textiles, (iv) scientific color measurement
in detecting and monitoring Chromogenic Diseases such as newborn bilirubinemia
(infant jaundice), and (v) scientific color coordination of products in relation
to other products. The Company determines such scientific product color
classifications by conducting laboratory product chromaticity studies (the
"Chromaticity Studies").

Color Science Applications

         Medical Applications

         Chromogenic Diseases. The Company believes that its Intellectual
Properties are capable of detecting and monitoring various Chromogenic Diseases,
such as bilirubin infant jaundice. In this regard, the Company has received FDA
clearance for commercial marketing of its ColorMate(Registered) 
TLc BiliTest(Trademark) System for monitoring of newborn bilirubinemia (infant
jaundice) in infants through the non-invasive scientific color measurement of
the skin of the newborn. The Company has also completed feasibility studies and
commenced ongoing clinical trials of its ColorMate(Registered) System for
dermatology applications in determining the level of phototherapy to be used in
treating certain skin disorders and diseases, such as psoriasis, and the
patients tolerance to such phototherapy treatment. This use of the
ColorMate(Registered) System will require additional FDA clearance through
submission of a 510(k) or pre-market approval application supported by clinical
data.

         Newborn Bilirubinemia (Infant Jaundice). Infant jaundice occurs in
most newborns because of a combination of increased bilirubin production, a
waste product that is normally produced from the breakdown of red blood cells,
and decreased clearance of bilirubin by the liver. Newborn bilirubinemia (infant
jaundice) primarily affects infants within the first three to 10 days of life.
Almost all newborn babies develop some degree of bilirubin infant jaundice and,
very high bilirubin levels, if left untreated, may, in extreme cases, lead to
permanent brain damage or death (kernicterus). Prior to birth, the bilirubin in
an infant is processed by the mother's liver and excreted. Following its birth,
an infant must eliminate bilirubin independent of its mother, and it may take an
infant's system several days to begin eliminating the bilirubin faster than it
is produced. Infants who are born prematurely, who are underfed, or who belong
to certain ethnic groups are at increased risk of developing newborn
bilirubinemia (infant jaundice) (defined as bilirubin levels or infant jaundice
in a range above that which would be considered average in a newborn). The
initial screening of bilirubin levels is the observation of the yellowing of the
skin by professional care providers, which is a subjective determination prone
to errors due to differing skin colors. If the initial clinical assessment
suggests the possibility of significant elevated bilirubin levels, the current
procedure requires that a blood sample be obtained from the infant, usually by
lancing the infant's heel (heelstick). These laboratory measurements are
time-consuming, costly and a traumatic process for the infant. In addition,
repeated blood drawing in very low birth weight babies with extremely small
blood volumes may result in the need for blood transfusion. Since infant
jaundice is normally present in infants 36 to 72 hours following birth, infants
who are sent home after a short hospital stay pursuant to managed care
guidelines in the United States are at risk because the condition may not have
presented prior to release. Thus, the Company believes a non-invasive instrument
that monitors newborn bilirubinemia (infant jaundice) in infants represents a
significant improvement in patient care.

         The Company has developed a ColorMate(Registered) non-invasive
transcutaneous bilirubinometer device for monitoring newborn bilirubinemia
(infant jaundice) in infants of all races including when under phototherapy.
This ColorMate(Registered) device received FDA clearance for use in monitoring
newborn bilirubinemia (infant jaundice) by scientifically measuring the color of
the skin of the newborn and periodically monitoring incremental changes in the
skin color. The FDA-cleared device includes the ColorMate(Registered) device for
monitoring newborn bilirubinemia (infant jaundice) when operated using external
power sources with a computer and printer, and when operated as a
battery-operated, hand-held, optional computer assisted device (collectively,
with the Company's disposable calibration components, hereinafter referred to as
the "ColorMate(Registered) TLc BiliTest(Trademark) System"). The
ColorMate(Registered) TLc BiliTest(Trademark) System is a proprietary color
measurement system containing a light source and optical filters. Color
measurements


                                       3
<PAGE>


are obtained from an infant by placing the ColorMate(Registered) 
TLc BiliTest(Trademark) System on different physical sites of the newborn for
5-10 seconds. Accuracy of the color measurements are ensured by the
TLc Lensette(Trademark), a proprietary disposable color-calibration and
verification standard used prior to each baby's measurement. Each color
measurement of the skin is analyzed by the Company's proprietary technology to
provide an estimate in mg./dl. correlating to the newborn's serum bilirubin
concentration within a clinically useful range.

         The Bilirubin Project. Since 1988, the Company has been engaged with
Mt. Sinai Hospital, and more recently with Elmhurst Hospital in clinical
research studies (the "Bilirubin Project") involving the use of the
ColorMate(Registered) TLc BiliTest(Trademark) System in the monitoring of
newborn bilirubinemia (infant jaundice) in infants. The initial studies
conducted in Mt. Sinai Hospital tracked, on a parallel basis, (i) the
non-invasive skin color measurements made of each infant by the
ColorMate(Registered) Bilirubin Device and (ii) simultaneous blood samples drawn
from the infant to obtain a laboratory report on the patient's bilirubin count.
The first phase of testing in 1988 and 1989 resulted in a positive feasibility
study demonstrating that the ColorMate(Registered) TLc BiliTest(Trademark)
System skin color measurements corresponded in direct ratio to the laboratory
reports of the blood samples drawn. The second phase, which was concluded in
November 1992, studied a larger volume of patients and demonstrated the same
results. In October 1993, the Company and Mt. Sinai Hospital published the
research results to that date. From October 1993 to April 1996, the Company and
Mt. Sinai Hospital conducted the third phase of clinical testing involving the
compiling of certain additional clinical data relating to expanded testing on a
larger group of patients, with emphasis on skin color measurement at birth and
while under phototherapy (the current standard treatment for the disorder).

         In January 1997, the Company commenced multicenter studies of the
ColorMate(Registered) TLc BiliTest(Trademark) System for monitoring newborn
bilirubinemia (infant jaundice) in infants at Mt. Sinai Hospital and Elmhurst
Hospital, and in February 1998 commenced such studies at William Beaumont
Hospital and in July 1998 commenced such studies at Parkland Hospital
(Dallas). These studies were successfully completed and showed a high
correlation between the results of the Company's technology and standard blood
serum testing.

         In 1998, the Company presented the ColorMate(Registered)
TLc BiliTest(Trademark) System at the Pediatric Academic Society (New Orleans),
Sinomed '98 (China), International Congress of Pediatrics (Amsterdam), the
National Association of Neonatal Nurses (Cincinnati), the American Academy of
Pediatrics (San Francisco) and at the 5th Annual Pediatric Critical Care
Medicine Conference (China). In response to the interests generated for the
ColorMate(Registered) TLc BiliTest(Trademark) System at these exhibitions, in
November 1998, the Company opened a medical marketing, sales and distribution
support division in Connecticut. The Company also hired neonatal nurse clinical
specialists to provide training to hospital staffs and physicians using the
ColorMate(Registered) TLc BiliTest(Trademark) System. This medical division will
be available to provide the training, technical, sales, and marketing support
anticipated in the transition period expected when the Company enters into any
new contracts with potential global distributors, will oversee the clinical
studies in Beijing, China and the business relationships with the Ministry of
Health and will develop the marketing plans for the home health care market and
other markets for the ColorMate(Registered) TLc BiliTest(Trademark) System
worldwide.

         Regulatory Clearances. In June 1996, the Company retained government
regulatory consultants and legal counsel to oversee compliance with applicable
federal and state regulations for commercialization of the ColorMate(Registered)
TLc BiliTest(Trademark) System, and for complying with any applicable European
Community and other foreign government requirements. The initial clinical
studies conducted at Mt. Sinai Hospital were completed with positive results and
on November 14, 1996, the Company filed its application with the FDA for the
medical application of its technologies, specifically, the non-invasive
monitoring of newborn bilirubinemia (infant jaundice). On July 30, 1997, the
Company received confirmation of marketing clearance pursuant to a "substantial
equivalence" determination order, dated July 24, 1997, from the FDA's Center for
Devices and Radiological Health (the "CDRH"), authorizing the Company to
commercially distribute the ColorMate(Registered) TLc BiliTest(Trademark) System
in the United States. The "substantial equivalence" order states that the
Company must comply with all relevant statutes enforced by and regulations
promulgated by the FDA, including Quality System Regulation ("QSR")
requirements, labeling, and the statutory prohibitions against adulteration and
misbranding. The order also states that the ColorMate(Registered)
TLc BiliTest(Trademark) System is a "Class II device" which may be subject to
additional "special controls." The Company intends to maintain substantial
compliance with any applicable requirements and any special controls for
purposes of commercial distribution.


                                       4
<PAGE>


         The Company's FDA market clearance authorizes use of the Company's
technology as an aid to the physician in monitoring the status of newborn babies
for the development of newborn bilirubinemia (infant jaundice). Following a
physician's examination of a newborn within the first hours of birth, newborn
babies would be measured initially and monitored periodically by the
ColorMate(Registered) TLc BiliTest(Trademark) System for incremental changes in
the yellow content of their skin color. Because the ColorMate(Registered)
TLc BiliTest(Trademark) System can provide effective non-invasive monitoring of
newborn bilirubinemia (infant jaundice) in infants, it may have significant
marketing advantages over the invasive, repeated, daily blood testing techniques
currently used, which in many cases leads to blood transfusion of the infant.
See "Risk Factors." However, because the medical community is relatively slow to
adopt new technologies, there can be no assurance that practitioners will
perceive a need for, or accept, the Company's technology, or be willing to
commit funds to its development or the purchase of any such completed
technology.

         The Company intends to market the medical application of its
Intellectual Properties for the monitoring of newborn bilirubinemia (infant
jaundice) through international medical distributors to hospitals, pediatricians
and home health care facilities. Since receiving FDA marketing clearance in the
United States, the Company has undertaken the procedures to obtain required
international regulatory clearances for its ColorMate(Registered) Bilirubin
Device. 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. See "Proposed Marketing Plan",
"Governmental Regulations" and "Risk Factors."

         To market its ColorMate(Registered) TLc BiliTest(Trademark) System in
the European Union, the Company sought ISO-9001/EN46001 certification and the
right to affix the CE mark. ISO-9001/EN46001 certification recognizes that the
Company has established a quality system for the design, development,
manufacturing, servicing and distribution of its medical device. The CE mark is
a symbol of quality and compliance with applicable European Union medical device
directives. In March 1999, the Company received ISO-9001/EN46001 certification
and passed a product inspection in February 1999 for purposes of receiving the
right to affix the CE mark to such specific inspected product. The Company is
awaiting a certification from the appropriate European authority to allow
release of the specific inspected product for European Union distribution.
The Company also has applied for and is awaiting the right to self-certify the
product, without the need for third party specific product inspection and
certification, for purposes of affixing the CE mark for European Union
distribution.

         Cosmetic, Fashion, Beauty Aid and Haircolor Applications

         In the early 1980s, a number of authors, fashion consultants and retail
companies promoted the concept of marketing cosmetics and fashion based on the
advertised compatibility of the color in a consumer's skin, hair and eyes with
the color of the products being sold, in order to achieve a harmonious "color
coordinated" effect. Marketing programs and product lines were introduced based
on the retailers' matching of its goods to the "personal colors" of the
consumer, as determined by the retailer or independent color consultants.
Generally, businesses in the cosmetics and fashion industries continue to employ
color compatibility techniques and concepts in their marketing efforts. Although
the fashion industry is subject to rapid and radical changes in styles and
trends, the Company's color science technology and instrumentation, which is
keyed to the comparison of skin color to products and of product colors to other
product colors, is not dependent on the popularity of any given fashion style or
trend. The Company's color measuring instrument permitted the user, without any
visual estimates or judgments, to determine the color of a person's skin and
assign it accurately to one of over 200 scientifically determined skin color
categories identified by the Company.

         Prior to June 1991, the Company's marketing activities principally
involved licensing the Intellectual Properties, including conducting
Chromaticity Studies, leasing the ColorMate(Registered) System and marketing the
Beauty-Aid Products primarily in the cosmetic, hair color, beauty aid and
fashion industries with nationally recognized cosmetics and textile companies,
such as the Company's national sales program with Avon Products, Inc. ("Avon"),
and limited test marketing programs with Clairol Inc. ("Clairol"), and Hanes
Hosiery Inc. ("Hanes"). In addition, from 1994 to 1996, the Company conducted a
limited consumer testing project for hair color analysis with Clairol and Regis
Corp., a U.S. beauty salon chain ("Regis"). See "Test Marketing History." The
Company also entered into leases and licensing agreements with respect to its
ColorMate(Registered) System with Gordon Laboratories Inc.


                                       5
<PAGE>


("Gordon Laboratories") and IMS Cosmetics, Inc. ("IMS"), as well as with various
beauty-related businesses and beauty salons. In this regard, the Company
recently completed its line of custom blended foundations for Gordon
Laboratories, and has completed with IMS its new line of foundations, lipsticks
and blushes.

         In September 1998, the Company entered into a lease and license
agreement with Nordstrom, Inc. ("Nordstrom") granting Nordstrom a license to use
the ColorMate(Registered) System to formulate and recommend Nordstrom's "C20
Color to Order" line of proprietary cosmetic products in four Nordstrom flagship
department stores. The products will be introduced and evaluated over a three
month period (commencing upon delivery of packaging materials from Nordstrom and
final cosmetic formulations) for potential extended use, including additional
store locations. In connection with this license agreement, the Company is
collaborating with a consultant to provide training, marketing, sales,
promotional and liaison services (including assisting in development of all
applicable non-color product formulas, manuals, promotional materials and
training aids) at each of the four Nordstrom's stores.

         Although the Company from time to time has been engaged in preliminary
discussions (including limited consumer testing and Chromaticity Study
activities) for use of its technologies in the cosmetics and beauty aid fields,
until the Company completes successful marketing and distribution of its
ColorMate(Registered) TLc BiliTest(Trademark) System, the Company does not
expect to engage in significant additional efforts in the cosmetic and beauty
aid industry. However, the Company recently completed research and development
for a working prototype of a less expensive, hand-held, LED version, of the
ColorMate(Registered) unit, the ColorMate(Registered) LED Device, which the
Company anticipates will enhance its eventual marketing efforts to potential
licensees in these non-medical industries. The Company is currently preparing
the mass-manufacturing prototype of the ColorMate(Registered) LED Device, in
compliance with applicable regulatory requirements for medical applications. See
"Risk Factors" and "Proposed Marketing Plan."

         Other Potential Medical and Dental Applications

         In addition to its FDA-cleared device for the monitoring of newborn
bilirubinemia (infant jaundice) in infants, the Company believes that the
Intellectual Properties and ColorMate(Registered) System have commercial
applications in (i) health care relating to the non-invasive detection and
monitoring of certain Chromogenic Diseases, such as skin diseases, tuberculosis
and anemia, and (ii) dental care (i.e., the color matching of teeth and tooth
enamel). Additional medical applications for the Intellectual Properties require
extensive and lengthy clinical testing and will be subject to various federal
and state regulatory requirements, including FDA clearances and approvals and
may be subject to comparable foreign regulatory approvals to the extent the
Company markets such applications abroad. See "Risk Factors" and "Government
Regulations."

         In July 1998, following IRB approval from Mt. Sinai, Dr. Mark Lebwohl,
chairman of the Department of Dermatology at Mt. Sinai, commenced ongoing
clinical trials of the ColorMate(Registered) non-invasive medical technology for
dermatological use in determining appropriate levels of phototherapy to treat
various skin diseases, and patient tolerance for such levels of phototherapy by
quantifying the amount of pigmentation and hence, photo-sensitivity in the skin
of patients. This potential dermatological application of the Company's
proprietary technology and device would be for patients for a variety of
diseases including psoriasis, excema, cutaneous T-cell lymphoma, vitiligo, and
others. Post inflammatory hyperpigmentation also would be a condition subject to
monitoring by the ColorMate(Registered) technology. The non-invasive measurement
of the skin by the Company's ColorMate(Registered) non-invasive medical
technology will be tested and verified against minimal erythema dose-testing
including the Fitzpatrick skin type test. The results of these studies are
intended to be used in support of future applications for FDA marketing
clearance of the Company's technology for such uses.

         From February 1993 to June 1995, the Company conducted a feasibility
study for clinical tests at Elmhurst Hospital for use of its technology in the
diagnosis of tuberculosis through the measurement of skin color. The Company
stopped such studies in order to focus its limited resources on the more
advanced Bilirubin Project and its long-range business plan to commercialize
that application. The Company has no immediate plan to commence such studies for
the detection and monitoring of tuberculosis until commercialization of the
ColorMate(Registered) Bilirubin Device is complete. Clinical trials for FDA
clearance will be required for use of the Company's technology for the detection
and monitoring of tuberculosis, and there can be no assurance this application
will have commercial applications or generate revenue for the Company.


                                       6
<PAGE>


         In 1990, the Company concluded a feasibility study for Dentsply, Inc.,
a dental supply company, for use of the Intellectual Properties and
ColorMate(Registered) units in the color measurement and matching of human tooth
color and tooth enamel color for dentures, bonding, inlays and caps, for use by
dentists and dental laboratories. This study concluded that the
ColorMate(Registered) units could accurately and reproducibly measure the colors
of both human teeth and tooth enamels, but needed further design research and
engineering studies to develop a stabilized housing system for such a small area
of measurement. The project was discontinued by both companies at that time due
to an inability to agree on financial terms for the project. The Company is in
preliminary discussions with dental supply distribution companies with respect
to the possible development of prototypes for dental applications and the
marketing of such application. There can be no assurance that the Company will
be able to commercialize this application.

         Other Potential Applications

         The Company believes that the Intellectual Properties and
ColorMate(Registered) System may have commercial applications in industrial
color measurement applications, in order to achieve and confirm uniformity of
color shades within a given product line or between two products of the same
line (i.e., paint, textile and food products). To that end, the Company intends
to increase its efforts to lease the ColorMate(Registered) System and/or license
the Intellectual Properties, including the Company's Chromaticity Study
capabilities, to industrial companies such as paint, textile and food companies,
that use or could use existing color measurement technologies in the
manufacturing and marketing of their own products. Many companies in these
industries currently use color measurement instruments to ensure uniformity of
product line colors (e.g., that manufacturing facilities are producing different
dye lots and/or goods of the same color). These instruments are generally
available at prices well in excess of the price at which the Company would
market the ColorMate(Registered) System for such application, because the
Company has been able to mass manufacture its color measurement technology,
thereby taking advantage of the economies of scale. In addition, the
ColorMate(Registered) System provides machine-to-machine stability and
reproducibility (i.e., that each machine will achieve results consistent with
that of other machines), whereas the competing color measurement instruments
available today generally cannot produce such consistent machine-to-machine
results without complex inter-machine calibration adjustments. See
"Manufacturing" and "Risk Factors."

Proposed Marketing Plan

         Potential Market for ColorMate(Registered) TLc BiliTest(Trademark)
System. In September 1997, the Company released the results of market research
studies, which analyzed the existing market for methods currently used to
monitor newborn bilirubinemia (infant jaundice) in infants in the United States
and in the developed countries of Europe, South America and Canada combined, and
Asia. The study indicated that the World Health Organization published annual
birthrate is approximately 4,000,000 births in the United States, with
approximately 10% of these births being premature infants. The Company estimates
that individual bilirubin heelstick blood tests on newborn infants, which are
not part of a general panel blood test, total approximately 15,000,000 tests
performed annually in the United States, based on data made available by the
World Health Organization, the American Academy of Pediatrics, independent
market studies commissioned by the Company and business proposals from potential
marketing partners. Internationally, using the World Health Organization birth
rates, independent market studies and research obtained from companies currently
marketing neonatal medical devices in foreign countries, the Company estimates
that the current European market for infant bilirubin tests is approximately the
same size as the United States; South America and Canada combined represent
approximately 25% of the United States market size, and the Southern Chinese and
entire Japanese markets combined represent approximately the same size of market
as the United States.

         Marketing Plan for Medical Applications. The Company's primary efforts
to date have been to build the skill and information base to identify and
quantify market segments to which the Company's technologies can be economically
developed and marketed. The Company intends to exploit the primary markets for
its ColorMate(Registered) TLc BiliTest(Trademark) System in the monitoring of
newborn bilirubinemia (infant jaundice) in infants, which include hospitals,
other medical institutions and pediatricians' offices and home health care
agencies in the United States and other countries around the world. In order to
successfully market and sell its ColorMate(Registered) TLc BiliTest(Trademark)
System for monitoring of newborn bilirubinemia (infant jaundice) in infants, the
Company must either develop an extensive marketing and sales force or


                                       7
<PAGE>


enter into arrangements with third parties to market and sell this product.
These arrangements could take the form of lease/license arrangements, marketing
and distribution arrangements, joint ventures or acquisitions. The Company's
strategy is to effect the sales and distribution of its ColorMate(Registered)
TLc BiliTest(Trademark) System through collaborative distributors. The Company
believes that by aligning with larger, more established medical company
distributors, in specific market segments, it can more effectively and quickly
penetrate the medical marketplace. There can be no assurance that the Company
will be able to successfully enter into additional marketing and sales
agreements with third parties on acceptable terms.

         The ColorMate(Registered) TLc BiliTest(Trademark) System as currently
marketed by the Company's medical division has a list price of $3,000 to $5,000
depending on the model and may be leased or used under the limited time offer
for use and evaluation of the system, all with either purchase of minimum
monthly supplies of the TLc Lensette(Trademark) calibration standards at $10 per
TLc Lensette(Trademark), or minimum monthly charges of $10 per use under a
Managed Use Program.

         As part of its marketing plan, the Company offers a Managed Use Program
for hospitals under which the hospital can monitor bilirubin levels in infants
for a fixed monthly fee paid to the Company [or its distributor]. The hospital
and the Company would jointly decide on the number of uses of the
Colormate(Registered) TLc Bilitest(Trademark) System covered by such fee based
on number of births and existing bilirubin testing levels. These estimates would
be reviewed quarterly for adjustments to the program.

         In order to provide the ColorMate(Registered) TLc BiliTest(Trademark)
System to hospitals and physicians already placing orders, and to expedite
evaluation of the product by the medical community, the Company has taken a
series of significant steps to increase awareness of its products in the medical
community and to initiate its own sales and servicing of the
ColorMate(Registered) TLc BiliTest(Trademark) System with United States
physicians and clinicians in hospitals.

         In November 1998, the Company opened its medical division, supervised
by Sheila Kempf, Vice President Medical Division. Ms. Kempf is a former Vice
President - Marketing of Corometrics, a Marquette Medical Inc. company, and a
former director of Marketing for Sensors and accessories of Nelcor Puritan
Bennet, Inc. and has over 13 years experience in the medical marketing field.
The Company also hired neonatal nurse clinical specialists to provide training
to hospital staffs using the ColorMate(Registered) TLc BiliTest(Trademark)
System. The newly formed medical division provides sales and support for the
ColorMate(Registered) TLc BiliTest(Trademark) System delivered to customers in
the medical community, including hospitals, pediatricians, clinics and home
health care agencies, and performs delivery, training and in-servicing for
customers initially generated by the Company's presentations to the medical
community. 

         In January 1999, the Company formed a five-person sales unit to be led
by Dennis A. McClinton, Vice President of Sales. Mr. McClinton has an 18-year
background in sales of fetal and neonatal ICU monitoring products at Marquette
Medical Systems and will head a staff that averages ten years experience in that
field. The new unit is responsible for the initial sales activity for the
ColorMate(Registered) TLc BiliTest(Trademark) System.

         In January 1999, the Company appointed Medical International, Inc. as
its exclusive distributor of the ColorMate(Registered) TLc BiliTest(Trademark)
System in certain states; in February 1999, the marketing efforts of this
distributor commenced. 

         The Company launched the ColorMate(Registered) TLc BiliTest(Trademark)
System to the Chinese medical community at the Sinomed 1998 Exhibition, the 7th
China International Medical Equipment and Facilities Exhibition ("Sinomed").
This exhibition was attended by over 80,000 physicians, healthcare
professionals, hospital administrators and medical equipment manufacturers and
distributors. In conjunction with Sinomed, doctors from the Company's Medical
Advisory Board conducted seminars on the technology and use of the
ColorMate(Registered) TLc BiliTest(Trademark) System at two hospitals in
Beijing. In connection with Sinomed, the Company signed a Memorandum of
Understanding


                                       8
<PAGE>


("M.O.U.") with the International Health Exchange Center, Ministry of Health
("M.O.H.") of the People's Republic of China in Beijing regarding the Company's
ColorMate(Registered) TLc BiliTest(Trademark) System non-invasive newborn
bilirubinemia (infant jaundice) monitoring device. Under the M.O.U., the M.O.H.
has recently completed the first stage of its nationwide study and is compiling
the results in connection with developing a plan on the most advantageous
structure to implement the device's use in the People's Republic of China, based
on the results of the study. There can be no assurance as to the timing of the
actions anticipated to be taken by M.O.H.

         The Company also announced that it signed a letter of intent with the
China National Medical Equipment and Supplies, Import and Export Corporation,
M.O.H., People's Republic of China, which is interested in supporting the
distribution of the Company's device, including investigations for acceptable
price structures for marketing the ColorMate(Registered) TLc BiliTest(Trademark)
System in China. There can be no assurance as to the timing of the actions
anticipated to be taken by M.O.H. In support of any potential distribution
partner and the relationships established between the Company and the M.O.H.,
other officials, physicians and the Chinese business community, the Company will
continue to support these collaborations with the People's Republic of China and
in this regard has hired two Chinese representatives of the Company to expedite
any potential manufacturing, marketing and distribution of the
ColorMate(Registered) TLc BiliTest(Trademark) System in China.

         The Company also launched the ColorMate(Registered)
TLc BiliTest(Trademark) System to the European medical community at the
International Congress of Pediatrics and the First International Congress of
Pediatric Nursing, held in Amsterdam from August 4 to August 14, 1998. The
conference, held every four years, is one of the largest pediatric conferences
in Europe with attendance of approximately 8,000 pediatricians, neonatologists
and health care professionals. At the conference, Dr. Ian Holzman, Chief of
Newborn Medicine at Mt. Sinai Hospital, New York, presented a paper on the
results of extensive clinical trials of the ColorMate(Registered)
TLc BiliTest(Trademark) System at two hospitals in New York. Dr. Holzman's paper
on the studies was published in the September 1998 issued of Pediatrics.

         In October 1998, the Company initiated ongoing clinical trials of the
ColorMate(Registered) TLc BiliTest(Trademark) System at the Beijing OB GYN
Hospital in China. The Company has hired two employees in South Africa and in
November 1998 initiated ongoing clinical trials of the ColorMate(Registered)
TLc BiliTest(Trademark) System in monitoring newborn bilirubinemia (infant
jaundice) at King Edward Hospital in Durban. In addition, the Company
anticipates commencing additional multicenter studies of the
ColorMate(Registered) TLc BiliTest(Trademark) System in monitoring newborn
bilirubinemia (infant jaundice) in a number of hospitals located in the United
States, England, Israel, Brazil and Argentina, although there can be no
assurance of the exact timing of implementation at each hospital. These studies,
as well as those conducted in South Africa and Beijing, are being coordinated by
Dr. Jeffrey Maisels pursuant to international testing protocols developed by Dr.
Maisels.

         Cosmetics and Beauty Aid. The Company will seek to market its
Beauty-Aid Products by establishing relationships with national distributors or
other companies that it believes could effectively market and/or utilize the
Company's technology and Intellectual Property. These relationships could take
the form of lease/license arrangements, marketing and distribution arrangements,
joint ventures or acquisitions. Presently, as the result of its efforts to
market commercially the ColorMate(Registered) Bilirubin Device for medical
application, other than its arrangements with Gordon Laboratories and Nordstrom,
the Company has not initiated any new relationships to distribute its Beauty-Aid
Products. Once the ColorMate(Registered) TLc BiliTest(Trademark) System has
achieved commercial distribution, the Company will renew its efforts for
commercial distribution of its Beauty-Aid Products.

         The Company's marketing plan for the beauty salon and beauty-related
business markets initially focused on direct marketing by the Company through
commissioned sales representatives and indirect marketing through independent
distributors. The Company now believes, based on its prior experience with
regional distributors, that, in order to achieve any significant penetration in
these markets, it will be necessary for the Company to establish relationships
with larger distributors having substantial sales forces and a national
presence, which, will likely result in lower operating margins on such sales
than on sales effected through commissioned sales representatives. Subject to
the availability of funds and the establishment of relationships with suitable
marketing partners, the Company will seek marketing opportunities in the mass,
door-to-door, specialty store and infomercial markets.


                                       9
<PAGE>


         The Company has not achieved material levels of cosmetics sales from
its ColorMate(Registered) units locations and expects that, at the cosmetics
sales levels achieved per location to date, the Company will have to greatly
increase the number of ColorMate(Registered) units in use to achieve significant
levels of cosmetics sales revenue. The Company also believes, based on its
operating history since February 1993, that achieving such increased levels of
cosmetics sale revenues will take significantly longer than was originally
anticipated. However, the Company has completed its inventory of a new line of
chromatically balanced and color coordinated cosmetics, which factors the
Company believes (although there can be no assurance) may enhance revenues from
the beauty-related installations once marketing efforts in these sectors are
renewed.

         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. 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, particularly in the medical industry, the Company will need to
develop additional marketing skills, and continue to incur significant expenses
for sales and marketing activities and in order to hire finders, distributors
and new personnel, including consultants. There can be no assurance the
Company's marketing plans will be successful. See "Competition" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Manufacturing

         Medical. One element of the Company's business strategy is to outsource
the production of the components and final assembly of the ColorMate(Registered)
TLc BiliTest(Trademark) System (including the TLc Lensette, the associated
disposable calibration and verification standard for the system) to third-party
manufacturers. In November 1998, the Company reached an agreement with a
third-party manufacturer for the production of the ColorMate(Registered)
TLc BiliTest(Trademark) System. The manufacturer is a medical device production
contractor, is ISO 9001/EN46001 certified, and has advised the Company that it
is in substantial compliance with all applicable regulatory requirements for the
contract manufacture of medical devices for U.S. and European Union
distribution, including requirements under the FDA's Quality System Regulation
("QSR") and the requirements applicable to the manufacture of medical devices
for the European Union (including ISO 9001 and EN46001).

         Under this renewable, four-year medical device manufacturing agreement,
the contract manufacturer is the exclusive manufacturer/assembler and packager
of two models of the Company's instrument for non-invasive monitoring of newborn
bilirubinemia (infant jaundice) for distribution in the United States (subject
to limited volume exceptions with respect to one model of the instrument). The
manufacturer also has a right of first refusal to match third-party bids to
manufacture/assemble and package a third model of such instrument and a further
right of first refusal to match third-party bids to manufacture/assemble and
package the two models referenced above for distribution outside the United
States. In this regard, subject to any failure of the manufacturer to exercise
its right of first refusal to match third-party bids (thus permitting the
Company to use other manufacturers), the manufacturer is the Company's sole
source of supply for the instruments. Under the agreement, the Company is
responsible for providing to the manufacturer, for assembly and packaging,
certain component parts.

         In February 1999, the first manufacturing run of the Company's
ColorMate(Registered) TLc BiliTest(Trademark) System (under FDA QSR as well as
ISO 9001/EN46001 manufacturing regulatory requirements) for monitoring newborn
jaundice was completed by the manufacturer. The Company commenced shipping the
ColorMate(Registered) TLc BiliTest(Trademark) System to those hospitals having
placed purchase orders for the systems under a limited time offer. The Company
also has begun in-servicing at hospitals and with physicians who have placed
initial orders.

         The Company believes, based on discussions with suppliers of components
used in its ColorMate(Registered) TLc BiliTest(Trademark) System and published
price lists, that the components can be purchased in quantities of 1,000 or more
on terms acceptable to the Company. However, there can be no assurance the
Company will be able to obtain such terms or order in such quantities, and
manufacture of limited quantities of the ColorMate(Registered) units would be
significantly more expensive.

         To the extent the Company successfully markets the
ColorMate(Registered) TLc BiliTest(Trademark) System for medical application,
the Company will use the nonproprietary and proprietary components of a portion
of the existing


                                       10
<PAGE>


ColorMate(Registered) units in its possession for the production of a limited
number of such devices for early stage marketing and sales efforts and for
commercial use.

         In August 1995, the Company established a research and development
facility in Spokane, Washington. This office is staffed, in addition to support
personnel, by two engineers who are former principals of R.B.H. Electronics, one
of the companies which originally engineered and manufactured the Company's
original ColorMate(Registered) units. These engineers currently are primarily
engaged in developing the mass manufacture prototypes of the Bilirubin LED
Device and the ColorMate(Registered) LED Device.

         Cosmetics. The Company's new cosmetics line is being manufactured by
IMS and two independent suppliers; the Company believes its relations with these
suppliers are good, and that in any event the Company is not dependent on these
suppliers and can have its cosmetics line produced by other suppliers of goods
to the cosmetics industry.

         The Company expects that the new versions of its ColorMate(Registered)
System will also be capable of being manufactured at a cost substantially less
than the cost incurred in manufacturing the Company's original
ColorMate(Registered) units. See "Proposed Marketing Plan," and Note 1 of Notes
to the Financial Statements.

Research and Development History

         From 1979 to 1984, prior to inception of the Company, its founders
sought to research and develop an accurate and repeatable technology for the
scientific measurement of human skin color and commercial product colors and the
classification of these into scientific color categories. In 1983, the founders
filed a patent application relating to this technology and, in 1984, formed the
Company to continue such research and development, develop instrumentation and
seek commercial applications. See "Intellectual Properties, Patents and Patent
Applications Pending."

         Between 1984 and 1986, the Company developed the first version of the
ColorMate(Registered) unit, a color measuring instrument that incorporated a
computer, an industrial color measurement instrument, a printer and software
incorporating certain of the Intellectual Properties, including the Chromaticity
Studies. These Intellectual Properties and instrumentation would permit the
user, without any visual estimates or judgments, to determine the color of a
person's skin and assign it accurately to one of over 200 scientifically
determined skin color categories identified by the Company. These categories are
proprietary and constitute part of the Company's Intellectual Properties for use
in various commercial applications. The skin color categories can, for
non-medical marketing purposes, be scientifically defined by the Company within
broader "cool/warm" color spectrum categories. During this period, the Company
researched and developed and formulated its Products. Between 1984 and 1986, the
Company also conducted additional research and development, refined its
methodology and created software for use with the first ColorMate(Registered)
unit to enable it to conduct the Chromaticity Studies for skin color
compatibility with cosmetic, beauty aid and fashion products, and product color
to product color compatibility.

         Additionally, the Company has achieved the ability to scientifically
measure the color of hair (and assign it to one of 57 scientifically defined
hair color categories) and has developed the technology and formulas for custom
blending cosmetic foundations for each individual skin color identified by the
Company, which foundations the Company anticipates marketing under the Nordstrom
Agreement.

         During the early period of test marketing of its Intellectual
Properties and the ColorMate(Registered) units with Hanes and Clairol, the
Company engaged in further research and development regarding scientific
measurement and color classification of hair and hair color products, hosiery,
fabrics and cosmetics. In 1987, the Company conducted further research and
development involving refining many aspects of the technology and
instrumentation to create a miniaturized and portable version of the first
ColorMate(Registered) unit capable of machine-to-machine reproducibility of the
system (i.e., consistent results when different units are used to measure the
same products or skin color). This enabled the Company to arrange for the mass
manufacture for Avon in 1988 of 2,000 portable, miniaturized
ColorMate(Registered) units in connection with the Avon Project. See "Avon
Project and Litigation," "Manufacturing," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 1 of Notes to
Financial Statements.



                                       11
<PAGE>


         From 1986 to 1991, the Company conducted additional research and
development, refined its methodology and created and upgraded software for use
with the ColorMate(Registered) System for skin color measurement for (i) medical
application in detecting and monitoring certain Chromogenic Diseases (such as
newborn bilirubinemia), defined by the Company as those where skin coloration is
symptomatic of disease or disorder and (ii) for skin color compatibility to
products, and (iii) for product color to product color compatibility in the
dental and printing industries.

         The Company has completed both the new housing and related packaging
for the briefcase model of its ColorMate(Registered) TLc BiliTest(Trademark)
System. The Company has also recently completed development of the Bilirubin LED
Device that could be used for monitoring newborn bilirubinemia (infant
jaundice), subject to additional clinical testing and further FDA review and
clearance. The Company is also engaged in clinical trials of the
Colormate(Registered) Bilirubin Device for use in determining the appropriate
levels of phototherapy to treat various skin diseases, such as psoriasis, and
patient tolerance for phototherapy in treating various skin diseases.

         Since the IPO, research and development and technical efforts have been
primarily directed towards (i) the Bilirubin Project, including the preparation
and prosecution of the FDA 510(k) submission, and regulatory requirements for
commercial distribution, (ii) conducting preliminary research for other medical
applications, (iii) applying the Intellectual Properties to develop custom
blended cosmetic foundations and hair color applications, (iv) conducting
research for development of working prototypes of the ColorMate(Registered)
externally powered and battery operated units and mass manufacture prototypes of
the ColorMate(Registered) hand held units for medical application and (v)
conducting research for development of a less expensive, hand held, LED version
based on the ColorMate(Registered) portable units. Although the Company does not
believe that further basic technological developments are required for the
medical applications being targeted by the Company, the Intellectual Properties
embodied in the software may be refined and updated. The Company believes that
any such refinements will be within its current technological expertise.

Intellectual Properties, Patents and Patent Applications Pending

         The Company owns U.S. Patent No. 4,909,632 (expiring in 2007) entitled
"Method For Selecting Personal Compatible Colors," U.S. Patents Nos. 5,311,293
(expiring in 2007), 5,313,267 (expiring in 2011) both entitled "Method and
Instrument For Selecting Personal Compatible Colors" and 5,671,735 (expiring in
2014) entitled "Method and Apparatus for Detecting and Measuring Conditions
Affecting Color." 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. The Company also has filed patent applications in a number
of foreign jurisdictions which correspond, at least in part, to the Company's
United States patents. The Company has been granted European Patent No. 0446512
entitled "Method for Selecting Personal Compatible Colors." That European Patent
has been nationalized in Austria, Belgium, France, Germany, Great Britain,
Italy, Luxembourg, The Netherlands, Spain, Sweden and Switzerland and
Liechtenstein. The Company also has Australian, Canadian, Korean 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. 5,671,735 (collectively, together with the United States
patents, the "Patents"). The Company has not yet been granted any other foreign
patents for its Intellectual Properties.

         The proprietary information claimed by the Patents includes, among
other things: (i) a method of detecting a medical condition that involves a
symptomatic, detectable change in a test subject's skin coloration, such as a
method for monitoring newborn bilirubinemia (infant jaundice) in an infant test
subject, (ii) a method and instrument for identifying skin color and categories
of individuals, (iii) a method of determining color compatibility of an
individual's skin with non-skin matter and (iv) a method of assigning a skin
color compatibility classification to non-skin matter and color charts and
sample assemblages made by that method. Proprietary information claimed by the
Patents is incorporated in the proprietary software and measurement system used
in the ColorMate(Registered) units.

         The Company has the trademarks COLORMATE(Registered) and MY COLORS BY
CHROMATICS(Registered) registered in the United States Patent and Trademark
Office ("USPTO"). The Company believes it also has established common law rights
in the following marks: Baby Face Design Trademark, CCBRC, SITE FLAG, TLC BILI,


                                       12
<PAGE>


TLC BILITEST, TLC LENSETTE, TLC LENSPAK, TLC SOFT and TLC TOUCH and has filed
applications with the USPTO to register the following marks: Baby Face Design
Trademark, SITE FLAG, TLC BILI and TLC BILITEST. Further, the Company believes
it has copyright protection for all of the software used in the
ColorMate(Registered) System. After the respective expiration date of each of
the Company's patents, 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 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. See "Risk Factors--Protection of Intellectual Property."

ColorMate(Registered) Products

         The ColorMate(Registered) units. The ColorMate(Registered) unit is
principally a scientific color measurement instrument to be held against a
subject's skin, hair, teeth, or sample, a series of filters and a computer and
related proprietary software all housed in a portable briefcase. The color
measurement instrument used within the ColorMate(Registered) unit or as a
hand-held battery operated instrument is a ubiquitous unit utilized in the
Company's medical, cosmetic and other applications. The instrument is held
against the subject's skin, hair, teeth or sample and performs scientific color
measurement of coloration and luminosity. In skin color analysis, the software
then analyzes the color measurements so obtained and assigns the subject to one
of the approximately 200 scientific skin color categories identified by the
Company through its research and development effort. In the medical application
for monitoring newborn bilirubinemia (infant jaundice) in infants, the
instrument measures the incremental yellow content of the skin and provides a
numerical index in milligrams/deciliter or micromoles correlating to the serum
bilirubin concentration within a clinically useful range.

         In the beauty-related applications, the ColorMate(Registered) unit
matches each skin color type to a range of scientifically pre-tested compatible
product colors. The unit is equipped with a printer and can provide the subject
with a record of his or her skin color category and color compatible shades of
specific products (including the Company's cosmetic products) appropriate for
that skin color category and other product colors. The ColorMate(Registered)
units also can be used to perform Chromaticity Studies of various product lines
in manufactured or applied forms (e.g., tooth enamel, hair coloring, hosiery,
other cosmetic lines) on behalf of licensees. The ColorMate(Registered) unit was
used in this capacity for Avon, was test marketed in this capacity for Hanes,
Clairol and Regis, and is currently being used in this capacity in tests being
conducted for IMS and under contract with Gordon Laboratories and Nordstroms.
This capability permits the organization of the licensee's products into
scientific color categories so that the consumer can be assisted with proper
color coordination within the licensee's product line.

         The Company has completed the new housing and related packaging for the
briefcase model of its ColorMate(Registered) TLc BiliTest(Trademark) System for
monitoring newborn bilirubinemia (infant jaundice), which has FDA clearance for
commercial marketing. Of the 2,000 ColorMate(Registered) units leased to Avon in
1988, the Company negotiated the return of 1,947 units to the Company during the
Avon litigation in July 1991, of which approximately 1,400 units are available
for commercial use. Sixty-two of these units are in commercial use in beauty
salons or beauty-related installations located in the United States and
internationally. Of the 1,338 ColorMate(Registered) units remaining, 300 units
have been rehoused or repackaged and will be available for use in monitoring
newborn bilirubinemia (infant jaundice). The balance are being completed on an
ongoing basis. Thereafter, the Company will need to outsource the production of
such components by subcontracting to third-party manufacturers. See
"Manufacturing."

         The Company has conducted research and development and developed
engineering specifications regarding a hand-held LED version of the
ColorMate(Registered) System. This version may be marketed for medical use after
conducting further clinical testing and is subject to FDA clearance for the
Bilirubin LED Device. For non-medical applications, the ColorMate(Registered)
LED Device may be marketed in various industries including the dental, beauty
aid and fashion industries and also may be marketed directly to consumers for
home and personal use. The Company expects the new LED versions will also be
capable of being manufactured at a cost substantially less than the cost
incurred in manufacturing the Company's existing ColorMate(Registered) units.


                                       13
<PAGE>


         Cosmetics Line. The ColorMate(Registered) System makes use of only skin
coloration in assigning each complexion to one of approximately 200 measurable
skin color categories. Each category is then assigned to one of four broader
product color categories. The Company's cosmetics are divided into these same
four color classifications, and the product shades in each have been
scientifically measured and balanced chromatically to be compatible with the
approximately 200 skin colorations within the four broad classifications. The
product shades recommended by the ColorMate(Registered) System are individually
prescribed for color coordination with each of the approximately 200 skin color
categories. The Company's cosmetics line is scientifically formulated and
balanced to provide color coordinated products for the skin color of all races.
Each product shade also has been measured and cross-balanced to be compatible
with all other shades in each of the four broad classifications, so that the
colors blend together, and color coordinate with each other after they are
applied. The Company previously marketed its cosmetics, My Colors by
Chromatics(Registered), through the use of the ColorMate(Registered) units. The
previous cosmetics line included underbase makeup, eyeshadow, blushers, eyeliner
pencils, lipliner pencils, lipstick and nail polish, and was manufactured to the
Company's color specifications by private label manufacturers, including IMS.

         The Company developed in conjunction with IMS and other subcontractors,
a completely new line of cosmetic products featuring new formulas and updated
packaging which track the Company's existing scientifically determined
classifications and product shades. The Company anticipates marketing its
cosmetic products, including new color compatible custom blended foundations,
under the Nordstrom Agreement commencing upon delivery of packaging materials
from Nordstrom and final cosmetic formulations, and under the Gordon
Laboratories contract. The Company believes the new cosmetics line will be
comparable in quality and performance to cosmetics sold in leading department
stores, but generally will be priced lower than the cosmetics sold at the
prestige end of the market. See "Proposed Marketing Plan," "Risk Factors," and
Note 1 of Notes to the Financial Statements. To date, the Company has received
insignificant revenues from cosmetics sales other than in connection with the
Avon Project. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

         Swatch Packs. The Company has marketed, through the use of the
ColorMate(Registered) units, a line of fashion swatch packs consisting of 36
scientifically measured colors, coordinated with each other and with the
consumer's skin tone color to aid the consumer in selecting color compatible
fabrics and fashion accessories. Substantially all of the $1,300,000 revenue
generated to date from swatch pack sales occurred in connection with Avon. Sales
revenues from swatch packs since termination of the Avon project have been
insignificant.

Test Marketing History and Prior Marketing Efforts

         Between 1986 and 1987, the Company entered into a series of separate
test marketing arrangements and licenses of its Intellectual Properties and
ColorMate(Registered) units with Clairol, Hanes and Bloomingdales. However, the
Clairol test terminated as a result of failure to reach definitive agreement on
licensing terms, and the Hanes and Bloomingdales tests were terminated when the
Company entered into a license agreement with Avon, which required the Company
not to compete in the department store market.

         From the termination of its national marketing campaign with Avon until
the IPO, marketing of the Company's products primarily had been limited by
inadequate financial and personnel resources. Utilizing the proceeds of the IPO,
the Company hired additional personnel and implemented certain sales and
marketing programs which management believed were necessary to profitably market
its existing products. To date, these efforts have not produced significant
revenues.

         In 1994, the Company entered into two separate domestic distribution
arrangements, and one foreign distribution arrangement. These relationships were
terminated in 1996 without generating any significant revenues. During 1996, the
Company engaged in certain consumer testing, chromaticity studies and other
studies of its technologies with a number of companies in the cosmetics, hair
color and beauty aid fields, including Proctor & Gamble and Clairol. However, no
definitive agreement was reached between the Company and any of the parties. The
Company from time to time has been engaged in certain consumer testing,
chromaticity study engagements, preliminary business discussions and early
contract negotiations with a number of companies in the cosmetics and beauty aid
fields. Such activities with certain of such companies have ceased, certain are
ongoing and certain additional activities with such companies only recently
commenced, such as the 1998 agreement with Nordstrom.



                                       14
<PAGE>


         There can be no assurance the Company will ever develop a successfully
commercial market for the licensing or leasing of its ColorMate(Registered)
System and Intellectual Properties or for the sale of the Beauty-Aid Products,
or for medical application of its technologies. See "Risk Factors--Prior
Marketing Attempts" and "Proposed Marketing Plan".

License and Lease Arrangements

         Medical. The Company has agreed on definitive basic terms with two 
potential marketing and distribution partners for the exclusive distribution of
the Colormate(Registered) TLc Bilitest(Trademark) System in the hospital,
pediatrician and home healthcare markets. Both of these proposals include terms
requiring minimum annual placements of the Colormate(Registered) TLc
Bilitest(Trademark) System and TLc Lensette(Trademark) calibration standards
and/or charges per use. The Board is reviewing both sets of terms as well as
recommendations of its advisors and the Company anticipates selecting one of
these distributors shortly.

         Cosmetics and Beauty Aid. In September 1998, the Company entered into a
lease and license agreement with Nordstrom, Inc. ("Nordstrom") granting
Nordstrom a license to lease the ColorMate(Registered) System and to formulate
and recommend Nordstrom's "C2O Color to Order" line of proprietary cosmetic
products in four Nordstrom flagship department stores. The products will be
introduced and evaluated over a three month period (commencing upon delivery of
packaging materials from Nordstrom and final cosmetic formulations) for
potential extended use, including additional store locations. In connection with
this license agreement, the Company is collaborating with a consultant to
provide training, marketing, sales, promotional and liaison services (including
assisting in development of all applicable non-color product formulas, manuals,
promotional materials and training aids) at each of the four Nordstrom's stores.

         The Company's leases and licenses for its ColorMate(Registered) units
and Intellectual Properties for the sale of its Beauty-Aid Products at beauty
salons/beauty-related installations in the United States are currently being
renegotiated pending the completion and evaluation of the Colormate(Registered)
LED System mass manufacturing prototype. Outside the United States, the Company
conducts business in Israel and South Africa. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 1 to Notes
to the Financial Statements. In addition, the Company has entered into perpetual
lease/licensing arrangements in respect of two such units for an aggregate price
of $5,000 each at two beauty salons. The Company has received immaterial levels
of sales revenue from these leases and licenses. See "Proposed Marketing Plan."

         In April 1992, the Company entered into an agreement with IMS, a
cosmetic marketing, manufacturing and distribution company based in Israel, for
the license of the Intellectual Properties and the lease of 24
ColorMate(Registered) units for use in marketing in Israel, the Company's swatch
packs and those of IMS's chromatically balanced cosmetic products developed by
the Company through Chromaticity Studies utilizing the Intellectual Properties.
The Company has continued to extend, on a month-to-month basis, IMS's option to
renew its leases for a five-year period in order for IMS to evaluate the
handheld version of the ColorMate(Registered) LED Device upon completion of the
prototype. IMS may lease up to 200 additional ColorMate(Registered) units during
the five-year extension of this agreement. There can be no assurance that this
agreement will be renewed for the full five-year renewal period or that IMS will
lease additional ColorMate(Registered) units. In 1998 and 1997, the Company did
not generate any revenues from IMS. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and Note 1 to Notes to Financial
Statements.

         Other than the units provided to IMS and Gordon Laboratories, the
Company has leased or intends to lease the ColorMate(Registered) units for
cosmetic use to beauty salons, beauty-related businesses, direct sales
representatives and distributors and specialty stores (i) at a monthly rental
fee ranging from $165 to $250 (depending on the length of the lease terms), if
rented on a full-time basis, and at a proportionately higher rate if the machine
is leased for shorter periods, or (ii) on a minimum monthly guarantee cosmetic
product purchase basis. The Company sells its Beauty-Aid Products for resale to
the public to persons leasing the ColorMate(Registered) units and licensing the
Intellectual Properties. The Company intends to sell "tester" sets of its new
cosmetics line, in connection with the placement of the ColorMate(Registered)
units, in order to stimulate cosmetic sales. The Company's marketing plan
currently anticipates that the skin color analysis capability of the
ColorMate(Registered) units will be marketed in conjunction with the Beauty-Aid
Products at a variety of price points--i.e., the color analysis alone will be
priced at $25 and the analysis will be done on a complimentary basis for a
customer who purchases Beauty-Aid Products for at least $25. However, the
Company does not intend to conduct significant marketing efforts in the
cosmetics or beauty aid field until after it



                                       15
<PAGE>


has successfully commercialized its technologies for the monitoring of newborn
bilirubinemia (infant jaundice) in infants.

Competition

         Medical Industry

         The medical device industry in general is intensely competitive. Now
that the Company believes it is in substantial compliance with QSR and other FDA
requirements and is beginning to market and distribute its ColorMate(Registered)
TLc BiliTest(Trademark) System for monitoring newborn bilirubinemia (infant
jaundice) in infants in the United States, the Company will compete with other
providers of infant jaundice diagnostic and monitoring products.

         As the Company implements its business plan to commercialize the
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 Company will be competing with established
companies which have greater financial, technical, manufacturing, marketing,
research and development and management resources, including with respect to the
monitoring of infant jaundice, companies such as Minolta Co., Ltd. ("Minolta"),
Respironics, Inc. ("Respironics"), which recently acquired Healthdyne
Technologies, Inc. ("Healthdyne"), and SpectRx, Inc. ("SpectRx"), among others.
In addition, the invasive laboratory blood test detection and manufacturing
methods currently in use for bilirubin infant jaundice, have already achieved
acceptance by and are in widespread use in the medical community, unlike the
Company's proposed methods. See "Risk Factors."

         The Company believes that Minolta developed and markets a screening
device, the Minolta Jaundice Meter, to measure the amount of bilirubin in the
skin of a newborn infant and whether a serum bilirubin measurement is required.
The Company believes that the measurements obtained by the Minolta device,
unlike the ColorMate(Registered) TLc BiliTest(Trademark) System, are not used
when the infant is being treated by phototherapy for hyperbilirubinemia, and
are affected by the infant's race and skin color, which the Company believes
significantly limits its use in a heterogeneous population. As a result, the
Company believes that the Minolta device is currently in limited use in the
United States and that it is not used at all for infants who are receiving
phototherapy. There can be no assurance that Minolta will not effect
improvements to its device in the future to overcome these apparent limitations.
See "Risk Factors."

         Based on public filings, the Company believes that in June 1996,
SpectRx entered into a collaborative arrangement with Respironics in which
Respironics was responsible for regulatory clearance and sales of SpectRx's
device for infant jaundice analysis in the United States and Canada. Based on
these filings SpectRx's infant jaundice device is intended to be a hand-held
instrument, which incorporates a microspectrometer to collect spectroscopic
information from the infant's skin. In February 1999, SpectRx announced that it
had obtained 510(k) clearance for its device and that it would commence U.S.
marketing of its device shortly. SpectRx also announced that during the third
quarter of 1998, it entered into a distribution agreement with Atom Medical
Corporation for distribution of the company's infant jaundice product in Japan,
pending regulatory clearance from Japan's Ministry of Health and Welfare. Also,
during the third quarter of 1998, SpectRx announced receipt of regulatory
clearance to market its infant jaundice product in Canada and shipments to
Respironics for sale in Canada commenced in the same quarter. The Company
believes that the measurements obtained by the SpectRx device, unlike the
Colormate(Registered) TLc BiliTest(Trademark) System, are not used when the
infant is being treated by phototherapy for hyperbilirubinemia, which the
Company believes significantly limits its use in monitoring bilirubin infant
jaundice. See "Risk Factors."

         The Company's success depends in large part on the acceptance by the
medical community of the Company's new technology. There can be no assurance
that the ColorMate(Registered) TLc BiliTest(Trademark) System will effectively
compete with any currently used systems. 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. Furthermore, there can
be no


                                       16
<PAGE>


assurance that the Company's competitors will not succeed in developing, during
commercialization of the Company's products, devices and technologies that
permit more efficient, less expensive non-invasive analysis 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 infant jaundice or otherwise render
the Company's products obsolete. Such competition could have a material adverse
effect on the Company's business, financial condition and results of operation.

         The Company's ability to compete is affected by its product development
and innovation capabilities, its ability to obtain additional regulatory
clearances, as necessary, the marketing and manufacturing capabilities of the
Company and its third party vendors, its ability to protect the proprietary
technology of its products, its ability to attract and retain skilled employees,
and, for products sold in managed care environments, its ability to maintain
current distribution relationships and establish new distribution
relationships.

         Cosmetics Industry

         Competition in the cosmetics industry is principally based on price,
perceived market cachet or "image" and breadth and quality of product line. The
cosmetics industry is particularly sensitive to changing consumer preferences
and demands, which are difficult to predict and over which the Company has no
control. Additionally, competition in the cosmetics industry is diverse and
fragmented, but is nevertheless dominated in certain markets by a number of
large, established, well-known companies. Many of these companies have 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. However, these companies do not claim that their
ability to deliver color compatible products is scientifically based. In
addition, there are a significant number of other cosmetic/beauty aid companies,
as well as color consultation companies and independent color consultants, which
currently market products and services with which the Company's color science
marketing approach and Products would have to compete. Many of the competitors
are established companies, having, among other things, significantly greater
financial, marketing and human resources than the Company and broader, more
recognizable product lines than the Company, as well as established presence in
the market and their own cosmetic manufacturing facilities, unlike the Company.

         Many of the companies with which the Company competes rely on a variety
of subjective techniques to determine color compatibility, such as video
simulation techniques, computer processing of responses to questionnaires,
material draping techniques and "white card to wrist" techniques. With these
subjective techniques, results can vary from customer to customer, from
geographical region to region, etc. Many of the Company's competitors have been
quite successful in marketing their cosmetic lines based on the subjective
techniques described above or by marketing cosmetics advertised as "color
coordinated" even without being sold in connection with the subjective
techniques. The Company believes that only its ColorMate(Registered) units and
Intellectual Properties, and licensees thereof, can provide scientifically
accurate color analysis and that this capability provides significant marketing
advantage as was demonstrated in certain of the Company's test marketing
activities and with Avon. There can be no assurance that consumers will prefer
products based on such determinations, rather than the products sold by most of
the Company's competitors based on subjective techniques. However, the Company
believes its objective scientific techniques provide competitive marketing
advantages to the consumer in that the Company believes the subjective
techniques do not produce accurate, consistent results from consumer to
consumer, or upon multiple readings of the same consumer at different times. The
inaccuracy inherent in the subjective techniques is attributable to reliance on
or interference from such variables as (i) variations in the accuracy of draping
materials and the inability of video simulators to accurately reproduce color
images, (ii) differences in the training and color vision of the consultant
(which vary from person to person and which in any event cannot be as accurate
as a scientific measuring instrument), (iii) consistent lighting (i.e., natural
light versus fluorescent and/or non-fluorescent lighting) and (iv) surrounding
hair and eye coloration (which can result in misleading color analysis of
adjacent skin tone, such as trying to compare the skin of people of different
races who both have black eyes and hair). The Company's system relies solely on
color measurement of the skin by instrument and does not rely on, and achieves
consistent, repeatable scientific results independent of, such variables. The
Company believes that consumers will prefer a system that offers objective,
accurate, repeatable determination of skin color and the products most
compatible with that skin color over subjective techniques that offer
inconsistent results. In addition, because the ColorMate(Registered) units are
easy to use and virtually automatic, the units do not rely on the operator's
color analysis expertise or require extensive operator training, thereby
resulting in training cost savings.

                                       17


<PAGE>

         Other Applications

         The Company has not previously licensed its Intellectual Properties for
use in any industry other than the cosmetics, beauty aid and fashion industries.
In addition, management of the Company has had limited experience in marketing
the Intellectual Properties and ColorMate(Registered) System in other fields,
such as the dental industry. Although the Company intends to retain consultants
who will be able to assist the Company in marketing in such fields, as well as
the medical industry, the Company's resources are limited. To the extent the
Company attempts to market products utilizing its Intellectual Properties in
other industries, the Company will compete with established companies and
technologies in those industries, which companies 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 particular, other
companies, including newer companies, that may have developed non-invasive
detection and monitoring devices but that may or may not have obtained FDA
marketing clearance, already have established certain relationships with large
distribution companies based on other products they have developed and
manufactured to date. In addition, the industrial color meter divisions of
camera companies, provide color measurement equipment in the paint, textile,
automotive and food industries, and are the leaders in scientific color
measurement of products in these industries. In fact, the Company would be
competing in these industries with suppliers of components for the
ColorMate(Registered) units. These components employ the same color measurement
technology and methodology as do the ColorMate(Registered) units when they are
equipped with standard non-proprietary software for industrial application.
However, when the ColorMate(Registered) units are equipped with certain of the
Company's proprietary software programs, they provide machine-to-machine
stability and reproducibility. Other than in special applications, including
applications requiring such machine-to-machine stability and reproducibility,
the Company's Intellectual Properties and ColorMate(Registered) units do not
provide batch to batch (for instance, dye lot to dye lot) color measurement
superior to that provided by existing technology. However, the Company believes
that the ColorMate(Registered) units can be marketed at prices less than those
currently charged by such competitors for comparable color measurement
instruments, even in standard industrial applications.

Government Regulations

         Product Regulation. The Company's advertising, sales practices,
cosmetic products 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 various laws such as 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 ColorMate(Registered) units and products abroad. In
addition, the research, development, testing, production and marketing of the
Company's medical products are subject to extensive governmental regulation in
the United States at the federal, state and local levels, and in certain other
countries, that regulate direct selling activities. Non-compliance with
applicable requirements may result in recall or seizure of products, total or
partial suspension of production, refusal of the government to allow clinical
testing or commercial distribution of products, civil monetary penalties,
injunction and criminal prosecution.

         The FDA regulates the development, production, distribution and
promotion of medical devices in the United States. The medical products being
developed for manufacture and sale by the Company are subject to regulation as
medical devices by the FDA. Pursuant to the Federal Food, Drug and Cosmetic Act
(the "Act"), a medical device is classified as a Class I, Class II or Class III
device. Class I devices are subject to general controls, including establishment
registration, device listing, premarket notification (510(k)) clearance (in some
cases), labeling requirements, QSR requirements, prohibitions on adulteration
and misbranding, and reporting of certain adverse events (known as medical
device reporting or "MDR"). In addition to general controls, Class II devices
may be subject to special controls that could include performance standards,
postmarket surveillance, patient registries, guidelines, recommendations and
other actions as the FDA deems necessary to provide reasonable assurance of
safety and effectiveness of the device. Class III devices must meet the most
stringent regulatory requirements and must be approved as safe and effective by
the FDA before they can be marketed. Such premarket (PMA) approval can involve
extensive preclinical and clinical testing to prove safety and effectiveness of
the device and generally is more costly and time consuming than a 510(k)
submission.

         Unless otherwise exempt, all medical devices introduced to the market
since 1976 are required by the FDA, as a condition of marketing, to secure
510(k) clearance or premarket approval through a PMA. A product will be 

                                       18


<PAGE>


cleared by the FDA under a 510(k) if it is found to be substantially equivalent
in terms of safety, effectiveness, technology and intended use to another
legally marketed medical device that was on the market prior to May 28, 1976
(that subsequently did not require a PMA application) or to a product that has
previously received a 510(k) and is lawfully on the market. If a product is not
substantially equivalent to such a medical device, and not otherwise exempt, the
FDA must first approve a PMA application before it can be marketed. An approved
PMA indicates that the FDA has determined the product has been proven, through
the submission of clinical data and manufacturing and other information, to be
safe and effective for its labeled indications. The PMA process typically takes
more than a year and typically requires the submission of significant quantities
of clinical data and supporting information. The process of obtaining a 510(k)
currently takes, on average, approximately four months from the date of
submission (based on FDA's fiscal year 1998 figures). However, the review
process for a particular product may be shorter or substantially longer
depending upon the circumstances. Moreover, there can be no assurance that a
510(k) will be cleared. A 510(k) must include submission of supporting
information, including design details and draft labeling, and may be required to
contain safety and efficacy data, possibly from clinical trials. Product
modifications intended to be made to a cleared device also may require filing
and clearance of a new 510(k) submission or filing and approval of a PMA
supplement, during which time the modified product cannot be commercially
distributed.

         The 510(k) clearance order obtained from the FDA's CDRH indicates that
the Company's ColorMate(Registered) Bilirubin Device is a Class II device,
subjecting it to "general controls" and "special controls." Currently, the
Company is unaware of any special controls applicable to the
ColorMate(Registered) Bilirubin Device. The Company is not currently developing,
manufacturing or distributing any Class III devices, although it may do so in
the future. The Company also is subject to additional FDA and foreign statutes
and regulations and/or may be subject to additional clearances or approvals to
the extent the Company continues its efforts to test, manufacture and license
the Intellectual Properties and lease the ColorMate(Registered) units to the
medical community in additional or significantly modified forms or for new uses.
The Company is subject to regulation by various governmental agencies that
regulate direct selling activities. See "Risk Factors."

         Although the Company has received FDA clearance on its
ColorMate(Registered) 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(Registered) Bilirubin Device for monitoring newborn bilirubinemia
(infant jaundice) by healthcare professionals in the United States, the Company
also must comply with the other applicable statutes enforced, and 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), medical device reporting, labeling, and the statutory
prohibitions against adulteration and misbranding.

         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 or
significantly modified products or to expand permitted uses of existing
products. Regulatory clearance to market a product from the FDA may entail
limitations on the indicated uses of the product. The ability to market can be
challenged (and possibly 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. There can be no assurance the Company will be able to
maintain substantial FDA compliance.

         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 and maintain 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 

                                       19


<PAGE>


tax requirements. These regulations vary from country to country. To market its
ColorMate(Registered) TLc BiliTest(Trademark) System in the European Union, the
Company sought ISO-9001/EN46001 certification and the right to affix the CE
mark. ISO-9001/EN46001 certification recognizes that the Company has established
a quality system for the design, development, manufacturing, servicing and
distribution of its medical device. The CE mark is a symbol of quality and
compliance with applicable European Union medical device directives. In March
1999, the Company received ISO-9001/EN46001 certification and passed a product
inspection in February 1999 for purposes of receiving the right to affix the CE
mark to such specific inspected product. The Company is awaiting a certification
from the appropriate European authority to allow release of the specific
inspected product for European Union distribution. The Company also has applied
for and is awaiting the right to self-certify the product, without the need for
third party specific product inspection and certification, for purposes of
affixing the CE mark for European Union distribution. Failure to maintain ISO
9001/EN 46001 certification, CE mark rights or other foreign regulatory
approvals for the Company's medical products would prevent the Company from
marketing its medical products abroad, which would 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 contract
manufacturing or other regulated arrangements will be required to adhere to
applicable FDA regulations, including the QSR requirements and similar
regulations in other countries, which include, among other things, 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. The FDA revised the QSR requirements in 1996 which
increased the cost of regulatory compliance for the Company. 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, possible
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.

         Future products developed by the Company and products currently under
development may require FDA clearance through either 510(k) or PMA application
procedures. There can be no assurance that marketing clearances or approvals
will be obtained on a timely basis or at all. Delays in receiving such
clearances or approvals could have a material adverse effect on the Company.

         The FDA also regulates the commencement and conduct of clinical
investigations to determine the safety and effectiveness of unapproved
investigational devices, including investigations involving new intended uses of
previously cleared or approved devices. Clinical investigations are regulated by
the FDA under the Investigational Device Exemptions ("IDE") regulations. The IDE
regulations include significant requirements that must be met, including but not
limited to informed patient consent, IRB review and approval of research
protocols, reporting obligations to the FDA, recordkeeping requirements and
prohibitions against commercialization of investigational devices. A sponsor
must obtain FDA approval of an IDE application before starting the
investigation, unless the device is found to be a non-significant risk (NSR)
device by the sponsor and each IRB that reviews and approves the study. The FDA,
however, has the authority to determine that a study designated as involving an
NSR device by the sponsor and IRBs involves a significant risk device, and to
require that an IDE application be submitted and approved before the study can
resume. In addition, a study of an NSR device must still comply with the
above-referenced and certain other IDE requirements. A violation of the IDE
regulations can result in a variety of sanctions, such as warning letters,
prohibition against additional clinical research, the refusal to accept data and

                                       20

<PAGE>


criminal prosecution. The Company also may provide devices for use in FDA
approved or recognized clinical trials as a contract manufacturer.

         There can be no assurance that any clinical study will comply with all
elements of the FDA's IDE regulations, that a study will provide evidence of the
safety or effectiveness of the device, or that a study will ultimately result in
the approval of the device.

         Anti-Remuneration Laws. A federal law commonly known as the
"anti-kickback statute" prohibits the offer, solicitation, payment or receipt of
anything of value (direct or indirect, overt or covert, in cash or in kind)
which is intended to induce business for which payment may be made under a
federal health care program, i.e., any plan or program that provides health
benefits, whether directly or indirectly, through insurance, or otherwise, which
is funded directly, in whole or in part, by the United States Government (e.g.,
Medicare, Medicaid and CHAMPUS). The type of remuneration covered by the
anti-kickback statute is very broad. It includes not only kickbacks, bribes and
rebates, but also proscribes any remuneration, whether made directly or
indirectly, overtly or covertly, or in cash or in kind. Moreover, prohibited
conduct includes not only remuneration intended to induce referrals, but also
remuneration intended to induce purchasing, leasing, arranging or ordering of
any goods, facilities, services, or items paid for by a federal health care
program.

         In part to address concerns regarding the implementation of the
anti-kickback statute, in 1991, the federal government published regulations
that provide exceptions or "safe harbors" for certain transactions that are
deemed not to violate the anti-kickback statute. Among the safe harbors included
in the regulations are transactions involving discounts or the payment of
certain administrative fees to group purchasing organizations. While the failure
to satisfy all the criteria for a safe harbor does not necessarily mean that an
arrangement is unlawful, engaging in a business practice for which there is a
safe harbor may be regarded as suspect if the practice fails to meet each of the
prescribed criteria of the safe harbor. Violations of the statute are punishable
by civil and criminal penalties and/or exclusion of the provider from
participation in the federal health care programs. Also, there is the risk that,
in a civil lawsuit to enforce a contract that contains a structure in violation
of the anti-kickback statute, a court might conclude that the contract is
unenforceable as against public policy. Congress directed the Secretary of the
United States Department of Health and Human Services ("HHS") to issue advisory
opinions regarding compliance with the anti-kickback statute. Failure of a party
to seek an advisory opinion, however, may not be introduced into evidence to
prove that the party intended to violate the anti-kickback statute. Several
states also have statutes or regulations prohibiting financial relationships
with referral sources that are not limited to services for which a federal
health care program pays.

         While the Company believes its marketing programs meet the requirements
of the anti-kickback statute and its implementing regulations, there is no
guaranty that the HHS Office of the Inspector General would view all of the
Company's marketing arrangements as meeting all of the requirements of the
appropriate safe harbors. The Company has not sought, and has no present
intention to seek, an HHS advisory opinion regarding any aspect of its current
marketing arrangements. A finding of noncompliance with the anti-remuneration
laws by federal or state regulatory officials, including noncompliance with
appropriate safe harbors, could have a material adverse effect on the Company.

         Coverage and Reimbursement. The Company's products are intended to be
purchased or leased by health care providers or suppliers which submit claims
for reimbursement for such products or their use to third-party payors such as
Medicare, Medicaid and private health insurers. In the United States, patients,
hospitals and physicians who purchase medical devices, generally rely on such
third-party payors to reimburse them for all or a portion of the cost of the
medical device or its use. Reimbursement for devices (or their use) that have
received FDA clearance has generally been available in the United States.
Third-party payors are increasingly challenging the prices charged for medical
products and services. There can be no assurance that the Company's products
will be considered cost effective and that reimbursement to the consumer will be
or continue to be available, or sufficient to allow the Company to sell its
medical device products on a competitive basis. Moreover, obtaining and
maintaining health care payors' approval of reimbursement for the Company's
products or their use, and the level of reimbursement made available, will be an
important factor in establishing pricing, structure and market acceptance. 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. Although the Company has no knowledge that
third-party payors will 

                                       21

<PAGE>



adopt measures that would limit coverage of, or reimbursement for, its products
or their use, any such measures that were applied to the Company's products
could have a material adverse effect on the Company. See "Risk Factors" -
"Government Regulation - Coverage and Reimbursement" for a discussion of the
impact of U.S. and foreign healthcare and insurance policies on the Company's
business and marketing plan.

         American Medical Association ("AMA") CPT codes are generally used to
facilitate the processing of insurance reimbursement claims and to provide a
simplified reporting procedure. However, assignment of a code does not assure
that the insurer will provide reimbursement or that the AMA endorses the medical
procedure at issue. In March 1998, the Company was assigned AMA CPT Code 82250
for processing claims for use of the ColorMate(Registered) TLc
BiliTest(Trademark) System. The same code is assigned for the reimbursement of
laboratory blood tests currently used to monitor newborn bilirubinemia (infant
jaundice). Subsequently, the AMA informed the Company that CPT Code 84999
("Unlisted Chemistry Procedure"), not Code 82250, was the assigned code.
However, the AMA indicated that it was reviewing coding in this area generally.
The Company believes the original Code 82250 is correct and will continue its
efforts to have the AMA reassign this code, or apply for a new code. There can
be no assurance that the Company will be reassigned the original CPT Code 82250.
Claims for reimbursement under CPT Code 84999 may not be as easily processed for
reimbursement as claims made under CPT Code 82250.

         In addition, since receiving FDA marketing clearance in the United
States, the Company has undertaken the procedures to obtain required
international regulatory clearances for its ColorMate(Registered)
TLc BiliTest(Trademark) System. In this regard, to market its
ColorMate(Registered) TLc BiliTest(Trademark) System in the European Union, the
Company sought ISO-9001/EN46001 certification and the right to affix the CE
mark. ISO-9001/EN46001 certification recognizes that the Company has established
a quality system for the design, development, manufacturing, servicing and
distribution of its medical device. The CE mark is a symbol of quality and
compliance with applicable European Union medical device directives. In March
1999, the Company received ISO-9001/EN46001 certification and passed a product
inspection in February 1999 for purposes of receiving the right to affix the CE
mark to the specific inspected products. The Company is awaiting a certification
from the appropriate European authority to allow release of the specific
inspected product for the European Union distribution. The Company
also has applied for and is awaiting the right to self-certify the product,
without the need for third-party specific product inspection and certification,
for purposes of affixing the CE mark for European Union distribution. As the
Company moves forward with European Union commercialization plans, and if the
Company obtains necessary regulatory marketing approvals from other foreign
countries, 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.

         The Company is unable to predict what changes will be made in the
reimbursement methods utilized by third-party health care payors. Although the
Company anticipates that hospitals and physicians will justify the use of the
ColorMate(Registered) TLc BiliTest(Trademark) System by clinical benefits that
the Company believes will be derived from the use of the ColorMate(Registered)
TLc BiliTest(Trademark) System, there can be no assurance that this will be the
case.

         Health Care Reform. Because the cost of health care delivery has been
rising steadily and because the cost of a significant portion of medical care in
the United States and other countries is typically funded by governmental
insurance programs, there have been a number of government initiatives to reduce
health care costs. Congress and various state legislatures have proposed changes
in laws and regulations that, if ever enacted, could effect major restructuring
of the health care industry. Although many of these proposals may seek to
maintain or expand access to health care services, the common objective of the
proposed legislation is to achieve cost containment in the health care sector.
Changes in governmental support of health care services, the methods by which
such services are delivered, the prices for such services or the regulations
governing such services or mandated benefits all may have a material adverse
effect on the Company. Even if the ultimate impact of any such changes on net
sales is positive, no assurance can be given that the costs of complying with
possible new requirements would not have a negative impact on the Company's
future earnings. No assurance can be given that any such legislation will not
have a material adverse effect on the Company.

                                       22


<PAGE>


Avon Project and Litigation

         Avon Project. Commencing in November 1986 and through 1987, the Company
engaged in limited marketing activities with Avon and, in 1987 and 1988, engaged
in research and development in respect of the miniaturization and refinement of
the ColorMate(Registered) units, which contributed to the development of the
portable ColorMate(Registered) units marketed by Avon. On October 15, 1987, the
Company entered into an exclusive master license agreement with Avon under which
the Company (i) researched and developed, engineered and arranged for the
assembly by third-party subcontractors of 2,000 ColorMate(Registered) units,
(ii) conducted proprietary Chromaticity Studies of Avon's cosmetics line in
order to develop Avon's "Avon Color" cosmetics line, and (iii) granted an
exclusive United States license for use of its Intellectual Properties in
certain retail areas. The cost of such research and development (estimated at
$1,000,000) as well as the manufacturing cost of $4,600,000 for the
ColorMate(Registered) units was paid by the Company from the proceeds of the
license agreement with Avon.

         Avon Litigation. In April 1990, the Company commenced a suit against
Avon in the United States District Court for the Southern District of New York
for patent infringement, misappropriation of trade secrets, breach of contract,
federal antitrust violations and unfair competition. On August 12, 1994, the
Company and Avon entered into a settlement agreement under which, among other
recovery, Avon made a $2,000,000 cash payment to the Company, the parties
exchanged mutual releases regarding the subject matter of the litigation, and
the Company and Avon entered into a stipulation dismissing the Company's case
with prejudice.

Year 2000

         Until recently computer programs were generally written using two
digits rather than four to define the applicable year. Accordingly, such
programs may be unable to distinguish properly between the Year 1900 and the
Year 2000. This could result in system failures or data corruption for the
Company or its vendors which could cause disruptions of operations, including,
among other things, a temporary inability to process transactions or engage in
business activities or to receive information, services or payment from vendors.

         The Company's internal computing systems are primarily limited to
hardware and software for its financial systems, such as general ledger and
accounts receivable and payable systems, and word processing and database
systems. The Company is not dependent on large legacy systems and does not use
mainframes.

         The Company's management is continuing to conduct an assessment of the
Company's operations from an internal, vendor and customer perspective. The
assessment addresses all of the Company's material computer systems,
applications and any other material systems that the Company believes may be
vulnerable to the Year 2000 issue and significantly affect the Company's
operations. This assessment includes contacting third parties with whom the
Company has a material relationship to determine their Year 2000 readiness. The
Company's assessment is not yet complete and there can be no assurances that any
such problems will not arise.

         The total costs associated with the Company's Year 2000 compliance are
not expected to be material to the Company's financial position. However,
satisfactory remediation of Year 2000 issues is dependent upon many factors,
some of which are not completely within the Company's control. The Company's
current estimates of the impact of Year 2000 compliance on its financial
position do not include costs that may result from the failure of third parties
with whom the Company has a material relationship to be Year 2000 compliant.
Should the Company's internal systems or systems of one or more significant
third parties fail to achieve Year 2000 compliance, the Company's business and
its operations could be materially adversely affected.

Employees

         The Company currently employs 41 persons on a full-time basis, 20 of
which are medical marketing or regulatory personnel. None of the Company's
employees is represented by a union. The Company believes that its relationship
with its employees is good. The Company intends to hire additional employees and
consultants to carry out its proposed marketing plans. Such persons will be
compensated with salaries, or on a fee or commission basis, as applicable. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

                                       23

<PAGE>


Recent Events

         On April 15, 1999, the Company issued an aggregate of $5,000,000 14%
senior convertible debentures due April 15, 2002 (the "Debentures") in a private
placement. Payments of interest on the outstanding principal amount of the
Debentures are due on the earlier of the maturity date or upon any conversion of
the Debentures into the Company's Common Stock. The accrued interest may be paid
either in cash, shares of the Company's Common Stock or a combination of Common
Stock and cash, at the option of the Company.

         The outstanding principal amount of the Debentures (together with
accrued interest thereon) is convertible until after the first anniversary of
the closing. At that time, the Debentures are convertible into shares of Common
Stock, at the option of the holder or holders thereof, at the conversion price
of $5.00. However, at any time prior to April 14, 2000, such portion of the
Debentures may be converted, at the option of the holder or holders thereof, as
shall result in the issuance, upon such conversion, of not more than an
aggregate of 200,000 shares of Common Stock. Subject to applicable securities
laws, the holder or holders of such shares, in the aggregate, may only sell not
more than an aggregate of 50,000 shares of such Common Stock issued upon such
conversion during any one month period ending prior to April 14, 2000. At any
time after the 18 month anniversary of the closing, the Company may prepay the
entire amount of the Debentures or any portion thereof for a prepayment price
equal to the original principal amount of the Debentures plus all accrued and
unpaid interest. At any time after the 18 month anniversary of the closing and
prior to the Maturity Date, in the event the average closing bid price (as
reported on the Nasdaq SmallCap Market or such other principal market or
exchange on which the Common Stock is then traded) of the Company's Common Stock
for any 10 consecutive trading days equals or exceeds $10.29, the Company can
require conversion of the outstanding principal amount (together with accrued
interest) of the Debentures into Common Stock at a conversion price of $5.00 per
share.

         For as long as the Debentures are outstanding, the Company's obligation
to pay the principal of and interest on the Debentures shall be senior in right
of payment and priority to any current or future (i) obligations of the Company
to commercial banks, institutional lenders or other lenders for borrowed money,
(ii) obligations of the Company to commercial banks, institutional lenders or
other lenders under guarantees by the Company of obligations of wholly-owned
subsidiaries of the Company to any such lenders and (iii) convertible preferred
equity or convertible debt security issued by the Company.

         The Company is required to file a registration statement for all of the
shares of Common Stock issuable upon the conversion of the outstanding principal
amount of and accrued interest on the Debentures within 60 days of the closing,
and to use best efforts to cause such registration statement to be effective
within 120 days from the closing.

         An "Event of Default" under the Debentures shall constitute any of the
following: (i) failure by the Company to make any payment (whether principal,
interest or otherwise) on the Debentures when due and such default continues for
10 days; (ii) breach of any of the representations or warranties made by the
Company in the Debentures or Subscription Agreement therefor, or in any written
statements furnished by the Company in connection with the financing; (iii) the
Company shall fail to perform its agreements or obligations under the Debentures
or the Subscription Agreement and such failure shall continue for 30 days; (iv)
the Company shall (1) make an assignment for the benefit of its creditors or
commence proceedings for its dissolution; or (2) apply for or consent to the
appointment of a trustee, liquidator, custodian or receiver thereof, or for a
substantial part of its property or business; (v) a trustee, liquidator,
custodian or receiver shall be appointed for the Company or for a substantial
part of its property or business without its consent and shall not be discharged
within ninety (90) days after such appointment; (vi) bankruptcy, reorganization,
insolvency or liquidation proceedings or other proceedings for relief under any
bankruptcy law or any law for the relief of debtors shall be instituted by or
against the Company and, if instituted against the Company, shall not be
dismissed within ninety (90) trading days after such institution or the Company
shall by any action or answer approve of, consent to, or acquiesce in any such
proceeding or admit the material allegations of, or default in answering a
petition filed in any such proceeding; or (vii) the Company shall dispose of
all or substantially all of its assets in one or more transactions or shall
redeem more than a de minimis amount of its outstanding shares of capital stock.

         Following the occurrence of any Event of Default which is not waived by
the Debenture holders, the holders may accelerate the maturity of the
Debentures, whereupon all principal and interest thereunder shall be immediately
due and payable. See "Risk Factors."

         The Company has agreed on definitive basic terms with two potential
marketing and distribution partners for the exclusive distribution of the
Colormate(Registered) TLc Bilitest(Trademark) System in the hospital,
pediatrician and home healthcare markets. Both of these proposals include terms
requiring minimum annual placements of the Colormate(Registered) TLc
Bilitest(Trademark) System and TLc Lensette(Trademark) calibration standards
and/or charges per use. The Board is reviewing both sets of terms as well as
recommendations of its advisors and the Company anticipates selecting one of
these distributors shortly.

         Adoption of Shareholders' Rights Plan

         On December 31, 1998, the Company's Board of Directors adopted a
Shareholders' Rights Plan (the "Plan") designed to protect shareholders from
various abusive or coercive takeover tactics, including attempts to acquire
control of the Company at an inadequate price. The Plan is also intended to
provide additional protection from partial or two-tiered takeover attempts,
coercive stock accumulation programs, street-sweeps, squeeze-outs and other
tactics that may be used to gain control of the Company without offering an
adequate price to all shareholders. The Plan is similar to plans adopted by many
public companies.

         Under the Plan, each shareholder will receive a dividend of one right
for each share of the Company's outstanding common stock (a "Right"). Subject to
the terms of the rights agreement between the Company and its transfer agent
(the "Rights Agreement"), each Right will entitle the holder to purchase one
one-hundredth of a share of the Company's new Class B Series 1 Preferred Stock
at an initial exercise price of $28. Until the Rights become exercisable, they
will be represented by, and trade with, the outstanding common stock; the
Company does not anticipate issuing separate certificates for the Rights at this
time.

         Initially, the Rights are attached to the Company's common stock and
are not exercisable. They become detached from the Common Stock, and become
immediately exercisable, (i) following expiration of the Board of Directors'
right to redeem the Rights during the 10 day window period (the "Window
Period"), or any extension of the Window Period, after any person or group
(other than the exempted shareholder) becomes the beneficial owner of 20 percent
or more of the Company's common stock (other than acquisitions which are
approved in advance by the Board of Directors), or (ii) ten days after any
person or group announces a tender or exchange offer that would result in that
same beneficial ownership level (other than pursuant to certain permitted
offers).

         If a person (other than the exempted shareholder or pursuant to a
pre-approved acquisition) becomes a 20 percent owner in the Company, all Rights
holders, other than such person, will be entitled to purchase shares of the
Company's stock at a discounted price. If the Company is acquired in a merger
after such an acquisition, all Rights holders except the buyer also will be
entitled to purchase stock in the buyer at a discount.

         The Plan exempts any existing shareholder (including Darby Macfarlane,
the Company's founder and Chief Executive Officer, her heirs and entities
controlled by her, currently the owners of approximately 861,896 shares of the
Company's common stock, 1,380,000 shares of the Company's Class A Preferred
Stock and 450,000 options granted pursuant to the Company's 1992 Stock Option
Plan), so long as the number of shares of common stock beneficially owned by
that shareholder does not exceed, with respect to all such exempt shareholders
other than Mrs. Macfarlane, by more than ten percent (by acquisition) the number
of shares of common stock beneficially owned by that shareholder as of December
30, 1998. In the case of Mrs. Macfarlane, such ownership cannot exceed by more
than one percent the sum of (i) the shares of common stock beneficially owned by
Mrs. Macfarlane as of December 30, 1998, plus (ii) all shares acquired upon
exercise of options issued to Mrs. Macfarlane and her heirs, relatives and
entities controlled by her, including without limitation, options issued under
the Company's 1992 Stock Option Plan, plus (iii) all shares issued upon
conversion of the Class A Preferred Stock owned by Mrs. Macfarlane and her
heirs, relatives and entities controlled by her.

         The distribution of Rights was made on January 11, 1999 to shareholders
of record of common stock on that date, and shares of common stock that are
newly issued after that date will also carry Rights until the Rights become
detached from the common stock. The Rights will expire on January 11, 2009. The
Rights distribution is not taxable to shareholders. The Company may redeem the
Rights for $0.001 each at any time during the Window Period, or any extension
thereof, after a buyer acquires a 20 percent position in the Company, and under
certain other circumstances.

                                       24

<PAGE>


          In February 1998, at a special meeting of shareholders held at the
Company's offices in New York, New York (the "Special Meeting"), the
shareholders approved, among other things, a revision to the Company's capital
structure to effect a three-for-two forward stock split of the Company's issued
and outstanding shares of Common Stock (the "Stock Split"). The Stock Split is
effective as of February 13, 1998.

         Additionally, at the Special Meeting, the shareholders approved 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 Convertible 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 Convertible Preferred Stock for redemption
from December 31, 1998 to December 31, 2000, (iii) to revise the market price
conversion feature of the Class A Convertible 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
Convertible Preferred Stock, extraordinary items and revenues generated by
businesses acquired by the Company.

         Lastly, at the Special Meeting, the shareholders approved an amendment
to the Company's 1992 Stock Option Plan, as amended (the "1992 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.

Risk Factors

         Limited Operating History. The Company has a limited operating history
upon which its prospects can be evaluated. Such prospects must be considered in
light of the substantial risks, expenses and difficulties encountered by
entrants into the medical device industry, which is characterized by an
increasing number of participants, intense competition and a high failure rate.
Until 1986, the Company was principally engaged in research and development
relating to the Intellectual Properties, ColorMate(Registered) 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(Registered) TLc BiliTest(Trademark) System for the monitoring of
newborn bilirubinemia (infant jaundice), the development of prototypes of
additional versions of the ColorMate(Registered) unit and the refinement of its
technologies for other applications. From October 1990 to date, the Company has
not generated any material revenues 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 successfully
developed and marketed by the Company.

         Operating Losses. The Company has incurred significant losses from
operations for the years ended December 31, 1998 and December 31, 1997
($7,284,800 and $5,053,100, respectively). The Company anticipates incurring
substantially increased operating expenses as it attempts to expand its
marketing and sales activity, incurs manufacturing expenses for the
ColorMate(Registered) TLc BiliTest(Trademark) System and otherwise continues to
implement its business plan, including for the medical application involving the
monitoring of newborn bilirubinemia (infant jaundice). There can be no assurance
the Company will not continue to incur such losses or will ever generate
revenues at levels sufficient to support profitable operations.

         Although the Company anticipates that the future expenses regarding FDA
application costs and related patent application costs should be significantly
less than amounts incurred prior to receipt of the initial FDA marketing
clearance, the Company will continue to incur significant additional costs and
expenses in connection 

                                        25

<PAGE>


with FDA manufacturing and other regulations, state regulatory requirements and
foreign market clearances and other requirements. Additional expenses are
anticipated in connection with certain international multicenter studies being
conducted on the ColorMate(Registered) TLc BiliTest(Trademark) System. See
"Business." In addition, the Company expects to incur significant expenses
relating to manufacturing expenses, products liability insurance, legal and
regulatory compliance, including QSR/GMP quality system substantial compliance,
as well as research and development for new potential applications, and
implementation of the next phase of its efforts to successfully commercialize
the medical application of its technology. The Company also anticipates
significantly higher compensation expenses in connection with increased hiring
to staff its medical division. See "Liquidity and Capital Resources," below.
The Company will also incur additional expenses implementing additional testing
and clinical trials of its technologies for the possible monitoring of other
chromogenic diseases. Further, the Company anticipates significantly higher
legal expenses in connection with its defense of certain class action suits that
have been brought against the Company and as the Company explores all of its
potential legal remedies. See "Legal Proceedings."

         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 proceeds from
the Debentures or remaining proceeds from the previous exercise of its
Placement Agent Warrants and Warrants, together with any anticipated sales
revenues, future distributor payments and/or additional financing, if any, will
be sufficient to fund operations until December 31, 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(Registered) units and Beauty-Aid Products, and in particular, its
ColorMate(Registered) TLc BiliTest(Trademark) System for monitoring of newborn
bilirubinemia (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 the successful
marketing of the ColorMate(Registered) unit, 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(Registered) units, and the
availability of future financing. The Company expects that, in addition to the
Debentures, further financing will be required to successfully commercialize
the ColorMate(Registered) TLc BiliTest(Trademark) System and 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 significantly curtail and/or cease operations.

         Default under the Debentures. Following the occurrence of any Event of
Default under the Debentures or at any time thereafter (see "Recent Events -
1999 Financing") which is not waived by the Debenture holders, the holders may
accelerate the maturity of the Debentures, whereupon all principal and interest
thereunder shall be immediately due and payable. In the event the Company
becomes obligated to effect such payment, and does not have sufficient funds to
make such payment, the Company may be forced to cease operations and seek
protection from its liabilities under applicable bankruptcy laws.

         No Assurance of Successful Commercialization of ColorMate(Registered)
TLc BiliTest(Trademark) System. 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 newborn bilirubinemia (infant
jaundice). Although the Company is aware that studies have been conducted on
non-invasive transcutaneous bilirubinometer devices other than the
ColorMate(Registered) TLc BiliTest(Trademark) System and that some of these
devices have received FDA marketing clearance, the Company believes the ability
of the ColorMate(Registered) TLc BiliTest(Trademark) System to accurately
provide an estimate of serum bilirubin levels in babies over a wide range of
gestation, in babies of all racial categories and in babies receiving
phototherapy, distinguishes it from the other existing non-invasive
bilirubinometers with FDA clearance for commercial marketing. While the Company
believes the non-invasive nature of its ColorMate(Registered)
TLc BiliTest(Trademark) System for monitoring newborn bilirubinemia (infant
jaundice) provides benefits to patients, no assurance can be given that the
medical community will accept and support the Company's medical device. There is
no assurance that the Company's ColorMate(Registered) Device for newborn
bilirubinemia (infant jaundice), or other future medical applications of the
Company's technology will be capable of being produced in commercial quantities
at acceptable costs. There can be no assurance that the existing medical
applications for monitoring newborn bilirubinemia (infant jaundice), or for
future applications even if all regulatory and reimbursement approvals are
obtained, will be successfully marketed or achieve any significant degree of
market acceptance among physicians, health care payors and others. The medical
community generally has had limited exposure to the Company and 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 to demonstrate the operation and efficacy of
its Intellectual Properties in the medical field. Even if the Company gains
access to sufficient 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.

                                       26

<PAGE>


         Physicians and other health care professionals will not recommend or
use the ColorMate(Registered) TLc BiliTest(Trademark) System unless they
determine, based on experience, clinical data, relative cost, and other factors,
that the ColorMate(Registered) TLc BiliTest(Trademark) System is an attractive
alternative to reducing the current traumatic blood tests that have a long
history of safe and effective use. The Company has begun conducting additional
independent studies in order to achieve acceptance in the medical community. See
"Business." The Company believes that recommendations by physicians and
clinicians will be essential for the market acceptance of these products, but
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(Registered)
TLc BiliTest(Trademark) System, broad market acceptance of the Company's device
will require the training of numerous physicians and clinicians, and the time
required to complete such training could result in a delay of successful
commercial distribution to the medical market. Moreover, obtaining and
maintaining health care payors' approval of reimbursement for the Company's
products, and the level of reimbursement made available, will be an important
factor in establishing pricing, structure and 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 ColorMate(Registered)
TLc BiliTest(Trademark) System due to institutional budgetary constraints.

         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 maintained, or products for which approvals or clearances are
obtained (such as the ColorMate(Registered) TLc BiliTest(Trademark) System) are
not commercially successful, the Company's business, financial condition and
results of operations would be materially adversely affected. 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(Registered)
TLc BiliTest(Trademark) System.

         Early Stage of Development of Other Potential Medical Applications.
Although the Company has received FDA clearance to commercially market its
ColorMate(Registered) TLc BiliTest(Trademark) System as described above, has
conducted early stage research and commenced initial clinical studies with
respect to certain other Chromogenic Diseases identified by the Company (See
"Business"), the Company's clinical and research development programs for other
medical applications of its technology are at a very preliminary stage and
substantial additional research and development and further clinical trials will
be necessary before commercial versions of any additional proposed products are
submitted for FDA marketing clearance 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 proposed 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.

         Assumptions Regarding Medical Business Plan and Strategy. The Company
has formulated its medical business plan and strategy based upon certain
assumptions regarding the size of the bilirubin monitoring market, the Company's
anticipated short term and eventual share of this market, the price at which the
Company believes it will be able to sell or lease its products, and consumer
acceptance of the Company's products. There can be no assurance that the
Company's assumptions will prove to be correct. The Company's ability to operate
in the future will depend upon many factors, including technological advances
and product obsolescence; levels of competition, including the entry into the
market of additional competitors and increased success by existing competitors;
changes in general economic conditions; increases in operating costs including
costs of production, supplies, personnel or equipment; and changes in
requirements and regulations promulgated by applicable federal, state, local and
foreign regulatory authorities. There can be no assurance that the Company will
successfully obtain or apply the human, operational and financial resources
needed to manage a developing business. Failure by the Company to manage its

                                       27


<PAGE>



growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations.

         Need for Additional Personnel. In order to generate and service sales
of the Company's medical products, the Company needs to attract and retain
significant additional senior and midlevel personnel experienced in marketing,
sales and regulatory matters in the medical industry. The Company currently has
only 41 full-time employees, of which 20 are medical marketing or regulatory
personnel. In order to effectively implement its marketing and sales strategy
for the medical market, the Company will need to hire additional sales,
marketing, technical and operations personnel. The success of the Company will
also be dependent upon its ability to hire, train and retain new and existing
personnel. The Company will compete with other companies with greater financial
and other resources for such qualified personnel. There can be no assurance that
the Company will be able to hire and retain additional personnel to support the
Company's marketing, sales, research and product development efforts.

         Lack of Marketing and Sales Experience. The Company has not previously
licensed its Intellectual Properties for use in any industry other than the
beauty aid, hosiery and cosmetics industries and management of the Company has
not had any experience in marketing the Intellectual Properties,
ColorMate(Registered) units or Beauty-Aid Products in any other field. Prior to
licensing the Company's Intellectual Properties in any 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. The Company's medical support and sales
division was only recently established and there can be no assurance it will
successfully generate commercial levels of sales. There can be no assurance that
the Company will be able to successfully maintain a marketing and sales force, 
or that it will be able to enter into additional marketing and sales agreements
with third parties on acceptable terms.

         Dependence on Marketing and Distribution Arrangements with Third
Parties. The Company has established a medical division to support its own and
third party initial marketing efforts and has entered into a separate third
party manufacturing agreement for the ColorMate(Registered) TLc
BiliTest(Trademark) System. The Company's business strategy for the
commercialization of its medical products depends upon the Company's ability to
selectively enter into and maintain arrangements with leading marketing and
distribution companies in the medical field. There can be no assurance that the
Company will be able to do so. Any revenues to be received by the Company from
its ColorMate(Registered) TLc BiliTest(Trademark) System will be dependent on
arrangements with third parties for marketing, distribution and sales of the
products. The obligation of any potential third party to fund or undertake the
marketing, distribution and/or sale of the product covered by any arrangements
with the Company may be dependent upon the satisfaction of certain goals or
"milestones" by certain specified dates, some of which are outside the Company's
control. To the extent that the obligations of any third party to fund or
undertake the foregoing activities are not contingent upon the satisfaction of
certain goals or milestones, a third party may retain a significant degree of
discretion regarding the timing of these activities and the amount and quality
of financial, personnel and other resources that they devote to these
activities. Furthermore, there can be no assurance that disputes will not arise
between the Company and any third party regarding their respective rights and
obligations under the arrangements. Finally, there can be no assurance that a
third party will not be unable, due to financial, regulatory or other reasons,
to satisfy its obligations under its collaborative arrangement with the Company
or will not intentionally or unintentionally breach its obligations under the
arrangement.

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

         Any significant dispute with or breach, inability to perform, or
termination of any arrangement with such third party would 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 

                                       28

<PAGE>


were able to perform and fund these activities, the Company's capital
requirements would increase substantially. In addition, the further manufacture,
development, marketing, distribution and sale of the product covered by such
arrangement would be significantly delayed.

         Dependence on Medical Device Manufacturer. The Company does not itself
manufacture the ColorMate(Registered) units, the ColorMate(Registered)
TLc BiliTest(Trademark) System 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 may encounter various problems in
establishing and maintaining manufacturing relationships and/or operations,
resulting in inefficiencies and delays. Specifically, companies often encounter
difficulties in scaling up production, including problems involving production
yield, quality control and assurance, and shortages of qualified personnel. In
addition, the manufacturing facilities retained by the Company to manufacture
its ColorMate(Registered) products for medical applications are subject to FDA
QSR requirements and other regulatory requirements, international quality
standards (such as ISO 9001/EN46001) and other regulatory requirements.
Currently, the Company is dependent on the sole source manufacturer of the
ColorMate(Registered) TLc BiliTest(Trademark) System under the existing
exclusivity arrangements. The Company will have to maintain relationships with
such manufacturer and third party suppliers of component parts for the
production of its devices. There can be no assurance the Company will be able to
maintain its relationships with its current manufacturer, or will be able to
maintain arrangements with the other parts suppliers or assemblers on terms
satisfactory to the Company. Although the Company believes that a number of
manufacturers are capable of manufacturing and assembling the
ColorMate(Registered) TLc BiliTest(Trademark) System, any change in
manufacturers, or the retention of additional subcontractors, could result in
additional costs and delays. Difficulties encountered by the Company in
subcontracting to third-party manufacturers, scaling up production or failure by
the Company to utilize manufacturing facilities in substantial compliance with
FDA requirements, international quality standards or other regulatory
requirements, could result in a delay or termination of production or regulatory
enforcement action, which could have a material adverse effect on the Company's
business, financial condition and results of operations.

         In connection with manufacturing of the ColorMate(Registered) units,
the Company could be required to make significant advance payments, obtain
letters of credit, cause potential customers or licensees to advance funds under
their agreements entered into with the Company or otherwise secure its payment
obligations to third-party manufacturers. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Although the
Company's existing manufacturing agreement for the ColorMate(Registered)
TLc BiliTest(Trademark) System does not require such obligations, there can be
no assurance the Company will be able to maintain the existing relationship, or
that the Company will be able to enter into replacement agreements that do not
provide for such obligations and are otherwise on acceptable terms. There can be
no assurance the Company will 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(Registered) units or obtain further manufacture of the
ColorMate(Registered) units or its products.

         To the extent the Company obtains any required FDA clearance for and
markets the Bilirubin LED Device or markets the Colormate(Registered) LED
Device, the Company will need to outsource the production and assembly of the
components of the Bilirubin LED Device and the Colormate(Registered) LED Device
to third party manufacturers and assemblers. One of the components of the
Bilirubin LED Device is available from only one supplier. The Company is reliant
on that one source of supply and these products would require a major redesign
in order to incorporate any substitute components.

         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 has not
achieved significant levels of cosmetics sales from its ColorMate(Registered)
unit locations, and expects based on the deminimus cosmetics sales levels
achieved per location to date, that it will have to greatly increase the number
of ColorMate(Registered) 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

                                       29


<PAGE>


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. 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.

         Legal Proceedings. Three putative class actions were commenced against
the Company and certain of its officers and directors in the Southern District
of New York. The first two actions were commenced in June 1998 and are captioned
L.F. Monk v. Chromatics Color Sciences International, Inc., Darby S. Macfarlane,
Arthur Guiry, David K. Macfarlane and Leslie Foglesong, C.A. No. 98 CV 4111
(S.D.N.Y.) and Daniel R. Marquis v. Chromatics Color Sciences International,
Inc., Darby S. Macfarlane, Arthur Guiry and Leslie Foglesong, C.A. No. 98 CV
4335 (S.D.N.Y.). The third action was commenced in August 1998 and is captioned
Joseph Grunberg v. Chromatics Color Sciences International, Inc., Darby S.
Macfarlane, Arthur Guiry, David K. Macfarlane and Leslie Foglesong, C.A. No. 98
CIV. 5646 (S.D.N.Y.)

         The complaints were consolidated pursuant to the Consolidation Order
entered by the Court in December 1998. A consolidated amended complaint in the
matter now captioned In re Chromatics Color Sciences International, Inc.
Securities Litigation, Consolidated Matter File No. 98 Civ. 4111 (SHS), was
filed and served in January 1999 (the "Action").

         Plaintiffs purport to bring the Action on behalf of all purchasers of
the common stock of the Company, between July 30, 1997 and June 9, 1998, seeking
damages for the alleged violation by defendants of Section 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. ss.78j(b), and Rule 10b-5 promulgated
thereunder, 17 C.F.R. ss.240.10b-5, and pursuant to Section 20(a) of the
Securities Exchange Act of 1934, 15 U.S.C. ss.78t(a), with respect to the
individual named defendants as "controlling persons." The complaint alleges that
the Company "embarked upon a scheme" to inflate the price of the Company's
Common Stock by making false and misleading statements concerning: (i) the new
and innovative nature of the Company's ColorMate(Registered)
TLc BiliTest(Trademark) System; (ii) the market size and revenue potential of
the ColorMate(Registered) TLc BiliTest(Trademark) System; and (iii) the
existence and status of negotiations with potential distributors of the
ColorMate(Registered) TLc BiliTest(Trademark) System. The allegations of the
complaint arise principally from a "report" prepared by Manuel I. Asensio of
Asensio & Company, Inc. that was disseminated at the close of the putative class
period.

         Defendants have moved to dismiss them Action. Defendants believe that
the claims asserted against them are without merit and intend to vigorously
defend the Action. No assurance can be given that the resolution of the Action
and/or future actions will not have a material adverse effect on the Company's
results of operations and liquidity. The Company has directors and officers
insurance which may cover a portion of the liability asserted in the Action. The
Company is exploring its legal remedies in respect of what it believes to be
false allegations against the Company made by short sellers of its stock; the
Company expects to incur significant expenses in this regard.

         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, South Africa and South America. See "Business - The Bilirubin
Project." The Company also intends to contract with a number of foreign
manufacturers to provide certain of its sourcing needs for its medical device,
although there can be no assurance it will be able to do so. To market its
ColorMate(Registered) TLc BiliTest(Trademark) System in the European Union, the
Company sought ISO-9001/EN46001 certification and the right to affix the CE
mark. ISO-9001/EN46001 certification recognizes that the Company has established
a quality system for the design, development, manufacturing, servicing and
distribution of its medical device. The CE mark is a symbol of quality and
compliance with applicable European Union medical device directives. In March
1999, the Company received ISO-9001/EN46001 certification and passed a product
inspection in February 1999 for purposes of receiving the right to affix the CE
mark to the specific inspected product. The Company is awaiting a certification
from the appropriate European authority to allow release of the specific
inspected product for European Union

                                       30

<PAGE>


distribution. The Company also has applied for and is awaiting the right to
self-certify the product, without the need for third party specific product
inspection and certification, for purposes of affixing the CE mark for European
Union distribution. There can be no assurance the Company will receive release
of the already inspected product, or will receive the right to self-certify
future products, which in either case would have a material adverse effect on
the Company's plan for European Union distribution.

         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, import and 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, arrangements with IMS and its beauty salon placements and the
Nordstrom's contract, the Company's own attempts to license and/or lease its
Intellectual Properties and the ColorMate(Registered) 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(Registered) units and
commercial licensing of the Intellectual Properties or the sale of the
Beauty-Aid Products. In addition, other than its installation of
ColorMate(Registered) units in beauty salons and beauty-related businesses
(which are generating insignificant revenue), 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, including for medical applications of
its products and technologies. Further, there can be no assurance the Company
will ever develop a commercial market for the licensing or leasing of its
ColorMate(Registered) 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
monitoring of newborn bilirubinemia (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 companies, some of which are more established and
which have greater financial, technical, manufacturing, marketing, research and
development and management resources than the Company (including companies such
as Minolta Co., Ltd., Respironics, Inc., which recently acquired Healthdyne
Technology, Inc., and SpectRx, Inc., among others), and some of which have
greater name recognition and lengthier operating histories in the health care
industry. The Company believes the only commercially available non-invasive
bilirubinometers with FDA marketing clearance in the United States are the
Minolta Jaundice Meter and the SpectRx Bilicheck. 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 monitoring of newborn bilirubinemia (infant
jaundice) as well as dermatological diseases and tuberculosis, the principal
diseases with respect to which the Company may seek regulatory marketing
clearance, 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.

         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, during or after the commercialization of the
Company's product, devices and technologies that permit more efficient, less
expensive non-invasive detection and monitoring of 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 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 

                                       31

<PAGE>


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.

         Now that the Company has developed 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(Registered) TLc BiliTest(Trademark) System, 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).

         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.

         Protection of Intellectual Property. The Company depends on its ability
to obtain and maintain 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 

                                       32

<PAGE>


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, as well as
Australian, Canadian, Korean 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.
5,671,735. The Company has not yet been granted any other foreign patents for
its Intellectual Properties and there can be no assurance that it will be
granted any such patents. Consequently, wherever the Company does not have
foreign patents, third parties currently could exploit, outside the United
States, the technology disclosed in the U.S. Patents, thereby increasing
competition in such foreign markets. In addition, persons gaining access to the
Company's unpatented proprietary information and technology and who are not
bound by confidentiality agreements with the Company would have the ability to
exploit the Company's unpatented proprietary information and technology both
inside and outside the United States, thereby increasing competition.

         There can be no assurance that one or more of the Patents held by the
Company will not be successfully challenged or circumvented or that the Company
will otherwise be able to rely on such Patents. In addition, there can be no
assurance that competitors, many of whom have substantial resources and have
made substantial investments in competing technologies, will not seek to apply
for and obtain patents that prevent, limit or interfere with the Company's
ability to make, use and sell its products either in the United States or in
foreign markets. If 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(Registered) Systems will provide it with a
competitive advantage in that it may be possible for a competitor

                                       33

<PAGE>



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,
re-examination or interference proceedings may be instituted in the United
States Patent and Trademark Office ("USPTO"). 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 in 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.

         The Company is aware that others have obtained and are pursuing patent
protection for various aspects of infant jaundice diagnostic and monitoring
products and their use, including products that are non-invasive. There can be
no assurance that the Company's technology, current or future products or
activities will not be deemed to infringe upon the patent rights of others.

         Failure to Obtain and Maintain Third-Party Reimbursement. In the United
States and elsewhere, sales of medical products and their use 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 brings its
ColorMate(Registered) TLc BiliTest(Trademark) System or other future products to
market, there can no assurance that such products will be considered cost
effective and that reimbursement to the consumer will be or continue to be
available, or sufficient to allow the Company to sell its medical device
products on a competitive basis. Moreover, obtaining and maintaining health care
payors' approval of reimbursement for the Company's products or their use, and
the level of reimbursement made available, will be an important factor in
establishing pricing, structure and market acceptance. 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.

         American Medical Association ("AMA") CPT codes are generally used to
facilitate the processing of insurance reimbursement claims and to provide a
simplified reporting procedure. However, assignment of a code does not assure
that the insurer will provide reimbursement or that the AMA endorses the medical
procedure at issue. In March 1998, the Company was assigned AMA CPT Code 82250
for processing claims for use of the ColorMate(Registered)
TLc BiliTest(Trademark) System. The same code is assigned for the reimbursement
of laboratory blood tests currently used to monitor newborn bilirubinemia
(infant jaundice). Subsequently, the AMA informed the Company that CPT Code
84999 ("Unlisted Chemistry Procedure"), not Code 82250, was the assigned code.
However, the

                                       34


<PAGE>


AMA indicated that it was reviewing coding in this area generally. The Company
believes the original Code 82250 is correct and will continue its efforts to
have the AMA reassign this code, or apply for a new code. There can be no
assurance that the Company will be reassigned the original CPT Code 82250.
Claims for reimbursement under CPT Code 84999 may not be as easily processed for
reimbursement as claims made under CPT Code 82250.

         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 newborn bilirubinemia
(infant jaundice). If the Company obtains the necessary foreign regulatory
clearances, 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
obtain and maintain third-party reimbursement coverage for use of the
ColorMate(Registered) TLc BiliTest(Trademark) System 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 various laws such as 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 marketing clearance of its
ColorMate(Registered) TLc BiliTest(Trademark) System 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(Registered) TLc BiliTest(Trademark) System for monitoring newborn
bilirubinemia (infant jaundice) by healthcare professionals in the United
States, the Company also must comply with the other applicable statutes and
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), medical device reporting, labeling, and the statutory
prohibitions against adulteration and misbranding. The order also states that
the ColorMate(Registered) TLc BiliTest(Trademark) System is a Class II device
which may be subject to additional special controls.

         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 or significantly modified products or to expand
permitted uses of existing products. Regulatory clearance to market a product
from the FDA may entail limitations on the indicated uses of the product. The
ability to market can be challenged (and possibly 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. 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.

         In order for the Company to market its products in Europe and certain
other foreign jurisdictions, the Company and its distributors and agents must
maintain 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. To
market its ColorMate(Registered) TLc BiliTest(Trademark) System in the European
Union, the Company sought ISO-9001/EN46001 certification and the right to affix
the CE mark. ISO-

                                       35

<PAGE>


9001/EN46001 certification recognizes that the Company has established a quality
system for the design, development, manufacturing, servicing and distribution of
its medical device. The CE mark is a symbol of quality and compliance with
applicable European Union medical device directives. In March 1999, the Company
received ISO-9001/EN46001 certification and passed a specific product inspection
in February 1999 for purposes of receiving the right to affix the CE mark to the
specific inspected product. The Company is awaiting a certification from the
appropriate European authority to allow release of the inspected product for
European Union distribution. The Company also has applied for and is awaiting
the right to self-certify the product, without the need for third party specific
product inspection and certification, for purposes of affixing the CE mark for
European Union distribution. There can be no assurance the Company will receive
release of the already inspected product, or will receive the right to
self-certify future products, which in either case would have a material adverse
effect on the Company's plan for European Union distribution. Failure to
maintain ISO 9001/EN 46001 certification, CE mark rights or other foreign
regulatory approvals for the Company's medical products would prevent the
Company from marketing its medical products abroad, which would 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 contract
manufacturing or other regulated arrangements is required to adhere to
applicable FDA regulations, including the QSR requirements and similar
regulations in other countries, which include, among other things, 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, possible 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.

         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 such claims could have a material adverse effect on
the Company, including on market acceptance of its ColorMate(Registered)
TLc BiliTest(Trademark) System. As the ColorMate(Registered)
TLc BiliTest(Trademark) System enters commercial use, the Company will be in 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. Although the Company has product liability insurance, it does not
have malpractice insurance for such applications. There can be no assurance that
it will be able to maintain such product liability 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(Registered) 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(Registered)
TLc BiliTest(Trademark) System, its 

                                       36

<PAGE>


ColorMate(Registered) 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.

         Year 2000 Compliance. Until recently computer programs were generally
written using two digits rather than four to define the applicable year.
Accordingly, such programs may be unable to distinguish properly between the
Year 1900 and the Year 2000. This could result in system failures or data
corruption for the Company or its vendors which could cause disruptions of
operations, including, among other things, a temporary inability to process
transactions or engage in business activities or to receive information,
services or payment from vendors.

         The Company's internal computing systems are primarily limited to
hardware and software for its financial systems, such as general ledger and
accounts receivable and payable systems, and word processing and database
systems. The Company is not dependent on large legacy systems and does not use
mainframes.

         The Company's management is continuing to conduct an assessment of the
Company's operations from an internal, vendor and customer perspective. The
assessment addresses all of the Company's material computer systems,
applications and any other material systems that the Company believes may be
vulnerable to the Year 2000 issue and significantly affect the Company's
operations. This assessment includes contacting third parties with whom the
Company has a material relationship to determine their Year 2000 readiness. The
Company's assessment is not yet complete and there can be no assurances that any
such problems will not arise.

         The total costs associated with the Company's Year 2000 compliance are
not expected to be material to the Company's financial position. However,
satisfactory remediation of Year 2000 issues is dependent upon many factors,
some of which are not completely within the Company's control. The Company's
current estimates of the impact of Year 2000 compliance on its financial
position do not include costs that may result from the failure of third parties
with whom the Company has a material relationship to be Year 2000 compliant.
Should the Company's internal systems or systems of one or more significant
third parties fail to achieve Year 2000 compliance, the Company's business and
its operations could be materially adversely affected.

         Control; Dependence on Management. Darby Simpson Macfarlane, Chief
Executive Officer of the Company, owns shares of Common Stock and Series A
preferred stock, par value $0.001 per share (the "Preferred Stock") aggregating
2,991,896 (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.

         No Assurance of continued Nasdaq SmallCap Market Listing; Risk of
Application of Penny Stock Rules. The trading of the Company's stock in the
Nasdaq SmallCap Market will be conditioned upon the Company's continuing to meet
certain asset, capitalization, earnings and stock price tests. To maintain
eligibility for trading on the Nasdaq SmallCap Market, the Company will be
required to maintain, among other things, net tangible assets of at least
$2,000,000; a minimum bid price for the listed securities of $1.00 per share; a
market value of the public float of at least $1,000,000; and at least two market
makers for its securities. If the Common Stock were to be delisted from the
Nasdaq SmallCap market, the prices and the holders' ability to sell such
securities would be adversely affected. If the Common Stock were delisted and
the Company desired to have it relisted, the Company would be required to
satisfy the more stringent initial listing requirements of the Nasdaq SmallCap
Market.

         If the Company is delisted from the Nasdaq SmallCap Market and the
price per share dropped below $5.00, then unless the Company satisfied certain
net assets tests, the Common stock would become subject to certain penny stock
rules promulgated by the Securities and Exchange Commission (the "Commission").
The penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document prepared by the Commission that provides information about
penny stocks and the nature and level of risks in the penny stock market. The
broker-dealer must also provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson 

                                       37


<PAGE>


in the transaction and monthly account statements showing the market value of
each penny stock held in the customer's account. In addition, the penny stock
rules require that prior to a transaction in a penny stock not otherwise exempt
from such rules, the broker-dealer must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activities in the secondary
market for stock that becomes subject to the penny stock rules. If the Common
Stock becomes subject to the penny stock rules, investors may find it more
difficult to sell their Common Stock.

         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 Outstanding Warrants and Conversion of Debentures. 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 and the conversion of Debentures is expected to be substantially less
than the market price of the Common Stock at the time such Private Placement
Warrants are exercised or such Debentures are converted. For the life of such
Private Placement Warrants and Debentures, 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 and Debentures remain not
converted, the terms under which the Company could obtain additional equity
financing may be adversely affected. Moreover, the holders of such Private
Placement Warrants and Debentures may be expected to exercise (or convert, as
applicable) 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 securities. To the extent of any exercise
or conversion of such Private Placement Warrants or Debentures, the interests
of the Company's shareholders will be diluted proportionately.

         Outstanding Voting Preferred Stock. The Company has outstanding
1,380,000 shares of 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 (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 2.  Properties

         The Company's executive offices are located in New York, New York and
are occupied pursuant to a month to month lease. The Company is currently
negotiating the lease. Rentals under such month to month lease (including
storage facilities) currently are being paid at the rate of $21,000 per month,
plus occupancy costs. Additionally, the Company leases space in Spokane,
Washington pursuant to a month to month lease. Rentals under such lease are
$2,018 per month.

                                       38


<PAGE>



         The Company also occupies office space located in Riverdale, New York,
at a cost of $1,620 per month, which space is subleased by the Company from
Darby Simpson Macfarlane, a director, officer and principal shareholder of the
Company; such rent is equal to Mrs. Macfarlane's actual lease cost for such
premises. The Company paid Mrs. Macfarlane $19,400 for such space in 1998. The 
Company also maintains office space at 10 Old Jackson Avenue,
Hastings-on-Hudson, New York, at the residence of Mrs. Macfarlane. The Company
paid Mrs. Macfarlane approximately $9,600 for such space in 1998.

         The Company also occupies office space located in Milford, Connecticut,
and are leased pursuant to a month to month lease at a cost of $1,670 per month,
which space is used primarily for the Company's medical marketing, sales and
distribution support division.

Item 3.  Legal Proceedings

         Three putative class actions were commenced against the Company and
certain of its officers and directors in the Southern District of New York. The
first two actions were commenced in June 1998 and are captioned L.F. Monk v.
Chromatics Color Sciences International, Inc., Darby S. Macfarlane, Arthur
Guiry, David K. Macfarlane and Leslie Foglesong, C.A. No. 98 CV 4111 (S.D.N.Y.)
and Daniel R. Marquis v. Chromatics Color Sciences International, Inc., Darby S.
Macfarlane, Arthur Guiry and Leslie Foglesong, C.A. No. 98 CV 4335 (S.D.N.Y.).
The third action was commenced in August 1998 and is captioned Joseph Grunberg
v. Chromatics Color Sciences International, Inc., Darby S. Macfarlane, Arthur
Guiry, David K. Macfarlane and Leslie Foglesong, C.A. No. 98 CIV. 5646
(S.D.N.Y.)

         The complaints were consolidated pursuant to the Consolidation Order
entered by the Court in December 1998. A consolidated amended complaint in the
matter now captioned In re Chromatics Color Sciences International, Inc.
Securities Litigation, Consolidated Matter File No. 98 Civ. 4111 (SHS), was
filed and served in January 1999 (the "Action").

         Plaintiffs purport to bring the Action on behalf of all purchasers of
the common stock of the Company, between July 30, 1997 and June 9, 1998, seeking
damages for the alleged violation by defendants of Section 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. ss.78j(b), and Rule 10b-5 promulgated
thereunder, 17 C.F.R. ss.240.10b-5, and pursuant to Section 20(a) of the
Securities Exchange Act of 1934, 15 U.S.C. ss.78t(a), with respect to the
individual named defendants as "controlling persons." The complaint alleges that
the Company "embarked upon a scheme" to inflate the price of the Company's
Common Stock by making false and misleading statements concerning: (i) the new
and innovative nature of the Company's ColorMate(Registered)
TLc BiliTest(Trademark) System; (ii) the market size and revenue potential of
the ColorMate(Registered) TLc BiliTest(Trademark) System; and (iii) the
existence and status of negotiations with potential distributors of the
ColorMate(Registered) TLc BiliTest(Trademark) System. The allegations of the
complaint arise principally from a "report" prepared by Manuel I. Asensio of
Asensio & Company, Inc. that was disseminated at the close of the putative class
period.

         Defendants have moved to dismiss the Action. Defendants believe that
the claims asserted against them are without merit and intend to vigorously
defend the Action. No assurance can be given that the resolution of the Action
and/or future actions will not have a material adverse effect on the Company's
results of operations and liquidity. The Company has directors and officers
insurance which may cover a portion of the liability asserted in the Action. The
Company is exploring its legal remedies in respect to what it believes to be
false allegations against the Company made by short sellers of its stock; the
Company expects to incur significant expenses in this regard.

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

         On December 21, 1998, at the annual meeting of shareholders held at the
Company's offices in New York, New York, the shareholders (i) elected five
directors of the Company to serve for a term of one year and until their
respective successors shall be elected and shall qualify and (ii) ratified the
appointment of BDO Seidman LLP as auditors of the Company for the year ending
December 31, 1998.


                                       39

<PAGE>

                                     PART II


Item 5.  Market For the Company's Common Equity and Related Stockholder Matters

         The Company has registered the Common Stock (and prior to their
expiration, the Warrants) with the Commission under the provisions of Section
12(g) of the Exchange Act of 1934, as amended (the "Exchange Act"). Registration
under the Exchange Act requires the Company to comply with certain reporting,
proxy solicitation and other requirements of the Exchange Act.

         There can be no assurance that an active public trading market for the
Common Stock will continue. Prior to February 8, 1993, the date on which the
Common Stock was approved for quotation on the Nasdaq Stock Market SmallCap
Market ("NASDAQ"), there was no public market for the Common Stock. The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commissions, and may not necessarily reflect actual transactions. On April 13,
1999, the last reported bid price for the Common Stock was $7.938 per share. The
Warrants expired on November 5, 1997, subject to limited waivers granted by the
Company in respect of obtaining state regulatory clearance for the issuance of
shares underlying the warrants. There were 119 holders of record of the Common
Stock as of April 13, 1999, including nominees for an unknown number of
beneficial holders.

         The following tables set forth the high and low bid prices for the
Common Stock and the Warrants for each of the periods indicated (after giving
retroactive effect to the February 1998 3 for 2 Stock Split):

            Common Stock

                              Period                          Price
                              ------                  ---------------------
                                                       High            Low
                                                       ----            ---

            January 1, 1997 to March 31, 1997          6.352          2.805
            April 1, 1997 to June 30, 1997             5.610          1.980
            July 1, 1997 to September 30, 1997         9.900          4.455
            October 1, 1997 to December 31, 1997      12.540          8.002
            January 1, 1998 to March 31, 1998         17.375          7.172
            April 1, 1998 to June 30, 1998            18.000          3.375
            July 1, 1998 to September 30, 1998         6.000          2.375
            October 1, 1998 to December 31, 1998       8.438          2.563



            Warrants

                              Period                          Price
                              ------                  ---------------------
                                                       High            Low
                                                       ----            ---

            January 1, 1996 to March 31, 1996         $3.712         $0.495
            April 1, 1996 to June 30, 1996             5.527          1.980
            July 1, 1996 to September 30, 1996         2.145          0.618
            October 1, 1996 to December 31, 1996       1.608          0.453

            January 1, 1997 to March 31, 1997          3.413          0.624
            April 1, 1997 to June 30, 1997             3.247          0.749
            July 1, 1997 to September 30, 1997         6.993          1.830
            October 1, 1997 to November 5, 1997        9.490          4.662



                                       40
<PAGE>

Dividend Policy

         The Company has not paid, during the two fiscal years ended December
31, 1998, and has no present intention to declare or pay, cash dividends on the
Common Stock in the foreseeable future. The Company intends to retain any
earnings which it may realize in the foreseeable future to finance its
operations. The Company has outstanding 1,380,000 shares of the Preferred Stock,
entitled to an annual non-cumulative dividend of $0.001 per share, when and as
declared by the Board of Directors of the Company, payable quarterly, which
dividend must be paid before any cash dividend may be paid with respect to the
Common Stock.

Item 6.  Selected Financial Data

         The following information has been derived from the Company's
consolidated financial statements. The selected consolidated financial data
should be read in conjunction with the Consolidated Financial Statements and the
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" elsewhere in this report.

<TABLE>
<CAPTION>
                                                            Years Ended December 31,
                                      --------------------------------------------------------------------------
                                           1998            1997            1996            1995            1994
                                           ----            ----            ----            ----            ----
<S>                                  <C>             <C>             <C>             <C>                <C>     
Total Assets                          7,878,200      10,752,600       6,747,500       3,489,900       2,436,300
Total Liabilities                     1,295,200         842,500         791,500         599,700         804,100
Stockholders' Equity                  6,569,200       9,896,300       5,942,200       2,876,400       1,618,400
Lease, license and service                                                                                      
  contract revenues                      45,000          10,500          66,100         167,000         193,600
Interest Income                         372,000         238,900         220,800         117,800          26,900
Loss                                 (7,284,800)     (5,053,100)     (4,442,300)     (2,494,300)        (96,300)
Loss per share - Basic                                                                                          
  and diluted (*)                         (0.49)          (0.40)          (0.51)          (0.39)          (0.02)

</TABLE>

(*)  Loss per share was retroactively adjusted to reflect the three for two
     split of February 1998.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

         THIS ANNUAL REPORT ON FORM 10-K, INCLUDING ITEM 1 ("BUSINESS") AND ITEM
7 ("MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS"), 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"
ABOVE AT PAGES 25 TO 38, 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 COMPANY'S ABILITY TO ENTER INTO AGREEMENTS WITH MARKETING AND
DISTRIBUTION PARTNERS, THE OBTAINING AND MAINTAINING OF AND COMPLIANCE WITH ANY
NECESSARY REGULATORY APPROVALS OR CLEARANCES 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 FORWARD-LOOKING
STATEMENTS INCLUDED HEREIN, THE INCLUSION OF SUCH STATEMENTS SHOULD NOT BE
REGARDED AS A


                                       41
<PAGE>

REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON THAT THE OBJECTIVES AND PLANS
OF THE COMPANY WILL BE ACHIEVED.

Overview

         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(Registered) System
(the "ColorMate(Registered) 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 the ColorMate(Registered) TLc BiliTest(Trademark) System to measure
the incremental change of the yellow content of the skin color in newborns to
monitor newborn bilirubinemia (infant jaundice). On July 30, 1997, the Company
received U.S. Food and Drug Administration ("FDA") clearance for commercial
marketing of the ColorMate(Registered) TLc BiliTest(Trademark) System for the
non-invasive monitoring of newborn bilirubinemia (infant jaundice) by health
care professionals in hospitals, pediatricians' offices or by home healthcare
agencies ("ColorMate(Registered) TLc BiliTest(Trademark) System"). The Company's
efforts are currently focused on successfully commercializing this medical
application of its Intellectual Properties for non-invasive monitoring of
newborn bilirubinemia (infant jaundice). See "Risk Factors."

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

         The Company's marketing activities have principally involved licensing
the Intellectual Properties, including conducting laboratory product
chromaticity studies ("Chromaticity Studies"), leasing the ColorMate(Registered)
System and marketing the Beauty-Aid Products, all 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 has been
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 completed
research and development for the working prototype of a hand-held less expensive
light-emitting diode ("LED") model of the ColorMate(Registered) System (the
"ColorMate(Registered) LED Device") which the Company anticipates may enhance
its marketing efforts in these fields.

         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(Registered) unit for
a certain medical application 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(Registered) Bilirubin Device for non-invasive detection and
monitoring of newborn bilirubinemia (infant jaundice) by healthcare
professionals. The "substantial equivalence" order states that the Company must
comply with the medical device


                                       42
<PAGE>

"general controls," e.g., device establishment registration, medical device
listing, good manufacturing practices/ quality system regulation ("QSR"),
labeling, and the statutory prohibitions against adulteration and misbranding.
The order also states that the ColorMate(Registered) transcutaneous
bilirubinometer is a Class II device which may be subject to additional "special
controls." The Company intends to maintain compliance with any applicable
"general controls" and "special controls" for purposes of commercial
distribution but there can be no assurance it will be able to do so. See "Risk
Factors."

         In 1998, the Company took significant steps to implement its business
plan for medical applications, including expansion of the multicenter hospital
studies of the ColorMate(Registered) TLc BiliTest(Trademark) System to three new
institutions, participation in a number of United States and international
presentations of the ColorMate(Registered) TLc BiliTest(Trademark) System to the
medical community, and the opening of a medical marketing, sales, distribution
and training support division. The Company also entered into exclusive
manufacturing arrangements for the production of the ColorMate(Registered)
TLc BiliTest(Trademark) System. Following the positive response to the device
from the medical community, the Company arranged for the mass manufacture of the
ColorMate(Registered) TLc BiliTest(Trademark) System, and in February 1999 began
shipping the device (together with the TLc Lensette, the disposable calibration
standard) to U.S. hospitals and physicians and conducting inservicing and
training of clinicians through the Company's new medical support division. See
"Proposed Marketing Plan" and "Manufacturing."

         In September 1998, the Company entered into a lease and license
agreement with Nordstrom, Inc. ("Nordstrom") granting Nordstrom a license to use
the ColorMate(Registered) System to formulate and recommend Nordstrom's "C2O
Color to Order" line of proprietary cosmetic products in four Nordstrom flagship
department stores. The products will be introduced and evaluated over a three
month period (commencing upon delivery of packaging materials from Nordstrom and
final cosmetic formulations) for potential extended use, including additional
store locations. In connection with this license agreement, the Company is
collaborating with a consultant to provide training, marketing, sales,
promotional and liaison services (including assisting in development of all
applicable non-color product formulas, manuals, promotional materials and
training aids) at each of the four Nordstrom's stores.

         In April 1999, the Company raised gross proceeds of $5 million from the
private placement of 14% Senior Convertible Debentures due April 15, 2002, the
proceeds of which the Company intends to use to support its marketing efforts
and obligations under the arrangements with the marketing and distribution
partner selected.

         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
proceeds 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 and commercialization of the
ColorMate(Registered) 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,
research and development expenses and marketing start-up expenses relating to
the ColorMate(Registered) TLc BiliTest(Trademark) System and research and
development expenses related to the Colormate(Registered) LED Device. The
Company also has not achieved significant operating revenues from marketing its
Intellectual Properties, Beauty-Aid Products and ColorMate(Registered) units in
the cosmetic and beauty aid industries since termination of the Avon Project in
1991, and has generated limited revenue from licensing its Intellectual
Properties or the ColorMate(Registered) System in any industry other than the
cosmetics, haircolor, beauty aid and fashion industries. See Note 1 of Notes to
Financial Statements and "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 three quarters of 1998, the
Company did not generate any lease, license and service contract


                                       43
<PAGE>

revenues from IMS. To the extent the Company receives payments from licensees,
distributors or other sources, such payments may occur 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(Registered) 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(Registered) TLc BiliTest(Trademark) System,
the ColorMate(Registered) units and the Beauty-Aid Products. In addition, the
Company's future ability to generate revenues from its technologies and its
ColorMate(Registered) units will depend on, among other things, the Company's
ability to establish and maintain 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(Registered) 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 establish
such arrangements, timely place such units or identify alternative markets. See
"Risk Factors."

Results of Operations

Fiscal Year 1998 Compared to Fiscal Year 1997

         The Company incurred net losses of $7,284,800 and $5,053,100 for fiscal
years 1998 and 1997, respectively, as revenues received have not been
significant relative to the Company's expenses incurred in implementing its
business plan. The $2,231,700 increase in such losses in 1998 as compared to
1997 is primarily attributable to the Company's 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: consultants' compensation; legal expenses incurred in
respect of the Company's negotiations with its medical device manufacturer and
potential distribution partners, the recent litigation and matters related to
the short selling activities in the Company's stock, and legal, consulting and
other related expenses regarding regulatory compliance with respect to
manufacturing and other requirements for the Company's ColorMate(Registered) TLc
BiliTest(Trademark) System; sales, marketing and trade show expenses, primarily
attributable to the Company's presentations at the Annual Convention of the
Pediatric Academic Societies, the Sinomed Conference in China, the International
Congress of Pediatrics, the National Association of Neonatal Nurses, the
American Academy of Pediatrics and the 5th Annual Pediatric Critical Care
Medicine Conference in China; option grants; public relations and promotions;
and contributions to the new employee benefit plan. These increased expenses
were partially offset by a decrease in patent application costs, as the Company
has begun capitalizing certain of these expenses in 1998. The Company incurred
research and development expenses primarily consisting of compensation of
officers, employees and consultants of $705,000 and $435,300 for fiscal years
1998 and 1997, respectively.

         Although the Company anticipates that the future expenses regarding FDA
application costs and related patent application costs should be significantly
less than amounts incurred prior to receipt of the initial FDA marketing
clearance, the Company will continue to incur significant additional costs and
expenses in connection with FDA manufacturing and other regulations, state
regulatory requirements and foreign market clearances and other requirements.
Additional expenses are anticipated in connection with certain international
multicenter studies being conducted on the ColorMate(Registered)
TLc BiliTest(Trademark) System. See "Business." In addition, the Company expects
to incur significant expenses relating to manufacturing expenses, products
liability insurance, legal and regulatory compliance, including QSR/GMP quality
system substantial compliance, as well as research and development for new
potential applications, and implementation of the next phase of its efforts to
successfully commercialize the medical application of its technology. The
Company also anticipates significantly higher compensation expenses in
connection with increased hiring to staff its medical division. See "Liquidity
and Capital Resources," below. The


                                       44
<PAGE>

Company will also incur additional expenses implementing additional testing and
clinical trials of its technologies for the possible monitoring of other
chromogenic diseases. Further, the Company anticipates significantly higher
legal expenses in connection with its defense of certain class action suits that
have been brought against the Company and as the Company explores all of its
potential legal remedies. See "Legal Proceedings."

         In 1998, the Company focused its resources on implementation of its
long-range business plan for the FDA medical application of its technologies and
received no revenues from operations. The Company believes the absence of sales
in 1998 was also attributable to ongoing delays in manufacturing certain color
shades of the Company's new line of cosmetic products for its
ColorMate(Registered) System (which delays were attributable to finalizing color
formulations). Under the Nordstrom Agreement, the Company anticipates the new
cosmetics will be ready to market upon delivery of packaging materials from
Nordstrom and final cosmetic formulations.

         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 the medical
application of its technologies and as revenues from the cosmetics, beauty aid
and fashion areas are anticipated to continue to be insignificant relative to
the Company's anticipated expenses in the foreseeable future.

Fiscal Year 1997 Compared to Fiscal Year 1996

         The Company incurred net losses of $5,053,100 and $4,442,300 for fiscal
years 1997 and 1996, respectively, as revenues received have not been
significant relative to the Company's expenses incurred in implementing its
business plan. The $610,800 increase in such losses in 1997 as compared to 1996
is primarily attributable to expenses incurred in 1997 in respect of increased
patent applications costs, write-offs of certain inventory, non-cash expenses
relating to the grant of options to consultants, and increased research and
development expense. The Company incurred research and development expenses
primarily consisting of compensation of officers, employees and consultants of
$435,300 and $194,400 for fiscal years 1997 and 1996, respectively. The 1997
loss was mitigated by the capitalization of $124,200 of software development
costs, decreased FDA medical application costs, and a decrease in other expenses
described below. See Note 1 of Notes to Financial Statements for a discussion of
the effect on net losses and net losses per share attributable to (i) the
Company's outstanding convertible securities and (ii) accounting for stock-based
compensation on the intrinsic value method, rather than the fair market value
method.

         The Company believes that the level of expenses relating to the FDA
initial application and related patent applications will not be recurring in the
future at previous levels and that any future expenses incurred in connection
therewith will be significantly less than the amount incurred in 1997, although
no assurance can be given of such result.

         Bad debt expense decreased to $5,000 in 1997 from $257,700 in 1996
primarily attributable to the adjustment of amounts due from IMS IN 1996.
Depreciation and amortization expense decreased to $80,500 in 1997 from $178,600
in 1996, primarily attributable to the amortization of deferred legal expenses
incurred in 1996 in respect of financing activities. Compensation expense for
employees, officers and directors decreased to $729,300 in 1997 from $810,500 in
1996, primarily attributable to increased use of consultants. Bonuses were not
paid to executive officers during 1997.

         Assets increased to $10,752,600 in 1997 from $6,747,500 in 1996
primarily attributable to increased cash and cash equivalents from the proceeds
received from the exercise of Warrants and interest income, as well as the
capitalization of software development costs. See Notes 1 and 5 of Notes to
Financial Statements.

         Revenues from lease, license and service contracts decreased in 1997 as
the Company continued to focus its resources on implementation of its long range
business plan for the medical application of its technologies. The Company
receives payments from licensees, distributors or other sources sporadically
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 recurring revenues.


                                       45
<PAGE>

         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 the medical
application 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

Fiscal Year 1998 Compared to Fiscal Year 1997

         Current assets decreased to $4,251,200 at December 31, 1998 as compared
to $9,542,300 at December 31, 1997, primarily attributable to a decrease in cash
and cash equivalents resulting from the loss incurred in 1998 and the purchase
of equipment and component parts in respect of future manufacturing and sales
and costs relating to patents and software.

         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 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 non-cash compensation costs to consultants. Cash flows
from investing activities during 1998 of $2,554,200 are attributable to software
development costs of $421,800, patent costs of $540,300, purchases of property
and equipment of $87,700 and purchases and deposits on ColorMate(Registered) TLc
Bilitest(Trademark) units of $1,504,400. The increase is primarily a result of
the Company's rollout of its ColorMate(Registered) TLc Bilitest(Trademark)
System. Cash flows from financing activities during 1998 principally represent
$3,114,300 from the issuance of Common Stock (net of related costs) representing
the receipt of proceeds from the exercise of options and warrants. 

         Although the Company anticipates that penetration of the medical
marketplace will be through establishing relationships with specialized
distributors, rather than through a direct sales force, the Company has
established a medical division to support its own efforts to initially market
and distribute the ColorMate(Registered) TLc BiliTest(Trademark) System , and to
support training, technical and marketing efforts once the Company enters into
distribution agreements. See "Proposed Marketing Plan," "Recent Events" and
"Risk Factors." 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(Registered) 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 1998, such licensing,
leasing and sales yielded limited revenue, primarily because the Company devoted
its resources to the commercialization of its technologies for medical
application and because the Company's new cosmetics line was not yet available.

         The Company anticipates incurring significant additional expenditures
related to manufacturing expenses, parts order, insurance, regulatory compliance
and staffing and marketing expenses for the sales division as production and
distribution continues. Further, the Company anticipates significantly higher
legal expenses in connection with its defense of certain class action suits that
have been brought against the Company and as the Company explores all of its
potential legal remedies. Management expects that taking into account existing
resources, anticipated revenues from future sales of the ColorMate(Registered)
units, anticipated payments received under distribution agreements and/or the
proceeds of the Debentures and any additional financing, the Company will have
sufficient liquidity at least until December 31, 1999,  although there can be
no assurance of such result.



                                       46
<PAGE>

         If the Company is able to profitably market its Intellectual
Properties, ColorMate(Registered) units and Beauty-Aid 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(Registered) 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 is not able to attract
additional future financing, enter into a distribution agreement generating such
payments, generate significant revenue from operations and/or successfully
market its products and technologies, at such point in time, it may have to
significantly curtail and/or cease operations.

Fiscal Year 1997 Compared to Fiscal Year 1996

         In 1997, the Company continued to experience significant negative net
cash flows from operating activities. Net cash out flows from operating
activities increased by $509,200 in 1997 as compared to 1996, primarily due to
the increase in net loss in 1997 and the non-cash expense of options granted to
consultants.

         Cash flows from financing activities increased to $8,386,700 from
$7,387,800 in 1997 as compared to 1996, primarily attributable to $8,424,800
proceeds from the exercise of Warrants.

         The Company has applied a substantial portion of the proceeds of the
1995 Private Placement and 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 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. [The Company anticipates that any initial penetration of the
medical marketplace will be accomplished through the relationships with
specialized distributors, rather than through a direct sales force.]

         Management believes that, if its proposed marketing plans for
non-medical 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(Registered) units, sales of swatch packs, consulting fees, and
sales of cosmetics, although there can be no prediction or assurance as to which
or any of these potential revenue sources will be successful. However, since
consummation of the IPO, the Company's marketing of its Intellectual Properties,
Beauty-Aid Products and ColorMate(Registered) units in the beauty-aid industry
have resulted in immaterial revenues.

         As of December 31, 1997, management expects that the Company will have
sufficient liquidity at least until December 31, 1998, even if no revenues from
operations are generated. If the Company is able to profitably market its
Intellectual Properties, the ColorMate(Registered) units, the
ColorMate(Registered) TLc BiliTest(Trademark) System and Beauty-Aid 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. 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 at such point in time it may have to cease operations.

Year 2000

         Until recently computer programs were generally written using two
digits rather than four to define the applicable year. Accordingly, such
programs may be unable to distinguish properly between the Year 1900 and the
Year 2000. This could result in system failures or data corruption for the
Company or its vendors which could cause disruptions of operations, including,
among other things, a temporary inability to process transactions or engage in
business activities or to receive information, services or payment from vendors.

         The Company's internal computing systems are primarily limited to
hardware and software for its financial systems, such as general ledger and
accounts receivable and payable systems, and word processing and database
systems. The Company is not dependent on large legacy systems and does not use
mainframes.



                                       47
<PAGE>

         The Company's management is continuing to conduct an assessment of the
Company's operations from an internal, vendor and customer perspective. The
assessment addresses all of the Company's material computer systems,
applications and any other material systems that the Company believes may be
vulnerable to the Year 2000 issue and significantly affect the Company's
operations. This assessment includes contacting third parties with whom the
Company has a material relationship to determine their Year 2000 readiness. The
Company's assessment is not yet complete and there can be no assurances that any
such problems will not arise.

         The total costs associated with the Company's Year 2000 compliance are
not expected to be material to the Company's financial position. However,
satisfactory remediation of Year 2000 issues is dependent upon many factors,
some of which are not completely within the Company's control. The Company's
current estimates of the impact of Year 2000 compliance on its financial
position do not include costs that may result from the failure of third parties
with whom the Company has a material relationship to be Year 2000 compliant.
Should the Company's internal systems or systems of one or more significant
third parties fail to achieve Year 2000 compliance, the Company's business and
its operations could be materially adversely affected.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

         None






                                       48
<PAGE>

Item 8.  Financial Statements and Supplemental Data

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                               Page
                                                                                                               ----
         <S>                                                                                                     <C>
         Independent Auditors' Reports...........................................................................48

         Consolidated Balance Sheets as of December 31, 1998 and 1997............................................50

         Consolidated  Statements of Operations  for the years ended  December 31, 1998,
           1997 and 1996.........................................................................................51

         Consolidated  Statements of Changes in Shareholders' Equity for the years ended
           December 31, 1998, 1997 and 1996......................................................................52

         Consolidated  Statements  of Cash Flows for the years ended  December 31, 1998,
           1997 and 1996.........................................................................................53

         Notes to Consolidated Financial Statements..............................................................54

</TABLE>


                                       49
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of
Chromatics Color Sciences International, Inc.


         We have audited the consolidated balance sheet of Chromatics Color
Sciences International, Inc. and subsidiary as of December 31, 1998, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Chromatics
Color Sciences International, Inc. and subsidiary as of December 31, 1998 and
the results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.





                                                  BDO SEIDMAN LLP



New York, New York
March 15, 1999, except for
Note 6 which is as of April 15, 1999




                                       50
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of
Chromatics Color Sciences International, Inc.


         We have audited the consolidated balance sheet of Chromatics Color
Sciences International, Inc. as of December 31, 1997 and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the two years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Chromatics
Color Sciences International, Inc. and subsidiary as of December 31, 1997, and
the results of their operations and their cash flows for each of the two years
in the period ended December 31, 1997 in conformity with generally accepted
accounting principles.










                                                WISS & COMPANY, LLP







Livingston, New Jersey
February 17, 1998


                                       51


<PAGE>

          CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                December 31,
                                                                        ----------------------------
                                                                            1998            1997
                                                                        ------------    ------------
<S>                                                                     <C>             <C>
                              ASSETS

CURRENT ASSETS:
     Cash and equivalents                                               $  3,929,800    $  9,225,400
     Accounts receivable                                                      92,300          92,400
     Inventories                                                             147,300         148,100
     Prepaid expenses and other assets                                        81,800          76,400
                                                                        ------------    ------------
          Total Current Assets                                             4,251,200       9,542,300

COLORMATE(Registered) UNITS                                                1,820,100         715,700

PROPERTY AND EQUIPMENT                                                       301,700         344,900

SOFTWARE DEVELOPMENT COSTS                                                   546,000         124,200

PATENT COSTS                                                                 540,300               -

OTHER ASSETS (primarily deposits on ColorMate(Registered) Units) in
     1998                                                                    418,900          25,500
                                                                        ------------    ------------
                                                                        $  7,878,200    $ 10,752,600
                                                                        ============    ============
               LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
     Notes payable - collateralized by equipment                        $          -    $      4,700
     Amounts payable to related party                                        318,900         293,200
     Accounts payable and accrued expenses:
       Attorneys and accountants                                             673,000         361,900
       Consultants                                                           146,500          54,900
       Trade                                                                 156,800         127,800
                                                                        ------------    ------------
          Total Current Liabilities                                        1,295,200         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
       at par and redemption value                                            13,800          13,800
                                                                        ------------    ------------
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 - 15,452,442 (1998)
       and 13,814,859 (1997) shares                                           15,400          13,800
     Capital in excess of par value                                       28,327,000      24,370,900
     Accumulated deficit                                                 (21,773,200)    (14,488,400)
                                                                        ------------    ------------
          Total Shareholders' Equity                                       6,569,200       9,896,300
                                                                        ------------    ------------
                                                                        $  7,878,200    $ 10,752,600
                                                                        ============    ============

</TABLE>

                 See accompanying notes to financial statements.


                                       52
<PAGE>

          CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                        Year End December 31,
                                                            --------------------------------------------
                                                               1998            1997             1996
                                                            -----------     -----------      -----------
<S>                                                         <C>             <C>              <C>        
REVENUES:
     Lease, license and service contracts                   $    45,000     $    10,500      $    66,100
     Interest income                                            372,000         238,900          220,800
     Other                                                        1,600           1,000              500
                                                            -----------     -----------      -----------
                                                                418,600         250,400          287,400
                                                            -----------     -----------      -----------
COSTS AND EXPENSES:
     Medical regulatory expenses                              1,341,500       1,148,600        1,281,500
     Patent application costs                                   221,700         691,200          382,300
     Research and development costs                             705,000         435,300          194,400
     Compensation costs relating to options granted to
       consultants                                              843,400         582,400                -
     Sales, marketing and trade show costs                      728,100          12,300                -
     General and administrative:
          Compensation - officers and employees                 772,200         729,300          810,500
          Consultants                                           265,600         198,300          205,900
          Legal fees                                            956,900         288,100          296,300
          Accounting fees                                        51,000          35,100           51,600
          Rent and storage                                      266,000         199,900          195,400
          Insurance                                             194,700         220,600          195,800
          Travel and entertainment                               98,200          17,900           25,900
          Repairs and maintenance                                87,500         122,100           85,100
          Depreciation and amortization                         130,900          80,500          178,600
          Payroll taxes                                          56,700          84,900           80,000
          Stock administrative fees                              83,300          53,300           52,500
          Interest                                               27,100          26,800           65,900
          Employee benefit plan                                 133,200               -                -
          Public relations                                      299,400           9,700                -
          Promotion, printing and advertising                   230,800         106,800                -
          Bad debt expense (recovery)                                 -         (5,000)          257,700
          Other                                                 210,200         265,400          370,300
                                                            -----------     -----------      -----------
                                                              7,703,400       5,303,500        4,729,700
                                                            -----------     -----------      -----------
NET LOSS                                                    $(7,284,800)    $(5,053,100)     $(4,442,300)
                                                            ===========     ===========      =========== 
WEIGHTED AVERAGE NUMBER OF COMMON
     SHARES OUTSTANDING                                      14,968,019      12,601,430        8,737,509
                                                            ===========     ===========      =========== 
BASIC AND DILUTED LOSS PER SHARE                                 $(0.49)         $(0.40)          $(0.51)
                                                            ===========     ===========      =========== 

</TABLE>


                 See accompanying notes to financial statements.


                                       53
<PAGE>

          CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                  COMMON STOCK
                                                           -------------------------         Capital
                                                           Number of           Par        in Excess of    Accumulated
                                                             Shares           Value         Par Value       Deficit
                                                           ----------        -------      ------------   ------------ 
<S>                                                        <C>               <C>           <C>           <C>          

BALANCES, DECEMBER 31, 1995                                 6,992,904        $ 7,000       $ 7,862,400   $ (4,993,000)

Year Ended December 31, 1996:
   Net loss                                                         -              -                 -     (4,442,300)
   Exercise of stock options and warrants                   1,073,678          1,100         2,945,600              -
   Conversion of convertible debentures into
      common stock                                          2,686,514          2,700         4,328,300              -
   Contribution of "short swing" profits under SEC
      rules                                                         -              -           230,400              -
                                                           ----------        -------       -----------   ------------ 

BALANCES, DECEMBER 31, 1996                                10,753,096         10,800        15,366,700     (9,435,300)

Year Ended December 31, 1997:
   Net loss                                                         -              -                 -     (5,053,100)
   Exercise of stock options and warrants                   3,061,763          3,000         8,405,500
   Compensation cost relating to options granted to
      consultants                                                   -              -           582,400              -
   Contribution of "short swing" profits under SEC
      rules                                                         -              -            16,300              -
                                                           ----------        -------       -----------   ------------ 

BALANCES, DECEMBER 31, 1997                                13,814,859         13,800        24,370,900    (14,488,400)

Year Ended December 31, 1998:
   Net loss                                                         -              -                 -     (7,284,800)
   Exercise of stock options and warrants                   1,637,583          1,600         3,112,700              -
   Compensation cost relating to options granted to
      consultants                                                   -              -           843,400              -
                                                           ----------        -------       -----------   ------------ 

BALANCES, DECEMBER 31, 1998                                15,452,442        $15,400       $28,327,000   $(21,773,200)
                                                           ==========        =======       ===========   ============ 

</TABLE>


                 See accompanying notes to financial statements.



                                       54
<PAGE>

          CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                     Year Ended December 31,
                                                                          --------------------------------------------- 
                                                                              1998             1997             1996
                                                                          -----------      -----------      ----------- 
<S>                                                                       <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                                $(7,284,800)     $(5,053,100)     $(4,442,300)
     Adjustments to reconcile net loss to
       net cash flows from operating activities:
       Depreciation and amortization                                          130,900           80,500          178,600
       Provisions for losses on accounts receivable                                 -          (10,000)           7,800
       Provision for slow moving inventories                                        -           75,000          100,000
       Compensation cost relating to options granted to consultants           843,400          582,400                -
       Changes in operating assets and liabilities:
         Accounts receivable                                                      100            5,000          220,500
         Inventories                                                              800              300          (31,800)
         Prepaid expenses and other current assets                             (5,400)          12,800            9,600
         Other assets                                                           6,600            1,900           34,400
         Accounts payable and accrued expenses                                431,700           95,200          207,400
         Other                                                                      -          (10,500)           4,500
                                                                          -----------      -----------      ----------- 
             Net cash flows from operating activities                      (5,876,700)      (4,220,500)      (3,711,300)
                                                                          -----------      -----------      ----------- 
CASH FLOWS FROM INVESTING ACTIVITIES:
  Software development costs                                                 (421,800)        (124,200)               -
  Capitalized patent costs                                                   (540,300)
  Purchases of property and equipment                                         (87,700)        (169,000)        (151,500)
  Purchase of ColorMate(Registered) Units and deposits thereon             (1,504,400)               -                -
                                                                          -----------      -----------      ----------- 
             Net cash flows from investing activities                      (2,554,200)        (293,200)        (151,500)
                                                                          -----------      -----------      ----------- 
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of common stock net of related costs               3,114,300        8,424,800        7,407,100
  Proceeds (payments) of amounts payable to related parties                    25,700          (32,800)         (14,900)
  Payments of notes payable                                                    (4,700)          (5,300)          (4,400)
                                                                          -----------      -----------      ----------- 
             Net cash flows from financing activities                       3,135,300        8,386,700        7,387,800
                                                                          -----------      -----------      ----------- 

NET CHANGE IN CASH AND EQUIVALENTS                                         (5,295,600)       3,873,000        3,525,000

CASH AND EQUIVALENTS, BEGINNING OF YEAR                                     9,226,400        5,352,400        1,827,400
                                                                          -----------      -----------      ----------- 

CASH AND EQUIVALENTS, END OF YEAR                                         $ 3,929,800      $ 9,225,400      $ 5,352,400
                                                                          ===========      ===========      ===========
SUPPLEMENTAL CASH FLOW INFORMATION
  Interest paid                                                           $     1,400      $    33,700      $    39,600
                                                                          ===========      ===========      ===========

</TABLE>

                 See accompanying notes to financial statements.


                                       55


<PAGE>


                  CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  --    Nature of Business and Summary of Significant Accounting Policies:

              Since its formation in 1984, the Company has been principally
              engaged in color science technology research and development and
              licensing activities, seeking mass market applications for its
              proprietary technology and instrumentation. 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 sufficient revenues and/or outside
              financing.

              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.
              Estimates relate primarily to inventory valuation and
              recoverability of the Company's tangible and intangible assets.

              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 in 1997 and 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.


              ColorMate(Registered) 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.

                                       56
<PAGE>

              Following the Food and Drug Administration ("FDA") marketing
              clearance in 1997, the Company has decided to use certain
              components from the existing ColorMate(Registered) units for use
              in the ColorMate(Registered) TLc BiliTest(Trademark) System. The
              costs will be expensed as incurred, remaining components will not
              be valued and the cost currently assigned to the existing
              ColorMate(Registered) units ($500 per unit) will be assigned to
              the ColorMate(Registered) TLc BiliTest(Trademark) System, as the
              current replacement cost of these components exceeds the book
              value of the ColorMate(Registered) units.

              In connection with the Company's efforts to distribute the
              ColorMate(Registered) TLc BiliTest(Trademark) System and in
              anticipation of entering into the manufacturing agreement, the
              Company commenced purchasing equipment and component parts in the
              second quarter of 1998 (approximately $1,504,000 in the aggregate
              for 1998). At this time, the Company is uncertain as to whether it
              will sell or lease such equipment to customers; accordingly, the
              cost of such items, as well as units previously obtained from Avon
              Products, Inc. in connection with a prior license agreement, has
              been classified as a non-current asset in the accompanying
              consolidated balance sheets.


              Lease, License and Service Revenues - Lease, license and service
              revenues consist of short term contracts relating to the
              ColorMate(Registered) II System Units reported on a straight-line
              basis over the terms of the contracts, which generally have terms
              of 12 months.

              Inventories - Inventories, consisting primarily of finished goods,
              are stated at the lower of first-in, first-out cost or market.

              Property and Equipment and Depreciation - Property and equipment
              are stated at cost. Depreciation is computed using principally the
              straight-line method over estimated useful lives of 5 to 7 years.
              The Company continually evaluates the life and carrying amount of
              such equipment in light of current conditions. No writedowns have
              been required through December 31, 1998.

              Software Development Costs - Once technological feasibility is
              established, the costs of developing software to be marketed as
              part of a product is capitalized and will be amortized on the
              basis of estimated future revenues with annual minimum charges,
              which is similar to the straight line basis over the estimated
              remaining useful life.

              Reclassification - Certain amounts previously reported have been
              reclassified to conform to current year presentation.

              Cash Equivalents - The Company considers certificates of deposit,
              money market funds and all other highly liquid debt instruments
              purchased with an original maturity of three months or less to be
              cash equivalents.

              Financial Instruments - Financial instruments include cash and
              equivalents, accounts receivable, other assets, accounts payable
              and accrued expenses. The amounts reported for financial
              instruments are considered to be reasonable approximations of
              their fair values. The fair value estimates presented herein were
              based on market information available to management as of December
              31, 1998.

              Concentration of Credit Risk/Major Customers, Supplier and
              Manufacturer - The Company maintains its cash balances with
              financial institutions insured by the Federal Deposit Insurance
              Corporation to a maximum of $100,000. The Company's balances
              exceed such amount. The Company generated approximately 39% of its
              revenues from one customer in 1996. No customer exceeded 10% of
              revenues in 1997 or 1998.

              The Company is dependent upon one supplier for a major part of its
              Colormate(Registered) TLc BiliTest(Trademark) System and one
              company to manufacture the Colormate(Registered)
              TLc BiliTest(Trademark) System. The loss of these companies would
              materially adversely affect the Company.



                                       57
<PAGE>


              Loss Per Share - The Company adopted SFAS No. 128, "Earnings Per
              Share," ("EPS") which requires a presentation of basic EPS and
              diluted EPS. Basic EPS excludes dilution and is computed by
              dividing earning available to common stockholders by the
              weighted-average number of common shares outstanding for the
              period. Diluted EPS assumes conversion of convertible debt and the
              issuance of common stock for all other potentially dilutive
              equivalent shares outstanding. Diluted EPS is not shown since it
              is anti-dilutive.

              Stock-Based Compensation - Statement of Financial Accounting
              Standards No. 123 "Accounting for Stock-Based Compensation," ("FAS
              123") encourages, but does not require, companies to record
              compensation cost at fair value for stock-based employee
              compensation plans. The Company has chosen to continue to account
              for stock-based compensation using the intrinsic value method
              prescribed in Accounting Principles Board Opinion No. 25,
              "Accounting for Stock Issued to Employees," and related
              Interpretations. Accordingly, compensation cost for options
              granted by the Company is measured as the excess, if any, of the
              quoted market price of the Company's stock at the date of the
              grant over the amount an employee must pay to acquire the stock.
              The fair value of option grants is discussed in Note 5.

              Income Taxes - Deferred tax assets and liabilities reflect the net
              tax effects of temporary differences between the carrying amount
              of assets and liabilities for financial reporting purposes and the
              amounts for income tax purposes. A valuation allowance is provided
              for the net deferred tax assets if it is more likely than not that
              some or all of the deferred tax assets will be realized.

              Research and Development - These costs are expensed as they are
              incurred.

              Recent Accounting Standards - In June 1998, the Financial
              Accounting Standards Board issued SFAS No. 133, "Accounting for
              Derivative Instruments and Hedging Activities" which establishes
              accounting and reporting standards for derivative instruments,
              including certain derivative instruments embedded in other
              contracts (collectively referred to as derivatives), and for
              hedging activities. It requires that an entity recognize all
              derivatives as either assets or liabilities in the statement of
              financial position and measure those instruments at fair value.
              This statement will be adopted in the Company's 2000 fiscal year.
              While management is still reviewing the statement, it believes the
              adoption of this statement will not have a material effect on the
              Company's consolidated financial position, results of operations
              or cash flows.

Note 2  --    Management's Plans to Overcome Operating Difficulties:


              Since 1989, the Company has incurred losses from operations and
              net cash outflows from operations, and has owned
              ColorMate(Registered) 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 or sell its equipment and market its
              related services and products to ultimately overcome these
              difficulties. In the event the ColorMate(Registered) 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 and continued
              significant operating losses.


              On July 30, 1997, the Company was granted clearance by the FDA for
              commercial marketing of the ColorMate(Registered)
              TLc BiliTest(Trademark) System for the non-invasive monitoring of
              newborn bilirubinemia (infant jaundice) by health care
              professionals in hospitals, pediatricians' offices or by home
              healthcare agencies. Since that date, the Company has had
              discussions with several companies interested in distributing the
              ColorMate(Registered) TLc BiliTest(Trademark) System and is
              currently 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.


                                       58
<PAGE>


              The Company anticipates incurring significant additional
              expenditures related to manufacturing expenses, parts order,
              insurance, regulatory compliance and staffing and marketing
              expenses for the sales division as production and distribution
              commences over the next two quarters. Management expects that
              taking into account existing resources, anticipated revenues from
              future sales of the ColorMate(Registered) units, anticipated
              payments received under any future distribution agreements 
              and/or the proceeds of the Debentures (see Note 6) and any
              additional financing, the Company will have sufficient liquidity
              at least until December 31, 1999.

              If the Company is able to profitably market its
              ColorMate(Registered) TLc BiliTest(Trademark) System, Intellectual
              Properties, ColorMate(Registered) 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(Registered) System units for all applications will be
              marketed interchangeably, as the only difference 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 is not able to
              attract additional future financing, enter into distribution
              agreements generating such payments, generate significant revenue
              from operations and/or successfully market its products and
              technologies, at such point in time, it may have to significantly
              curtail operations.


Note 3  --    Related Party Transactions, Commitments and Contingencies:

              Related Party Transactions - In connection with the Avon
              Settlement and her employment agreement, Mrs. Macfarlane, the
              Company's CEO and a principal shareholder, is to receive a bonus
              of $361,200, of which $98,800 has been paid. The remaining
              $262,400 accrues interest at the rate of 10% per annum. In
              December 1997, Mrs. Macfarlane agreed to delay demand for payment
              until January 1999, and has since temporarily waived repayment at
              this time. At December 31, 1998, $318,900, including interest,
              remained due.

              Employment Agreements - In December 1997, the Company agreed with
              Mrs. Macfarlane to extend her employment at an annual salary of
              $175,000 through December 31, 2000.

              On April 10, 1995, the Company hired Arthur Guiry as its new
              president at an annual salary of $200,000 through April 10, 2000.
              In addition, Mr. Guiry received an aggregate of 300,000 incentive
              and non-qualified options at an exercise price of $2.25, expiring
              April 10, 2000. The options vest at the rate of 100,000 per year
              commencing April 10, 1996 and are now fully vested.

              Lease Agreements - The Company leases office and warehouse space.
              Most of the leases are on a month to month basis, with aggregate
              monthly rentals of approximately $27,000. Total rent and storage
              expense was $266,000, $199,900 and $195,400 in 1998, 1997 and
              1996, respectively. Approximately $30,000 per year related to rent
              paid to Mrs. Macfarlane.

              Retirement Plan - In 1997, the Company adopted a defined
              contribution plan which provided for discretionary Company
              contributions for qualified employees. The expense relating to
              this plan was $0 and $93,246 in 1997 and 1998, respectively.

              Legal Proceedings -- Three putative class actions were commenced
              against the Company and certain of its officers and directors in
              the Southern District of New York. The first two actions were
              commenced in June 1998 and are captioned L.F. Monk v. Chromatics
              Color Sciences International, Inc., Darby S. Macfarlane, Arthur
              Guiry, David K. Macfarlane and Leslie Foglesong, C.A. No. 98 CV
              4111 (S.D.N.Y.) and Daniel R. Marquis v. Chromatics Color Sciences
              International, Inc., Darby S. Macfarlane, Arthur Guiry and Leslie
              Foglesong, C.A. No. 98 CV 4335 (S.D.N.Y.). The third action was
              commenced in August 1998 and is captioned Joseph Grunberg v.
              Chromatics Color Sciences International, Inc., Darby S.
              Macfarlane, Arthur Guiry, David K. Macfarlane and Leslie
              Foglesong, C.A. No. 98 CIV. 5646 (S.D.N.Y.)



                                       59
<PAGE>

              The complaints were consolidated pursuant to the Consolidation
              Order entered by the Court in December 1998. A consolidated
              amended complaint in the matter now captioned In re Chromatics
              Color Sciences International, Inc. Securities Litigation,
              Consolidated Matter File No. 98 Civ. 4111 (SHS), was filed and
              served in January 1999 (the "Action").

              Plaintiffs purport to bring the class action on behalf of all
              purchasers of the common stock of the Company, between July 30,
              1997 and June 9, 1998, seeking damages for the alleged violation
              by defendants of Section 10(b) of the Securities Exchange Act of
              1934, 15 U.S.C. ss.78j(b), and Rule 10b-5 promulgated thereunder,
              17 C.F.R. ss.240.10b-5, and pursuant to Section 20(a) of the
              Securities Exchange Act of 1934, 15 U.S.C. ss.78t(a), with respect
              to the individual named defendants as "controlling persons." The
              complaint alleges that the Company "embarked upon a scheme" to
              inflate the price of the Company's Common Stock by making false
              and misleading statements concerning: (i) the new and innovative
              nature of the Company's ColorMate(Registered)
              TLc BiliTest(Trademark) System; (ii) the market size and revenue
              potential of the ColorMate(Registered) TLc BiliTest(Trademark)
              System; and (iii) the existence and status of negotiations with
              potential distributors of the ColorMate(Registered)
              TLc BiliTest(Trademark) System. The allegations of the complaint
              arise principally from a "report" prepared by Manuel I. Asensio of
              Asensio & Company, Inc. that was disseminated at the close of the
              putative class period.

              Defendants have moved to dismiss the complaint. Defendants believe
              that the claims asserted against them are without merit and intend
              to vigorously defend this action. No assurance can be given that
              the resolution of the Action and/or future actions will not have a
              material adverse effect on the Company's results of operations and
              liquidity. The Company has directors and officers insurance which
              may cover a portion of the liability asserted in the Action. The
              Company is exploring its legal remedies in respect to what it
              believes to be false allegations against the Company made by short
              sellers of its stock; the Company expects to incur significant
              expenses in this regard.

Note 4  --    Income Taxes:

              The Company had a deferred tax asset at December 31, 1998 and 1997
              of approximately $10,000,000 and $7,000,000, respectively. These
              amounts relate primarily to net operating loss and tax credit
              carryforwards. These assets have been offset by valuation
              allowances since their realizability can not be determined.

              At December 31, 1998, the Company had net operating loss
              carryforwards of approximately $26,600,000 for Federal income tax
              purposes which expire through December 31, 2012. In addition, the
              Company had research and development tax credit carryforwards of
              approximately $50,000 at December 31, 1998 available to offset
              future Federal income taxes. Included in the net operating loss
              carryforwards is approximately $5,500,000 relating to the
              exercise of stock options. The benefits, if any, from the
              utilization of this amount will be credited to additional paid-in
              capital.

Note 5  --    Capital Stock and Options:

              Stock Split - In February 1998, the Company effected a
              three-for-two split (the "Stock Split"). All share and per share
              data included in this report have been restated to reflect the
              stock split.

              Preferred Stock - The Company's shares of Class A Convertible
              Preferred Stock are entitled to non-cumulative dividends, if
              declared, at $.001 per annum. In February 1998, the shareholders
              approved an amendment to the Class A Convertible Preferred Stock
              to provide that in the event either the Company's earnings before
              interest, income taxes and extraordinary items exceed $20,000,000
              for two consecutive calendar years, or the closing bid price
              exceeds $31.11 for 30 consecutive trading days at any time through
              December 31, 2000, each share of Class A Preferred Stock shall be
              convertible into .979 shares of Common Stock. Such shares shall
              otherwise be called for redemption during 120 days following
              December 31, 2000 at $.01 per share plus any declared but unpaid
              dividends.



                                       60
<PAGE>


              In addition, the shareholders approved an amendment to the
              Company's Certificate of Incorporation to (1) revise the market
              price conversion feature of the Class A Convertible Preferred
              Stock to provide for adjustment upon the occurrence of certain
              events involving the Common Stock, and (2) revise the calculation
              of the earnings goal needed to trigger the conversion feature of
              the Class A Convertible Preferred Stock by deleting the exclusion
              therefrom of extraordinary items and revenues and earnings
              generated by businesses acquired by the Company.

              The Company also has 10,000,000 shares of Class B Preferred Stock
              which may be issued with such rights and preferences as the Board
              of Directors may determine upon issuance. In January 1999, the
              Company amended its Certificate of Incorporation to fix the
              relative rights, preferences and limitations with respect to the
              Class B Preferred Stock pursuant to the Shareholders' Rights Plan
              (the "Plan") adopted in December 1998 by the Board of Directors.

              Under the Plan, each shareholder will receive a dividend of one
              right for each share of the Company's outstanding common stock (a
              "Right"). Subject to the terms of the rights agreement between the
              Company and its transfer agent (the "Rights Agreement"), each
              Right will entitle the holder to purchase one one-hundredth of a
              share of the Company's new Class B Series 1 Preferred Stock at an
              initial exercise price of $28. Until the Rights become
              exercisable, they will be represented by, and trade with, the
              outstanding common stock; the Company does not anticipate issuing
              separate certificates for the Rights at this time.

              Initially, the Rights are attached to the Company's common stock
              and are not exercisable. They become detached from the Common
              Stock, and become immediately exercisable, (i) following
              expiration of the Board of Directors' right to redeem the Rights
              during the 10 day window period (the "Window Period"), or any
              extension of the Window Period, after any person or group (other
              than the exempted shareholder) becomes the beneficial owner of 20
              percent or more of the Company's common stock (other than
              acquisitions which are approved in advance by the Board of
              Directors), or (ii) ten days after any person or group announces a
              tender or exchange offer that would result in that same beneficial
              ownership level (other than pursuant to certain permitted offers).

              The distribution of Rights was made on January 11, 1999 to
              shareholders of record of common stock on that date, and shares of
              common stock that are newly issued after that date will also carry
              Rights until the Rights become detached from the common stock. The
              Rights will expire on January 11, 2009. The Rights distribution is
              not taxable to shareholders. The Company may redeem the Rights for
              $0.001 each at any time during the Window Period, or any extension
              thereof, after a buyer acquires a 20 percent position in the
              Company, and under certain other circumstances.

              Stock Option Plan - The Company has a Stock Option Plan which
              currently provides for options to purchase up to 4,500,000 shares
              of Common Stock. The Plan provides for the granting of incentive
              stock options to all employees and non-incentive stock options to
              all employees and certain consultants at an exercise price equal
              to at least the fair market value of a share of Common Stock at
              the date of grant for incentive options (other than for the
              holders of more than 10% of the outstanding Common Stock which
              must be at least 110% of the fair market value on the date of
              grant) and at least 85% of the fair market value on the date of
              grant for non-incentive options. Stock options are generally
              exercisable in 33-1/3% annual increments commencing one year after
              the date of grant and generally expire five years after the date
              of grant.

              The Company estimates the fair value of each stock option at the
              grant date by using the Black-Scholes option-pricing model with
              the following weighted average assumptions used for grants in
              1996, 1997 and 1998, no dividend yield, expected volatility of
              76%, 76% and 60%, risk free interest rates of 5% to 7% and
              expected lives of approximately 22 years. If compensation cost for
              the Company's stock option plan had been determined in accordance
              with SFAS No. 123, net loss would have been increased in 1996,
              1997 and 1998 by approximately $544,000, $424,000 and $470,000,
              respectively and loss per share would have been increased by $.05,
              $.05 and $.03, respectively.


                                       61
<PAGE>


         The following table summarizes information about stock options
outstanding at December 31, 1998:

<TABLE>
<CAPTION>
                                                              Options Outstanding                    Options Exercisable
                                                         ------------------------------     ---------------------------------------
                                                          Weighted
                                                           average
                                                         remaining
                                   Number Outstanding    contractual        Weighted                               Weighted average
                                     as of 12/31/98      life (years)     average price     Number exercisable      exercise price
                                   ------------------    ------------     -------------     ------------------     ----------------
<S>                                <C>                   <C>              <C>               <C>                    <C>  
              Range of            
              Exercise Prices:         1,159.049            2.64             $2.80              1,140,716               $2.80
              $1.02 - $2.92            1,176,999            4.33              5.23                232,499                4.77
              $2.96 - $5.42              546,750            4.08              7.73                 33,750                7.74
              $7.00 - $8.25              228,750            3.91              9.47                 64,750                9.51
              $9.25 - $10.00           ---------            ----             -----              ---------               -----
                                       3,111,548            3.62             $5.08              1,470,715               $3.52
                                       =========            ====             =====              =========               =====
</TABLE>


              Transactions under the stock option plan are summarized as
follows:

<TABLE>
<CAPTION>
                                                                               Weighted average
                                                                 Shares         exercise price
                                                                 ------        ----------------
<S>                                                              <C>           <C> 
              Shares under option at December 31, 1995           1,023,750           2.17
                     Granted (at $2.75 to $2.92 per share)       1,140,000           2.90
                     Exercised                                    (187,500)          1.64
                     Cancelled (at $2.96 per share)                 (3,750)          2.96
                                                                 ---------

              Shares under option at December 31, 1996           1,972,500           2.64
                     Granted (at $5.00 to $10.00 per share)        791,250           7.04
                     Exercised                                    (671,502)          2.34
                                                                 ---------

              Shares under option at December 31, 1997           2,092,248           4.40
                     Granted (at $4.88 to $9.25 per share)       1,432,500           6.40
                     Exercised                                    (165,700)          3.85
                     Cancelled (at $7.46 to $8.25 per share)      (247,500)          7.82
                                                                 ---------           ----
              Shares under option at December 31, 1998           3,111,548           5.08
                                                                 =========           ====

              Options exercisable at December
                     1996     530,000
                     1997   1,201,082
                     1998   1,470,715

              Weighted average fair value of options granted
                     during:
                     1998 $2.26 per share
</TABLE>

                                       62
<PAGE>


              The Company granted options to consultants and certain other
              professionals who provide services to the Company. These options
              have been valued in accordance with FAS 123 and are being expensed
              over the vesting period of the options. The amounts expensed in
              1997 and 1998 amounted to $582,400 and $843,400, respectively. The
              activity for these options is included in the table above.

              At December 31, 1998 warrants to purchase 478,273 shares of common
              stock at $1.67 per share were outstanding. These warrants, issued
              to a placement agent in previous years in connection with equity
              financings, expire as follows: (i) 124,299 warrants issued on
              January 6, 1995 expire January 6, 2002; (ii) 408 warrants issued
              on March 13, 1995 expire March 13, 2002; (iii) 93,628 warrants
              issued on May 4, 1995 expire May 4, 2002; and (iv) 259,938
              warrants issued on June 8, 1995 expire June 8, 2002.

Note 6 --     Subsequent Events:

              On April 15, 1999 the Company issued an aggregate of $5,000,000
              14% senior convertible debentures due April 15, 2002 (the
              "Debentures") in a private placement. Payments of interest on the
              outstanding principal amount of the Debentures are due on the
              earlier of the maturity date or upon any conversion of the
              Debentures into the Company's Common Stock. The accrued interest
              may be paid either in cash, shares of the Company's Common Stock
              or a combination of Common Stock and cash, at the option of the
              Company.

              The outstanding principal amount of the Debentures (together with
              accrued interest thereon) is convertible until after the first
              anniversary of the closing. At that time, the Debentures are
              convertible into shares of Common Stock, at the option of the
              holder or holders thereof, at the conversion price of $5.00.
              However, at any time prior to April 14, 2000, such portion of the
              Debentures may be converted, at the option of the holder or
              holders thereof, as shall result in the issuance, upon such
              conversion, of not more than an aggregate of 200,000 shares of
              Common Stock. Subject to applicable securities laws, the holder
              or holders of such shares, in the aggregate, may only sell not
              more than an aggregate of 50,000 shares of such Common Stock
              issued upon such conversion during any one month period ending
              prior to April 14, 2000. At any time after the 18 month
              anniversary of the closing, the Company may prepay the entire
              amount of the Debentures or any portion thereof for a prepayment
              price equal to the original principal amount of the Debentures
              plus all accrued and unpaid interest. At any time after the 18
              month anniversary of the closing and prior to the Maturity Date,
              in the event the average closing bid price (as reported on the
              Nasdaq SmallCap Market or such other principal market or exchange
              on which the Common Stock is then traded) of the Company's Common
              Stock for any 10 consecutive trading days equals or exceeds
              $10.29, the Company can require conversion of the outstanding
              principal amount (together with accrued interest) of the
              Debentures into Common Stock at a conversion price of $5.00 per
              share.
              
Item 9.       Changes in and Disagreements With Accountants on Accounting and
              Financial Disclosure

              On April 21, 1998, Wiss & Company, LLP ("Wiss") informed the
              Company that, based on mutual determination between the Company
              and Wiss, it would not stand for re-election as the Company's
              principal accountants for the audit of the Company's financial
              statements following the completion of its most recent audit of
              the Company's financial statements on February 17, 1998 in
              connection with the Company's Annual Report on Form 10-K for the
              fiscal year ended December 31, 1997.

              Wiss' report on the financial statements for the fiscal year ended
              December 31, 1996 included a statement, indicating that the
              financial statements were prepared by Wiss on the assumption that
              the Company would continue as a going concern. Wiss' report on the
              financial statements for the fiscal year ended December 31, 1997
              did not contain such statement. Wiss' reports for fiscal years
              1996 and 1997 contained no other adverse opinions, disclaimers of
              opinion or modifications as to uncertainty, audit scope or
              accounting principles.

              Within the two most recent fiscal years and the subsequent interim
              period preceding Wiss' notification confirming that it would not
              stand for re-election, there were no disagreements between the
              Company and Wiss on any matter of accounting principles or
              practices, financial statement disclosure or auditing scope or
              procedures, which disagreements if not resolved to Wiss'
              satisfaction would have caused it to make reference in connection
              with its report to the subject matter of the disagreement.

              Wiss has not advised the Company of any reportable events as
              defined in paragraphs (A) through (D) of Regulation S-K Item
              304(a)(1)(v).

              On May 1, 1998, the Company engaged BDO Seidman LLP ("BDO") as the
              independent accountant to audit the Company's financial
              statements.


              During the Company's two most recent fiscal years and the
              subsequent interim period preceding the date of BDO's engagement,
              neither the Company nor any person on the Company's behalf
              consulted BDO regarding either (i) the application of accounting
              principles to a specified transaction, or the type of audit
              opinion that might be rendered on the Company's financial
              statements, or (ii) any matter that was a subject of disagreement
              or a reportable event.

                                       63
<PAGE>


                                    PART III


Item 10. Directors and Executive Officers of the Company

         Certain information concerning directors and executive officers of the
Company is set forth below:

<TABLE>
<CAPTION>
                 Name                                     Age                                 Position
                 ----                                     ---                                 --------
<S>                                                       <C>                   <C>                            
Darby Simpson Macfarlane                                  54                    Director, Chairperson of the Board
                                                                                of Directors, Chief Executive
                                                                                Officer, Assistant Treasurer

Arthur Guiry                                              59                    President

David Kenneth Macfarlane                                  52                    Director, Vice President, Research
                                                                                and Development

Leslie Foglesong*                                         43                    Director, Secretary and Treasurer

Edmund Vimond*+                                           63                    Director

Edward Mahoney*+                                          48                    Director
</TABLE>

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

*         Member of the Audit Committee of the Board of Directors.

+         Member of the Compensation Committee of the Board of Directors.


         Directors are elected annually by the shareholders and hold office
until the next annual meeting and until their respective successors are elected
and qualified. Executive officers are elected by the Board of Directors, serve
at the direction of the Board of Directors and hold office until their
respective successors are elected and qualified. There is no arrangement or
understanding between any director or executive officer and any other person
pursuant to which such person was or is to be selected as a director or
executive officer of the Company except that the Company has agreed with the
placement agent of the Company's 1995 Private Placement that it will have the
option of selecting a designee of the placement agent to the Company's Board of
Directors for a period of five years following the completion of the 1995
Private Placement. The Company has agreed to use its best efforts to elect such
designee of the placement agent. To date, the placement agent has not requested
that the Company elect such designee.

         Set forth below is certain additional information with respect to the
directors, executive officers and certain consultants of the Company.


         Mrs. Macfarlane co-founded the Company in March 1984. She has been
Chairperson of the Board, Chief Executive Officer, Assistant Treasurer and a
director of the Company since formation and also served in the capacity of
President until April 9, 1995. Prior to such time, Mrs. Macfarlane was the
co-founder in 1974 of Personalized Colors, Inc. Commencing in 1978, Mrs.
Macfarlane and Mr. Macfarlane led and directed the Company's research and
development and mass-manufacturing efforts of the color science technology,
instrumentation and cosmetic and related products now offered by the Company.

         Mr. Macfarlane co-founded the Company and is also one of the primary
inventors of the patented technologies used in the ColorMate(Registered) System.
In addition, Mr. Macfarlane developed the manufacturing, technical and
engineering specifications necessary to have miniaturized and mass manufactured
the ColorMate(Registered) System. Mr. Macfarlane has been Vice
President-Research and Development, and a director of the Company since
formation.



                                       64
<PAGE>


Prior to 1984, Mr. Macfarlane held a variety of executive positions with
finance, sales, marketing, research and development and manufacturing companies
in Europe, South Africa and the United States, including International Technical
Research and Development, Ltd., and Trumach, Inc.


         Leslie Foglesong has been the Secretary, Treasurer and a director of
the Company since its formation.

         Mr. Edmund Vimond has previously provided consulting services to the
Company. On December 1, 1997, Mr. Vimond was appointed to the Company's Board of
Directors and currently acts as Chairman of the Company's Compensation
Committee. From 1991 to 1997, Mr. Vimond was the President and Chief Executive
Officer of Ocurest Laboratories, Inc. Mr. Vimond was responsible for managing
all functions of the business, including marketing, sales, contract
manufacturing, personnel and finance and systems. Prior to 1991, Mr. Vimond held
positions in various executive capacities with RJR Nabisco Inc., American
Cyanamid Co., Johnson & Johnson and Warner-Lambert Companies Inc. Mr. Vimond
received B.S.B.A. and M.B.A. degrees from Northwestern University.

         Edward Mahoney, a certified public accountant, was appointed to the
Board of Directors on January 26, 1998, and currently acts as Chairman of the
Company's Audit Committee. Since January 1998, Mr. Mahoney has owned and
operated a certified public accounting firm and was a tax partner with the
accounting firm of BDO Seidman LLP from 1994 to 1997 and Price Waterhouse from
1973 to 1994. Mr. Mahoney received a Bachelor of Science in Accounting degree
from Brooklyn College of the City University of New York.

         Mr. Arthur Guiry provided consulting services to the Company from
January 1, 1995 to March 1995, in connection with the marketing of the Company's
medical applications for its technology. On April 10, 1995, Mr. Guiry commenced
his duties as President of the Company. Prior to joining the Company, Mr. Guiry
held positions as an executive in sales for divisions of Bristol-Myers, Smith &
Nephew Ltd. and Solzer, for the past 18 years. He also holds a physics degree
from Manhattan College.

         Darby Simpson Macfarlane and David Kenneth Macfarlane are the founders
of the Company and, as such, may be deemed "promoters" of the Company as those
terms are defined in the rules and regulations promulgated under the Securities
Act of 1933, as amended. There is no family relationship among any other
directors or executive officers of the Company.

Medical Advisory Board

         The Company recently established a Medical Advisory Board consisting of
Dr. Fred W. Billmeyer, Dr. Ian Holzman and Dr. Jeffrey Maisels, independent
consultants/advisors to the Company.

         Dr. Fred W. Billmeyer, Jr., Professor Emeritus at Rensselaer
Polytechnic Institute, a color scientist and recognized expert in the color
science field for more than 40 years, has been a consultant to the Company since
1984 and is a member of the Company's Medical Advisory Board. Dr. Billmeyer has
published numerous books and articles in the field of color science. The
consulting agreement with Dr. Billmeyer provides that he will provide color
consulting services to the Company at a fee of $125 per hour. Such services
include providing advice and supervisory assistance in connection with any
further research and development, modification, enhancement or marketing
activity relating to the ColorMate(Registered) System and Intellectual
Properties in specific applications and assisting in obtaining patent protection
for the unpatented Intellectual Properties. In addition, Dr. Billmeyer is
entitled to receive a royalty in the amount of 2% of the selling price less the
cost of manufacture of any device sold by the Company. In 1998, the Company paid
Dr. Billmeyer $12,876.

         Dr. Ian Holzman, a physician with the Department of Pediatrics,
Division of Newborn Medicine, Mt. Sinai Medical Center, is a member of the
Medical Advisory Board. Dr. Holzman is presently the Chief of the Division of
Newborn Medicine at Mt. Sinai Medical Center and a member of the Attending Staff
at each of Mt. Sinai Medical Center and City Hospital Center at Elmhurst. In
addition, Dr. Holzman is a Professor of Pediatrics, Obstetrics and Gynecology
and Reproductive Medicine, at Mt. Sinai School of Medicine. Dr. Holzman has
published numerous journal articles, book chapters and medical abstracts in the
field of pediatric treatment and medicine.



                                       65
<PAGE>


         Dr. Jeffrey Maisels, a physician with the Department of Pediatrics,
William Beaumont Hospital, is a member of the Medical Advisory Board. Dr.
Maisels is presently the Chief of the Department of Pediatrics at William
Beaumont Hospital and is also a Clinical Professor of Pediatrics at Wayne State
University School of Medicine. Dr. Maisels has published numerous journal
articles, book chapters and medical abstracts in the field of pediatric
treatment and medicine including, publications relating to bilirubin infant
jaundice and phototherapy.

Consultants

         The Company relies on the services of certain other consultants and
advisors. The consultants are not executive officers of the Company but make or
are expected to make significant contributions to the business of the Company.

         Mr. Frederick Frank, Vice Chairman of Lehman Brothers, an investment
banking firm, has been an advisor to the Company since December 1, 1997,
providing financial, strategic and business advisory services. The consulting
agreement with Mr. Frank expired December 1, 1998 but was renewed by mutual
agreement of the Company and Mr. Frank.

         The Company from time to time also employs certain other consultants
and temporary personnel for various purposes such as FDA and regulatory matters,
the Bilirubin Project and marketing, engineering, research and development
associated with the Intellectual Properties, Beauty-Aid Products, the
ColorMate(Registered) Bilirubin Device and ColorMate(Registered) units. The
Company has also retained consultants to provide public relations, shareholder
relations, financial, licensing and investment banking services. In 1998, these
consultants and temporary personnel were paid an aggregate of $265,000 and were
granted options to purchase an aggregate of 260,000 shares of the Company's
Common Stock under the 1992 Plan. All consultants may be reimbursed by the
Company for reasonable out-of-pocket expenses incurred by them in connection
with the services each consultant provides to the Company.

Compliance with Section 16(a) of the Exchange Act

         The Company became subject to the reporting requirements of Section 13
of the Exchange Act on February 5, 1993 and, accordingly, the Company's
officers, directors and greater than 10 percent beneficial owners were subject
to the reporting requirements of Section 16(a) of the Exchange Act during the
year ended December 31, 1993. The Company believes that except as described
below, during the fiscal year ended December 31, 1998, all filing requirements
under Section 16(a) applicable to its officers, directors and greater than ten
percent beneficial owners were complied with on a timely basis:

         On October 30, 1998, Leslie Foglesong, the Company's Secretary and
Treasurer, was granted 100,000 options to purchase shares of the Common Stock
under the 1992 Plan, which become exercisable on October 30, 1999 and expire
October 30, 2003. A Statement of Changes in Beneficial Ownership on Form 4 was
filed for such options with the Commission on February 8, 1999. Also, on October
30, 1998, Edmund Vimond and Edward Mahoney were each granted options to purchase
20,000 shares of the Company's Common Stock under the 1992 Plan. Statements of
Changes in Beneficial Ownership on Form 4 were filed for each of Mssrs. Vimond
and Mahoney with the Commission on February 3, 1999.

Item 11. Executive Compensation

Summary Compensation Table

         The following table summarizes all plan and non-plan compensation
awarded to, earned by or paid to the Company's Chief Executive Officer and its
four other executive officers who were serving as such during and at the end of
fiscal 1998 for services rendered in all capacities to the Company in the last
three fiscal years.


                                       66
<PAGE>


<TABLE>
<CAPTION>
                                                                                        Long-Term
                                                                                       Compensation
                                                     Annual Compensation                  Awards
                                                     -------------------                  ------
                                                                                        Securities
Name and                                                                                Underlying
Principal                                                                                Options             All Other
Position                                    Year            Salary        Bonus           (#)(1)            Compensation
--------                                    ----            ------        -----           ------            ------------
<S>                                         <C>             <C>        <C>             <C>                  <C>     
Darby Simpson Macfarlane,                   1996            125,000    $   20,000         450,000             5,617(2)
  Chief Executive Officer                   1997            175,000             0               0                 0
                                            1998            175,000             0               0                 0

Arthur Guiry, President                     1996            200,000             0               0                 0
                                            1997            200,000             0               0                 0
                                            1998            200,000             0               0                 0

David Kenneth Macfarlane,                   1996            125,000         4,500         300,000             5,950(2)
  Vice President,                           1997            125,000             0               0                 0
  Research and Development                  1998            125,000             0               0                 0

Leslie Foglesong,                           1996             75,000       103,650(3)      150,000                 0
  Secretary and Treasurer                   1997            100,000             0               0                 0
                                            1998            100,000         5,000         100,000                 0
</TABLE>


----------------------
(1)  In February 1998, the Company effected a three-for-two forward Stock Split.
     The number of shares issuable upon the exercise of stock options granted
     under the 1992 Plan presented above give effect to the Stock Split.

(2)  Includes premiums paid by the Company on the term life insurance policies
     and disability insurance policies of Mrs. and Mr. Macfarlane.

(3)  Includes 1995 bonus not paid until 1996.


Option/SAR Grants in Last Fiscal Year

         Leslie Foglesong, the Company's Secretary and Treasurer, was granted
100,000 options under the 1992 Plan on October 30, 1998, which become
exercisable on October 30, 1999 and expire October 30, 2003.

Aggregated Option/SAR Exercises in Last Fiscal Year and
Fiscal Year End Option/SAR Value Table

         The following table sets forth information with respect to stock
options exercised during the fiscal year ended December 31, 1998 and the value
at December 31, 1998 of unexercised stock options held by the Chief Executive
Officer and the other executive officers of the Company. The number of shares
presented gives effect to the Stock Split:



                                       67
<PAGE>


<TABLE>
<CAPTION>
                                                                               Number of                           
                                                                              Securities                           
                                                                              Underlying             Value of
                                                                              Unexercised           Unexercised
                                                                              Options at           In-the-Money
                                                                                Fiscal                Options
                                                                               Year-End              at Fiscal
                                                                               --------             Year-End(2)
                                                                                                    -----------
                                         Shares                         
                                      Acquired on                            Exercisable/          Exercisable/
                                        Exercise            Value            Unexercisable
Name                                      (#)            Realized(1)              (#)              Unexercisable
----------------------------------  -----------------  ----------------- ----------------------  ------------------
<S>                                 <C>                <C>               <C>                     <C>       
Darby Simpson Macfarlane                   0                  --               450,000/0            $2,257,875

Arthur Guiry                               0                  --               105,000/0             $597,187

David Kenneth Macfarlane                   0                  --               300,000/0            $1,505,250

Leslie Foglesong                           0                  --            150,000/100,000          $755,675/
                                                                                                      256,250
</TABLE>


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

(1)  The value realized on the exercise of options was calculated by multiplying
     the number of underlying shares by the difference between the closing price
     of the Common Stock on the date of exercise (as quoted on the Nasdaq
     SmallCap Market published in The Wall Street Journal) and the option
     exercise price.

(2)  The value of unexercised in-the-money options was calculated by multiplying
     the number of underlying shares held by the difference between the closing
     price of the Common Stock on December 31, 1998 ($7.938 per share, as
     originally quoted on the Nasdaq SmallCap Market published in The Wall
     Street Journal) and the option exercise price, but after giving effect to
     the Stock Split.

Compensation of Directors

         Directors who are officers of the Company do not receive additional
compensation for serving on the Board of Directors or for their attendance at
Board of Directors' meetings. Edmund Vimond receives a monthly director's fee of
$6,000 and Edward Mahoney receives a monthly director's fee of $4,000. In
addition, Mr. Mahoney received options to purchase 37,500 (on January 26, 1998)
shares of the Company's Common Stock under the Company's 1992 Stock Option Plan
and each of Mssrs. Mahoney and Vimond received options to purchase 20,000 (on
October 30, 1998) shares of the Company's Common Stock under the Company's 1992
Stock Option Plan. The stock options granted to Mr. Vimond and Mr. Mahoney vest
in equal installments on the first, second and third anniversaries of the date
of grant and are exercisable at $9.25 (Mahoney's grant on January 26, 1998) and
$5.375 (grants on October 30, 1998) per share, respectively. Mr. Vimond also
received 22,500 stock options on December 1, 1997, one third of which became
exercisable on December 1, 1998 and expire on December 1, 2002 and are
exercisable at $9.71 per share. In addition, on July 15, 1997, Mr. Vimond
received 15,000 stock options, one third of which options were fully exercisable
on July 15, 1998, expire on July 15, 2002 and are exercisable at $5.42 per
share.

Employment Agreements

         The Company has entered into separate employment agreements with each
of Darby Simpson Macfarlane and David Kenneth Macfarlane, providing for Mrs.
Macfarlane's employment as Chief Executive Officer and for Mr. Macfarlane's
employment as Vice President, Research and Development. The agreements with Mrs.
and Mr. Macfarlane provide for current annual base salaries in 1997 of $175,000
and $125,000, respectively, subject to annual increases at the discretion of the
Board of Directors. In addition, Mrs. Macfarlane's agreement provides for a
bonus payment of 33% of the first million of the Company's net recovery in
excess of $2,000,000 from the Avon


                                       68
<PAGE>


Litigation. Accordingly, Mrs. Macfarlane is to receive $361,200, of which
$98,800 has been paid. The remaining $262,400 is currently payable and accrues
interest at the rate of 10% per annum. However, repayment of this amount is
subject to Mrs. Macfarlane's agreement to defer repayment until January 1999 in
connection with the amendment to the Company's Certificate of Incorporation
which amendment modified certain terms of the Class A Preferred Stock, including
the following: (i) extension to December 31, 2000 of the expiration date of the
conversion feature and redemption period, (ii) revision of the market price
conversion feature to provide for adjustment upon the occurrence of certain
events involving the Common Stock, and (iii) revision of the calculation of the
earnings goal needed to trigger the conversion feature by including
extraordinary items and revenues and earnings generated by businesses acquired
by the Company. In connection with Mrs. Macfarlane's agreement to defer
repayment until January 1999 (which repayment Mrs. Macfarlane has temporarily
waived at this time), Mrs. Macfarlane also agreed to extend the term of her
employment with the Company until December 31, 2000 and forego any discretionary
performance bonus under her employment agreement in 1999. Under the employment
agreements, the Company is obligated to provide Mr. Macfarlane with a $300,000
and Mrs. Macfarlane with a $500,000 term life insurance policy and disability
insurance. The Company maintains key-man life insurance on each of Mrs. and Mr.
Macfarlane in the amount of $1,000,000.

         The employment agreements also provide for the payment of termination
benefits by the Company if employment thereunder is terminated (i) by the
Company for any reason other than death, disability or "cause" as set forth
therein or (ii) by reason of death or disability. If Mr. or Mrs. Macfarlane's
employment is terminated by the Company for any reason other than death,
disability or "cause," the Company is required by each agreement to pay to the
terminated employee an amount equal to the greater of (a) the aggregate base
salary payable for the remainder of the employment period of the agreement and
(b) the aggregate base salary payable thereunder for two years, plus, in each
case, an amount not less than any bonus granted by the Board of Directors of the
Company to the employee in the year immediately preceding the year in which
termination occurred. If the employee's employment is terminated by reason of
death or disability, the Company is required to pay to Mrs. Macfarlane and Mr.
Macfarlane, as applicable, an amount equal to two years aggregate base salary in
the case of Mrs. Macfarlane, and one year's base salary in the case of Mr.
Macfarlane, plus in each case an amount not less than the pro rata portion of
any bonus granted to the employee in the year immediately preceding the year in
such termination occurs.

         The Company has entered into a five year employment agreement,
commencing on April 10, 1995, with Arthur Guiry providing for Mr. Guiry to serve
as President of the Company. The agreement provides for an annual base salary of
$200,000, subject to annual increases at the discretion of the Board of
Directors, plus options to purchase an aggregate of 300,000 shares of Common
Stock at an exercise price of $2.25 per share under the Company's 1992 Stock
Option Plan. Mr. Guiry shall be entitled to an annual bonus subject to the
discretion of the Board of Directors. The Company, at its option, can maintain
key-man insurance on Mr. Guiry in the amount of $1,000,000. The agreement
provides for the payment of termination benefits by the Company if employment
thereunder is terminated by the Company for any reason other than death,
disability, "cause" as set forth therein, or voluntary resignation. If Mr.
Guiry's employment is terminated by the Company for any reason other than death,
disability, "cause," or voluntary resignation, the Company is required to pay to
Mr. Guiry an amount equal to the aggregate base salary for the remainder of the
employment period plus an amount equal to the bonus granted for the year
immediately preceding the year in which such termination occurs. If Mr. Guiry's
employment is terminated by reason of death, disability, cause or voluntary
resignation, he will not receive any other compensation besides accrued salary
through the date of such termination and an amount equal to the pro rata portion
of any bonus granted for the year immediately proceeding the year in which such
termination occurs.

         All of the agreements described above prohibit disclosure of
proprietary and confidential information regarding the Company and its business
to anyone outside the Company both during and subsequent to employment and
provide certain non-competition and non-solicitation restrictions on the
employee for the duration of employment with the Company, and for one year
thereafter.

Compensation Committee Interlocks and Insider Participation

         There are no reportable compensation committee (Board of Directors)
interlocks or insider participation transactions. The Company established a
compensation committee in January 1998 consisting of Edmund Vimond and Edward
Mahoney.


                                       69
<PAGE>


Compensation Committee Report on Executive Compensation


         The Compensation Committee of the Board of Directors is responsible for
establishing compensation policies applicable to the Company's executive
officers; evaluating and recommending to the Board the compensation of the chief
executive officer and other executive officers; and recommending to the Board
individual stock option grants for executive officers from the Company's 1992
Stock Option Plan. The following report relates to the Company's compensation
policies and the compensation paid to the chief executive officer for the year
ending December 31, 1998.

         Compensation Policies: The Company's compensation policies for all
employees, including executive officers, are designed to provide compensation
levels that are competitive with those of small capitalization early stage
technology companies, with whom the Company must compete in the recruitment and
retention of highly qualified, motivated personnel. The Company's executive
compensation program is structured to (1) compensate its executive officers on
an annual basis with a cash salary and discretionary bonus at a sufficient level
to retain and motivate these officers and (2) provide long-term incentives to
those executives through periodic grant of stock options.

         The salary component of executive compensation and any bonuses granted
in the Company's discretion, is based on each executive's level of
responsibility in comparison to similar positions in comparable companies. The
Company believes a competitive base salary, and bonus when warranted, is
essential to the development and retention of capable management. Base salaries
for executive officers are reviewed periodically, based on a review of
competitive salaries obtained from published data and other sources, and
discretionary performance bonuses, if any, are used to augment salary in
circumstances where special achievement is to be rewarded.

         The long-term incentive component recognizes the importance of stock
ownership by employees and reflects the use of stock options as an integral part
of each executive's compensation. The Company believes the opportunity for stock
appreciation through stock options which vest over time promotes the
relationship between long-term interests of executive officers and shareholders.
The size of specific grants takes into account the executive officer's salary,
number of options previously granted, and overall individual contributions to
the Company.

         Chief Executive Officer Compensation: The Company extended until
December 31, 2000 the employment agreement with Ms. Macfarlane, the Chief
Executive Officer, at an annual base salary of $175,000 per annum, in connection
with her agreement with the Company, as recommended by the Compensation
Committee, to forego any bonus grant in 1999 in consideration of the Company so
extending her employment agreement and agreeing to modify certain terms of the
Class A Preferred Stock owned by Ms. Macfarlane, including extension of the
redemption date for the Preferred Stock to December 31, 2000. The determination
of this salary level was based on the same criteria applicable to base salaries
of all executive officers. Ms. Macfarlane received no stock option or bonus
grant in 1998.


Item 12. Security Ownership of Certain Beneficial Owners and Management

         The following table sets forth, as of April 13, 1999, the beneficial
ownership of the Common Stock: (i) by each stockholder known by the Company to
beneficially own more than 5% of the Common Stock; (ii) by each director of the
Company; (iii) by the Company's Chief Executive Officer; and (vi) by all
executive officers and directors of the Company as a group. Amounts presented
give effect to the February 1998 three-for-two forward Stock Split (including
shares issuable upon the exercise of stock options and/or warrants). Except as
otherwise indicated below, each named beneficial owner has sole voting and
investment power with respect to the shares of Common Stock listed.


                                       70
<PAGE>

<TABLE>
<CAPTION>
Name and Address of
Beneficial Owner                                              Number of Shares               Percent of Class
----------------                                              ----------------               ----------------
<S>                                                           <C>                            <C>  
Darby Simpson Macfarlane (1)
10 Old Jackson Avenue, #28                                      2,991,896                           19.4%
Hastings-on-Hudson, NY 10706

David Kenneth Macfarlane (2)                                    2,991,896                           19.4%
5 East 80th Street
New York, NY  10021

Leslie Foglesong (3)                                              165,000                            1.1%
116 Lafayette Avenue
Brooklyn, NY 11217

Edmund Vimond                                                      12,500                              --
6967 Country Lakes Circles
Sarasota, FL  34243

Edward Mahoney                                                     12,500                              --
2044 Palisades Drive
Pacific Palisades, CA  90272

Janssen-Meyers Associates, L.P.(4)                              1,206,934                            7.8%
17 State Street
New York, NY 10001

All directors and executive officers                            3,181,896                           20.5%
as a group (6 persons) (5)
</TABLE>

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

(1)  Includes all of the 1,380,000 issued and outstanding shares of the Class A
     Preferred Stock owned by Mrs. Macfarlane, 450,000 shares issuable upon the
     exercise of options granted to Mrs. Macfarlane and 300,000 shares issuable
     upon the exercise of options granted to Mr. Macfarlane which options are
     currently exercisable. Mrs. Macfarlane disclaims beneficial ownership of
     the shares and/or options owned by Mr. Macfarlane.

(2)  Includes the 1,380,000 issued and outstanding shares of the Class A
     Preferred Stock owned by Mrs. Macfarlane, 861,896 issued and outstanding
     shares of the Common Stock beneficially owned by Mrs. Macfarlane, 450,000
     shares issuable upon the exercise of options granted to Mrs. Macfarlane and
     300,000 shares issuable upon the exercise of options granted to Mr.
     Macfarlane which options are currently exercisable.

(3)  Includes 150,000 shares issuable upon the exercise of options which are
     currently exercisable.

(4)  Based on a representation letter from Janssen-Meyers Associates, L.P. dated
     March 19, 1999, and includes 636,250 shares of Common Stock held by Peter
     Janssen (an affiliate of Janssen-Meyers Associates, L.P.), 145,750 shares
     of Common Stock and 314,347 warrants held by Janssen-Meyers Associates,
     L.P. which, in each case, are currently exercisable, 108,647 warrants held
     by limited partners of Janssen-Meyers Associates, L.P. and 1,940 warrants
     held by Meyers Janssen Securities Corp., which, in each case, are currently
     exercisable.


                                       71
<PAGE>


(5)  Includes 945,000 shares issuable upon the exercise of options which are
     currently exercisable and 1,380,000 issued and outstanding shares of the
     Class A Preferred Stock.

     Mellon Bank Corporation filed a Schedule 13G, dated February 5, 1999,
     indicating that as of January 26, 1999, Mellon Bank Corporation ceased to
     be the beneficial owner of more than five percent of the Company's Common
     Stock.


Item 13. Certain Relationships and Related Transactions

         In December 1997, Mrs. Macfarlane agreed to (i) delay payment to
January 1999 on the note she received under her employment agreement in respect
of the Avon Settlement, (ii) extend the term of her employment with the Company
until December 31, 2000, and (iii) forego any discretionary performance bonus
under her employment agreement for 1999 in connection with the Company's Board
of Directors agreeing to modify certain features of the Company's Class A
Preferred Stock. The note has not yet been repaid to Mrs. Macfarlane, who has
temporarily waived repayment at this time. The changes to the Class A Preferred
Stock, approved by the Company's shareholders on February 13, 1998, provide
that, if (i) the Company's earnings for any two calendar years during the period
ending on December 31, 2000 exceeds $20,000,000 or (ii) the closing bid price of
the Common Stock has been at least $46.67 ($31.11 giving effect to the Stock
Split) on 30 consecutive trading days at any time prior to December 31, 2000,
each outstanding share of Preferred Stock shall be converted into .979 shares of
Common Stock, subject to adjustment for stock-splits, including the Stock Split,
stock dividends, reclassification or other combinations or subdivisions. If
neither condition is satisfied by December 31, 2000, the Preferred Stock shall
be redeemed by the Company at a price of $0.01 per share, plus any declared but
unpaid dividends.

         Since August 1990, the Company has occupied office space leased from
Darby Simpson Macfarlane. The Company pays Mrs. Macfarlane $1,620 per month
under the lease (representing her actual lease cost for such premises). For the
year ended December 31, 1997, the Company paid Mrs. Macfarlane $19,400 in
connection with such lease. In addition, the Company also paid Mrs. Macfarlane
approximately $9,600 for the year ended December 31, 1997, for the use of her
residence as offices of the Company.

         Accrued royalties under certain prior license arrangements between the
Company and Pink & Peach Computer Corp. (an affiliate of Mrs. Macfarlane) were
$147,200 at December 31, 1992. $80,000 of this amount was paid to Pink & Peach
Computer Corp. from the proceeds of the IPO, $41,100 of this amount was paid to
Pink & Peach Computer Corp. in 1996 and the balance of $26,100 was paid in 1997.

         In connection with the Avon Settlement and Mrs. Macfarlane's employment
agreement, Mrs. Macfarlane is to receive $361,200 from the proceeds from the
Avon Settlement, of which $98,800 has been paid. The remaining $262,400 is
currently payable and accrues interest at the rate of 10% per annum. See
"Employment Agreements." In addition, Mrs. Macfarlane is due $12,100 for unpaid
salary, which is currently payable without interest.

         Management believes that each of the transactions described above were
obtained on terms at least as favorable as could have been obtained from
unaffiliated third parties.

                                     PART IV


Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) and (d)1.       Financial Statements

                    The following Financial Statements of the Company are
                    included in Part II, Item 8 of this report:

                    Independent Auditors' Reports



                                       72
<PAGE>


                    Consolidated Balance Sheets as of December 31, 1998 and 1997

                    Consolidated Statements of Operations for the years ended
                    December 31, 1998, 1997 and 1996

                    Consolidated Statements of Changes in Stockholders' Equity
                    for the years ended December 31, 1998, 1997 and 1996

                    Consolidated Statements of Cash Flows for the years ended
                    December 31, 1998, 1997 and 1996

                    Notes to Consolidated Financial Statements

(a) and (d)2.       Financial Statements Schedules

                    All schedules have been omitted because they are not
                    applicable, are not required or because the required
                    information is included in the Financial Statements or notes
                    thereto.

(b)                 Reports on Form 8-K:

                    Form 8-K**, dated November 12, 1998, announcing that the
                    Company executed a manufacturing agreement under which the
                    manufacturer is the exclusive manufacturer/assembler and
                    packager of the two models of the Company's instrument.

(c)                 The following exhibits are included in this report:

Number              Description of Document
------              -----------------------

3.1                 Restated Articles of Incorporation of the Company
                    (incorporated by reference to Exhibit 3.1 to the Company's
                    Registration Statement on Form S-1 (File No. 33-54256),
                    filed on November 5, 1992, as amended (the "Registration
                    Statement")).

3.1.1               Certificate of Amendment to the Certificate of Incorporation
                    of the Company regarding the change of the Company's name
                    (incorporated by reference to Exhibit 3.1.1 to the
                    Registration Statement).

3.1.2               Certificate of Amendment to the Certificate of Incorporation
                    of the Company increasing the authorized number of shares of
                    Common Stock and increasing the authorized number of shares
                    of Preferred Stock (incorporated by reference to Exhibit
                    3.1.2 to the Company's Annual Report on Form 10-KSB for the
                    fiscal year ended December 31, 1996).

3.1.3               Certificate of Amendment to the Certificate of Incorporation
                    of the Company dated February 13, 1998 effecting the
                    three-for-two Stock Split and certain changes to the Class A
                    Convertible Preferred Stock (incorporated by reference to
                    Exhibit 3.1.3 to the Company's Annual Report on Form 10-K
                    for the fiscal year ended December 31, 1997).

3.14                Certificate of Amendment to the Certificate of Incorporation
                    of the Company dated January 8, 1999 to fix the relative
                    rights, preferences and limitations with respect to the
                    Class B Preferred Stock of the Company, pursuant to the
                    adoption of the Shareholders' Rights Plan (incorporated by
                    reference as Exhibit 1 to the Form 8-A dated January 5,
                    1999).

3.2                 By-Laws of the Company (incorporated by reference to Exhibit
                    3.2 to the Registration Statement).

4.1                 Specimen form of the Common Stock Certificate (incorporated
                    by reference to Exhibit 4.1 to the Registration Statement).

4.2                 Shareholders' Rights Plan, adopted by the Company on
                    December 31, 1998 (incorporated by reference as Exhibit 
                    1 to the Form 8-A dated January 5, 1999).

9.1                 Voting Proxy dated December 13, 1995, of David Kenneth
                    Macfarlane to Darby Simpson Macfarlane (incorporated by
                    reference to Exhibit 2 to Schedule 13D of Darby Macfarlane
                    and Ken Macfarlane dated February 12, 1996).


                                       73
<PAGE>


Number              Description of Document
------              -----------------------

9.2                 Voting Trust Agreement dated December 13, 1995, between
                    David Kenneth Macfarlane and Darby Simpson Macfarlane
                    (incorporated by reference to Exhibit 3 to Schedule 13D of
                    Darby Macfarlane and Ken Macfarlane dated February 12,
                    1996).

10.1*               Form of Employment Agreement between the Company and Darby
                    Simpson Macfarlane (incorporated by reference to Exhibit
                    10.1 to the Registration Statement).

10.2*               Form of Employment Agreement between the Company and David
                    Kenneth Macfarlane (incorporated by reference to Exhibit
                    10.2 to the Registration Statement).

10.3*               Consulting Agreement, dated February 25, 1992, between the
                    Company and Dr. Fred W. Billmeyer, Jr. (incorporated by
                    reference to Exhibit 10.4 to the Registration Statement).

10.4                Form of Indemnity Agreement between the Company and its
                    directors and officers (incorporated by reference to Exhibit
                    10.6 to the Registration Statement).

10.5                Know-How Agreement, dated September 3, 1992, between the
                    Company, Darby Simpson Macfarlane and David Kenneth
                    Macfarlane (incorporated by reference to Exhibit 10.12 to
                    the Registration Statement).

10.6                Assignment, dated September 3, 1992 from Darby Simpson
                    Macfarlane to the Company regarding Intellectual Property
                    (incorporated by reference to Exhibit 10.13 to the
                    Registration Statement).

10.7**              Agreement, dated April 16, 1992, between the Company and IMS
                    Cosmetics, Inc. (incorporated by reference to Exhibit 10.14
                    to the Registration Statement).

10.8                U.S. Patent No. 4,909,632 relating to Method for Selecting
                    Personal Compatible Colors (incorporated by reference to
                    Exhibit 10.17 to the Company's Annual Report on Form 10-KSB
                    for the fiscal year ended December 31, 1994).

10.9                U.S. Patent No. 5,311,293 relating to Method and Instrument
                    for Selecting Personal Compatible Colors (incorporated by
                    reference to Exhibit 10.18 to the Company's Annual Report on
                    Form 10-KSB for the fiscal year ended December 31, 1994).

10.10               U.S. Patent No. 5,313,267 relating to Method and Instrument
                    for Selecting Personal Compatible Colors (incorporated by
                    reference to Exhibit 10.19 to the Company's Annual Report on
                    Form 10-KSB for the fiscal year ended December 31, 1994).

10.11               The Australian Patent relating to Method of Selecting
                    Personal Compatible Color (incorporated by reference to
                    Exhibit 10.20 to the Company's Annual Report on Form 10-KSB
                    for the fiscal year ended December 31, 1994).

10.12               European Community Patent No. 0446512 relating to Method for
                    Selecting Personal Compatible Colors (incorporated by
                    reference to Exhibit 10.21 to the Company's Annual Report on
                    Form 10-KSB for the fiscal year ended December 31, 1994).

10.13               U.S. Patent No. 5,671,735 relating to Method and Apparatus
                    for Detecting and Measuring Conditions Affecting Color
                    (incorporated by reference to Exhibit 10.13 to the Amendment
                    to the Company's Annual Report on Form 10-K for the fiscal
                    year ended December 31, 1998).

10.14               Assignment, dated October 30, 1992, between Darby Simpson
                    Macfarlane and the Company relating to the Avon litigation
                    (incorporated by reference to Exhibit 10.19 to the
                    Registration Statement).

10.15               Know-How Assignment, dated October 30, 1992, from Pink &
                    Peach Computer Corp. to the Company (incorporated by
                    reference to Exhibit 10.20 to the Registration Statement).

10.16               1992 Stock Option Plan (incorporated by reference to Exhibit
                    10.1 to the Registration Statement on Form 8-A (File No.
                    333-51697).

                                       74
<PAGE>


Number              Description of Document
------              -----------------------

10.17               Consulting Agreement dated January 6, 1995, between the
                    Company and Janssen-Meyers Associates, L.P. (incorporated by
                    reference to Exhibit 10.27 to the Company's Annual Report on
                    Form 10-KSB for the fiscal year ended December 31, 1994).

10.18               Warrant Agreement dated January 6, 1995, between the Company
                    and Janssen-Meyers Associates, L.P. (incorporated by
                    reference to Exhibit 10.28 to the Company's Annual Report on
                    Form 10-KSB for the fiscal year ended December 31, 1994).

10.19               Warrant Agreement dated March 13, 1995, between the Company
                    and Janssen-Meyers Associates, L.P. (incorporated by
                    reference to Exhibit 10.29 to the Company's Annual Report on
                    Form 10-KSB for the fiscal year ended December 31, 1994).

10.20**             Manufacturing Agreement, dated November 3, 1998, between the
                    Company and a third party manufacturer (incorporated by
                    reference as Exhibit 10.1 to the Form 8-K dated November 12,
                    1998).

10.21               Rights Agreement, dated January 11, 1999, between the
                    Company and Continental Stock Transfer & Trust Company
                    (incorporated by reference as Exhibit 1 to the Form 8-A
                    dated January 5, 1999).

10.22               Subscription Agreement, dated April 15, 1999; Form of 14%
                    Convertible Debentures Due April 15, 2002 (to be filed
                    supplementally).

18.1                Letter, dated April 21, 1998, from Wiss & Company, LLP
                    informing the Company that it would not stand for
                    re-election as the Company's principal accountants
                    (incorporated by reference as Exhibit 16 to the Form 8-K
                    dated April 24, 1998).

18.2                Press Release, dated May 1, 1998, announcing that the
                    Company engaged BDO Seidman LLP as the principal accountants
                    for the Company (incorporated by reference as Exhibit 99 to
                    the Form 8-K dated May 5, 1998).

21                  Subsidiaries of the Company (incorporated by reference to
                    Exhibit 21 to the Company's Post Effective Amendment No. 1
                    on Form SB-1 to the Registration Statement filed on January
                    11, 1994).

23+                 Consents of Independent Auditors.

27+                 Financial Data Schedule

-----------------------------------------
*    Management contract or compensatory plan or arrangement required to be
     filed as an exhibit.
**   Confidential treatment has been requested with respect to certain
     information contained in this agreement.
+    Filed herewith.


                                       75
<PAGE>


                                   SIGNATURES


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

         CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
         By:   /s/ Darby S. Macfarlane                     Date:  April 15, 1999
               ----------------------------------------
               Darby S. Macfarlane,
               Chief Executive Officer
         By:   /s/ Leslie Foglesong                        Date:  April 15, 1999
               ----------------------------------------
               Leslie Foglesong,
               Treasurer
               (Chief Financial and Accounting Officer)
     
         In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.

         By:   /s/ Darby S. Macfarlane                     Date:  April 15, 1999
               -----------------------------------------
               Darby S. Macfarlane,
               CEO; Chairman of the Board;
               Assistant Treasurer; Director
         By:   /s/ David K. Macfarlane                     Date:  April 15, 1999
               -----------------------------------------
               David K. Macfarlane,
               Vice President, Research & Development;
               Director
         By:   /s/ Leslie Foglesong                        Date:  April 15, 1999
               -----------------------------------------
               Leslie Foglesong,
               Secretary; Treasurer; Director
         By:   /s/ Edmund Vimond                           Date:  April 15, 1999
               -----------------------------------------
               Edmund Vimond,
               Director
         By:   /s/ Edward Mahoney                          Date:  April 15, 1999
               -----------------------------------------
               Edward Mahoney,
               Director


                                       76
<PAGE>

                                  Exhibit Index


Number              Description of Document
------              -----------------------

3.1                 Restated Articles of Incorporation of the Company
                    (incorporated by reference to Exhibit 3.1 to the Company's
                    Registration Statement on Form S-1 (File No. 33-54256),
                    filed on November 5, 1992, as amended (the "Registration
                    Statement")).
3.1.1               Certificate of Amendment to the Certificate of Incorporation
                    of the Company regarding the change of the Company's name
                    (incorporated by reference to Exhibit 3.1.1 to the
                    Registration Statement).
3.1.2               Certificate of Amendment to the Certificate of Incorporation
                    of the Company increasing the authorized number of shares of
                    Common Stock and increasing the authorized number of shares
                    of Preferred Stock (incorporated by reference to Exhibit
                    3.1.2 to the Company's Annual Report on Form 10-KSB for the
                    fiscal year ended December 31, 1996).
3.1.3               Certificate of Amendment to the Certificate of Incorporation
                    of the Company dated February 13, 1998 effecting the
                    three-for-two Stock Split and certain changes to the Class A
                    Convertible Preferred Stock (incorporated by reference to
                    Exhibit 3.1.3 to the Company's Annual Report on Form 10-K
                    for the fiscal year ended December 31, 1997).
3.14                Certificate of Amendment to the Certificate of Incorporation
                    of the Company dated January 8, 1999 to fix the relative
                    rights, preferences and limitations with respect to the
                    Class B Preferred Stock of the Company, pursuant to the
                    adoption of the Shareholders' Rights Plan (incorporated by
                    reference as Exhibit 1 to the Form 8-A dated January 5,
                    1999).
3.2                 By-Laws of the Company (incorporated by reference to Exhibit
                    3.2 to the Registration Statement).
4.1                 Specimen form of the Common Stock Certificate (incorporated
                    by reference to Exhibit 4.1 to the Registration Statement).
4.2                 Shareholders' Rights Plan, adopted by the Company on
                    December 31, 1998, on Form 8-A, dated January 5, 1999. 
                    (incorporated by reference as Exhibit 1 to the Form 8-A 
                    dated January 5, 1999).
9.1                 Voting Proxy dated December 13, 1995, of David Kenneth
                    Macfarlane to Darby Simpson Macfarlane (incorporated by
                    reference to Exhibit 2 to Schedule 13D of Darby Macfarlane
                    and Ken Macfarlane dated February 12, 1996).
9.2                 Voting Trust Agreement dated December 13, 1995, between
                    David Kenneth Macfarlane and Darby Simpson Macfarlane
                    (incorporated by reference to Exhibit 3 to Schedule 13D of
                    Darby Macfarlane and Ken Macfarlane dated February 12,
                    1996).
10.1*               Form of Employment Agreement between the Company and Darby
                    Simpson Macfarlane (incorporated by reference to Exhibit
                    10.1 to the Registration Statement).
10.2*               Form of Employment Agreement between the Company and David
                    Kenneth Macfarlane (incorporated by reference to Exhibit
                    10.2 to the Registration Statement).
10.3*               Consulting Agreement, dated February 25, 1992, between the
                    Company and Dr. Fred W. Billmeyer, Jr. (incorporated by
                    reference to Exhibit 10.4 to the Registration Statement).
10.4                Form of Indemnity Agreement between the Company and its
                    directors and officers (incorporated by reference to Exhibit
                    10.6 to the Registration Statement).
10.5                Know-How Agreement, dated September 3, 1992, between the
                    Company, Darby Simpson Macfarlane and David Kenneth
                    Macfarlane (incorporated by reference to Exhibit 10.12 to
                    the Registration Statement).
10.6                Assignment, dated September 3, 1992 from Darby Simpson
                    Macfarlane to the Company regarding Intellectual Property
                    (incorporated by reference to Exhibit 10.13 to the
                    Registration Statement).
10.7**              Agreement, dated April 16, 1992, between the Company and IMS
                    Cosmetics, Inc. (incorporated by reference to Exhibit 10.14
                    to the Registration Statement).
10.8                U.S. Patent No. 4,909,632 relating to Method for Selecting
                    Personal Compatible Colors (incorporated by reference to
                    Exhibit 10.17 to the Company's Annual Report on Form 10-KSB
                    for the fiscal year ended December 31, 1994).
10.9                U.S. Patent No. 5,311,293 relating to Method and Instrument
                    for Selecting Personal Compatible Colors (incorporated by
                    reference to Exhibit 10.18 to the Company's Annual Report on
                    Form 10-KSB for the fiscal year ended December 31, 1994).



                                       77
<PAGE>


Number              Description of Document
------              -----------------------

10.10               U.S. Patent No. 5,313,267 relating to Method and Instrument
                    for Selecting Personal Compatible Colors (incorporated by
                    reference to Exhibit 10.19 to the Company's Annual Report on
                    Form 10-KSB for the fiscal year ended December 31, 1994).
10.11               The Australian Patent relating to Method of Selecting
                    Personal Compatible Color (incorporated by reference to
                    Exhibit 10.20 to the Company's Annual Report on Form 10-KSB
                    for the fiscal year ended December 31, 1994).
10.12               European Community Patent No. 0446512 relating to Method for
                    Selecting Personal Compatible Colors (incorporated by
                    reference to Exhibit 10.21 to the Company's Annual Report on
                    Form 10-KSB for the fiscal year ended December 31, 1994).
10.13               U.S. Patent No. 5,671,735 relating to Method and Apparatus
                    for Detecting and Measuring Conditions Affecting Color
                    (incorporated by reference to Exhibit 10.13 to the Amendment
                    to the Company's Annual Report on Form 10-K for the fiscal
                    year ended December 31, 1998).
10.14               Assignment, dated October 30, 1992, between Darby Simpson
                    Macfarlane and the Company relating to the Avon litigation
                    (incorporated by reference to Exhibit 10.19 to the
                    Registration Statement).
10.15               Know-How Assignment, dated October 30, 1992, from Pink &
                    Peach Computer Corp. to the Company (incorporated by
                    reference to Exhibit 10.20 to the Registration Statement).
10.16               1992 Stock Option Plan (incorporated by reference to Exhibit
                    10.1 to the Registration Statement on form S-8 (File No.
                    333-91697).
10.17               Consulting Agreement dated January 6, 1995, between the
                    Company and Janssen-Meyers Associates, L.P. (incorporated by
                    reference to Exhibit 10.27 to the Company's Annual Report on
                    Form 10-KSB for the fiscal year ended December 31, 1994).
10.18               Warrant Agreement dated January 6, 1995, between the Company
                    and Janssen-Meyers Associates, L.P. (incorporated by
                    reference to Exhibit 10.28 to the Company's Annual Report on
                    Form 10-KSB for the fiscal year ended December 31, 1994).
10.19               Warrant Agreement dated March 13, 1995, between the Company
                    and Janssen-Meyers Associates, L.P. (incorporated by
                    reference to Exhibit 10.29 to the Company's Annual Report on
                    Form 10-KSB for the fiscal year ended December 31, 1994).
10.20**             Manufacturing Agreement, dated November 3, 1998, between the
                    Company and a third party manufacturer (incorporated by
                    reference as Exhibit 10.1 to the Form 8-K dated November 12,
                    1998).
10.21               Rights Agreement, dated January 11, 1999, between the
                    Company and Continental Stock Transfer & Trust Company
                    (incorporated by reference as Exhibit 1 to the Form 8-A
                    dated January 5, 1999).
10.22               Subscription Agreement, dated April 15, 1999; Form of 14%
                    Convertible Debentures Due April 15, 2002 (to be filed
                    supplementally).
18.1                Letter, dated April 21, 1998, from Wiss & Company, LLP
                    informing the Company that it would not stand for
                    re-election as the Company's principal accountants
                    (incorporated by reference as Exhibit 16 to the Form 8-K
                    dated April 24, 1998).
18.2                Press Release, dated May 1, 1998, announcing that the
                    Company engaged BDO Seidman LLP as the principal accountants
                    for the Company (incorporated by reference as Exhibit 99 to
                    the Form 8-K dated May 5, 1998).
21                  Subsidiaries of the Company (incorporated by reference to
                    Exhibit 21 to the Company's Post Effective Amendment No. 1
                    on Form SB-1 to the Registration Statement filed on January
                    11, 1994).
23+                 Consents of Independent Auditors.
27+                 Financial Data Schedule

------------------------------
*    Management contract or compensatory plan or arrangement required to be
     filed as an exhibit.
**   Confidential treatment has been requested with respect to certain
     information contained in this agreement.
+    Filed herewith.


                                       78