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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004

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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

OR

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

For the transaction period from _______ to ________

Commission File No. 0-27646

GUM TECH INTERNATIONAL, INC.
(Name of business issuer in its charter)

UTAH 87-0482806
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)

2375 E. Camelback Road, Suite 500
Phoenix, AZ 85016
(602) 387-5353
(Address of principal executive offices,
Issuer's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:

Title of Each Class Name of Each Exchange on Which Registered
- ------------------- -----------------------------------------
Common Stock, no par value Nasdaq National Market

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K, is not be contained herein, and will not be contained, to
the best of the 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 20, 2002, 9,432,251 shares of the Registrant's Common Stock
were outstanding. As of March 20, 2002, the market value of the Registrant's
Common Stock (based on the closing price of the shares on the Nasdaq National
Market), excluding shares held by affiliates, was approximately $65,700,000.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive proxy statement prepared in
connection with the Registrant's 2002 annual meeting of stockholders are
incorporated by reference into Part III, Items 10, 11, 12 and 13 of this Form
10-K.

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TABLE OF CONTENTS

Page
----

PART I.........................................................................1

ITEM 1. BUSINESS.............................................................1
ITEM 2. DESCRIPTION OF PROPERTY..............................................5
ITEM 3. LEGAL PROCEEDINGS....................................................5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................6
EXECUTIVE OFFICERS OF GUM TECH...............................................6

PART II........................................................................7

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............7
ITEM 6. SELECTED FINANCIAL DATA..............................................8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..........................................9
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS AND RISK FACTORS..14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..........................................19

PART III......................................................................19

ITEM 10. INFORMATION CONCERNING DIRECTORS, NOMINEES, AND
EXECUTIVE OFFICERS...............................................19
ITEM 11. EXECUTIVE COMPENSATION.............................................19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....19
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................19

PART IV.......................................................................20

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K....20

SIGNATURES....................................................................48

Unless otherwise indicated in this Form 10-K, "Gum Tech," "us," "we,"
"our", "the Company" and similar terms refer to Gum Tech International, Inc. and
its subsidiaries. Zicam is a registered trademark of our subsidiary, Gel Tech,
L.L.C., and the Gum Tech name and logo are trademarks of the Company.

-i-

PART I

ITEM 1. BUSINESS

INTRODUCTION

Gum Tech International was incorporated in Utah in 1991. Our original
business developed, manufactured and distributed functional chewing gum products
that contained nutrients, vitamins, and/or over-the-counter drugs to provide a
variety of health benefits. The products were manufactured and distributed under
the Gum Tech brand or manufactured for contract customers under their product
labels. In 1999, we formed a joint venture company, Gel Tech, L.L.C., of which
we owned 60%, with another party, which owned the other 40%, to develop, market
and distribute Zicam Cold Remedy, a nasal gel product. In an initial internal
study and in a subsequent independent study, Zicam Cold Remedy has been shown to
reduce the duration and severity of the common cold when taken at the onset of
cold symptoms. In 2000, Gel Tech introduced another product, Zicam Allergy
Relief, a nasal gel which controls allergy symptoms.

In 2001, we undertook a strategic change of direction in our business
operations. We exited the chewing gum products business and refocused our
business entirely on the development, production and sale of healthcare products
which utilize innovative delivery systems for bioactive compounds, including our
two Zicam products. In July 2001, we sold substantially all of our assets and
business related to our chewing gum operations to the Wm. Wrigley Jr. Company
("Wrigley"). In December 2001, we acquired the remaining 40% of Gel Tech that
had been owned by our joint venture partner. Gum Tech now owns all of Gel Tech
and its nasal gel technology, including Zicam Cold Remedy and Zicam Allergy
Relief.

Our principal executive offices are located at 2375 E. Camelback Road,
Suite 500, Phoenix, Arizona 85016 and our telephone number is (602) 387-5353.

MARKETS AND COMPANY PRODUCTS

The market for cough and cold products is very large. More than one billion
common colds occur in the United States each year, with over 100 million of
these colds resulting in lost days of school or work or some level of restricted
activity. Colds are estimated to occur at a rate of two to five per person (six
to eight per child) each year. The total retail value of cough and cold products
in the United States per year is estimated at more than $3 billion.

We currently market and distribute two homeopathic nasal gel products,
Zicam Cold Remedy, which is based on our patented zincum gluconium delivery
system, and Zicam Allergy Relief. Zicam Cold Remedy, which was introduced in
1999 and which competes in the market for cough and cold products, accounted for
approximately 70% of our net sales in 2001. Zicam Cold Remedy was formulated to
reduce the severity and duration of the common cold. In a study published in the
October 2000 issue of the ENT- Ear, Nose & Throat Journal, Zicam Cold Remedy was
shown to reduce the duration of the common cold by an average of 75% when taken
at the onset of symptoms. Due to the claims that we are able to make regarding
the product's ability to reduce the duration of the common cold, we believe the
product is unique in the cough and cold market category in which we compete.
Virtually every other product in the cough and cold category treats symptoms of
the common cold but does not claim to reduce the duration of the cold. Sales of
Zicam Cold Remedy have grown steadily since its introduction in 1999 as customer
awareness of the product has increased as a result of our marketing and public
relations efforts, and word-of-mouth experience by consumers.

Zicam Allergy Relief, our second nasal gel product, was introduced in the
second quarter of 2000. Zicam Allergy Relief is designed to control allergy
symptoms for sufferers of hay fever and other upper respiratory allergies. An
initial double-blind scientific study conducted indicated that Zicam Allergy
Relief reduced the severity of symptoms resulting from these types of allergies.
We believe Zicam Allergy Relief is distinctive from most allergy products
available in the market due to the absence of side effects, such as drowsiness
or jitters. Although the number of individuals affected by allergies (estimated
at 35 million people in the United States) is substantially smaller than the
number of individuals affected by colds, allergy sufferers are more likely to
require medication for a much longer period of time to relieve their allergy
symptoms. Despite the lack of significant direct marketing or public relations
support for Zicam Allergy Relief, product sales have steadily increased since
inception.

BUSINESS STRATEGY

Our objective is to become a leading provider of consumer healthcare
products which utilize innovative and proprietary alternative delivery systems.
To achieve our objective, the key elements of our business strategy include the
following:

EXPANDING MARKETING EFFORTS FOR EXISTING PRODUCTS: We intend to continue to
develop and refine our sales and marketing efforts for our current products to
increase market penetration of our Zicam products in U.S. households. Such
efforts include improving the timing and consistency of marketing activities
compared to previous years, executing effective trial generating programs,
implementing programs with retailers to enhance consumer awareness of our
products and seeking to increase recommendations from healthcare professionals.
We are also implementing new creative advertising approaches and public
relations efforts. We believe these efforts will continue to build brand
awareness, trials and sales for our products.

CAPITALIZING ON OUR NASAL GEL TECHNOLOGY AND KNOW-HOW: We intend to
leverage our nasal gel technology and know-how to develop additional gel
delivery system product offerings that complement the Zicam Cold Remedy and
Zicam Allergy Relief products. We expect to commence production of these
additional products in late 2002, assuming all quality and regulatory
requirements can be met. Additional gel technology products may include
over-the-counter pharmaceutical ingredients that can be effectively delivered
through our nasal gel delivery system. We believe extending the product line in
this way will bring additional consumer awareness and expand our product
presence and support from retailers.

EXTENDING SALES INTO NEW MARKETS: International markets represent an
important growth opportunity for Gum Tech. We intend to explore expanding sales
into appropriate international markets where sales prospects are favorable.
Because of the complex and multiple regulatory environments, languages, customs,
logistics and working capital requirements involved in developing these markets,
we are exploring possible relationships with multi-national business
organizations and established international distributors capable of introducing
products and competing in international markets. We believe this approach could
provide significant sales growth opportunities for our current and future
products. However, we do not intend to sacrifice potential long term returns for
shareholders for short term results.

PURSUING ADDITIONAL DELIVERY SYSTEMS: Our success in expanding consumer
acceptance of our nasal gel delivery system and growing the Zicam franchise
indicates to us that opportunities exist to pursue development of other unique
and proprietary consumer healthcare product delivery systems. Such systems may
include gel coatings, rapid dissolve products, sub-lingual products and soft
gels that effectively deliver over-the-counter pharmaceutical and nutritional
products. We believe that our focus on identifying, through internal research

2

and development efforts and through consideration of external opportunities can
provide growth opportunities for Gum Tech.

CUSTOMERS

We sell our products directly to major food, drug, mass market (e.g.
Wal-Mart, Target) and wholesale warehouse retailers throughout the United
States, and to distributors that sell to smaller retail establishments. We
believe that Zicam Cold Remedy is sold in over 50,000 retail outlets and Zicam
Allergy Relief is sold in over 30,000 retail outlets. We are highly dependent on
a small group of large national retailers for our product distribution such that
10 customers account for almost 70% of our sales. Of these customers, Wal-Mart
and Walgreens each accounted for more than 10% of our sales in 2001. Our
agreements with our customers generally provide for their ability to return
unsaleable merchandise, including damaged product, excessive overstock or
out-of-date product. We provide in our financial results as an offset against
sales, an estimate for expected returns. Due to the continuing growth and
success of both Zicam products, we have not experienced unusual or excessive
amounts of product returns, other than that which occurred in connection with
the initial introduction of Zicam Cold Remedy in late 1999 and early 2000, which
resulted in overstock and out-of-date situations with a few retailers. To the
extent that any of our largest customers were to stop carrying our products for
any reason, or were to fail to pay us for our products, our sales or financial
results could be negatively impacted.

MANUFACTURING AND DISTRIBUTION

The Zicam products are manufactured for us by Botanical Laboratories Inc.
in Ferndale, Washington. Botanical Laboratories is a recognized leader in the
development, formulation and manufacture of homeopathic medicines and herbal and
specialty supplements. Botanical Laboratories operates under a federal Food and
Drug Administration (FDA) Drug Manufacturing License and has confirmed to us
that it adheres to current Good Manufacturing Practices (cGMP's) in its
production processes and procedures. It has met all of our production
requirements in the past and we believe it should be able to meet our production
needs, taking into account expected growth in sales, in the future. Botanical
Laboratories sources all raw materials used in its production of the Zicam
products through third party suppliers. These raw materials are widely
available. To date, we have not operated under a supply agreement with Botanical
Laboratories, but instead have successfully relied on individual production
orders to meet our product sales needs. We are currently in the process of
negotiating a general supply agreement with Botanical Laboratories. We expect
that under the agreement, Botanical Laboratories will continue to be the primary
production supplier for the existing Zicam products. We have identified at least
one other supplier that we believe is capable of meeting our current production
requirements.

With the exception of purchasing packaging materials, Botanical
Laboratories is responsible for all aspects of the manufacturing process,
including formulating product mixtures, filling bottles, assembling finished
product and packing finished product in master cases. Finished product is
shipped by Botanical Laboratories to an independent warehouse in Phoenix for
storage prior to shipment to our customers. We do not currently have, and we
have not historically had, material amounts of backlog orders.

RESEARCH AND DEVELOPMENT

Research and development is an important part of our business. Expenditures
in the last two years have been primarily related to clinical testing costs for
our two Zicam products and our nicotine gum project. We anticipate that
expenditures in the future will be related to new product development in
conjunction with our efforts to expand the Zicam brand.

3

FDA AND OTHER GOVERNMENT REGULATION

We are subject to various federal, state and local laws and regulations
affecting our business. All of our products are subject to regulation by the
FDA, including regulations with respect to the approval of manufacturing
processes and procedures, ingredients in the products, labeling and claims made.
In addition, both of our products are subject to the requirements of the
Homeopathic Pharmacopeia of the Unites States. Our claims and advertising are
subject to the rules of the Federal Trade Commission (FTC). Although we believe
that our products and claims comply in all material respects with all regulatory
requirements, if the FDA or FTC were to determine that we are in violation of
any such requirement, either agency could restrict our ability to market the
products, change the claims that we make or cause us to remove the products from
the market.

ENVIRONMENTAL MATTERS

Compliance with environmental rules and regulations did not significantly
affect our earnings or competitive position during 2001. We ceased direct
manufacturing and product storage operations in July 2001 when we sold
substantially all of our chewing gum assets and related business to Wrigley. Our
Zicam product manufacturing and warehousing in 2001 was outsourced to third
party contractors. As a result, expenses in the latter half of 2001 related to
environmental monitoring and regulatory compliance were significantly reduced.
With our continued outsourcing of Zicam product manufacturing and storage, and
no present plans to return to direct manufacturing or storage of products, we
expect these expenses to remain low in the foreseeable future.

TRADEMARKS, TRADE NAMES, AND PROPRIETARY RIGHTS

We received a patent (#6,080,783) from the U.S. Patent and Trademark Office
for Zicam Cold Remedy. This patent covers the delivery of zincum gluconium in a
particular formula and viscosity to the nasal cavity. We believe this patent
affords significant protection from competitors that may wish to sell similar
products. We have been informed by the U.S. Patent and Trademark Office that an
expansion of our current patent will be issued in the near future which will
enhance the protection of the Zicam Cold Remedy product. We have also filed for
similar patents for Zicam Cold Remedy in several other countries, including
Canada, Mexico, the European Union, Hong Kong, Japan, Korea, China, Brazil and
India. We hold a registered trademark for "Zicam" in the United States, the
European Union, Japan and Australia and we have applied for similar trademark
protection in other countries, including Mexico, China, Taiwan and Brazil. We
intend to file for patent and trademark protection for other products that we
bring to market in the future. There can be no assurance, however, that our
existing patent or any additional patents we may secure in the future will be
adequate to protect the Company's intellectual property from a competitor's
actions. Further, patent litigation can be very time-consuming and costly.

EMPLOYEES

As of December 31, 2001, we employed 10 people in our Phoenix, Arizona
headquarters office and 8 individuals in our California office. The ten
employees in Phoenix consist of two executive officers and individuals
responsible for operations, sales, investor relations, and accounting. We closed
our California office at the end of February 2002, moving the administrative and
marketing functions previously handled in that office to our Phoenix office.

SEASONALITY

Sales of both Zicam products are highly seasonal, with most sales occurring
during the respective cold and allergy seasons. The cold season generally runs
from September through April, while the allergy season runs from April through
October. Both of these seasons vary in intensity and duration from year to year.

4

COMPETITION

Zicam Cold Remedy competes in the highly competitive cough and cold market
category with a vast number of well-established brands marketed by large
pharmaceutical and consumer products companies. With our limited resources, we
are aiming to succeed in this category by emphasizing Zicam Cold Remedy's
distinctive claim regarding its ability to reduce the duration of the common
cold. Zicam Allergy Relief competes against a smaller number of over-the-counter
products in the allergy market category, but also competes against highly
marketed prescription allergy products. Zicam Allergy Relief also competes with
products that are marketed by large pharmaceutical and consumer products
companies. Participants in the cough and cold and allergy markets compete
primarily on the basis of price, quality of product and consumer awareness. Most
of our competitors have substantially greater financial, marketing and other
resources, longer operating histories, larger product portfolios and greater
brand recognition than we do.

ITEM 2. DESCRIPTION OF PROPERTY

We have leased office space at 2375 E. Camelback Road in Phoenix, Arizona
through February 2004 to house our corporate offices. Warehouse storage of our
finished goods, including shipping services, are provided by a contract
warehouse in Phoenix through a month to month agreement. We consider our
existing facilities to be adequate and suitable for their intended use.

ITEM 3. LEGAL PROCEEDINGS

On October 16, 1996, a lawsuit was filed against us and other parties in
the United States District Court for the Central District of California. The
action was entitled GCN Products, Inc. vs. Roy Kelly, et al. The complaint, as
it related to us, principally alleged that we engaged in unlawful rebates,
appropriations and overcharges, commercial bribery, fraud and unjust enrichment.
On September 4, 1998, the court granted a motion for summary judgment in our
favor, and dismissed the plaintiff's claims against us. GCN Products
subsequently appealed the decision of the District Court to the U.S. Court of
Appeals for the Ninth Circuit. In November, 2001 the U.S. Court of Appeals for
the Ninth Circuit affirmed the decision of the District Court dismissing the
plaintiff's claims against us.

On June 2, 1999, we filed a complaint in the Superior Court of Maricopa
County, Arizona against DJ Ltd. ("DJ"). Our complaint sought a declaratory
judgment that DJ was not owed any fee under an agreement entered into between
the parties pursuant to which DJ was to act as our financial advisor. DJ removed
the case to the United States District Court for the District of Arizona and
filed a counterclaim. In its counterclaim, DJ alleges that we breached the
contract between the parties and that Gum Tech has been unjustly enriched. DJ
seeks damages in the amount of $480,000, plus costs, expenses and warrants to
purchase 50,000 shares of Gum Tech common stock. An expert hired by DJ in the
lawsuit has computed the cost of the warrants that would have been issued at
$200,000 to $400,000. DJ also seeks a declaratory judgment confirming its
version of its rights under the agreement. We anticipate the case will move to
the trial phase in the fall of 2002. We intend to vigorously defend this action.

On November 9, 1999, The Quigley Corporation commenced a civil action
against us and Gel Tech in the United States District Court for the Eastern
District of Pennsylvania. The complaint alleged that Zicam Cold Remedy infringed
on a patent licensed to The Quigley Corporation and sought compensatory damages
and injunctive relief and sought compensatory damages and injunctive relief.
Without admitting guilt, Gum Tech and Gel Tech agreed to settle the case in June
2001 to avoid the potential adverse consequences of an unfavorable outcome,

5

including potential damages that may have been awarded to Quigley or the entry
of an order for injunctive relief. The settlement provided for payments of
$1.138 million and a royalty payment of 5.5% of net sales of Zicam Cold Remedy,
but not less than $500,000, for the period April 1, 2001 to through March 5,
2002.

On November 8, 2000, Gel Tech filed a complaint in the U.S. District Court
for the District of Arizona against AccuMed, Inc. Our complaint involved claims
of patent infringement, copyright infringement and unfair competition concerning
a cold remedy product manufactured and distributed by AccuMed. In a settlement
with AccuMed in December 2001, both parties agreed to the entry of an order that
Gel Tech's U.S. Patent No. 6,080,783 was valid and infringed upon by AccuMed.
AccuMed further agreed that it would discontinue its competing zinc-based cold
remedy products by the end of 2001, and would not produce such products in the
future.

We are not involved as a party in any other legal proceeding other than
various claims and lawsuits arising in the normal course of business, none of
which, in the opinion of our management, is individually or collectively
material to our business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At the 2001 Annual Meeting of Stockholders, held on December 4, 2001, the
stockholders approved the election of the following directors to serve for the
following year or until their successors are elected:

NAME FOR ABSTAIN
---- --- -------
Edward E. Faber 9,176,764 1,561
William C. Egan 9,176,764 1,561
Carl J. Johnson 9,176,764 1,561
Edward J. Walsh 9,176,764 1,561
William A. Yuan 9,176,764 1,561
Michael A. Zeher 9,176,764 1,561

Our shareholders also approved the Gum Tech International, 2001 Employee
Stock Incentive Plan:

FOR AGAINST ABSTAIN
--- ------- -------
9,156,664 20,600 1,061

EXECUTIVE OFFICERS OF GUM TECH

The names, ages, positions and business experience of each of our executive
officers are listed below. Each executive officer is appointed by our board of
directors to hold his office until his successor is appointed and qualified or
until such earlier time as such officer may resign or be removed by the board.

6

Carl J. Johnson, 53 Mr. Johnson joined Gum Tech in July 2001 as
President and Chief President and Chief Executive Officer and as a
Executive Officer member of the board of directors. Mr. Johnson's
professional experience spans twenty years in the
product development, marketing, and sales arenas
with several large pharmaceutical and consumer
goods companies. From 1993 to 2001, Mr. Johnson
was Vice President, Commercial Development with
Perrigo Company, a public company and leading
manufacturer of over-the-counter pharmaceutical
and nutritional products for the store brand
market. In that capacity he was responsible for
the procurement of new products and technologies
and contract manufacturing services with emphasis
on Abbreviated New Drug Applications (ANDA)
products. From 1973 to 1989, Mr. Johnson worked at
Johnson & Johnson, where he held a number of
positions of increasing responsibility in
marketing and sales, including responsibility for
the national launch of the Acuvue(R) disposable
contact lenses. Mr. Johnson also provided
marketing leadership for a special Johnson &
Johnson team that was selected to re-engineer
sales, administrative and operational functions.
Mr. Johnson earned a Master of Business
Administration - Marketing from the Fairleigh
Dickinson University and a Bachelor of Science in
Economics from Wagner College.

William J. Hemelt, 48 Mr. Hemelt joined Gum Tech in June 1998 as our
Executive Vice President, Chief Financial Officer, Treasurer, and Secretary.
Operations, Chief Financial The additional title of Executive Vice President,
Officer, Treasurer and Operations was added in 2001. From 1980 to 1997,
Secretary Mr. Hemelt held a variety of financial positions
with Arizona Public Service Company, Arizona's
largest utility, including six years as Treasurer
and four years as Controller. Mr. Hemelt earned a
Master of Business Administration and a Bachelor
of Science in Electrical Engineering from Lehigh
University.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock has traded on the Nasdaq National Market under the symbol
"GUMM" since April 24, 1996. The following table sets forth, for the quarters
indicated, the range of high and low closing prices of our common stock as
reported by the Nasdaq National Market.

7

MARKET PRICE
---------------------
HIGH LOW
-------- --------
FISCAL YEAR 2000
First Quarter................................. $ 33.875 $14.5625
Second Quarter................................ $ 15.125 $ 9.25
Third Quarter................................. $17.0625 $11.3125
Fourth Quarter................................ $ 17.25 $ 6.50

FISCAL YEAR 2001
First Quarter................................. $ 9.875 $ 6.9688
Second Quarter................................ $ 9.70 $ 7.13
Third Quarter................................. $ 8.25 $ 6.60
Fourth Quarter................................ $ 7.99 $ 6.40

FISCAL YEAR 2002
First Quarter (through March 20, 2002)........ $ 8.29 $ 6.52

As of March 20, 2002, we had approximately 5,100 record and beneficial
stockholders.

DIVIDEND POLICY

Since our initial public offering in 1996, we have not paid dividends on
our common stock and do not expect to pay dividends in the future. We intend to
retain any earnings to fund the expansion of our business. The amount of future
dividends, if any, will be determined by the board of directors based upon our
earnings, financial condition, capital requirements and other factors, including
any contractual or statutory restrictions on our ability to pay dividends.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected historical financial data for Gum
Tech for each of the years in the five-year period ended December 31, 2001, and
where appropriate reflects results on a continuing and discontinued operations
basis. The financial data presented below is derived from Gum Tech's financial
statements audited by independent auditors. For additional information, see the
financial statements of Gum Tech and the notes thereto included elsewhere in
this report. The following table should be read in conjunction with Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and is qualified by reference thereto and to Gum Tech's financial
statements and notes thereto.

8



(000's, except per share data) 2001 2000 1999 1998 1997
-------- -------- -------- -------- --------

Net sales $ 16,072 $ 10,817 $ 9,593 $ 0 $ 0
Net income (loss)
-- Continuing Operations $ (4,799) $ (6,166) $ (172) $ 0 $ 0
-- Discontinued Operations $ 17,412 $ (1,971) $ (601) $ (6,261) $ (5,399)

Net income (loss) per share of common stock
-- Continuing Operations $ (0.52) $ (0.69) $ (0.06) $ 0 $ 0
-- Discontinued Operations $ 1.88 $ (0.22) $ (0.08) $ (0.97) $ (1.02)
Dividends per share $ 0 $ 0 $ 0 $ 0 $ 0
Shares outstanding at year end 9,432 9,047 8,321 6,858 5,856
Total assets $ 42,507 $ 16,981 $ 20,028 $ 7,900 $ 9,685
Long term obligations $ 5,254 $ 0 $ 2,241 $ 2,380 $ 3,785
Stockholders' equity $ 24,369 $ 10,448 $ 12,702 $ 3,718 $ 4,673


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

In Fiscal 2001 we undertook a significant change in our strategic plan and
related business operations by exiting the chewing gum business and refocusing
entirely on the development, production and sale of healthcare products
utilizing innovative delivery systems for bioactive compounds, including our two
Zicam products. In July 2001, we sold substantially all of our assets and
business related to our chewing gum operations to Wrigley. In December 2001, we
acquired the remaining 40% of Gel Tech, making Gel Tech a wholly-owned
subsidiary of Gum Tech. Through our acquisition of the remaining 40% of Gel
Tech, we believe that we can consolidate operations and streamline
decision-making in order to capitalize on the growth potential that we believe
exists in our current Zicam products and in related product line extensions.

Our financial results reflect our former chewing gum operations as
discontinued operations, and consequently these operations are not reflected in
the following discussion and analysis.

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR
ENDED DECEMBER 31, 2000

We report Gel Tech's financial results on a consolidated basis. We owned
60% of Gel Tech prior to December 5, 2001 and 100% on and subsequent to that
date. Certain information is set forth below for our operations expressed in
dollars and as a percentage of net sales for the periods indicated:

9

YEARS ENDED DECEMBER 31,
-----------------------------------------
2001 2000
------------------ ------------------
Net sales $ 16,072 100% $ 10,817 100%
Cost of sales 4,215 26 3,411 32
-------- ------ -------- ------

Gross profit 11,857 74 7,406 68
Operating expenses 16,964 106 15,657 145
Research and development 716 4 433 4
-------- ------ -------- ------

Income (loss) from operations (5,823) (36) (8,684) (81)
Interest and other income - net 174 1 284 3
Interest expense 163 1 433 4
-------- ------ -------- ------

Income (loss) from continuing
operations before income tax
and minority interest $ (5,812) (36)% $ (8,833) (82)%
======== ====== ======== ======

NET SALES

Sales of Zicam Cold Remedy and Zicam Allergy Relief products are highly
seasonal. The cold season generally occurs between the months of September
through April, although the peak and the intensity of the cold season varies
from year to year. The allergy season generally occurs during the months of
April through October, with peaks occurring in April through June and September
through October. The 1999-2000 cold season peaked very early and subsequently
dropped off rapidly in the first quarter of 2000, whereas the 2000-2001 cold
season began very slowly, but continued at a higher than normal level into the
first quarter of 2001.

For 2001, net sales of Zicam Cold Remedy and Zicam Allergy Relief increased
to $16.1 million or approximately 49% above the 2000 level. Unit sales of Zicam
Cold Remedy in 2001 increased more than 60% over the prior year due primarily to
increased sales to end-use consumers due to increased consumer awareness of the
product and the introduction in 2001 of a new twin-pack Cold Remedy product,
which was well received in the marketplace. Sales of Zicam Cold Remedy accounted
for approximately 70% of net sales in 2001. The sales comparison to 2000 is also
affected by relatively low sales in 2000 due to a high level of inventory held
by retailers at the start of the 2000-2001 cold season as a result of initial
purchases made in connection with introduction of the product in the prior year.

Zicam Allergy Relief was introduced in March 2000. Unit sales of Zicam
Allergy Relief increased more than 30% in 2001 over the prior year due to
increased sales to end-use customers and a greater level of retail distribution.

COST OF SALES

Cost of sales increased in 2001 from the prior year by approximately
$800,000, reflecting the higher level of sales, but decreased as a percentage of
sales from 32% in 2000 to 26% in 2001 due to higher freight costs experienced in
early 2000 during the introduction of Zicam Cold Remedy and a decrease in
manufacturing costs in 2001.

10

GROSS PROFIT

Gross profit increased from $7.4 million in 2000 to $11.9 million in 2001
as a result of the higher sales level and decreases in the cost of sales.

OPERATING EXPENSES

Operating expenses increased from $15.7 million in 2000 to $17.0 million in
2001 due to the amount of the settlement that we paid and legal expenses that we
incurred in connection with The Quigley Corporation's lawsuit against us and Gel
Tech. The combined settlement amount and expenses amounted to nearly $2.5
million. That increase was partially offset by a small decrease in marketing
expenses between the two periods. Our royalty obligations to Quigley ended on
March 5, 2002. We expect that operating expenses will be lower in 2002 than in
2001, primarily due to the absence of the impact of the Quigley litigation.

RESEARCH AND DEVELOPMENT

The increase in research and development expense in 2001 is attributable to
costs associated with our nicotine gum project that were incurred subsequent to
the termination of our joint venture with Swedish Match. After termination of
the joint venture, Swedish Match no longer reimburses us for research and
development expenses related to nicotine gum. We expect to continue to incur
research and development expenses for the foreseeable future as we undertake
further work on our Zicam products, including potential product line extensions,
and explore other product opportunities.

INTEREST AND OTHER INCOME - NET

Interest and other income principally reflects interest income on our cash
investments. We invested our cash, which increased significantly as a result of
receipt of the proceeds from the sale of substantially all of our chewing gum
business assets and 200,000 shares of our common stock to Wrigley in July 2001,
in relatively low yielding U.S. Treasury securities. Offsetting this income in
2001, was a write-down in the amount of $250,000 for an investment in a company
that Gum Tech had evaluated and rejected as a possible acquisition candidate.

INTEREST EXPENSE

Interest expense decreased from $433,000 in 2000 to $163,000 in 2001 due to
our repayment in early 2000 of debt and lease financings.

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX AND MINORITY INTEREST

The loss from continuing operations before income taxes and minority
interest improved in 2001 by approximately $3.0 million over 2000 due to the
higher sales levels, offset in part by the higher expenses resulting from the
Quigley lawsuit.

11

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1999

YEARS ENDED DECEMBER 31,
-----------------------------------------
2000 1999
------------------ ------------------
Net sales $ 10,817 100% $ 9,593 100%
Cost of sales 3,411 32 2,703 28
-------- ------ -------- ------

Gross profit 7,406 68 6,890 72
Operating expenses 15,657 145 4,550 47
Research and development 433 4 242 3
-------- ------ -------- ------

Income (loss) from operations (8,684) (81) 2,098 22
Interest and other income - net 284 3 124 1
Interest expense 433 4 1,020 11
-------- ------ -------- ------

Income (loss) from continuing
operations before income tax
and minority interest $ (8,833) (82)% $ 1,202 12%
======== ====== ======== ======

NET SALES

Net sales increased from $9.6 million in 1999 to $10.8 million in 2000.
Sales of Zicam Allergy Relief, which was introduced in early 2000, accounted for
approximately one-third of 2000 net sales and offset a decrease in sales of
Zicam Cold Remedy from the 1999 level. Unit sales of Zicam Cold Remedy decreased
in 2000 from 1999 levels due to the high level of introductory sales to
retailers in late 1999 following widespread national publicity of the product.
These introductory sales subsequently resulted in an overstock by retailers of
the product at the beginning of the 2000-2001 cold season.

COST OF SALES

Cost of sales increased in 2000 from the prior year by approximately
$700,000 reflecting the higher level of sales, and increased as a percentage of
sales from 28% in 1999 to 32% in 2000 due primarily to high freight costs
incurred in early 2000 required to expedite shipment of components and finished
goods during the initial introductory period for Zicam Cold Remedy.

GROSS PROFIT

Gross profit increased from $6.9 million in 1999 to $7.4 million in 2000
due to the higher level of sales, offset in part by higher freight costs
incurred in early 2000.

OPERATING EXPENSES

Operating expenses increased from $4.6 million in 1999 to $15.7 million in
2000 due principally to a $10 million increase in advertising expense. The
increase in advertising, relative to sales levels, is largely due to the
Company's decision to significantly increase its advertising budget to promote
Zicam Cold Remedy. Operating expenses also increased due to an increase in legal
expenses arising from the patent infringement lawsuit filed by The Quigley
Corporation against us and Gel Tech, and a one-time $310,000 settlement cost of
another lawsuit.

12

RESEARCH AND DEVELOPMENT

Research and development expenses increased in 2000 to $433,000 from
$242,000 in 1999 as a result of additional clinical work related to the Zicam
Cold Remedy and Zicam Allergy Relief products.

INTEREST AND OTHER INCOME

Interest and other income increased from $124,000 in 1999 to $284,000 in
2000 due to a higher level of invested cash maintained throughout 2000.

INTEREST EXPENSE

Interest expense decreased significantly from $1,020,000 in 1999 to
$433,000 in 2000 due to Gum Tech's repayment of debt and lease financings in
early 2000.

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX AND MINORITY INTEREST

The income from continuing operations before income tax and minority
interest declined from an income amount of $1.2 million in 1999 to a loss of
$8.8 million in 2000 due primarily to the sizeable increase in advertising
expenses.

LIQUIDITY AND CAPITAL RESOURCES

Our working capital increased to approximately $13.4 million at December
31, 2001 from $5.6 million at December 31, 2000. During this period, we
experienced a decrease in cash from operating activities of approximately $4.5
million, due primarily to a net loss from continuing operations (after minority
interest in subsidiary) of $6.1 million, offset in part by a decrease in
accounts payable of $2.1 million.

Cash flows from investing activities provided $5.7 million in cash in 2001,
due to $23.5 million of net cash received from the sale of substantially all of
our chewing gum assets and related business to Wrigley, offset in part by a
$10.5 million net investment in marketable securities, a $6.2 million initial
payment to acquire the remaining 40% interest in Gel Tech and a $1.2 million
investment in capital equipment for gum manufacturing operations prior to its
sale.

Cash flow from financing activities provided $2.6 million in cash largely
due to $1.5 million in proceeds received from our sale of 200,000 shares of
common stock to Wrigley and cash received from the issuance of stock upon the
exercise of options and warrants.

At December 31, 2001, we had a $1.0 million loan outstanding under our
revolving credit agreement with Comerica Bank. The current credit facility is
scheduled to expire in May 2002. We plan to replace the existing credit facility
with a new credit facility with a higher credit limit and improved borrowing
terms.

Our capital requirements in 2002 consist of software and hardware
improvements needed for our information technology systems. Other anticipated
expenditures include costs associated with the further development and expansion
of our Zicam products and the development and introduction of new products.

We believe that our existing capital resources and our credit line are
sufficient to fund our operations and capital requirements for the next twelve
months.

13

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS AND RISK FACTORS

FORWARD LOOKING STATEMENTS

This Form 10-K, including documents incorporated herein by reference,
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The words "believe", "expect", "estimate",
"anticipate", "intend", "may", "might", "will", "would", "could", "project" and
"predict", or similar words and phrases generally identify forward-looking
statements. Forward looking statements contained herein and in document
incorporated by reference herein include, but are not limited to statements
regarding:

* our ability and intention to further develop and expand the market
presence of our existing Zicam products and to bring other products to
market, including our belief that the development of such other
products can provide us with growth opportunities;

* planned research and development and anticipated expenditures related
to such activities;

* expected reductions in operating expenditures for fiscal 2002;

* market acceptance and profitability of, and future consumer and
retailer demand for, our products;

* anticipated expansion into international markets for our Zicam
products and our belief that such international markets could provide
significant sales growth opportunities;

* our belief that our marketing efforts will continue to build brand
awareness and product sales;

* intended filings of patent and trademark applications in the United
States and in jurisdictions outside the United States;

* our ongoing relationship with our primary product supplier, Botanical
Laboratories, including its ability to meet our production needs in
the future;

* our having no plans to directly manufacture and store our products;

* our intention to secure a new credit facility with a higher credit
limit and improved borrowing terms over our present credit facility;
and

* the effect of interest rate changes on our financial position.

We may make additional written or oral forward-looking statements from time
to time in filings with the Securities and Exchange Commission or in public news
releases. Such additional statements may include, but not be limited to,
projections of revenues, income or loss, capital expenditures, acquisitions,
plans for future operations, financing needs or plans, the impact of inflation
and plans relating to our products or services, as well as assumptions relating
to the foregoing. Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in, contemplated
by, or underlying our forward-looking statements.

Statements in this Form 10-K, including those set forth in the sections
entitled "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations", and under the subheading below entitled
"Risk Factors", describe factors that could contribute to or cause actual
results to differ materially from our expectations. Other factors include (i)
less than anticipated demand or fluctuations in seasonal demand for our Zicam
products, (ii) lack of market acceptance for or uncertainties concerning the
efficacy of the Zicam products, (iii) difficulties in increasing production to
meet unexpectedly high demand in the short term; (iv) financial difficulties
encountered by one or more of our principal customers, (v) difficulties in
obtaining additional capital for marketing, research and development, and other
expenses, (vi) oversupply of product inventory to retailers, resulting in unsold
product returns, and (vii) material litigation involving patent and contractual
claims, product liabilities and consumer issues.

14

Forward-looking statements contained in this Form 10-K speak only as of the date
of this Form 10-K or, in the case of any document incorporated by reference, the
date of that document. We do not undertake, and we specifically disclaim any
obligation, to publicly update or revise any forward-looking statement contained
in this Form 10-K or in any document incorporated herein by reference to reflect
changed assumptions, the occurrence of unanticipated events or changes to future
operating results over time.

RISK FACTORS

OUR NEW BUSINESS FOCUS MEANS WE HAVE A LIMITED OPERATING HISTORY ON WHICH TO
ASSESS OUR CURRENT AND PROSPECTIVE PERFORMANCE

Although we have been in operations for a number of years, the significant
change of direction and focus in our business that we made in 2001 by exiting
the chewing gum business and refocusing entirely on the development, production
and sale of healthcare products utilizing innovative delivery systems presents a
limited operating history upon which you may evaluate our current and
prospective performance. The possibility of our future success must be
considered relative to the problems, challenges, complications and delays
frequently encountered in connection with the development and operation of a new
business, and the development and marketing of relatively new healthcare
products such as Zicam Cold Remedy and Zicam Allergy Relief.

WE INCURRED SIGNIFICANT LOSSES IN PREVIOUS YEARS AND MAY NOT BECOME PROFITABLE

We have recorded losses (excluding the income recorded in connection with
the sale in July 2001 of substantially all of our chewing gum assets to Wrigley)
in each of the last several years. While a significant portion of these loses
were attributable to our former chewing gum operations that we sold to Wrigley,
we cannot be certain that the change in our business focus in 2001 to healthcare
products will result in our becoming profitable in the foreseeable future or
over the longer term. Our need for continued expenditures for product research
and development and marketing, among other things, will make it difficult for us
to reduce our operating expenses in order to deal with lack of sales growth or
unanticipated reductions in existing sales. Our failure to balance expenditures
in any period with sales could have an adverse effect on our results of
operations.

IF ZICAM COLD REMEDY AND ZICAM ALLERGY RELIEF DO NOT GAIN WIDESPREAD MARKET
ACCEPTANCE, OUR ANTICIPATED SALES AND RESULTS OF OPERATIONS WILL SUFFER

Although studies have indicated that Zicam Cold Remedy can significantly
reduce the duration and severity of the common cold, we cannot be certain that
the product will achieve widespread acceptance by the market. To date, Zicam
Allergy Relief has not achieved the market success presently enjoyed by Zicam
Cold Remedy. While we are working to increase Zicam Allergy Relief's market
presence, we cannot be certain that demand for the product will grow. If any
unanticipated problem arises concerning the efficacy of Zicam Cold Remedy or
Zicam Allergy Relief, or either product fails to achieve widespread market
acceptance for any other reason, our operating results and prospects would be
materially adversely affected.

15

UNANTICIPATED PROBLEMS ASSOCIATED WITH PRODUCT DEVELOPMENT AND COMMERCIALIZATION
COULD ADVERSELY AFFECT OUR OPERATING RESULTS

Our successful development of existing and new products is subject to the
risks of failure and delay inherent in the development and commercialization of
products based on innovative technologies. These risks include the possibilities
that:

* we may experience unanticipated or otherwise negative research and
development results;

* existing or proposed products may be found to be ineffective or
unsafe, or may otherwise fail to receive required regulatory
clearances or approvals;

* we may find that existing or proposed products, while effective, are
uneconomical to commercialize or market;

* existing or proposed products do not achieve broad market acceptance;
or

* proprietary rights held by third parties preclude us from developing
or marketing existing or proposed products.

Our inability to develop and commercialize our existing products or any new
products on a timely basis and within our financial budgets could have a
material adverse effect on our operating results and future prospects.

OUR INABILITY TO PROVIDE SCIENTIFIC PROOF FOR PRODUCT CLAIMS MAY ADVERSELY
AFFECT OUR SALES

The marketing of our Zicam products involves claims that these products
assist in reducing the duration of the common cold (in the case of Zicam Cold
Remedy) and controlling allergy symptoms (in the case of Zicam Allergy Relief).
Under FDA and FTC rules, we are required to obtain scientific data to support
any health claims we make concerning our products. Although we have neither
provided nor been requested to provide any scientific data to the FDA in support
of claims regarding our Zicam products, we have obtained scientific data for all
of our products. We cannot be certain, however, that the scientific data we have
obtained in support of our claims will be deemed acceptable to the FDA or FTC,
should either agency request any such data in the future. If the FDA or the FTC
requests any supporting information, and we are unable to provide support that
is acceptable to the FDA or the FTC, either agency could force us to stop making
the claims in question or restrict us from selling the affected products.

FDA AND OTHER GOVERNMENT REGULATION MAY RESTRICT OUR ABILITY TO SELL OUR
PRODUCTS

We are subject to various federal, state and local laws and regulations
affecting our business. Our Zicam products are subject to regulation by the FDA,
including regulations with respect to labeling of products, approval of
ingredients in products, claims made regarding the products, and disclosure of
product ingredients. If we do not comply with these regulations, the FDA could
force us to stop selling the affected products or require us to incur
substantial costs in adopting measures to maintain compliance with these
regulations. Our advertising claims regarding our products are subject to the
jurisdiction of the FTC as well as the FDA. In both cases we are required to
obtain scientific data to support any advertising or labeling health claims we
make concerning our products, although no pre-clearance or filing is required to
be made with either agency. If we are unable to provide the required support for
such claims, the FTC may stop us from making such claims or require us to stop
selling the affected products.

16

WE MAY FAIL TO COMPETE EFFECTIVELY, PARTICULARLY AGAINST LARGER, MORE
ESTABLISHED PHARMACEUTICAL AND HEALTH PRODUCTS COMPANIES, CAUSING OUR BUSINESS
AND OPERATING RESULTS TO SUFFER

The consumer health products industry is highly competitive. We compete
with companies in the United States and abroad that are engaged in the
development of both traditional and innovative healthcare products. Many of
these companies have much greater financial and technical resources and
production and marketing capabilities than we do. As well, many of these
companies have already achieved significant product acceptance and brand
recognition with respect to products that compete directly with our Zicam
products. Our competitors may successfully develop and market superior or less
expensive products which could render our Zicam and other future products less
valuable or unmarketable.

IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY OR IF WE INFRINGE THE
INTELLECTUAL PROPERTY OF OTHERS, OUR FINANCIAL CONDITION AND FUTURE PROSPECTS
COULD BE MATERIALLY HARMED

We rely significantly on the protections afforded by patent and trademark
registrations that we routinely seek from the U.S. Patent and Trademark Office
and from similar agencies in foreign countries. We cannot be certain that any
patent or trademark application that we file will be approved by the USPTO or
other foreign agencies. In addition, we cannot be certain that we will be able
to successfully defend any trademark, trade name or patent that we hold against
claims from, or use by, competitors or other third parties. No consistent policy
has emerged from the USPTO or the courts regarding the breadth of claims allowed
or the degree of protection afforded under biotechnology and similar patents.
Our future success will depend on our ability to prevent others from infringing
on our proprietary rights, as well as our ability to operate without infringing
upon the proprietary rights of others. We may be required at times to take legal
action to protect our proprietary rights and, despite our best efforts, we may
be sued for infringing on the patent rights of others. Patent litigation is
costly and, even if we prevail, the cost of such litigation could adversely
affect our financial condition. If we do not prevail, in addition to any damages
we might have to pay, we could be required to stop the infringing activity or
obtain a license. We cannot be certain that any required license would be
available to us on acceptable terms, or at all. If we fail to obtain a license,
our business might be materially adversely affected. In addition to seeking
patent protection, we rely upon a combination of non-disclosure agreements,
other contractual restrictions and trade secrecy laws to protect proprietary
information. There can be no assurance that these steps will be adequate to
prevent misappropriation of our proprietary information or that our competitors
will not independently develop technology or trade secrets that competes with
our proprietary information.

WE MAY INCUR SIGNIFICANT COSTS RESULTING FROM PRODUCT LIABILITY CLAIMS

We are subject to significant liability should use or consumption of our
products cause injury, illness or death. Although we carry product liability
insurance, there can be no assurance that our insurance will be adequate to
protect us against product liability claims or that insurance coverage will
continue to be available on reasonable terms. A product liability claim, even
one without merit or for which we have substantial coverage, could result in
significant legal defense costs, thereby increasing our expenses and lowering
our earnings. Such a claim, whether or not proven to be valid, could have a
material adverse effect on our product branding and goodwill, resulting in
reduced market acceptance of our products. This in turn could materially
adversely affect our results of operations and financial condition.

WE DO NOT HAVE MANUFACTURING CAPABILITIES OF OUR OWN

We currently do not have the physical or human resources to independently
manufacture our Zicam products or any other products that we may develop. We
currently outsource all of our product manufacturing and packaging operations

17

and intend to continue this outsourcing for the foreseeable future. If we are
unable to enter into suitable arrangements for manufacturing of our Zicam
products or any other products, or if our third party contractors fail to
adequately perform their manufacturing operations, our sales and related
financial results could be materially adversely affected. If, in the future, we
decide to establish our own manufacturing facilities, we will require
substantial additional funds and significant additional personnel to undertake
such operations. We cannot be certain that such funding or a sufficient number
of such qualified persons will be available for such an undertaking.

THE LARGE NUMBER OF SHARES ELIGIBLE FOR IMMEDIATE AND FUTURE SALES MAY DEPRESS
THE PRICE OF OUR STOCK

Sales of substantial amounts of our common stock in the open market or the
availability of a large number of additional shares for sale could adversely
affect the market price of our common stock. Substantially all of our
outstanding shares of common stock, as well as the shares underlying vested but
as yet unexercised warrants and options, have either been registered for public
sale or may be sold under Rule 144 promulgated under the Securities Act of 1933,
as amended. Therefore, all of these shares may be immediately sold by the
holders. A substantial increase in sales of our common stock could depress the
price of our common stock.

THE PRICE OF OUR STOCK MAY CONTINUE TO BE VOLATILE

The market price of our common stock, which is quoted for trading on the
Nasdaq National Market, has been highly volatile and may continue to be volatile
in the future. Any or a combination of the following factors could cause the
market value of our common stock to decline quickly: Operating results that
differ from market expectations, negative or other unanticipated results of
clinical trials or other testing, delays in product development, technological
innovations or commercial product introductions by our competitors, changes in
government regulations, developments concerning proprietary rights, including
pending or threatened patent litigation, public concerns regarding the safety of
any of our products and general economic and stock market conditions. Since the
Spring of 2000, the stock market has experienced, and it may continue to
experience, significant price and volume fluctuations. These fluctuations have
particularly affected the market prices of equity securities of many small
capitalization companies, like Gum Tech, that are not yet profitable or that
experience low or inconsistent earnings. Often, the effect on the price of such
securities is disproportionate to the operating performance of such companies.
In our case, such broad market fluctuations may adversely our stockholders'
ability to dispose of their shares of Gum Tech at a price equal to or above the
price at which they purchased such shares.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our primary market risk exposure relates to our variable rate revolving
line of credit with Comerica Bank, which is described in the notes to our
consolidated financial statements contained in this Form 10-K. As of the fiscal
year ended December 31, 2001, we had a $1.0 million outstanding balance against
this line of credit. During fiscal 2001, the average outstanding balance on a
daily basis was approximately $1.0 million. Based on our average borrowings in
2001, a hypothetical interest rate change of 1% would increase our interest
expense approximately $10,000 per year from the expense levels that we
experienced in 2001. Consequently, we believe that moderate interest rate
increases will not have a material adverse impact on our results of operations
or financial position in the foreseeable future.

As of December 31, 2001, we did not participate in any market
risk-sensitive commodity instruments for which fair value disclosure would be
required under Statement of Financial Accounting Standards No. 107. We presently
hold approximately $15.0 million in short-term U.S. treasury securities which
are not subject to material risk. We believe that we

18

are not subject in any material way to other forms of market risk, such as
foreign currency exchange risk or foreign customer purchases (of which there
were none in 2001) or commodity price risk.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Independent Auditors' Report and Consolidated Financial Statements of
Gum Tech, including the Notes to those statements, are included in Part IV, Item
14 of this Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

We have had no disagreements with our independent accountants with respect
to accounting and financial disclosure, and we have not changed our independent
accountants during the two most recent fiscal years.

PART III

ITEM 10. INFORMATION CONCERNING DIRECTORS, NOMINEES, AND EXECUTIVE OFFICERS

The information required by this Item for our directors and executive
officers is set forth in Part I of this Form 10-K under the heading "Executive
Officers of Gum Tech" and in our Proxy Statement relating to our 2002 annual
meeting of stockholders to be held on June 18, 2002 (the "2002 Proxy
Statement"), under the headings, "Proposal No. 1 - Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance", and is incorporated
herein by this reference as if set forth in full.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item for our executive officers is set
forth in the 2002 Proxy Statement, under the heading, "Executive Compensation",
and is incorporated herein by this reference as if set forth in full. The
information set forth in the 2002 Proxy Statement under the headings, "Report of
the Audit Committee" and "Report of the Compensation Committee" is not
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item for certain of our beneficial owners
is set forth in the 2002 Proxy Statement, under the headings, "Securities
Authorized For Issuance Under Equity Compensation Plans" and "Security Ownership
of Certain Beneficial Owners", and is incorporated herein by this reference as
if set forth in full.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is set forth in the 2002 Proxy
Statement, under the headings, "Certain Relationships and Related Transactions"
and "Information Concerning Directors - Compensation Committee Interlocks," and
is incorporated herein by this referenced as if set forth in full.

19

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



Financial Statements Page
- -------------------- ----

Independent Auditors' Report 21

Consolidated Balance Sheets as of December 31,
2001 and 2000 22

Consolidated Statements of Operations for the
years ended December 31, 2001, 2000 and 1999 24

Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 2001, 2000
and 1999 25

Consolidated Statements of Cash Flows for the years
ended December 31, 2001, 2000 and 1999 27

Notes To Consolidated Financial Statements 29

20

INDEPENDENT AUDITORS' REPORT

To the Board of Directors
Gum Tech International, Inc.

We have audited the accompanying consolidated balance sheets of Gum Tech
International, Inc. and Subsidiary as of December 31, 2001 and 2000 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years ended December 31, 2001, 2000 and 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gum Tech International, Inc.
and Subsidiary as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for the years ended December 31, 2001, 2000 and
1999 in conformity with accounting principles generally accepted in the United
States of America.

Angell & Deering
Certified Public Accountants

Denver, Colorado
February 8, 2002

21

GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000

ASSETS



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

Current Assets:
Cash and cash equivalents $ 7,342,985 $ 3,485,204
Restricted cash 1,503,150 1,187,114
Accounts receivable:
Trade, net of allowance for doubtful
accounts of $468,389 and $306,835 4,461,156 4,198,731
Employees -- 911
Inventories 1,580,912 3,056,782
Marketable securities 10,656,380 --
Prepaid expenses 508,462 119,715
Notes receivable 200,000 150,000
------------ ------------

Total Current Assets 26,253,045 12,198,457
------------ ------------

Property and Equipment, at cost:
Machinery and equipment -- 5,255,308
Office furniture and equipment 94,277 350,076
Leasehold improvements 2,112 553,288
------------ ------------

96,389 6,158,672
Less accumulated depreciation (33,245) (2,166,093)
------------ ------------

Net Property and Equipment 63,144 3,992,579
------------ ------------

Other Assets:
Deposits 32,400 789,868
Patents, net of accumulated amortization of $4,619 1,118,981 --
Goodwill 15,039,836 --
------------ ------------

Total Other Assets 16,191,217 789,868
------------ ------------

Total Assets $ 42,507,406 $ 16,980,904
============ ============


The accompanying notes are an integral
part of these consolidated financial statements.

22

GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000

LIABILITIES AND STOCKHOLDERS' EQUITY



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

Current Liabilities:
Accounts payable and accrued expenses $ 5,928,985 $ 3,780,264
Customer deposits -- 64,862
Sales returns and allowances 1,031,897 855,760
Notes payable 1,000,000 1,000,000
Current portion of long-term debt 4,923,882 2,956
Deferred revenue -- 936,141
------------ ------------

Total Current Liabilities 12,884,764 6,639,983
------------ ------------

Long-Term Debt, net of current portion above:
Financial institutions and other 10,177,525 --
Obligations under capital leases -- 2,956
Less current portion above (4,923,882) (2,956)
------------ ------------

Total Long-Term Debt 5,253,643 --
------------ ------------

Minority interest in consolidated affiliate -- (107,547)
------------ ------------

Commitments and Contingencies -- --

Stockholders' Equity:
Preferred stock: no par value, 1,000,000 shares authorized:
Series A preferred stock, $1,000 stated value,
2,000 shares authorized, none issued and outstanding -- --
Common stock: no par value, 20,000,000 shares
authorized, 9,432,251 and 9,047,047 shares
issued and outstanding 33,120,651 30,459,362
Additional paid in capital 2,374,744 3,675,699
Accumulated deficit (11,073,960) (23,686,593)
------------ ------------

24,421,435 10,448,468
Less common stock held in treasury, at cost
(8,100 and -0- shares) (52,436) --
------------ ------------

Total Stockholders' Equity 24,368,999 10,448,468
------------ ------------

Total Liabilities and Stockholders' Equity $ 42,507,406 $ 16,980,904
============ ============


The accompanying notes are an integral
part of these consolidated financial statements.

23

GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999



2001 2000 1999
------------ ------------ ------------

Net sales $ 16,072,162 $ 10,817,286 $ 9,593,447
Cost of sales 4,214,812 3,410,904 2,703,509
------------ ------------ ------------

Gross Profit 11,857,350 7,406,382 6,889,938

Operating expenses 16,963,958 15,656,697 4,549,647
Research and development 716,390 433,560 241,893
------------ ------------ ------------

Income (Loss) From Operations (5,822,998) (8,683,875) 2,098,398
------------ ------------ ------------

Other Income (Expense):
Interest and other income, net 174,023 283,504 123,564
Interest expense (162,882) (433,237) (1,020,219)
------------ ------------ ------------

Total Other Income (Expense) 11,141 (149,733) (896,655)
------------ ------------ ------------

Income (Loss) Before Provision For
Income Taxes and Minority Interest (5,811,857) (8,833,608) 1,201,743
Provision for income taxes -- -- --

Minority interest in earnings of
consolidated affiliate 1,012,543 2,667,165 (1,374,117)
------------ ------------ ------------

Net Income (Loss) From Continuing Operations (4,799,314) (6,166,443) (172,374)
------------ ------------ ------------

Discontinued Operations:
Loss from discontinued operations (305,415) (1,970,637) (601,247)
Gain on disposal of gum operations, net of
income taxes of $325,000 17,717,362 -- --
------------ ------------ ------------

Total Gain (Loss) From Discontinued Operations 17,411,947 (1,970,637) (601,247)
------------ ------------ ------------

Net Income (Loss) 12,612,633 (8,137,080) (773,621)
Preferred stock dividends -- 12,005 238,466
------------ ------------ ------------

Net Income (Loss) Applicable to
Common Shareholders $ 12,612,633 $ (8,149,085) $ (1,012,087)
============ ============ ============

Net Income (Loss) Per Basic and Diluted Share
of Common Stock:
Continuing operations $ (.52) $ (.69) $ (.06)
Discontinued operations 1.88 (.22) (.08)
------------ ------------ ------------

Net Income (Loss) $ 1.36 $ (.91) $ (.14)
============ ============ ============

Weighted Average Number of Basic and Diluted
Common Shares Outstanding 9,284,234 8,906,635 7,412,959


The accompanying notes are an integral
part of these consolidated financial statements.

24

GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999



Series A
Preferred Stock Common Stock Additional
---------------------- ----------------------- Paid in Treasury Accumulated
Shares Amount Shares Amount Capital Stock Deficit
------- ----------- --------- ----------- ---------- ------- ------------

Balance at December 31, 1998 -- $ -- 6,857,999 $15,145,037 $2,915,152 $ -- $(14,342,384)

Issuance of common stock upon exercise
of stock options and warrants -- -- 890,800 3,672,044 -- -- --

Conversion of convertible notes payable
into common stock -- -- 317,046 1,505,972 -- -- --

Issuance of Series A preferred stock
(net of costs of $519,011) 2,000 2,000,000 -- -- (519,011) -- --

Issuance of common stock for repayment
of senior notes, including prepayment
penalty -- -- 163,704 2,200,000 -- -- --

Issuance of common stock for redemption
of Series A preferred stock, including
prepayment penalty (1,000) (1,000,000) 86,163 1,100,000 -- -- --

Issuance of common stock for payment of
interest on senior notes -- -- 4,993 64,526 -- -- --

Compensation from issuance of stock
options -- -- -- -- 64,275 -- --

Issuance of warrants in connection
with financing -- -- -- -- 1,091,350 -- --

Payment of Series A preferred stock
dividends -- -- -- -- -- -- (238,466)

Dividend distribution of subsidiary -- -- -- -- -- -- (183,037)

Net loss -- -- -- -- -- -- (773,621)
------- ----------- --------- ----------- ---------- ------- ------------

Balance at December 31, 1999 1,000 1,000,000 8,320,705 23,687,579 3,551,766 -- (15,537,508)

Issuance of common stock upon exercise
of stock options and warrants -- -- 532,895 3,771,783 -- -- --


The accompanying notes are an integral
part of these consolidated financial statements.

25

GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(CONTINUED)



Series A
Preferred Stock Common Stock Additional
--------------------- ----------------------- Paid In Treasury Accumulated
Shares Amount Shares Amount Capital Stock Deficit
------- ----------- --------- ----------- ----------- -------- ------------

Issuance of common stock for repayment
of senior notes -- $ -- 145,395 $ 2,000,000 $ -- $ -- $ --

Issuance of common stock for redemption
of Series A preferred stock (1,000) (1,000,000) 48,052 1,000,000 -- -- --

Compensation from issuance of options -- -- -- -- 123,933 -- --

Payment of Series A preferred stock
dividends -- -- -- -- -- -- (12,005)

Net loss -- -- -- -- -- -- (8,137,080)
------- ----------- --------- ----------- ----------- -------- ------------

Balance at December 31, 2000 -- -- 9,047,047 30,459,362 3,675,699 -- (23,686,593)

Issuance of common stock upon exercise
of stock options and warrants -- -- 185,204 1,159,413 -- -- --

Issuance of common stock for cash -- -- 200,000 1,501,876 -- -- --

Compensation from issuance of stock
options -- -- -- -- 25,830 -- --

Repurchase shares of the Company's
common stock (8,100 shares) -- -- -- -- -- (52,436) --

Acquisition of subsidiary -- -- -- -- (1,326,785) -- --

Net income -- -- -- -- -- -- 12,612,633
------- ----------- --------- ----------- ----------- -------- ------------

Balance at December 31, 2001 -- $ -- 9,432,251 $33,120,651 $ 2,374,744 $(52,436) $(11,073,960)
======= =========== ========= =========== =========== ======== ============


The accompanying notes are an integral
part of these consolidated financial statements.

26

GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999



2001 2000 1999
------------ ------------ ------------

Cash Flows From Operating Activities:
Net income (loss) $ 12,612,633 $ (8,137,080) $ (773,621)
Adjustments to reconcile net income (loss) to net
cash (used) by operating activities:
Depreciation 225,853 460,702 430,223
Amortization 4,619 160,659 392,218
Amortization of discount on notes payable 46,906 212,500 387,500
Provision for bad debts 450,115 448,645 45,000
Loss on disposal of assets 530 8,017 1,544
Impairment of investment 250,000 -- --
Gain on disposal of gum operations (17,717,362) -- --
Compensation from forgiveness of note receivable -- 209,753 --
Compensation from issuance of stock options 25,830 123,933 64,275
Common stock issued for payment of interest -- -- 264,526
Minority interest in earnings of consolidated affiliate (1,012,543) (2,667,165) 1,374,117
Changes in assets and liabilities:
Restricted cash (316,036) (916,236) --
Accounts receivable (712,540) 3,549,804 (6,779,541)
Employee receivables 911 55,326 (56,237)
Inventories 869,518 (1,089,963) (70,658)
Prepaid expenses and other (397,418) 35,566 (345,159)
Interest receivable (111,912) -- --
Accounts payable and accrued expenses 2,148,721 1,701,906 726,842
Customer deposits (64,862) 54,362 (24,263)
Sales returns and allowances 176,137 (346,340) 1,167,100
Deferred revenue (936,141) 936,141 --
------------ ------------ ------------

Net Cash (Used) By Operating Activities (4,457,041) (5,199,470) (3,196,134)
------------ ------------ ------------

Cash Flows From Investing Activities:
Capital expenditures (1,190,871) (1,050,449) (294,389)
Proceeds from sale of gum operations 25,000,000 -- --
Costs of sale of gum operations (1,527,922) -- --
Increase in notes receivable (200,000) (359,753) --
Cash paid for purchase of Gel Tech (6,239,512) -- --
Deposits and other 661,698 (574,932) 64,195
Purchase of marketable securities (17,543,105) -- --
Security of marketable securities 6,998,637 -- --
Investment in corporation (250,000) -- --
------------ ------------ ------------

Net Cash Provided (Used) By Investing Activities 5,708,925 (1,985,134) (230,194)
------------ ------------ ------------


The accompanying notes are an integral
part of these consolidated financial statements.

27

GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(CONTINUED)



2001 2000 1999
------------ ------------ ------------

Cash Flows From Financing Activities:
Proceeds from borrowing $ 600,000 $ 1,000,000 $ 4,000,000
Principal payments on notes payable (602,956) (870,546) (381,307)
Issuance of common stock 2,661,289 3,771,783 3,672,054
Issuance of preferred stock -- -- 2,000,000
Offering costs incurred -- -- (155,231)
Debt issuance costs incurred -- -- (310,462)
Dividend distribution of subsidiary -- (814,499) (183,037)
Capital contribution of minority interest -- 2,000,000 --
Dividends paid on preferred stock -- (12,005) (138,466)
Purchase of treasury stock (52,436) -- --
------------ ------------ ------------

Net Cash Provided By Financing Activities 2,605,897 5,074,733 8,503,551
------------ ------------ ------------

Net Increase (Decrease) in Cash and Cash Equivalents 3,857,781 (2,109,871) 5,077,223

Cash and Cash Equivalents at Beginning of Year 3,485,204 5,595,075 517,852
------------ ------------ ------------

Cash and Cash Equivalents at End of Year $ 7,342,985 $ 3,485,204 $ 5,595,075
============ ============ ============

Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 136,492 $ 64,985 $ 509,997
Income taxes 336,127 8,735 150

Supplemental Disclosure of Non-cash Investing
and Financing Activities:
Conversion of convertible notes payable into common stock $ -- $ -- $ 1,505,972
Issuance of warrants in connection with financing -- -- 1,091,340
Issuance of common stock to repay senior notes and redeem
preferred stock -- 3,000,000 3,000,000
Issuance of common stock for payment of dividends -- -- 100,000
Note payable incurred in connection with purchase of 40%
interest in Gel Tech 10,130,619 -- --


The accompanying notes are an integral
part of these consolidated financial statements.

28

GUM TECH INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION

Gum Tech International, Inc. (the "Company") was incorporated in Utah on
February 4, 1991 to develop, market and distribute specialty chewing gum
products for branded and private label customers, as well as products
marketed under the Company's brand. The Company sold its gum operations in
July 2001 (Note 3). The Company's sole business segment in 2001 is
developing, marketing and selling homeopathic remedies utilizing a nasal
gel technology through a wholly owned subsidiary, Gel Tech, L.L.C. ("Gel
Tech").

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its majority owned subsidiary, Gel Tech. All significant intercompany
accounts and transactions have been eliminated.

INVENTORIES

Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out pricing method.

MARKETABLE SECURITIES

Management determines the appropriate classification of its investments in
marketable debt and equity securities at the time of each purchase and
re-evaluates such determination at each balance sheet date. At December 31,
2001 the Company's investment portfolio consisted of marketable debt
securities classified as held-to-maturity and is carried at amortized cost,
which approximates fair value.

PROPERTY AND EQUIPMENT

Depreciation of the primary asset classifications is calculated based on
the following estimated useful lives using the straight-line method.

CLASSIFICATION USEFUL LIFE IN YEARS
-------------- --------------------
Machinery and equipment 5-30
Office furniture and equipment 5
Leasehold improvements 5-10

Depreciation of property and equipment charged to operations was $225,853,
$460,702 and $430,223 for the years ended December 31, 2001, 2000 and 1999,
respectively.

INTANGIBLE ASSETS

Debt issuance costs are being amortized using the straight-line method over
the term of the notes.

The patent is being amortized using the straight-line method over the
remaining term of the patent of 16.75 years at the date of purchase.

29

Goodwill is considered to have an indefinite life, and therefore, it is not
amortized.

REVENUE RECOGNITION

The Company recognizes revenue from product sales upon shipment to the
customer, net of an allowance for sales returns.

STOCK-BASED COMPENSATION

The Company adopted Statement of Financial Accounting Standard ("SFAS") No.
123, "Accounting for Stock-Based Compensation". The Company will continue
to measure compensation expense for its stock-based employee compensation
plans using the intrinsic value method prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations. See
Note 12 for pro forma disclosures of net income and earnings per share as
if the fair value-based method prescribed by SFAS No. 123 had been applied
in measuring compensation expense.

LONG-LIVED ASSETS

When facts and circumstances indicate that the cost of long-lived assets
may be impaired, an evaluation of the recoverability is performed by
comparing the carrying value of the assets to the projected future cash
flows. Upon indication that the carrying value of such assets may not be
recoverable, the Company recognizes an impairment loss by a charge against
current operations.

A forecast showing lack of long-term profitability, a current period
operating or cash flow loss combined with a history of operating or cash
flow losses are conditions, among others, that would trigger an impairment
assessment of the carrying amount of enterprise goodwill. The impairment
would be determined using discounted cash flows or market appraisals.

SHIPPING AND HANDLING COSTS

The Company includes shipping and handling costs in cost of sales.

INCOME TAXES

Deferred income taxes are provided for temporary differences between the
financial reporting and tax basis of assets and liabilities using enacted
tax laws and rates for the years when the differences are expected to
reverse.

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred. Research and
development costs were $974,447, $782,383 and $664,448 for the years ended
December 31, 2001, 2000 and 1999, respectively. Research and development
costs for the Company's gum operations that were sold are included in
discontinued operations.

ADVERTISING

The Company advertises primarily through television, radio and print media.
The Company's policy is to expense advertising costs, including production
costs, as incurred. Advertising expense was $8,867,239, $10,008,274 and

30

$1,343,492 for the years ended December 31, 2001, 2000 and 1999,
respectively.

NET INCOME (LOSS) PER BASIC AND DILUTED SHARE OF COMMON STOCK

Basic earnings per share is calculated using the average number of common
shares outstanding. Diluted earnings per share is computed on the basis of
the average number of common shares outstanding plus the dilutive effect of
outstanding stock options using the "treasury stock" method.

The basic and diluted earnings per share are the same since the Company had
a net loss from continuing operations in 2001, 2000 and 1999 and the
inclusion of stock options and other incremental shares would be
antidilutive. Consequently, options, warrants and other incremental shares
to purchase 654,960, 945,310 and 1,540,168 shares of common stock at
December 31, 2001, 2000 and 1999, respectively were excluded from the
computation of diluted earnings per share.

CASH AND CASH EQUIVALENTS

For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less at the
date of purchase to be cash equivalents.

ESTIMATES

The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires the Company's 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 amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 requires business combinations initiated
after June 30, 2001 to be accounted for using the purchase method of
accounting. It also specifies the types of acquired intangible assets that
are required to be recognized and reported separately from goodwill. SFAS
No. 142 will require that goodwill and certain intangibles no longer be
amortized, but instead tested for impairment at least annually. SFAS No.
142 is required to be applied starting with fiscal years beginning after
December 15, 2001, with early application permitted in certain
circumstances. The Company will adopt SFAS No. 142 on January 1, 2002 and
does not expect any impairment of goodwill or other intangible assets upon
adoption.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 establishes accounting standards for
recognition and measurement of a liability for the costs of asset
retirement obligations. Under SFAS No. 143, the costs of retiring an asset
will be recorded as a liability when the retirement obligation arises, and
will be amortized to expense over the life of the asset. The Company will
adopt SFAS No. 143 on January 1, 2002 and does not currently expect any
impact on the Company's financial statements.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of

31

long-lived assets and discontinued operations. The Company will adopt SFAS
No. 144 on January 1, 2002 and does not currently expect any impact on the
Company's financial statements.

RECLASSIFICATIONS

Certain prior period amounts have been reclassified to conform with the
current period presentation. The results of the Company's operations for
all periods presented have been restated for the discontinued operations of
the Company's gum operations.

2. ACQUISITION

On December 5, 2001 the Company entered into a Purchase Agreement (the
"Agreement") to acquire the 40% interest in Gel Tech previously owned by
Zensano. The Company now owns 100% of Gel Tech. The Company acquired the
remaining portion of Gel Tech so as to gain full operating and strategic
control of Gel Tech in order to develop and capitalize on the growth
potential that management believes is inherent in the existing Zicam
products and product line extensions. Under the terms of the Agreement, the
Company paid $6,120,000 in cash at closing and will make four subsequent
cash payments of $2,750,000 each over the next two years, for a total cash
purchase price of $17,120,000 less the imputed interest on the note payable
to Zensano of $869,381 resulting in a net purchase price of $16,250,619. In
addition, the Company will pay a two percent royalty on net sales in excess
of $6,000,000 in the first quarter of 2002, and further, will compensate
Zensano with an additional amount if Gum Tech sells all or part of the
Company within twelve months of closing the transaction that results in net
proceeds to the Company in excess of the amount paid to Zensano. The
Company also incurred legal, accounting, appraisal and other costs of
approximately $119,512 in connection with the transaction.

The acquisition of the 40% interest by the Company is recorded as a
purchase. The cost of Gel Tech's assets and liabilities approximates fair
value except for the value assigned to Gel Tech's patent and goodwill.

The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.

Current assets $ 2,626,114
Property and equipment 8,788
Intangible assets 1,123,600
Goodwill 15,039,836
------------

Total Assets Acquired 18,798,338
------------

Current Liabilities (2,428,207)
------------

Total Liabilities Assumed (2,428,207)
------------

Net Assets Acquired $ 16,370,131
============

The $1,123,600 assigned to patents is amortized over the remaining life of
the patent of 16.75 years. The $15,039,836 of goodwill is expected to be
deductible for tax purposes.

32

3. DISCONTINUED OPERATIONS
SALE OF GUM OPERATIONS

On July 20, 2001, the Company sold substantially all of its assets related
to its gum operations to Wm. Wrigley Jr. Company ("Wrigley"), for
$25,000,000 in cash and other consideration. The Company retained certain
assets, including cash, accounts receivable, its 60% interest in Gel Tech
and its 49% interest in a joint venture with Swedish Match. In addition,
Wrigley purchased 200,000 shares of the Company's common stock at a price
of $7.50938 per share, or approximately $1,501,876.

The results of operations for all periods presented have been restated for
the discontinued gum operations, which are summarized below. In addition,
the Company recorded an after-tax gain of approximately $17,717,362 as a
result of the asset sale in 2001.

Summary of Operating Results of Discontinued Operations:

YEAR ENDED DECEMBER 31,
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
Net sales $ 2,064,457 $ 2,560,603 $ 5,993,093
Cost of sales 2,233,272 3,740,999 4,907,995
----------- ----------- -----------

Gross profit (168,815) (1,180,396) 1,085,098
Operating expenses 814,684 1,105,054 972,217
Research and development 258,057 348,823 422,555
----------- ----------- -----------

Income (loss) from operations (1,241,556) (2,634,273) (309,674)
Other income (expense) 936,141 663,636 (291,573)
----------- ----------- -----------

Net Income (Loss) $ (305,415) $(1,970,637) $ (601,247)
=========== =========== ===========

4. RESTRICTED CASH

Cash of $1,503,150 and $1,187,114 at December 31, 2001 and 2000,
respectively, was held as collateral by a bank for letters of credit issued
to a vendor of the Company's advertising campaign. The unused letter of
credit at December 31, 2001 was $1,500,000.

5. INVENTORIES

Inventories consist of the following:

2001 2000
---------- ----------
Raw materials and packaging $ 466,520 $1,816,922
Work in process -- 159,516
Finished goods 1,114,392 1,080,344
---------- ----------

Total $1,580,912 $3,056,782
========== ==========

33

6. MARKETABLE SECURITIES

At December 31, 2001, all marketable debt securities were classified as
held-to-maturity and are carried at amortized cost. Investments consisted
entirely of U.S. government securities. At December 31, 2001, the estimated
fair value of each investment approximated its amortized cost and
therefore, there were no significant unrealized gains or losses.

7. NOTES PAYABLE BANK

$1,000,000 line of credit due in 2001 which
was extended until March 2002, with interest
at 3% above prime (or 7.75% and 9.5% at
December 31, 2001 and 2000, respectively),
collateralized by Gel Tech's, accounts
receivable, inventory, property and equipment
and intangible assets. Advances under the
line of credit are limited to 50% of Gel
Tech's, eligible accounts receivable plus
cash on deposit with the bank. The loan also
contains various financial covenants
regarding liquidity percentages and Gel Tech,
must maintain a profit on a quarterly basis.
The bank has waived the net income covenant
of Gel Tech, on a quarterly basis in 2000 and
2001. $ 1,000,000 $ 1,000,000
=========== ===========

8. LONG-TERM DEBT

Long-term debt consists of the following:

2001 2000
----------- -----------
FINANCIAL INSTITUTIONS AND OTHER

Non-interest bearing installment note with
imputed interest at 6.5% due in 2003, payable
in four installments of $2,750,000 on June
30, 2002, November 30, 2002, June 30, 2003
and November 30, 2003. Collateralized by
forty percent ownership interest in Gel Tech. $10,177,525 $ --

OBLIGATIONS UNDER CAPITAL LEASES

9.4% installment notes due in 2001 with
monthly principal and interest payments of
$1,000, collateralized by equipment. -- 2,956
----------- -----------

Total Long-Term Debt 10,177,525 2,956

Less current portion of long-term debt (4,923,882) (2,956)
----------- -----------

Long-Term Debt $ 5,253,643 $ --
=========== ===========

34

Installments due on debt principal at December 31, 2001 are as follows:

Year Ending
December 31,
------------
2002 $ 4,923,882
2003 5,253,643
-----------

Total $10,177,525
===========

9. INCOME TAXES

The components of the provision for income taxes are as follows:

2001 2000 1999
-------- -------- --------
Current:
Federal $325,000 $ -- $ --
State -- -- --
-------- -------- --------
Total 325,000 -- --
-------- -------- --------
Deferred:
Federal -- -- --
State -- -- --
-------- -------- --------
Total -- -- --
-------- -------- --------

Total Provision For Income Taxes $325,000 $ -- $ --
======== ======== ========

The provision (benefit) for income taxes reconciles to the amount computed
by applying the federal statutory rate to income before the provision
(benefit) for income taxes as follows:

2001 2000 1999
------ ------ ------
Federal statutory rate 34% (34)% (34)%
State income taxes, net of federal benefits 5 (5) (5)
Valuation allowance -- 39 39
Net operating loss carryover (39) -- --
------ ------ ------

Total --% --% --%
====== ====== ======

The following is a reconciliation of the provision for income taxes to
income before provision for income taxes computed at the federal statutory
rate of 34%.



2001 2000 1999
----------- ----------- -----------

Income taxes at the federal statutory rate $ 4,288,295 $(2,763,688) $ (263,031)
State income taxes, net of federal benefits 630,632 (406,425) (38,681)
Nondeductible expenses 4,231 4,465 3,836
Net operating loss carryover (4,598,158) -- --
Valuation allowance -- 3,165,648 297,876
----------- ----------- -----------

Total $ 325,000 $ -- $ --
=========== =========== ===========


The income taxes for the year ended December 31, 2001 are comprised of
federal alternative minimum tax that is due as a result of the gain on the
sale of the Company's gum operations.

35

Significant components of deferred income taxes as of December 31, 2001 and
2000 are as follows:

2001 2000
------------ ------------
Net operating loss carryforward $ 10,115,000 $ 15,917,800
Reserve for bad debts 192,000 116,900
Reserve for obsolete inventory -- 4,800
------------ ------------

Total Deferred Tax Asset 10,307,000 16,039,500
------------ ------------

Amortization (34,900) --
Depreciation (3,700) (580,600)
Stock option compensation (5,965,500) (5,983,600)
Other -- (5,800)
------------ ------------

Total Deferred Tax Liability (6,004,100) (6,570,000)
Less valuation allowance (4,302,900) (9,469,500)
------------ ------------

Net Deferred Tax Asset $ -- $ --
============ ============

The Company has assessed its past earnings history and trends, sales
backlog, budgeted sales, and expiration dates of carryforwards and has
determined that it is more likely than not that no deferred tax assets will
be realized. The valuation allowance of $4,302,900 is maintained on
deferred tax assets which the Company has not determined to be more likely
than not realizable at this time. The net change in the valuation allowance
for deferred tax assets was a decrease of $5,166,600. The Company will
continue to review this valuation on a quarterly basis and make adjustments
as appropriate.

At December 31, 2001, the Company had federal and state net operating loss
carryforwards of approximately $24,000,000. Such carryforwards expire in
the years 2012 through 2021 and 2002 through 2006 for federal and state
purposes, respectively.

10. PREFERRED STOCK

The authorized preferred stock of the Company consists of 1,000,000 shares,
no par value. The preferred stock may be issued in series from time to time
with such designation, rights, preferences and limitations as the Board of
Directors of the Company may determine by resolution. The rights,
preferences and limitations of separate series of preferred stock may
differ with respect to such matters as may be determined by the Board of
Directors, including without limitation, the rate of dividends, method and
nature of payment of dividends, terms of redemption, amounts payable on
liquidation, sinking fund provisions (if any), conversion rights (if any),
and voting rights. Unless the nature of a particular transaction and
applicable statutes require approval, the Board of Directors has the
authority to issue these shares without shareholder approval.

In June 1999, the Company designated a new class of preferred stock "Series
A Preferred Stock" and the number of shares constituting such series is
2,000 shares with no par value. The new series was authorized in connection
with a Securities Purchase Agreement for the sale of $4,000,000 of senior
notes and $2,000,000 of Series A preferred stock. Each preferred share
shall bear dividends at a rate of 14% per year, which shall be cumulative,
and are payable on a quarterly basis. Upon the second anniversary of the
issuance date (June 2, 2001) each preferred share will automatically
convert into shares of common stock by dividing the stated value of the
preferred shares ($1,000) by 80% of the average of the closing bid price of

36

the Company's common stock for the 20 days preceding such date. Until all
of the preferred shares have been converted into common stock or redeemed,
the Company may not declare or pay any cash dividends on its common stock
without the written consent of at least two thirds of the holders of the
preferred shares. One half of the preferred shares must be redeemed within
one year with a 10% prepayment penalty. Any redemptions of the preferred
shares must be accompanied by a repayment of the Company's senior notes on
a prorata basis of one third preferred stock and two thirds senior notes.
Any redemptions of the preferred stock prior to June 2, 2001 are based on
95% of the average of the closing bid price of the Company's common stock
for the 20 days prior to the date of redemption. The Company may redeem the
preferred stock in cash, solely at its option. The Company redeemed all of
the outstanding preferred shares in January and February 2000 through the
issuance of common stock.

11. STOCK REPURCHASE PLAN

In September 2001, the Company began acquiring shares of its common stock
in connection with its stock repurchase plan approved in August 2001. The
plan authorizes the Company to repurchase up to 1,000,000 outstanding
common shares. During 2001, the Company purchased 8,100 shares of common
stock at an aggregate cost of $52,436.

12. STOCK OPTIONS AND WARRANTS
1995 STOCK OPTION PLAN

In March 1995, the Company adopted a stock option plan (the "1995 Plan")
which provides for the grant of both incentive stock options and
non-qualified options. A total of 2,000,000 shares of common stock have
been reserved for issuance under the 1995 Plan.

Options under the Company's 1995 Plan are issuable only to eligible
officers, directors, key employees and consultants of the Company. The 1995
Plan is administered by a committee selected by the Board of Directors,
which determines those individuals who shall receive options, the time
period during which the options may be exercised, the number of shares of
common stock that may be purchased under each option, and the option price.
Unless sooner terminated, the 1995 Plan shall remain in effect until
January 1, 2005.

The per share exercise price of the common stock may not be less than the
fair market value of the common stock on the date the option is granted.
The aggregate fair market value (determined as of the date the option is
granted) of the common stock that any employee may purchase in any calendar
year pursuant to the exercise of incentive stock options may not exceed
$100,000. No person who owns, directly or indirectly, at the time of the
granting of an incentive stock option to him, more than 10% of the total
combined voting power of all classes of stock of the Company shall be
eligible to receive any incentive stock options under the 1995 Plan unless
the option price is at least 110% of the fair market value of the common
stock subject to the option, determined on the date of grant.

All options granted under the 1995 Plan provide for the payment of the
exercise price in cash or, with the prior written consent of the Company,
by delivery to the Company of shares of common stock already owned by the
optionee having a fair market value equal to the exercise price of the
options being exercised, or by a combination of such methods of payment.

The following table contains information on the stock options under the
Company's 1995 Plan for the years ended December 31, 1999, 2000 and 2001.
The outstanding options expire from July 2002 to July 2006.

37

Number of Weighted Average
Shares Exercise Price
-------- --------------
Options outstanding at December 31, 1998 697,000 $ 5.86
Granted 315,000 11.90
Exercised (333,500) 5.62
Cancelled (14,000) 5.63
-------- --------

Options outstanding at December 31, 1999 664,500 8.85
Granted 120,000 13.40
Exercised (148,000) 5.63
Cancelled (45,000) 12.00
-------- --------

Options outstanding at December 31, 2000 591,500 10.34
Granted 95,000 7.94
Exercised (158,500) 5.96
Cancelled (205,000) 11.43
-------- --------

Options outstanding at December 31, 2001 323,000 $ 11.10
======== ========

2001 LONG-TERM INCENTIVE PLAN

In November 2001, the Company adopted the 2001 Long-Term Incentive Plan
(the "2001 Plan"). The 2001 Plan provides for the grant of incentive stock
options, non-qualified options, restricted common stock, performance based
awards, tandem awards and substitute awards. A total of 1,000,000 shares of
common stock have been reserved for issuance under the 2001 Plan.

The following table contains information on the stock options under the
Company's 2001 Plan for the year ended December 31, 2001. The outstanding
options expire in December 2008.

Number of Weighted Average
Shares Exercise Price
-------- --------------
Options outstanding at December 31, 2000 -- $ --
Granted 12,000 6.90
Exercised -- --
Cancelled -- --
-------- --------

Options outstanding at December 31, 2001 12,000 $ 6.90
======== ========

OTHER STOCK OPTIONS

The Company has granted non-qualified stock options to consultants,
distributors and other individuals. The outstanding options expire from
January 2002 to September 2004.

The following table contains information on all of the Company's non-plan
stock options for the years ended December 31, 1999, 2000 and 2001.

38

Number of Weighted Average
Shares Exercise Price
-------- --------------
Options outstanding at December 31, 1998 125,000 $ 6.09
Granted 215,000 9.63
Exercised (100,000) 4.75
Cancelled -- --
-------- --------

Options outstanding at December 31, 1999 240,000 9.82
Granted 20,000 14.31
Exercised (77,314) 9.91
Cancelled (5,900) 9.61
-------- --------

Options outstanding at December 31, 2000 176,786 10.12
Granted 10,000 8.88
Exercised -- --
Cancelled (14,286) 11.44
-------- --------

Options outstanding at December 31, 2001 172,500 $ 10.11
======== ========

PROFORMA DISCLOSURES

The Company has adopted SFAS No. 123. In accordance with the provisions of
SFAS No. 123, the Company applies APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for its
plans and does not recognize compensation expense for its stock-based
compensation plans other than for options granted to non-employees. If the
Company had elected to recognize compensation expense based upon the fair
value at the grant date for awards under these plans consistent with the
methodology prescribed by SFAS No. 123, the Company's net income and
earnings per share would be reduced to the following pro forma amounts:

2001 2000 1999
----------- ----------- -----------
Net income (loss) applicable to
common shareholders:
As reported $12,612,633 $(8,149,085) $(1,012,087)
Pro forma $12,457,812 $(9,661,085) $(1,654,447)

Net income (loss) per share of
common stock:
As reported $ 1.36 $ (.91) $ (.14)
Pro forma $ 1.34 $ (1.08) $ (.22)

These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense
over the vesting period and additional options may be granted in future
years. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following assumptions
for the years ended December 31, 2001, 2000 and 1999.

39

2001 2000 1999
----------- ----------- -----------
Risk-free interest rate 4.22% 6.19% 5.90%
Expected life 3.13 years 2.16 years 3 years
Expected volatility 66.29% 69.96% 63.1%
Expected dividend yield 0% 0% 0%

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in subjective input assumptions can materially
affect the fair value estimates, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair
value of its employee stock-based compensation plans.

The weighted average fair value price of options granted was $3.61, $5.72
and $5.56 in 2001, 2000 and 1999, respectively.

The following table summarizes information about the Company's two
stock-based compensation plans outstanding at December 31, 2001:

Options Outstanding and Exercisable by Price Range as of December 31, 2001:



Options Outstanding Options Exercisable
-------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life in Years Price Exercisable Price
-------------- ----------- ------------- -------- ----------- --------

$ 6.90 - 9.00 107,000 4.53 $ 7.83 17,400 $ 8.35
$11.75 - 16.13 228,000 1.58 $ 12.42 193,000 $ 12.32
-------------- -------- ----- ------- -------- -------

$ 6.90 - 16.13 335,000 2.52 $ 10.95 210,400 $ 11.99
============== ======== ===== ======= ======== =======


COMPENSATION EXPENSE

The Company recorded compensation expense of $25,830, $123,933 and $64,275
for the years ended December 31, 2001, 2000 and 1999, respectively for the
value of certain options granted to non-employees of the Company. The
valuation of the options and warrants granted to employees is based on the
difference between the exercise price and the market value of the stock on
the measurement date. The valuation of the options granted to non-employees
is estimated using the Black-Scholes option pricing model.

UNDERWRITER'S WARRANTS

In connection with the Company's Initial Public Offering in 1996 the
Company issued to the Underwriter, warrants to purchase up to 40,000 units
of the Company's securities for $24.75 per unit. Each warrant was
exercisable to purchase three shares of common stock and one redeemable
common stock purchase warrant which was exercisable to purchase one share

40

of common stock at $7.50 per share at anytime until April 24, 2001. The
Underwriter's warrant was exercisable at anytime until April 24, 2001.

In 1998 through 2001 39,285 of the Underwriter's warrants were exercised
and 715 expired unexercised in 2001.

FINANCING WARRANTS

In connection with the Company's Securities Purchase Agreement for the sale
of senior notes and Series A preferred stock in 1999, the Company issued
warrants to the lenders. The Company issued a total of 300,000 common stock
purchase warrants. Each warrant is exercisable to purchase one share of the
Company's common stock at $12.44 per share at anytime until June 1, 2002.
In 2000, 212,540 warrants were exercised and 87,460 warrants are
outstanding as of December 31, 2001.

The Company also issued a total of 60,000 common stock purchase warrants as
a finders fee in connection with the financing. Each warrant is exercisable
to purchase one share of the Company's common stock, 30,000 at $11.70 per
share through June 1, 2002 and 30,000 at $15.00 per share through June 1,
2004. All of the warrants are outstanding at December 31, 2001.

13. COMMITMENTS AND CONTINGENCIES
LEASES

The Company leases its office facilities under a long-term leasing
arrangement. The following is a schedule of future minimum lease payments
at December 31, 2001 under the Company's operating leases that have initial
or remaining noncancellable lease terms in excess of one year:

Year Ending
December 31, Facilities
------------ ----------
2002 $42,735
-------

Total Minimum Lease Payments $42,735
=======

The Company entered into a new lease for its office facilities in 2002. The
lease is for a two year term at $15,840 per month.

Rental expense charged to operations was $280,838, $330,134 and $323,173
for the years ended December 31, 2001, 2000 and 1999, respectively.

Leased equipment under capital leases as of December 31, 2001 and 2000 is
as follows:

2001 2000
-------- --------
Equipment $ -- $ 47,727
Less accumulated depreciation -- (45,341)
-------- --------

Net Property and Equipment Under Capital Leases $ -- $ 2,386
======== ========

LITIGATION

On November 9, 1999, The Quigley Corporation ("Quigley") commenced a civil
action against the Company in the United States District Court for the
Eastern District of Pennsylvania. The complaint alleged that Zicam(TM) Cold

41

Remedy infringed on a patent licensed to Quigley and sought compensatory
damages and injunctive relief.

Without admitting guilt, the Company agreed to settle the case in June 2001
to avoid the potential adverse consequences of an unfavorable outcome,
including potential damages that may have been awarded to Quigley or the
entry of an order for injunctive relief. The settlement provides for
payment of $1,000,000 On August 1, 2001, $137,500 in four equal
installments through April 2002 and a royalty payment of 5.5% of net sales
of Zicam Cold Remedy, but not less than $500,000, for the period April 1,
2001 through March 5, 2002, payable on a quarterly basis.

On June 2, 1999, the Company filed a complaint against DJ Ltd. ("DJ").
Following a private placement the Company completed in June 1999, DJ sent
the Company a letter demanding a placement fee based on an agreement
between the parties dated December 1996. The Company's complaint sought a
declaratory judgment that DJ was not owed any fee under the agreement. DJ
filed a counterclaim against the Company. In its counterclaim DJ alleges
that the Company breached the contract between the parties and that the
Company has been unjustly enriched. DJ seeks damages in the amount of
$480,000, plus costs, expenses and warrants to purchase 50,000 shares of
the Company's common stock. DJ also seeks a declaratory judgment confirming
its version of its rights under the agreement. The Company is vigorously
defending this action.

14. RELATED PARTY TRANSACTIONS

In 2000, the Company loaned $200,000 to its former Chairman of the Board
and $150,000 to the Company's former President. The notes included interest
at 10% per annum. The Company wrote off the note receivable from its former
Chairman of the Board of $209,753, which included $9,753 of accrued
interest in 2000. The $150,000 note receivable from the Company's former
President plus accrued interest of $8,671 was forgiven in 2001 in
connection with the sale of the Company's gum operations in 2001.

15. EMPLOYEE BENEFIT PLAN

Effective September 1, 1997, the Company adopted a Simple Retirement
Account Plan for employees. The Company shall make a matching contribution
for each employee in an amount equal to each employees' Salary Reduction
Contributions for the Plan year of up to 3% of the employees compensation
for the Plan year. The Company made matching contributions of $32,988,
$31,198 and $28,250 for the years ended December 31, 2001, 2000 and 1999,
respectively. Each employee shall be fully vested at all times in his
contribution and the Company's matching contributions.

16. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments and accounts receivable. The Company places its cash
equivalents and short term investments with high credit quality financial
institutions and limits its credit exposure with any one financial
institution. The Company's cash in its banks exceeds the federally insured
limits. The Company provides credit in the normal course of business to
many of the nation's top drug stores and mass merchandisers. The Company's
accounts receivable are due from customers located throughout the United
States and various foreign countries. The Company performs periodic credit
evaluations of its customers' financial condition and generally requires no
collateral. The Company obtains letters of credit from many of its foreign
customers to limit its exposure to credit risk on its accounts receivable.

42

The Company maintains reserves for potential credit losses, and such losses
have not exceeded management's expectations.

The Company's sales are from two products, Zicam(TM) Cold Remedy and
Zicam(TM) Allergy Relief, which subjects the Company to significant
financial exposure. If future sales of these two products decrease the
Company's operations could be materially adversely affected. The Company
currently uses a single contract manufacturer to produce its nasal gel
products. However, the Company has identified an alternate supplier, but no
purchases have been made from this source.

Sales to major customers, which comprised 10% or more of net sales, for the
years ended December 31, 2001, 2000 and 1999 were as follows:

2001 2000 1999
------ ------ ------
Customer A 10.6% * *
Customer B 10.3% 13.0% *
Customer C * * 10.0%

* Less than 10%

17. FAIR VALUE OF FINANCIAL INSTRUMENTS

Disclosures about Fair Value of Financial Instruments for the Company's
financial instruments are presented in the table below. These calculations
are subjective in nature and involve uncertainties and significant matters
of judgment and do not include income tax considerations.

Therefore, the results cannot be determined with precision and cannot be
substantiated by comparison to independent market values and may not be
realized in actual sale or settlement of the instruments. There may be
inherent weaknesses in any calculation technique, and changes in the
underlying assumptions used could significantly affect the results. The
following table presents a summary of the Company's financial instruments
as of December 31, 2001 and 2000:



2001 2000
------------------------- -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ----------- ----------- -----------

Financial Assets:
Cash and cash equivalents $ 7,342,985 $ 7,342,985 $ 3,485,204 $ 3,485,204
Restricted cash 1,503,150 1,503,150 1,187,114 1,187,114
Marketable securities 10,656,380 10,656,380 -- --

Financial Liabilities:
Notes payable 1,000,000 1,000,000 1,000,000 1,000,000
Long-term debt 10,177,525 10,177,525 2,956 2,956


The carrying amounts for cash and cash equivalents, receivables, accounts
payable and accrued expenses approximate fair value because of the short
maturities of these instruments. The fair value of marketable securities is
determined by the most recently traded price of each security at the
balance sheet date. The fair value of notes payable approximates fair value
because of the market rate of interest on the notes payable. The carrying
value of long-term debt approximates fair value because the note is
non-interest bearing and has been recorded by the Company on a discounted
basis using a market rate of interest.

43

18. JOINT DEVELOPMENT AGREEMENT

In November 1999, the Company entered into a one year Joint Development
Agreement with The Procter & Gamble Company ("P&G") for potentially
developing new products. In November 2000, the Company entered into an
agreement for the extension of the Joint Development Agreement with P&G
through February 2001. The Company received $1,625,000 from P&G as
consideration for extending the agreement. The $1,625,000 was recorded as
deferred revenue and was amortized to income over the three month period of
the extension agreement. $936,141 and $688,859 is included in loss from
discontinued operations for the years ended December 31, 2001 and 2000,
respectively.

19. JOINT VENTURE AGREEMENT

The Company entered into a letter of intent with Swedish Match AB ("SM") to
form a joint venture for the purpose of developing, manufacturing,
marketing and distributing non tobacco nicotine products. The Board of
Directors of the joint venture consisted of four members: two members
designated by SM, one of which acted as chairman, and two members
designated by the Company. SM was to make a cash commitment of $10,000,000
to the joint venture of which $3,500,000 was to be funded at the closing of
the formation of the joint venture and the remainder was to be funded on an
as needed basis, and in exchange SM received a 51% interest in the joint
venture. The Company contributed intellectual property relating to its non
tobacco nicotine gum products to the joint venture and received a 49%
interest in the joint venture. The Company accounts for its interest in the
joint venture using the equity method of accounting. The Company and SM
agreed to terminate the joint venture in November 2001 and all of the
developed intellectual property is available to both SM and the Company.

20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

Selected unaudited quarterly financial data for the years 2001 and 2000 are
summarized below:



FISCAL YEAR 2001 QUARTERS
-----------------------------------------------------------
1ST 2ND 3RD 4TH TOTAL
------------ ------------ ------------ ------------ ------------

Net sales $ 6,472,190 $ 1,373,330 $ 2,718,194 $ 5,508,448 $ 16,072,162
Gross profit 4,858,870 890,959 1,966,792 4,140,729 11,857,350

Net income (loss) from
continuing operations 102,098 (1,934,022) (101,254) (2,866,136) (4,799,314)

Net income (loss) per
basic and diluted share
from continuing operations .01 (.21) (.01) (.30) (.52)

Net income (loss) 346,053 (2,302,029) 17,332,438 (2,763,829) 12,612,633


44



FISCAL YEAR 2000 QUARTERS
-----------------------------------------------------------
1ST 2ND 3RD 4TH TOTAL
------------ ------------ ------------ ------------ ------------

Net sales $ 3,102,853 $ 1,814,240 $ 1,227,384 $ 4,672,809 $ 10,817,286
Gross profit 1,961,335 1,204,281 773,234 3,467,532 7,406,382

Net income (loss) from
continuing operations (2,220,021) (429,230) (475,757) (3,041,435) (6,166,443)

Net income (loss) per
basic and diluted share
from continuing operations (.25) (.05) (.05) (.34) (.69)

Net income (loss) (2,716,158) (915,796) (1,258,214) (3,246,912) (8,137,080)


(1) Net income (loss) per common share is computed individually for each
of the quarters presented, therefore, the sum of the quarterly net
income (loss) per share may not necessarily equal the total for the
year.

(2) In the second quarter of 2001, the Company reflected the gum
operations, which was sold on July 20, 2001, as a discontinued
operation and recorded a gain on the disposal of such business of
$17,717,362. All prior periods presented have been restated for the
discontinued operations.

(a)2. FINANCIAL STATEMENT SCHEDULES

Financial statement schedules have been omitted because either they are not
required or are not applicable, or because the information has been included in
the consolidated financial statements or notes thereto contained in this Form
10-K.

(a)3. EXHIBITS

EXHIBIT NO. TITLE
----------- -----
3.01 Articles of Incorporation and Amendments thereto of the
Registrant (1)

3.02 Bylaws of the Registrant (1)

10.01 Securities Purchase Agreement among the Registrant, Fisher
Capital Ltd. and Wingate Capital Ltd. (2)

10.02 Form of Common Stock Purchase Warrant issued by the
Registrant to each of Fisher Capital Ltd. and Wingate
Capital Ltd. (2)

10.03 Registration Rights Agreement among the Registrant, Fisher
Capital Ltd. and Wingate Capital Ltd. (2)

10.04 *Consulting Agreement between the Registrant and Gary S.
Kehoe (3)

10.05 *Gum Tech International, Inc.1995 Stock Option Plan (1)

10.06 *Amendment to Gum Tech International, Inc.1995 Stock Option
Plan (1)

45

10.07 Credit Agreement between Gel Tech, L.L.C. and Imperial Bank
(4)

10.08 Asset Purchase Agreement between the Registrant and Wm.
Wrigley Jr. Company (5)

10.09 Registration Rights Agreement between the Registrant and Wm.
Wrigley Jr. Company

10.10 Purchase Agreement among the Registrant, Zensano, Inc. and
Zengen, Inc. for the Registrant's acquisition of 40%
interest in Gel Tech, L.L.C. (6)

10.11 Security Agreement between the Registrant and
Zensano, Inc. (6)

10.12 Confidentiality and Non-Competition Agreement among the
Registrant, Gel Tech, L.L.C., Zensano, Inc., Zengen, Inc.
and certain other individuals (6)

10.13 *Employment Agreement between the Registrant and Carl J.
Johnson (7)

10.14 *First Amendment to Employment Agreement between the
Registrant and Carl J. Johnson

10.15 *Gum Tech International, Inc. 2001 Stock Incentive Plan (8)

23 Consent of Angell & Deering

* Indicates management compensatory contract, plan or arrangement.

(1) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 declared effective by the Commission on April 24, 1996, file
number 333-870.

(2) Incorporated by reference to the Registrant's Report on Form 8-K filed June
9, 1999, file number 000-27646.

(3) Incorporated by reference to the Registrant's Report on Form 10-Q for the
quarter ended June 30, 2000, file number 000-27646.

(4) Incorporated by reference to the Registrant's Report on Form 10-K for the
fiscal year ended December 31, 1999, file number 000-27646.

(5) Incorporated by reference to the Registrant's Report on Form 10-K for the
fiscal year ended December 31, 2000, file number 000-27646.

(6) Incorporated by reference to the Registrant's Report on Form 8-K filed
December 14, 2001, file number 000-27646.

(7) Incorporated by reference to the Registrant's Report on Form 10-Q for the
quarter ended June 30, 2001, file number 000-27646.

(8) Incorporated by reference to the Registrant's definitive proxy statement on
Schedule 14A, filed October 17, 2001, file number 000-27646.

46

(b) REPORTS ON FORM 8-K

On December 14, 2001, the Registrant filed a Report on Form 8-K regarding
the completion of the Registrant's acquisition from Zensano, Inc. of the
remaining 40% interest in Gel Tech, L.L.C.. On February 12, 2002, the Registrant
filed a Report on Form 8-K/A which amended the Form 8-K filed on December 14,
2001 by including as exhibits thereto the financial statements required to be
filed in connection with the Registrant's acquisition of the 40% interest in Gel
Tech, L.L.C..

47

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Phoenix, Arizona,
on March 29, 2002.


GUM TECH INTERNATIONAL, INC.


By: /s/ Carl J. Johnson
------------------------------------
Carl J. Johnson
President and Chief Executive Officer


Pursuant to the requirements of 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 dated indicated:


SIGNATURE TITLE DATE
- --------- ----- ----

/s/ Edward E. Faber Chairman of the Board March 29, 2002
- ------------------------------ of Directors
Edward E. Faber


/s/ Carl J. Johnson President, Chief Executive March 29, 2002
- ------------------------------ Officer and Director
Carl J. Johnson


/s/ William J. Egan Director March 29, 2002
- ------------------------------
William J. Egan


/s/ Edward J. Walsh Director March 29, 2002
- ------------------------------
Edward J. Walsh


/s/ William A. Yuan Director March 29, 2002
- ------------------------------
William A. Yuan


/s/ Michael A. Zeher Director March 29, 2002
- ------------------------------
Michael A. Zeher


/s/ William J. Hemelt Executive Vice President, March 29, 2002
- ------------------------------ Chief Financial Officer
William J. Hemelt (Principal Financial Officer
& Principal Accounting
Officer), Treasurer and
Secretary

48