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                     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, 1999

/_/ Transition report under Section 13 or 15(d) of the Securities Exchange Act
    of 1934

For the transition period from ____________________ to ____________________


                         Commission file number 0-21168
--------------------------------------------------------------------------------
                  CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
             (Exact Name of Registrant as Specified in Its Charter)

<TABLE>
<CAPTION>

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

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

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

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

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

                    Common Stock, par value $0.001 per share

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

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

                                    Yes X   No
                                       ---    ----

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

         As of March 23, 2000, 15,901,403 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
$88,268,894.
--------------------------------------------------------------------------------

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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"
BELOW AT PAGES 14 TO 25, WHICH COULD CAUSE ACTUAL EVENTS OR THE ACTUAL FUTURE
RESULTS OF THE COMPANY TO DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENT.
SUCH RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHER THINGS, THE AVAILABILITY OF
ANY NEEDED FINANCING, THE COMPANY'S ABILITY TO IMPLEMENT ITS BUSINESS PLAN FOR
VARIOUS APPLICATIONS OF ITS TECHNOLOGIES, INCLUDING MEDICAL AND INDUSTRIAL
APPLICATIONS, THE COMPANY'S ABILITY TO ENTER INTO AGREEMENTS WITH 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(Registered Trademark) System."

The Company has developed a ColorMate(Registered Trademark) device to measure
the incremental change of the yellow content of the skin color in newborns to
monitor newborn bilirubinemia (infant jaundice) (defined as bilirubin levels or
infant jaundice in a range above that which would be considered average in a
newborn). On July 30, 1997 the Company received U.S. Food and Drug
Administration ("FDA") clearance for commercial marketing of the
ColorMate(Registered Trademark) 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(Registered Trademark) TLc-BiliTest(Registered Trademark) System").
The Company's efforts are currently primarily focused on successfully
commercializing this medical application of its Intellectual Properties.

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 (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

                                        2

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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."

Prior to marketing the ColorMate(Registered Trademark) TLc-BiliTest(Registered
Trademark) System, the Company's activities principally involved licensing the
Intellectual Properties, leasing the ColorMate(Registered Trademark) System and
marketing its own line of precisely color coordinated proprietary cosmetics ("My
Colors by Chromatics (Registered Trademark)") 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 market commercially the ColorMate(Registered
Trademark) TLc-BiliTest(Registered Trademark) System for medical application,
the Company has not initiated any new relationships to distribute its Beauty-Aid
Products. Once the ColorMate(Registered Trademark) TLc-BiliTest(Registered
Trademark) System has achieved sufficient commercial distribution, the Company
will renew its efforts for commercial distribution of its Beauty-Aid Products.

Current Products

The Company has developed the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) 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 (Registered Trademark)
TLc-BiliTest(Registered Trademark) 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
FDA-cleared device includes the ColorMate(Registered Trademark) 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,
optional computer assisted device. (This device together with the Company's
disposable calibration components is hereafter referred to as the
"ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System.")
The ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) 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(Registered Trademark) TLc-BiliTest(Registered Trademark) System on
different physical sites of the newborn for five to ten seconds. Accuracy of the
color measurements is ensured by the TLc-Lensette(Trademark), a proprietary
disposable color-calibration and verification standard 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(Registration Trademark) TLc-BiliTest(Registered Trademark) 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(Trademark) calibration
standards at $11.90 per unit or minimum monthly charges per use under a Managed
Use Program.

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.

In order to successfully market and sell its ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System for monitoring of newborn infant
jaundice globally, the Company must either develop an extensive marketing and
sales force or enter into arrangements with third

                                        3

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parties to market and sell this product in different territories and markets.
These arrangements could take the form of lease/license arrangements, marketing
and distribution arrangements, joint ventures or acquisitions. The Company's
strategy is to effect the sales and distribution of its ColorMate(Registered
Trademark) TLc-BiliTest(Registered Trademark) System through collaborative
distributors. The Company believes that by aligning with larger, more
established medical company distributors, in specific market segments and
territories, it can more effectively and quickly penetrate the medical
marketplace.

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 (Registered Trademark) TLc-BiliTest (Registered Trademark)
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 (Trademark) disposable standard that is used to calibrate
measurements taken by the ColorMate (Registered Trademark) TLc-BiliTest
(Registered Trademark) System. The terms of the agreement provide for minimum
purchases of ColorMate (Registered Trademark) System units and TLc-Lensette
(Trademark) 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. DO commenced marketing the ColorMate (Registered
Trademark) TLc-BiliTest (Registered Trademark) System in the third quarter of
1999 to hospitals and expects to launch the product to the home health care
market (in which the test is administered solely by a healthcare professional)
in the first quarter of 2000. Substantially all of the Company's sales in 1999
were from shipments under this agreement. There can be no assurance that the
Company will be able to successfully enter into additional marketing and sales
agreements with third parties on acceptable terms.

Prior to entering into the agreement with DO and in order to provide the
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System to
hospitals and physicians, and to expedite evaluation of the product by the
medical community, the Company implemented a series of significant steps to
increase awareness of its products in the medical community and to initiate its
own sales and servicing of the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System with United States physicians and
clinicians in hospitals.

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

In January 1999, the Company formed a five-person sales unit led by Dennis A.
McClinton, Vice President of Sales. Mr. McClinton has an 18-year background in
sales of fetal and neonatal intensive care unit monitoring products at Marquette
Medical Systems and heads a staff that averages ten years experience in that
field. The unit's initial responsibility was to commence sales activity of the
ColorMate (Registered Trademark) TLc-BiliTest (Registered Trademark) System and
to further commercialize sales in the medical markets working in concert with
distribution partners.

Regulatory Clearances.

In June 1996, the Company retained government regulatory consultants and legal
counsel to oversee compliance with applicable federal and state regulations for
commercialization of the ColorMate(Registered Trademark) TLc-BiliTest(Registered
Trademark) System, and for complying with any applicable European Community and
other foreign government requirements. The initial clinical studies conducted at
Mt. Sinai Hospital were completed with positive results and on November 14, 1996
the Company filed its application with the FDA for the medical application of
its technologies, specifically, the non-invasive monitoring of newborn 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. The "substantial equivalence" order states that the Company must
comply with all relevant statutes enforced by and regulations promulgated by the
FDA, including Quality System Regulation ("QSR") requirements, labeling, and the
statutory prohibitions against adulteration and misbranding. The order also
states that the system is a "Class II device" which may be subject to additional
"special controls." The Company intends to maintain substantial compliance with
any applicable requirements and any special controls for purposes of commercial
distribution.

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.

The Company believes a non-invasive instrument that monitors infant jaundice in
infants represents a significant improvement in patient care.

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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(Registered Trademark) TLc-BiliTest(Registered Trademark) System
for incremental changes in the yellow content of their skin color. Because the
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System can
provide effective 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 the procedures to obtain required international regulatory clearances
for its ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark)
System. 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(Registered) TLc-BiliTest(Registered Trademark) System.

Manufacturing

One element of the Company's business strategy is to outsource the production of
the components and final assembly of the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System and its TLc-Lensette(Trademark)
disposable calibration and verification standard to third-party manufacturers.
In November 1998, the Company reached an agreement with Nova Biomedical
Corporation for the production of the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) 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 the 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(Registered Trademark) TLc-BiliTest(Registered Trademark)
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(Registered Trademark) TLc-BiliTest(Registered Trademark) 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(Registered Trademark) TLc-BiliTest(Registered
Trademark) 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 and began to invoice the first substantial revenues for
the Company from the sale of its medical products.

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

To the extent the Company successfully markets the ColorMate(Registered
Trademark) TLc-BiliTest(Registered Trademark) System for medical application,
the Company will use the nonproprietary and proprietary components of a portion
of the existing ColorMate(Registered Trademark) units in its possession for the
production of a limited number of such devices under the FDA's QSR and
ISO-9001/EN46001 for early stage marketing and sales efforts and for commercial
use.

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

                                        5

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Device is expected to require additional regulatory clearances or approvals.

Intellectual Properties, Patents and Patent Applications Pending

The Company owns U.S. Patent No. 4,909,632 (expiring in 2007) entitled "Method
for Selecting Personal Compatible Colors," U.S. Patents Nos. 5,311,293 (expiring
in 2007), 5,313,267 (expiring in 2011) both entitled "Method and Instrument For
Selecting Personal Compatible Colors" and 5,671,735 (expiring in 2014) entitled
"Method and Apparatus for Detecting and Measuring Conditions Affecting Color."
The Company has developed intellectual property rights in color analysis,
calibration and verification in a number of fields including medical,
biological, dental, cosmetic and materials testing. The intellectual property
rights include trade secrets, know how and 10 pending United States patent
applications. The Company also has filed patent applications in a number of
foreign jurisdictions which correspond, at least in part, to the Company's
United States patents. The Company has been granted European Patent No. 0446512
entitled "Method for Selecting Personal Compatible Colors." That European patent
has been nationalized in Austria, Belgium, France, Germany, Great Britain, Hong
Kong, Italy, Luxembourg, The Netherlands, Spain, Sweden, Switzerland and
Liechtenstein. The Company also has Australian, Canadian, Korean and Mexican
patents corresponding, at least in part, to its U.S. Patent No. 4,909,632,
Australian. Taiwanese and Korean patents corresponding, at least in part, to its
U.S. Patent No. 5,313,267 and a Singapore patent and two Taiwanese patents
corresponding, at least in part, to its U.S. Patent No. 5,671,735 (collectively,
together with the United States patents, the "Patents"). The Company has not yet
been granted any other foreign patents for its Intellectual Properties.

The proprietary information claimed by the Patents includes, among other things:
(i) a method of detecting a medical condition that involves a symptomatic,
detectable change in a test subject's skin coloration, such as a method for
monitoring newborn bilirubinemia (infant jaundice) in an infant test subject,
(ii) a method and instrument for identifying skin color and categories of
individuals, (iii) a method of determining color compatibility of an
individual's skin with non-skin matter and (iv) a method of assigning a skin
color compatibility classification to non-skin matter and color charts and
sample assemblages made by that method. Proprietary information claimed by the
Patents is incorporated in the proprietary software and measurement system used
in the ColorMate(Registered Trademark) units. Although many of the individual
hardware components of the ColorMate(Registered Trademark) System and the
ColorMate(Registered Trademark) TLc-BiliTest (Registered Trademark) System are
public and not proprietary to the Company, the color measurement sensor 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(Registered Trademark) System and
the ColorMate(Registered Trademark) TLc-BiliTest (Registered Trademark) System,
the operation of which is covered by the claims of the Company's patents. The
Company's TLc-Lensette (Trademark) 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(Registered Trademark) TLc-BiliTest(Registered Trademark) system for
use on all 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: SITE FLAG and TLC BILI. Further, the Company
believes it has copyright protection for all of the software used in the
ColorMate(Registered Trademark) System and the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) 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. Now that the
Company believes it is in substantial compliance with QSR and other FDA
requirements and is beginning to market and distribute its ColorMate(Registered
Trademark) TLc-BiliTest(Registered Trademark) System for monitoring newborn
infant jaundice in the United States, the Company will compete with other
providers of infant jaundice diagnostic and monitoring products.

As the Company implements its business plan to further commercialize the medical
application for its Intellectual Properties, it will be in a field characterized
by rapidly changing technology, intense competition and extensive research and
development. The Company will be competing with established companies which have
greater financial, technical, manufacturing, marketing, research and development
and management resources, including with respect to the monitoring of infant
jaundice, companies such as Minolta Co., Ltd. ("Minolta"), Air Shields,
Respironics, Inc. ("Respironics"), which recently 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."


                                        6

<PAGE>



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(Registered Trademark) TLc-BiliTest(Registered
Trademark) System, are not used when the infant is being treated by phototherapy
for hyperbilirubinemia, and are affected by the infant's race and skin color,
which the Company believes significantly limits its use in a heterogeneous
population. As a result, the Company believes that the Minolta device is
currently in limited use in the United States and that it is not used at all for
infants who are receiving phototherapy. There can be no assurance that Minolta
will not effect improvements to its device in the future to overcome these
apparent limitations. See "Risk Factors."

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

The Company's success depends in large part on the acceptance by the medical
community of the Company's new technology. There can be no assurance that the
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System will
effectively compete with any currently used systems. Furthermore, many of the
Company's competitors have substantially greater financial, research, technical,
manufacturing, marketing and distribution resources than the Company and have
greater name recognition and lengthier operating histories in the health care
industry. There can be no assurance that the Company will be able to effectively
compete against these and other competitors, including those competitors who
intend to promote their versions of non-invasive devices. Furthermore, there can
be no 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.

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(Registered Trademark) 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.

                                        7

<PAGE>



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 process typically takes more than a year
and typically requires the submission of significant quantities of clinical data
and supporting information. The process of obtaining a 510(k) currently takes,
on average, approximately four months from the date of submission (based on
FDA's fiscal year 1998 figures). However, the review process for a particular
product may be shorter or substantially longer depending upon the circumstances.
Moreover, there can be no assurance that a 510(k) will be cleared. A 510(k) must
include submission of supporting information, including design details and draft
labeling, and may be required to contain safety and efficacy data, possibly from
clinical trials. Product modifications intended to be made to a cleared device
also may require filing and clearance of a new 510(k) submission or filing and
approval of a PMA supplement, during which time the modified product cannot be
commercially distributed.

The 510(k) clearance order obtained from the FDA's CDRH indicates that the
Company's ColorMate(Registered Trademark)TLc-BiliTest(Registered Trademark)
System is a Class II device, subjecting it to "general controls" and "special
controls." Currently, the Company is unaware of any special controls applicable
to the ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark)
System. The Company is not currently developing, manufacturing or distributing
any Class III devices, although it may do so in the future. The Company also is
subject to additional FDA and foreign statutes and regulations and/or may be
subject to additional clearances or approvals to the extent the Company
continues its efforts to test, manufacture and license the Intellectual
Properties and lease the ColorMate(Registered Trademark) 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(Registered
Trademark)TLc-BiliTest(Registered Trademark) System pursuant to a "substantial
equivalence" determination order, in the form of a letter dated July 24, 1997
from the FDA's CDRH, authorizing the Company to commercially distribute its
device for monitoring 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 "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 requirements, and the
statutory prohibitions against adulteration and misbranding.

The process of obtaining marketing clearance or approval for new medical
products from the FDA can be costly and time consuming, and there can be no
assurance that such clearance or approval 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 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 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.

Since receiving FDA marketing clearance in the United States, the Company has
undertaken the procedures to obtain required international regulatory clearances
for its ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark)
System. 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(Registered Trademark) TLc-BiliTest(Registered Trademark) System.

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. To market its ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System in the European Union, the Company
sought ISO-9001/EN46001 certification and the right to affix the CE mark.
ISO-9001/EN46001 certification recognizes that the Company has established a
quality system for the design, development, manufacturing, servicing and
distribution of its medical device. The CE mark is a symbol of quality and
compliance with applicable European Union medical device directives. In March
1999, the Company received ISO-9001/EN46001 certification and passed a product
inspection in February 1999

                                        8

<PAGE>



for purposes of receiving the right to affix the CE mark to such specific
inspected product. In April 1999, the Company was granted permission by the EU
notified body, TUV Essen, to affix the CE Mark to its ColorMate(Registered
Trademark) TLc-BiliTest(Registered Trademark) System. 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.

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

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

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

                                        9

<PAGE>



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

If the Company moves forward with European Union commercialization plans, and if
the Company obtains necessary regulatory marketing approvals from other foreign
countries, market acceptance of the Company's products in international markets
will be dependent in part, upon the availability of reimbursement within
prevailing health care payment systems. Reimbursement and health care payment
systems in international markets vary significantly by country and include both
government sponsored health care and private insurance. Although the Company
intends to seek international reimbursement approvals, there can be no assurance
that such approvals will be obtained in a timely manner, if at all.

The Company is unable to predict what changes will be made in the reimbursement
methods utilized by third-party health care payors. Although the Company
anticipates that hospitals and physicians will justify the use of the
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System by
clinical benefits that the Company believes will be derived from the use of the
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) 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.

                                       10

<PAGE>



Employees

The Company currently employs 37 persons on a full-time basis, 18 of which are
medical marketing or regulatory personnel. None of the Company's employees is
represented by a union. The Company believes that its relationship with its
employees is good. The Company intends to hire additional employees and
consultants to carry out its proposed business plans. Such persons will be
compensated with salaries, or on a fee or commission basis, as applicable. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Recent Events

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

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

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

The Company filed a registration statement for all of the shares of Common Stock
issuable upon the conversion of the outstanding principal amount of and a
portion of the accrued interest on the Debentures, which registration statement
was declared effective by the Securities and Exchange Commission (the
"Commission") on January 28, 2000.

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

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

On June 15, 1999, the Company completed a private placement of 40,000 shares of
convertible preferred stock (the "Preferred Stock") to an affiliate of Lehman
Brothers, Inc. for aggregate proceeds of $4 million. The Preferred Stock is
convertible into shares of the Company's Common Stock at a price of $6.29 per
share, subject to adjustment for stock splits, combinations and similar
recapitalizations affecting the Company's Common Stock and to downward
adjustment if the Company issues or agrees to issue additional shares of its
Common Stock

                                       11

<PAGE>



(excluding options under the Company's 1992 Stock Option Plan (the "1992 Plan")
and a limited number of other securities excluded under the terms of the
agreement with the Lehman Brothers affiliate) at a price of less than $6.29 per
share to the price at which the Company issues or agrees to issue the
lower-priced shares of its Common Stock or securities convertible or
exchangeable for shares of its Common Stock. The Preferred Stock is redeemable
in cash for an amount equal to $115 per share of Preferred Stock on the third
anniversary of the date of initial issuance if not sooner converted unless the
Company elects in its discretion to extend the redemption date to the fifth
anniversary of the date of initial issuance. The Preferred Stock is also subject
to mandatory conversion into shares of the Company's Common Stock at its 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 $9.44
per share. The Preferred Stock is not entitled to any voting rights except as
otherwise required by applicable law and is 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 dividends would accrue at the
rate of 8% from and after the third anniversary of the date of initial issuance
which could be paid in shares of the Company's Common Stock at its option.

In addition to the shares of Preferred Stock, on June 15, 1999 the Company also
issued an aggregate of 220,690 warrants (the "Warrants") to purchase shares of
its Common Stock to the Lehman Brothers affiliate. An additional 50,000 Warrants
were issued to the Lehman Brothers affiliate as compensation for services
rendered in connection with this placement of Preferred Stock. The Warrants
issued have a five-year term unless sooner exercised, are exercisable for shares
of the Company's Common Stock at a price of $6.99 per share, subject to
adjustment in the same circumstances as the shares of the Preferred Stock and
are subject to mandatory exercise into shares of the Company's Common Stock at
its 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 $13.98. In connection with this private placement, the Company
filed registration statements for the shares of Common Stock issuable upon the
conversion of the shares of Preferred Stock and exercise of the Warrants, which
registration statements were declared effective by the Commission on January 28,
2000 and February 8, 2000.

On February 11, 2000, the Company completed a private placement of 40,000 shares
of Preferred Stock and 254,372 Warrants to purchase shares of the Company's
Common Stock to the Lehman Brothers affiliate for aggregate proceeds of $4
million. The terms of the Preferred Stock and Warrants issued on that date are
identical to the terms of the Preferred Stock described above. An additional
50,000 Warrants were issued to the Lehman Brothers affiliate as compensation for
services rendered in connection with this placement of Preferred Stock. In
connection with this private placement, the Company agreed to register the
shares of its Common Stock issuable upon the conversion of the Preferred Stock
and Warrants for resale by the Lehman Brothers affiliate under the Securities
Act of 1933 and to use its best efforts to maintain the effectiveness of this
registration statement until the date that all of the shares of the Company's
Common Stock issuable upon the conversion of the Preferred Stock and Warrants
have been sold.

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

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

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

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

The Plan exempts any existing shareholder (including Darby Macfarlane, the
Company's founder and Chief Executive Officer, her heirs and entities controlled
by her, currently the owner of approximately 861,895 shares of the Company's
Common Stock, 1,380,000 shares of the Company's Class A Preferred Stock and
450,000 options granted pursuant to the 1992 Plan), so long as the number of
shares of Common Stock beneficially owned by that shareholder does not exceed,
with respect to all such exempt shareholders other than Mrs. Macfarlane, by more
than

                                       12

<PAGE>



ten percent (by acquisition) the number of shares of Common Stock beneficially
owned by that shareholder as of December 30, 1998. In the case of Mrs.
Macfarlane, such ownership cannot exceed by more than one percent the sum of (i)
the shares of Common Stock beneficially owned by Mrs. Macfarlane as of December
30, 1998, plus (ii) all shares acquired upon exercise of options issued to Mrs.
Macfarlane and her heirs, relatives and entities controlled by her, including,
without limitation, options issued under the 1992 Plan, plus (iii) all shares
issued upon conversion of the Class A Preferred Stock owned by Mrs. Macfarlane
and her heirs, relatives and entities controlled by her.

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

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

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

Lastly, at the Special Meeting, the shareholders approved an amendment to the
1992 Plan to increase the number of shares of Common Stock with respect to which
options may be granted from 3,500,000 to 4,500,000 (later increased to 5,500,000
at the Company's Annual Meeting of Shareholders held on December 20, 1999).

Beauty-Aid Products

The ColorMate(Registered Trademark) System. Although it is not currently
expanding in this activity as a result of its efforts to market commercially the
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System for
medical application, the Company has engaged in efforts to commercialize its
Intellectual Properties for beauty-related applications. The
ColorMate(Registered Trademark) 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(Registered Trademark) 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(Registered Trademark) 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(Registered Trademark) 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 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(Registered Trademark) Cosmetics Line. The Company's
cosmetics line ("My Colors by Chromatics (Registered Trademark)") divides the
product shades into four color classifications. The product shades recommended
by the ColorMate(Registered Trademark) 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(Registered Trademark)
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.


                                       13

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In December 1996, the Company entered into a lease and license agreement with
Gordon Laboratories, Inc. granting Gordon a license and lease of the Company's
Intellectual Properties and the ColorMate(Registered Trademark) System to
formulate and develop custom blended cosmetic foundations for use in a field
test retail program.

Other Potential Products and Applications. The Company has conducted research
and development and developed engineering specifications regarding a hand-held
light-emitting diode version of the ColorMate(Registered Trademark) System (the
"LED Device"). This version may be marketed for medical use after collecting
further clinical testing and is subject to FDA 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(Registered Trademark) System units because of technological
improvements which have resulted in substantially lower component part costs.
The Company believes that the Intellectual Properties and ColorMate(Registered
Trademark) System have commercial applications in (i) healthcare relating to the
non-invasive detection and monitoring of certain chromogenic diseases, such as
skin diseases, tuberculosis and anemia and (ii) dental care (i.e., the color
matching of teeth and tooth enamel). Additional medical applications for the
Intellectual Properties require extensive and lengthy clinical testing and will
be subject to various federal and state regulatory requirements, including FDA
clearances and approvals, and may be subject to comparable foreign regulatory
approvals to the extent the Company markets such applications abroad. 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.

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

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

The Company also believes that the Intellectual Properties and
ColorMate(Registered Trademark) System may have commercial applications in
industrial color measurement applications, in order to achieve and confirm
uniformity of color shades within a given product line or between two products
of the same line (i.e., paint, textile and food products). To that end, the
Company intends to increase its efforts to lease the ColorMate(Registered
Trademark) 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(Registered
Trademark) 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(Registered
Trademark) System provides machine-to-machine stability and reproducibility
(i.e., that each machine will achieve results consistent with that of other
machines), whereas the competing color measurement instruments available today
generally cannot produce such consistent machine-to-machine results without
complex inter-machine calibration adjustments.

Risk Factors

Limited Operating History. The Company has a limited operating history upon
which its prospects can be evaluated. Such prospects must be considered in light
of the substantial risks, expenses and difficulties encountered by entrants into
the medical device industry, which is characterized by an increasing number of
participants, intense competition and a high failure rate. Until 1986, the
Company was principally engaged in research and development relating to the
Intellectual Properties, ColorMate(Registered Trademark) 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

                                       14

<PAGE>



Properties and Beauty-Aid Products through its former licensees. From October
1987 until June 1991, the Company was principally engaged in the Avon Project.
Since 1991, the Company has been engaged in the research and development of its
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System for
the monitoring of newborn bilirubinemia (infant jaundice), the development of
prototypes of additional versions of the ColorMate(Registered Trademark) unit
and the refinement of its technologies for other applications. The Company has
only recently begun to generate material revenues and there can be no assurance
it will be able to continue to do so in the future. The Company's business is
subject to the risks inherent in the development of new products using new
technologies and approaches, many of which are beyond the Company's control,
such as unanticipated development, manufacturing and regulatory delays and
expenses. There can be no assurance that unforeseen problems will not develop
with these technologies or applications, that the Company will be able to
successfully address technological challenges it encounters in its research and
development program or that commercially feasible products will ultimately be
successfully developed and marketed by the Company.

Operating Losses. The Company has incurred significant losses from operations
for the years ended December 31, 1999 and December 31, 1998 ($12,808,000 and
$7,284,800, respectively). The Company anticipates incurring substantially
increased operating expenses as it attempts to expand its marketing and sales
activity, incurs manufacturing expenses for the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System and otherwise continues to implement
its business plan, including for the medical application involving the
monitoring of newborn bilirubinemia (infant jaundice). There can be no assurance
the Company will not continue to incur such losses or will ever generate
revenues at levels sufficient to support profitable operations.

Although the Company anticipates that the future expenses regarding FDA
application costs and related patent application costs should be significantly
less than amounts incurred prior to receipt of the initial FDA marketing
clearance, the Company will continue to incur significant additional costs and
expenses in connection with FDA manufacturing and other regulations, state
regulatory requirements and foreign market clearances and other requirements.
Additional expenses are anticipated in connection with certain international
multicenter studies being conducted on the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System. See "Business." 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
development for new potential applications, and implementation of the next phase
of its efforts to successfully commercialize the medical application of its
technology. The Company also anticipates significantly higher compensation
expenses in connection with increased hiring of staff. See "Liquidity and
Capital Resources," below. The Company will also incur additional expenses
implementing additional testing and clinical trials of its technologies for the
possible monitoring of other chromogenic diseases. The Company also anticipates
further legal expenses in connection with its defense of certain class action
suits that have been brought against the Company and as the Company explores all
of its potential legal remedies. See "Legal Proceedings."

Need for Additional Financing; Cessation of Operations. The Company has limited
resources and has not been able to finance its activities with cash flow from
operations. There can be no assurance that proceeds from warrants issued
previously by the Company to a placement agent (the "Placement Agent Warrants"),
Debentures, Preferred Stock or Warrants, together with any anticipated sales
revenues, future distributor payments and/or additional financing, if any, will
be sufficient to fund operations until December 31, 2000, that sufficient sales
levels, if any, will be achieved thereafter to fund operations or that the
Company will not incur additional unanticipated expenses. In this regard, if the
Company is unable to successfully market its Intellectual Properties,
ColorMate(Registered Trademark) units and Beauty-Aid Products, and in
particular, its ColorMate(Registered Trademark) TLc-BiliTest(Registered
Trademark) System for monitoring of newborn bilirubinemia (infant jaundice), it
is extremely doubtful it will be able to obtain additional future financing and,
at such point, may have to cease operations. The Company's continued operation
will depend on the successful marketing of the ColorMate(Registered Trademark)
unit, its ability to obtain significant commercial sales of the Beauty-Aid
Products and/or licensing and leasing fees from its Intellectual Properties and
the ColorMate(Registered Trademark) units, and the availability of future
financing. The Company expects that, in addition to the Placement Agent
Warrants, Debentures, Preferred Stock and Warrants, further financing will be
required to successfully commercialize the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System and any additional medical application
of its technologies. There can be no assurance that the Company will be able to
obtain additional financing, such commercial sales or fees, in which case the
Company's operations would be materially adversely affected and it may be forced
to significantly curtail and/or cease operations.

Under the terms of the Company's manufacturing agreement it must provide its
manufacturing partner with a number of key component parts to be assembled into
its ColorMate(Registered Trademark) System and its ColorMate(Registered
Trademark) TLc-BiliTest(Registered Trademark) System. Without the funds to
provide these component parts, the Company's products cannot be manufactured and
it will be unable to fulfill its obligations to its distribution partner. The
terms of the Preferred Stock that require a downward adjustment in the
conversion price if the Company issues shares of Common Stock at a price of less
than $6.29 per share will increase the cost to the Company of any subsequent
equity financing effected at less than $6.29 per share. If the Company fails to
make any payment required or if the Company is otherwise in default under the
manufacturing and distribution agreements relating to its ColorMate(Registered
Trademark) System and its ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System, the other parties will have the right
to terminate the agreements. Termination of any of these agreements would have a
material adverse effect on the Company's business by rendering it unable to
manufacture and distribute its ColorMate(Registered Trademark) System and its
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System until
replacement agreements were entered into.


                                       15

<PAGE>



Additional Funds Required if the Debentures and Preferred Stock Are Not
Converted Prior to Maturity. The Company will be obligated to repay the holders
of the Debentures $7,100,000 in cash on the April 15, 2002 maturity date unless
they elect to convert or the Company is able to compel conversion. Under the
terms of the Preferred Stock private placements, the Company will be obligated
to repay the holder $4,600,000 on June 15, 2002 and $4,600,000 on February 11,
2003 unless it elects to convert the Preferred Stock or the Company is able to
compel conversion. Each of the Preferred Stock redemption dates may be postponed
at the Company's option for two years, subject to the accrual of an 8% dividend.
In the event that the Company postpones the redemption dates of the Preferred
Stock, it must pay to the holder $5,240,000 on June 15, 2004 and $5,240,000 on
February 11, 2005.

The holders of the Debentures generally will not elect to convert unless the
market price of the Company's Common Stock exceeds $5.00 per share at the time
of conversion. Similarly, the holder of the Preferred Stock generally will not
elect to convert unless the market price of the Company's Common Stock exceeds
$6.29 per share at the time of conversion. In addition, if an Event of Default
occurs with respect to the Debentures prior to the stated maturity date the
holders of the Debentures may elect to accelerate the maturity of the Debentures
with the effect that the principal amount and all accrued but unpaid interest
would become immediately due and payable. There can be no assurance that the
Company would have sufficient funds available to satisfy these obligations.
Failure to satisfy these obligations would have a material adverse effect on the
Company's business and could force the Company to close its operations and seek
protection from its creditors under applicable bankruptcy laws.

No Assurance of Successful Commercialization of ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System. The Company's current ability to
generate revenues and to achieve profitability and positive cash flow in the
immediate future substantially will depend on the successful introduction of the
medical application of its technology to monitor newborn bilirubinemia (infant
jaundice). Although the Company is aware that studies have been conducted on
non-invasive transcutaneous bilirubinometer devices other than the
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System and
that some of these devices have received FDA marketing clearance, the Company
believes the ability of the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System to provide non-invasive monitoring for
babies over a wide range of gestation, in babies of all racial categories and in
babies receiving phototherapy, distinguishes it from the other existing
non-invasive bilirubinometers with FDA clearance for commercial marketing. While
the Company believes the non-invasive nature of its ColorMate(Registered
Trademark) TLc-BiliTest(Registered Trademark) System for monitoring newborn
bilirubinemia (infant jaundice) provides benefits to patients, no assurance can
be given that the medical community will accept and support the Company's
medical device. There is no assurance that the Company's ColorMate(Registered
Trademark) Device for newborn bilirubinemia (infant jaundice), or other future
medical applications of the Company's technology will be capable of being
produced in commercial quantities at acceptable costs. There can be no assurance
that the existing medical applications for monitoring newborn bilirubinemia
(infant jaundice), or for future applications even if all regulatory and
reimbursement approvals are obtained, will be successfully marketed or achieve
any significant degree of market acceptance among physicians, health care payors
and others. The medical community generally has had limited exposure to the
Company and its proposed medical application. Because the medical community is
generally relatively slow to adopt new technologies, procedures or devices, the
Company might be unable to gain access to potential customers to demonstrate the
operation and efficacy of its Intellectual Properties in the medical field. Even
if the Company gains access to sufficient potential customers, no assurance can
be given that members of the medical community will perceive a need for or
accept the Company's proposed medical application.

Physicians and other health care professionals will not recommend or use the
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System unless
they determine, based on experience, clinical data, relative cost, and other
factors, that the ColorMate(Registered Trademark) TLc-BiliTest(Registered
Trademark) System is an attractive alternative for reducing the current
traumatic blood tests that have a long history of safe and effective use. The
Company believes that recommendations by physicians and clinicians will be
essential for the market acceptance of these products, but there can be no
assurance that any such recommendations will be obtained. To the extent the
Company is able to market and distribute its ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System, broad market acceptance of the
Company's device will require the training of numerous physicians and
clinicians, and the time required to complete such training could result in a
delay of successful commercial distribution to the medical market. Moreover,
obtaining and maintaining health care payors' approval of reimbursement for the
Company's products, and the level of reimbursement made available, will be an
important factor in establishing pricing, structure and market acceptance. In
addition, purchase decisions for the device will be greatly influenced by health
care administrators who are subject to increasing pressures to reduce costs.
Some purchasers, such as hospitals, pediatrician's offices and home health care
facilities, also might be reluctant to purchase products from a company that has
not demonstrated the ability to satisfy ongoing delivery requirements. In
addition, hospitals, clinics and pediatricians may be unwilling or unable to
commit funds to the purchase of the Company's ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System due to institutional budgetary
constraints.

User acceptance of these products will depend on many factors, including
physician recommendations, the degree, rate and severity of potential
complications, the cost and benefits compared to competing products or
alternative medical treatments, available reimbursement and other
considerations. In addition, the Company's pricing policies could adversely
impact market acceptance of these products as compared to competing products and
alternative treatments. If any of the Company's marketing or development
programs are not successfully completed, required regulatory approvals or
clearances are not obtained or maintained, or products for which approvals or
clearances are obtained (such as the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) 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

                                       16

<PAGE>



assurance that the Company will be able to successfully address any problems
that may arise during the commercialization process of its ColorMate(Registered
Trademark) TLc-BiliTest(Registered Trademark) System.

Early Stage of Development of Other Potential Medical Applications. Although the
Company has received FDA clearance to commercially market its
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System as
described above, has conducted early stage research and commenced initial
clinical studies with respect to certain other Chromogenic Diseases identified
by the Company (See "Business"), the Company's clinical and research development
programs for other medical applications of its technology are at a very
preliminary stage and substantial additional research and development and
further clinical trials will be necessary before commercial versions of any
additional proposed products are submitted for FDA marketing clearance and
produced for other such medical applications. The Company could encounter
unforeseen problems in the development of such other products such as delays in
conducting clinical trials, delays in the supply of key components or delays in
overcoming technical hurdles. There can be no assurance that the Company will be
able to successfully address the problems that may arise during the
development/commercialization process. In addition, there can be no assurance
that any of the Company's proposed products for any such other medical
application will be successfully developed, proven safe and efficacious in
clinical trials, obtain regulatory approval or clearance, or meet applicable
regulatory standards and requirements.

Assumptions Regarding Medical Business Plan and Strategy. The Company has
formulated its medical business plan and strategy based upon certain assumptions
provided by the Company's medical distribution partner 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; changes in general economic
conditions; increases in operating costs including costs of production,
supplies, personnel or equipment; and changes in requirements and regulations
promulgated by applicable federal, state, local and foreign regulatory
authorities. There can be no assurance that the Company will successfully obtain
or apply the human, operational and financial resources needed to manage a
developing business. Failure by the Company to manage its growth effectively
could have a material adverse effect on the Company's business, financial
condition and results of operations.

Need for Additional Personnel. In order to generate and service sales of the
Company's products, the Company needs to attract and retain significant
additional senior and midlevel personnel experienced in marketing, sales and
regulatory matters in the medical, beauty, dental and other industries. The
Company currently has only 37 full-time employees, of which 18 are medical
marketing or regulatory personnel. In order to effectively implement its
marketing and sales strategy for the medical market and other markets, the
Company will need to hire additional sales, marketing, technical and operations
personnel. The success of the Company will also be dependent upon its ability to
hire, train and retain new and existing personnel. The Company will compete with
other companies with greater financial and other resources for such qualified
personnel. There can be no assurance that the Company will be able to hire and
retain additional personnel to support the Company's marketing, sales, research
and product development efforts.

Lack of Marketing and Sales Experience. The Company has not previously licensed
its Intellectual Properties for use in any industry other than the beauty aid,
hosiery and cosmetics industries and management of the Company has not had any
experience in marketing the Intellectual Properties, ColorMate(Registered
Trademark) units or Beauty-Aid Products in any other field. Prior to licensing
the Company's Intellectual Properties in any industry, including the cosmetic,
beauty aids and fashion industries, the Company will be required to develop
additional marketing skills relevant to such industries and conduct significant
further marketing activity, and in certain of these industries, overcome
regulatory hurdles, professional skepticism and develop specific practical
applications therefor. The Company's medical support and sales division was only
recently established and the Company's medical distribution agreement only
recently executed. There can be no assurance either will successfully generate
commercial levels of sales. There can be no assurance that the Company will be
able to successfully maintain a marketing and sales force, or that it will be
able to enter into additional marketing and sales agreements with third parties
on acceptable terms.

Dependence on Marketing and Distribution Arrangements with Third Parties. The
Company has established a medical division as well as 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(Registered Trademark) TLc-BiliTest(Registered Trademark) System.
The Company's business strategy for the commercialization of its medical
products depends upon the Company's ability to maintain existing and 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(Registered Trademark) TLc-BiliTest(Registered Trademark) System
will be dependent on arrangements with third parties for marketing, distribution
and sales of the products. 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

                                       17

<PAGE>



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, inability to perform, or termination of
any arrangement with such third party would require the Company to seek and
reach an agreement with another third party or to assume, to the extent possible
and at its own expense, all the responsibilities being undertaken by the first
such third party. There can be no assurance that the Company would be able to
reach an agreement with a replacement third party. If the Company were not able
to find a replacement third party, there can be no assurance that the Company
would be able to perform or fund the activities for which the first such third
party would be responsible. Even if the Company 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(Registered Trademark) units, the
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System or the
Beauty-Aid Products, and in the past has been wholly dependent on third-party
OEMs of parts, assemblers, cosmetics suppliers and textile suppliers. The
Company may encounter various problems in establishing and maintaining
manufacturing relationships and/or operations, resulting in inefficiencies and
delays. Specifically, companies often encounter difficulties in scaling up
production, including problems involving production yield, quality control and
assurance, and shortages of qualified personnel. In addition, the manufacturing
facilities retained by the Company to manufacture its ColorMate(Registered
Trademark) products for medical applications are subject to FDA QSR requirements
and other regulatory requirements, international quality standards (such as ISO
9001/EN46001) and other regulatory requirements. Currently, the Company is
dependent on the sole source manufacturer of the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System under the existing exclusivity
arrangements. The Company will have to maintain relationships with such
manufacturer and third party suppliers of component parts for the production of
its devices. There can be no assurance the Company will be able to maintain its
relationships with its current manufacturer, or will be able to maintain
arrangements with the other parts suppliers or assemblers on terms satisfactory
to the Company. Although the Company believes that a number of manufacturers are
capable of manufacturing and assembling the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System, any change in manufacturers, or the
retention of additional subcontractors, could result in additional costs and
delays. Difficulties encountered by the Company in subcontracting to third-party
manufacturers, scaling up production or failure by the Company to utilize
manufacturing facilities in substantial compliance with FDA requirements,
international quality standards or other regulatory requirements, could result
in a delay or termination of production or regulatory enforcement action, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.

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

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

Lack of Market Penetration in Other Industries. The Company has not yet achieved
commercial market penetration in any industry, and there can be no assurance the
Company will be able to do so in the future. The Company has not achieved
significant levels of cosmetics sales from its ColorMate(Registered Trademark)
unit locations, and expects based on the de minimus cosmetics sales levels
achieved per location to date, that it will have to greatly increase the number
of ColorMate(Registered Trademark) unit installations to achieve significant
levels of cosmetics sale revenues. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The Company also believes, based
on its operating history since February 1993, that obtaining such increased
cosmetic sales revenue will take significantly longer to achieve than was
originally anticipated. In order to implement its marketing plans in the United
States and abroad, including in industries in which the Company does not have
prior experience, the Company will have to develop additional marketing skills
and incur significant expenses on sales

                                       18

<PAGE>



and marketing activities, including hiring finders, new personnel and
consultants, and entering into arrangements with retailers and distribution
companies having a regional or national presence. There can be no assurance the
Company's marketing plan will be successful.

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

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

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

Defendants moved to dismiss the complaint, which motion was fully briefed and
submitted to the court. On March 24, 2000, the defendants' motion to dismiss the
complaint was granted subject to a 30-day period within which the plaintiffs may
refile a complaint. If the plaintiffs do, in fact, refile a complaint within
such 30-day period no assurance can be given that the resolution of the Action
and/or future actions will not have a material adverse effect on the Company's
results of operations and liquidity. The Company has directors and officers
insurance which may cover a portion of the liability asserted in the Action. The
Company is exploring its legal remedies in respect of what it believes to be
false allegations against the Company made by short sellers of its stock; the
Company expects to incur significant expenses in this regard.

Potential International Operations. The Company believes that sales of products
to customers outside of the United States represents a significant potential
source of growth. Following compliance with applicable foreign regulatory
requirements, the Company expects to market its medical products internationally
through affiliates and distributors. The primary targeted markets for the
Company's products outside the United States are Western Europe, Canada, Asia,
South Africa and South America. See "Business - The Bilirubin Project." The
Company also intends to contract with a number of foreign manufacturers to
provide certain of its sourcing needs for its medical device, although there can
be no assurance it will be able to do so. To market its ColorMate(Registered
Trademark) TLc-BiliTest(Registered Trademark) System in the European Union, the
Company sought ISO-9001/EN46001 certification and the right to affix the CE
mark. ISO-9001/EN46001 certification recognizes that the Company has established
a quality system for the design, development, manufacturing, servicing and
distribution of its medical device. The CE mark is a symbol of quality and
compliance with applicable European Union medical device directives. In March
1999, the Company received ISO-9001/EN46001 certification. In April 1999, the
Company was granted permission by the EU notified body, TUV Essen, to affix the
CE Mark to its ColorMate (Registered Trademark) TLc-BiliTest (Registered
Trademark) System.

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

Prior Marketing Attempts. Other than the Company's marketing efforts with Avon,
arrangements with IMS and its beauty salon placements and a lease and license
agreement with Nordstrom, the Company's own attempts to license and/or lease its
Intellectual Properties and the ColorMate(Registered Trademark) units and to
market its Beauty-Aid Products independently and/or through licensees never
proceeded beyond the test marketing stage. There can be no assurance the Company
will in the future achieve commercial leasing of its ColorMate(Registered
Trademark) 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(Registered Trademark) TLc-BiliTest(Registered
Trademark) System and its installation of ColorMate(Registered Trademark) units
in beauty salons and beauty-related businesses (which are generating
insignificant revenue), the Company's revenue generating activities have been
primarily conducted in conjunction with its former licensees (i.e., Clairol,
Hanes and Avon), that provided substantial economic, administrative, marketing
and advertising support. There can be no assurance that without the support of a
marketing partner with financial resources, an advertising

                                       19

<PAGE>



budget, market presence and consumer recognition, the Company will be able to
achieve successful operations, including for medical applications of its
products and technologies. Further, there can be no assurance the Company will
ever develop a commercial market for the licensing or leasing of its
ColorMate(Registered Trademark) units and Intellectual Properties, for the sale
of the Beauty-Aid Products or for any additional medical applications of its
technologies.

Competition. To the extent the Company continues to implement its business plan
to commercialize a medical application for its Intellectual Properties, it will
be in a field characterized by rapidly changing technology, intense competition
and extensive research and development. The medical products market in general
is highly competitive. The Company's ability to compete in the monitoring of
newborn bilirubinemia (infant jaundice) market depends primarily on the
acceptance by the medical community of the Company's new technology, which can
be influenced by factors such as price, product quality and features, technical
capability, breadth of product line and distribution capabilities. The Company
will be competing with companies, some of which are more established and which
have greater financial, technical, manufacturing, marketing, research and
development and management resources than the Company (including companies such
as Minolta Co., Ltd., AirShields, Respironics, Inc., which recently acquired
Healthdyne Technology, Inc., and SpectRx, Inc., among others), and some of which
have greater name recognition and lengthier operating histories in the health
care industry. The Company believes the only commercially available non-invasive
bilirubinometers with FDA marketing clearance in the United States are the
Minolta Jaundice Meter and the SpectRx Bilicheck. In addition, there will be
other companies with which the Company will compete regarding other potential
medical applications which the Company may pursue. Furthermore, the monitoring
methods currently in use for monitoring of newborn bilirubinemia (infant
jaundice) as well as dermatological diseases and tuberculosis, the principal
diseases with respect to which the Company may seek regulatory marketing
clearance in the future, have already achieved acceptance by and are in
widespread use in the medical community, unlike the Company's proposed methods.
There can be no assurance that the Company's proposed methods will be accepted
by the medical community or receive regulatory clearance.

There can be no assurance that the Company will be able to effectively compete
against these and other competitors, including those competitors who intend to
promote their versions of non-invasive devices. Additionally, there can be no
assurance that the Company's competitors will not succeed in developing, either
before, during or after the commercialization of the Company's product, devices
and technologies that permit more efficient, less expensive non-invasive
detection and monitoring of infant jaundice. It is also possible that one or
more pharmaceutical or other health care companies will develop therapeutic
drugs, treatments or other products that will substantially reduce the
prevalence of infant jaundice or otherwise render the Company's products
obsolete. There can be no assurance that the Company will be able to upgrade its
medical applications and devices to compete 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.

Now that the Company has developed its own marketing and sales capabilities and
entered into an agreement with its medical distribution partner, it will compete
with other companies that have experienced and well-funded marketing and sales
operations. In addition, the Company's ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System, as well as any future medical
applications marketed by the Company, will compete with existing devices,
technologies and methods in achieving acceptance in the medical community and in
attracting support from independent medical device distribution organizations
which sell medical equipment to the anticipated target market (i.e., hospitals,
pediatrician's offices and home health care services).

Independent medical supply distributors who may be retained by the Company will
distribute other products which may compete with those of the Company or which
would provide greater revenues to such distributors than would be provided by
the Company's products. In addition, many medical supply companies with which
the Company's proposed medical application and device will compete, and which
have significantly greater financial research, technical, manufacturing, and
distribution resources and broader product lines than the Company, have their
own in-house marketing and distribution capabilities and have established
relationships with potential customers for the Company's proposed medical
application, such as pediatricians and hospitals. In addition, many of the
Company's competitors offer broader product lines than the Company, which may be
a competitive advantage in obtaining contracts with health care purchasing
groups. No assurance can be given that the Company will successfully and
effectively market its medical products against these and other competitors or
contract with health care providers.

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

Protection of Intellectual Property. The Company depends on its ability to
obtain and maintain patent protection for its products and processes, to
preserve its trade secrets, and to operate without infringing upon the
proprietary rights of third parties. The validity and breadth of claims

                                       20

<PAGE>



covered in medical technology patents involve complex legal and factual
questions and therefore, may be highly uncertain. No assurance can be given that
the scope of any patent protection under the Company's current patents, or under
any patent the Company might obtain in the future, will exclude competitors or
provide competitive advantages to the Company; that any of the Company's patents
will not be held invalid if subsequently challenged; or that others will not
claim rights in or ownership of the patents and other proprietary rights held by
the Company.

The Company's U.S. Patents Nos. 4,909,632 and 5,311,293 expire in 2007; the
Company's U.S. Patent No. 5,313,267 expires in 2011; the Company's U.S. Patent
No. 5,671,735 expires in 2014; after the respective expiration date of each, the
proprietary technology and instrumentation disclosed in each Patent will be
available for use by others without compensation to the Company, unless
protected by the claims of other U.S. patents that may be issued to the Company.
The Company has developed intellectual property rights in color analysis,
calibration and verification in a number of fields including medical,
biological, dental, cosmetic and materials testing. The intellectual property
rights include trade secrets, know how and 10 pending United States patent
applications. These rights also include various foreign patent applications
corresponding, at least in part, to the U.S. Patents and the U.S. patent
applications. There can be no assurance that patents will issue based on these
patent applications or that any patent claims will provide sufficient protection
to exclude others from the Company's proprietary technology and instrumentation.
There can be no assurance that the Company will not be involved in litigation to
protect its trade secrets and know how or that the Company will prevail in such
litigation. There can be no assurance that challenges will not be instituted
against the validity or enforceability of any patents owned by or issued in the
future to the Company, or that such challenges will not be successful. There can
be no assurance that patent infringement claims will not be asserted against the
Company and found to have merit, that the Company will not be enjoined from
using its proprietary technology and instrumentation and from manufacturing and
selling certain of its Products, or would not be forced to obtain a license and
pay future royalty fees as well as past damages to the party claiming
infringement in amounts not presently determinable. There can be no assurance
that any such license will be available to the Company. Conversely, to the
extent third parties infringe upon the Company's patented Intellectual
Properties, the Company may have to litigate against such third parties in order
to prevent further infringement. There can be no assurance the Company will have
the resources to prosecute any such litigation, or that any such litigation
would be resolved in favor of the Company. In the event it is unable to bring
such litigation or obtain a favorable outcome, the Company's operations could be
materially adversely affected in that the Company's failure to enforce its
Patents could result in increased competition. If the Patents are declared
invalid, the Company would lose patent protection for certain of its
Intellectual Properties, which could have a material adverse effect on its
operations.

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

The Company's U.S. Patents apply only to the United States. The Company has
filed patent applications in a number of foreign jurisdictions which correspond,
at least in part, to the Company's U.S. Patents. The Company has been granted
European Patent No. 0446512, nationalizations of that European Patent in
Austria, Belgium, France, Germany, Great Britain, Hong Kong, Italy, Luxembourg,
The Netherlands, Spain, Sweden and Switzerland and Liechtenstein, as well as
Australian, Canadian, Korean and Mexican Patents corresponding, at least in
part, to its U.S. Patent No. 4,909,632, Australian, Taiwanese and Korean Patents
corresponding, at least in part, to its U.S. Patent No. 5,313,267 and a
Singapore Patent and two Taiwanese Patents corresponding, at least in part, to
its U.S. Patent No. 5,671,735. The Company has not yet been granted any other
foreign patents for its Intellectual Properties and there can be no assurance
that it will be granted any such patents. Consequently, wherever the Company
does not have foreign patents, third parties currently could exploit, outside
the United States, the technology disclosed in the U.S. Patents, thereby
increasing competition in such foreign markets. In addition, persons gaining
access to the Company's unpatented proprietary information and technology and
who are not bound by confidentiality agreements with the Company would have the
ability to exploit the Company's unpatented proprietary information and
technology both inside and outside the United States, thereby increasing
competition.

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

The Company has not applied for patent protection for many aspects of the
Intellectual Properties (i.e., its proprietary trade secrets and other
confidential information). The Company typically imposes on its consultants, key
employees and advisers confidentiality obligations in connection with their
employment, consulting or advisory relationship with the Company. There can be
no assurance that such confidentiality obligations will be observed or that the
Company will have adequate remedies if those obligations are breached. To the
extent that consultants, key employees or other advisors apply technological
information taken from the Company in violation of confidentiality obligations,
disputes

                                       21

<PAGE>



may arise as to the proprietary rights to such information which may not be
resolved in favor of the Company. There can be no assurance that others will not
independently develop technology that is substantially equivalent or superior to
that included in the Company's Intellectual Properties which are not protected
by patents.

There can be no assurance that the Company's copyright protection for the
software used in the ColorMate(Registered Trademark) 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(Registered Trademark) TLc-BiliTest(Registered Trademark) 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.

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

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

                                       22

<PAGE>



approvals, there can be no assurance that such approvals will be obtained in a
timely manner, if at all. Failure to obtain and maintain third-party
reimbursement coverage for use of the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System will have a material adverse effect on
the Company's ability to commercialize its technology for medical applications.

Government Regulations. The Company's advertising, sales practices, and
cosmetics and medical products (including the labeling and packaging thereof)
are and will be subject to applicable federal, state and local regulation
(including regulation by the FDA, the Federal Trade Commission, and the Federal
Communications Commission, under various laws such as the Fair Packaging and
Labeling Act and/or any comparable state authority, agency or statute) and will
be subject to regulation by comparable foreign authorities if the Company
markets its products abroad. The Company will also be subject to regulation by
various governmental agencies that regulate direct selling activities.

Although the Company has received FDA marketing clearance of its
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System
pursuant to a "substantial equivalence" determination order, in the form of a
letter dated July 24, 1997 from the FDA's CDRH, authorizing the Company to
commercially distribute its ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System for monitoring newborn bilirubinemia
(infant jaundice) by healthcare professionals in the United States, the Company
also must maintain such clearance and comply with the other applicable statutes
and applicable rules and regulations promulgated by the FDA, in order to legally
market the device. The "substantial equivalence" order states that the Company
must comply with the medical device general controls, e.g., device establishment
registration, medical device listing, good manufacturing practices (QSR
requirements), medical device reporting, labeling, and the statutory
prohibitions against adulteration and misbranding. The order also states that
the ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System is
a Class II device which may be subject to additional special controls.

In the United States, the FDA regulates the introduction of medical devices as
well as, among other things, manufacturing, labeling and recordkeeping
procedures for such products. The process of obtaining marketing clearance for
new medical products from the FDA can be costly and time consuming, and there
can be no assurance that such clearance will be granted for the Company's future
products on a timely basis, if at all, or that FDA review will not involve
delays that would adversely affect the Company's ability to commercialize
additional or significantly modified products or to expand permitted uses of
existing products. Regulatory clearance to market a product from the FDA may
entail limitations on the indicated uses of the product. The ability to market
can be challenged (and possibly withdrawn) by the FDA due to failure to comply
with regulatory standards or the occurrence of unforeseen problems following
initial clearance. The Company may be required to file further marketing
applications with the FDA under certain circumstances, such as the addition of
product claims or product redesign. FDA regulations depend heavily on
administrative interpretation, and there can be no assurance that future
interpretation made by the FDA or other regulatory bodies, will not adversely
affect the Company.

In order for the Company to market its products in Europe and certain other
foreign jurisdictions, the Company and its distributors and agents must maintain
required regulatory registrations or approvals and otherwise comply with
extensive regulations regarding safety, efficacy and quality in those
jurisdictions. Specifically, certain foreign regulatory bodies have adopted
various regulations, among other things, governing product standards, packaging
requirements, labeling requirements, import restrictions, tariff regulations,
duties and tax requirements. These regulations vary from country to country. To
market its ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark)
System in the European Union, the Company sought ISO-9001/EN46001 certification
and the right to affix the CE mark. ISO- 9001/EN46001 certification recognizes
that the Company has established a quality system for the design, development,
manufacturing, servicing and distribution of its medical device. The CE mark is
a symbol of quality and compliance with applicable European Union medical device
directives. In March 1999, the Company received ISO-9001/EN46001 certification.
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 (Registered
Trademark) TLc-BiliTest (Registered Trademark) System. Failure to maintain ISO
9001/EN 46001 certification, CE mark rights or other foreign regulatory
approvals for the Company's medical products would prevent the Company from
marketing its medical products abroad, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
There can be no assurance that the Company will obtain any other required
regulatory registrations or approval in such countries or that it will not be
required to incur significant costs in obtaining or maintaining such regulatory
registrations or approvals. Delays in obtaining any registrations or approvals
required to market the Company's products, failure to receive these
registrations or approvals, or future loss of previously obtained registration
or approvals could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company may rely on its
third-party foreign distributors to comply with certain foreign regulatory
requirements. The inability or failure of the Company or such foreign
distributors to comply with varying foreign regulations or the imposition of new
regulations could restrict the sale of the Company's products internationally
and thereby adversely affect the Company's business, financial condition and
results of operations.

The Company and any third party with which it has made contract manufacturing or
other regulated arrangements is required to adhere to applicable FDA
regulations, including the QSR requirements and similar regulations in other
countries, which include, among other things, testing, control, and
documentation requirements. Ongoing compliance with QSR requirements and other
applicable regulatory requirements will be strictly enforced in the United
States through periodic inspections by federal and possibly state agencies,
including the FDA, and in foreign jurisdictions by comparable agencies. Failure
to comply with applicable regulatory requirements could result in, among other
things, warning letters, injunctions, civil monetary penalties, recall or
seizure of products, total or partial suspension of production, refusal of the
government to grant premarket clearance or premarket approval for devices,
possible rescission or withdrawal of clearances or approvals

                                       23

<PAGE>



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(Registered Trademark) TLc-BiliTest(Registered
Trademark) System. As the ColorMate(Registered Trademark) TLc-
BiliTest(Registered Trademark) System enters commercial use, the Company will be
in a field where it may become subject to product liability claims by patients
and/or users and might become a defendant in product liability litigation.
Although the Company has product liability insurance, there can be no assurance
that it will be able to maintain such product liability insurance or that such
insurance would be sufficient to protect the Company against any such
liabilities.

The Company maintains its own product liability insurance with respect to
cosmetic and beauty aid applications. There can be no assurance that such
insurance will be adequate to protect the Company from claims that may be
brought against it by users of the ColorMate(Registered Trademark) units or its
Beauty-Aid Products.

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

Control; Dependence on Management. Darby Simpson Macfarlane, Chief Executive
Officer of the Company, owns shares of Common Stock and Series A preferred
stock, par value $0.001 per share (the "Preferred Stock") aggregating 2,991,895
(including currently exercisable stock options) of the shares eligible to vote
on matters presented to the shareholders, which amount is sufficient to permit
her to significantly influence the election of directors and the approval of
significant corporate transactions. The Company is dependent primarily on the
services of Darby Simpson Macfarlane and David Kenneth Macfarlane, Vice
President, Research and Development. The loss of either of their services could
have a material adverse effect on the Company. Although the Company has
purchased key-man life insurance policies in the amounts of $1,000,000 on the
lives of both Mrs. and Mr. Macfarlane, there can be no assurance that the
proceeds from such policies would enable the Company to retain suitable
replacements for them.

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

If the Company is delisted from the Nasdaq SmallCap Market and the price per
share dropped below $5.00, then unless the Company satisfied certain net assets
tests, the Common Stock would become subject to certain penny stock rules
promulgated by the Securities and Exchange Commission (the "Commission"). The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document prepared by the Commission that provides information about
penny stocks and the nature and level of risks in the penny stock market. The
broker-dealer must also provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction and monthly account statements showing the market
value of each penny stock held in the customer's account. In addition, the penny
stock rules require that prior to a transaction in a penny stock not otherwise
exempt from such rules, the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level of trading
activities in the secondary market for stock that becomes subject to the penny
stock rules. If the Common Stock becomes subject to the penny stock rules,
investors may find it more difficult to sell their Common Stock.

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

                                       24

<PAGE>



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.

Outstanding Voting Preferred Stock. The Company has outstanding 1,380,000 shares
of Class A Preferred Stock. Each share of Class A Preferred Stock has voting
rights equivalent to each share of Common Stock and is convertible to Common
Stock if (i) the Company's earnings (i.e. pre tax operating income, before
interest expense) for any two consecutive calendar years ending on December 31,
2000 exceed $20,000,000 or (ii) the closing bid price of the Common Stock has
been at least $31.11 on 30 consecutive trading days at any time ending on
December 31, 2000. Further, the Class A Preferred Stock has a $13,800
liquidation preference and earns an annual non-cumulative dividend of $0.001 per
share. The voting rights, conversion rights, dividend rights and liquidation
preference of the Class A Preferred Stock may adversely affect the trading value
or the market price of the Common Stock.

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

Item 2.  Properties

The Company's executive offices, consisting of approximately 15,000 sq. ft. of
space, are located in New York, New York and are occupied pursuant to a month to
month lease. The Company is currently negotiating the lease. Rentals under such
month to month lease (including storage facilities) currently are being paid at
the rate of $21,000 per month, plus occupancy costs. Additionally, the Company
leases approximately 1,500 sq. ft. of space in Spokane, Washington which is used
for research and development activities pursuant to a month to month lease.
Rentals under such lease are $2,018 per month.

The Company also occupies approximately 2,000 sq. ft. of space located in
Riverdale, New York, which is used for research and development activities and
manufacturing administration, at a cost of $1,750 per month, which space is
subleased by the Company from Darby Simpson Macfarlane, a director, officer and
principal shareholder of the Company; such rent is equal to Mrs. Macfarlane's
actual lease cost for such premises. The Company paid Mrs. Macfarlane $20,090
for such space in 1999. 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 Mrs. Macfarlane
approximately $10,240 for such space in 1999.

The Company also occupies approximately 1,000 sq. ft. of space located in
Milford, Connecticut which is 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 occupies all of the spaces described above on an exclusive basis
except for the space located at the residence of Mrs. Macfarlane which it shares
with Mrs. Macfarlane.

Item 3.  Legal Proceedings

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

                                       25

<PAGE>



The third action was commenced in August 1998 and is captioned Joseph Grunberg
v. Chromatics Color Sciences International, Inc., Darby S. Macfarlane, Arthur
Guiry, David K. Macfarlane and Leslie Foglesong, C.A. No. 98 CIV. 5646
(S.D.N.Y.)

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

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

Defendants moved to dismiss the complaint, which motion was fully briefed and
submitted to the court. On March 24, 2000, the defendants' motion to dismiss the
complaint was granted subject to a 30-day period within which the plaintiffs may
refile a complaint. If the plaintiffs do, in fact, refile a complaint within
such 30-day period no assurance can be given that the resolution of the Action
and/or future actions will not have a material adverse effect on the Company's
results of operations and liquidity. The Company has directors and officers
insurance which may cover a portion of the liability asserted in the Action. The
Company is exploring its legal remedies in respect to what it believes to be
false allegations against the Company made by short sellers of its stock; the
Company expects to incur significant expenses in this regard.

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

On December 20, 1999, at the annual meeting of shareholders held at the
Company's offices in New York, New York, the shareholders (i) elected five
directors of the Company to serve for a term of one year and until their
respective successors shall be elected and shall qualify, (ii) ratified the
appointment of BDO Seidman, LLP as auditors of the Company for the year ending
December 31, 1999 and (iii) approved a proposal to amend the 1992 Plan to
increase the number of shares of Common Stock authorized to be issued thereunder
from 4,500,000 to 5,500,000, an increase of 1,000,000 shares.

The following table sets forth the votes cast for each proposal presented at the
Company's annual meeting:
<TABLE>
<CAPTION>
                                                     Election of Directors

                                   Votes For     Votes Against       Abstentions      Broker Non-Votes
                                   ---------     -------------       -----------      ----------------
<S>                               <C>                <C>                  <C>                <C>
Darby S. Macfarlane               15,101,382         571,853              0                  0
David Kenneth Macfarlane          15,110,802         562,433              0                  0
Leslie Foglesong                  14,989,624         683,611              0                  0
Edmund Vimond                     14,937,460         735,775              0                  0
Edward Mahoney                    14,991,364         681,871              0                  0

<CAPTION>
                                                Ratification of Appointment of BDO Seidman LLP

                                   Votes For     Votes Against       Abstentions      Broker Non-Votes
                                   ---------     -------------       -----------      ----------------
                                   <S>           <C>                <C>               <C>
                                   15,531,709    55,756              85,770           0

                                                       Amendment of 1992 Plan

                                   Votes For     Votes Against       Abstentions      Broker Non-Votes
                                   ---------     -------------       -----------      ----------------
                                   <S>           <C>                 <C>              <C>
                                   6,260,124     806,044             111,746          8,495,321

</TABLE>


                                       26
<PAGE>



                                     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.

There can be no assurance that an active public trading market for the Common
Stock will continue. Prior to February 8, 1993, the date on which the Common
Stock was approved for quotation on the Nasdaq Stock Market SmallCap Market
("NASDAQ"), there was no public market for the Common Stock. The quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commissions,
and may not necessarily reflect actual transactions. On March 23, 2000, the last
reported bid price for the Common Stock was $5,875 per share. There were 125
holders of record of the Common Stock as of March 23, 2000, including nominees
for an unknown number of beneficial holders.

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

                                  Common Stock

                   Period                                   Price
                   ------                                   -----
                                                   High                Low
                                                   ----                ---
     January 1, 1998 to March 31, 1998            17.375              7.172
     April 1, 1998 to June 30, 1998               18.000              3.375
     July 1, 1998 to September 30, 1998            6.000              2.375
     October 1, 1998 to December 31, 1998          8.438              2.563
     January 1, 1999 to March 31, 1999            11.500              4.625
     April 1, 1999 to June 30, 1999               13.938              7.625
     July 1, 1999 to September 30, 1999            8.938              5.125
     October 1, 1999 to December 31, 1999          9.125              5.125


Dividend Policy


The Company has not paid, during the two fiscal years ended December 31, 1999,
and has no present intention to declare or pay, cash dividends on the Common
Stock in the foreseeable future. The Company intends to retain any earnings
which it may realize in the foreseeable future to finance its operations. The
Company has outstanding 1,380,000 shares of the 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.

                                       27

<PAGE>



<TABLE>
<CAPTION>

                                                  Years Ended December 31,
                                                  ------------------------
                                    1999             1998             1997            1996             1995
                                    ----             ----             ----            ----             ----
<S>                               <C>             <C>             <C>               <C>             <C>
Total Assets                      $8,110,200      $7,878,200      $10,752,600       $6,747,500      $3,489,900
Senior Convertible Debentures
 including accrued interest        4,661,600              --               --               --              --
Redeemable Preferred Stock         2,942,500          13,800           13,800           13,800          13,800
Stockholders' Equity (Deficiency)   (503,700)      6,569,200        9,896,300        5,942,200       2,876,400
Revenues                           1,103,200          46,600           11,500           66,600         170,100
Net Loss                         (12,808,000)     (7,284,800)      (5,053,100)      (4,442,300)     (2,494,300)
Net Loss per share - Basic
and diluted (*)                       (0.93)           (0.49)           (0.40)          (0.51)           (0.39)
</TABLE>

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

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

Results of Operations

Fiscal Year 1999 Compared to Fiscal Year 1998

The Company incurred a net loss of $12,808,000 and $7,284,800, for fiscal years
1999 and 1998, respectively. Revenues of $1,103,200 have been received
principally from sales of ColorMate (Registered Trademark) TLc-BiliTest
(Registered Trademark) Systems and TLc-Lensette (Trademark) Calibration
Standards and other products under the Company's distribution agreement with
Datex Ohmeda, Inc. and its Ohmeda Medical Division. Of the increase in net loss
from 1999 as compared to 1998, $2,740,800 represents non-cash financing costs
computed as original issue discount ("OID") on financing transactions, $495,800
represents non-cash accrued interest on senior convertible debentures and
$140,600 represents an increase in non-cash expenses relating to stock option
grants to non-employees. The resulting $2,146,000 increase in losses from 1999
as compared to 1998 (without consideration of the non-cash OID costs, the
non-cash accrued interest on senior convertible debentures and non-cash expenses
for stock option grants to non-employees), is primarily attributable to an
increased cost of $1,552,700 relating to the Company's medical division sales
force, as the Company continues the implementation of its long-term business
plan to seek commercial applications of its intellectual properties and
technologies in the medical field. The Company had a gross profit in 1999 from
sales of ColorMate (Registered Trademark) TLc-BiliTest (Registered Trademark)
Systems and TLc-Lensette (Trademark) Calibration standards and other products of
$205,100 which was offset by: the increased cost of Sales, Marketing and Trade
show expenses which include the above-mentioned fully implemented sales force at
its medical division of $1,552,700; increases in amortization of patent,
software and ColorMate (Registered Trademark) TLc-BiliTest (Registered
Trademark) System promotional expenses of $363,700 and an increase in stock
administration fees of $88,400 relating primarily to registration costs of the
1999 financing transactions. These increased expenses were partially offset by a
decrease in legal fees of $163,000.

The Company anticipates that it will continue to incur significant costs and
expenses in connection with FDA 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, products liability insurance, legal and regulatory
compliance, including QSR/GMP quality system substantial compliance, as well as
research and development for new potential applications, and implementation of
the next phase of its efforts to successfully commercialize the medical
application of its technology. The Company anticipates significantly higher
compensation expenses in connection with increased hiring of executives and
staff. The Company will also incur additional expenses implementing additional
testing and clinical trials of its technologies for the possible monitoring of
other chromogenic diseases. The Company also anticipates further legal expenses
in connection with its defense of certain class action suits that have been
brought against the Company and as the Company explores all of its potential
legal remedies. See "Legal Proceedings."

In June 1999 the Company entered into an agreement for the exclusive
distribution of its ColorMate(Registered Trademark) TLc-BiliTest(Registered
Trademark) System in the hospital, pediatricians' office and home healthcare
markets in the United States with Datex Ohmeda, Inc. and its Ohmeda Medical
Division. The Company expects to generate profits through its relationship with
Datex Ohmeda, Inc. and its Ohmeda Medical Division from the aggregate sales of
its ColorMate (Registered Trademark) TLc-BiliTest(Registered Trademark) System
and the disposable TLc-Lensette (Trademark) Calibration Standards which
calibrate the device prior to its use.

The ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System
consists of two distinct products: the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System device and the TLc-Lensette(Trademark)
Calibration Standards. The initial transfer prices of the ColorMate(Registered
Trademark) TLc-BiliTest(Registered Trademark) System devices and the
TLc-Lensette(Trademark) calibration standards are initially set at established
minimum amounts. The Company expects to receive additional amounts from the
distributor equal to a defined percentage of the distributor's sales of the
products ("Profit Sharing Payments"). The Company

                                       28

<PAGE>



incurred a small loss in 1999 based on the initial transfer price of the
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System
devices. The loss was offset through the profits generated from the sale of
TLc-Lensette(Trademark) calibration standards, which are initially transferred
at a significant profit. In addition, any Profit Sharing Payments will generate
additional profits to the Company.

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

Fiscal Year 1998 Compared to Fiscal Year 1997

The Company incurred net losses of $7,284,800 and $5,053,100 for fiscal years
1998 and 1997, respectively, as revenues received have not been significant
relative to the Company's expenses incurred in implementing its business plan.
Lease, license and service revenues in 1998 represent fees paid to the Company,
in connection with a test project done with the Company. The $2,231,700 increase
in such losses in 1998 as compared to 1997 is primarily attributable to the
Company's continuing implementation of its long-range business plan to seek
commercial applications of its Intellectual Properties and technologies in the
medical field, including an increase in costs and expenses regarding:
consultants' compensation; (which increased by $67,300 in 1998 compared to 1997)
legal expenses incurred in respect of the Company's negotiations with its
medical device manufacturer and potential distribution partners, the recent
litigation and matters related to the short selling activities in the Company's
stock, and legal, consulting and other related expenses regarding regulatory
compliance with respect to manufacturing and other requirements for the
Company's ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark)
System (which increased by $668,800 in 1998 compared to 1997); sales, marketing
and trade show expenses, primarily attributable to the Company's presentations
at the Annual Convention of the Pediatric Academic Societies, the Sinomed
Conference in China, the International Congress of Pediatrics, the National
Association of Neonatal Nurses, the American Academy of Pediatrics and the 5th
Annual Pediatric Critical Care Medicine Conference in China (which increased by
$839,800 in 1998 compared to 1997); option grants (which increased $261,000 in
1998 compared to 1997); public relations and promotions (which increased by
$289,700 in 1998 compared to 1997); and contributions to the new employee
benefit plan. These increased expenses were partially offset by a decrease in
patent application costs, as the Company has begun capitalizing certain of these
expenses in 1998. The Company incurred research and development expenses
primarily consisting of compensation of officers, employees and consultants of
$705,000 and $435,300 for fiscal years 1998 and 1997, respectively.

In 1998, the Company focused its resources on implementation of its long-range
business plan for the FDA medical application of its technologies and received
no revenues from operations.

In November 1998, the Company entered into a manufacturing agreement with Nova
Biomedical Corporation for the production of the ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System. Under this renewable, four year
medical device manufacturing agreement, the Company pays Nova Biomedical a per
unit fee for the manufacture of the ColorMate(Registered Trademark) TLc-
BiliTest(Registered Trademark) units.

Liquidity and Capital Resources

Fiscal Year 1999 Compared to Fiscal Year 1998

Current assets increased to $4,933,700 at December 31, 1999 as compared to
$4,251,200 at December 31, 1998, primarily attributable to increases in accounts
receivable and inventory. The increase of $750,000 in accounts receivable is due
to sales in 1999 of its ColorMate(Registered Trademark) TLc-BiliTest(Registered
Trademark) System and TLc Lensette(Trademark) Calibration Standards. Although
cash and cash equivalents decreased by $1,139,400, inventories increased by
$1,024,500 at December 31, 1999 as compared to December 31, 1998, due to the
Company's new distribution agreement with Datex-Ohmeda, Inc. and its Ohmeda
Medical Division.

As indicated in the Company's Statements of Cash Flows, the Company continued to
experience significant negative net cash flows from operating and investing
activities in 1999. The 1999 increase in cash outflows from operating activities
is primarily attributable to the increase in the Company's net loss, partially
offset by an increase in depreciation and amortization expenses, non-cash
compensation costs to consultants and non-cash interest and financing costs.
Cash outflows from investing activities, which are attributable to software
development costs of $81,300, patent costs of $553,000 and purchases of property
and equipment of $91,200, decreased to $725,500 during fiscal year 1999 from
$2,554,200 during fiscal year 1998. The primary reason for this decrease is that
purchases and deposits of ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System units, which represented $1,504,400 of
cash outflows from investing activities during 1998, have been reclassified as
inventory in 1999. Cash flows from financing activities during 1999 principally
represent $9,104,800 of proceeds from the issuance of the Common Stock,
Debentures, Preferred Stock and Warrants, partially offset by payments of
$62,800 to a related party.

The Company's primary source of liquidity in 1999 was the net proceeds from the
private placements of convertible debt and equity securities totaling
$8,727,400. The Company anticipates incurring significant additional
expenditures related to manufacturing expenses, parts order, insurance,
regulatory compliance and staffing as production and distribution continues.
Also, the Company anticipates further legal expenses

                                       29

<PAGE>



in connection with its defense of certain class action suits that have been
brought against the Company and as the Company explores all of its potential
legal remedies. Management expects that taking into account existing resources,
revenues from sales of the ColorMate(Registered Trademark) units, payments
received under distribution agreements and/or the proceeds of $3.6 million from
the February 2000 Preferred Stock and Warrant financing and any additional
financing, the Company will have sufficient liquidity at least until December
31, 2000. The Company may seek additional debt or equity financing to further
support and expand its operations. If the Company is not able to attract
additional future financing, generate significant revenue from operations and/or
successfully market its products and technologies, at such point in time, it may
have to significantly curtail and/or cease operations. The Company does not
believe inflation had a material effect on its financial position or results of
operations.





                                       30

<PAGE>



Item 7A. Quantitative and Qualitative Disclosure About Market Risk.

         None.


Item 8.  Financial Statements and Supplemental Data


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>

                                                                                            Page
                                                                                            ----
<S>                                                                                        <C>

  Independent Accountants' Reports.........................................................   32

  Consolidated Balance Sheets as of December 31, 1999 and 1998.............................   34

  Consolidated Statements of Operations for the years ended December 31, 1999,
    1998 and 1997..........................................................................   35

  Consolidated Statements of Changes in Shareholders' Equity for the years ended
    December 31, 1999, 1998 and 1997.......................................................   36

  Consolidated Statements of Cash Flows for the years ended December 31, 1999,
    1998 and 1997..........................................................................   37

  Notes to Consolidated Financial Statements...............................................   38
</TABLE>




                                       31

<PAGE>



                         INDEPENDENT ACCOUNTANTS' REPORT

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

We have audited the consolidated balance sheets of Chromatics Color Sciences
International, Inc. and subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the years 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 audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Chromatics Color
Sciences International, Inc. and subsidiary as of December 31, 1999 and 1998 and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.

                                                          BDO SEIDMAN, LLP

New York, New York
March 10, 2000




                                       32

<PAGE>





                         INDEPENDENT ACCOUNTANTS' REPORT

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

We have audited the consolidated statement of operations, changes in
shareholders' equity and cash flows of Chromatics Color Sciences International,
Inc. for the year ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

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

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

                                                        WISS & COMPANY, LLP

Livingston, New Jersey
February 17, 1998




                                       33

<PAGE>




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

None



                                       49

<PAGE>




PART III

Item 10. Directors and Executive Officers of the Company

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

        Name                   Age                         Position
        ----                   ---                         --------
Darby Simpson Macfarlane       55             Director, Chairperson of the Board
                                              of Directors, Chief Executive
                                              Officer, Assistant Treasurer

Arthur Guiry+                  60             President

David Kenneth Macfarlane       53             Director, Vice President, Research
                                              and Development

Leslie Foglesong*              44             Director, Secretary and Treasurer

Edmund Vimond*++               64             Director

Edward Mahoney*++              49             Director

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

+    Deceased March 9, 2000.

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


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

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, 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. Arthur Guiry died in March, 2000. Mr. Guiry had served as President of the
Company since April 10, 1995.

Mr. Macfarlane co-founded the Company and is also one of the primary inventors
of the patented technologies used in the ColorMate(Registered Trademark) System.
In addition, Mr. Macfarlane developed the manufacturing, technical and
engineering specifications necessary to have miniaturized and mass manufactured
the ColorMate(Registered Trademark) 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.

                                       50

<PAGE>



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

Mr. Edmund Vimond has previously provided consulting services to the Company. On
December 1, 1997, Mr. Vimond was appointed to the Company's Board of Directors
and currently acts as Chairman of the Company's Compensation Committee. From
1991 to 1997, Mr. Vimond was the President and Chief Executive Officer of
Ocurest Laboratories, Inc. Mr. Vimond was responsible for managing all functions
of the business, including marketing, sales, contract manufacturing, personnel
and finance and systems. Prior to 1991, Mr. Vimond held positions in various
executive capacities with RJR Nabisco Inc., American Cyanamid Co., Johnson &
Johnson and Warner-Lambert Companies Inc. Since January 1998, Mr. Vimond has
been the principal of Edmund Vimond Associates, a business development
consulting practice. Mr. Vimond received B.S.B.A. and M.B.A. degrees from
Northwestern University.

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

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

Dr. Fred W. Billmeyer, Jr., Professor Emeritus at Rensselaer Polytechnic
Institute, a color scientist and recognized expert in the color science field
for more than 40 years, has been a consultant to the Company since 1984 and is a
member of the Company's Medical Advisory Board. Dr. Billmeyer has published
numerous books and articles in the field of color science. The consulting
agreement with Dr. Billmeyer provides that he will provide color consulting
services to the Company at a fee of $125 per hour. Such services include
providing advice and supervisory assistance in connection with any further
research and development, modification, enhancement or marketing activity
relating to the ColorMate(Registered Trademark) 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 1999, the Company paid
Dr. Billmeyer $4,827.

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.

The Company from time to time also employs certain other consultants and
temporary personnel for various purposes such as FDA and regulatory matters, the
Bilirubin Project and marketing, engineering, research and development
associated with the Intellectual Properties, Beauty-Aid Products, the
ColorMate(Registered Trademark) Bilirubin Device and ColorMate(Registered
Trademark) units. The Company has also retained consultants to provide public
relations, shareholder relations, financial, licensing and investment banking
services. In 1999, these consultants and temporary personnel were paid an
aggregate of $301,000 and were granted options to purchase an aggregate of
90,000 shares of the Company's Common Stock under the 1992 Plan. All consultants
may be reimbursed by the Company for reasonable out-of-pocket

                                       51

<PAGE>


expenses incurred by them in connection with the services each consultant
provides to the Company.

Compliance with Section 16(a) of the Exchange Act

The Company became subject to the reporting requirements of Section 13 of the
Exchange Act on February 5, 1993 and, accordingly, the Company's officers,
directors and greater than 10 percent beneficial owners were subject to the
reporting requirements of Section 16(a) of the Exchange Act during the year
ended December 31, 1993. The Company believes that during the fiscal year ended
December 31, 1999 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 Officer and its three other
executive officers who were serving as such during and at the end of fiscal 1999
for services rendered in all capacities to the Company in the last three fiscal
years.

<TABLE>
<CAPTION>

                                                                                                       Long-Term
                                                                                                     Compensation
                                                                                              --------------------------
                                                   Annual Compensation                        Awards
                                   ----------------------------------------------------       -------             All other
 Name and Principal Position           Year           Salary ($)          Bonus ($)        Options (#)(1)       Compensation
 -------------------------------   -------------    ---------------   -----------------   ----------------      -------------
<S>                                     <C>              <C>                   <C>                <C>                <C>
Darby S. Macfarlane,                    1999             175,000               0                  0                  0
 Chief Executive Officer                1998             175,000               0                  0                  0
                                        1997             175,000               0                  0                  0
Arthur Guiry, President                 1999             200,000               0                  0                  0
                                        1998             200,000               0                  0                  0
                                        1997             200,000               0                  0                  0
David Kenneth Macfarlane,               1999             125,000               0                  0                  0
 Vice President,                        1998             125,000               0                  0                  0
 Research Development                   1997             125,000               0                  0                  0
Leslie Foglesong                        1999             100,000            10,000                0                  0
 Secretary and Treasurer                1998             100,000             5,000             100,000               0
                                        1997             100,000               0                  0                  0
</TABLE>

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

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, 1999 and the value at
December 31, 1999 of unexercised stock options held by the Chief Executive
Officer and the other executive officers of the Company. The number of shares
presented gives effect to the Stock Split:

<TABLE>
<CAPTION>
                                                                                                                 Value of
                                                                                   Number of Securities      Unexercised In-the-
                                                                                  Underlying Unexercised      Money Options at
                                                                                Options at Fiscal Year-End   Fiscal Year-End (1)
                                                                         ---------------------------------  --------------------
                                  Shares Acquired on         Value           Exercisable/ Unexercisable         Exercisable/
 Name                                Exercise (#)           Realized                    (#)                     Unexercisable
--------------------------     ----------------------  ---------------  ---------------------------------  --------------------
<S>                                       <C>                 <C>                   <C>                             <C>
 Darby S. Macfarlane                       0                   0                     450,000/0                        $1,864,350
 Arthur Guiry                              0                   0                     105.000/0                          $505,365
 David Kenneth Macfarlane                  0                   0                     300,000/0                        $1,242,900
 Leslie Foglesong                          0                   0                     250,000/0                          $797,000
</TABLE>

 (1)     The value of unexercised in-the-money options was calculated by
         multiplying the number of underlying shares held by the difference
         between the closing price of the Common Stock on December 31, 1999
         ($7.063 per share, as originally quoted on the Nasdaq SmallCap Market
         published in The Wall Street Journal) and the option exercise price,
         but after giving effect to the Stock Split.


                                       52
<PAGE>


Compensation of Directors

 Directors who are officers of the Company do not receive additional
 compensation for serving on the Board of Directors or for their attendance at
 Board of Directors' meetings. Edmund Vimond receives a monthly director's fee
 of $6,000 and Edward Mahoney receives a monthly director's fee of $4,000. In
 addition, Mr. Mahoney received options to purchase 37,500 (on January 26, 1998)
 shares of the Company's Common Stock under the 1992 Plan and each of Mssrs.
 Mahoney and Vimond received options to purchase 20,000 (on October 30, 1998)
 shares of the Company's Common Stock under the 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) (one-third became exercisable at
 January 26, 1999) and $5.375 (grants on October 30, 1998) (one-third became
 exercisable at October 30, 1999) per share, respectively. Mr. Vimond also
 received 22,500 stock options on December 1, 1997, two-thirds of which became
 exercisable on December 1, 1999 and expire on December 1, 2002 and are
 exercisable at $9.71 per share. In addition, on July 15, 1997, Mr. Vimond
 received 15,000 stock options, two-thirds of which options were fully
 exercisable on July 15, 1999, expire on July 15, 2002 and are exercisable at
 $5.42 per share.

 Employment Agreements

 The Company has entered into separate employment agreements with each of Darby
 Simpson Macfarlane and David Kenneth Macfarlane, providing for Mrs.
 Macfarlane's employment as Chief Executive Officer and for Mr. Macfarlane's
 employment as Vice President, Research and Development. The agreements with
 Mrs. and Mr. Macfarlane provide for annual base salaries in 1999 of $175,000
 and $125,000, respectively, subject to annual increases at the discretion of
 the Board of Directors. In addition, Mrs. Macfarlane's agreement provides for a
 bonus payment of 33% of the first million of the Company's net recovery in
 excess of $2,000,000 from the Avon Litigation. Accordingly, Mrs. Macfarlane was
 to receive $361,200, of which $110,900 has been paid. The remaining $250,300 is
 currently payable and accrues interest at the rate of 10% per annum. However,
 repayment of this amount is subject to Mrs. Macfarlane's agreement to defer
 repayment until January, 1999 in connection with the amendment to the Company's
 Certificate of Incorporation which amendment modified certain terms of the
 Class A Preferred Stock, including the following: (i) extension to December 31,
 2000 of the expiration date of the conversion feature and redemption period,
 (ii) revision of the market price conversion feature to provide for adjustment
 upon the occurrence of certain events involving the Common Stock, and (iii)
 revision of the calculation of the earnings goal needed to trigger the
 conversion feature by excluding extraordinary items and revenues and earnings
 generated by businesses acquired by the Company. In connection with Mrs.
 Macfarlane's agreement to defer repayment until January 1, 1999, Mrs.
 Macfarlane has also agreed to extend the term of her employment with the
 Company until December 31, 2000 with an optional two-year renewal and forego
 any discretionary performance bonus under her employment agreement in 1999.
 Under the employment agreements, the Company is obligated to provide Mr.
 Macfarlane with a $300,000 and Mrs. Macfarlane with a $1,000,000 term life
 insurance policy and disability insurance. The Company maintains key-man life
 insurance on each of Mrs. and Mr. Macfarlane in the amount of $1,000,000. Mrs.
 Macfarlane subsequently extended the repayment date of the amount due to her
 from the Company in connection with the Avon litigation until April 2000.

 The employment agreements also provide for the payment of termination benefits
 by the Company if employment thereunder is terminated after January 1, 2000 (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 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, an amount not less than any bonus granted by the Board of
 Directors of the Company to the employee in the year immediately preceding the
 year in which termination occurred. If the employee's employment is terminated
 by reason of death or disability, the Company is required to pay to Mrs.
 Macfarlane and Mr. Macfarlane, as applicable, an amount equal to 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 an amount not less than
 the pro rata portion of any bonus granted to the employee in the year
 immediately preceding the year in such termination occurs.

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

 Compensation Committee Interlocks and Insider Participation

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

                                       53

<PAGE>



 Compensation Committee Report on Executive Compensation

 The Compensation Committee of the Board of Directors is responsible for
 establishing compensation policies applicable to the Company's executive
 officers; evaluating and recommending to the Board the compensation of the
 chief executive officer and other executive officers; and recommending to the
 Board individual stock option grants for executive officers from the 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, 1999.

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

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

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

 Chief Executive Officer Compensation: The Company extended the employment
 agreement with Mrs. Macfarlane, the Chief Executive Officer, until December 31,
 2000 with an optional two-year renewal at an annual base salary of $175,000
 until January 1, 2000, in connection with her agreement with the Company, as
 recommended by the Compensation Committee, to forego any bonus grant in 1999 in
 consideration of the Company agreeing to modify certain terms of the Class A
 Preferred Stock owned by Mrs. Macfarlane, including extension of the redemption
 date for the Preferred Stock to December 31, 2000. The determination of salary
 level was based on the same criteria applicable to base salaries of all
 executive officers. Mrs. Macfarlane received no stock option or bonus grant in
 1999 and received an annual salary of $175,000 in 1999.

 Item 12.  Security Ownership of Certain Beneficial Owners and Management

 The following table sets forth, as of March 23, 2000, the beneficial ownership
 of the Common Stock: (i) by each stockholder known by the Company to
 beneficially own more than 5% of the Common Stock or the Class A Preferred
 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. Amounts presented give effect to the February 1998
 three-for-two forward stock split (the "Stock Split") (including shares
 issuable upon the exercise of stock options and/or warrants). Except as
 otherwise indicated below, each named beneficial owner has sole voting and
 investment power with respect to the shares of Common Stock or Class A
 Preferred Stock listed.


                                       54

<PAGE>


<TABLE>
<CAPTION>
                                          Class A
 Name and Address of                      Preferred Stock(1)      Percent               Common Stock Number
 Beneficial Owner                         Number of Shares        of Class                   of Shares           Percent of Class
---------------------------------------- ----------------------  ------------------  -------------------------  ------------------
<S>                                           <C>                       <C>                 <C>                        <C>
 Darby Simpson Macfarlane                       1,380,000               100%                1,611,895(2)               9.9%
 10 Old Jackson Avenue, #28
 Hastings-on-Hudson, NY 10706
 David Kenneth Macfarlane                       1,380,000(3)            100%                1,611,895(4)               9.9%
 5 East 80th Street
 New York, NY 10021
 Leslie Foglesong (5)                                                                         265,000                     *
 116 Lafayette Avenue
 Brooklyn, NY 11217
 Edmund Vimond                                                                                 31,666                     *
 6967 Country Lakes Circles
 Sarasota, FL 34243
 Edward Mahoney                                                                                19,166                     *
 2044 Palisades Drive
 Pacific Palisades, CA 90272
 Arthur Guiry                                                                                 105,000                     *
 The Willows
 11-5 Jackson Avenue
 Scarsdale, New York 10583
 Janssen-Meyers Associates, L.P. (6)                                                        1,206,934                 7.56%
 17 State Street
 New York, NY 10001
 LB I Group Inc. (7)                                                                        1,846,922                10.62%
 3 World Financial Center
 New York, New York 10285
 Gary W. Schreiner (8)                                                                      1,000,000                 6.05%
 c/o P.O. Box 400
 Sterling, Illinois 61081
 All directors and executive officers           1,380,000               100%                2,032,727                11.74%
 as a group (6 persons) (9)
</TABLE>

(1)  The Class A Preferred Stock is a voting security which votes together with
     the Common Stock as a single class and is entitled to one vote per share.
     The shares of Class A Preferred Stock are convertible into shares of Common
     Stock if (i) the Company's earnings for any two calendar years during the
     period ending on December 31, 2000 exceeds $20,000,000 or (ii) the closing
     bid price of the Common Stock has been at least $31.11 on 30 consecutive
     trading days at any time prior to December 31, 2000. The conversion ratio
     is .979 shares of Common Stock for each share of Class A Preferred Stock.
     If neither condition to conversion is satisfied by December 31, 2000, the
     Class A Preferred Stock will be redeemed by the Company at a price of $.01
     per share.
(2)  Includes 861,895 issued and outstanding shares of the Common Stock
     beneficially owned by Mrs. Macfarlane, 450,000 shares issuable upon the
     exercise of options granted to Mrs. Macfarlane and 300,000 shares issuable
     upon the exercise of options granted to Mr. Macfarlane which options are
     currently exercisable. 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.
(3)  Represents the 1,380,000 issued and outstanding shares of the Class A
     Preferred Stock owned by Mrs. Macfarlane.
(4)  Includes 861,895 issued and outstanding shares of the Common Stock
     beneficially owned by Mrs. Macfarlane, 450,000 shares issuable upon the
     exercise of options granted to Mrs. Macfarlane and 300,000 shares issuable
     upon the exercise of options granted to Mr. Macfarlane which options are
     currently exercisable.
(5)  Includes 250,000 shares issuable upon the exercise of options which are
     currently exercisable.
(6)  Based on a representation letter from Janssen-Meyers Associates, L.P. dated
     March 19, 1999, and includes 636,250 shares of Common Stock held by Peter
     Janssen (an affiliate of Janssen-Meyers Associates, L.P.), 145,750 shares
     of Common Stock and 314,347 warrants held by Janssen-Meyers Associates,
     L.P. which, in each case, are currently exercisable, 108,647 warrants held
     by limited partners of Janssen-Meyers Associates, L.P. and 1,940 warrants
     held by Meyers Janssen Securities Corp., which, in each case, are currently
     exercisable. Peter Janssen and Bruce Meyers are deemed to be the beneficial
     owners of the shares of Common Stock and warrants held by Janssen-Meyers
     Associates, L.P.
(7)  Represents shares of Common Stock which may be acquired upon the conversion
     of convertible Preferred Stock and warrants owned by LB I Group, Inc.
(8)  Represents shares of Common Stock which may be acquired upon the conversion
     of convertible debentures owned by certain trusts as to which Mr. Schreiner
     exercises sole voting and sole dispositive power.
(9)  Includes 1,050,832 shares issuable upon the exercise of options which are
     currently exercisable.


                                       55
<PAGE>



Item 13. Certain Relationships and Related Transactions

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

Since August 1990, the Company has occupied office space leased under Darby
Simpson Macfarlane's name. The Company pays $1,750 per month under the lease
(representing the actual lease cost for such premises), which rent increased
from $1,620 in August 1999. For the year ended December 31, 1998 the Company
paid $19,400 in connection with such lease, and for the year ended December 31,
1999 the Company paid $20,090. In addition, the Company also paid Mrs.
Macfarlane approximately $9,600 for the year ended December 31, 1998 and
approximately $10,200 for the year ended December 31, 1999 under a lease for the
use of her residence as offices of the Company, which operates after normal
business hours and on weekends.

In connection with the Avon Settlement and Mrs. Macfarlane's employment
agreement, Mrs. Macfarlane was to receive $361,200 from the proceeds from the
Avon Settlement, of which $110,900 has been paid. The remaining $250,300 is
currently payable and accrues interest at the rate of 10% per annum. See
"Employment Agreements."

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.


                                       56

<PAGE>




                                     PART IV


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

(a) and (d)1. Financial Statements

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

                        Independent Accountant's Reports

Consolidated Balance Sheets as of December 31, 1999 and 1998

Consolidated Statements of Operations for the years ended December 31, 1999,
1998 and 1997

Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997

Consolidated Statements of Cash Flows for the years ended December 31, 1999,
1998 and 1997

Notes to Consolidated Financial Statements

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

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

     (b) Reports on Form 8-K:

Form 8-K/A, dated November 19, 1999, amending and restating the text of Item 7
of the Form 8-K and Exhibit 10.1 thereto filed with the Securities and Exchange
Commission on June 18, 1999.

Form 8-K/A, dated November 19, 1999, amending and restating the text of Item 7
of the Form 8-K and Exhibit 10.1 thereto filed with the Securities and Exchange
Commission on November 3, 1998.

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

<TABLE>
<CAPTION>

       Number                  Description of Document
       ------                  -----------------------
<S>                            <C>
       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
</TABLE>



                                       57

<PAGE>

<TABLE>
<CAPTION>

       Number                  Description of Document
       ------                  -----------------------
<S>                            <C>
                               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.

       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).
</TABLE>

                                       58

<PAGE>

<TABLE>
<CAPTION>

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

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

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

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

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

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

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

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

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


                                       59
<PAGE>

<TABLE>
<CAPTION>

       Number                  Description of Document
       ------                  -----------------------
<S>                            <C>
       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 Fenruary 11, 2000, by and between
                               the Company and LB I Group Inc. (incorporated by reference to
                               Exhibit 4.8 hereof).

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

       23+                     Consents of Independent Accountants.

       27+                     Financial Data Schedule
</TABLE>
*    Management contract or compensatory plan or arrangement required to be
     filed as an exhibit.
**   Portions subject to confidedential treatment.
+    Filed herewith.

                                       60
<PAGE>





                                   SIGNATURES

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

  CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
  By: /s/ Darby S. Macfarlane                Date: March 29, 2000
      -----------------------
  Darby S. Macfarlane,
  Chief Executive Officer

  By: /s/ Frank Marchese                     Date: March 29, 2000
     -------------------
   Frank Marchese,
   Chief Financial Officer
   (Chief Financial and Accounting Officer)

         In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.

  By:  /s/ Darby S. Macfarlane                          Date:  March 29, 2000
       -----------------------
       Darby S. Macfarlane,
       CEO; Chairman of the Board;
       Assistant Treasurer; Director

  By:  /s/ David K. Macfarlane                          Date: March 29, 2000
       -----------------------
       David K. Macfarlane,
       Vice President, Research & Development;
       Director

  By:  /s/ Leslie Foglesong                             Date: March 29, 2000
       --------------------
       Leslie Foglesong,
       Secretary; Treasurer; Director

  By:  /s/ Edmund Vimond                                Date: March 29, 2000
       -----------------
       Edmund Vimond,
       Director

  By:  /s/ Edward Mahoney                               Date: March 29, 2000
       ------------------
       Edward Mahoney,
       Director


                                       61


<PAGE>



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


<TABLE>
<CAPTION>

                                                                                              December 31,
                                                                                              ------------
                                                                                          1999                1998
                                                                                          ----                ----
<S>                                                                                 <C>                   <C>
                                      ASSETS
CURRENT ASSETS:
     Cash and equivalents                                                            $ 2,790,400         $ 3,929,800
     Accounts receivable                                                                 842,300              92,300
     Inventories                                                                       1,171,800             147,300
     Prepaid expenses and other current assets                                           129,200              81,800
                                                                                    ------------        ------------
               Total Current Assets                                                    4,933,700           4,251,200

PROPERTY AND EQUIPMENT - NET                                                             612,200             301,700
SOFTWARE DEVELOPMENT COSTS - NET                                                         470,500             546,000
PATENT COSTS - NET                                                                       984,000             540,300
COLORMATE(REGISTERED TRADEMARK) UNITS                                                          -           1,820,100
OTHER AMORTIZABLE ASSETS - NET                                                           455,400                   -
OTHER ASSETS                                                                             654,400             418,900
                                                                                    ------------        ------------
                                                                                     $ 8,110,200         $ 7,878,200
                                                                                    ============       =============
                      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
     Amounts payable to related party                                                  $ 256,100           $ 318,900
     Accounts payable and accrued expenses:
          Attorneys and accountants                                                      394,600             673,000
          Consultants                                                                    119,100             146,500
          Trade                                                                          240,000             156,800
                                                                                    ------------        ------------
               Total Current Liabilities                                               1,009,800           1,295,200
                                                                                    ------------        ------------
LONG TERM DEBT:
     Senior convertible debentures                                                     4,165,800                   -
     Accrued interest on senior convertible debentures                                   495,800                   -
                                                                                    ------------        ------------
                                                                                       4,661,600                   -
                                                                                    ------------        ------------
COMMITMENTS AND CONTINGENCIES

REDEEMABLE PREFERRED STOCK:
    Class A, Par value $.01 per share
          Authorized - 1,400,000 shares
          Issued and outstanding - 1,380,000 shares
          at par and redemption value                                                     13,800              13,800
     Class B, series 2 Convertible Preferred Stock, No Par Value:
          Authorized - 10,000,000 shares
          Issued and outstanding - 40,000 shares in 1999
          $115 redemption value                                                        2,928,700                   -
                                                                                    ------------        ------------
                                                                                       2,942,500              13,800
                                                                                    ------------        ------------
SHAREHOLDERS' EQUITY (DEFICIENCY)
     Common stock, par value $.001 per share:
          Authorized - 50,000,000 shares
          Issued and outstanding - 15,539,117 (1999)
               and 15,452,442 (1998) shares                                               15,500              15,400
     Additional paid-in capital                                                       34,062,000          28,327,000
     Accumulated deficit                                                             (34,581,200)        (21,773,200)
                                                                                    ------------        ------------
               Total Shareholders' Equity (Deficiency)                                  (503,700)          6,569,200
                                                                                    ------------        ------------
                                                                                     $ 8,110,200         $ 7,878,200
                                                                                    ============        ============
</TABLE>
              See accompanying notes to the consolidated financial statements

                                      34
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                 Year Ended December 31,
                                                                                -------------------------
                                                                          1999             1998              1997
                                                                          ----              ----              ----
<S>                                                                  <C>              <C>             <C>
REVENUES:
    Sales                                                           $   1,103,200     $          -     $           -
    Lease, license and service contracts                                        -           45,000            10,500
    Other                                                                       -            1,600             1,000
                                                                    -------------     ------------      ------------
                                                                        1,103,200           46,600            11,500
                                                                    -------------     ------------      ------------
COSTS AND EXPENSES:
     Cost of sales                                                        898,100                -                 -
     Sales, marketing and trade show costs                              2,511,600          958,900           119,100
     Medical regulatory expenses                                        1,323,300        1,341,500         1,148,600
     Research and development                                             996,300          705,000           435,300
     Patent application costs                                             134,400          221,700           691,200
     Compensation costs relating to options
            granted to consultants (non cash)                             984,000          843,400           582,400
     General and administrative:
            Compensation - officers and employees                         803,900          772,200           729,300
            Consultants                                                   301,000          265,600           198,300
            Legal fees                                                    793,900          956,900           288,100
            Accounting fees                                                79,100           51,000            35,100
            Rent and storage                                              296,800          266,000           199,900
            Insurance                                                     222,600          194,700           220,600
            Travel and entertainment                                      120,000           98,200            17,900
            Repairs and maintenance                                       118,100           87,500           122,100
            Depreciation and amortization                                 494,600          130,900            80,500
            Payroll taxes                                                  55,200           56,700            84,900
            Stock administrative fees                                     171,700           83,300            53,300
            Employee benefit plan                                           5,100          133,200                 -
            Public relations                                              192,700          299,400             9,700
            Other                                                         296,500          210,200           260,400
                                                                    -------------     ------------      ------------
                                                                       10,798,900        7,676,300         5,276,700
                                                                    -------------     ------------      ------------
OPERATING LOSS                                                         (9,695,700)      (7,629,700)       (5,265,200)
                                                                    -------------     ------------      ------------
INTEREST INCOME (EXPENSE)
     Interest income                                                      200,700          372,000           238,900
     Interest expense and non-cash financing costs
       including $2,740,800 in non-cash OID costs in 1999              (3,313,000)         (27,100)          (26,800)
                                                                    -------------     ------------      ------------
                                                                       (3,112,300)         344,900           212,100
                                                                    -------------     ------------      ------------
NET LOSS                                                            $ (12,808,000)    $ (7,284,800)     $ (5,053,100)
                                                                    =============     ============      =============
NET LOSS TO COMMON STOCKHOLDERS:
NET LOSS                                                            $ (12,808,000)    $ (7,284,800)     $ (5,053,100)
DEEMED DIVIDEND FOR CLASS B, SERIES 2
     CONVERTIBLE PREFERRED STOCK                                        1,558,300                -                -
                                                                    -------------     ------------      ------------
NET LOSS TO COMMON STOCKHOLDERS                                     $ (14,366,300)    $ (7,284,800)     $ (5,053,100)
                                                                    =============     ============      =============
WEIGHTED AVERAGE NUMBER OF
     COMMON SHARES OUTSTANDING                                         15,498,300       14,968,019        12,601,430
                                                                    =============     ============      =============
BASIC AND DILUTED LOSS PER SHARE                                    $      (0.93)     $      (0.49)     $      (0.40)
                                                                    =============     ============      =============
</TABLE>

           See accompanying notes to consolidated financial statements

                                      35
<PAGE>

<TABLE>
<CAPTION>

                                 CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
                             CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)

                                                            Common Stock
                                                   --------------------------------
                                                        Number                            Additional
                                                      of Shares             Par           Paid - in           Accumulated
                                                     Outstanding           Value           Capital              Deficit
                                                   -----------------     ----------     ---------------     ----------------
<S>                                                     <C>           <C>            <C>                 <C>
Balances, December 31, 1996                              10,753,096    $    10,800    $     15,366,700    $      (9,435,300)

Year Ended December 31, 1997:
      Net Loss                                                    -              -                   -           (5,053,100)
      Exercise of Stock options and
           warrants                                       3,061,763          3,000           8,405,500                    -
      Compensation cost relating to
           options granted to consultants                         -              -             582,400                    -
      Other equity transactions,
           net of costs                                           -              -              16,300                    -
                                                   -----------------     ----------     ---------------     ----------------
Balances, December 31, 1997                              13,814,859         13,800          24,370,900          (14,488,400)

Year Ended December 31, 1998:
      Net Loss                                                    -              -                   -           (7,284,800)
      Exercise of Stock options and
           warrants                                       1,637,583          1,600           3,112,700                    -
      Compensation cost relating to
           options granted to consultants                         -              -             843,400                    -
                                                   -----------------     ----------     ---------------     ----------------
Balances, December 31, 1998                              15,452,442         15,400          28,327,000          (21,773,200)

Year Ended December 31, 1999:
      Net Loss                                                    -              -                   -          (12,808,000)
      Exercise of Stock options and
           warrants                                          86,675            100             377,300                    -
      Original issue discount on 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                                                      (1,558,300)
      Compensation cost relating to
           options granted to consultants                         -              -             984,000                    -
                                                   -----------------     ----------     ---------------     ----------------
Balances, December 31, 1999                              15,539,117    $    15,500    $     34,062,000    $     (34,581,200)
                                                   =================     ==========     ===============     ================
</TABLE>
          See accompanying notes to consolidated financial statements


                                      36
<PAGE>

<TABLE>
<CAPTION>

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

                                                                                           Year Ended December 31,
                                                                            -----------------------------------------------------
                                                                                   1999              1998             1997
                                                                                   ----              ----             ----
<S>                                                                         <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
      Net Loss                                                              $     (12,808,000)   $  (7,284,800)   $  (5,053,100)
      Adjustments to reconcile net loss to net cash flows
           from operating activities:
      Depreciation and amortization                                                   494,600          130,900           80,500
      Provisions for losses on accounts receivable                                          -                -          (10,000)
      Provisions for slow moving inventories                                                -                -           75,000
      Compensation cost relating to options granted to consultants                    984,000          843,400          582,400
      Non-cash financing costs                                                      2,740,800                -                -
      Changes in operating assets and liabilities:
           Accounts receivable                                                       (750,000)             100            5,000
           Inventories                                                               (293,400)             800              300
           Prepaid expenses and other assets                                          (47,400)          (5,400)          12,800
           Other assets                                                               (49,700)           6,600           (8,600)
           Accrued interest on senior convertible debentures                          495,800                -                -
           Accounts payable and accrued expenses                                     (222,600)         431,700           95,200
                                                                              ----------------  ---------------   --------------
                Net cash flows from operating activities                           (9,455,900)      (5,876,700)      (4,220,500)
                                                                              ----------------  ---------------   --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
      Software development costs                                                      (81,300)        (421,800)        (124,200)
      Capitalized patent costs                                                       (553,000)        (540,300)               -
      Purchase of property and equipment                                              (91,200)         (87,700)        (169,000)
      Purchase of ColorMate(Registered Trademark) Units
         and deposits thereon                                                               -       (1,504,400)               -
                                                                              ----------------  ---------------   --------------
           Net cash flows from investing activities                                  (725,500)      (2,554,200)        (293,200)
                                                                              ----------------  ---------------   --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
      Proceeds from issuance of common stock, net
           of related costs                                                           377,400        3,114,300        8,424,800
      Proceeds (payments) of amounts payable to related party                         (62,800)          25,700          (32,800)
      Proceeds from senior convertible debentures                                   5,000,000                -                -
      Net proceeds from the issuance of preferred stock and
           warrants, net of costs                                                   3,727,400                -                -
      Payments of notes payable                                                             -           (4,700)          (5,300)
                                                                              ----------------  ---------------   --------------
           Net cash flows from financing activities                                 9,042,000        3,135,300        8,386,700
                                                                              ----------------  ---------------   --------------
NET CHANGE IN CASH AND EQUIVALENTS                                                 (1,139,400)      (5,295,600)       3,873,000
CASH AND EQUIVALENTS, BEGINNING OF PERIOD                                           3,929,800        9,225,400        5,352,400
                                                                              ----------------  ---------------   --------------
CASH AND EQUIVALENTS, END OF PERIOD                                           $     2,790,400    $   3,929,800    $   9,225,400
                                                                              ================  ===============   ==============
SUPPLEMENTAL CASH FLOW INFORMATION
      Interest Paid                                                           $        88,900    $       1,400    $      33,700
                                                                              ================  ===============   ==============
      Reclassification of ColorMate(Registered Trademark) Units               $     1,820,100
                                                                              ================
</TABLE>

          See accompanying notes to consolidated financial statements

                                      37
<PAGE>



           CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Since its formation in 1984, the Company has been principally engaged in color
science technology research and development and licensing activities, seeking
mass market applications for its proprietary technology and instrumentation. The
Company's business encompasses all of the risks inherent in the establishment of
a new business enterprise, including a limited operating history with
significant competition possessing substantially greater resources. Current and
future operations also depend upon the continued employment of certain key
executives, the ability to further commercialize its proprietary technology and
products and the Company's ability to obtain sufficient revenues and/or outside
financing.

Estimates and Uncertainties - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results, as determined at a later date,
could differ from those estimates. Estimates relate primarily to inventory
valuation and recoverability of the Company's tangible and intangible assets.

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

Patent Application Costs - Patent application costs had been expensed through
1997 because the Company was unable to determine the future recoverability of
such costs. In the first quarter of 1998, the Company was able to determine
future recoverability of such costs, due to marketing plans and potential
business proposals. Accordingly, the Company began capitalizing certain patent
application costs, commencing January 1, 1998, and is amortizing such costs over
the remaining patent lives, generally 10 to 15 years. Accumulated patent
amortization costs as of December 31, 1999 is $109,300. The Company will assess
the continuing carrying value of these assets when events and circumstances
warrant.

Revenue recognition - The Company records revenue from the sale of ColorMate
(Registered Trademark) TLc-BiliTest (Registered Trademark) Systems and
TLc-Lensette (Trademark) Calibration Standards at the time of shipment at the
minimum transfer price provided in the distribution agreement. The Company
expects to receive additional amounts from the distributor equal to a defined
percentage of the distributors' sales price of the above products. The Company
will record revenue from the additional amounts upon receipt from the
distributor.

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

Property and Equipment and Depreciation - Property and equipment are stated at
cost. Depreciation is computed using principally the straight-line method over
estimated useful lives of 5 to 7 years. Accumulated depreciation was $460,600
and $312,000 in 1999 and 1998, respectfully. The Company continually evaluates
the life and carrying amount of such equipment in light of current conditions.
No writedowns have been required through December 31, 1999.

Software Development Costs - Once technological feasibility was established, the
costs of developing software to be marketed as part of a product was
capitalized. Capitalization ceased in 1999 when the products became available
for sale. The costs are 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, 1999 is $157,000.

                                       38

<PAGE>


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. No impairment losses have been necessary through
December 31, 1999.

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

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

Financial Instruments - Financial instruments include cash and equivalents,
accounts receivable, other assets, accounts payable, accrued expenses 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, 1999.

Concentration of Credit Risk/Major Customers, Supplier and Manufacturer - The
Company maintains its cash balances with financial institutions insured by the
Federal Deposit Insurance Corporation to a maximum of $100,000. The Company's
balances exceed such amount. The Company generated approximately 98% of its
revenues from one customer in 1999 (see Note 4).

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

Loss Per Share - The Company follows 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 earnings available to common stockholders
by the weighted-average number of common shares outstanding for the period.
Diluted EPS assumes conversion of convertible debt, preferred stock and the
issuance of common stock for all other potentially dilutive equivalent shares
outstanding. All of these equivalents were anti-dilutive for all periods
presented.

Stock-Based Compensation - Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation," ("FAS 123") encourages, but does not
require, companies to record compensation cost at fair value for stock-based
employee compensation plans. The Company has chosen to continue to account for
stock-based compensation 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 7.

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.

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

                                       39
<PAGE>


Recent Accounting Standards - In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement will be adopted in the Company's 2001 fiscal year.
While management is still reviewing the statement, it believes the adoption of
this statement will not have a material effect on the Company's consolidated
financial position, results of operations or cash flows.

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

Since 1989, the Company has incurred losses from operations and net cash
outflows from operations, and has owned ColorMate(Registered Trademark) System
units since June 1991 whose ultimate recoverability depends upon the Company's
future marketing success. The Company expects to license its patents and
proprietary technology, rent or sell its equipment and market its related
services and products to ultimately overcome these difficulties. In the event
the ColorMate(Registered Trademark) System units and related proprietary
technology are not successfully leased/licensed and/or the products are not
successfully marketed in the future, the principal effect may be a substantial
write-down of the book value of such units and continued significant operating
losses.

On July 30, 1997, the Company was granted clearance by the FDA for commercial
marketing of the ColorMate(Registered Trademark) TLc-BiliTest(Registered
Trademark) System for the non-invasive monitoring of newborn bilirubinemia
(infant jaundice) by health care professionals in hospitals, pediatricians'
offices or by home healthcare agencies.

The Company anticipates incurring significant additional expenditures related to
manufacturing expenses, parts order, insurance, regulatory compliance and staff
as production and distribution continues. Management expects that taking into
account existing resources, including the financings in April 1999 and June 1999
and the second closing of the preferred stock financing in the amount of $4.0
million in February 2000, (See Note 9), revenues from future sales of the
ColorMate(Registered Trademark) units, and payments received under the
distribution agreement, the Company will have sufficient liquidity at least
until December 31, 2000.

If the Company is able to profitably market its ColorMate(Registered Trademark)
TLc-BiliTest(Registered Trademark) System, Intellectual Properties,
ColorMate(Registered Trademark) units, new cosmetics line and products, the
Company would use any cash flow obtained from operations, and may seek
additional debt or equity financing, to further support and expand its
operations. The Company's ColorMate(Registered Trademark) System units for all
applications will be marketed interchangeably, as the only difference between
the different models are design, power supply improvements and software systems.
There can be no assurance that the Company will not require additional funding.
If the Company is not able to attract additional future financing, generate
significant revenue from operations and/or successfully market its products and
technologies, at such point in time, it may have to significantly curtail
operations.

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

Related Party Transactions - In connection with the Avon Settlement in an
earlier year and her employment agreement, Mrs. Macfarlane, the Company's CEO
and a principal shareholder, was to receive a bonus of $361,200, of which
$110,900 had been paid. The remaining $250,300 accrues interest at the rate of
10% per annum. In December 1997, Mrs. Macfarlane agreed to delay demand for
payment until January 1999, and further extended this repayment to April 2000.
At December 31, 1999, $256,100, including interest, remained due.

                                     40
<PAGE>


Lease Agreements - The Company leases office and warehouse space. Most of the
leases are on a month to month basis. Total rent and storage expense was
$296,800, $266,000 and $199,900 in 1999, 1998 and 1997, respectively.
Approximately $31,000 per year related to rent paid to Mrs. Macfarlane under
month to month lease agreements. Such rent is equal to Mrs. Macfarlane's actual
cost for such premises.

Retirement Plan - In 1997, the Company adopted a defined contribution plan which
provided for discretionary Company contributions for qualified employees. The
expense relating to this plan was $0, $93,200 and $0 in 1999, 1998 and 1997,
respectively.

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

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

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

Defendants moved to dismiss the complaint, which motion was fully briefed and
was pending before the court. In March 2000, the defendant's motion to dismiss
the complaint was granted subject to a 30-day period within which the plaintiffs
may refile the complaint. If the Plaintiffs do, in fact refile a complaint, no
assurance can be given that the resolution of the Action and/or future actions
will not have a material adverse effect on the Company's results of operations
and liquidity. The Company has directors and officers insurance which may cover
a portion of the liability asserted in the Action. The Company is exploring its
legal remedies in respect to what it believes to be false allegations against
the Company made by short sellers of its stock; the Company expects to incur
significant expenses in this regard.

                                       41

<PAGE>



Note 4 -- ColorMate(Registered Trademark) Units:

ColorMate (Registered Trademark) TLc-BiliTest (Registered Trademark) Systems:

 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(Registered Trademark) TLc-BiliTest(Registered Trademark)
System ( "Systems") for non-invasive 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 disposable calibration standard (TLc-Lensette(Trademark)) that is used
to calibrate each measurement taken by the ColorMate(Registered Trademark)
TLc-BiliTest (Registered Trademark) System and provides that the Company will
share in the sales revenues for both products. Terms of the agreement include
annual minimum market penetration performance standards and purchasing and
placement of quantities for both the ColorMate (Registered
Trademark)TLc-BiliTest (Registered Trademark) System and the
TLc-Lensette(Trademark) Calibration Standard. Sales under the agreement
commenced in July 1999.

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 has classified $329,000 in property and equipment, representing the cost
of the Systems for which it maintains title, and has 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 is being amortized over the life of the
DO Agreement, 5 years. All remaining amounts previously classified as
ColorMate(Registered Trademark) Units have been classified as inventory, fixed
assets, other assets or other amortizable assets. The fixed assets and other
amortizable assets are being depreciated over a five - year period.

In 1999, the Company recorded sales from both the ColorMate (Registered
Trademark) TLc BiliTest (Registered Trademark) System and the TLc-Lensette
(Trademark) Calibration Standards. The sales were recorded at the initial
minimum transfer price as defined in the distribution agreement. The Company
incurred a small loss on the initial sales of the Systems. The Company expects
to receive additional amounts from the distributor equal to a defined percentage
of the distributors' sale of the above products ("profit sharing payments"). The
Company expects the initial loss on the sale to be more than offset through the
expected profits generated from the sales of TLc - Lensette(Trademark)
Calibration Standards and the profit sharing payments.

ColorMate(Registered Trademark) Systems:

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

Following the Food and Drug Administration ("FDA") marketing clearance in 1997,
the Company has decided to use certain components (consisting of sensors,
miniature printers, cables, power supplies and certain other

                                       42
<PAGE>



items) from the existing ColorMate(Registered Trademark) units for use in the
ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System. The
costs (which are not expected to be material) incurred in extracting the
components from the existing ColorMate(Registered Trademark) units for use in
the ColorMate(Registered Trademark) TLc-BiliTest(Registered Trademark) System
will be expensed as incurred and the value currently assigned to the existing
ColorMate(Registered Trademark) units ($500 per unit) will, upon extraction of
the component parts for current use, be reclassified to inventory as the current
replacement cost of these components exceeds the book value of the
ColorMate(Registered Trademark) units. Management believes the cost of the
recovered components will be realized from future sales.

The cost of the above units has been classified as other assets in the
accompanying consolidated balance sheets.

Note 5 -- Income Taxes:

The Company has a deferred tax asset at December 31, 1999 and 1998 of
approximately $15,000,000 and $10,000,000, respectively. These amounts relate
primarily to net operating loss and tax credit carryforwards. These assets have
been offset by valuation allowances since their realizability can not be
determined. At December 31, 1999, the Company had net operating loss
carryforwards of approximately $38,000,000 for Federal income tax purposes which
expire through December 31, 2019. In addition, the Company had research and
development tax credit carryforwards of approximately $75,000 at December 31,
1999 available to offset future Federal income taxes. The utilization of such
loss and tax credit carryforwards may be limited due to changes in control.
Included in the net operating loss carryforwards is approximately $5,700,000
relating to the exercise of stock options. The benefits, if any, from the
utilization of this amount will be credited to additional paid-in capital.

Note 6 -- 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 of the
Debentures are due on the earlier of the maturity date or upon any conversion of
the Debentures into the Company's Common Stock. The accrued interest may be paid
either in cash, shares of the Company's Common Stock or a combination of Common
Stock and cash, at the option of the Company.

The outstanding principal amount of the Debentures (together with accrued
interest thereon) is not convertible until after the first anniversary of the
closing (except for 20%, which was immediately convertible). At that time, the
Debentures are convertible into shares of Common Stock, at the option of the
holder or holders thereof, at the conversion price of $5.00. However, at any
time prior to April 14, 2000, such portion of the Debentures may be converted,
at the option of the holder or holders thereof, as shall result in the issuance,
upon such conversion, of not more than an aggregate of 200,000 shares of Common
Stock. Subject to applicable securities laws, the holder or holders of such
shares, in the aggregate, may only sell not more than an aggregate of 50,000
shares of such Common Stock issued upon such conversion during any one month
period ending prior to April 14, 2000. At any time after the 18 month
anniversary of the closing, the Company may prepay the entire amount of the
Debentures or any portion thereof for a prepayment price equal to the original
principal amount of the Debentures plus all accrued and unpaid interest. At any
time after the 18 month anniversary of the closing and prior to the Maturity
Date, in the event the average closing bid price (as reported on the Nasdaq
SmallCap Market or such other principal market or exchange on which the Common
Stock is then traded) of the Company's Common Stock for any 10 consecutive
trading days equals or exceeds $10.29, the Company can require conversion of the
outstanding principal amount (together with accrued interest) of the Debentures
into Common Stock at a conversion price of $5.00 per share. The Debentures
resulted in an original issue discount charge of approximately $3.6 million
(representing the intrinsic value of the below-market conversion price) which
will be amortized over one year. Through December 31, 1999 the Company has
amortized $2.7 million.

                                      43
<PAGE>



Note 7 -- Common Stock and Stock Options:

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

Stock Option Plan - The Company has a Stock Option Plan which currently provides
for options to purchase up to 5,500,000 shares of Common Stock. The Plan
provides for the granting of incentive stock options to all employees and
non-incentive stock options to all employees and certain consultants at an
exercise price equal to at least the fair market value of a share of Common
Stock at the date of grant for incentive options (other than for the holders of
more than 10% of the outstanding Common Stock which must be at least 110% of the
fair market value on the date of grant) and at least 85% of the fair market
value on the date of grant for non-incentive options. Stock options are
generally exercisable in 33-1/3% annual increments commencing one year after the
date of grant and generally expire five years after the date of grant.

The Company estimates the fair value of each stock option at the grant date by
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997, 1998 and 1999, no dividend yield, expected
volatility of 76%, 60% and 46%, risk free interest rates of 5% to 7% and
expected lives of approximately 2.5 years. The grant date fair market value for
options granted in 1999, 1998 and 1997 was $2.23, $2.26 and $6.46, respectively.
If compensation cost for the Company's stock option plan had been determined in
accordance with SFAS No. 123, net loss would have been increased in 1997, 1998
and 1999 by approximately $425,000, $470,000 and $121,000, respectively and loss
per share would have been increased by $.05, $.03 and $.01, respectively.

The following table summarizes information about stock options outstanding at
December 31, 1999:

<TABLE>
<CAPTION>

                              Options Outstanding                          Options Exercisable
                    ---------------------------------------------  -----------------------------------
                                       Weighted
                                       average
                                      remaining
                  Number Outstanding  contractual     Weighted                          Weighted average
                    as of 12/31/99    life (years)  average price   Number exercisable   exercise price
                    --------------    ------------  -------------   ------------------   --------------
<S>                  <C>                <C>           <C>              <C>                 <C>
Range of
Exercise Prices:
$1.02 - $2.92         1,128,748          1.64          $2.82            1,128,748           $2.82
$2.96 - $5.42         1,219,499          3.45           5.20              595,249            5.16
$7.00 - $8.25           523,000          3.10           7.75              201,833            7.76
$9.25 - $10.00          275,250          3.17           9.44              137,667            9.48
                       -------           ----           ----              -------            ----
                      3,146,497          2.72          $5.14            2,063,497           $4.42
                      =========          ====          =====            =========           =====
</TABLE>

                                      44
<PAGE>

Transactions under the stock option plan are summarized as follows:

<TABLE>
<CAPTION>
                                                                     Weighted average
                                                        Shares        exercise price
                                                        ------        --------------
<S>                                                    <C>                <C>
Shares under option at December 31, 1996               1,972,500          2.64
             Granted (at $5.00 to $10.00 per share)      791,250          7.04
             Exercised                                  (671,502)         2.34

Shares under option at December 31, 1997                2,092,248         4.40
             Granted (at $4.88 to $9.25 per share)      1,432,500         6.40
             Exercised                                   (165,700)        3.85
             Canceled (at $7.46 to $8.25 per share)      (247,500)        7.82

Shares under option at December 31, 1998                3,111,548         5.08
             Granted (at $4.68 to $9.375 per share)       160,000         6.20
             Exercised                                    (62,551)        5.39
             Canceled (at $1.50 to $5.42 per share)       (62,500)        4.47

Shares under option at December 31, 1999                3,146,497         5.14
                                                        =========         ====
Options exercisable at December
            1997             1,201,082
            1998             1,470,715
            1999             2,063,497
</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 FAS 123 and are being expensed over the vesting period of the options. The
amounts expensed in 1997, 1998 and 1999 amounted to $582,400, $843,400 and
$984,000, respectively. The activity for these options is included in the table
above.

At December 31, 1999 warrants to purchase 454,148 shares of common stock at
$1.67 per share were outstanding. These warrants, issued to a placement agent in
previous years in connection with equity financings, expire as follows: (i)
100,174 warrants issued on January 6, 1995 expire January 6, 2002; (ii) 408
warrants issued on March 13, 1995 expire March 13, 2002; (iii) 93,628 warrants
issued on May 4, 1995 expire May 4, 2002; and (iv) 259,938 warrants issued on
June 8, 1995 expire June 8, 2002. At December 31, 1998, warrants to purchase
478,273 shares of Common Stock at an exercise price of $1.67 were outstanding.

In addition, 270,690 and 304,372 warrants at an exercise price of $6.99,
expiring June 2004 and February 2005, respectively, were issued in connection
with financing transactions in June 1999 and February 2000 (See Notes 8 and 9).

                                      45
<PAGE>


Note 8 -- Preferred Stock:

Class A:

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

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

Class B:

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.

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.

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.

                                      46
<PAGE>


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 million. The shares of
convertible preferred stock issued on that date (the "Shares") are convertible
into shares of the Company's Common Stock at a price of $6.29 per share, subject
to adjustment for stock splits, combinations and similar recapitalizations
affecting the Company's Common Stock and to downward adjustment if the Company
issues or agrees to issue additional shares of the Company's Common Stock
(excluding options under the Company's option plan and certain other excluded
securities) at a price of less than $6.29 per share to the price at which the
Company issues or agrees to issue the lower-priced shares of the Company's
Common Stock or securities convertible or exchangeable for shares of the
Company's Common Stock. The Shares are redeemable in cash for an amount equal to
$115 per 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.
The 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 $9.44 per share. The 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 dividends would accrue at the rate of 8% from and after the third
anniversary of the date of initial issuance which could be paid in shares of the
Company's Common Stock at the Company's option.

In addition to the Shares on June 15, 1999 the Company also issued an aggregate
of 220,690 warrants to purchase shares of the Company's Common Stock to a
private investor. An additional 50,000 warrants were issued to such investor as
compensation for services rendered in connection with the placement of the
Shares. 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 of $6.99 per share, subject to adjustment in the same circumstances
as the 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 $13.98.

The Company also agreed to issue and sell an additional 40,000 shares of
convertible preferred stock and warrants to purchase 304,372 shares of the
Company's Common Stock to the same investor at a second closing( see Note 9).

The private placement has resulted in a deemed dividend charge of approximately
$3.2 million, resulting from a below market conversion price of preferred stock
($1,154,000), a $15 per share redemption premium and other costs ($800,000) 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 $1.6
million has been charged through December 1999 and $1.6 million will be charged
over the redemption period.

                                      47
<PAGE>

Note 9 -- Subsequent Events:

On February 11, 2000, the Company completed the second closing of a private
placement of 40,000 shares of convertible preferred stock and warrants to
purchase 254,372 shares of Common Stock to a private investor for aggregate
proceeds of $4 million. The shares of convertible preferred stock issued on that
date (the "Shares") are convertible into shares of the Company's Common Stock at
a price of $6.29 per share, subject to adjustment for stock splits, combinations
and similar recapitalizations affecting the Company's Common Stock and to
downward adjustment if the Company issues or agrees to issue additional shares
of the Company's Common Stock (excluding options under the Company's option plan
and certain other excluded securities) at a price of less than $6.29 per share
to the price at which the Company issues or agrees to issue the lower-priced
shares of the Company's Common Stock or securities convertible or exchangeable
for shares of the Company's Common Stock. The Shares are redeemable in cash for
an amount equal to $115 per 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. The 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 $9.44 per share. The
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 dividends would accrue at the rate of 8% from
and after the third anniversary of the date of initial issuance which could be
paid in shares of the Company's Common Stock at the Company's option.

In addition to the Shares on February 11, 2000 the Company also issued an
aggregate of 254,372 warrants to purchase shares of the Company's Common Stock
to a private investor. An additional 50,000 warrants were issued to such
investor as compensation for services rendered in connection with the placement
of the Shares. 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 of $6.99 per share, subject to adjustment in the same
circumstances as the 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
$13.98.

The private placement will result in a deemed dividend charge of approximately
$2.5 million, resulting from a below market conversion price of preferred stock
($445,000), a $15 per share redemption premium and other costs ($990,000) and
the fair value (using the Black Scholes method) of warrants issued in connection
with the private placement ($1,050,000). Of this amount, approximately $.5
million will be charged immediately and $2.0 million will be charged over the
redemption period.

                                      48