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, 2001

|_|  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.
        ---------------------------------------------------------------
                (Name of Registrant as Specified in Its Charter)

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



            2500 Johnson Avenue, Riverdale, NY               10463
        ----------------------------------------------   -------------
         (Address of Principal Executive Offices)          (Zip Code)


                                 (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

        Purchase Rights for Class B Series 1 Preferred Stock, par value $0.001
        ------------------------------------------------------------------------
                                (Title of Class)

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

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

     Check 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.

     For the year ended December 31, 2001, the Company had revenues of
$8,000.

     As of April 11, 2002, 20,989,550 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
$419,791.


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                                     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",
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 SUCCESSFUL RESOLUTION OF THE
COMPANY'S CURRENT LIQUIDITY CRISIS, THE COMPANY'S ABILITY TO OBTAIN IMMEDIATE
ADDITIONAL FINANCING TO CONTINUE OPERATIONS, 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 ADDITIONAL 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, develop and commercialize certain intellectual property rights,
proprietary technology and instrumentation in the field of color science
(collectively, the "Intellectual Properties"). The Intellectual Properties
provide color measurement to a laboratory standard of accuracy, analysis and
classification of human skin, tissue, fluid, hair, teeth or biological subject
which facilitates the detection and monitoring of conditions affecting their
coloration and the classification and organization by color of various consumer-
sensitive products such as cosmetics, tooth enamel, hair color, hosiery,
clothing fashion accessories and textiles. 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(R)
System."

The Company has developed a ColorMate(R) 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(R) device for non- invasive
monitoring of newborn bilirubinemia (infant jaundice) in infants by healthcare
professionals in the hospital, institutional, pediatricians' office or home
setting (the "ColorMate(R) TLc-BiliTest(R) System"). In September 2001, the
Company received further clearances from the U.S. Food and Drug Administration
for upgrades to the ColorMate(R) TLc-BiliTest(R) System.

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.
Infant jaundice primarily affects infants within the first three to ten days of
life. Almost all newborn babies develop some degree of infant jaundice and very
high bilirubin levels, if left untreated, may, in extreme cases, lead to
permanent brain damage or death. 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 an increased risk of developing newborn infant
jaundice. 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


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(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 itself prior to release. Thus the
Company believes a non-invasive instrument that monitors infant jaundice in
infants represents a significant improvement in patient care. A joint statement
by the American Academy of Pediatrics and the Canadian Pediatric Society
published in the February 2000 issue of Pediatrics, titled Prevention and
Management of Pain and Stress in the Neonate, urges doctors to take measures to
alleviate pain in healthcare for babies and prevent causing pain whenever
possible. The statement recommends, "Health care institutions should develop and
implement patient care policies to assess, prevent and manage pain in neonates,
including those receiving palliative care." Also, "whenever possible validated
noninvasive monitoring techniques . . . that are not tissue damaging should
replace invasive methods." The Company believes that potentially the
ColorMate(R) TLc-BiliTest(R) System could significantly reduce the number of
invasive blood tests in monitoring newborn jaundice.

In June 1999 the Company entered into an agreement for the exclusive
distribution of this medical product in the hospital, pediatrician's office and
home healthcare markets in the United States with Datex-Ohmeda Inc. and its
Ohmeda Medical Division. As a result of the disappointing results achieved to
date in pursuing the Company's business strategy through the distribution
agreement with Datex-Ohmeda and the limited financial resources of the Company,
the Company's current objective with regard to its medical business is to either
explore revised business arrangements with Datex-Ohmeda acceptable to both
parties, or to identify a strategic partner in the medical industry to whom the
Company could sell, for an up-front fee and ongoing royalty, the exclusive
market rights to the ColorMate(R) TLc-BiliTest(R) System. There can be no
assurance that the Company will be able to reach acceptable business
arrangements with Datex-Ohmeda or identify such a strategic partner or to
negotiate and consummate such a sale. We are also developing a business plan for
establishing a new management structure and commercializing applications of our
technology in the Beauty Industry. We will need to raise substantial capital
from equity financings and/or the sale of our products in order to fund our
continuing operations and to develop and/or market other medical and non-medical
applications for our intellectual property rights, technology and
instrumentation. If we are not successful in raising sufficient capital and/or
generating adequate revenues, we may be forced to curtail our operations and
seek protection from our creditors under applicable bankruptcy laws.

On June 2, 2000 the Company acquired the common stock and certain debt of Gordon
Laboratories, Inc. ("Gordon"), a Carson City, California based formulator and
manufacturer of cosmetics, hair care and other personal care product, for
approximately $5.5 million, principally in Company stock. Gordon's financial
results after the acquisition were substantially below the Company's
expectations and in March 2001 it defaulted on its outstanding secured
indebtedness to a third party lender. In order to resolve this situation, the
Company entered into negotiations regarding the potential sale of Gordon. On
July 3, 2001, Gordon was acquired by Abilene Investments Corp. and GAC-Labs, LLC
for an aggregate purchase price of $1,000,000 paid to Gordon to be used for
operating capital. Simultaneously, the shares of Gordon stock that were
outstanding immediately prior to the closing of this transaction, all of which
were owned by the Company, were redeemed for an aggregate payment of one dollar.
In addition, the Company assigned to Abilene and GAC-Labs the indebtedness of
Gordon and H.B. Gordon Manufacturing Co., Inc., its wholly-owned subsidiary,
owed to the Company. As part of the same transaction, the Company was granted
the option to purchase from Abilene and GAC-Labs the shares of Gordon stock
issued to them and the indebtedness assigned to them within one year for an
aggregate purchase price of $1,000,000 plus interest thereon at the rate of 14%
per annum, subject to reduction under certain conditions. The purpose of this
option is to afford the Company an opportunity to reacquire Gordon within one
year.

Prior to marketing the ColorMate(R) TLc-BiliTest(R) System, the Company's
activities principally involved licensing the Intellectual Properties, leasing
the ColorMate(R) System and marketing its own line of precisely color
coordinated proprietary cosmetics ("My Colors by Chromatics(R)") and proprietary
color charts and material swatchpacks (collectively, the "Beauty Aid Products")
in the cosmetics, hair color, beauty aid and fashion industries (i) in a
national sales program with Avon Products, Inc. and in limited test markets with
Clairol, Inc. and Hanes Hosiery, Inc. (all conducted prior to June 1991), (ii)
under a product development agreement with Gordon Laboratories, Inc. ("Gordon")
and (iii) under a license and lease agreement with Nordstrom, Inc.
("Nordstrom"). Presently, as the result of its efforts to attempt to
successfully market commercially the ColorMate(R) TLc-BiliTest(R) System for
medical application, the Company has not initiated any new relationships to
distribute its Beauty-Aid Products. However, the Company's new business plan
includes renewing its efforts for commercial distribution of its Beauty-Aid
Products, and the Company has introduced a prototype of a new hand held LED
ColorMate(R) device described below, to a number of potential customers in the
Beauty Industry (See below). The Company will require substantial additional
capital and completion of the LED instrument currently in Research and
Development for mass-manufacturing to commence it's business plan for this
application.


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PRODUCTS

The Company has developed the ColorMate(R) TLc-BiliTest(R) System for monitoring
newborn infant jaundice in infants of all races, including when under
phototherapy. This device uses a color measurement instrument in combination
with certain apertures, calibration systems, accessories and software which have
been developed by the Company for this specific medical application. The
ColorMate(R) TLc-BiliTest(R) System received FDA clearance for use in monitoring
newborn infant jaundice by measuring the color of the skin of the newborn and
periodically monitoring incremental changes in the skin color. The legally
marketable device includes the ColorMate(R) device for monitoring newborn infant
jaundice when operated using external power sources with a computer and printer,
and when operated as a battery- operated, hand-held, computer assisted device.
(This device together with the Company's disposable calibration components is
hereafter referred to as the "ColorMate(R) TLc-BiliTest(R) System.") The
ColorMate(R) TLc-BiliTest(R) System is a proprietary color measurement system
containing a light source and optical filters. Color measurements are obtained
from an infant by placing the ColorMate(R) TLc-BiliTest(R) System on different
physical sites of the newborn for five to ten seconds. Accuracy of the color
measurements is ensured by the TLc-Lensette(TM), proprietary disposable
color-calibration and verification standards consisting of a device containing a
dye deposit specially colored and treated paper, which is 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 milligrams per
deciliter (the laboratory scale used for blood serum tests) correlating to the
newborn's serum bilirubin concentration within a clinically useful range.

The ColorMate(R) TLc-BiliTest(R) System for monitoring infant jaundice as
currently marketed by the Company's distribution partner, Datex-Ohmeda, Inc. and
its Ohmeda Medical Division has a list price of $3,000 to $5,000 depending on
the model and may be leased or used under a limited time offer for use and
evaluation of the system, all with either purchase of minimum monthly supplies
of the TLc-Lensette(TM) calibration standards at $11.90 per unit or minimum
monthly charges per use under a Managed Use Program.

The Company has also developed a low-cost Light Emitting Diode (LED) instrument
that adapts its Intellectual Properties to the beauty industry. The LED
instrument uses inexpensive Light Emitting Diodes technology to measure color as
opposed to other competitive instruments that use conventional color measurement
systems with more expensive technology. The Company plans to market the LED
instrument to brand marketers in the Beauty Aid industry who will use the device
to provide their customers with a compatible skin tone match or corrective skin
tone match for their foundation makeup and compatible color cosmetics such as
lipstick, eyeshadow or blush.

The Company has commenced its first mass manufacturing effort of the LED device,
however initial testing of the first products demonstrated further research and
development was required to provide certain additional specifications for the
light emitting diodes for consistent accuracy when ordering and assembling large
batches of the LED device for potential commercial use.


MARKETING AND DISTRIBUTION

In September 1997, the Company released the results of market research studies
which analyzed the existing market for methods currently used to monitor newborn
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, business proposals from potential marketing partners and its
current distribution partner. 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.

On June 7, 1999, the Company executed a renewable, five-year agreement with
Datex-Ohmeda, Inc. and its Ohmeda Medical Division ("DO") pursuant to which the
Company appointed DO as the exclusive distributor in the United States of the
Company's ColorMate(R) TLc-BiliTest(R) System for noninvasive monitoring of
bilirubin (infant jaundice) in the hospital market, the non-consumer home
healthcare market (in which the test is administered solely by a healthcare
professional), the pediatrician office market and clinics within all such
markets. The agreement also applies to the Company's TLc-Lensette(TM)


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disposable standards that are used to calibrate measurements taken by the
ColorMate(R) TLc-BiliTest(R) System. The terms of the agreement provide for
minimum purchases of ColorMate(R) System units and TLc-Lensette(TM) disposable
color-calibration and verification standards for the term of the agreement.
There are no financial penalties for failure to meet these minimum levels.
However, the Company has the option to terminate the agreement if these minimums
are not met. As of March 26, 2002, DO had not achieved the minimum performance
requirements set forth in the agreement and the Company is currently exploring
acceptable business arrangements with DO.

Following the marketing launch of the ColorMate(R) TLc-BiliTest(R) System by DO
in February 2000, the Company experienced a slower than expected hospital
evaluation process for the non-invasive technology, a reality not uncommon to
other medical devices that attempt to become the standard of care. The Company
discovered that the hospital market was taking longer to evaluate the device,
which impacted its near-term revenue stream. The Company also encountered the
widespread medical practice related to the early discharge of infants, which is
moving the larger market potential to the pediatrician offices and home
healthcare markets. The Company further discovered that while healthcare
professionals are certainly interested in non-invasive devices for babies,
establishing new protocols for the treatment of infantile jaundice requires
continual education and medically sponsored awareness campaigns. The Company
also received feedback that its monitoring device would require additional
redesign and modifications to accommodate the busier hospital environment. In
cooperation with our distributor, Ohmeda Medical, the Company is working to
address these issues, has redesigned the product and obtained recent FDA
clearances for the redesigned device in September 2001. Another key issue to the
acceptance of the ColorMate(R) TLc-BiliTest(R) System was the fact that until
recently a CPT (Current Procedural Terminology) code did not exist for a
non-invasive procedure. Healthcare providers use CPT codes extensively for
reporting medical procedures and services for administrative management and
insurance reimbursement. A CPT code was issued for non-invasive testing for
bilirubin which became effective January 1, 2001. The new code that is listed in
CPT 2001 is 88400 bilirubin, total transcutaneous. Healthcare providers use the
CPT codes when reporting medical procedures and services under public and
private health insurance programs, and for administrative management in claims
processing and developing guidelines for medical care review according to the
AMA.

As a result of the disappointing results achieved to date in pursuing the
Company's business strategy through the distribution agreement with DO and the
limited financial resources of the Company, the Company's current objective with
regard to its medical business is to either arrive at acceptable revised
business arrangements with DO or to identify a strategic partner in the medical
industry to which the Company could sell, for an up-front fee and ongoing
royalty, the exclusive market rights to the ColorMate(R) TLc-BiliTest(R) System.

Due to the problems addressed above, revenues from the sale of the ColorMate(R)
TLc-BiliTest(R) System were minimal in 2001.


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(R) TLc-BiliTest(R) System as an aid to the
physician in monitoring the status of newborn babies for the development and
progression of newborn infant jaundice, 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 adjunctive
non-invasive monitoring of newborn 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 system in the United States. In September 2001, the
Company received confirmation of further marketing clearance pursuant to a
"substantial equivalence" determination order from the FDA's Center for Devices
and Radiological Health (the CDRH") authorizing the Company to commercially
distribute an upgraded 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 states that the system is a
"Class I Reserved device." The Company intends to maintain substantial
compliance with any applicable requirements for purposes of commercial
distribution.

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 and progression of newborn infant jaundice.


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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(R) TLc-BiliTest(R) System for incremental changes in the yellow
content of their skin color. Because the ColorMate(R) TLc-BiliTest(R) System can
provide effective adjunctive non-invasive monitoring of newborn infant jaundice,
it may have significant marketing advantages toward reducing 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.

Since receiving FDA marketing clearance in the United States, the Company has
undertaken procedures towards obtaining required international regulatory
clearances for its ColorMate(R) TLc-BiliTest(R) System. In March 1999, the
Company received ISO-9001 and EN46001 certification, signifying that the
Company's facility meets important international quality standards for product
design and development, manufacturing, servicing and distribution. In April
1999, the Company also was granted permission by the European Union (EU)
notified body, TUV Essen, to affix the CE Mark to its ColorMate(R)
TLc-BiliTest(R) System.


MANUFACTURING

One element of the Company's business strategy is to outsource the production of
the components and final assembly of the ColorMate(R) TLc-BiliTest(R) System and
its TLc-Lensette(TM) disposable calibration and verification standards to
third-party contract manufacturers. In November 1998, the Company reached an
agreement with Nova Biomedical Corporation for the contract production of the
ColorMate(R) TLc-BiliTest(R) System. Nova Biomedical 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 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 (a battery powered model and an electrically powered model) of the
Company's ColorMate(R) TLc-BiliTest(R) System 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 Nova Biomedical to exercise its right of first refusal to match third party
bids (thus permitting the Company to use other manufacturers), Nova Biomedical
is the Company's sole source of supply for the instruments. Under the agreement,
the Company is responsible for providing to Nova Biomedical, for assembly and
packaging, certain component parts.

In February 1999, the first manufacturing run of the Company's ColorMate(R)
TLc-BiliTest(R) System (under the FDA's QSR as well as ISO-9001/EN46001
manufacturing regulatory requirements) for monitoring newborn jaundice was
completed by Nova Biomedical. The Company commenced shipping the ColorMate(R)
TLc-BiliTest(R) System to those hospitals having placed purchase orders for the
systems under a limited time price offer which allowed the hospitals to obtain
the device and evaluate its performance during a trial period. The Company also
began in-servicing at hospitals and with physicians who placed initial orders.
In the fourth quarter of 1999 the Company delivered the first 500 commercial
units purchased by DO. Sales in the years 2000 and 2001 were less than $100,000
under this distribution agreement and the Company is pursuing alternative
business strategies at this time.



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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," 5,671,735 (expiring in 2014) entitled
"Method and Apparatus for Detecting and Measuring Conditions Affecting Color,"
6,067,504 (expiring in 2014) entitled "Method For Correctly Identifying Hair
Color," 6,128,516 (expiring in 2014), 6,129,664 (expiring in 2014) and 6,157,445
(expiring in 2009) all entitled "Method and Apparatus For Detecting and
Measuring Conditions Affecting Color". Additional U.S. Patents were granted to
the Company in 2001, namely U.S. Patent Nos. 6,308,088 (expiring in 2014)
entitled "Methods and Apparatus for Detecting and Measuring Conditions Affecting
Color" and 6,314,372 (expiring in 2014) 6,330,341 (expiring in 2014), both
entitled "Method and Apparatus for Hair Color Characterization and Treatment,"
U.S. Patent No. 6,178,341 (expiring in 2018), entitled "Color Measurement System
with color Index for Skin, Teeth, Hair and Material Substances", U.S. Patent No.
6,271,920 (expiring in 2017), entitled "Methods and Apparatus for Color
Calibration and Verification." 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 pending patent
application. 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 Great Britain and Hong Kong. The Company also has
Australian, Canadian, Korean and Mexican patents corresponding, at least in
part, to its U.S. Patent No. 4,909,632, Australian, Canadian, Taiwanese and
Korean patents corresponding, at least in part, to its U.S. Patent No. 5,313,267
and an Australian Patent, a Canadian patent, a Singapore patent and two
Taiwanese patents corresponding, at least in part, to its U.S. Patent No.
5,671,735 and an Australian patent corresponding, at least in part, to its U.S.
Patent No. 6,178,341 (collectively, together with the United States patents, the
"Patents").

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(R) units. Although many of the individual hardware components
of the ColorMate(R) System and the ColorMate(R) TLc-BiliTest(R) System are
public and not proprietary to the Company, the color measurement system is
manufactured to proprietary specifications of the Company and when those
individual hardware components are assembled in conjunction with the Company's
proprietary software they form the ColorMate(R) System and the ColorMate(R)
TLc-BiliTest(R) System, the operation of which is covered by the claims of the
Company's patents. The Company's TLc-Lensette (TM) disposable color-calibration
and verification standard is entirely proprietary to the Company because the
proprietary color formulation used is uniquely capable of effectively
calibrating the ColorMate(R) TLc- BiliTest(R) system for use on human skin
colors.

The Company has registered its trademarks COLORMATE, MY COLORS BY CHROMATICS,
TLC- BILITEST and the Baby Face Design in the United States Patent and Trademark
Office ("USPTO"). The Company believes it also has established common law rights
in the following marks: CCBRC, SITE FLAG, TLC, TLC BILI, TLC-LENSETTE, TLC
LENSPAK, TLC SOFT AND TLC TOUCH and has filed applications with the USPTO to
register the following marks: CCBRC, SITE FLAG and TLC BILI, TLC-LENSETTE, TLC
SOFT and TLC TOUCH. Further, the Company believes it has copyright protection
for all of the software used in the ColorMate(R) System and the ColorMate(R)
TLc-BiliTest(R) 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 key
employees, consultants and advisers confidentiality obligations in connection
with their employment, consulting or advisory relationship with the Company. See
"Risk Factors Protection of Intellectual Property."


COMPETITION

The medical device industry in general is intensely competitive. The Company
competes with other providers of infant jaundice diagnostic and monitoring
products which have greater financial, technical, manufacturing, marketing,
research and


                                        7

<PAGE>

development and management resources, such as Minolta Co., Ltd. ("Minolta"), Air
Shields, Respironics, Inc. ("Respironics"), which acquired Healthdyne
Technologies, Inc. ("Healthdyne"), and SpectRx, Inc. ("SpectRx"), among others.
In addition, the invasive laboratory blood test detection 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
method. See "Risk Factors."

The Company believes that Minolta developed and Air Shields markets a screening
device, the Minolta Jaundice Meter, to measure the amount of bilirubin in the
skin of a newborn infant to determine whether a serum bilirubin measurement is
required. The Company believes that the measurements obtained by the Minolta
device, unlike the ColorMate(R) TLc- BiliTest(R) 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 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 SpectRx'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 Spectrx infant jaundice device
was recently given FDA clearance for commercial marketing for babies under
phototherapy. 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(R) TLc-BiliTest(R) 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 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 maintain or obtain additional regulatory
clearances, as necessary, the marketing and manufacturing capabilities of the
Company, its distributors, 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.

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.



                                        8

<PAGE>


GOVERNMENT REGULATIONS

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(R) 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 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 review process on average takes 411 days
(based on FDA's fiscal year 2001 figures) 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 96 days
from the date of submission (based on FDA's fiscal year 2001 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 latest 510(k) clearance orderS obtained from the FDA's CDRH indicates that
the Company's ColorMate(R) TLc- BiliTest(R) System is a "Class I Reserved"
device, subjecting it to "general controls. 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(R) units to the
medical community in additional or significantly modified forms or for new uses.
See "Risk Factors."

Although the Company has received FDA clearance on its ColorMate(R)
TLc-BiliTest(R) System pursuant to a "substantial equivalence" determination
order, in the form of letters dated July 1997 and September 2001 from the FDA's
CDRH, authorizing the Company to commercially distribute its device for
adjunctive monitoring of newborn 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 latest "substantial equivalence"
order states that the Company must comply with the medical device general
controls, e.g., device establishment


                                        9

<PAGE>


registration, medical device listing, good manufacturing practices (QSR
requirements), medical device reporting, labeling requirements, and the
statutory prohibitions against adulteration and misbranding.

The process of obtaining marketing clearance or approval for medical products
from the FDA can be costly and time consuming, and there can be no assurance
that such required clearance or approval will be granted for the Company's
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 or approval 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's current 510(k) clearances can be
withdrawn or limited by the FDA or 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 compliance with FDA requirements.

In order for the Company to market its products in Europe and certain other
foreign jurisdictions, the Company and its distributors and agents obtained and
must maintain required regulatory registrations and/or approvals and must
otherwise comply with extensive regulations regarding safety, efficacy and
quality in those jurisdictions. Specifically, certain foreign regulatory bodies
have adopted various regulations, among other things, governing product
standards, packaging requirements, labeling requirements, import restrictions,
tariff regulations, duties and tax requirements. These regulations vary from
country to country. After receiving FDA marketing clearance in the United
States, the Company undertook the procedures to obtain European regulatory
clearances for its ColorMate(R) TLc-BiliTest(R) System. To market its
ColorMate(R) TLc-BiliTest(R) 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 and EN46001 certifications, signifying that
the Company's New York facility meets important international quality standards
for product design and development, manufacturing, servicing and distribution.
In April 1999, the Company also was granted permission by the European Union
(EU) notified body, TUV Essen, to affix the CE Mark to its ColorMate(R)
TLc-BiliTest(R) System. Prior to April 1, 1999, the Company has passed a product
inspection in February 1999 for purposes of receiving the right to affix the CE
mark to such specific inspected product. Failure to maintain ISO-9001/EN46001
certification, CE mark rights or other foreign regulatory registrations or
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 or previously obtained
certifications, rights, registrations or approvals could have a material adverse
affect 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 increases 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 failure to comply with regulatory
requirements, could have a material adverse effect on the Company's business,
financial condition and results of operations.


                                       10

<PAGE>


Future products developed by the Company and products currently under
development may require FDA marketing authorization 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, institutional review board ("IRB") review and
approval of research protocols, reporting obligations to the FDA, record keeping
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
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 regulations, including 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 clearance or approval of the device.

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- kickback laws by federal
or state regulatory officials, including noncompliance with appropriate safe
harbors, could have a material adverse effect on the Company.

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 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.

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. Effective January 1, 2001, the AMA assigned AMA CPT code
88400 bilirubin, total transcutaneous, for use with the Company's
ColorMate(R)TLc-BiliTest(R) System. Health care providers use the CPT code when
reporting medical procedures and services under public and private health
insurance programs, and for administrative management in claims processing and
developing guidelines for medical care review according to the AMA.

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(R) TLc- BiliTest(R) System by clinical benefits that the Company
believes will be derived from the use of the ColorMate(R) TLc- BiliTest(R)
System, there can be no assurance that this will be the case. 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.


EMPLOYEES

Since December 2000 the Company has reduced its number of employees. The Company
currently employs 3 persons on a full-time basis. These employees are
principally engaged in raising finances, as well as administration, research and
development, regulatory and intellectual property functions. The Company has
significantly reduced its operating expenses while focusing on its current
objective of obtaining financing and identifying strategic partners for
marketing its ColorMate(R) system in the beauty industry and to purchase
exclusive market rights to the ColorMate(R) TLc-BiliTest(R) System.


RECENT EVENTS

Gordon Laboratories Sale and Repurchase Option

On June 2, 2000 the Company acquired the common stock and certain debt of Gordon
Laboratories, Inc. ("Gordon"), a Carson City, California based formulator and
manufacturer of cosmetics, hair care and other personal care products. The
Company acquired an approximately 85% equity interest in Gordon for
approximately $5.5 million, principally in stock, and acquired the remaining
interest in June 2001, per the terms of the June 2000 agreement.


                                       11

<PAGE>


On July 3, 2001, Gordon was acquired by Abilene Investments Corp. and GAC-Labs,
LLC for an aggregate purchase price of $1,000,000 paid to Gordon to be used for
operating capital. Simultaneously, the shares of Gordon stock that were
outstanding immediately prior to the closing of this transaction, all of which
were owned by the Company, were redeemed for one dollar. In addition, the
Company assigned to Abilene and GAC-Labs the indebtedness of Gordon and H.B.
Gordon Manufacturing Co., Inc., its wholly-owned subsidiary, owed to the Company
in the ratio of 20% to Abilene and 80% to GAC-Labs.

As part of the same transaction, the Company was granted the option to purchase
from Abilene and GAC-Labs the shares of Gordon stock issued to them and the
indebtedness assigned to them within one year for an aggregate purchase price of
$1,000,000 plus interest thereon at the rate of 14% per annum, subject to
reduction under certain conditions.

Stockholder Rights Offering

The Company is now offering and selling up to 210,900,000 shares of our common
stock, which are the subject of a prospectus filed with the Securities and
Exchange Commission, to our existing stockholders.

Current Cash Requirements/Financing Proposals

The Company is currently lacking funds to continue material aspects of the
Company's operations and business plan, including funds and necessary personnel
to complete research and development on its new LED instrument and technology
discovered during its first mass manufacturing process; complete filings,
administration and maintenance for certain intellectual properties and
regulatory requirements; supply upgraded products and sales support to its
medical distributor; and complete regulatory filings. The Company has recently
downsized its corporate offices and the Board of Directors is reviewing
potential proposals for financing the Company, along with contingency plans in
the event such financing cannot be completed.

The Company is currently reviewing potential financings. One potential financing
would be for a $3.5 million equity financing. Such proposals require negotiation
of warrants to purchase the Company's stock and are subject to satisfactory
completion of due diligence, negotiation, execution and delivery of definitive
agreements by and between the parties.

Nasdaq Delisting

On November 29, 2001, the Company's common stock was delisted from the Nasdaq
SmallCap Market. The Company's common stock is currently listed on the OTC
Bulletin Board.

Board of Directors Decrease

The Board of Directors was decreased from nine to six members due to the
resignations of three of its members.


BEAUTY-AID PRODUCTS

The ColorMate(R) System. Although it is not currently expanding in this activity
as a result of its efforts to find a strategic partner for the ColorMate(R)
TLc-BiliTest(R) System for medical application and the lack of necessary
funding, the Company has engaged in efforts to commercialize its Intellectual
Properties for beauty-related applications. The ColorMate(R) System consists of
a 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(R) unit or as a handheld battery operated instrument is 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 color
measurement of coloration and luminosity to a laboratory standard of accuracy.
In skin color analysis, the software then analyzes the color measurements so
obtained and assigns the subject to one of the approximately 200 skin color
categories identified by the Company through its research and development
effort.

In the beauty-related applications the ColorMate(R) System matches each skin
color type to a range of 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(R) System also can be used to perform chromaticity studies of
various product lines in manufactured or applied forms (for example, tooth
enamel, hair coloring, hosiery, other cosmetic lines) on behalf of licensees.
This capability

                                       12

<PAGE>


permits the organization of the licensee's products into precise color
categories so that the consumer can be assisted with proper color coordination
within the licensee's product line.

My Colors by Chromatics(R) Cosmetics Line. The Company's cosmetics line ("My
Colors by Chromatics(R)") divides the product shades into four color
classifications. The product shades recommended by the ColorMate(R) System are
individually prescribed for color coordination with each of the approximately
200 skin color categories. The Company's cosmetic line is precisely formulated
and balanced to provide color coordinated products for the skin color of all
races. In the past the Company has also marketed, through the use of the
ColorMate(R) System, a line of fashion swatch packs consisting of 36 objectively
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.


OTHER POTENTIAL  PRODUCTS AND APPLICATIONS.

The Company has conducted research and development and developed engineering
specifications for a mass manufacturing prototype regarding a hand-held light-
emitting diode version of the ColorMate(R) System (the "LED Device"). This
version may be marketed for medical use after collecting further clinical
testing data and is subject to FDA approval or clearance (the Bilirubin LED
Device). For non-medical applications, the 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(R) System units because of technological improvements which
have resulted in substantially lower component part costs. The Company believes
that the Intellectual Properties and ColorMate(R) System have commercial
applications in (i) healthcare relating to the non-invasive detection and
monitoring of certain chromogenic diseases, such as skin diseases, 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 or approvals, and
may be subject to comparable foreign regulatory approvals to the extent the
Company markets such applications abroad. There can be no assurance that the
Company will obtain any additional FDA or foreign approvals or clearances or
will be able to comply with such regulatory requirements for additional
applications.

The Company also believes that the Intellectual Properties and ColorMate(R)
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(R) System and 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(R)
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 and lower unit prices available through large volume orders
from component parts suppliers. In addition, the ColorMate(R) System provides
machine- to-machine stability and reproducibility (i.e., that each machine will
achieve results consistent with that of other machines).


RISK FACTORS

Liquidity Crisis. The Company is currently experiencing a liquidity crisis and
requires an immediate infusion of cash in order to continue operations. As of
December 31, 2001, the Company had cash and cash equivalent of $55,000, current
liabilities of $4,499,000 and an accumulated deficit of $61,996,000. The Company
will be unable to continue operations, maintain its existing distribution
arrangements or pursue its strategy to identify a strategic partner in the
medical industry to which the Company could sell, for an up-front fee and
ongoing royalties, the exclusive market rights to the ColorMate(R) TLc-
BiliTest(R) System unless it obtains an immediate infusion of cash. No assurance
can be given that the Company will be successful in obtaining the needed cash
infusion to fund it's immediate needs and if it is unsuccessful the Company may
be forced to seek protection from its creditors under the Bankruptcy Code.

Nasdaq SmallCap Market Delisting. Effective November 29, 2001 the Company's
Common Stock was delisted from trading on the Nasdaq Small Cap Market as a
result of the Company's failure to satisfy certain minimum conditions. As a
result of


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<PAGE>


this delisting, the ability of holders of the Company's Common Stock to sell
such securities has been adversely affected. In order for the Company to have
its Common Stock relisted on the Nasdaq Small Cap Market, it would need to meet
certain minimum requirements for relisting including receiving significant
additional equity funding in order to satisfy the initial listing requirements
of the Nasdaq Small Cap Market. No assurance can be given that such funding will
be obtained or that the Company's common stock will become eligible for
relisting on the Nasdaq Small Cap Market in the future.

When the Company was delisted from the Nasdaq SmallCap Market and the price per
share dropped below $5.00, then the Common Stock became 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 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 the Company's stock subject to
the penny stock rules. Additionally investors may find it more difficult to sell
their Common Stock.

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(R) 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(R) TLc-BiliTest(R)
System for the monitoring of newborn bilirubinemia (infant jaundice), the
development of prototypes of additional versions of the ColorMate(R) unit and
the refinement of its technologies for other applications. There can be no
assurance that the Company will generate material revenues from the sale of its
products. 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, 2001 and December 31, 2000 ($7,918,000 and
$19,496,000, respectively). These continuing losses raise substantial doubt
about the Company's ability to continue as a going concern and the audit report
of the Company's independent accountants for the year ended December 30, 2000
and December 31, 2001 contained a "going concern" qualification. Prior to the
delisting of the Common Stock in November, 2001, the Company had funded its
operating losses with the proceeds raised from sales to third party investors of
its Common Stock and securities convertible into Common Stock. For the fiscal
year ended December 31, 2001, 2000 and 1999, the Company raised $0, $9,152,000
and $9,104,000 respectively in net proceeds from these offerings. The delisting
of the Company's common stock from the Nasdaq Small Cap Market has adversely
affected the Company's ability to continue to fund these operating losses from
the proceeds of such sales to third party investors. As a result, the Company
has incurred short-term indebtedness of $1,699,000 since the second quarter of
2001 to fund its operating losses. No assurance can be given that the Company
will be able to generate sufficient cash proceeds from its operations or
financing activities to fund its operating losses. In the event that such cash
proceeds are not obtained, the Company may be forced to seek protection from its
creditors under the Bankruptcy Code.

If the Company is successful in raising financing required to continue
operations, the Company will continue to incur significant additional costs and
expenses in connection with FDA Regulatory costs and patent application costs,
manufacturing and other regulations, state regulatory requirements and foreign
market clearances and other requirements. In addition, the Company expects to
incur significant expenses relating to manufacturing expenses, product liability
insurance, legal and regulatory compliance, including QSR/GMP quality system
substantial compliance, as well as research and


                                       14

<PAGE>



development, and implementation of the next phase of its efforts to successfully
commercialize the medical and beauty applications of its technology. See
"Liquidity and Capital Resources".

No Assurance of Successful Commercialization of ColorMate(R) TLc-BiliTest(R)
System. For the years ended December 31, 2001, 2000 and 1999, the Company's
sales have been $8,000, $80,000 and $1,103,000. While the Company believes the
non-invasive nature of its ColorMate(R) TLc- BiliTest(R) 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. Physicians and other health care professionals will
not recommend or use the ColorMate(R) TLc- BiliTest(R) System unless they
determine, based on experience, clinical data, relative cost, and other factors
such as competitive products, that the ColorMate(R) TLc-BiliTest(R) System is an
attractive alternative for reducing the current traumatic blood tests that have
a long history of safe and effective use or other competitive products. 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(R) TLc-BiliTest(R)
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(R) TLc-BiliTest(R) 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 obtained or maintained, or products for which approvals or
clearances are obtained (such as the ColorMate(R) TLc-BiliTest(R) System for
monitoring infant jaundice) 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(R) TLc-BiliTest(R) System.

Early Stage of Development of Other Potential Applications. The Company's
development programs for other applications of its technology are at a very
preliminary stage and substantial additional research and development and for
medical applications, further clinical trials will be necessary before
commercial versions of any additional proposed products are produced for such
applications. Because of the Company's current liquidity issues, the development
of these other potential applications is not being actively pursued and no
assurance can be given regarding the successful development of any of these
other potential applications.

Assumptions Regarding Medical Business Plan and Strategy. The Company has
formulated its medical business plan and strategy based upon certain assumptions
provided by the Company's medical distribution partner and other medical
distribution companies 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 these 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; and changes in general economic conditions. Failure by the Company
to manage its business plan effectively could have a material adverse effect on
the Company's business, financial condition and results of operations.

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(R) 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.
There can be no assurance its own marketing efforts or those of the


                                       15

<PAGE>


Company's medical distributors will successfully generate commercial levels of
sales. There can be no assurance that the Company will be able to maintain
existing distribution agreements or 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 distribution partnership with Datex-Ohmeda, Inc. and
its Ohmeda Medical Division to support its marketing efforts and has entered
into a separate third party manufacturing agreement for the ColorMate(R)
TLc-BiliTest(R) System. The Company's business strategy for the
commercialization of its medical products depends upon the Company's ability to
either maintain existing or selectively enter into and maintain arrangements
with additional 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(R) TLc-BiliTest(R)
System will be dependent on arrangements with third parties for marketing,
distribution and sales of the products. As of March 26, 2002, DO has not
achieved the minimum performance requirements set forth in the distribution
agreement. The Company and DO are currently exploring potential business
arrangements under these circumstances. The obligation of any existing or
additional 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 able, 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, 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 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 and other Product Manufacturers. The Company does
not itself manufacture the ColorMate(R) units, the ColorMate(R) TLc-BiliTest(R)
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(R)
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(R) TLc- BiliTest(R)
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(R) TLc-BiliTest(R) 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(R) 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


                                       16

<PAGE>


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(R) TLc-BiliTest(R) 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(R)
units or obtain further manufacture of the ColorMate(R) 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(R) LED Device, the Company will
need to outsource the production and assembly of the components of the Bilirubin
LED Device and the ColorMate(R) 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(R) System. The Company
also believes, based on its operating history since February 1993, that
obtaining any cosmetic or beauty aid sales revenue will require significant
additional financing and personnel. In order to implement its marketing plans
the Company will have to develop additional marketing skills. There can be no
assurance the Company's marketing plan will be successful.

Legal Proceedings. In April 2000 the United States District Court for the
Southern District of New York dismissed three putative class actions that had
been filed against the Company and certain of its officers and directors.

On January 16, 2001, a lawsuit was commenced against the Company and Darby
Macfarlane in the federal district court for the Southern District of New York
entitled Richard Sommers and Linda Sommers v. Chromatics Color Sciences
International, Inc. and Darby S. Macfarlane. The plaintiffs alleged that certain
statements purportedly made by or on behalf of the Company concerning the
Company's success, the extent of use of the ColorMate(R) System and the
Company's cash flow constituted violations of Section 10(b) of the Securities
Exchange Act of 1934 and SEC Rule 10b-5 promulgated thereunder and Section
12(a)(2) of the Securities Act of 1933 as well as common law claims alleging
fraudulent misrepresentation, concealment and nondisclosure and seek unspecified
charges in an amount to be proven at trial. On March 1, 2001, the defendants
moved to dismiss the complaint for failure to make a claim upon which relief can
be granted, for failure to plead fraud with requisite particularity and for
failure to comply with the statutory requirements for federal securities fraud
claims. Oral argument was held before the court (Grisea, J.) on January 17,
2002, and the court entered an order granting the defendants' motion and
dismissing the case without prejudice, but with leave for the plaintiffs to
refile. A Second Amended Complaint, dated February 7, 2002 has been filed, and
defendants believe that the claims asserted against them are without merit and
intend to vigorously defend this action.

Prior Marketing Attempts. Other than the Company's marketing efforts with Avon,
arrangements with IMS and its beauty salon placements the Company's own attempts
to license and/or lease its Intellectual Properties and the ColorMate(R) 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(R) units
and commercial licensing of the Intellectual Properties or the sale of the
Beauty- Aid Products. In addition, other than the Company's distribution
partnership with Datex-Ohmeda, Inc. and its Ohmeda Medical Division for the sale
of its ColorMate(R) TLc-BiliTest(R) System (which is 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(R) units and
Intellectual Properties, for the sale of the Beauty-Aid Products or for any
medical applications of its technologies.

Competition. 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,


                                       17

<PAGE>


research and development and management resources than the Company (including
companies such as Minolta Co., Ltd., AirShields, Respironics, Inc., which
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 ColorMate(R) TLco BiliTest(R) System, 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 laboratory blood test method currently in
use for monitoring of newborn bilirubinemia (infant jaundice) has already
achieved acceptance by and is in widespread use in the medical community, unlike
the Company's proposed methods. There can be no assurance that the Company's
proposed method 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
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 with such competitors or with persons who
may in the future develop products or monitoring methods competitive with the
Company's proposed medical applications and devices.

The Company is competing with other companies that have experienced and
well-funded marketing and sales operations. In addition, the Company's
ColorMate(R) TLc-BiliTest(R) System, as well as any future medical or beauty
applications marketed by the Company, will compete with existing devices,
technologies and methods in achieving acceptance in the medical community or
beauty industry and in attracting support from independent device distribution
organizations which sell equipment to the anticipated target markets (i.e.,
hospitals, pediatrician's offices and home health care services, beauty salons,
consumer beauty outlets, etc.).

Independent medical or beauty 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 or beauty
supply companies with which the Company's proposed applications and devices will
compete, and which have significantly greater financial research, technical,
manufacturing, and distribution resources and broader product lines than the
Company, have their own in-house marketing and distribution capabilities and
have established relationships with potential customers for the Company's
proposed medical or beauty 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 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 would 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 technology patents involve complex legal and factual questions and therefore,
may be highly uncertain. No assurance can be given that the Company will have
adequate funds to protect its intellectual property or 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.


                                       18

<PAGE>


After the expiration of a U.S. Patent owned by the Company, 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 pending 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 application. There can be no assurance that patents
will issue based on these patent applications or that any patent claims will
provide sufficient protection to exclude others from the Company's proprietary
technology and instrumentation. There can be no assurance that the Company will
not be involved in litigation to protect its trade secrets and know how or that
the Company will prevail in such litigation. There can be no assurance that
challenges will not be instituted against the validity or enforceability of any
patents owned by or issued in the future to the Company, or that such challenges
will not be successful. There can be no assurance that patent infringement
claims will not be asserted against the Company and found to have merit, that
the Company will not be enjoined from using its proprietary technology and
instrumentation and from manufacturing and selling certain of its Products, or
would not be forced to obtain a license and pay future royalty fees as well as
past damages to the party claiming infringement in amounts not presently
determinable. There can be no assurance that any such license will be available
to the Company. Conversely, to the extent third parties infringe upon the
Company's patented Intellectual Properties, the Company may have to litigate
against such third parties in order to prevent further infringement. There can
be no assurance the Company will have the resources to prosecute any such
litigation, or that any such litigation would be resolved in favor of the
Company. In the event it is unable to bring such litigation or obtain a
favorable outcome, the Company's operations could be materially adversely
affected in that the Company's failure to enforce its Patents could result in
increased competition. If the Patents are declared invalid, the Company would
lose patent protection for certain of its Intellectual Properties, which could
have a material adverse effect on its operations.

There can be no assurance that the Company's Intellectual Properties will
provide it with a competitive advantage in that it may be possible for a
competitor independently to develop non-infringing technologies, independently
duplicate the Company's unpatented technology through reverse engineering,
design around the patented aspects of the Company's technology, or otherwise
independently develop scientifically accurate processes, instruments or color
charts to measure skin coloration, skin tone color categories and conduct
comparative color analysis, color calibration and color verification 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 Great Britain and Hong Kong, as well as Australian,
Canadian, Korean and Mexican Patents corresponding, at least in part, to its
U.S. Patent No. 4,909,632, Australian, Canadian, Taiwanese and Korean Patents
corresponding, at least in part, to its U.S. Patent No. 5,313,267 an Australian
Patent, a Canadian Patent, a Singapore Patent and two Taiwanese Patents
corresponding, at least in part, to its U.S. Patent No. 5,671,735 and an
Australian patent corresponding, at least in part, to its U.S. Patent No.
6,178,341. 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


                                       19

<PAGE>


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(R) Systems will provide it with a competitive
advantage in that it may be possible for a competitor independently to develop
similar software, design around the Company's copyrighted software or otherwise
independently develop software with the capacity to accurately measure skin tone
categories and conduct comparative color analysis.

The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, particularly with
respect to newly developed technology. In addition, 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. As the Company brings its
ColorMate(R) TLc-BiliTest(R) System or other future products to market, there
can be 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.

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


                                       20

<PAGE>


ColorMate(R) TLc- BiliTest(R) 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 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(R)
TLc-BiliTest(R) System pursuant to a "substantial equivalence" determination
orders, in the form of letters dated July 1997 and September 2001 from the FDA's
CDRH, authorizing the Company to commercially distribute its ColorMate(R)
TLc-BiliTest(R) System for adjunctive monitoring of newborn bilirubinemia
(infant jaundice) by healthcare professionals in the United States, the Company
also must maintain such clearances and comply with the other applicable statutes
and applicable rules and regulations promulgated by the FDA, in order to legally
market the device. The latest "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.

In the United States, the FDA regulates the introduction of medical devices as
well as, among other things, manufacturing, labeling and record keeping
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(R) TLc-BiliTest(R) 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. In April
1999, the Company also was granted permission by the European Union notified
body, TUV Essen, to affix the CE Mark to its ColorMate (R) TLc-BiliTest (R)
System. Prior to April 1, 1999, the Company passed a product inspection in
February 1999 for purposes of receiving the right to affix the CE mark to such
specific inspected product. 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.


                                       21

<PAGE>


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 as required, 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. 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(R) TLc-BiliTest(R) System. As the
ColorMate(R) TLc-BiliTest(R) 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 litigation.

The Company maintains its own product liability insurance with respect to
medical, 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(R) units or its Beauty-Aid
Products.

The Company has not established any reserves against any of the foregoing
liabilities. In the event of an uninsured or inadequately insured product
liability claim in the future based on the performance of the Company's
ColorMate(R) TLc-BiliTest(R) System, its ColorMate(R) units or Beauty-Aid
Products, the Company's business and financial condition could be materially
adversely affected and the Company could be forced to cease operations.

Control; Dependence on Management. The Company is dependent primarily on the
services of Darby Simpson Macfarlane, Chairperson and Chief Technology Officer,
and David Kenneth Macfarlane, Vice President, Research and Development. The loss
of either of their services could have a material adverse effect on the Company.
Although the Company has purchased key-man life insurance policies in the
amounts of $1,000,000 on the lives of both Mrs. and Mr. Macfarlane, there can be
no assurance that the proceeds from such policies would enable the Company to
retain suitable replacements for them.

Lack of Public Market; Possible Volatility of Stock Price. There is no assurance
that a regular trading market for the Company's securities will be restored or,
if restored, that it 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, the medical communities 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 Placement Agent Warrants and Warrants and Conversion of
Debentures and Preferred Stock. The price which the Company will receive for the
Common Stock issued upon exercise of the Placement Agent Warrants and Warrants
and the conversion of Debentures and Preferred Stock is expected to be
substantially less than the market price of the Common Stock at the time such
Placement Agent Warrants and Warrants are exercised or such Debentures or
Preferred Stock are converted. For the life of such Placement Agent Warrants,
Warrants, Debentures and Preferred Stock, 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 Placement Agent Warrants and Warrants remain unexercised and Debentures and
Preferred Stock remain unconverted, the terms under which the Company could
obtain additional equity financing may be adversely affected. Moreover, the
holders of such Placement Agent Warrants, Warrants, Debentures and Preferred
Stock 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 Placement Agent
Warrants, Warrants, Debentures or Preferred Stock, the interests of the
Company's shareholders will be diluted proportionately.


                                       22

<PAGE>


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, consisting of approximately 2,000 sq. ft. of
space, are located in Riverdale, New York and are occupied pursuant to a month
to month sublease 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. Rentals
under such sublease (including storage facilities) currently are being paid at
the rate of $2,200 per month, plus occupancy costs.

The Company paid $26,400 for such space in 2001. The Company also maintains
approximately 1,000 sq. ft. of space at 10 Old Jackson Avenue,
Hastings-on-Hudson, New York, at the residence of Mrs. Macfarlane which is used
for research and development activities and administrative offices for extensive
overtime hours spent on management and research and development. The Company
paid approximately $10,980 for such space in 2001.

In 2000, the Company also occupied approximately 1,000 sq. ft. of space located
in Milford, Connecticut which was leased pursuant to a month to month lease at a
cost of $1,670 per month, and used primarily as office space for the Company's
medical marketing, sales and distribution support division. The Company ceased
to occupy such space in February 2001.


Item 3.  Legal Proceedings

In April 2000 the United States District Court for the Southern District of New
York dismissed three putative class actions that had been filed against the
Company and certain of its officers and directors.

On January 16, 2001, a lawsuit was commenced against the Company and Darby
Macfarlane in the federal district court for the Southern District of New York
entitled Richard Sommers and Linda Sommers v. Chromatics Color Sciences
International, Inc. and Darby S. Macfarlane. The plaintiffs allege that certain
statements purportedly made by or on behalf of the Company concerning the
Company's success, the extent of use of the ColorMate (Registered Trademark)
System and the Company's cash flow constituted violations of Section 10(b) of
the Securities Exchange Act of 1934 and SEC Rule 10b-5 promulgated thereunder
and Section 12(a)(2) of the Securities Act of 1933 as well as common law claims
alleging fraudulent misrepresentation, concealment and nondisclosure and seek
unspecified damages in an amount to be proven at trial. On March 1, 2001, the
defendants moved to dismiss the complaint for failure to state a claim upon
which relief can be granted, for failure to plead fraud with requisite
particularity and for failure to comply with the statutory requirements for
federal securities fraud claims. Oral argument was held before the court
(Grisea, J.) on January 17, 2002, and the court entered an order granting the
defendants' motion and dismissing the case without prejudice, but with leave for
the plaintiffs to refile. A Second Amended Complaint, dated February 7, 2002,
has been filed, and defendants believe that the claims asserted against them are
without merit and intend to vigorously defend this action.


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

On October 31, 2001, at a Special Meeting of the Shareholders held at the
Legends Hotel and Conference Center in McAfee, New Jersey, the shareholders: (i)
approved an Amendment to the Company's Certificate of Incorporation to effect a
one share for up to forty shares reverse stock split of the Company's issued and
outstanding shares of common stock, as determined by the Company's Board of
Directors; and (ii) approved an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of common stock, $.001
par value per share, from 50,000,000 to 550,000,000.

The following table sets forth the votes cast for each proposal presented at the
Special Meeting of the Shareholders:




                                       23

<PAGE>


     Amendment of the Company's Certificate of Incorporation to effect a one
     share for up to forty shares reverse stock split of the Company's issued
     and outstanding shares of common stock, as determined by the Company's
     Board of Directors
-------------------------------------------------------------------------------
      Votes For                  Votes Against                Abstentions
----------------------       ----------------------      ----------------------
      18,078,177                   1,052,519                     84,550



     Amendment of the Company's Certificate of Incorporation to increase the
     number of authorized shares of common stock, $.001 par value per share,
     from 50,000,000 to 550,000,000

--------------------------------------------------------------------------------
      Votes For                  Votes Against                 Abstentions
----------------------       ----------------------       ----------------------
      18,110,383                   1,033,794                      71,069


                                     PART II

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

The Company has registered the Common Stock 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.

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 March 23, 2001, the Company's Common Stock was
suspended from trading on the Nasdaq Small Cap Market as a result of the
Company's failure to satisfy certain conditions. On November 29, 2001 the
Company's common stock delisted from NASDAQ SmallCap Market. However, the common
stock continues to be listed on the OTC Bulletin Board. There were 152 holders
of record of the Common Stock as of February 1, 2002, including nominees for an
unknown number of beneficial holders.

Common Stock

The following tables set forth the high and low bid prices of our common stock
for each of the periods indicated. Prices reported subsequent to November 29,
2001 reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not reflect actual transactions.


Period                                                  Price
-------------------------------------------     ----------------------
                                                   High         Low
                                                --------      --------
January 1, 2000 to March 31, 2000                $7.938        $5.375
April 1, 2000 to June 30, 2000                    5.375         2.875
July 1, 2000 to September 30, 2000                5.063         0.625
October 1, 2000 to December 31, 2000              2.125         0.250

January 1, 2001 to March 31, 2001                $1.031        $0.063
April 1, 2001 to June 30, 2001                    0.310         0.100
July 1, 2001 to September 30, 2001                0.220         0.040
October 1, 2001 to December 31, 2001              0.110         0.010

Dividend Policy

The Company has never paid 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


                                       24

<PAGE>


operations. The Company has outstanding 1,380,000 shares of the Class A
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. The Company's Class B Preferred Stock is to not
entitled to any dividends.

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,
                                            -----------------------------------------------------------------------------------
                                                2001            2000             1999              1998              1997
                                            -------------  ---------------  ---------------  ----------------  ----------------
<S>                                          <C>              <C>              <C>               <C>              <C>
Total Assets                                 $1,312,000         $4,914,000       $8,110,200        $7,878,200       $10,752,600
Senior Convertible Debentures including
accrued interest                                     --                 --        4,661,600                --                --
Redeemable Preferred Stock                           --             14,000        2,942,500            13,800            13,800
Stockholders' Equity (Deficiency)            (3,187,000)         3,386,000         (503,700)        6,569,200         9,896,300
Revenues                                          8,000             80,000        1,103,200            46,600            11,500
Net Loss                                     (7,918,000)       (19,496,000)     (12,808,000)       (7,284,800)       (5,053,100)
Net Loss per common
  share - Basic and diluted(*)                    (0.41)             (1.40)           (0.93)            (0.49)            (0.40)
</TABLE>
----------
(*) Loss per share was retroactively adjusted to reflect the three for two split


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

Fiscal Year 2001 Compared to Fiscal Year 2000

The Company incurred net losses of $7,918,000 and $19,496,000 for the fiscal
years ended December 31, 2001 and 2000, respectively. Loss per share was $0.41
for 2001 and $1.40 for 2000. The reduction in net loss is primarily a result of
the Company pairing back its expenses to preserve cash and the completion of the
developmental stage of its medical product, and a reduced impact from continued
operations.

Revenues for the fiscal year ended December 31, 2001 were $8,000 compared to
$80,000 in the prior fiscal year. The lack of significant revenue is primarily
attributable to the Company's inability to successfully market and distribute
its medical product. A combination of factors contributed to disappointing sales
results during 2000 and 2001. There were many upgrades to the instrument
requested by the end user including ease of use features such as rechargeable
batteries, shortened length of test and accelerated modem transfer of test
results to a central server for tracking patient tests after hospital discharge.
These and numerous other upgrades required additional FDA applications and FDA
clearances which were not obtained until the third quarter of 2001.
Additionally, the length of the hospital evaluation period was much longer than
expected, including multi-site studies, which were completed in the years 2000
and 2001. These post market studies were submitted in the Company's FDA
application in 2001 which received FDA clearances in the third quarter of 2001.
These clearances allow the Company to upgrade the medical instruments to
accommodate the end users requirements. However, further funding of the Company
is required to perform these upgrades on the Company's medical distributor's
inventory.

Costs of sales were $1,000 and $760,000 (which includes an impairment charge of
$733,000 on the Company's inventory) for the fiscal years ended December 31,
2001 and 2000 respectively. Cost of sales primarily relate to the sales to
Ohmeda of which there was a $1,000 charge for the December 31, 2001 period. In
order to support the extended length of time hospitals required to conduct the
Company's medical instrument evaluations, and post-market studies required for
FDA applications for upgrades, additional parts and raw materials were required
and therefore purchased. Also the Company was required to keep minimum backup
inventories under its contractual agreements with its medical distributor.

In light of the serious liquidity and other problems at the Company and because
of the lack of viable levels of sales of its medical equipment the Company
recorded $1,338,000 and $1,508,000 of impairment charges in 2001 and 2000,
respectively. These charges include $647,000 and $581,000 reductions in carrying
costs for patents, a $258,000 reduction in carrying costs for demo equipment in
2000, $300,000 and $315,000 reduction in carrying costs for ColorMate(R) units


                                       25

<PAGE>


in 2001 and 2000, a $354,000 reduction of deferred contract costs incurred
during the Datex-Ohmeda contract negotiations in 2000, a $53,000 reduction of
software costs in 2001, and a reduction of inventory of $338,000 in 2001.

Sales, marketing and trade show costs were $285,000 in 2001 as compared to
$2,047,000 in 2000. The decrease was primarily attributable to Datex-Ohmeda, the
Company's distributor, taking over these responsibilities.

Medical regulatory expenses were $304,000 in 2001 as compared to $840,000 in
2000. The decrease was primarily attributable to Datex-Ohmeda, the Company's
distributor, assuming some of the regulatory expenses and the completion of the
majority of the expenses for FDA applications.

Research and development costs were $745,000 for the fiscal year ended December
31, 2001 as compared to $1,257,000 in the prior fiscal year. The decrease in
2001 is primarily a result of the completion of the majority of the work for FDA
applications for upgrades to the TLc-BiliTest(R) medical instrument in 2000, and
pairing back expenses on further research and development required on the LED
instrument. The LED Instrument is a significantly lower cost instrument made
using low cost light emitting diodes (LEDs) to measure color. This instrument
allows the Company to offer lower cost instruments for use in mass market
applications where cost per instrument is critical to mass marketing such as in
the beauty industry for salons, door-to-door or retail sales of cosmetics and
hair color, for dentist offices, or home use by the consumer.

The Company recorded a provision for payments for termination clauses in
employee contracts of $795,000 in 2001.

Compensation - Officers, employees and consultants were $1,389,000 for the
fiscal year ended December 31, 2001 as compared to $2,390,000 for the prior
fiscal year. The decrease in these costs in 2001 is a result of the reduction of
personnel, including executive and senior level personnel to pare back its
expenses to preserve cash and a reduction in compensation costs relating to
stock options.

Total General and administrative costs were $3,261,000 for the fiscal year ended
December 31, 2001 as compared to $5,631,000 in the prior year. The decrease
primarily results from the above-mentioned decrease in compensation costs, a
decrease in depreciation and amortization costs and a significant reduction in
overall operating costs to preserve cash.

Interest and financing costs were $662,000 in the fiscal year ended December 31,
2001 as compared to $1,437,000 in the prior period. The decrease is due to a
reduction in the amortization of original issue discount on the senior
convertible debentures.

Due to the sale of Gordon in 2001 the operations of Gordon, which was acquired
in June 2000, was retroactively treated as a discontinued operation. The loss
from discontinued operations in 2000 was $5,973,000 of which $697,000 represents
Gordon's operating losses for the 7 months in 2000 and $5,276,000 represents the
impairment of goodwill related to the acquisition of Gordon. The decision to
sell Gordon was directly related to Gordon's lack of liquidity and continued
reliance on cash inflows from the Company. Due to the lack of funds the Company
experienced beginning in 2000 and Gordon's simultaneous default on a $2.7
million loan from Boeing, also requiring a large infusion of capital, the
Company could no longer supply Gordon's capital requirements and so it made the
decision to sell Gordon Laboratories. The loss from discontinued operations in
2001 through the disposal date was $1,250,000. The Company reflected a gain of
$759,000 on disposal, representing the net liabilities of Gordon.

Deemed dividend on preferred stock was $293,000 in the fiscal year ended
December 31, 2001 as compared to $3,900,000 in the prior year. The decrease is
due to the effect in 2000 of the amortization of a new series of preferred stock
which was completed in 2000 and the impact of a new accounting release in 2000
causing a large one time catch up charge. The deemed dividend is a result of the
Company issuing preferred stock at a discount, consisting of a below market
conversion price, warrants issued with the preferred stock, and, in certain
cases, redemption premiums.

Although the Company has substantially reduced personnel and ongoing operating
expenses, the Company expects that it will continue to incur costs in connection
with the required research and development on its new LED instrument and
technology, complete filings, administration and maintenance for certain
intellectual properties and regulatory requirements; supply updated products and
sales support to its medical distributor; complete FDA filings for upgrades to
its medical products, and explore the possibility of either renegotiating its
current distribution agreement for its medical products or selling the exclusive
rights to its medical products and technology.

The Company anticipates that it will continue to incur new losses for the
foreseeable future as expenses are incurred in implementing its long-term
business plan.

Fiscal Year 2000 Compared to Fiscal Year 1999


                                       26

<PAGE>


The Company incurred net losses of $19,496,000 and $12,808,000 for the fiscal
years ended December 31, 2000 and 1999, respectively. Loss per share was $1.40
for 2000 and $.93 for 1999.

Revenues for the fiscal year ended December 31, 2000 were $80,000 compared to
$1,103,000 in the prior fiscal year. The decrease in revenues for the fiscal
year is primarily attributable to a reduction of sales of products to
Datex-Ohmeda, the Company's medical distributor. Sales in 1999 were primarily
due to the distribution agreement signed with Datex-Ohmeda, and consisted of
minimum inventory purchase obligations by Datex-Ohmeda. A combination of factors
contributed to disappointing sales results during 2000 and 2001. There were many
upgrades to the instrument requested by the end user including ease of use
features such as rechargeable batteries, shortened length of test and
accelerated modem transfer of test results to a central server for tracking
patient tests after hospital discharge. These upgrades and numerous other
upgrades required additional FDA applications and FDA clearances which were not
obtained until the third quarter of 2001. Additionally, the length of the
hospital evaluation period was much longer than expected, including multi-site
studies, which were completed in the years 2000 and 2001. These post market
studies were submitted in the Company's FDA application in 2001 which received
FDA clearances in the third quarter of 2001. These clearances allow the Company
to upgrade the medical instruments to accommodate the end users requirements.
However, further funding of the Company is required to perform these upgrades on
the Company's medical distributor's inventory.

Costs of sales were $760,000 (which includes an impairment charge of $733,000 on
the Company's inventory) for the fiscal year ended December 31, 2000 as compared
to $898,000 in the prior year. Cost of sales primarily relate to the sales to
Ohmeda. The impairment charge was incurred due to the lack of success in
marketing and sales under the Ohmeda contract.

In light of the serious liquidity and other problems at the Company and because
of the lack of viable levels of sales of its medical equipment the Company
recorded $1,508,000 of impairment charges in 2000. These charges include a
$581,000 reduction in carrying costs for patents, a $258,000 reduction in
carrying costs for demo equipment, a $315,000 reduction in carrying costs for
ColorMate(R) units, and a $354,000 reduction of deferred contract costs incurred
during the Datex-Ohmeda contract negotiations.

Sales, marketing and trade show costs were $2,047,000 in 2000 as compared to
$2,512,000 in 1999. The decrease was primarily attributable to Datex-Ohmeda
assuming some of the marketing expenses in 2000.

Medical regulatory expenses were $840,000 in 2000 as compared to $1,323,000 in
1999. The decrease was primarily attributable to Datex-Ohmeda assuming some of
the regulatory expenses in 2000.

Research and development costs were $1,257,000 for the fiscal year ended
December 31, 2000 as compared to $996,000 in the prior fiscal year. The increase
in 2000 is primarily a result of the further development of the Company's LED
machine, and research and development for upgrades to the Company's medical
product for FDA applications.

Compensation - Officers, employees and consultants were $2,390,000 for the
fiscal year ended December 31, 2000 as compared to $2,089,000 for the prior
fiscal year. The increase in these costs in 2000 is a result of the addition of
executive and senior level personnel to implement the Company's business plan.

Total General and administrative costs were $5,631,000 for the fiscal year ended
December 31, 2000 as compared to $4,936,000 in the prior year. The increase
primarily results from the above-mentioned increase in compensation costs, an
increase in consultants, an increase in depreciation and amortization costs.

Interest and non-cash financing costs were $1,437,000 in the fiscal year ended
December 31, 2000 as compared to $3,313,000 in the prior period. The decrease is
due to a reduction in the amortization of original issue discount on the senior
convertible debentures.

Due to the sale of Gordon in 2001 the operations of Gordon, which was acquired
in June 2000, was retroactively treated as a discontinued operation. The loss
from discontinued operations in 2000 was $5,973,000 of which $697,000 represents
Gordon's operating losses for the 7 months in 2000 and $5,276,000 represents the
impairment of goodwill related to the acquisition of Gordon. The decision to
sell Gordon was directly related to Gordon's lack of liquidity and continued
reliance on cash inflows from the Company, which in 2001 the Company ceased
being able to provide.

Deemed dividend on preferred stock was $3,900,000 in the fiscal year ended
December 31, 2000 as compared to $1,558,000 in the prior year. The increase is
due to the amortization of a new series of preferred stock which was not issued
in 1999 and the impact of a new accounting release in 2000 causing a large one
time catch up charge. The deemed dividend is a result of the Company issuing
preferred stock at a discount, consisting of a below market conversion price,
warrants issued with the preferred stock, and, in certain cases, redemption
premiums.


                                       27

<PAGE>


Although the Company has substantially reduced personnel and ongoing operating
expenses, the Company expects that it will continue to incur costs in connection
with the required research and development on its new LED instrument and
technology, complete filings, administration and maintenance for certain
intellectual properties and regulatory requirements; supply updated products and
sales support to its medical distributor; complete FDA filings for upgrades to
its medical products, and explore the possibility of either renegotiating its
current distribution agreement for its medical products or selling the exclusive
rights to its medical products and technology.

The Company anticipates that it will continue to incur new losses for the
foreseeable future as expenses are incurred in implementing its long-term
business plan.


Liquidity and Capital Resources

Current Assets were $447,000 at December 31, 2001 as compared to $2,496,000 at
December 31, 2000. This decrease is primarily attributable to decrease in cash
due to the operating losses and an impairment charge that reduced inventory.

With respect to the Bridge financing received in 2001 notes payable totaling
$1,699,000, are payable in one year and carry annual interest charges of 6% to
14%. In addition to the interest charges, 26,750,000 warrants to purchase the
Company's common stock at $.10 per share and 6,500,000 warrants to purchase the
Company's stock at $.06 per share were issued in connection with the bridge
notes.

During the year ended December 31, 2000, the Company generated net cash flows
from financing activities of $7,792,000 of which $5,480,000 was generated from
the issuance of preferred stock and warrants. A complete summary of the
preferred stock and warrant agreements are available in the Notes to the
Financial Statements.

As indicated in the Consolidated Statement of Cash Flows, the Company continues
to experience significant negative net cash flows from operating activities. The
2001 net cash outflow from operating activities is primarily attributed to the
Company's net loss partially offset by depreciation and amortization expense and
increases in accounts payable.

The Company lacks funds to continue its operations and business plan, including
funds and necessary personnel to complete research and development on its new
LED instrument and technology which it became aware of during its first mass
manufacturing process; complete filings, administration and maintenance for
certain intellectual properties and regulatory requirements and supply upgraded
products and sales support to its medical distributor. After completion of the
first mass manufacturing prototype of the LED Instrument, the first mass
manufacturing run of products was attempted. During this process, the batch to
batch variability of the light emitting diodes caused errors in accuracy of the
instruments. This can be corrected in a number of ways, including additional
calibration procedures, which require more research and development to complete.


                                       28

<PAGE>


Additional funding is required to complete this research and development. The
Company's inability to complete required filings, administration and maintenance
related to its intellectual property would result in the loss of these related
sections of its intellectual property.

The Company's current objective with regard to its medical business is to arrive
at acceptable revised terms of the existing agreement with the distributor or to
identify a strategic partner in the medical industry to whom the Company could
sell, for an up-front fee and ongoing royalty, the exclusive market rights to
the ColorMate(R) TLc-BiliTest(R) System.

The Independent Auditors' Reports on the December 31, 2001 and December 31, 2000
financial statements describe conditions that raise substantial doubt about the
Company's ability to continue as a going concern. Gordon was sold in 2001.

The Company's business plan is to maintain reduced operating costs while seeking
additional financing and attempting to either arrive at acceptable revised
business arrangements with its current medical distributor or to sell to a
strategic partner the exclusive rights to its medical technology for monitoring
infant jaundice for an up-front fee and ongoing royalties. If it is successful
in these efforts to raise funds for continued operations, then the Company plans
to hire new management, continue its research and development on the LED
instrument and implement its business plan for marketing its technology and
instruments to the beauty industry including cosmetics, fashion and hair color
markets.

The Company is experiencing a major liquidity crisis and requires an immediate
infusion of cash to continue operations. The Company is seeking additional
capital to facilitate liquidity and is reviewing various potential financings
and has taken steps to significantly reduce costs. If the Company is unable to
obtain such financing, or sell its assets to obtain a cash infusion, it may be
forced to seek protection from its creditors in bankruptcy.

Even if the Company is successful in obtaining this cash infusion, the Company
will require additional future financing to further execute its long range
business plan. If the Company is not able to attract additional future
financing, generate significant revenue from operations and/or successfully
market its products and technologies, it may have to significantly curtain
and/or cease operations and be forced to seek protection from its creditors in
bankruptcy.

In August 2001, the Company retained Janssen Partners, Inc. to serve as its
placement agent in connection with an offering of 10,333,333 shares of common
stock and warrants to raise $620,000 in proceeds, of which $25,000 has been
subscribed to as of April 22, 2002. Attached to each share is a Series A Common
Stock Purchase Warrant which vests immediately, has a five-year life and is
exercisable at $0.10 per share after registration of the underlying shares. Upon
the exercise of each Series A Common Stock Purchase Warrant, the holder will
receive a Series B Common Stock Purchase Warrant which vests immediately, has a
five-year life from date of issuance and is exercisable at $0.15 per share after
registration of the underlying shares.

The Company is contemplating issuing an additional proxy to obtain stockholder
approval for an additional proposed private placement by the Company involving
potential issuance of additional shares of common stock by the Company in an
aggregate amount in excess of 20% of the Company's common stock outstanding
immediately prior to such private placement at a price per share less than the
market value of the common stock.

On October 31, 2001, at a special shareholder meeting an amendment to the
Company's Certificate of Incorporation to increase the number of authorized
shares of common stock, $.001 par value per share, from 50,000,000 to
550,000,000 was approved by the following votes: 18,110,383 for, 1,033,794
against and 71,069 abstained. Additionally, an amendment to the Company's
Certificate of Incorporation to effect a one share for up to forty shares
reverse stock split of the Company's issued and outstanding shares of common
stock, as determined by the Company's Board of Directors was approved by the
following votes: 18,078,117 for, 1,052,519 against; and 84,550 abstained. Due to
the delisting of the Company's securities from NASDAQ SmallCap market, the
Company's Board of Directors does not see the necessity to execute a reverse
split in the Company's common stock at this time, but reserves the right to
reconsider this action at a later date within time frames proposed in the Proxy
which were approved by the Company's shareholders at the October 31, 2001
Special Meeting of the Shareholders.

Some of the information presented herein constitutes "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Although the Company believes that its expectations are based on
reasonable assumptions, within the bounds of its knowledge of its business and
operations, there can be no assurance that actual results will not differ
materially from its expectations. Factors that could cause actual results to
differ from expectations including, among other things: (i) the inability of the
Company to resolve the current liquidity crisis, (ii) the inability of the
Company to


                                       29

<PAGE>


secure additional financing, (iii) the failure of the Company to implement its
business plan for various applications of its technologies, including medical
and industrial technologies, (iv) government regulation and (v) the loss of key
personnel.



Item 8.  Financial Statements


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                        Page
                                                                       ------

Independent Auditors' Reports..........................................  *

Consolidated Balance Sheets as of December 31, 2001 and 2000...........  *

Consolidated Statements of Operations for the years
  ended December 31, 2001, 2000, and 1999..............................  *

Consolidated Statements of Changes in Stockholders' Equity (Deficit)
  for the years ended December 31, 2001, 2000, and 1999................  *

Consolidated Statements of Cash Flows for the years ended
  December 31, 2001, 2000, and 1999....................................  *

Notes to Consolidated Financial Statements.............................  *

              [ * FINANCIAL STATEMENTS LOCATED AT END OF DOCUMENT ]




Item 9. Changes In And Disagreements With Accountants On Accounting And
        Financial Disclosure.

On March 8, 2002, the Audit Committee of the Company appointed Richard A. Eisner
& Company, LLP ("Eisner") as its independent auditors to replace BDO Seidman,
LLP, ("BDO") as BDO declined to be reappointed as the Company's independent
auditors because the Company does not currently meet its client profile.

BDO's reports on the Company's financial statements for the past two years did
not contain an adverse opinion, disclaimer of opinion, or qualification or
modification as to uncertainty, audit scope, or accounting principles, except
the report contained a going concern explanatory paragraph.

During the two most recent fiscal years and the subsequent interim period
preceding March 8, 2002, there have been no disagreements with BDO on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure which, if not resolved to the satisfaction of BDO,
would have caused it to make reference to the subject matter of the
disagreements in connection with its report.

BDO furnished a letter addressed to the Securities and Exchange Commission
stating it agreed with the above statements.

The Company (or someone on its behalf) has not consulted Eisner during the two
most recent fiscal years and the subsequent interim period preceding March 8,
2002 regarding 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.



                                       30

<PAGE>


                                    PART III

Item 10. Directors, Executive Officers, Promotees and Control Persons,
         Compliance with Section 16(a) of the Exchange Act

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


Name                               Age      Position(s)
-----------------------------   ---------   ----------------------------------
Darby Simpson Macfarlane           57       Director, Chairperson of the Board
                                            of Directors, Chief Technology
                                            Officer, Treasurer
Brian T. Fitzpatrick               48       Director, Acting Chief Executive
                                            Officer, President
David Kenneth Macfarlane           55       Director, Vice President Research
                                            and Development
Leslie Foglesong                   46       Director, Secretary,
                                            Assistant Treasurer
Edmund Vimond*++                   66       Director
Ed Mahoney*++                      51       Director
----------
* 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 current 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.

Mrs. Macfarlane and Mr. Macfarlane were formerly married to one another. There
are no other family relationships among the directors or executive officers of
the Company.

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, Chief Technology Officer, Treasurer or
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(R)System. In addition, Mr.
Macfarlane developed the manufacturing, technical and engineering specifications
necessary to have miniaturized and mass manufactured the ColorMate(R)System. Mr.
Macfarlane has been Vice President- Research and Development, and a director of
the Company since formation. 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 or Assistant Treasurer and a
director of the Company since its formation.

Mr. Edmund G. 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 Company. Mr. Vimond received
BSBA and MBA degrees from Northwestern University.


                                       31

<PAGE>


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.

Brian T. Fitzpatrick was appointed Acting Chief Executive Officer and a director
of the Company on August 14, 2000. He previously served in the capacity of
President and Chief Operating Officer of the Company, which role he assumed upon
the Company's June 2000 acquisition of Gordon Laboratories, Inc., a Carson City,
California based formulator and manufacturer of cosmetics, hair care and other
personal care products. Mr. Fitzpatrick had been the President, Chief Executive
Officer and Chairman of Gordon since April 1996, and continues to retain the
title of President. Prior to Gordon, Mr. Fitzpatrick served as President of
several electronic manufacturing companies and worked for the Polaroid
Corporation in its industrial marketing division. Mr. Fitzpatrick earned an
M.B.A. in Finance and Marketing from Adelphi University in 1986 and a B.S. in
Marketing from Seton Hall University in 1975.

Darby S. 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 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(R) 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 2000 and 1999, the Company paid Dr. Billmeyer
$2,800 and $4,827 respectively.

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.

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 until July 1, 2002.

The Company 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(R) Bilirubin Device
and ColorMate(R) units. The Company has also retained consultants to provide
public relations, shareholder relations, financial, administrative, licensing
and investment banking services. In 2001, these consultants and temporary
personnel were paid an aggregate of $874,700. All consultants


                                       32

<PAGE>


may be reimbursed by the Company for reasonable out-of-pocket expenses incurred
by them in connection with the services each consultant provides 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 during the fiscal year ended
December 31, 2001 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.



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 Office and its three other
executive officers who were serving as such during and at the end of fiscal 2001
for services rendered in all capacities to the Company in the last three fiscal
years.


<TABLE>
<CAPTION>

Name and Principal Position         Year        Annual Compensation              Long-Term Compensation
-------------------------------    ------    ----------------------------   ------------------------------------
                                               Salary ($)      Bonus ($)        Awards             Payouts
                                              ------------    -----------   --------------     -----------------
                                                                                                   All Other
                                                                             Options (#) (1)    Compensation ($)
                                                                            -----------------  ------------------
<S>                                 <C>         <C>             <C>           <C>
Darby S. Macfarlane,                2001        $225,000
Chairperson                         2000        $224,000        $20,000
                                    1999        $175,000

David Kenneth Macfarlane,           2001        $150,000                                            $100,000(3)
Vice President                      2000        $125,000
                                    1999        $125,000

Leslie Foglesong,                   2001        $135,000
Secretary                           2000        $134,000
                                    1999        $100,000        $10,000

Brian T. Fitzpatrick,               2001        $150,000
Acting Chief Executive Officer      2000        $115,000(2)                      250,000

</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) For 6 months.
(3) Replacement of escrow benefits.




                                       33

<PAGE>


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, 2001 and the value at
December 31, 2001 of unexercised stock options held by the Chief Executive
Officer and the other executive offers of the Company. The number of shares
presented gives effect to the Stock Split:


<TABLE>
<CAPTION>
                                                                        Number of Securities          Value of Unexercised
                                                                       Underlying Unexercised        In-the-Money Options at
                                                                     Options at Fiscal Year-End        Fiscal Year-End (1)
                                                                    -----------------------------   --------------------------
                                 Shares acquired         Value
Name                             on Exercise (#)        Realized    Exercisable/Unexercisable (#)   Exercisable/Unexercisable
----------------------------    ------------------    ------------  ----------------------------    --------------------------
<S>                                                                          <C>
Darby S. Macfarlane                                                          450,000/0
Brian T. Fitzpatrick                                                       83,334/166,666
David Kenneth Macfarlane                                                     300,000/0
Leslie Foglesong                                                             250,000/0
</TABLE>
----------
(1) Options were not in-the-money at year end


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 and Edward Mahoney each received a monthly
director's fee of $6,000. Currently these fees are in arrears. In addition, Mr.
Mahoney received options to purchase 37,500 (on January 26, 1998) shares of the
Company's Common Stock under the 1992 Plan and each of Messrs. Mahoney and
Vimond received options to purchase 20,000 (on October 30, 1998) shares of the
Company's Common Stock under the 1992 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) all of which became exercisable on January 26, 2001) and
$5.375 (grants on October 30, 1998) (two-thirds became exercisable at October
30, 2001) per share, respectively. Mr. Vimond also received 22,500 stock options
on December 1, 1997, all of which became exercisable on December 1, 2001 and
expires on December 1, 2007 and are exercisable at $9.71 per share. In addition,
on July 15, 1997, Mr. Vimond received 15,000 stock options, all of which options
were fully exercisable on July 15, 2000, expire on July 15, 2007 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 Chairperson and Chief Executive Officer and for Mr. Macfarlane's
employment as Vice President, Research and Development, each extendable at the
employee's option until February 1, 2003. These Agreements were amended in
August 2000 to provide for conforming severance benefits in accordance with the
terms of these employment agreements when Brian T. Fitzpatrick was appointed
Acting Chief Executive Officer and Ms. Macfarlane was appointed as Chief
Technology Officer and continued as Chairperson of the Company. The agreements
with Mrs. and Mr. Macfarlane provide for annual base salaries in 2001 of
$225,000 and $150,000, respectively, subject to annual increases as provided for
in their agreements. Under the employment agreements, the Company is obligated
to provide Mr. Macfarlane with a $300,000 and Mrs. Macfarlane with a $1,000,000
term life insurance policy and disability insurance. The Company maintains
key-man life insurance of 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 or disability as set forth therein or (ii) by reason of
death or disability. If Mr. or Mrs. Macfarlane's employment is terminated by the
Company or the employee for any reason the Company is required by each agreement
to pay to the terminated employee an amount equal to (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 three years, plus, in each
case, and for each year, 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


                                       34

<PAGE>


employment is terminated by reason of death or disability, the Company is
required to pay to Mrs. Macfarlane and Mr. Macfarlane, as application, an amount
equal to three years aggregate base salary in the case of Mrs. Macfarlane, and
two year's base salary in the case of Mr. Macfarlane, plus in each case and for
each year, an amount not less than the pro rata portion of any bonus granted to
the employee in the year immediately preceding the year in which such
termination occurs.

 In addition, the Company entered into a five-year employment agreement with
Brian T. Fitzpatrick, commencing on April 17, 2000, pursuant to which he serves
as the Chief Operating Officer, President and Acting Chief Executive Officer of
the Company. As compensation, Mr. Fitzpatrick is entitled under the agreement to
an annual base salary of $200,000, plus options under the 1992 Stock Option Plan
to purchase an aggregate of 250,000 shares of Common Stock at an exercise price
of $5.03, the closing bid price of the stock on June 2, 2000. The options vest
in equal installments upon each of the first, second and third anniversaries of
the start date. In addition, Mr. Fitzpatrick is to receive with respect to each
fiscal year a bonus to be determined by the Compensation Committee of the
Company. The Company may terminate the agreement by reason of physical or mental
disability, but in such case Mr. Fitzpatrick would remain entitled to full
compensation and benefits during the period prior to such termination. If Mr.
Fitzpatrick's employment were terminated by reason of his death, the Company
would have no further obligations under the agreement other than his stock
options. If his employment were terminated for any reason other than death,
disability, "cause," voluntary resignation or a "change of control," then the
Company would pay Mr. Fitzpatrick his base salary for the 24 months following
such termination.

Additionally, the Company entered into a four-year employment agreement with
Leslie Foglesong commencing on December 15, 1997, pursuant to which she serves
as Secretary and Treasurer (or Assistant Treasurer) of the Company. The term of
the agreement has been extended for an additional year at Ms. Foglesong's
option. The agreement provides for an annual base salary of $100,000, subject to
an increase as of January 1, 2000 to $135,000, plus a bonus with respect to each
fiscal year to be determined by the Board of Directors, as well as options under
the 1992 Stock Option Plan. The Company may terminate the agreement by reason of
physical or mental disability, but in such case Ms. Foglesong would remain
entitled to full compensation and benefits during the period prior to such
termination. If Ms. Foglesong's employment were terminated by reason of her
death, the Company would have no further obligations under the agreement other
than allowing her stock options to be exercised by her estate for a period of
five years after such termination. If her employment were terminated for any
reason other than death, disability or "cause," then Ms. Foglesong would be
entitled to her base salary for the 24-month period following such termination
or the remaining term of the agreement, whichever is greater; in addition, her
stock options would continue to be exercisable for a period of five years after
such termination.

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. Payments
due under these agreements are currently in arrears.


Compensation Committee Interlocks and Insider Participation

There are no reportable compensation committee (Board of Directors) interlocks
or insider participation transactions.

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 1992 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, 2001.

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.


                                       35

<PAGE>


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.



Item 12.  Security Ownership of Certain Beneficial Owners and Management

The following tables sets forth, as of March 26, 2001, the beneficial ownership
of the common stock: (i) by each shareholder 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 (iv) by all
executive officers and directors of the Company as a group. Except as otherwise
indicated below, each named beneficial owner has sole voting and investment
power with respect to the shares of common stock listed.


<TABLE>
<CAPTION>
                                                          common stock        Percent of
Name and Address of Beneficial Owner                    Number of Shares        Class
------------------------------------------------------ --------------------  ------------
<S>                                                        <C>                  <C>
Darby Simpson Macfarlane                                   3,611,895(1)         15.21%
2500 Johnson Ave., Riverdale, NY 10463

David Kenneth Macfarlane                                   3,611,895(2)         15.21%
2500 Johnson Ave., Riverdale, NY 10463

Brian T. Fitzpatrick                                         199,033(3)           *
c/o Gordon Laboratories, Inc.
751 East Artesia Boulevard, Carson, CA 90746

Leslie Foglesong                                             265,000(4)          1.25%
c/o Chromatics Color Sciences International, Inc.
2500 Johnson Ave., Riverdale, NY 10463

Edmund Vimond                                                 57,500(5)           *
6967 Country Lakes Circle, Sarasota, FL 34243

Edward Mahoney                                                57,500(6)           *
140 Jones Creek Drive, Jupiter, FL 33458

LB I Group, Inc.                                           2,163,951(7)          9.35%
745 Seventh Ave., New York, NY 10019

Peter Janssen                                                636,250(8)          3.03%
c/o Janssen Partners, Inc.
1345 Old Northern Blvd., Roslyn, NY 11576

Janssen Partners, Inc.                                       636,250(9)          3.03%
1345 Old Northern Blvd., Roslyn, NY 11576

Crescent International, Ltd.                               4,195,800(10)        17.57%
c/o The Robinson-Humphrey Company LLC
3333 Peachtree Road, N.E., Atlanta, GA 30326

GAC-LABS, LLC                                              1,600,000(11)         7.08%
1936 Lee Road, Winter Park, FL 32789

Millennium Partners, LP                                    4,195,800(12)        17.30%
666 5th Avenue, New York, NY 10103

All directors and executive officers as a group            4,190,928(13)        17.33%
(6 persons)
</TABLE>
------------------------------------------------------
* indicates less than 1%


                                       36

<PAGE>

(1)  Includes 861,895 issued and outstanding shares of the common stock
     beneficially owned by Mrs. Macfarlane, 2,000,000 warrants which are
     exercisable upon registration of the underlying securities, 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. As a result of a
     certain voting agreement between them, Mrs. Macfarlane is entitled to sole
     voting power and sole power of disposition over all shares of common stock
     held or acquired by Mr. Macfarlane.
(2)  Includes 861,895 issued and outstanding shares of common stock and
     2,000,000 warrants which are exercisable upon the registration of the
     underlying securities 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 83,333 shares of common stock issuable upon the exercise of
     options which are currently exercisable.
(4)  Includes 250,000 shares of common stock issuable upon the exercise of
     options which are currently exercisable.
(5)  Represents 57,500 shares of common stock issuable upon the exercise of
     options which are currently exercisable.
(6)  Represents 57,500 shares of common stock issuable upon the exercise of
     options which are currently exercisable.
(7)  Represents 1,388,889 shares of common stock issuable upon the conversion of
     Class B Series 2 and Class B Series 3 Convertible Preferred Stock and
     775,062 shares of common stock issuable upon the exercise of currently
     exercisable warrants. Frederick Appel is the investment manager for these
     shares.
(8)  Represents 636,250 shares of common stock owned by Peter Janssen. Mr.
     Janssen is the principal shareholder of Janssen Partners, Inc.
(9)  Represents 636,250 shares of common stock owned by Peter Janssen. Mr.
     Janssen is the principal shareholder of Janssen Partners, Inc.
(10) Includes 1,311,304 shares of common stock, 270,000 warrants which are
     currently exercisable, and 2,614,496 issuable upon the conversion of Class
     B Series 4 Preferred Stock totaling shares not in excess of 20% of the
     current outstanding shares of the Company's common stock. Mel Craw is the
     investment manager of these shares.
(11) Represents 1,600,000 warrants, which are currently exercisable. John
     Schmook and Thomas Little are managers for GAC-Labs.
(12) Includes 3,623,326 shares issuable to Millennium that are not in excess of
     20% of the current outstanding shares of the Company's common stock. Daniel
     Cardella is the investment manager for these shares.
(13) Includes 3,198,333 options and warrants which are currently exercisable.


Item 13. Certain Relationships and Related Transactions

Since August 1990, the Company has occupied office space leased under Darby
Simpson Macfarlane's name. The Company pays $2,260 per month under the lease
(representing the actual lease cost for such premises), which rent increased
from $1,965 in August 2001. For the year ended December 31, 2000 the Company
paid $21,000 in connection with such lease and $26,320 for the year 2001. In
addition, the Company also paid approximately $10,980 for the year ended
December 31, 2000 and approximately $10,980 for the year ended December 31, 2001
under a lease for the use of her residence as offices of the Company, which
operates after normal business hours and on weekends.

On July 3, 2001, Gordon issued 200 shares of its common stock, par value $.001
per share, to Abilene Investments Corp. and 800 shares to GAC-Labs, LLC for an
aggregate purchase price of $1,000,000 paid to Gordon to be used for operating
capital. Simultaneously, the shares of Gordon stock that were outstanding
immediately prior to the closing of this transaction, all of which were owned by
the Company, were redeemed for one dollar. In addition, the Company assigned to
Abilene and GAC-Labs the indebtedness of Gordon and H.B. Gordon Manufacturing
Co., Inc., its wholly-owned subsidiary, owed to the Company in the ratio of 20%
to Abilene and 80% to GAC-Labs.

As part of the same transaction, the Company was granted the option to purchase
from Abilene and GAC-Labs the shares of Gordon stock issued to them and the
indebtedness assigned to them within one year for an aggregate purchase price of
$1,000,000 plus interest thereon at the rate of 14% per annum, subject to
reduction under certain conditions, as described below.



                                       37

<PAGE>


Furthermore, the Company granted to Abilene and GAC-labs one-year warrants to
purchase (i) an aggregate of 2,000,000 shares of our common stock at the
exercise price of $.50 per share, if the Company does not consummate a rights
offering prior to the expiration of such warrants, or (ii) an aggregate of
11,200,000 shares of our common stock at the exercise price of $.10 per share,
if the Company consummates a rights offering prior to the expiration of such
warrants and obtain shareholder approval for the increase in warrants.

If (i) the Company exercises its option to purchase the shares of Gordon stock
issued to Abilene and GAC-Labs and the indebtedness assigned to them, (ii) the
Company has not effected a reverse stock split of its common stock in a ratio
greater than ten to one, (iii) the Company has consummated a rights offering and
(iv) the market price of the Company's common stock exceeds $1.00 per share for
at least ten consecutive trading days from the date of exercise, the warrants
will be subject to mandatory exercise. In the event of such a mandatory
exercise, the Company will accept as payment of the aggregate exercise price the
shares of Gordon stock that the Abilene and GAC-Labs acquired last year, and the
purchase price under the repurchase option agreement will be reduced to one
dollar. The warrants are also subject to mandatory exercise if (i) a
registration statement, filed by us with respect to the shares of our common
stock issuable upon exercise of the warrants has been declared effective by the
Securities and Exchange Commission, (ii) the Company has not effected a reverse
stock split of our common stock in a ratio greater than ten to one, (iii) the
Company has consummated a rights offering and (iv) the market price of our
common stock exceeds $1.00 per share for at least ten consecutive trading days
from and after the effective date of such registration statement. In the event
of such a mandatory exercise, the Company will accept payment of the aggregate
exercise price through the terms of a broker's cashless exercise transaction.

Brian T. Fitzpatrick, the President and Secretary of Gordon and the President,
Acting Chief Executive Officer and a director of the Company, is also the
President of GAC-Labs.

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

Independent Auditors Reports

Consolidated Balance Sheets as of December 31, 2001 and 2000

Consolidated Statements of Operations for the years ended December 31, 2001,
2000, and 1999

Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the
years ended December 31, 2001, 2000, and 1999

Consolidated Statements of Cash Flows for the years ended December 31, 2001,
2000, and 1999

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:



                                       38

<PAGE>


Form 8-K dated March 13, 2002 - the Company filed a Form 8-K relative to the
change in the Company's accountants.

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


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

2.1   Agreement of Purchase and Sale (the "Gordon Purchase Agreement"), dated as
      of April 17, 2000, among Chromatics Color Sciences International, Inc. and
      the shareholders and certain noteholders of Gordon Acquisition Corp.
      (incorporated by reference to Exhibit 2.1 to the Form 8-K filed on June
       19, 2000).

2.2   Amendment No. 1 to the Gordon Purchase Agreement, dated May 15, 2000
      (incorporated by reference to Exhibit 2.2 to the Form 8-K filed on June
      19, 2000)

2.3   Amendment No. 2 to the Gordon Purchase Agreement, dated May 25, 2000
      (incorporated by reference to Exhibit 2.3 to the Form 8-K filed on June
      19, 2000).

2.4   Amendment No. 3 to the Gordon Purchase Agreement, dated May 31, 2000
      (incorporated by reference to Exhibit 2.4 to the Form 8-K filed on June
      19, 2000).

3.1   Restated Articles of Incorporation of the Company (incorporated by
      reference to Exhibit 3.1 to the Form 10-Q filed on August 23, 1999).

3.1.1 Certificate of Amendment to the Certificate of Incorporation of the
      Company.

3.2   By-Laws of the Company.

4.1   Specimen form of the Common Stock Certificate (incorporated by reference
      to Exhibit 4.1 to the Company's Registration Statement on Form S-1
      (File No. 33-54256), filed on November 5, 1992, as amended (the
      "Registration Statement")).

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).

4.3   Subscription Agreement, dated April 15, 1999 (incorporated by reference to
      Exhibit 4.2 to the Form 8-K dated April 30, 1999).

4.4   Form of 14%Convertible Debentures Due April 15, 2002 (incorporated by
      reference to Exhibit 4.3 to the Form 8-K dated April 30, 1999).

4.5   Preferred Stock Purchase Agreement, dated as of June 11, 1999, by and
      between the Company and LB I Group Inc. (incorporated by reference to
      Exhibit 4.1 to the Form 8-K, filed on July 1, 1999).

4.6   Warrant Agreement, dated as of June 11, 1999, by and between the Company
      and LB I Group Inc. (incorporated by reference to Exhibit 4.2 to the Form
      8-K, filed on July 1, 1999).

4.7   Preferred Stock Purchase Agreement, dated as of February 11, 2000, by and
      between the Company and LB I Group Inc.

4.8   Warrant Agreement, dated as of February 11, 2000, by and between the
      Company and LB I Group Inc.

4.9   Securities Purchase Agreement, dated as of August 16, 2000, between the
      Company and Millennium Partners, L.P. ("Millennium") (incorporated by
      reference to Exhibit 4.1 to the Form 8-K, filed on September 1, 2000).

4.10  Warrant, dated as of August 16, 2000, made by the Company in favor of
      Millennium (incorporated by reference to Exhibit 4.2 to the Form 8-K,
      filed on September 1, 2000).

4.11  Warrant No. C W 1, dated as of August 16, 2000, made by the Company in
      favor of Millennium (incorporated by reference to Exhibit 4.3 to the Form
      8-K, filed on September 1, 2000).

4.12  Registration Rights Agreement, dated as of August 16, 2000, between the
      Company and Millennium (incorporated by reference to Exhibit 4.4 to the
      Form 8-K, filed on September 1, 2000).

4.13  Warrant No. CW2, dated as of August 16, 2000, made by the Company in favor
      of Wharton Capital Partners, Ltd. (incorporated by reference to Exhibit
      4.11 to the Form S-3, filed on September 18, 2000).

4.14  Warrant Agreement, dated as of June 30, 2000, between the Company and
      Josephthal & Co. Inc. (incorporated by reference to Exhibit 4.12 to the
      Form S-3, filed on September 18, 2000).

4.15  Warrant Certificate No. W-01, dated as of June 30, 2000 made by the
      Company in favor of X Securities, Ltd. (incorporated by reference to
      Exhibit 4.13 to the Form S-3, filed on September 18, 2000).

4.16  Warrant Certificate No. W-02, dated as of June 30, 2000, made by the
      Company in favor of John O'Brien (incorporated by reference to Exhibit
      4.14 to the Form S-3, filed on September 18, 2000).

4.17  Warrant Certificate No. W-03, dated as of June 30, 2000, made by the
      Company in favor of Edmund Belak (incorporated by reference to Exhibit
      4.15 to the Form S-3, filed on September 18, 2000).

4.18  Financial Advisory and Investment Banking Agreement, dated as of June 12,
      2000, between Chromatics and Josephthal & Co. Inc. (incorporated by
      reference to Exhibit 4.16 to the Form S-3, filed on September 18, 2000).

4.19  Stock Purchase Agreement, dated as of October 31, 2000, between the
     Company and Crescent International Ltd. ("Crescent") (incorporated by
     reference to Exhibit 4.1 to the Form 8-K, filed on November 3, 2000).



                                       39

<PAGE>



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

4.20  Warrant, dated as of October 31, 2000, made by the Company in favor of
      Crescent (incorporated by reference to Exhibit 4.2 to the Form 8-K, filed
      on November 3, 2000).

4.21  Registration Rights Agreement, dated as of October 31, 2000, between the
      Company and Crescent (incorporated by reference to Exhibit 4.3 to the Form
      8-K, filed on November 3, 2000).

4.22  Certificate of Amendment of the Certificate of Incorporation of the
      Company, dated as of October 31, 2000 (incorporated by reference to
      Exhibit 4.4 to the Form 8-K, filed on November 3, 2000).

4.23  Letter Agreement, dated as of October 11, 2000, between the Company and
      Millennium (incorporated by reference to Exhibit 4.1 to the Form 8- K,
      filed on November 3, 2000).

4.24  Certificate of Amendment of the Certificate of Incorporation of the
      Company, dated November 1, 2000, relating to the Class B Series 2
      Preferred Stock of the Company (incorporated by reference to Exhibit 4.2
      to the Form 8-K, filed on November 3, 2000).

4.25  Certificate of Amendment of the Certificate of Incorporation of the
      Company, dated November 1, 2000, relating to the Class B Series 3
      Preferred Stock of the Company (incorporated by reference to Exhibit 4.3
      to the Form 8-K, filed on November 3, 2000).

4.26  Letter Agreement, dated as of October 11, 2000, between the Company and LB
      I Group Inc. ("Lehman") (incorporated by reference to Exhibit 4.4 to the
      Form 8-K, filed on November 3, 2000).

4.27  Letter Agreement, dated as of November 1, 2000, between the Company and
      Lehman (incorporated by reference to Exhibit 4.5 to the Form 8-K, filed on
      November 3, 2000).

4.28  Letter Agreement, dated as of August 16, 2000, between the Company and
      Lehman (incorporated by reference to Exhibit 4.6 to the Form 8-K, filed on
      November 3, 2000).

4.29  Certificate of Amendment of the Certificate of Incorporation of the
      Company, dated November 1, 2000, relating to the Class B Series 5
      Preferred Stock of the Company (incorporated by reference to Exhibit 4.7
      to the Form 8-K, filed on November 3, 2000).

4.30  Letter Agreement, dated as of October 11, 2000, among the Company and the
      holders of the 14% Senior Convertible Debentures, dated April 15, 1999 and
      due April 15, 2002, in the principal amount of $5,000,000, issued by the
      Company to Gary W. Schreiner (incorporated by reference to Exhibit 4.8 to
      the Form 8-K, filed on November 3, 2000).

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).

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).



                                       40

<PAGE>


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

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)).

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 (incorporated by reference to
      Exhibit 4.2 to the Form 8-K dated April 30, 1999).

10.23 Form of 14% Convertible Debentures Due April 15, 2002 (incorporated by
      reference to Exhibit 4.3 to the Form 8-K dated April 30, 1999).

10.24 Preferred Stock Purchase Agreement, dated as of June 11, 1999, by and
      between the Company and LB I Group Inc. (incorporated by reference to
      Exhibit 4.1 to the Form 8-K, filed on July 1, 1999).

10.25 Warrant Agreement, dated as of February 11, 1999, by and between the
      Company and LB I Group Inc. (incorporated by reference to Exhibit 4.2 to
      the Form 8-K, filed on July 1, 1999).

10.26 Preferred Stock Purchase Agreement, dated as of February 11, 2000, by and
      between the Company and LB I Group Inc. (incorporated by reference to
      Exhibit 4.7 hereof).

10.27 Warrant Agreement, dated as of February 11, 2000, by and between the
      Company and LB I Group Inc. (incorporated by reference to Exhibit 4.8
      hereof).

10.28 Consent and Waiver, dated June 8, 1999, made by Gary W. Schreiner in favor
      of the Company (incorporated by reference to Exhibit 10.23 to the Form
      10-K/A filed on January 21, 2000).

10.29 License Agreement, dated September 1, 1998, between the Company and
      Nordstrom., Inc. (incorporated by reference to Exhibit 10.24 to the Form
      10-K/A filed on January 21, 2000).

10.30 Agreement, dated December 13, 1996, between the Company and Gordon
      Laboratories, Inc. (incorporated by reference to Exhibit 10.25 to the Form
      10-K/A filed on January 21, 2000).

10.31 Agreement, dated as of June 7, 1999, between the Company and Datex-Ohmeda,
      Inc. (incorporated by reference to Exhibit 10.1 to the Form 8- K/A filed
      on January 28, 2000).

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+   Consent of Independent Accountants.
----------
*    Management contract or compensatory plan or arrangement required to be
     filed as an exhibit.
**   Portions subject to confidential treatment.
+    Filed herewith.





                                       41

<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/ Brian T. Fitzpatrick                            Date: April 23, 2002
     --- ----------------------------------------------
         Brian T. Fitzpatrick, Acting Chief Executive
         Officer

By:  /s/ Darby S. Macfarlane                             Date: April 23, 2002
     --- ----------------------------------------------
         Darby S. Macfarlane, Chairperson of the Board,
         Chief Technology Officer; Treasurer; Director


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 23, 2002
     --- ----------------------------------------------
         Darby S. Macfarlane, Chairperson of the Board,
         Chief Technology Officer; Treasurer; Director

By:  /s/ Brian T. Fitzpatrick                            Date: April 23, 2002
     --- ----------------------------------------------
         Brian T. Fitzpatrick, Acting Chief Executive
         Officer

By:  /s/ David K. Macfarlane                             Date: April 23, 2002
     --- ----------------------------------------------
         David K. Macfarlane, Vice President, Research &
         Development; Director

By:  /s/ Leslie Foglesong                                Date: April 23, 2002
     --- ----------------------------------------------
         Leslie Foglesong, Secretary; Assistant Treasurer;
         Director

By:  /s/ Edmund Vimond                                   Date: April 23, 2002
     --- ----------------------------------------------
         Edmund Vimond, Director

By:  /s/ Edward Mahoney                                  Date: April 23, 2002
     --- ----------------------------------------------
         Edward Mahoney, Director








                                       42

<PAGE>





         CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Contents                                                                 Page
                                                                        ------
Independent Auditors' Reports...........................................  44
Consolidated financial statements:
     Balance Sheets.....................................................  46
     Statements of Operations...........................................  47
     Statements of Changes in Stockholders' Equity (Deficit)............  48
     Statements of Cash Flows...........................................  49
     Notes to Consolidated Financial Statements.........................  50







                                       43

<PAGE>


                         INDEPENDENT ACCOUNTANTS' REPORT



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

We have audited the consolidated balance sheet of Chromatics Color Sciences
International, Inc. and subsidiaries as of December 31, 2000, and the
related consolidated statements of operations, changes in stockholders' equity
(deficit) and cash flows for each of the two years in the period ended
December 31, 2000. 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 auditing standards generally accepted
in the United States of America. 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 subsidiaries as of December 31, 2000, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred recurring losses for
the last several years, including $19,496,000 in 2000, and has experienced
significant problems and delays exploiting its primary technology (medical
equipment). These matters raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.


BDO Seidman, LLP

New York, New York
April 13, 2001, except for
  Note 3, which is July 3, 2001








                                       44

<PAGE>

Independent Auditors' Report
To the Board of Directors and Shareholders of
Chromatics Color Sciences International, Inc.


We have audited the accompanying consolidated balance sheet of Chromatics Color
Sciences International, Inc. and subsidiaries as of December 31, 2001, and the
related consolidated statements of operations, changes in shareholders' equity
(deficit) 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Chromatics Color
Sciences International, Inc. and subsidiaries as of December 31, 2001 and the
consolidated results of their operations and their consolidated cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred recurring net
losses, cash outflows from operating activities and has a negative working
capital position and a capital deficiency. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.


Richard A. Eisner, LLP
New York, New York
April 17, 2002



                                       45

<PAGE>


                  Chromatics Color Sciences International, Inc.

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                              December 31,
                                                       2001                2000
                                                 ----------------    ----------------
ASSETS
Current assets:
<S>                                              <C>                 <C>
   Cash and cash equivalents                     $        55,000     $     1,379,000
   Accounts receivable                                     4,000              73,000
   Inventories                                           350,000             747,000
   Prepaid expenses and other current assets              38,000             297,000
                                                 ---------------     ---------------
      Total current assets                               447,000           2,496,000

Property and equipment, net                              155,000             244,000
Software development costs, net                                              261,000
Patent costs, net                                                            581,000
Net assets of Gordon                                                       1,000,000
Deferred financing costs                                 710,000
Other assets                                                                 332,000
                                                 ---------------     ---------------
                                                 $     1,312,000     $     4,914,000
                                                 ===============     ===============
LIABILITIES
Current liabilities:
   Accounts payable and accrued expenses:
      Attorneys and accountants                  $     1,031,000     $       459,000
      Consultants                                        469,000             141,000
      Trade                                              276,000             261,000
      Severance payable                                  725,000
      Due to related parties                             274,000
   Notes payable                                       1,449,000
   Notes payable - officer/stockholder                   250,000
   Advance from investor                                  25,000
                                                 ---------------     ---------------
      Total current liabilities                        4,499,000             861,000
                                                 ---------------     ---------------
      Amount payable for purchase of Gordon                                  653,000

                                                 ---------------     ---------------
                                                       4,499,000           1,514,000
                                                 ---------------     ---------------

COMMITMENTS AND OTHER MATTERS

REDEEMABLE PREFERRED STOCK:
   Class A - authorized 1,400,000 shares,
      $.01 par value; issued and outstanding
      1,380,000 shares (redemption $.01 per
      share)                                                                  14,000
                                                 ---------------     ---------------


STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock                                       11,804,000          11,511,000
Common stock; authorized 550,000,000 shares,
   $.001 par value; issued and outstanding
   20,989,550 and 19,033,308 shares                       21,000              19,000
Additional paid-in capital                            46,984,000          45,934,000
Accumulated deficit                                  (61,996,000)        (54,078,000)
                                                 ---------------     ---------------
                                                      (3,187,000)          3,386,000
                                                 ---------------     ---------------
                                                 $     1,312,000     $     4,914,000
                                                 ===============     ===============
</TABLE>



                 See notes to consolidated financial statements


                                       46

<PAGE>

                  Chromatics Color Sciences International, Inc.

                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                                                           2001               2000                1999
                                                      --------------   ---------------   --------------
Revenues:
<S>                                                   <C>              <C>               <C>
     Sales                                            $        8,000   $        80,000   $    1,103,000
                                                      --------------   ---------------   --------------

Cost and expenses:
     Cost of sales                                             1,000           760,000          898,000
     Sales, marketing and trade show costs                   285,000         2,047,000        2,512,000
     Medical regulatory expenses                             304,000           840,000        1,323,000
     Research and development                                745,000         1,257,000          996,000
     Patent application costs                                 47,000           256,000          134,000
     Severence expense                                       795,000
     Impairment charges                                    1,338,000         1,508,000
     General and administrative:
          Compensation - Officers, employees and
            consultants                                    1,389,000         2,390,000        2,089,000
          Legal fees                                         340,000           702,000          794,000
          Accounting fees                                     92,000           158,000           79,000
          Rent and storage                                   335,000           339,000          297,000
          Insurance                                          221,000           315,000          223,000
          Repairs and maintenance                             56,000           158,000          118,000
          Depreciation and amortization                      404,000           729,000          495,000
          Taxes                                               67,000            74,000           55,000
          Stock administrative fees                           85,000           131,000          172,000
          Public relations                                    42,000           212,000          193,000
          Other                                              230,000           423,000          421,000
                                                      --------------   ---------------   --------------
                                                           6,776,000        12,299,000       10,799,000
                                                      --------------   ---------------   --------------
                                                          (6,768,000)      (12,219,000)      (9,696,000)
                                                      --------------   ---------------   --------------
Other income (expense):
     Interest income                                           3,000           133,000          201,000
     Interest expense and financing costs                   (662,000)       (1,437,000)      (3,313,000)
                                                      --------------   ---------------   --------------
                                                            (659,000)       (1,304,000)      (3,112,000)
                                                      --------------   ---------------   --------------
Loss from continuing operations                           (7,427,000)      (13,523,000)     (12,808,000)
Loss from discontinued operations (Note 3)                (1,250,000)       (5,973,000)
Gain on disposal of Gordon                                   759,000
                                                      --------------   ---------------   --------------
Net loss                                              $   (7,918,000)  $   (19,496,000)  $  (12,808,000)
                                                      ==============   ===============   ==============

Net loss to common stockholders:
Loss from continuing operations                       $   (7,427,000)  $   (13,523,000)  $  (12,808,000)
Deemed dividend on Class B, Series 2 and 3
  convertible preferred stock                                293,000         3,900,000        1,558,000
                                                      --------------   ---------------   --------------
Loss from continuing operations to
  common stockholders                                     (7,720,000)      (17,423,000)      14,366,000)
Loss from discontinued operations (Note 3)                (1,250,000)       (5,973,000)
Gain on disposal of Gordon                                   759,000
                                                      --------------   ---------------   --------------
Net loss to common stockholders                       $   (8,211,000)  $   (23,396,000)  $  (14,366,000)
                                                      ==============   ===============   ==============
Weighted average number of common shares
        Outstanding - basic and diluted                 19,880,869        16,746,354        15,498,300
                                                        ==========        ==========        ==========
Basic and diluted loss per share:
        Loss from continuing operations                    $ (0.39)         $ (1.04)          $ (0.93)
        Discontinued operations                              (0.02)           (0.36)
                                                        -----------       ----------        ----------
        Net loss to common stockholders                    $ (0.41)         $ (1.40)          $ (0.93)
                                                        ===========       ==========        ==========
</TABLE>


                 See notes to consolidated financial statements

                                       47

<PAGE>


                  Chromatics Color Sciences International, Inc.

      Consolidated Statements of Changes in Stockholders' Equity (Deficit)


<TABLE>
<CAPTION>
                                                                            Common Stock
                                                   Preferred                                          Additional
                                                     Stock          Number of                           Paid-in     Accumulated
                                                     Amount           Shares            Amount          Capital       Deficit
                                                 --------------  ---------------   ------------   --------------   --------------


<S>                                              <C>                <C>             <C>           <C>              <C>
Balance - January 1, 1999                                           15,452,442      $   15,000    $  28,327,000    $ (21,774,000)

Net loss for the year ended
  December 31, 1999                                                                                                  (12,808,000)
Exercise of stock options and warrants                                  86,675                          377,000
Original issue discount of senior
  convertible debentures (below market
  conversion price)                                                                                   3,575,000
Original issue discount on Class B
  convertible preferred stock (warrants
  and below market conversion price)                                                                  2,357,000
Deemed dividend on Class B convertible
  preferred stock                                                                                    (1,558,000)
Compensation cost relating to options
  granted to consultants                                                                                984,000
                                                 -------------   --------------     -----------   --------------    -------------

Balance - December 31, 1999                                         15,539,117      $   15,000       34,062,000      (34,582,000)

Net loss for the year ended December 31, 2000                                                                        (19,496,000)
Conversion of debentures to preferred stock        $6,079,000
Issuance of preferred stock for cash                5,025,000
Reclassification of redeemable preferred stock      2,263,000
Exercise of stock options and warrants                                 162,880                          377,000
Conversion of convertible preferred
  stock into common stock                          (1,856,000)       1,889,563           2,000        3,017,000

Original issue discount on convertible
  preferred stock (warrants and below
  market conversion price)                                                                            3,858,000
Deemed dividend on Class B convertible
  preferred stock                                                                                    (3,900,000)
Issuance of common stock for purchase
  of Gordon stock                                                      721,231           1,000        4,536,000
Issuance of common stock for cash                                      720,517           1,000        3,294,000
Compensation cost relating to options
  granted to consultants                                                                                690,000
                                                 --------------  --------------     -----------   --------------    --------------

Balance - December 31, 2000                        11,511,000       19,033,308          19,000       45,934,000       (54,078,000)


Net loss for the year ended December
  31, 2001                                                                                                             (7,918,000)
Issuance of common stock for purchase
  of Gordon stock                                                       22,894                          144,000
Issuance of common stock -
  adjustable warrant                                                 1,933,348           2,000           (2,000)
Warrants issued in connection
  with notes payable                                                                                  1,181,000
Deemed dividend on Class B convertible
  preferred stock                                     293,000                                        (  293,000)
Compensation cost relating to options
  granted to terminated employees                                                                        20,000
                                                 -------------   --------------     -----------   --------------   ---------------

Balance - December 31, 2001                       $11,804,000       20,989,550      $   21,000    $  46,984,000    $  (61,996,000)
                                                 =============    =============     ===========   ==============   ===============
</TABLE>



                 See notes to consolidated financial statements

                                       48

<PAGE>


                  Chromatics Color Sciences International, Inc.

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                                        2001              2000             1999
Cash flows from operating activities:
<S>                                                               <C>               <C>               <C>
   Loss from continuing operations                                $    (7,427,000)  $   (13,523,000)  $(12,808,000)
   Discontinued operations                                               (491,000)       (5,973,000)
   Adjustments to reconcile loss to net cash used
      in operating activities:
        Impairment charge and net change in net assets
           of discontinued operations                                   1,829,000         7,517,000
        Depreciation and amortization                                     404,000           729,000        494,000
        Compensation cost relating to options granted
           to consultants and terminated employees                         20,000           690,000        984,000
        Interest and financing costs                                      596,000           851,000      2,741,000
        Writeoff of accounts receivable                                    71,000
        Changes in operating assets and liabilities:
           Accounts receivable                                             (2,000)          769,000       (750,000)
           Inventories                                                     59,000          (308,000)      (293,000)
           Prepaid expenses and other assets                              241,000          (230,000)       (97,000)
           Accrued interest on convertible debentures                                       583,000        496,000
           Accounts payable and accrued expenses                        1,901,000           107,000       (223,000)
                                                                  ---------------   ---------------   ------------

              Net cash used in operating activities                    (2,799,000)       (8,788,000)    (9,456,000)
                                                                  ---------------   ---------------   ------------

Cash flows from investing activities:
   Software development costs                                                                              (81,000)
   Capitalized patent costs                                              (167,000)         (337,000)      (553,000)
   Purchase of fixed assets                                                (6,000)          (78,000)       (91,000)
                                                                  ---------------   ---------------   ------------

              Net cash used in investing activities                      (173,000)         (415,000)      (725,000)
                                                                  ---------------   ---------------   ------------

Cash flows from financing activities:
   Net proceeds from the issuance of stock                                                3,672,000        377,000
   Proceeds from senior convertible debentures                                                           5,000,000
   Advance from investor                                                   25,000
   Payments of amounts to related party                                                  (1,360,000)       (62,000)
   Net proceeds from notes payable and warrants                         1,623,000
   Net proceeds from the issuance of preferred stock
      and warrants                                                                        5,480,000      3,727,000
                                                                  ---------------   ---------------   ------------

              Net cash provided by financing activities                 1,648,000         7,792,000      9,042,000
                                                                  ---------------   ---------------   ------------


Net decrease in cash and cash equivalents                              (1,324,000)       (1,411,000)    (1,139,000)
Cash and cash equivalents - January 1                                   1,379,000         2,790,000      3,929,000
                                                                  ---------------   ---------------   ------------

Cash and cash equivalents - December 31                           $        55,000   $     1,379,000   $  2,790,000
                                                                  ===============   ===============   ============

Supplemental disclosure cash flow information:
   Interest paid                                                                                      $     89,000
   Reclassification of ColorMate Units                                                                $  1,820,000


Supplemental disclosure of noncash financing information:
   Issuance of debt to pay accrued expenses                       $       300,000
   Reduction of liability resulting from
     Gordon purchase price adjustment                             $       509,000
   Issuance of stock for amount payable for purchase of Gordon    $       144,000   $     5,189,000
   Deemed dividends                                               $       293,000   $     3,900,000   $ 1,558,000
   Conversion of preferred stock into common                                        $     3,019,000
</TABLE>



                 See notes to consolidated financial statements

                                       49

<PAGE>


                  Chromatics Color Sciences International, Inc.
                   Notes to consolidated financial statements
                                December 31, 2001


NOTE 1 - Nature of Business and Summary of Significant Accounting Policies

Since its formation in 1984, Chromatics Color Sciences International, Inc. (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.

[a] Estimates and Uncertainties

     The preparation of financial statements in conformity with accounting
     principles generally accepted in the United States of America 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 revenue and expenses during the reporting period. Actual results
     could differ from those estimates. Significant estimates relate primarily
     to inventory valuation and recoverability of the Company's tangible and
     intangible assets.

[b] Principles of Consolidation

     The consolidated financial statements include the accounts of the Company
     and its wholly-owned subsidiaries. All intercompany balances and
     transactions have been eliminated in consolidation.

[c] Patent Application Costs

     The Company began capitalizing certain patent application costs, commencing
     January 1, 1998, and had been amortizing such costs over the remaining
     patent lives, generally 10 to 15 years. Accumulated amortization as of
     December 31, 2000 was $268,000. The Company assesses the continuing
     carrying value of these assets when events and circumstances warrant and,
     in 2001 and 2000, recorded impairment charges of $647,000 and $581,000,
     respectively (see Note 18).

[d] Revenue Recognition

     The Company records revenue from the sale of ColorMate TLc-BiliTest Systems
     and TLc-Lensette Calibration Standards at the time of shipment at the
     minimum transfer price provided in the distribution agreement. The
     agreement provides for additional amounts from the distributor equal to a
     defined percentage of the distributor's sales price of these products. The
     Company records revenue from the additional amounts upon receipt from the
     distributor. Sales of cosmetic products are recorded when the products are
     shipped.

     Shipping charges are included in sales. Shipping and handling costs are
     included in cost of sales.

[e] Inventories

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


                                       50

<PAGE>



NOTE 1 - Nature of Business and Summary of Significant Accounting Policies
(continued)

[f] 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 and, in 2000, wrote off the
     net book value of certain equipment totaling $258,000 (see Note 18).

[g]  Software Development Costs

     Once technological feasibility was established, the costs of developing
     software to be marketed as part of a product were capitalized.
     Capitalization ceased in 1999 when the products became available for sale.
     The costs were 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 (three years). Accumulated amortization
     of software development costs at December 31, 2000 was $366,000. Based on
     management's assessment of the carrying amount of the asset, an impairment
     charge of $53,000 was recorded in 2001 (see Note 18).

[h]  Long-Lived Assets

     Long-lived assets, such as intangible assets and property and equipment,
     are evaluated for impairment when events or changes in circumstances
     indicate that the carrying amount of the assets may not be recoverable
     through the estimated undiscounted future cash flows from the use of these
     assets. When any such impairment exists, the related assets will be written
     down to fair value. In 2001 and 2000 (see note 18), the Company recorded
     impairment losses relating to these assets.

[i] 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.

[j] Financial Instruments

     Financial instruments include cash and equivalents, accounts receivable,
     accounts payable and long-term debt. 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, 2001.


                                       51

<PAGE>


NOTE 1 - Nature of Business and Summary of Significant Accounting Policies
     (continued)

[k] Concentration of Credit Risk/Major Customers, Supplier and Manufacturer

     The Company generated principally all of its revenues from one customer in
     1999 and 2000 (see Note 6).

     The Company is dependent upon one supplier for a major part of its
     ColorMate TLc-BiliTest System and another to manufacture the ColorMate
     TLc-BiliTest System. The loss of either of these relationships would
     materially adversely affect the Company.

[l] Loss Per Share

     The Company follows Statement of Financial Accounting Standards ("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 loss to common stockholders by the weighted-average number of
     common shares outstanding for the period. Diluted EPS includes the effect,
     if dilutive, from the potential exercise or conversion of securities, which
     would result in the issuance of incremental shares of common stock. Such
     potential shares have been excluded from EPS in 2001, 2000 and 1999 as
     their effect would be anti-dilutive. Securities and the related number of
     common shares not included in the diluted computation for the year ended
     December 31, 2001 that would potentially dilute basic earnings per share,
     if any in the future, are as follows:

           Preferred stock                             109,071,000
           Warrants                                     35,940,000
           Options                                       3,271,000
           Advances from investor - see Note 14(b)         833,000
                                                     -------------
                                                       149,115,000
                                                     -------------

     The conversion price of the Series 4 convertible preferred stock is equal
     to the lower of $0.82 and 92% of the average of the three lowest
     consecutive closing bid prices during the 22 trading days preceding
     conversion. Included in the above table are 106,435,000 shares issuable
     upon the conversion of the outstanding Series 4 shares, reflecting the
     conversion terms most beneficial to the investor and a conversion price
     that would have been $0.0153 at December 31, 2001.

     Not included in the above table are the warrants issued in connection with
     the Gordon disposal or the Adjustable Warrant issued in connection with the
     sale of Common stock because the number that will vest is not determinable
     (see Note 14[b]).The maximum number of potential common shares from the
     warrants issued in the Gordon disposal is 16,000,000. The number of commmon
     shares issuable from the Adjustable Warrant would have been 108,129,000 on
     December 31, 2001. In addition, the Company issued 19,533,000 warrants with
     notes payable subsequent to December 31, 2001.

[m] Stock-Based Compensation

     SFAS No. 123, "Accounting for Stock-Based Compensation," 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 for employees 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 14.


                                       52

<PAGE>


NOTE 1 - Nature of Business and Summary of Significant Accounting Policies
(continued)

[n]  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 not
     be realized.

[o]  Research and Development

     Research and development costs are expensed as they are incurred.

[p]  Recent Accounting Standards

     In November 2000, the Emerging Issues Task Force ("EITF") issued consensus
     number 00-27 which requires the remeasurement of the original issue
     discount on preferred stock with characteristics similar to the convertible
     preferred stock issued by the Company earlier in 2000 and in 1999. The
     adoption of this EITF resulted in an additional imputed dividend of
     $2,325,000 (relating to additional charges for the below market conversion
     price of the preferred stock), which was recorded in the fourth quarter of
     2000.

     In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
     No. 141, "Business Combinations", which supersedes APB Opinion No. 16,
     "Business Combinations". SFAS 141 eliminates the pooling-of-interests
     method of accounting for business combinations and modifies the application
     of the purchase accounting method. The elimination of the
     pooling-of-interests method is effective for transactions initiated after
     June 30, 2001. The remaining provisions of SFAS 141 are effective for
     transactions accounted for using the purchase method that are completed
     after June 30, 2001. The Company believes that SFAS 141 will not have a
     material effect on its financial statements.

     In July 2001, the FASB also issued SFAS No. 142, "Goodwill and Intangible
     Assets", which supersedes APB Opinion No. 17, "Intangible Assets". SFAS 142
     eliminates the current requirement to amortize goodwill and
     indefinite-lived intangible assets, addresses the amortization of
     intangible assets with a defined life and addresses the impairment testing
     and recognition for goodwill and intangible assets. SFAS 142 applies to
     goodwill and intangible assets arising from transactions completed before
     and after the Statement's effective date. SFAS 142 is effective for fiscal
     2002. The Company will adopt SFAS 142 in fiscal 2002. The Company believes
     that SFAS 142 will not have a material effect on its financial statements.

     In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
     Retirement Obligations". This statement addresses financial accounting and
     reporting for obligations associated with the retirement of tangible
     long-lived assets and the associated retirement costs. SFAS 143 is
     effective for fiscal years beginning after June 15, 2002. The Company
     believes that SFAS 143 will not have a material effect on its financial
     statements.


                                       53

<PAGE>


NOTE 1 - Nature of Business and Summary of Significant Accounting Policies
(continued)

[p]  Recent Accounting Standards  (continued)

     In August 2001, the FASB issued SFAS No. 144, "Accounting for the
     Impairment or Disposal of Long-Lived Assets". This statement addresses
     financial accounting and reporting for the impairment or disposal of
     long-lived assets and supersedes SFAS 121, "Accounting for the Impairment
     of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and the
     accounting and reporting provisions of APB No. 30, "Reporting the Results
     of Operations for a Disposal of a Segment of a Business." SFAS 144 is
     effective for fiscal years beginning after December 15, 2001, with earlier
     application encouraged. The Company has not yet determined the impact the
     adoption of SFAS 144 will have on its financial statements.

NOTE 2 - Basis of Presentation

The Company's consolidated financial statements have been presented on the basis
that it is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
sustained net losses for the past several years, including $7,918,000 in 2001,
$19,496,000 in 2000 and $12,808,000 in 1999, has incurred recurring cash
outflows from operating activities, and has experienced significant problems and
delays exploiting its primary technology (medical equipment). At December 31,
2001 the Company had a negative working capital position and a capital
deficiency. In 2001, the Company significantly reduced its workforce and other
costs, and the Company is attempting to obtain additional financing (see Note 19
for financing received in 1st quarter of 2002).

The Company's business plan is to maintain reduced operating costs while seeking
additional financing and attempting to sell the exclusive rights to its medical
technology for monitoring infant jaundice for an upfront fee and ongoing
royalties. If it is successful in these efforts to raise funds for continued
operations, then the Company plans to hire new management, continue its research
and development on its LED instrument and implement its business plan for
marketing its technology and instruments to the beauty industry including
cosmetics, fashion and hair color markets. The Company will require additional
capital to continue operations.

The Company is undergoing due diligence with a number of investment banking
firms and private investors in an attempt to raise financing for the Company.
The Company has also filed a Rights Offering with the SEC to its existing
shareholders, to raise financing for the Company.

Management believes that agreements with former subordinated note holders and
Millennium and Lehman have not prevented the Company from raising capital as the
Compay obtained either waivers or negotiated restructuring acceptable to
potential investors. Other than the issuance of notes payable (see Note 19), the
Company has not entered into any financing agreements subsequent to December 31,
2001. Management does not expect these or subsequent agreements with Crescent to
prevent the Company from raising additional capital.

There can be no assurances that additional financing will be obtained or that
the Company's other plans will be achievable. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset amounts or the amounts and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.

NOTE 3 - Discontinued Operations

On June 2, 2000, the Company acquired the common stock and assumed certain debt
of Gordon, a privately held formulator and manufacturer of cosmetics, hair care
and other personal care products. The acquisition was for a purchase price of
$609,000 in cash used to repay Gordon debt and 721,231 shares of the Company's
common stock, valued for financial reporting purposes at $6.29 per share, which
approximated the market value of the Company's common stock at the acquisition
date. An additional $653,000 was payable to the former shareholders of Gordon to
complete the purchase in the form shares of the Company's common stock. As a
result of a post closing adjustment the Company issued 22,894 shares of common
stock in 2001, valued at $144,000, in full consideration of the obligation and
the purchase price was reduced by $509,000. The acquisition was accounted for
under the purchase method of accounting for business combinations.


                                       54

<PAGE>


NOTE 3 - Discontinued Operations  (continued)

Due to the Company's deteriorating financial condition and inability to continue
to support Gordon's operations, the Company decided in early 2001 to sell
Gordon. On July 3, 2001, pursuant to the Share Subscription and Redemption
Agreement, dated as of June 19, 2001 (the "Purchase Agreement"), among the
Company, Abilene Investments Corp. ("Abilene"), GAC- Labs, LLC ("GAC- Labs" and
collectively with Abilene, the "Purchasers") and Gordon Acquisition Corp., a
wholly-owned subsidiary of the Company ("Gordon"), Gordon issued 200 shares of
common stock, par value $.001 per share, of Gordon ("Gordon Stock") to Abilene
and 800 shares of Gordon Stock to GAC-Labs for an aggregate purchase price of
$1,000,000. Simultaneously, the shares of Gordon Stock that were outstanding
immediately prior to the closing of this transaction, all of which were owned by
the Company, were redeemed for one dollar. In addition, the Company assigned to
the Purchasers its right, title and interest in the indebtedness of Gordon
and/or H.B. Gordon Manufacturing Co., Inc., its wholly-owned subsidiary, owed to
the Company in the ratio of 20% to Abilene and 80% to GAC-Labs.

As part of the same transaction, pursuant to the Purchase Option Agreement,
dated as of July 3, 2001 (the "Option Agreement"), among the Company, Abilene
and GAC-Labs, the Company was granted the option to purchase from the Purchasers
the shares of Gordon Stock issued to them and the indebtedness assigned to them
under the Purchase Agreement within one year for an aggregate purchase price of
$1,000,000 plus interest thereon at the rate of 14% per annum, subject to
reduction under certain conditions, as described below.

Furthermore, the Company granted to the Purchasers one-year warrants (the
"Warrants") to purchase (i) an aggregate of 2,000,000 shares of common stock,
par value $.001 per share, of the Company ("CCSI Stock") at the exercise price
of $.50 per share, if the Company does not consummate a rights offering/ private
placement by the Company of its securities prior to the one year expiration of
such warrants, or alternatively (ii) an aggregate of 11,200,000 shares of CCSI
Stock at the exercise price of $.10 per share and 4,800,000 shares at $0.001 per
share, subject to price adjustment, if the Company consummates a rights
offering/private placement by the Company of its securities prior to the one
year expiration of such warrants and obtains shareholder approval with respect
to such rights offering/private placement by the Company of its securities and
such increase in warrants. The fair market value of the 2,000,000 warrants was
immaterial. If the alternative additional warrants are issued at a later date,
the fair market value of such warrants will be recorded as a further loss on the
disposal of Gordon.

If (i) pursuant to the Option Agreement the Company exercises its option to
purchase from the Purchasers the shares of Gordon Stock issued to them and the
indebtedness assigned to them under the Purchase Agreement, (ii) the Company has
not effected a reverse stock split of the CCSI Stock in a ratio greater than ten
to one, (iii) the Company has consummated a rights offering/private placement by
the Company of its securities and (iv) the market price of CCSI Stock exceeds
$1.00 per share for at least ten consecutive trading days from and after the
date of exercise under the Option Agreement, the Warrants will be subject to
mandatory exercise. In the event of such a mandatory exercise, the Company will
accept as payment of the aggregate exercise price the shares of Gordon Stock
that the Purchasers



                                       55

<PAGE>


NOTE 3 - Discontinued Operations  (continued)

acquired under the Purchase Agreement, and the exercise price under the Option
Agreement will be reduced to one dollar. The Warrants are also subject to
mandatory exercise if (i) a registration statement filed by the Company with
respect to the shares of CCSI Stock issuable upon exercise of the Warrants has
been declared effective by the Securities and Exchange Commission, (ii) the
Company has not effected a reverse stock split of the CCSI Stock in a ratio
greater than ten to one, (iii) the Company has consummated a rights
offering/private placement by the Company of its securities and (iv) the market
price of CCSI Stock exceeds $1.00 per share for at least ten consecutive trading
days from and after the effective date of such registration statement. In the
event of such a mandatory exercise, the Company will accept payment of the
aggregate exercise price through the means of a broker's cashless exercise
transaction.

The Company does not intend to exercise its option to repurchase Gordon and has
not had any influence on Gordon's operations since the sale in July 2001. An
officer and director of the Company, who is a former shareholder and Chairman of
Gordon, has maintained the title of President of Gordon and provides limited
consulting to Gordon's new management. Additionally, certain of the Purchasers
are stockholders of the Company. The financial statements for 2000 have been
retroactively changed to reflect Gordon's net assets and operations as
discontinued operations. The net assets of Gordon were written down to
$1,000,000 as of December 31, 2000. As a result of a post closing adjustment to
the purchase price, an adjustment was made in 2001 to reduce goodwill and the
amount payable for the purchase of Gordon by $509,000. Gordon incurred a loss in
2001 through the disposal date and the Company recorded a gain on disposal,
representing the net liabilities on the disposal date.

Net sales and loss from the discontinued operation are as follows for the year
ended December 31:

<TABLE>
<CAPTION>
                                                            2001                  2000
                                                     -----------------      ----------------

<S>                                                  <C>                    <C>
        Net sales                                    $       2,590,000      $      3,762,000
                                                     =================      ================

        Loss from discontinued operations                $  (1,250,000)     $       (697,000)
        Impairment loss relating to goodwill                                      (5,276,000)
                                                     -----------------      ----------------

        Loss from discontinued operations            $      (1,250,000)     $     (5,973,000)
                                                     =================      ================
</TABLE>




Net assets of Gordon at December 31, 2000 were:

           Cash                                            $       79,000
           Accounts receivable                                    887,000
           Inventory                                              896,000
           Property and equipment                                 814,000
           Other assets, primarily goodwill                     2,705,000
                                                           --------------
                                                                5,381,000
                                                           --------------
           Accounts payable and accrued expenses                1,234,000
           Debt                                                 3,147,000
                                                           --------------
                                                                4,381,000
                                                           --------------
           Net assets                                      $    1,000,000
                                                           ==============


                                       56

<PAGE>


NOTE 4 - Inventories

Inventories consist of the following at December 31:

                                              2001              2000
                                         --------------    --------------

        Raw materials                    $    1,421,000    $    1,480,000
        Valuation allowance                  (1,071,000)         (733,000)
                                         --------------    --------------

                                         $      350,000    $      747,000
                                         ==============    ==============



NOTE 5 - Property and Equipment

Property and equipment consists of the following at December 31:

                                                    2001              2000
                                            --------------    --------------

       Machinery and equipment              $    1,003,000    $      998,000
       Furniture and fixtures                      140,000           139,000
                                            --------------    --------------
                                                 1,143,000         1,137,000
       Accumulated depreciation
         and amortization                         (730,000)         (636,000)
       Impairment reserves                        (258,000)         (257,000)
                                            --------------    --------------

                                            $      155,000    $      244,000
                                            ==============    ==============



Depreciation and amortization expense for property and equipment for the years
ended December 31, 2001, 2000 and 1999 was $94,000, $175,000 and $398,000,
respectively.


NOTE 6 - ColorMate(R) Units

In 1999, the Company executed a distribution agreement with Datex-Ohmeda, Inc.
and its Ohmeda Medical Division ("DO") Other than the original sales to DO in
1999 of $1,075,000, there have been minimal sales in 2000 and 2001.



                                       57

<PAGE>


NOTE 6 - ColorMate(R) Units  (continued)

The agreement called for the Company to provide a certain number of Systems to
DO at no cost until sold to serve as demo units or promotional units to assist
in the sales and marketing of the Systems. The Company maintains title of
certain of these Systems, while DO obtained ownership of the other Systems. The
Company had classified $329,000 in property and equipment, representing the cost
of the Systems for which it maintains title, and had classified $506,000 in
other amortizable assets, representing the cost of the remaining Systems
(intangible asset associated with obtaining the agreement with DO). The amount
classified in other amortizable assets was being amortized over the life of the
DO Agreement, 5 years. Given the poor level of sales to date, the Company wrote
off the balance of these capitalized costs ($612,000) in the fourth quarter of
2000 (see Note 18).

In connection with the termination of a license agreement in 1991, the Company
received 1,947 units of color measurement instruments and related equipment, the
majority of which 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.

Due to the lack of sales of the ColorMate(R) TLcoBiliTest(R) Systems, the
Company took an impairment charge in the fourth quarter of 2000 of $315,000 (see
Note 18). The net amount capitalized at December 31, 2000 totaled $300,000 which
was written off as an impariment charge in the fourth quarter of 2001.


NOTE 7 - Severence liability

In 2001, the Company terminated 30 of its employees. Some of these employees
have employment contracts that provide for severance and other payments upon the
termination of employment or breach in such contracts. Accordingly, the Company
recorded a $775,000 liability to these employees for additional amounts due to
them. As of December 31, 2001, $50,000 of this provision has been utilized via
payments by an officer of the Company, which is included in due to related
parties. The Company expects to pay $200,000 of the remaining $725,000 accrual
if and when the Company receives net proceeds from the sale of the exclusive
rights to its medical technology for monitoring infant jaundice of at least
$2,000,000. The Company expects to further pay all or part of the remaining
$525,000 accrual if and when the Company raises additional capital or receives
net proceeds from the sale of the exclusive rights to its medical technology for
monitoring infant jaundice of at least $5,000,000.



NOTE 8 - Notes payable

During the year ended December 31, 2001 the Company received $1,699,000 through
the issuance of notes payable, including $250,000 to an officer/stockholder. The
officer/stockholder paid $250,000 on behalf of the Company to another
officer/stockholder resulting from a change in control of the Company. The
change in control was deemed to occur in form when the chief executive officer
(who paid the $250,000) changed positions from CEO to Chairperson. The notes
bear interest at rates ranging from 6% to 14% and are due in one year. In
connection with the financing, the Company issued 26,750,000 warrants (including
7,250,000 to the finder and 2,000,000 to an officer/stockholder) exercisable at
$0.10 per share and 6,500,000 warrants exercisable at $0.06 per share. All of
the warrants have a five-year life. The fair market value of the warrants issued
to the investors amounted to $1,181,000 determined using the Black-Scholes
option pricing model. The fair market value of these warrants issued in
connection with debt has been recorded as deferred financing costs and is being
amortized over the life of the relative debt. For the year ended December 31,
2001, approximately $527,000 was charged to non-cash financing costs relating to
the amortization of the deferred financing costs.



                                       58

<PAGE>


NOTE 9 - Income Taxes

The Company had a deferred tax asset at December 31, 2001 and 2000 of
approximately $22,711,000 and $19,500,000 related primarily to net operating
loss and tax credit carryforwards. The deferred tax asset has been offset by a
valuation allowance, which increased by $3,211,000 in 2001 , since their
realizability cannot be determined. At December 31, 2001, the Company had net
operating loss carryforwards of approximately $56,652,000 for Federal income tax
purposes which expire through 2021. In addition, the Company had research and
development tax credit carryforwards of approximately $50,000 at December 31,
2001 available to offset future Federal income taxes. The utilization of such
net operating loss and tax credit carryforwards may be severely limited due to
past and future changes in control, including stock issuances.

NOTE 10 - Senior Convertible Debentures

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 were 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) was not convertible until after the
first anniversary of the closing (except for 20%, which was immediately
convertible). At that time, the Debentures were convertible into shares of
common stock, at the option of the holder or holders thereof, at the conversion
price of $5.00. At any time after the 18-month anniversary of the closing, the
Company could have prepaid 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 Small Cap 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 could have required 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. The Debentures resulted in an original
issue discount charge of approximately $3,600,000 (representing the intrinsic
value of the below-market conversion price) which was amortized over one year.
In 1999, the Company amortized $2,700,000 and, in 2000, the balance of $900,000
was amortized. This debt was converted to preferred stock in 2000 (see Note 12).

NOTE 11 -  Preferred Stock

[a] Class A Preferred Stock

The Company's shares of Class A convertible preferred stock expired in 2001,
however, the shares were not redeemed (1,380,000 shares at $0.01) due to the
Company's financial difficulties. The redemption amount of $14,000 was
reclassified as due to related parties as it is due to an officer/stockholder.


                                       59

<PAGE>


NOTE 11 - Preferred Stock (continued)

[b]  Class B Preferred Stock

     The Company also has authorized 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.

     The Company has outstanding the following series of Class B preferred stock
     at December 31:

<TABLE>
<CAPTION>
                                             2001                               2000
                                 --------------------------------   -------------------------------
                                                    Carrying                           Carrying
                                     Shares          Amount            Shares           Amount
                                 ------------    ----------------   ------------    ---------------

<S>                 <C>                <C>       <C>                      <C>       <C>
             Series 2                  25,000    $      2,556,000         25,000    $     2,263,000
             Series 3                  40,000           3,155,000         40,000          3,155,000
             Series 4                     136           1,230,000            136          1,230,000
             Series 5                  48,633           4,863,000         48,633          4,863,000
                                 ------------    ----------------   ------------    ---------------

                                      113,769    $     11,804,000        113,769    $    11,511,000
                                 ============    ================   ============    ===============
</TABLE>



     Class B Series 1 Preferred Stock

     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.


                                       60

<PAGE>


NOTE 11 - Preferred Stock (continued)

[b] Class B Preferred Stock (continued)

     Class B Series 1 Preferred Stock  (continued)

     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.

     Class B Series 2 Convertible Preferred Stock

     On June 15, 1999, the Company completed a private placement of 40,000
     shares of convertible preferred stock and warrants to purchase 220,690
     shares of common stock to a private investor for aggregate proceeds of
     $4,000,000. The shares of Class B Series 2 convertible preferred stock
     issued on that date (the "Series 2 Shares") are convertible into shares of
     the Company's common stock at a price, as adjusted, of $4.68 per share,
     subject to additional adjustment for stock splits, combinations and similar
     recapitalizations affecting the Company's common stock and in certain
     circumstances including the issuance of shares of the Company's common
     stock. The Series 2 Shares were previously redeemable in cash for an amount
     equal to $115 per Series 2 Share on the third anniversary of the date of
     initial issuance if not sooner converted unless the Company elects in the
     Company's discretion to extend the redemption date to the fifth anniversary
     of the date of initial issuance. As a result of a capital restructuring
     program completed on October 31, 2000 (see Note 12), the Series 2 Shares
     are no longer redeemable in cash. Accordingly, the amount was classified
     within equity in the fourth quarter of 2000. The Series 2 Shares are
     subject to mandatory conversion into shares of the Company's common stock
     at the Company's option at any time after December 15, 1999 if the average
     closing bid price of the Company's common stock for ten consecutive trading
     days equals or exceeds $7.02 per share. The Series 2 Shares are not
     entitled to any voting rights except as otherwise required by applicable
     law and are not entitled to any dividend rights unless the Company elects
     to extend the redemption date of the fifth anniversary of the date of
     initial issuance, in which case noncash dividends (which increase the
     number of shares issuable upon redemption ) would accrue at the rate of 8%
     from and after the third anniversary of the date of initial issuance which
     can only be paid in shares of the Company's common stock.


                                       61

<PAGE>


NOTE 11 - Preferred Stock (continued)

[b] Class B Preferred Stock (continued)

     In addition to the Series 2 Shares, on June 15, 1999, the Company also
     issued an aggregate of 270,690 warrants to purchase shares of the Company's
     common stock to the same private investor. The warrants issued on that date
     have a five-year term unless sooner exercised. The warrants are exercisable
     for shares of the Company's common stock at a price, as adjusted, of $4.68
     per share, subject to additional adjustment in the same circumstances as
     the Series 2 Shares described above and are subject to mandatory exercise
     into shares of the Company's common stock at the Company's option at any
     time after December 15, 1999 if the average closing bid price of the
     Company's common stock measured over twenty consecutive trading days equals
     or exceeds $9.36.

     The private placement resulted in a deemed dividend charge of approximately
     $4,505,000, resulting from a below market conversion price of preferred
     stock ($2,430,000), a $15 per share redemption premium ($600,000) and
     financing costs ($200,000) and the fair value (using the Black-Scholes
     method) of warrants issued in connection with the private placement
     ($1,275,000). Of this amount, approximately $1,559,000 had been charged
     through December 1999. $293,000 and $1,772,000 were reflected as deemed
     dividends in 2001 and 2000, respectively. In 2000, 15,000 Series 2 Shares
     were converted into 238,473 shares of the Company's common stock. Of the
     original deemed dividend charge, $562,000 has been eliminated as a result
     of the conversion.

     Class B Series 3 Convertible Preferred Stock

     On February 11, 2000, the Company completed a private placement of 40,000
     shares of convertible preferred stock to the above private investor for
     aggregate proceeds of $4,000,000. The shares of Class B Series 3
     convertible preferred stock issued on that date (the "Series 3 Shares") are
     convertible into shares of the Company's common stock at a price, as
     adjusted, of $4.68 per share, subject to additional adjustment for stock
     splits, combinations and similar recapitalizations affecting the Company's
     common stock and in certain circumstances including the issuance of shares
     of the Company's common stock. The Series 3 Shares were previously
     redeemable in cash for an amount equal to $115 per Series 3 Share on the
     third anniversary of the date of initial issuance if not sooner converted
     unless the Company elects in the Company's discretion to extend the
     redemption date to the fifth anniversary of the date of initial issuance.
     As a result of the capital restructuring program completed on October 31,
     2000 (see Note 12), the Series 3 Shares are no longer redeemable in cash.
     Accordingly, the amount was classified within equity in the fourth quarter
     of 2000.The Series 3 Shares are subject to mandatory conversion into shares
     of the Company's common stock at the Company's option at any time after
     August 11, 2000 if the average closing bid price of the Company's common
     stock for ten consecutive trading days equals or exceeds $7.02 per share.
     The Series 3 Shares are not entitled to any voting rights except as
     otherwise required by applicable law and are not entitled to any dividend
     rights unless the Company elects to extend the redemption date to the fifth
     anniversary of the date of initial issuance, in which case noncash
     dividends (which increase the number of shares issuable upon redemption)
     would accrue at the rate of 8% from and after the third anniversary of the
     date of initial issuance which can only be paid in shares of the Company's
     common stock.


                                       62

<PAGE>


NOTE 11 - Preferred Stock (continued)

[b] Class B Preferred Stock (continued)

     Class B Series 3 Convertible Preferred Stock  (continued)

     In addition to the Series 3 Shares, on February 11, 2000, the Company also
     issued an aggregate of 304,372 warrants to purchase shares of the Company's
     common stock to the same private investor. The warrants issued on that date
     have a five-year term unless sooner exercised. The warrants are exercisable
     for shares of the Company's common stock at a price, as adjusted, of $4.68
     per share, subject to additional adjustment in the same circumstances as
     the Series 3 Shares described above and are subject to mandatory exercise
     into shares of the Company's common stock at the Company's option at any
     time after August 11, 2000 if the average closing bid price of the
     Company's common stock measured over twenty consecutive trading days equals
     or exceeds $9.36.

     The private placement resulted in a deemed dividend charge of approximately
     $3,535,000, resulting from a below market conversion price of preferred
     stock ($1,495,000), a $15 per share redemption premium ($600,000) and
     financing costs ($390,000) and the fair value (using the Black-Scholes
     method) of warrants issued in connection with the private placement
     ($1,050,000). $0 and $2,090,000 were reflected as deemed dividends in
     2001 and 2000, respectively.

     Class B Series 4 Convertible Preferred Stock

     On October 31, 2000, the Company consummated a private placement of 200
     shares of a new series of preferred stock, designated Class B Series 4
     convertible preferred stock, par value $.01 per share ("Series 4 Preferred
     Stock") for an aggregate purchase price of $2,000,000. Pursuant to the
     Stock Purchase Agreement between the Company and Crescent International
     Ltd. (the "Purchaser"), the Company also issued to the Purchaser a warrant
     (the "Incentive Warrant"), the terms of which provide that the Purchaser
     has the right to acquire up to 270,000 shares of the Company's common stock
     at an exercise price equal to $1.00 per share, subject to adjustment in
     certain circumstances, for a five-year period.

     The Series 4 Preferred Stock will, with respect to the distribution of
     assets on liquidation, dissolution or winding up of the Company, rank (i)
     senior and prior to the common stock of the Company and any other class or
     series of capital stock of the Company hereafter issued, the terms of which
     specifically provide that shares of such class or series shall rank junior
     to shares of the Series 4 Preferred Stock (ii) on parity with any other
     class or series of capital stock of the Company hereafter issued, the terms
     of which specifically provide that shares of such class or series shall
     rank on parity with shares of the Series 4 Preferred Stock, and (iii)
     junior to the Class A preferred stock and any other class or series of
     capital stock of the Company hereafter issued, the terms of which
     specifically provide that shares of such class or series shall rank senior
     to shares of the Series 4 Preferred Stock.


                                       63

<PAGE>


NOTE 11 - Preferred Stock (continued)

[b] Class B Preferred Stock (continued)

     Class B Series 4 Convertible Preferred Stock  (continued)

     At any time after October 31, 2002, any or all of the outstanding shares of
     Series 4 Preferred Stock will, upon written request of the holders of a
     majority of the issued and outstanding shares thereof, be subject to
     redemption by the Company for either, at the option of the Company, (i)
     $12,000 in cash per share or (ii) the number of shares of common stock
     obtained by dividing $12,000 by the lower of $.82 and 92% of the average of
     the lowest three consecutive closing bid prices of the common stock during
     the 22 trading day period immediately preceding the date that redemption is
     requested. In addition, subject to certain adjustments, each share of the
     Series 4 Preferred Stock will be convertible at any time at the option of
     the holder thereof into the number of shares of common stock determined by
     dividing $10,000 by the lower of $.82 and 92% of the average of the lowest
     three consecutive closing bid prices of the common stock during the 22
     trading day period immediately preceding the date that conversion is
     requested. The holder of shares of Series 4 Preferred Stock will have no
     voting rights and, if the Company fails to deliver certificates of shares
     of common stock upon redemption or conversion of the Series 4 Preferred
     Stock, will receive dividends at a rate of 8.0% per annum, payable in cash
     in quarterly installments.

     In December 2000, 64 of these shares were converted into 1,391,304 shares
     of common stock.

     Class B Series 5 Convertible Preferred Stock

     Pursuant to a letter agreement, the Company and the holders agreed to
     convert the entire principal amount of the Debentures (see Note 10), and
     any accrued but unpaid interest thereon, into a newly-authorized series of
     convertible preferred stock of the Company (the "New Preferred"), effective
     October 31, 2000. Prior to their conversion, the Debentures had a principal
     face amount of $5,000,000, accrued but unpaid interest in the amount of
     $1,079,167 and were due on April 15, 2002. the Company and the holders
     further agree that (i) the New Preferred would be convertible into shares
     of common stock at a conversion price of $4.68 per share, subject to
     adjustment for stock splits, combinations and similar recapitalizations
     affecting the common stock, (ii) with respect to the distribution of assets
     on the liquidation, dissolution or winding up of the Company, the New
     Preferred shall rank senior and prior to all classes or series of capital
     stock of the Company issued prior thereto or thereafter issued, (iii)
     cumulative dividends would accrue on the New Preferred beginning on April
     15, 2002 at a rate of 8% per annum (subject to increase to 11% per annum
     during any period in which such cumulative dividends are not currently
     paid), and (iv) the New Preferred would be subject to involuntary
     conversion into shares of common stock at the option of the Company at a
     conversion price of $4.68 per share if the average closing bid price of the
     Company's common stock for ten consecutive trading days exceeds $10.29. The
     Company also agreed with the holders (i) not to incur or permit any future
     liens on any of its properties or assets, (ii) not to grant any security
     interests in its future revenues and (iii) not to consummate any future
     financings which contemplate the issuance of debentures by the Company.

     In December 2000, 12,158 of these shares were converted into 259,786 shares
     of common stock.


                                       64

<PAGE>


NOTE 12 - Capital Restructuring Program

On October 11, 2000, the Company obtained commitments from three of its major
investors, Millennium Partners, L.P. ("Millennium") (see Note 13), LBI Group,
Inc. ("Lehman") (see Note 11(b) - Series 2 and 3) and the holders (the
"Holders") of its 14% senior convertible debentures, dated April 15, 1999 (the
"Debentures") (see Note 10) to restructure the terms of their respective
securities. The purpose of this restructuring was to assist the Company in
meeting the net tangible assets requirement for continued listings of its common
stock, on the NASDAQ Small Cap Market ("NASDAQ"). These commitments of the
investors were subject to certain conditions, which were subsequently satisfied
on October 31, 2000, including the Company's securing confirmation from NASDAQ
of the Company's eligibility for continued listing on NASDAQ and the closing of
a proposed additional financing with Crescent International Ltd. ("Crescent"),
pursuant to which the Company would issue and sell to Crescent, and Crescent
would purchase, shares of a newly-authorized series of preferred stock of the
Company (the "Crescent Preferred" and a five-year warrant to purchase up to
270,000 shares of Common stock at an exercise price equal to $1.00 per share,
subject to adjustment in certain circumstances (the "Crescent Warrants"), for an
aggregate purchase price of not less than $2,000,000 (see Note 11(b) - Series
4). In consideration of their agreements to restructure their respective
securities, the Company agreed to issue to each of Lehman and the Holders
200,000 five-year warrants to purchase shares of the common stock of the Company
at an exercise price of $1.50 per share (the "New Lehman Warrants" and the
"Holders' Warrants", respectively). The value of the warrants issued in this
restructuring program was deemed to be immaterial. The Company also agreed with
the holders (i) not to incur or permit any future liens on any of its properties
or assets, (ii) not to grant any security interests in its future revenues and
(iii) not to consummate any future financings which contemplate the issuance of
debentures by the Company.

Pursuant to a letter agreement (the "Millennium Letter Agreement"), the Company
and Millennium agreed to amend the Millennium Purchase Agreement and the
Adjustable Warrant to delete any provision granting Millennium the right to
require the Company to repurchase the Millennium Shares or redeem the Adjustable
Warrant Shares, as the case may be, for cash except in the event that the
Company (i) engages in a "Rule 13e-3 Transaction" (as defined in Rule 13e-3
under the Securities Exchange Act of 1934, as amended) or (ii) fails to file a
request to accelerate the effectiveness of the registration statement covering
the Millennium Shares and the shares underlying the warrants issued to
Millennium promptly after securing confirmation from NASDAQ of the Company's
eligibility for continued listing of the common stock on NASDAQ. The Company has
satisfied this condition by filing such acceleration of effectiveness on
November 3, 2000.

The Company and Millennium further agreed to amend the Adjustable Warrant (i) to
reduce the number of dates (each, a "Vesting Date") upon which the number of
shares to be issued upon the exercise of the Adjustable Warrant would be
determined from three to two, (ii) to postpone the first Vesting Date thereunder
(the "First Vesting Date") until March 31, 2001, at which time the number of
shares to be issued thereunder would be determined based on an Adjustment Period
Price of not less than $1.00 and, (iii) to postpone the second Vesting Date
thereunder (the "Second Vesting Date") until November 1, 2001, at which time the
number of shares to be issued thereunder (in addition to the number of shares
determined as of the First Vesting Date) would be determined based on an
Adjustment Period price which would not be subject to a $1.00 minimum (as was
the case on the First Vesting Date). The


                                       65

<PAGE>


NOTE 12 - Capital Restructuring Program (continued)

Company and Millennium also agreed (x) to amend that certain Registration Rights
Agreement, dated as of August 16, 2000, to eliminate the provisions imposing
monetary penalties upon the delisting of the common stock from NASDAQ, (y) to
waive any events of default occurring prior to the execution of the

Millennium Letter Agreement that would entitle Millennium to any monetary
penalties from the Company and (z) to irrevocably waive its rights to adjust the
exercise price of the Adjustable Warrant or the number of Adjustable Warrant
Shares as a result of the issuance of up to $4,000,000 of financing from the
Crescent Preferred.

Lehman is the holder of (i) 25,000 shares of the Class B Series 2 Convertible
Preferred Stock of the Company and 40,000 shares of the Class B Series 3
Convertible Preferred Stock of the Company (collectively, the "Lehman
Preferred") and (ii) warrants (the "Lehman Warrants") to purchase common stock
(see Note 11). Pursuant to a letter agreement, the Company and Lehman agreed to
amend those certain Preferred Stock Purchase Agreements, dated as of June 11,
1999 and February 11, 2000, respectively, to eliminate the provisions imposing
monetary penalties in the event that the common stock is delisted from NASDAQ.

The Company and Lehman further agreed to amend the Certificate of Incorporation
of the Company to delete any provision granting Lehman the right to require the
Company to redeem the shares of Lehman Preferred for cash. Pursuant to such
amendments, the Company is now required to convert the shares of Lehman
Preferred into Common stock on the third anniversary of their respective
issuance dates unless the Company elects, at its option, to extend the mandatory
conversion date to the fifth anniversary of the respective issuance dates of the
shares of Lehman Preferred. Lehman further agreed to waive its right to decrease
the conversion price of the Lehman Preferred and the exercise price of the
Lehman Warrants as a result of (i) the issuance of the Crescent Preferred and
the Crescent Warrant on October 31, 2000 for aggregate proceeds of $2,000,000 or
any further issuances of preferred stock or warrants to Crescent which do not
exceed an additional aggregate purchase price of $2,000,000, (ii) the issuance
of warrants to the Company's financial adviser in connection with the Crescent
Financing, (iii) the issuance of the New Lehman Warrants and the Holders'
Warrants and (iv) the determination on the First Vesting Date of the number of
shares of Common stock issuable with respect to the Adjustable Warrant. In
addition, Lehman agreed (A) that the deemed exercise price (the "Deemed Exercise
Price") with respect to the number of shares of Common stock issuable pursuant
to the Adjustable Warrant on the Second Vesting Date would be the greater of (i)
$1.00 and (ii) the exercise price calculated in the manner set forth in that
certain letter agreement, dated as of August 16, 2000, by and between the
Company and Lehman, and (B) to waive its right to decrease the conversion price
of the Lehman Preferred and the exercise price of the Lehman Warrants to a price
which is less than the Deemed Exercise Price.

Pursuant to a letter agreement, the Company and the Holders agreed to convert
the entire principal amount of the Debentures, and any accrued but unpaid
interest thereon, into a newly-authorized series of convertible preferred stock
of the Company (the "New Preferred"), effective October 31, 2000. Prior to their
conversion, the Debentures had a principal face amount of $5,000,000, accrued
but unpaid interest in the amount of $1,079,167 and were due on April 15, 2002.
The Company and the holders further agreed that (i) the New Preferred would be
convertible into shares of Common stock at a conversion price of $4.68 per
share, subject to adjustment for stock splits, combinations and similar


                                       66

<PAGE>


NOTE 12 - Capital Restructuring Program (continued)

recapitalizations affecting the Common stock, (ii) with respect to the
distribution of assets on the liquidation, dissolution or winding up of the
Company, the New Preferred shall rank senior and prior to all classes or series
of capital stock of the Company issued prior thereto or thereafter issued, (iii)
cumulative dividends would accrue on the New Preferred beginning on April 15,
2002 at a rate of 8% per annum (subject to increase to 11% per annum during any
period in which such cumulative dividends are not currently paid) and (iv) the
New Preferred would be subject to involuntary conversion into shares of Common
stock at the option of the Company at a conversion price of $4.68 per share if
the average closing bid price of the Company's Common stock for ten consecutive
trading days exceeds $10.29. The Company also agreed with the holders (i) not to
incur or permit any future liens on any of its properties or assets, (ii) not to
grant any security interests in its future revenues and (iii) not to consummate
any future financings which contemplate the issuance of debentures by the
Company.

NOTE 13 - Sale of Common stock

On August 16, 2000, the Company sold 641,026 shares of Common stock to
Millennium at a price per share of $4.68 for gross proceeds of $3,000,000, less
fees and expenses ("first closing"). In connection with the above transaction,
the Company issued to the investor 150,000 warrants to purchase Common stock at
an exercise price of $5.26 per share. Pursuant to the purchase agreement for the
above transaction, the Company issued to the private investor an "Adjustable
Warrant" pursuant to which the number of shares issuable upon the exercise
thereof, at $.001 per share, (the "Adjustable Warrant Shares") is based upon a
formula involving closing bid prices of the Common stock on certain future
dates, as amended. Prior to the amendment of the purchase agreement (see Note
12), the private investor had the right to require the Company to repurchase for
cash the shares and Adjustable Warrant Shares issued to the private investors
under certain defined conditions. Accordingly, at September 30, 2000, the
Company recorded the net proceeds of $2,815,000 as redeemable Common stock. As a
result of the amendment, which eliminated the cash requirement, the amount has
been classified in Common stock in the fourth quarter of 2000. In connection
with two partial exercises of the Adjustable Warrant, 1,933,348 shares of common
stock were issued in 2001.

Also in 2000, the Company sold 79,491 shares of common stock and, as adjusted,
118,726 warrants exercisable at $4.68 per share for $500,000.

NOTE 14 - Stock Options and Warrants

[a] Stock Option Plan

     The Company has a Stock Option Plan which currently provides for options to
     purchase up to 6,500,000 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 nonincentive 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.


                                       67

<PAGE>


NOTE 14 - Stock Options and Warrants  (continued)

[a] Stock Option Plan  (continued)

     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 2001 and 2000:

<TABLE>
<CAPTION>
                                                            2001           2000           1999
                                                           ------         ------         ------

<S>                                                        <C>            <C>            <C>
         Dividend yield                                       0%             0%             0%
         Expected volatility                                101%            73%            46%
         Risk-free interest rate                              5%          5%-7%          5%-7%
         Expected life (in years)                           4.31           6.64           2.25

         Weighted average grant date fair value of
              stock options granted during the year        $0.13          $3.83          $2.23
</TABLE>

     The Company granted 366,000 options (with exercise prices of $1.50 to
     $1.75) to terminated employees in 2001 and recorded severance expense of
     $20,000 for the estimated fair value. Additionally the Company modified
     470,000 vested options in 2001 (with exercise prices of $2.75 to $7.88)
     such that the options would not expire as a result of termination of
     employment. The life of 100,000 of these options was also extended. The
     Company will reflect compensation for the modification of these options
     upon exercise. The modified options are included in options granted and
     options forfeited in 2001 in the table below and are reflected in the
     weighted average grant date fair value of 2001 grants.

     The Company applies APB No. 25 in accounting for stock options granted to
     employees and accordingly, no compensation expense has been recognized for
     such grants in the consolidated financial statements. If compensation cost
     for the employee grants had been determined using the fair value method
     prescribed by SFAS No. 123, the net loss attributable to common
     stockholders and the net loss per common share would have been adjusted to
     the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                  2001                2000               1999
                                                            --------------     -----------------  -----------------
     Net loss attributable to common stockholders
<S>                                                         <C>                <C>                <C>
        As reported                                         $  (8,211,000)     $    (23,396,000)  $    (14,366,000)
        Pro forma                                              (8,663,000)          (23,893,000)       (14,487,000)

     Basic and diluted loss per common share
        As reported                                             $ (0.41)           $ (1.40)           $ (0.93)
        Pro forma                                                 (0.44)             (1.43)             (0.94)
</TABLE>



     The following table summarizes information about stock options outstanding
at December 31, 2001:

<TABLE>
<CAPTION>
                                     Options outstanding                    Options exercisable
                          -------------------------------------------   ----------------------------
                                           Weighted
                                            Average         Weighted                      Weighted
                                           Remaining        Average                       Average
       Range of            Number         Contractual       Exercise        Number         Exercise
   Exercise Prices       Outstanding     Life (Years)        Price       Exercisable        Price
   ---------------      -------------    -------------     ----------   -------------    ----------
<S>        <C>              <C>               <C>           <C>               <C>           <C>
   $1.02 - $2.92            1,467,000         4.74          $2.41             966,000       $2.88
   $2.96 - $5.63            1,039,000         3.93           5.19             856,000        5.23
   $6.84 - $8.25              505,000         1.33           7.67             465,000        7.74
   $9.25 - $9.71              260,000         2.35           9.41             243,000        9.41
                      ---------------         ----           ----       -------------       -----
                            3,271,000         3.77          $4.66           2,530,000       $5.20
                      ===============         ====          =====       =============       =====
</TABLE>



                                       68

<PAGE>


NOTE 14 - Stock Options and Warrants (continued)


[a] Stock Option Plan (continued)

     Transactions under the Stock Option Plan are summarized as follows:

<TABLE>
<CAPTION>
                                                     2001                          2000                         1999
                                          --------------------------   --------------------------    -------------------------
                                                           Weighted                     Weighted                      Weighted
                                                           Average                       Average                       Average
                                                           Exercise                     Exercise                      Exercise
                                              Shares        Price         Shares          Price          Shares         Price
                                           -----------    ----------   -------------    ---------    -------------    --------

<S>                                          <C>             <C>          <C>             <C>           <C>            <C>
     Outstanding at beginning of year        3,285,000       $5.24        3,146,000       $5.14         3,111,000      $5.08
     Granted                                   946,000        3.67          468,000        5.75           160,000       6.20
     Exercised                                                             (138,000)       3.00           (63,000)      5.39
     Forfeited                                (960,000)       5.68         (191,000)       6.98           (62,000)      4.47
                                          ------------                 ------------      ------      ------------     ------

     Outstanding at end of year              3,271,000        4.66        3,285,000        5.24         3,146,000       5.14
                                          ============                 ============      ======      ============     ======

     Exercisable at end of year              2,530,000        5.20        2,446,000        5.00         2,063,000       4.42
                                          ============                 ============      ======      ============     ======
</TABLE>

     The Company granted options to consultants and certain other professionals
     who provide services to the Company. These options have been valued in
     accordance with SFAS 123 and are being expensed over the vesting period of
     the options. The amounts expensed in 2001 and 2000 amounted to $0 and
     $690,000, respectively. The activity for these options is included in the
     table above.

[b]  Warrants

     At December 21, 2001 the Company had the following warrants outstanding:

<TABLE>
<CAPTION>
       Year                                        Exercise
     Granted                Amount                  Price           Expiration      Reason for Grant
------------------     -----------------         ------------      ------------     ----------------------------
<S>                    <C>                          <C>               <C>          <C>
       2001                  26,750,000              $0.10             2006         Notes payable
       2001                   6,500,000               0.06             2006         Notes payable
       2001                     417,000               0.10             2006         Advances from investor
       2000                     304,000               4.68             2005         Preferred Stock
       2000                     270,000               1.00             2005         Preferred Stock
       2000                     180,000               5.26             2005         Common Stock
       2000                     119,000               4.68             2005         Common Stock
       2000                     400,000               1.50             2005         Capital restructuring
       2000                     299,000               4.68             2005         Other
       1999                     271,000               4.68             2004         Preferred Stock
       1995                     430,000               1.67             2002         Various financings
                       ----------------
                             35,940,000
                       ================
</TABLE>

     At December 31, 2001 all of the other warrants included in the above table
     are exercisable. However, the underlying shares of the warrants issued in
     2001 will not be able to be sold until after such shares are registered.


                                       69

<PAGE>


NOTE 14 - Stock Options and Warrants (continued)

[b]  Warrants (continued)

     Not included in the above table are the warrants issued in connection with
     the Gordon disposal (see Note 3) or the Adjustable Warrant issued in
     connection with the sale of common stock (see Note 13) since the number
     that will vest is not determinable. With respect to the Gordon disposal,
     warrants to purchase either 2,000,000 shares of Common stock at $0.50 per
     share or warrants to purchase 11,200,000 shares of Common stock at $.10 per
     share and 4,800,000 shares at $0.001 per share will vest.

     The table above excludes the number of common shares issuable in the future
     from the Adjustable Warrant, which would have been 108,129,000 at December
     31, 2001. The following table illustrates a range of additional shares of
     Common stock that would be issuable at $.001 per share. The number of
     shares issuable is adjusted using a formula based on the average of the ten
     lowest per share market values over the previous 40 trading days prior to
     the exercise date (the "Adjustment Period Price").

                     Adjustment Period
                           Price                Shares issuable
                   ----------------------    ---------------------
                        $0.01                      222,099,000
                         0.02                      110,843,000
                         0.06                       36,672,000
                         0.10                       21,838,000
                         0.50                        4,037,000
                         1.00                        1,811,000


However, the related financing agreement (see Note 13) provides that the holder
will not elect to convert more shares than would cause their ownership of shares
yet unsold to exceed 4.99% of the total then issued and outstanding shares.

The Company received advances of $25,000 from an investor in 2001, which may be
converted into 417,000 shares of common stock and 417,000 warrants. Each of the
warrants is exercisable at $0.10 into a share of commmon stock and an additional
warrant exercisable at $0.15. The table of outstanding warrants includes the
417,000 warrants that were outstanding at December 31, 2001. The other 833,000
shares issuable (pending registration) are reflected separately in the table in
Note 1(l).

NOTE 15 - Segment Information

Since the Company's consolidated financial statements no longer include the
operations of Gordon as a result of the sale in July 2001, the Company only
operates in one business segment.

NOTE 16 - Related Party

The Company paid rent of approximately $35,000 per year to an officer under
month-to-month leases, representing the same cost of the lease to the officer.


                                       70

<PAGE>


NOTE 17 - Commitments and Other Matters

[a]  Leases

     The Company leases its office and warehouse space on a month-to-month
     basis. Rent expense under these leases totaled $335,000 and $383,000 in
     2001 and 2000, respectively.

[b]  Retirement plan

     In 1997, the Company adopted a defined contribution plan, which provided
     for discretionary Company contributions for qualified employees. There was
     no expense relating to this plan in 2001, 2000 or 1999.

[c] Legal proceedings

     In April 2000 the United States District Court for the Southern District of
     New York dismissed three putative class actions that had been filed against
     the Company and certain of its officers and directors.

     In January 2001, a lawsuit was commenced against the Company and Darby
     Macfarlane, its Chairperson and a principal shareholder, in the federal
     district court for the Southern District of New York entitled Richard
     Sommers and Linda Sommers v. Chromatics Color Sciences International, Inc.
     and Darby Macfarlane. The plaintiffs allege that certain statements
     purportedly made by or on behalf of the Company concerning the Company's
     success, the extent of use of the ColorMate System and the Company's cash
     flow constituted violations of the Securities Exchange Acts as well as
     common law claims alleging fraudulent misrepresentation, concealment and
     nondisclosure and seek unspecified damages in an amount to be proven at
     trial. In March 2001, the defendants moved to dismiss the complaint for
     failure to state a claim upon which relief can be granted, for failure to
     plead fraud with requisite particularity and for failure to comply with the
     statutory requirement for federal securities fraud claims. Oral argument
     was held before the Court in January 2002 and the court entered an order
     granting the defendants' motion and dismissing the case without prejudice,
     but with leave for the plaintiffs to refile. A second amended complaint was
     filed in February 2002 and the defendants intend to vigorously defend this
     action. The Company's financial statements do not include any provision for
     the outcome of this matter.


[d]  Royalty arrangement

     A consultant, who is a member of the Company's Medical Advisory Board, is
     entitled to receive a royalty of 2% of the selling price less the cost of
     manufacturing of any device sold by the Company.

[e]  Employment agreements

     The Company has employment agreements with its officers that provide for
     payments in connection with termination and a change in control, which
     could have a material adverse effect on the Company.


                                       71

<PAGE>


NOTE 18 - Fourth Quarter Charges

In the fourth quarter of 2001 and 2000, in light of the serious liquidity and
other problems at the Company and because of the lack of viable levels of sales
of its medical equipment, the Company recorded the following impairment charges
and write-offs:

                                                    2001               2000
                                              --------------     --------------

    Inventory (included in
      cost of sales in 2000)                  $      338,000     $      733,000
    Property and equipment                                              258,000
    Net assets of Gordon (charged
      to discontinued operations)                                     5,276,000
    Patent costs                                     647,000            581,000
    Software costs                                    53,000
    Other assets                                     300,000            315,000
    Other intangibles                                                   354,000
                                              --------------     --------------

                                              $    1,338,000     $    7,517,000
                                              ==============     ==============


Also in the fourth quarter of 2000, the Company recorded an additional deemed
dividend of $2,325,000 relating to the adoption of EITF 00-27 (see Note 1).

NOTE 19 - Subsequent Events

[a]  Financing

     Subsequent to December 31, 2001 the Company received $400,000 in connection
     with the issuance of notes payable. The notes bear interest at 6% per annum
     and are due in one year. In connection with the debt the Company issued an
     aggregate of 19,533,000 warrants with an exercise price of $0.02 per share.
     The estimated fair value of these warrants will be reflected as deferred
     financing costs, which will be charged to expense over the term of the
     notes.


                                       72

<PAGE>


NOTE 20 - Quarterly Financial Information (Unaudited)

     Unaudited quarterly financial information for the two years ended December
31, 2001 is summarized as follows:

<TABLE>
<CAPTION>
                                       1st Quarter           2nd Quarter          3rd Quarter          4th Quarter
2001
<S>                                 <C>                   <C>                   <C>                  <C>
      Net sales                     $            0        $            0        $        6,000       $       2,000
      Gross profit/(loss)                        0                     0                     0                   0
      Net loss                          (3,616,000)             (946,000)           (1,057,000)         (2,299,000)
      Loss per share attributable
         to common stockholders              (0.20)                (0.06)                (0.07)              (0.12)

<CAPTION>
2000
<S>                                         <C>                  <C>                 <C>                 <C>
      Net sales                             39,000                41,000                     0                   0
      Gross profit/(loss)                   18,000                35,000                     0            (733,000)
      Net loss                          (3,429,000)           (2,959,000)           (3,023,000)        (10,085,000)
      Loss per share attributable
         to common stockholders              (0.26)                (0.20)                (0.19)              (0.75)

</TABLE>

The quarterly financial information has been revised to reflect the following:

                                                    Quarter ended
                                             -----------------------------
                                             March 31, 2001  June 30, 2001
                                             --------------  -------------

      Net loss as previously reported         $(4,031,000)      $(995,000)
      Additional compensation cost relating
        to terminated employees                   (45,000)
      Adjustment to loss from
        discontinued operations                   460,000        (710,000)
      Gain on disposal of Gordon                                  759,000
                                              ------------      ----------
      Net loss, as revised                    $(3,616,000)      $(946,000)
                                              ============      ==========


NOTE 21 -Valuation Reserves

The Company had the following valuation reserves:

<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                               ---------------------------------
                                                                   2001                  2000
                                                               --------------      -------------
<S>                                                            <C>                 <C>
    (a)   Inventory reserve
                Balance, January 1                             $      733,000      $           -
                Additions (see Note 18)                               338,000            733,000
                                                               --------------      -------------
                Balance, December 31                           $    1,071,000      $     733,000
                                                               ==============      =============
    (b)   Goodwill and other intangible assets
                Balance, January 1                                                 $           -
                Additions/deletions (see Note 18)                                      6,784,000
                                                                                   -------------
                Balance, December 31                                               $   6,784,000
                                                                                   =============
</TABLE>