PACIFICHEALTH LABORATORIES INC, 424B1, 1997-12-19

PACIFICHEALTH LABORATORIES INC
424B1, 1997-12-19
DRUGS, PROPRIETARIES & DRUGGISTS' SUNDRIES

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PROSPECTUS
1,200,000 SHARES

PACIFICHEALTH LABORATORIES, INC.
COMMON STOCK

PacificHealth Laboratories, Inc. (the "Company") is hereby offering
1,200,000 shares (the "Shares") of its common stock, par value $.0025 per share
(the "Common Stock"). Prior to this offering, there has been no public market
for the Common Stock, and there can be no assurance such a market will develop
or be sustained. It is currently estimated that the initial public offering
price will be $6.00 per Share. The initial public offering price of the Shares
has been arbitrarily determined by negotiation between the Company and First
Montauk Securities Corp. (the "Underwriter") and is not necessarily related to
the Company's assets, book value, results of operations, or any other
established criteria of value. The Company's Common Stock has been approved for
quotation on the SmallCap Market of the Nasdaq Stock Market, Inc. ("Nasdaq")
under the symbol "PHLI".

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

THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL
DILUTION. PURCHASERS SHOULD CAREFULLY CONSIDER THE MATTERS DESCRIBED UNDER "RISK
FACTORS" BEGINNING ON PAGE 4 AND "DILUTION".

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

(1) Does not include additional compensation to be paid to the Underwriter
consisting of (a) a non-accountable expense allowance of 3% of the gross
proceeds of this offering, or $.18 per Share, of which $30,000 has been paid
to date (b) warrants to purchase 120,000 additional shares of the Company's
Common Stock (the "Underwriter's Warrants") exercisable over a period of
four years commencing one year from the date hereof at an exercise price
equal to 145% of the initial public offering price of the Shares, and (c)
the retention of the Underwriter as the Company's investment banker and
financial consultant for a period of two years at a monthly fee of $2,000 or
an aggregate of $48,000. In addition, the Company has agreed to indemnify
the Underwriter against certain liabilities including liabilities under the
Securities Act of 1933, as amended. See "Underwriting".

(2) Before deduction of expenses payable by the Company (excluding the
Underwriter's Commissions but including the non-accountable expense
allowance) estimated at $380,000 or $.32 per Share ($412,400 or
approximately $.30 per Share if the Underwriter's over-allotment is
exercised). See "Use of Proceeds".

(3) The Company has granted to the Underwriter a 45-day option to purchase up to
180,000 additional Shares (15% of the number initially offered to the
public) upon the same terms as set forth above to cover over-allotments. If
the option is fully exercised the Totals for Price to Public, Underwriting
Discounts and Commissions and Proceeds to the Company will be $8,280,000,
$828,000 and $7,452,000, respectively. See "Underwriting".

The Shares are being offered by the Underwriter, when, as and if delivered
to and accepted by the Underwriter and subject to the approval of certain legal
matters by its counsel. The Underwriter reserves the right to reject any order
either in whole or in part. It is expected that delivery of the certificates for
the Shares will be made in against payment therefor at the offices of the
Underwriter on or about December 24, 1997.

[FIRST MONTAUK SECURITIES CORP. LOGO]

The date of this Prospectus is December 19, 1997

<PAGE>

AVAILABLE INFORMATION

As of the date of this Prospectus, the Company will become subject to the
informational and reporting requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and, in accordance therewith, will file
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information filed with the Commission by the Company may be inspected and copied
at the public reference facilities maintained by the Commission at its principal
offices at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's regional offices located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and 7 World Trade
Center, Suite 1300, New York, New York 10048. Such reports, proxy statements and
other information may also be obtained from the web site that the Commission
maintains at http://www.sec.gov. Copies of these materials can also be obtained
at prescribed rates from the Public Reference Section of the Commission at its
principal offices in Washington, D.C., set forth above.

The Company intends to distribute to its shareholders Annual Reports
containing audited financial statements and Quarterly Reports containing
unaudited financial information. The Company's fiscal year end is December 31.

FOR CALIFORNIA RESIDENTS ONLY: The Commissioner of Corporations of the
State of California (the "Commissioner") has imposed investor suitability
standards of $65,000 of income and $250,000 of net worth, excluding principal
residence, home furnishings, and automobiles, or in the alternative, a minimum
net worth of at least $500,000, excluding principal residence, home furnishings,
and automobiles, for all sales of Shares of the Company to residents of the
State of California. California residents wishing to invest must show their
eligibility by completing a confidential purchaser questionnaire. They must also
sign a form letter acknowledging that this offering does not meet certain
guidelines of the Commissioner. The secondary trading exemption ordinarily
provided by Section 25104(h) will be withheld until January 1, 1998 at which
time new Section 25101.1 shall become effective. As a result, investors may not
be able to resell their shares to residents of California until after January 1,
1998. The new Section 25101.1 requires that the Company be a "reporting" company
under Section 13 or 15d of the Securities and Exchange Act and that the Company
file a required notice with the Commissioner prior to any such sales.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET
PRICE, PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN
THE COMMON STOCK MAINTAINED BY THE UNDERWRITER AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".

<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by and should be read in
conjunction with more detailed information and financial statements, and notes
relating thereto, appearing elsewhere in this Prospectus. Effective as of the
date of this Prospectus, certain founding shareholders of the Company have
agreed to contribute 200,000 shares of Common Stock back to the Company for
cancellation. Unless otherwise indicated, all references in this Prospectus,
apart from the financial statements, to numbers of shares of Common Stock
outstanding and any related per share data give retroactive effect to this
cancellation. Unless otherwise specified in this Prospectus, all information in
this Prospectus assumes an initial offering price of $6.00 per Share, and no
exercise of the over-allotment granted to the Underwriter.

THE COMPANY

PacificHealth Laboratories, Inc. (hereinafter referred to as the "Company")
was incorporated in April 1995 to engage in the development and sale of products
based upon natural ingredients that have demonstrable health benefits and can be
marketed without prior Food and Drug Administration approval under current
regulatory guidelines, and to promote and market those products aggressively
through mass and health food channels of distribution using, among other things,
marketing claims based upon Company-conducted research and testing.

The Company has focused its efforts since inception on developing a limited
number of products and the infrastructure to support its initial activities. The
Company's first product, ENDUROX(Registered), a dietary supplement marketed in
the sports performance and recovery category, was introduced in March 1996.
Commercial shipments of the product commenced in May 1996. Extensions on the
ENDUROX product line (ENDUROX EXCEL(Trademark) and ENDUROX ProHeart(Trademark))
were introduced in March 1997. From inception through September 30, 1997, the
Company's sales of the original ENDUROX formulation were $4,948,079, and the
combined sales of ENDUROX EXCEL and ENDUROX ProHeart were $971,883.

Management believes that the use of natural products as dietary supplements
to improve and promote health and well being is gaining increasing acceptance by
American consumers. The Company's primary strategy for growth is to develop new
brands and products, and to continue to expand its distribution network. The
Company has pursued a "multi-channel" distribution strategy in marketing its
line of ENDUROX products, and intends to follow a similar strategy with future
products. The ENDUROX line is sold in retail outlets in all 50 states, including
mass merchandisers such as WalMart, KMart and Target; chain drug stores such as
CVS, Walgreens, Eckerds and Rite Aid; and grocery supermarkets such as Pathmark
and Albertsons. The Company distributes its products to the health food segment
through General Nutrition Centers, a chain with over 2,800 outlets, and
independent health food retailers. The Company also sells through other
channels, including sports specialty stores such as The Sports Authority and
health clubs. The nature of the product and its target market dictate the
channels of distribution in which a product is launched, and the level of effort
directed to each channel of distribution.

The Company has additional proprietary products in various stages of
development, including products which use natural ingredients that have
demonstrated effectiveness in muscle nutrition and sports recovery, in treating
the symptoms of mild to moderate depression, in reducing the pain and
inflammation of arthritis, in appetite control and in accelerating recovery from
strains and sprains. The proceeds from this offering will be used primarily to
develop and market these products.

The Company is a Delaware corporation with executive offices located at
1460 Route 9 North, Woodbridge, New Jersey 07095 (telephone 732/636-6141).

<PAGE>

THE OFFERING

Shares offered..................... 1,200,000 shares of Common Stock, par value
$.0025 ("Shares")

Shares outstanding:

Before the offering........... 2,985,672 shares(1)

After the offering............ 4,185,672 shares(1)(2)

Use of proceeds.................... The Company intends to use the proceeds of
this offering, after payment of costs
associated with the offering, to pay
advertising, marketing and manufacturing
costs, including costs associated with the
introduction of new products, for research
and development, to retain additional
personnel, and for general operating and
administrative expenses. See "Use of
Proceeds".

Risk factors....................... A purchase of Shares is a highly speculative
investment and subject to substantial
dilution and a high degree of risk,
including risks relating to a limited
operating history, recent losses, dependence
on new products, and dependence on certain
significant customers. See "Risk Factors"
and "Dilution".

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(1) Does not include 359,740 shares of Common Stock reserved for issuance upon
conversion of outstanding 10% Convertible Preferred Stock, 1,420,200 shares
of Common Stock issuable upon the exercise of outstanding options, and
255,500 shares of Common Stock issuable upon the exercise of outstanding
warrants. See "DESCRIPTION OF SECURITIES -- Preferred Stock" and "-- Stock
Options and Warrants".

(2) Assumes no exercise of the Underwriter's option to purchase 180,000
additional shares of Common Stock to satisfy overallotments in the offering
(the Underwriter's "Over-allotment Option"), and does not include shares of
Common Stock reserved for issuance upon the exercise of the Underwriter's
Warrant.

<PAGE>

SUMMARY FINANCIAL INFORMATION

The summary financial information presented below for the fiscal years
ended December 31, 1996 and 1995 was derived from the audited financial
statements of the Company appearing elsewhere herein. The summary financial
information as of September 30, 1997 for the nine-month periods ended September
30, 1997 and 1996 was derived from the unaudited financial statements of the
Company. The unaudited financial statements include all adjustments, consisting
of normal recurring adjustments, which the Company considers necessary for a
fair presentation of its financial position and results of operations for those
periods. Operating results for the nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1997. The summary should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the financial statements of the Company and the related notes to the
financial statements, each appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
--------------------- -----------------------
1996 1995(1) 1997 1996
---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues............................................... $3,085,726 $ -0- $2,834,236 $1,043,082
Net Operating Income (Loss)............................ 53,156 (210,647) (3,959,638) (557,877)
Other Income (Expense)................................. 53,583 14,026 36,442 41,028
Net Income (Loss)...................................... 144,751 (196,621) (3,961,408) (517,139)
Net Income (Loss) per Share
Primary(2)........................................... .05 (.12) (1.15) (.20)
Fully Diluted(2)..................................... .04 (.12) (1.15) (.20)
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
DECEMBER 31, AS
1996 ACTUAL ADJUSTED(3)
------------ ---------- -----------
<S> <C> <C> <C>
Balance Sheet Data:
Current Assets............................................ $4,006,474 $1,673,190 $7,773,190
Current Liabilities....................................... 669,227 1,281,947 1,281,947
Working Capital........................................... 3,337,247 391,243 6,491,243
Total Assets.............................................. 4,195,281 1,840,182 7,940,182
Total Long Term Liabilities............................... -0- -0- -0-
Stockholders' Equity...................................... 3,526,054 558,235 6,658,235
</TABLE>

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(1) Fiscal 1995 reflects operations from inception in April 1995 through
December 31, 1995.

(2) See Note 1 of Notes to Financial Statements concerning the computation of
"primary" and "fully diluted" earnings per share.

(3) Adjusted to give effect to the receipt of the net proceeds of the offering.
Assumes that the Underwriter's over-allotment option is not exercised.

<PAGE>

RISK FACTORS

Before deciding whether to purchase Shares in this offering, prospective
investors should carefully consider all of the information contained in this
Prospectus and, in particular, the factors discussed below. Information
contained in this Prospectus contains "forward-looking statements," including,
without limitation, statements containing the words "believes," "expects,"
"intends," "seeks to," "may," "will," "should," "anticipates" and similar words,
or the negative thereof, other variations thereon, comparable terminology or by
discussions of strategy. There is no assurance that future results or events
which are covered by forward-looking statements will be achieved. The following
paragraphs of this section of the Prospectus identify factors with respect to
certain forward-looking statements that could cause actual results to vary
materially from future results to which such forward-looking statements refer.
Other factors which are not discussed in this section also could cause actual
results to vary materially from future results referred to in forward-looking
statements.

Accumulated Deficit; Recent Losses; Limited Operating History. The Company
has a limited operating history and has accumulated losses since its inception,
with an accumulated deficit of $4,241,830 at September 30, 1997, primarily
attributable to operations in the nine month period then ended in which the
Company incurred a net loss of $3,961,408. The Company anticipates a loss in the
fourth quarter of 1997, primarily as a result of continuing marketing and
advertising costs, development costs and general and administrative expenses.
The Company does not have a history of operations from which investors could
draw reasonable conclusions as to its future performance, and there can be no
assurance that the Company will operate profitably in the future. The
implementation of the Company's current business plan, including the
introduction of new products, is materially dependent upon the receipt of
additional capital from this offering. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

Substantially all of the Company's revenues to date have resulted from sale
of its original product, ENDUROX(Registered), which was introduced in May 1996,
and extensions of the ENDUROX product line which were introduced in March 1997.
The Company intends to utilize a substantial portion of proceeds from this
offering to complete the development and to commence marketing new products,
will continue to incur significant marketing and selling costs in connection
with its current products and with new products as they are introduced, and
remains subject to all of the risks inherent in the establishment of a new
business enterprise. The likelihood that the Company will be successful should
be considered in light of the problems, expenses, difficulties, complications
and delays frequently encountered in establishing a new business in a
competitive environment such as the environment in which the Company operates.
See "Business of the Company."

Dependence on New Products. The Company believes that its ability to grow
and succeed in the future will be significantly dependent upon its ability to
introduce new and innovative products and market those products successfully.
Although the Company intends to introduce several new products over the next 18
months, there can be no assurance that these products will be launched on
schedule, or at all, that the Company's efforts to develop additional products
will be successful, or that any of the Company's new products will be
commercially successful, either initially or over time. See "Business of the
Company -- Proposed Products."

Dependence on Significant Customers. The Company's largest customer,
General Nutrition Centers, accounted for approximately 45% of net sales in
fiscal 1996. In the nine month period ended September 30, 1997, GNC accounted
for 26%, and WalMart and KMart accounted for 13% and 10%, respectively, of net
sales. The loss of any of these customers, or a significant reduction in
purchase volume by or financial difficulty of such customers, for any reason,
could have a material adverse effect on the Company's results of operations or
financial condition. The Company has no agreements with or commitments from
these customers with respect to future purchases, and there can be no assurance
that any of the these companies will continue as major customers of the Company.
See "Business of the Company -- Marketing and Distribution."

Dependence Upon Key Personnel. Prior to this offering, the Company has
relied extensively on the services of its founders and principal shareholders.
These individuals will continue to play key roles in the Company's management,
and the loss of services of one or more of them could, and in the

<PAGE>

case of Robert Portman, the Company's President, would, materially and adversely
affect the Company and its prospects. See "Management -- Executive Officers and
Directors." The Company has obtained a $2,000,000 "key man" life insurance
policy covering Dr. Portman, but it is unlikely that the proceeds from such
policy would be adequate to fully compensate the Company for the loss of Dr.
Portman's services. The Company has no such insurance on any other person.

The Company has a three year employment agreement with Dr. Portman, which
contains terms limiting his ability to engage in activities competitive with the
Company following the termination of his employment. Dr. Portman, together with
other founders and principal shareholders, is a party to a Shareholders
Agreement which contains restrictions against most activities that could be
considered competitive with the Company so long as that agreement is in force.
See "Management -- Compensation of Executive Officers."

Competition. The natural dietary supplement industry is highly
competitive. The availability of numerous contract manufacturers and a ready
availability of natural ingredients, coupled with a relatively relaxed
regulatory environment, result in a fairly low barrier to begin business.
Numerous companies compete with the Company in the development, manufacture and
marketing of supplements as their sole or principal business, and the Company
estimates that there are approximately 20 large national companies that
manufacture or distribute herbal products and medicinals. Generally, these
companies are well funded and sophisticated in their marketing approaches.
Examples are Weider Nutrition International, Nature's Way, Nature's Herbs and
Solaray, Inc. In addition, there are a number of large, multilevel marketers
such as Shaklee, Herbalife and Amway that sell encapsulated herbs, diet
products, herbal supplement formulas and vitamin supplements. See "Business of
the Company -- Competition."

No Manufacturing Capabilities. The Company has no manufacturing
facilities, and does not presently intend to manufacture any of its products.
Thus, the Company is dependent upon contractual relationships with manufacturers
to fulfill its product needs. The Company's ability to market and sell its
products requires that such products be manufactured in commercial quantities,
in compliance with applicable federal and state regulatory requirements, and at
an acceptable cost to enable the Company to arrive at a price structure which
will not inhibit sales while accommodating distribution costs and third party
sales compensation. Competitors who do their own manufacturing may obtain an
advantage over the Company with respect to pricing, availability of product and
in other areas through their control of the manufacturing process. See "Business
of the Company -- Manufacturing."

In addition to competitors whose primary business is in the natural dietary
supplement industry, large pharmaceutical companies and packaged food and
beverage companies to which the dietary supplement marketplace represents a
relatively small part of their total marketing effort and sales, participate in
the industry on a limited basis. Increased competition from such companies could
have a material adverse effect on the Company as they have financial and other
resources available to them, and possess manufacturing, distribution and
marketing capabilities, which are far greater than those of the Company. See
"Business of the Company -- Competition."

Broad Discretion of Management in Application of Proceeds. The anticipated
uses of the net proceeds of this offering have been allocated only generally,
and a significant portion (approximately 25%) of the net proceeds will be added
to working capital. The Company reserves the right to reallocate the proceeds
among the categories specified under the caption "Use of Proceeds" as well as
using the proceeds for purposes not specified. Accordingly, the Company's
management will have broad discretion in the application of the net proceeds of
this offering. See "Use of Proceeds."

Absence of Conclusive Clinical Studies. Although the ingredients in the
Company's products are vitamins, minerals, herbs and other substances for which
there is a long history of human consumption, and the Company believes all of
its products to be safe when taken as directed by the Company, no assurance can
be given that the Company's products, even when used as directed, will have the
effects intended or will not have adverse effects associated with long term
consumption in the combinations and dosages provided in the products. Although
the Company tests the ingredients, formulations and production of its products
to verify safety and to establish efficacy to support its marketing claims, they
have not sponsored clinical studies on the long-term effect of human
consumption. See "-- Effect of Unfavorable Publicity" and "-- Product Liability"
below.

<PAGE>

No Long-Term Contracts for Supply of Raw Materials. The Company obtains
from other sources all of its raw materials for the manufacture of its products.
The Company generally does not have contracts with any entities or persons
committing such suppliers to provide the materials required for the production
of its products. There can be no assurance that suppliers will provide the raw
materials needed by the Company in the quantities requested or at a price the
Company is willing to pay. Because the Company does not control the actual
production of these raw materials, it is also subject to delays caused by
interruption in production of materials based on conditions not wholly within
its control. Such conditions include job actions or strikes by employees of
suppliers, weather, crop conditions, transportation interruptions and natural
disasters or other catastrophic events. The inability of the Company to obtain
adequate supplies of raw materials for its products at favorable prices, or at
all, as a result of any of the foregoing factors or otherwise could have a
material adverse effect on the Company. See "Business -- Manufacturing."

Effect of Unfavorable Publicity. The Company believes the dietary
supplement market is affected by national media attention regarding the
consumption of such products. There can be no assurance that future scientific
research or publicity will not be unfavorable to the dietary supplement market
generally, or to any particular product, or inconsistent with earlier favorable
research or publicity. Because of the Company's dependence upon consumer
perceptions, adverse publicity associated with illness or other adverse effects
resulting from the consumption of products distributed by other companies which
are similar to the Company's products, could have a material adverse impact on
the Company, even if the publicity did not relate to the Company's products.
Adverse publicity directly concerning the Company's products could be expected
to have an immediate negative effect on the market for that product. See
"Business of the Company -- Marketing and Distribution."

Dependence on Chinese Relationships and Supplies. The Company has entered
into a number of licensing and cooperation agreements with institutions and
individuals located in the People's Republic of China ("China") in order to gain
access to products, research and manufacturing "know how" relating to herbs and
other natural ingredients used in "traditional" Chinese medicine. The Company's
ENDUROX line of products is based upon a Chinese herb, ciwujia, as the primary
active ingredient. There can be no assurance that circumstances beyond the
ability of the Company to control, such as political or economic conditions in
China, will not interfere with its supplies of this herb. While China has
encouraged commercial relationships with United States and other Western
businesses in recent years and, to a limited extent, has implemented a "free
enterprise" or "market" economy domestically, it remains ruled by a communist
dictatorship which could, at any time, for internal or international political
or economic reasons, curtail all such business and economic relationships. In
addition, the Company has not received an opinion of either U.S. or Chinese
counsel as to the enforceability of its licensing and cooperation agreements in
China or the United States, or, to the extent enforceable, the term during which
agreements, none of which has a fixed termination date, may be enforced. See
"Business of the Company -- The China Relationship."

Intellectual Property Protection. The Company has received a United States
patent covering the use of ciwujia, the principal active herb in ENDUROX, to
improve physical performance and stamina during exercise, and for enhancing
recovery after exercise is completed. The Company has applied for foreign
patents on ciwujia in Canada, Mexico, all Western European countries and in 51
other principal European, South American and Asian countries. To the extent the
Company does not have patents on its products, there can be no assurance that
another company will not replicate one or more of the Company's products, nor is
there any assurance that patents which are obtained, including the ciwujia
patent, will provide meaningful protection or significant competitive advantages
over competing products. For example, the Company's use patent on ciwujia would
not prevent sale of a product using this herb with a claimed benefit or use that
was not covered by the Company's patent.

The Company has federal trademark registrations for ENDUROX(Registered) and
has trademark applications pending to register ARNICYN(Trademark),
PROSOL(Trademark), ENDUROX(Registered) ProHeart(Trademark) and
ENDUROX(Registered) EXCEL(Trademark) pending with the United States Patent and
Trademark Office. See "BUSINESS -- Proposed Products." The Company also has
filed the ENDUROX trademark in all Western European countries, Canada, Mexico
and Japan. The Company's policy is to pursue registrations for all of the
trademarks associated with its key products, and to protect its legal rights
concerning the use of its trademarks. The Company relies on common law trademark
rights to protect its unregistered trademarks. Common law

<PAGE>

trademark rights do not provide the Company with the same level of protection as
afforded by a United States federal registration of a trademark. For example,
unlike a registered trademark, common law trademark rights are limited to the
geographic area in which the trademark is actually used.

There can be no assurance that any patent and trademark protection that the
Company obtains will be effective to protect the Company's products from
duplication by other manufacturers. In addition, while the Company believes that
its products do not and will not infringe upon the patents or violate the
proprietary rights of others, it is possible that such infringement or violation
has occurred or may occur. In the event that products sold by the Company are
determined to infringe upon the patents or proprietary rights of others, the
Company could be required to modify its products or obtain a license for the
manufacture and/or sale of such products, or could be prohibited from selling
such products. There can be no assurance that, in such an event, the Company
would be able to do so in a timely manner, upon acceptable terms and conditions,
or at all, and the failure to do any of the foregoing could have a material
adverse effect upon the Company. Nor can there be any assurance that the Company
will be able to afford the expense of any litigation which may be necessary to
enforce its intellectual property rights, or to defend an action charging the
Company with patent infringement or the violation of the intellectual property
rights of others. Further, if the Company's products or proposed products were
found to infringe upon the intellectual property rights of others, the Company
could, under certain circumstances, become liable for damages, which could also
have a material adverse effect on the Company. See "Business of the Company --
Patents and Trademarks."

Control by Management and Principal Stockholders. Following the completion
of this offering, the Company's executive officers and directors will own, in
the aggregate, approximately 31.4% of the outstanding Common Stock and
immediately exercisable options to acquire an additional 417,500 shares of the
Company's Common Stock which, if exercised in full, would give management an
additional 6.3% of the outstanding Common Stock. Accordingly, the Company's
existing management can be expected to be able to significantly influence or
control the election of the Board of Directors and the business affairs of the
Company following the offering. See "Principal Stockholders."

Possible Conflict of Interest with Underwriter. Robert Portman, and David
Portman, executive officers and directors of the Company, are shareholders of
First Montauk Financial Corp., the parent entity of the Underwriter. David
Portman owns 50,000 shares of common stock of First Montauk Financial Corp. and
options to purchase 60,000 shares. Robert Portman owns 125,386 shares of common
stock of First Montauk Financial Corp. First Montauk Financial Corp. is a
publicly-held corporation whose shares are traded in the over-the-counter
("OTC") market. David Portman has served as a director of First Montauk
Financial Corp. since 1993. Neither Robert Portman nor David Portman are
officers or directors of the Underwriter. Although David Portman does not
participate in any matters brought before the Board of Directors of First
Montauk Financial Corp. regarding the Company, as a result of the foregoing,
there may exist conflicts of interest between the Company and the Underwriter.
Investors should consider these potential conflicts of interests when making
their investment decision. See "Management" and "Underwriting."

No Prior Public Market for Common Stock; Determination of Offering
Price. Prior to this offering, there has been no market for the Common Stock of
the Company. While the Company's Common Stock has been approved for listing on
the Nasdaq SmallCap Market, there can be no assurance that an active trading
market for the Common Stock will be established, or if so established,
sustained. The initial offering price for the Shares has been arbitrarily
determined through negotiation between the Company and the Underwriter based on
such factors as the business potential and earnings prospects of the Company and
prevailing market conditions. Such price may not be indicative of the market
price of the Shares after this offering has been consummated. See
"Underwriting."

Substantial and Immediate Dilution. Purchasers of the Shares offered
hereby will incur an immediate and substantial dilution in the net tangible book
value of the Shares of approximately $4.75 per share (approximately 79.2%) from
the public offering price of $6.00. Certain existing shareholders of the
Company, including officers and directors, received their shares at nominal cost
or costs below the offering price of the Shares. The average price paid by
existing shareholders of the Company, assuming the conversion of outstanding
shares of 10% Covertible Preferred Stock, is approximately

<PAGE>

$1.54 per share. Thus, purchasers in this offering will bear a substantially
greater risk of loss than existing shareholders. See "Dilution."

Possible Delisting; Penny Stock Regulation. It is a condition of the
offering that the Company's Common Stock be listed on the Nasdaq SmallCap
Market. Under Nasdaq rules, in order to maintain a listing on the Nasdaq
SmallCap Market, a company must have, among other things, $2,000,000 in net
tangible assets, or either (i) a market capitalization of $35,000,000 or more,
or (ii) $500,000 net income in its last fiscal year or two of its last three
fiscal years. In addition, the listed security must have a minimum bid price of
$1.00 per share. Further, Nasdaq reserves the right to withdraw or terminate a
listing on the Nasdaq SmallCap Market at any time and for any reason in its
discretion. If the Company were unable to maintain a listing on the Nasdaq
SmallCap Market, quotations, if any, for "bid" and "asked" prices of the Common
Stock would be in the over-the-counter market, either in the "pink sheets"
published by the National Quotation Bureau, Inc. or on the National Association
of Securities Dealers OTC Electronic Bulletin Board. In such event, an investor
could find it more difficult to dispose of or to obtain accurate quotations of
prices for the Common Stock.

The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure relating to the market for penny stocks in connection with
trades in any stock defined as a penny stock. Securities and Exchange Commission
regulations generally define a penny stock to be an equity security that has a
price of less than $5.00 per share, subject to certain exceptions. Unless an
exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith. In addition, if the
Company's securities do not meet an exception to the penny stock regulations,
trading in the Company's securities would be covered by Rule 15g-9 promulgated
under the Securities Exchange Act of 1934 (the "Exchange Act") for non-Nasdaq
and non-national securities exchange listed securities. Under such rule,
broker/dealers who recommend such securities to persons other than established
customers and accredited investors (generally, individuals with net worth in
excess of $1,000,000 or annual incomes exceeding $200,000 or $300,000 together
with their spouses) must make a special written suitability determination for
the purchaser and receive the purchaser's written agreement to a transaction
prior to sale. Securities whose market price is at least $5.00 per share are
exempt from this rule.

If the Company's securities become subject to the regulations applicable to
penny stocks, the market liquidity for the Shares could be adversely affected
because the regulations on penny stocks could limit the ability of
broker/dealers to sell the Company's securities and thus the ability of
purchasers of the Company's securities to sell their securities in the secondary
market. See "Underwriting" and "Description of Securities."

Government Regulation. The manufacturing, packaging, labeling,
advertising, distribution and sale of the Company's products are subject to
regulation by one or more governmental agencies. Failure by the Company to
comply with governmental regulations applicable to its business could result in
limitations or prohibitions on the sale of certain products, fines or other
sanctions.

The Company believes that the most significant governmental regulations
applicable to its business are those promulgated by the Food and Drug
Administration (the "FDA") under the Federal Food, Drug and Cosmetic Act (the
"FFDC Act"), and the Federal Trade Commission under the Federal Trade Commission
Act, which prohibits unfair or deceptive trade practices, including false or
misleading advertising. The Company's products and activities also are subject
to regulation by the Consumer Product Safety Commission, the United States
Department of Agriculture, the Environmental Protection Agency, and by various
agencies of the states, localities and foreign countries in which the Company's
products are sold. See "Business of the Company -- Government Regulation."

With respect to its application to dietary supplements, the FFDC Act has
been amended several times, most recently by the Nutrition Labeling and
Education Act of 1990 and the Dietary Supplement Health and Education Act of
1994 (the "DSHEA"). The Company's products are generally classified and
regulated as dietary supplements under the FFDC Act, as amended, and are
therefore not subject to premarket approval by the FDA. However, these products
are subject to extensive labeling regulation by the FDA and can be removed from
the market if shown to be unsafe. Moreover, if the FDA

<PAGE>

determines, on the basis of labeling or advertising claims by the Company, that
the "intended use" of any of the Company's products is for the diagnosis, cure,
mitigation, treatment or prevention of disease, it can regulate those products
as drugs and require premarket clearance for safety and effectiveness, and if
the FDA determines that the requirements of DSHEA for making claims that a
dietary supplement product affects the "structure or function" of the body have
not been met, such non-complying claims could result in the regulation of the
product as a drug. See "Business of the Company -- Regulation."

Governmental regulations in foreign countries in which the Company wishes
to distribute its products may prevent or delay entry into the market, or
require the reformulation, of the Company's products. At the present time, the
only foreign country in which the Company's products are sold is Canada.
Compliance with Canadian governmental regulations is controlled by the Company's
distributor for Canada, an independent contractor over whom the Company has
limited control.

In the future, the Company may be subject to additional laws or regulations
administered by the FDA or other federal, state or foreign regulatory
authorities, the repeal of laws or regulations which the Company considers
favorable, such as the DSHEA, or more stringent interpretations of current laws
or regulations. New laws or regulations could, for example, require the
reformulation of certain products to meet new standards, the recall or
discontinuance of certain products not able to be reformulated, imposition of
additional recordkeeping requirements, expanded documentation of the properties
of certain products, expanded or different labeling and scientific
substantiation. Any or all of such requirements could have a material adverse
effect on the Company's results of operations and financial condition. The
Company cannot predict the nature of such future laws, regulations,
interpretations or applications, nor can it predict what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on its business. See "Business of the Company -- Regulation."

Product Liability. The Company, like other retailers, distributors and
manufacturers of products that are designed to be ingested, faces an inherent
risk of exposure to product liability claims in the event that the use of its
products results in injury. With respect to product liability claims, the
Company has coverage of $5,000,000 per occurrence and in the aggregate, subject
to a self-insurance retention or "deductible" of $2,500. However, there can be
no assurance, however, that such insurance will continue to be available at a
reasonable cost, or, if available, will be adequate to cover liabilities which
the Company could incur. The Company generally does not obtain contractual
indemnification from parties supplying raw materials or marketing its products
and, in any event, any such indemnification is limited by its terms and, as a
practical matter, to the creditworthiness of the indemnifying party. In the
event that the Company does not have adequate insurance or contractual
indemnification, product liabilities relating to defective products could have a
material adverse effect on the Company. See "Business of the Company."

Factors Inhibiting Takeover; Authorized Prefered Stock. Certain provisions
of the Company's Amended and Restated Certificate of Incorporation and Bylaws
may be deemed to have anti-takeover effects and may delay, defer or prevent a
takeover attempt that a stockholder might consider in the Company's or the
stockholder's best interest. The Company's Amended and Restated Certificate of
Incorporation authorizes the Board of Directors to determine the rights,
preferences, privileges and restrictions of unissued series of preferred stock
and the designation of any such series, without any vote or action by the
Company's stockholders. Thus, the Board of Directors can authorize and issue
shares of preferred stock with voting or conversion rights that could adversely
affect the voting or other rights of holders of the Company's Common Stock. In
addition, the issuance of preferred stock may have the effect of delaying,
deferring or preventing a change of control of the Company, since the terms of
any preferred stock which might be issued could contain terms which could
contain special voting rights or increase the costs of acquiring the Company.
See "Description of Securities -- 10% Convertible Preferred Stock."

The Company is subject to Section 203 of the Delaware General Corporation
Law which prevents transactions between the Company and an "interested
stockholder" unless certain conditions are satisfied. The applicability of
Section 203 may have the effect of delaying, deferring or preventing "changes in
control" of the Company, even if such event would be beneficial to the then
existing

<PAGE>

shareholders. See "Description of Capital Stock" for additional information
concerning Section 203 and other provisions of the Delaware General Corporation
Law.

Future Sales of Common Stock. Upon completion of this offering, there will
be 4,185,672 shares of Common Stock outstanding, assuming the over-allotment
option is not exercised, and 143,896 shares of 10% Convertible Preferred Stock,
each of which presently is convertible into 2.5 shares of Common Stock or a
total of 359,740 shares ("Conversion Shares"). See "Description of Securities --
10% Convertible Preferred Stock." Shares sold in this offering will be tradeable
without restriction by persons other than "affiliates" of the Company. The
shares of Common Stock presently outstanding are, and Conversion Shares if
issued would be, "restricted securities" as that term is defined in Rule 144
promulgated under the Securities Act of 1933 (the "Securities Act"). Such
securities are eligible for sale without registration under Rule 144 upon
satisfaction of certain conditions, including a minimum "holding period" of one
year from the time the securities are purchased from the Company or an affiliate
of the Company. All of the Company's outstanding Common Stock, and Conversion
Shares when issued, will be saleable under Rule 144 within ninety days following
completion of this offering, subject to the "lock up" agreements described in
the following paragraph in the case of shares owned by executive officers,
directors and certain other shareholders.

All of the Company's directors and executive officers, and certain of its
shareholders have entered into a "lock up" agreement with the Underwriter
pursuant to which they have agreed that, for a period of one year from the date
of this Prospectus, they will not offer, sell, contract to sell, pledge or
otherwise dispose of shares of the Company's Common Stock without the prior
written consent of the Underwriter. In order to obtain regulatory clearances for
this offering in certain states, the Underwriter has agreed that it will not
consent to any sales during the "lock up" period provided in these agreements.
Holders of 2,440,222 shares of Common Stock have entered into such agreements.
Holders of 353,750 shares of Common Stock and 46,223 shares of 10% Convertible
Preferred Stock have entered into similar agreements in which the "lock up"
period is six months. In addition, the Company has agreed not to issue
additional securities without the prior consent of the Underwriter for a period
of one year from the initial sale of Shares, except for additional shares of 10%
Convertible Preferred Stock as dividends to holders of outstanding shares of 10%
Convertible Preferred Stock, and additional shares of Common Stock upon the
exercise of outstanding options and warrants and the exercise of the
Underwriter's Overallotment Option or Underwriter's Warrants.

In addition to the Underwriter's "lock up" agreements, pursuant to the
request of certain state securities authorities officers, directors and one
other shareholder of the Company have entered into agreements with the Company
which further restrict their ability to sell shares of the Company's Common
Stock which they own. These agreements preclude the sale of shares subject to
the agreements (a total of 1,580,765 shares, hereinafter referred to as
"escrowed shares") by such shareholders for a period of one year from the date
of this Prospectus, and limit sales of all but 76,001 of the escrowed shares in
the second year following the date of this Prospectus to 2 1/2% of the total
number of escrowed shares owned by such shareholders every three months. The
shareholders who have entered into these agreements and the number of escrowed
shares subject to their respective agreements are as follows: Robert Portman and
Jennifer Portman, individually and as trustee for the Portman's minor children
- -- 887,198 shares); Jonathan D. Rahn -- 228,098 shares; David Portman -- 163,431
shares; T. Colin Campbell and Karen Campbell -- 199,893 shares; and Jemeson
Investment Co. -- 26,144 shares.

No prediction can be made as to the effect, if any, that future sales, or
the availability of Common Stock for future sales, will have on the market price
of the Common Stock from time to time. Sales of substantial amounts of Common
Stock by the Company or by stockholders who hold restricted securities, or the
perception that such sales may occur, could adversely affect market prices for
the Common Stock. For additional information on possible future sales of
restricted securities in accordance with Rule 144, see "Shares Available for
Future Sale."

Underwriter's Influence on the Market. A significant number of the Shares
may be sold to customers of the Underwriter. Such customers subsequently may
engage in transactions for the sale or purchase of such securities through or
with the Underwriter. Although it has no obligation to do so, the Underwriter
intends to make a market in the Common Stock and may otherwise effect
transactions in

<PAGE>

such securities. If it participates in such market, the Underwriter may exert a
dominating influence on the market, if one develops, for the Common Stock. Such
market-making activity, if commenced, may be discontinued at any time. Moreover,
if the Underwriter exercises the Underwriter's Warrants, it may be required
under Regulation M promulgated under the Exchange Act to temporarily suspend its
market-making activities. The price and liquidity of the Common Stock may be
significantly affected by the degree, if any, of the Underwriter's participation
in such market. See "Underwriting."

Limited Experience of Underwriter. Although the Underwriter was formed and
first registered as a broker-dealer in 1983, current management has operated the
Underwriter only since 1986. The Underwriter has, to date, manageed only one
public offering prior to this offering but has participated in more than 200
public offerings as a selling group member. Prospective purchasers of the Shares
offered hereby should consider this limited experience in evaluating the
securities offered hereby. See "Underwriting."

Future Issuances of Stock by the Company. Following this offering, the
Company will have 10,000,000 shares of Common Stock authorized, of which
4,185,672 shares will be issued and outstanding, assuming that the
over-allotment option has not been exercised, and an additional 1,200,700 shares
of Common Stock will be reserved for issuance upon the exercise of outstanding
options and warrants, and upon conversion of outstanding shares of 10%
Convertible Preferred Stock. The Company also will have 650,000 shares of
preferred stock, $.01 par value per share (the "Preferred Stock"), authorized
but unissued and undesignated. The balance of the Company's authorized shares of
Common Stock and 650,000 shares of the Preferred Stock are not reserved for any
purpose and may be issued without any action or approval by the Company's
stockholders. In connection with this offering, however, the Company has agreed
that no Preferred Stock will be issued to directors, officers or promoters of
the Company without stockholder approval. See "Description of Securities."

Shares Issuable Pursuant to Options. In addition to the Company's
outstanding warrants, the Company has granted options to purchase 1,420,200
shares of the Company's Common Stock. See "Management -- Stock Option Plan."
During the terms of the options, the holders thereof are given the opportunity
to profit from a rise in the market price of the Common Stock without assuming
the risks of ownership, with a resulting dilution in the interest of other
security holders. Also, the exercise thereof may dilute the net book value per
share of the Common Stock. The existence of the options may adversely affect the
terms on which the Company can obtain additional equity financing. Moreover, the
holders are likely to exercise their options at times when the Company would
otherwise be able to obtain capital on terms more favorable than could be
obtained through the exercise of the options. In order to gain regulatory
clearances for this offering in certain states, the Company has agreed that it
will not issue additional stock options or warrants for a period of one year
following the date of this Prospectus, apart from the warrants to be sold to the
Underwriter in connection with this offering. See "Underwriting."

Limitations on Liability of Directors and Officers. The Company's
Certificate of Incorporation limits the liability of directors of the Company
for monetary damages for breaches of directors' fiduciary duty of care. This
provision may reduce the likelihood of derivative litigation against directors
and may discourage or deter shareholders or management from suing directors for
breaches of their duty of care, even though such an action, if successful, might
otherwise benefit the Company and its shareholders. In addition, the Company's
Bylaws provide for the indemnification of directors and officers in connection
with civil, criminal, administrative or investigative proceedings when acting in
their capacities as agents for the Company. See "Disclosure of Commission
Position on Indemnification for Securities Act Liabilities."

Non-payment of Dividends. The Company has not paid dividends on Common
Stock in the past, and has no intention of paying dividends on Common Stock in
the foreseeable future. The Company has paid dividends on its 10% Convertible
Preferred Stock "in kind", i.e., in additional shares of 10% Convertible
Preferred Stock, with cash dividends paid only in lieu of fractional shares. See
"Description of Capital Stock" and "Use of Proceeds."

<PAGE>

DILUTION

The stockholders' equity of the Company at September 30, 1997, was
$558,235. Giving effect to the sale of the Shares and payment of offering
expenses, but to no other post-September 30, 1997, transactions or operations,
and assuming no exercise of the over-allotment option, the Company's
stockholders' equity immediately following the offering would be approximately
$6,658,235. The net tangible book value of Common Stock would be approximately
$1.25 per share, or approximately 79.2% less than the price paid by purchasers
of Shares in this offering. The difference between the net tangible book value
of the Common Stock following this offering and the initial offering price of
the Shares represents dilution in the tangible book value of the investment of
purchasers in the offering. The Company's present holders of Common Stock would
benefit from an increase in the present tangible book value of their investment,
from a negative $.30 per share to $1.25.

The following table illustrates this per share dilution:

Assumed initial public offering price per Share........... $6.00
Tangible book value per share of Common Stock before
this offering........................................ $(0.30)
Increase in net tangible book value per share
attributable to the sale of the Shares offered
hereby............................................... $ 1.55
------
Net tangible book value per share of Common Stock after
this offering.......................................... $1.25
-----
Dilution per share to new stockholders.................... $4.75
=====

The following table sets forth the number of shares of Common Stock
purchased from the Company and the total consideration and the average price
paid by (a) present holders of Common Stock or their predecessors, and (b)
purchasers of Shares in this offering.

<TABLE>
<CAPTION>
SHARES OF PERCENTAGE TOTAL PERCENTAGE OF AVERAGE
COMMON OF CLASS CONSIDERATION TOTAL PRICE
STOCK OUTSTANDING PAID CONSIDERATION PER SHARE
--------- ----------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Present holders................. 2,985,672 71.3% $ 3,946,519 35.4% $1.32
Purchasers in this offering
(1)........................... 1,200,000 28.7% $ 7,200,000 64.6% $6.00
--------- ---- ----------- ---- -----
Totals..................... 4,185,672 100% $11,146,519 100% $2.66
========= ==== =========== ==== =====
</TABLE>

- ------------------
(1) Assumes no exercise of the over-allotment option.

The Company also has outstanding 143,896 shares of 10% Convertible
Preferred Stock for which the holders of such shares or their predecessors paid
$1,200,000. Each share of the 10% Convertible Preferred Stock outstanding
presently is convertible into 2.5 shares of Common Stock, or 359,740 shares in
total. Conversion of outstanding 10% Convertible Preferred Stock would result in
an imputed purchase price of $3.34 per share of Common Stock issued in
conversion. The net tangible book value of the 10% Convertible Preferred Stock
at September 30, 1997, was approximately $3.88 per share. Giving retroactive
effect to the receipt of the proceeds from this offering, the net tangible book
value of shares of the 10% Convertible Preferred Stock would be $10.00 per
share. See "Description of Capital Stock -- 10% Convertible Preferred Stock."

<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from this offering, after deducting sales
commissions (10% of gross proceeds) and the non-accountable expense allowance
(3% of gross proceeds) payable to the Underwriter, and other offering expenses
such as legal and accounting expenses, registration and filing fees, printing
and other miscellaneous offering expenses, are estimated to be $6,100,000
($7,039,600 if the Underwriter's over-allotment option is exercised). The
Company intends to use the net proceeds of the offering as follows:

PERCENTAGES
OF TOTAL
DESCRIPTION AMOUNT PROCEEDS
- ----------- ---------- -----------
Marketing and advertising(1)......................... $2,640,000 43.3%
Inventory and manufacturing costs(2)................. 1,015,000 16.6%
Research and development............................. 610,000 10%
Added personnel costs(3)............................. 305,000 5%
Working capital(4)................................... 1,530,000 25.1%
---------- ----
Totals....................................... $6,100,000 100%
========== ====

- ------------------
(1) Both in connection with the launch of new products (approximately 80%) and
in support of existing products.

(2) New product inventory and costs associated with the start up of manufacture
for new products.

(3) The Company expects to increase its staff following this offering by hiring
five individuals, principally for sales and marketing purposes.

(4) Funds allocated for working capital may be used for payments relating to the
Company's reserve for product replacement. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Section
(b)(i)."

The above amounts represent management's present estimates based upon
current operating plans and certain strategic assumptions, including those
relating to the Company's future revenue levels and expenditures, and industry
and general economic and other conditions. Although the Company does not
contemplate any material changes in the proposed use of proceeds, since the
proposed uses of proceeds are based on assumptions concerning future events and
conditions, many of which are not in the Company's control, the amounts shown
may be adjusted among the uses indicated above or, if business conditions make
it necessary or advisable, in management's opinion, to do so, certain portions
of the net proceeds may be used for other corporate purposes. By way of
illustration only, if the Company's revenues in future periods were less than
anticipated, management might increase its allocation of funds to marketing and
advertising in an effort to increase sales. Alternatively, management might
decrease the allocation of funds for that purpose if, in the circumstances,
management believed that reduced sales levels would not support previously
budgeted marketing and advertising expenses. In the latter case, funds
previously allocated for marketing and advertising might be reallocated to
research and development to pursue the identification and development of new
products, or to accelerate ongoing research and development activities. By way
of further illustration, if manufacturing and inventory costs associated with
new products were higher than anticipated, management might be required to scale
back operations in the areas affected, or to reallocate funds to manufacturing
and inventory which previously had been allocated to other uses.

The Company anticipates that it will commence the application of the
proceeds upon completion of this offering and that such proceeds will be applied
over the next twelve months. The Company believes that the net proceeds of this
offering will be sufficient to satisfy its requirements to implement its
business plans over such period. Pending such use, the net proceeds of this
offering will be invested in short term, interest bearing deposits or in United
States government securities. The Company reserves the right to enter into short
term borrowing in the future as business conditions or the Company's needs may
require.

To the extent the over-allotment option is exercised, any proceeds from
such exercise will be added to working capital.

<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
September 30, 1997, and as adjusted to give effect to the issuance and sale of
1,200,000 Shares, the receipt of net proceeds therefrom, and the application of
net proceeds as set forth under the caption "Use of Proceeds."

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------
PRO FORMA
ACTUAL(1) AS ADJUSTED(1)
----------- --------------
(UNAUDITED)
<S> <C> <C>
Current liabilities............................... $1,281,947 $ 1,281,947
---------- -----------
Long term debt and other liabilities (excluding
current maturities)............................. $ -0- $ -0-
---------- -----------
Common Stock, authorized 10,000,000 shares, par
value $.0025 per share, 2,985,672 shares
outstanding (4,185,672 shares outstanding as
adjusted)....................................... $ 7,464(2) $ 10,464(2)
---------- -----------
10% Convertible Preferred Stock, authorized
250,000 shares, par value $.01 per share,
143,896 shares outstanding...................... $ 1,439 $ 1,439
---------- -----------
Additional paid in capital........................ $4,791,162(2) $10,888,162(2)(3)
---------- -----------
Accumulated deficit............................... $4,241,830(4) $ 4,241,830(4)
---------- -----------
Total Stockholder Equity.......................... $ 558,235 $ 6,658,235
---------- -----------
</TABLE>

- ------------------
(1) Does not include Common Stock reserved for issuance upon exercise of
outstanding options and warrants (1,200,200 shares), the over-allotment
option (180,000 shares) or the Underwriter's Warrants (120,000 shares), or
upon conversion of outstanding shares of 10% Convertible Preferred Stock
(359,470 shares based upon the present conversion ratio).

(2) Giving effect to the cancellation, effective as of the date of this
Prospectus, of 200,000 shares issued to the Company's President in
connection with the organization of the Company.

(3) After deduction of the Underwriter's commission (10%), unaccountable expense
allowance (3%), and other offering expenses (primarily legal and accounting
fees, and printing costs) estimated at $164,000.

(4) Includes dividends paid on 10% Convertible Preferred Stock ($102,765)
through September 30, 1997.

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with
the Company's financial statements, including the notes thereto, appearing
elsewhere in this Prospectus.

(a) Introduction

The Company was incorporated in April 1995 to develop and market dietary
supplements that improve and promote health and well being and can be offered
for sale without prior approval by The Food and Drug Administration in
compliance with current regulatory guidelines. The Company's first product,
ENDUROX(Registered), was introduced in March 1996, and commercial sales began in
May 1996. Prior to that time, the Company was engaged in organizational and
financing activities, product research and development, and preliminary
marketing and distribution activities. In March 1997, the Company extended the
ENDUROX line of products with ENDUROX ProHeart(Trademark) and ENDUROX
EXCEL(Trademark). The Company has identified and developed a number of new
products which are scheduled to be introduced beginning in the fourth quarter of
1997.

(b) Results of Operations

(i) Nine Months Ended September 30, 1997 versus September 30, 1996

The Company incurred a loss of $3,961,408 or $1.15 per share for the period
ended September 30, 1997, compared to a loss of $517,139 or $.20 per share for
the period ended September 30, 1996. In most respects, operations in these
periods cannot be meaningfully compared since the Company did not begin
commercial operations until May 1996.

In the nine months ended September 30, 1997, revenues increased to
$2,834,236, from $1,043,082 for the same period in 1996. The increase is
attributable to the fact that sales of the Company's initial product, ENDUROX,
and extensions to the ENDUROX line of products introduced in March 1997, were
placed into existing channels of distribution that had only begun to be
established in the comparable 1996 period, with the first sales of product
occurring in May 1996. A portion of sales in the first nine months of 1997 can
be attributed to retailer customer purchases of opening inventory, or "pipe-line
fill", for ENDUROX EXCEL and ENDUROX ProHeart, sales of which represented
$971,883 or approximately 34.3% of total sales in the nine month period. The
balance of the Company's revenues in the nine months ended September 30, 1997
($1,862,353) resulted from sales of ENDUROX and included both sales to new
customers and reorders from existing customers. Substantially all sales of the
Company in the first nine months of 1996 were attributed to "pipe-line fill" for
the original ENDUROX product. Once the distribution pipeline for a retail
product is filled, sales result only from reorders from retailers as they
replenish inventory sold to their customers, from the expansion of the
distribution network to new channels, or from adding retailers in existing
distribution channels. As a result, sales in the initial months of a product's
distribution may not be indicative of sales levels that will be achieved in
later periods.

The loss of $517,139 incurred by the Company in the nine months ended
September 30, 1996 was attributable primarily to the fact that revenues derived
from ENDUROX in and after May 1996 were insufficient to offset the selling,
general and administrative expenses which were incurred throughout the entire
nine month period. The Company's gross profit margin in the nine months ended
September 30, 1997 (57.4%) was lower than the margin in the nine months ended
September 30, 1996 (73.1%), primarily as a result of the inclusion of $420,100
in cost of goods sold in the nine months ended September 30, 1997, representing
the cost of encapsulated ENDUROX product inventory written off in the period, a
reduction in sales of $385,595 relative to customer refunds for returned ENDUROX
capsule inventory and lower gross profit margins on ENDUROX ProHeart and ENDUROX
EXCEL than on the original ENDUROX product.

The Company's substantial loss in the nine months ended September 30, 1997
was attributable primarily to a non-recurring charge of $564,749, to a
substantial increase in selling, general and administrative expenses, from
$1,278,681 in the first nine months of 1996 to $4,923,936 in the nine months
ended September 30, 1997, and to a reduction in sales of $385,595 relative to
customer refunds for returned ENDUROX capsule inventory. The non-recurring
charge of 564,749 was incurred in connection with the replacement by the Company
of its customers' inventory of ENDUROX in encapsulated form with a caplet form
of the product, and includes a reserve of $752,250 at September

<PAGE>

30, 1997, which management believes is adequate to cover future exchanges or
returns of retailers' capsule inventory. This replacement of inventory was
required because the active herbal ingredient in ENDUROX is highly water
absorbent, which resulted in the capsules changing color and/or size in
conditions of high heat and humidity, even though the product was encapsulated
in a gel capsule and sealed in a blister package. To rectify this problem, the
Company decided to switch to a caplet form of product, in which the ingredients
are compressed and coated, from the more porous gelatin capsule filled with
ingredients in powdered form. ENDUROX is now sold by the Company only in caplet
form. ENDUROX EXCEL and ENDUROX ProHeart were introduced in caplet form, but the
introduction of these products was delayed as a result of the capsule problem
with the original ENDUROX product, and the volume of original ENDUROX sales in
the nine months ended September 30, 1997 was substantially below the Company's
projections based upon the distribution which the Company had either obtained
for the product or which was anticipated.

The increase in selling, general and administrative expenses in the nine
months ended September 30, 1997, was attributable primarily to increased
expenditures for advertising and promotion. The promotional and advertising
expenses incurred in 1997 were committed well in advance in order to obtain mass
distribution in the case of television advertising and to obtain publication
dates in the case of print advertising, and the level of such expenditures in
the nine month period ended September 30, 1997 ($4,109,414) was in excess of
sales revenues for the period. The remaining increases in selling, general and
administration expense in the first nine months of 1997, as compared to the year
earlier period, was primarily a function of increased staff and related expense
as the Company progressed from the development stage to full operating status.

(ii) Fiscal Year Ended December 31, 1996 Versus December 31, 1995

In 1996, operating, selling, general and administrative expenses all
increased dramatically over fiscal 1995 levels, primarily as a result of
expenses incurred in development and marketing activities related to ENDUROX.
Personnel related costs increased, from $54,237 in fiscal 1995 to $310,934 in
fiscal 1996, primarily as a result of increases in staffing as the Company
progressed from a development stage company in 1995 to full commercial
operations in May 1996.

Approximately 90% of the Company's sales in 1996 were in the second half of
the year, with a majority occurring in the fourth quarter. Much of this sales
volume was the result of "pipe-line fill", i.e., as the Company expanded its
distribution network for ENDUROX, retailer purchases of opening inventory
represented a substantial portion of sales. The Company had no sales in 1995.

(i) September 30, 1997

At September 30, 1997, the Company's current assets exceeded its current
liabilities by $391,243, with a ratio of current assets to liabilities of
approximately 1.31 to 1 versus a ratio of approximately 5.99 to 1 at December
31, 1996. The change in current ratio was attributable primarily to the
Company's operating losses in the nine months ended September 30, 1997, the
decrease in accounts receivable ($1,427,580) being reflective of the decrease in
sales in August and September 1997 compared to November and December 1996,
ameliorated somewhat by the sale of Common Stock in the first quarter of 1997.

Based on current activities and assuming successful completion of the
offering, management expects the Company to be able to satisfy its cash
requirements during the remainder of fiscal 1997 and in fiscal 1998 from the
proceeds of this offering, from cash on hand and, if necessary, from a bank line
of credit, secured by accounts receivable, which enables the Company to borrow
up to 80% of the amount of current accounts receivable (defined as 90 days or
less), to a maximum of $1,000,000. At September 30, 1997, the Company had not
made any borrowings against this line of credit. The Company is in the second
year of a three year promotional contract which requires annual payments of
$300,000. Apart from this contract, the Company has no commitments for
advertising or promotion expenditures beyond the fourth quarter of 1997.
Commitments in the fourth quarter are approximately $80,000.

(ii) December 31, 1996 and 1995

At year end 1996 and 1995, the Company's cash resources were adequate for
its immediate working capital needs. A need for additional funds in 1996 in
order to begin marketing ENDUROX

<PAGE>

was anticipated, and this need was met through private offerings of 10%
Convertible Preferred Stock in the fourth quarter of 1995 and first quarter of
1996 ($1,200,000), and of Common Stock in the second and third quarters of 1996
($1,968,750). Total offering costs incurred in connection with these capital
transactions were approximately $463,000, exclusive of non-cash compensation
paid to the Underwriter for services relating to the transactions.

Additional capital was raised through the sale of Common Stock to
institutional investors in August 1996 ($525,000) and February 1997 ($999,999),
and to two individual investors in December 1996 ($60,000) and April 1997
($45,000). Total offering costs incurred in connection with these capital
transactions were approximately $113,000, exclusive of non-cash compensation
paid to the Underwriter for services relating to the August 1996 transaction.

(d) Impact of Inflation

The Company expects to be able to pass inflationary increases for raw
materials and other costs on to its customers through price increases, as
required, and does not expect inflation to be a significant factor in its
business. However, the Company's operating history is very limited, and this
expectation is based more on observations of its competitors' historic
operations than its own experience.

(e) Seasonality

Nutritional supplement sales tend to be somewhat seasonal, with lower sales
typically realized during the first and second fiscal quarters, and higher sales
typically realized during the third and fourth fiscal quarters. The Company
believes such fluctuations in sales are the result of greater marketing and
promotional activities toward the end of each fiscal year, customer buying
patterns, and consumer spending patterns related primarily to the consumers'
interest in achieving personal health and fitness goals after the beginning of
each new calendar year and before the summer fashion season. Some classes of
products, however, differ in seasonality. For example, January typically is the
best month for sales of products for weight loss and control. In any event, at
this stage and for the foreseeable future, the Company believes that the impact
of new product introductions and marketing expenses associated with the
introduction of new products will have a far greater impact on its operations
than industry and product seasonality.

(f) Impact of Recently Issued Financial Accounting Standards

In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which provides guidance on how to measure impairment of long-lived assets,
certain intangibles and goodwill related to those assets to be held and used,
and for long-lived assets and certain identifiable intangibles to be disposed
of. The Company adopted this statement effective June 1, 1996, and expects that
it will have no material effect on its financial position and results of
operations.

In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation", which defines a fair value based
method of accounting for stock based employee compensation plans. Under SFAS No.
123, companies are encouraged, but are not required, to adopt the fair value
method for fiscal years beginning after December 15, 1995 for all employee
awards granted after the beginning of such year. Companies are permitted to
continue to account for such transactions under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), but, in
future years, must disclose, in a note to the financial statements, pro forma
net income and earnings per share as if SFAS No. 123 had been applied. The
Company has determined that it will not adopt the fair value method, but will
continue to account for stock-based compensation under APB No. 25 and provide
the requisite disclosure under SFAS No. 123.

In February 1997, the Financial Accountant Standards Board issued SFAS No.
128 (SFAS No. 128), "Earnings per Share", which supersedes Accounting Principles
Board Opinion No. 15 "Earnings per Share" and replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and provides guidance on other computational
changes. SFAS No. 128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997. Earlier application is not
permitted. The Company does not expect the adoption of SFAS No. 128 to have a
material impact on the financial position and results of operations of the
Company.

<PAGE>

BUSINESS OF THE COMPANY

GENERAL

The Company was incorporated in April 1995 to develop and market natural
products based upon herbs and other botanicals with a demonstrated ability to
improve and promote health and well being. Management of the Company believes
that recent growth in the natural health product industry will continue, driven
by the public's heightened awareness of the benefits of such products and a more
favorable regulatory climate following the passage of the Dietary Supplement
Health & Education Act of 1994. See "Government Regulation" below.

From its organization in April 1995 until it introduced its first
commercial product, ENDUROX(Registered), in March 1996, the Company was engaged
primarily in organizational and financing activities, product research, and
preliminary marketing and distribution activities. During this period, the
Company developed a master broker network for ENDUROX and future products, and
obtained distribution for its products in mass channels (mass merchandisers,
chain drug and supermarkets) and through health food chains and individual
stores.

The product formulation for ENDUROX is based on a Chinese herb, ciwujia,
which has been shown to enhance athletic performance, stamina and recovery, and
was identified by the Company and the Institute of Nutrition and Food Hygiene of
the Chinese Academy of Preventative Medicine (the "INFH") in Beijing, China. See
" -- The China Relationship" below. In addition to ciwujia, which has long been
used as part of traditional Chinese medicine for the treatment of fatigue and
general malaise, the Company has identified other herbs and botanicals through
its relationship with the INFH. The Company also has sought to identify products
utilizing botanicals of non-Chinese origin and, where possible, to license
products conceived or developed by others which have some level of market
protection (e.g., through a patent, patent claim, manufacturing technology etc.)
Most of the proposed new products discussed below are based on herbs and other
natural ingredients which are not of Chinese origin.

The Company's business strategy is to identify novel and safe natural
products that have demonstrable health benefits and can be marketed without
prior FDA approval under current regulatory guidelines, and to promote and
market those products aggressively through mass and health food channels of
distribution using, among other things, marketing claims based upon Company-
conducted research and testing.

OVERVIEW OF THE NATURAL HEALTH PRODUCT MARKET

According to industry sources, sales of natural products and supplements
through all outlets were approximately $15 billion in 1996. Chain drug stores,
mass merchandising and grocery outlets, which represent the bulk of sales of
natural products and supplements, grew at a rate of 20% in 1996 over the
previous year. The Company believes that this growth is being driven by
information in the mass media which continues to highlight problems with the
American diet; the fact that American consumers are becoming increasingly
disenchanted with and skeptical about many conventional medical approaches to
disease treatment; and, finally, recent clarifications and changes of food and
drug laws that have eased significantly the regulatory burdens associated with
the introduction and sale of dietary supplements.

Public awareness of the positive effects of nutritional supplements on
health has been heightened by widely publicized reports and medical research
findings indicating a correlation between the consumption of a wide variety of
nutrients and the reduced incidence of certain diseases. Reports have indicated
that the United States government and universities generally have increased
sponsorship of research relating to nutritional supplements. In addition,
Congress has established the Office of Alternative Medicine within the National
Institutes of Health to foster research into alternative medical treatment
modalities, which may include natural remedies. Congress has also recently
established the Office of Dietary Supplements in the National Institutes of
Health to conduct and coordinate research into the role of dietary supplements
in maintaining health and preventing disease.

<PAGE>

According to Congressional findings that accompanied the passage of the
Dietary Supplement Health & Education Act of 1994, national surveys reveal that
almost 43% of Americans regularly consume vitamins, minerals and herbal
supplements and 80% consume these products at some time during their lives. The
35-and-older age group of consumers, which is expected to continue to grow over
the next two decades, represents 78% of the regular users of vitamin and mineral
supplements. Based on data provided by the United States Bureau of the Census,
from 1990 to 2010, the 35-and-older age group of the United States population is
projected to increase by 32%, a significantly greater increase than the 20%
projected increase for the United States population in general.

The Company believes that the aging of the United States population,
together with a corresponding increased focus on preventative health care
measures, will continue to result in increased demand for certain nutritional
supplement products. Also, the Company believes that the continuing shift to
managed healthcare delivery systems will place greater emphasis on disease
prevention and/or health maintenance, areas with which natural health products
are most identified.

With respect to the distribution of natural health products, while
distribution through small to large sized natural food stores remain a
significant factor, the bulk of the growth is found in the mass merchandisers
and health food chains such as General Nutrition Centers which now represent the
majority of sales, and represent the fastest growing channels of distribution.

INITIAL PRODUCTS -- ENDUROX(REGISTERED)

The Company's initial product, ENDUROX(Registered), is a dietary supplement
the principal ingredient of which is the herb ciwujia. Laboratory tests
conducted by the INFH compared the endurance of laboratory animals to which
ciwujia was administered to groups using other herbs (ginseng, cordyceps and
wolfberry) and to a control group. Test results showed that ciwujia
significantly improved the test animals' endurance. Human trials, in which test
subjects underwent aerobic and other measurements and assessments following
various exercise routines with and without administering ENDUROX, were conducted
in the exercise physiology laboratories at the Academy of Preventive Medicine,
Institute of Food Hygiene, in Beijing, and the University of North Texas Health
Science Center in Fort Worth, Texas. On the basis of these studies, researchers
and the Company concluded that ENDUROX changed the way the body fuels a workout
by shifting the fuel source from carbohydrate to fat, thereby increasing fat
metabolism; built endurance by slowing the lactic acid buildup that causes
muscle soreness and fatigue; raised the anaerobic threshold during workout; and
sped recovery following workout, as measured by heart rate and lactic acid
levels.

The Company also conducted extensive qualitative and quantitative marketing
research to measure consumer receptivity to a natural product that could improve
exercise performance. The research showed, among other things, that almost 52
million consumers exercise more than 100 times per year ("frequent exercisers"),
that the average household income of frequent exercisers exceeded $45,000 per
year in 1995 and, in that year, frequent exercisers had spent over $5.3 billion
on exercise equipment.

Based on its market research, management decided to launch ENDUROX in both
health food and mass consumer distribution channels, using a master broker for
chain drug, grocery, and mass merchandisers and a separate master broker for the
health food segments. The Company formally introduced ENDUROX on March 15, 1996,
at the Natural Product Expo West in Anaheim, California. See "Marketing and
Distribution" below.

The first extensions to the ENDUROX line of products, ENDUROX
EXCEL(Trademark) and ENDUROX ProHeart(Trademark), were introduced in March 1997.
ENDUROX EXCEL contains 50% more ciwujia than regular ENDUROX, plus vitamin E. It
is targeted to "serious" athletes, i.e., individuals who engage in competitive
athletics or whose exercise regimen is comparable to that of a competitive
athlete. ENDUROX ProHeart is targeted to the heart conscious consumers who
exercise regularly. In addition to ciwujia, ENDUROX ProHeart contains vitamins E
and C and folic acid. Sales of ENDUROX EXCEL and ENDUROX ProHeart were $407,831
and $564,052, respectively, in the nine months ended September 30, 1997.

<PAGE>

PROPOSED PRODUCTS

ENDUROX(Registered) RECOVER(Trademark) is a new sports drink in the
development stage. The Company expects to obtain data from trials to be
conducted for the Company at a number of institutions with well known exercise
physiology departments to support its marketing claims. These trials are
expected to be completed in the first quarter of 1998.

The market for sports drinks currently exceeds $1.5 billion a year. This
market is dominated by Gatorade, which is manufactured by Quaker Foods. In
addition, there are a number of sports drink products primarily marketed through
health food stores. These include MetRx, products from Weider Nutrition
International, Champion Nutrition, and house brands sold by General Nutrition
Centers. Sports drinks sold through health food channels, which is the market
which the Company intends to target, represent approximately $300 million in
sales, with the balance of sales being made in mass channels of distribution.
The Company expects to initiate sales of this product in the second quarter of
1998.

PROSOL PLUS(Trademark) is a new product based on the herb hypericum (St.
John's Wort). Hypericum has been shown to be effective in treating the symptoms
of mild to moderate depression in numerous clinical studies. In Germany, where
the expense of hypericum use is reimbursed by government sponsored health
insurance, it outsells Prozac, the leading US product for treating depression,
by a substantial margin. Under the Dietary Supplement Health and Supplement Act
of 1994, PROSOL PLUS cannot be marketed for the treatment of depression, as
such, but can be marketed to improve emotional well-being. "See Government
Regulation" below.

The Company has filed a trademark application for the names PROSOL and
PROSOL PLUS, and expects to launch advertising and promotional efforts for this
product in January 1998. Initial sales of the product were made to GNC in the
fourth quarter of 1997, and the Company expects initial retail sales to occur in
December 1997.

ARNICYN(Trademark) is a topical analgesic stick that contains a combination
of natural ingredients which have demonstrated effectiveness in reducing the
pain and inflammation of arthritis. The four herbal components in ARNICYN are
capsaicin, menthol, arnica and boswellia serrata.

The total market for topical analgesics in mass channels of distribution in
1997 exceeded $350 million. Some of the major brand names in this category
include Bengay and Zostrix. Products containing capsaicin represent the fastest
growing segment of the market. ARNICYN will be targeted to an estimated 20
million Americans who have arthritis. The Company intends to launch ARNICYN in
December 1997 through direct response TV, and then expand distribution into
chain drug and mass merchandisers.

PO 2 is the Company's working name for a proposed new product based on a
protein which, when ingested, stimulates the body's release of cholecystokinin,
a peptide which is involved in the human digestive process. Research has shown
that the release of cholecystokinin in humans increase satiety resulting in
decreased food intake and, thus, provides an approach to weight loss and control
using the body's natural appetite control mechanism.

The proteins which stimulate cholecystokinin are called protease inhibitors
and are found in soy and potatoes. Only the protease inhibitors obtained from
potatoes, however, have been shown to be effective in humans. The investigator
who showed that the protease inhibitor from potatoes stimulated the release of
cholecystokinin received a use patent on the enzyme in 1985. However,
purification of the enzyme was not commercially feasible until recently, when
researchers developed a proprietary method of purifying the protein. This
purified protease inhibitor (PO 2) has been found effective to stimulate the
release of cholecystokinin in numerous studies, including studies published by
researchers at the University of Texas Health Science Center and unpublished
studies by the same researchers.

The Company has signed a license agreement with the licensor of the patent
covering the potato-derived protease inhibitor and the developer of the
proprietary purification process. This agreement

<PAGE>

grants to the Company the exclusive world wide right to market and develop a
number of weight loss products incorporating the purified protein ingredient,
which would be supplied to the Company by the licensor.

The Company expects the product, which is as yet unnamed, to be introduced
as a powder drink that would be taken one hour prior to meals. The Company
estimates that the product will be launched in limited distribution in the third
quarter of 1998, with a full marketing and distribution to begin in January
1999. This schedule is intended to capitalize on the fact that approximately 30%
of the annual sales of diet products and services typically occur in January.
Industry data indicates a national market of approximately $3 billion for weight
loss and weight control products, including prescription drugs, OTC products,
diet foods and nutritional supplements.

SPORTS ANALGESIC: Strains and sprains resulting from sports injuries are
usually treated with a topical analgesic, an oral analgesic or a combination of
both agents. There currently are no non-prescription products that can
accelerate recovery from a sports injury in the sprain/strain category. The
Company has formulated a product with both an internal and external component
that it expects to launch in the third quarter of 1998. Management believes that
a combination internal/external sports analgesic would represent a unique
product in a category which has lacked innovation in the last ten years. The
Company intends to work with professional trainers both in evaluating the
product and also using their endorsements to promote the product. This product
would be distributed through health food stores and selected mass merchandisers.

THE CHINA RELATIONSHIP

In connection with its organization, the Company entered into an Exclusive
Technology Sharing and Strategic Alliance Agreement and a Licensing Agreement
with the Institute of Nutrition & Food Hygiene of the Chinese Academy of
Preventive Medicine (the "INFH") in Beijing, People's Republic of China. The
purpose of these agreements and relationships to obtain access to agents derived
from natural sources proven effective in China, where the use of herbs in health
and healing has been an integral part of "traditional" Chinese medicine for over
4,000 years, as well as to Chinese research and manufacturing "know how" in this
area.

INFH is the most prestigious nutritional organization in China, reporting
directly to the Ministry of Health. The INFH has worked closely with the World
Health Organization and is involved in on-going research concerning the
relationship of nutrition with health and disease from a mechanistic and
epidemiological perspective, and the role of natural products in maintaining and
preventing disease. Under its agreements with the Company, the INFH has granted
to the Company the exclusive right to commercialize within and outside of China
all products identified and developed by the Company and the INFH based upon
natural TCM herbs and other natural agents in nine specified areas: obesity
management, sports recovery/anti-fatigue, female health (PMS and estrogen
supplementation), health teas, arthritis, diabetes mellitus and cholesterol
lowering. The INFH also has agreed to seek out and enter into licensing
agreements with other Chinese institutions for other natural constituents that
can be used in products for the treatment of disease and maintenance of health
and well being, and either to assign such licenses to the Company or give the
Company a right of first refusal to license the product. Nothing in the
Company's agreements with the INFH or other Chinese institutions, however,
prevents any other person or company from buying herbs and other natural agents
in China for use or resale inside or outside of China.

The Company has agreed, after the Company achieves a defined level of
profitability, to pay a royalty (starting at 2% on annual net sales under $25
million, and declining to 0.5% on annual net sales in excess of $200 million) to
the INFH based upon sales of products utilizing natural constituents exported
from China or developed in China, or based in whole or in part on such
constituents. The level of profitability which the Company must achieve in any
annual period before a royalty must be paid is such that the Company's pre-tax
profits in the period, less 50% of the Company's accumulated loss carry forward,
less taxes, and less royalties payable to the INFH must be greater that zero.
Prior to the date of this Prospectus, the Company has not paid any royalties to
the INFH pursuant to this agreement, and the Company does not anticipate
incurring any obligation to pay royalties until the year

<PAGE>

ended December 31, 1998, at the earliest. See "Certain Relationships and Related
Transactions -- Certain Other Transactions".

None of the aforementioned agreements has a fixed termination date,
although the agreements may be terminated by either party upon ninety (90) days
notice in the event of a material breach.

MANUFACTURING

The Company does not intend to develop its own manufacturing capabilities
since management believes that the availability of manufacturing services from
third parties on a contract basis is more than adequate to meet the Company's
needs in the foreseeable future. The Company has identified and worked with a
number of manufacturers who have sufficient manufacturing capacity to meet the
short and intermediate-term production needs of the Company, and who will assist
the Company in its development work, as in the case of ENDUROX.

The Company has used the services of a number of companies to assist in the
manufacture of its ENDUROX line of products. Ciwujia is harvested and extracted
in China under the supervision of quality control scientists from the INFH.
Every lot of ciwujia extract is standardized and undergoes a broad range of
quality assurance tests. The extract is then shipped to a processor in the
United States, where it is spray dried. Following the spray dry procedure the
product is shipped to an encapsulator and, from the encapsulator, to a packager
where it is blister packed and packaged. The product is then shipped to a
distribution center in Cincinnati, Ohio.

The Company has no existing contractual commitments or other arrangements
for the future manufacture of its products. Rather, it places orders for
manufacturing services as required based upon price quotations and other terms
obtained from selected manufacturers.

ENDUROX is, and future products of the Company are expected to be,
manufactured in the United States.

MARKETING AND DISTRIBUTION

The Company's first product, ENDUROX(Registered), a dietary supplement in
the sports performance and recovery market segment, was introduced in March
1996, and commercial shipments of the product were begun in May 1996. Extensions
on the ENDUROX product line (ENDUROX EXCEL(Trademark) and ENDUROX
ProHeart(Trademark)) were introduced in March 1997.

The Company has pursued a "multi-channel" distribution strategy in
marketing its line of ENDUROX products, and intends to follow a similar strategy
with future products. The ENDUROX line of products is sold in retail outlets in
all 50 states, with customers in the mass channels of distribution including
mass merchandisers such as WalMart, KMart and Target; chain drug stores such as
CVS, Walgreens, Eckerds and Rite Aid; and grocery supermarkets such as Pathmark
and Albertsons. The Company distributes its products to the health food market
through General Nutrition Centers, a chain with over 2,800 outlets (see "Risk
Factors -- Dependence Upon Significant Customers"), and independent health food
retailers. The Company also sells through other channels, such as sports
specialty stores such as The Sports Authority and health clubs. The nature of
the product and its target market dictate the channels of distribution in which
a product is launched, and the level of effort directed to each channel of
distribution.

ENDUROX ProHeart presently is distributed through leading health food
stores and General Nutrition Centers. The Company plans to expand distribution
of ENDUROX ProHeart into mass channels, specifically chain drug and mass
merchandisers, in the fourth quarter of 1997. Advertising for this product will
commence in February 1998, which is National Heart Month, primarily in magazines
that reach the over 50 age bracket. The product also will be supported by an
extensive public relations campaign creating awareness on the importance of
exercise, antioxidants and folic acid in helping protect and maintain heart
health.

The Company uses two master brokers in its distribution network, one for
mass volume retailers and the other for the health food market. Both master
brokers receive a fixed monthly payment plus a commission on sales under
agreements that are terminable at will by either party on relatively short
notice. Most of the Company's customers are sold direct through its broker
networks, although large

<PAGE>

drug wholesalers are used to reach smaller chains and independents. General
Nutrition Centers, which is the Company's largest customer, is a "house account"
which the Company sells directly outside its broker network. The Company also is
considering the use of electronic media such as direct response TV, "home
shopping" networks and, possibly, TV infomercials to market one or more of its
new products. The Company believes that electronic media can serve as a means of
gaining immediate sales volume while laying a foundation for broader
distribution through mass channels.

The Company began distribution of ENDUROX in Canada in 1997 through an
independent distributor, with the first retail sales made in April 1997. At the
present time, this represents the Company's sole non-US marketing channel. The
Company is seeking regulatory clearances to distribute ENDUROX in Europe, South
America and Asia, but there is no assurance that the Company will obtain these
clearances, and, in any event, the Company does not expect to be in a position
to begin significant distribution outside the United States until the end of
1998 at the earliest.

To support its marketing efforts, the Company advertises in trade and
consumer health food and sports magazines and on television, attends trade shows
and exhibitions, sponsors promotional programs and events and in-store
promotions, and engages in an extensive public relations effort that has
included television, that has resulted in articles in numerous health, fitness,
trade and natural products publications, which the Company also uses to promote
its products. In September 1996, the Company entered into a three year
endorsement contract with former professional football player Joe Montana. Mr.
Montana receives an annual fee, and also received an option to purchase 25,000
shares of Common Stock upon execution of the endorsement contract. See
"Description of Capital Stock -- Other Options and Warrants". The Company has
made extensive use of television and other media advertising featuring Mr.
Montana, and Mr. Montana also has been featured in a number of the Company's
promotional and public relations activities. Other paid endorsers for the
Company include Frank Shorter (two-time Olympic medalist), Jeff Galloway (former
Olympian and author of the leading running book sold in North America), Debbi
Lawrence (two-time Olympian and considered America's greatest racewalker), Dave
Scott (six-time winner of the "Ironman" competition) and Grete Waitz (nine-time
winner of the New York City Marathon).

In the twelve-month period December 31, 1996 and the nine months ended
September 30, 1997, the Company's expenditures for product advertising and
promotion were approximately $1,303,880 and $4,109,414, respectively.

COMPETITION

Dietary supplements are distributed in variety of ways, including
independent health food suppliers, such as the Company, who focus on vitamins
and dietary supplements; mass volume retail suppliers; gym and health club
product suppliers; direct sale and mail order vendors; and private label
manufacturers. The Company estimates that there are approximately 20 large
national companies that manufacture or distribute herbal products and
medicinals. Generally, these companies are well funded and sophisticated in
their marketing approaches. Examples are Weider Nutrition International,
Nature's Way, Nature's Herbs and Solaray, Inc. In addition, there are a number
of large, multilevel marketers such as Shaklee, Herbalife and Amway that sell
encapsulated herbs, diet products, herbal supplement formulas and vitamin
supplements.

As the market for herbal products and medicinals has increased, major
retailers such as GNC have introduced house brands to take advantage of their
retailing strength, a trend that is likely to continue. Although major retailers
generally have not introduced innovative products in the past, the Company
believes that house brands represent a competitive threat once a product has
become established. Large pharmaceutical companies and packaged food and
beverage companies also participate in the nutritional supplement market on a
limited basis. Increased competitive activity from such companies could have a
material, adverse effect on the Company and other participants in the industry
since such companies have greater financial and other resources available to
them and possess far more extensive manufacturing, distribution and marketing
capabilities than the Company and its other competitors.

Since the Company's products are based upon natural ingredients, its
competitors have access to the same ingredients and will be able to develop and
market products the same as or similar to the Company's products. Except to the
limited extent that the Company may obtain patent protection for

<PAGE>

certain uses of ingredients in its products, its competitors' products may make
the same claims of benefits from use of the products that the Company makes.
Thus, long term success in the marketplace for any of the Company's products is
likely to be less dependent on the novelty of the product than on such factors
as distribution and marketing capabilities. In this regard, investors should
note that GNC, the Company's largest customer, presently offers a "generic"
product that is based on ciwujia, the natural ingredient on which the Company's
ENDUROX line of products is based.

As the nutritional supplement industry grows and matures, it can be
expected that retailers will favor suppliers that can provide innovative and
high margin products, who are financially stable and who aggressively market and
promote a wide line of products. Independent companies which have a limited
product line, and who fail to develop new, innovative products and support them
with strong marketing efforts will be unlikely to succeed in that environment.

GOVERNMENT REGULATION

The Company believes that all of its existing and proposed products, as
described above, are dietary supplements which do not require governmental
approvals to market in the United States. The processing, formulation,
packaging, labeling and advertising of such products, however, are subject to
regulation by one or more federal agencies including the Food and Drug
Administration ("FDA"), the Federal Trade Commission, the Consumer Products
Safety Commission, the Department of Agriculture and the Environmental
Protection Agency. See "RISK FACTORS -- Government Regulation". The Company's
activities also are subject to regulation by various agencies of the states and
localities in which its products are sold.

The FDA traditionally has been the main agency regulating the types of
products sold by nutritional supplement firms such as the Company, but much of
that authority stemmed from the FDA's treatment of dietary supplements as food
additives and drugs. The FDA's role in this area was reduced mainly to policing
the activities of makers of dietary supplements by the enactment of the Dietary
Supplement Health and Education Act of 1994 (the "DSHEA") in October 1994. The
DSHEA amended and modified the application of certain provisions of the Federal
Food, Drug and Cosmetics Act (the "FFDC Act") as they relate to dietary
supplements, established an Office of Dietary Supplements at the National
Institute of Health in order to coordinate and conduct scientific research into
the health benefits of dietary supplements, established a presidential
commission to study and make recommendations on the regulation of label claims
and statements for dietary supplements, and required the FDA to promulgate
regulations consistent with the DSHEA and the recommendations of the
presidential commission.

Prior to the enactment of the DSHEA, the FDA had required nutrition
labeling on all dietary supplements and prohibited the making of any health
claim on a dietary supplement unless the supplement was consumed as a food, its
components were demonstrated to be safe, and the health claim was supported by
significant scientific agreement and approved by the FDA. Passage of the DSHEA
impacted the FDA's ability to issue and implement regulations with respect to
dietary supplements by exempting such products from classification as "food
additives" or, in most circumstances, "drugs". Although the DSHEA is generally
viewed as a positive development for companies that sell dietary supplements
such as vitamins, minerals, herbs, botanicals, amino acids and similar
substances, the legislation imposed significant requirements that must be
adhered to in order for a product to qualify for the safe harbors established by
the DSHEA.

The DSHEA defines a dietary supplement to include (i) any product intended
to supplement the diet that bears or contains a vitamin, mineral, herb or other
botanical, an amino acid, a substance to supplement the diet by increasing the
total dietary intake, or any concentrate, constituent, extract, or combination
of any such ingredient, provided that such product is either intended for
ingestion in tablet, capsule, powder, softgel, gelcap, or liquid droplet form
or, if not intended to be ingested in such form, is not represented for use as a
conventional food or as a sole item of a meal or the diet, (ii) is not
represented for use as a conventional food or as a sole item of a meal or the
diet, and (iii) is labeled as a dietary supplement. The definition also includes
highly technical provisions dealing with a dietary supplement that contains an
ingredient that also has been approved by the FDA as a drug. The practical

<PAGE>

effect of such an expansive definition is to ensure that the new protections and
requirements of the DSHEA will apply to a wide class of products.

One important provision of the DSHEA exempts the dietary ingredients in
dietary supplements from being treated as "food additives". Any substance that
is added to a food product that is not "generally recognized as safe" by experts
whose opinion is based on published scientific literature is subject to being
regulated as a food additive by the FDA. Under the FFDC Act, a substance that is
a food additive may not be added to food products unless explicitly permitted by
the FDA by issuance of a regulation. Petitioning the FDA for such a regulation
is a process that could take five years or more, and involve the expenditure of
hundreds of thousands of dollars or more to test a product and participate in
any ensuing proceedings. Prior to enactment of the DSHEA, dietary supplement
ingredients were often alleged to have "food additive" status.

Although dietary supplements are now exempted from treatment as food
additives by the FDA, the DSHEA imposed significant new safety standards
regulating dietary supplements to prevent the sale of dietary supplements that
are unsafe, toxic, unsanitary or adulterated. The DSHEA provides that a dietary
supplement will be deemed to be an adulterated food if it presents a significant
or unreasonable risk of illness or injury when used in accordance with its
labeling or, if no conditions of use are suggested or recommended in the
labeling, under ordinary conditions of use. Generally, the FFDC Act prohibits
the introduction or delivery of adulterated food into interstate commerce so a
dietary supplement that is deemed adulterated may not be sold or distributed
through interstate commerce. The FDA has the burden of proof in establishing
that a dietary supplement is adulterated under such a standard, thereby reducing
the FDA's role from one of preapproval of dietary supplements to that of
policing those substances that present a significant or unreasonable risk of
illness or injury.

The DSHEA also imposes additional requirements that must be adhered to for
dietary supplements which contain a "new" dietary ingredient. Under the DSHEA, a
"new" dietary ingredient is one that was not marketed in the United States
before October 15, 1994. A dietary supplement that contains such a new dietary
ingredient will be deemed to be adulterated unless either (a) all ingredients
contained in the dietary supplement have been present in the food supply as an
article used for food in a form in which the food has not been chemically
altered, or (b) there is a history of use or other evidence of safety
establishing that the new dietary ingredient, when used under the conditions
recommended or suggested in the labeling, will reasonably be expected to be
safe. In order to qualify for the safe harbor under the second condition, a
manufacturer/distributor of the new dietary ingredient or supplement must
provide, at least 75 days before introducing or delivering for introduction such
substance into interstate commerce, information to the FDA that forms the basis
on which the manufacturer/distributor has concluded that a dietary supplement
containing the new dietary ingredient is reasonably expected to be safe.

Finally, the DSHEA provided non-delegable authority to the Secretary of the
Department of Health and Human Services to declare that a dietary supplement
poses an imminent hazard to public health or safety. Following such declaration,
it is immediately illegal to market such a product, although the Secretary must
thereafter promptly hold a formal hearing in order to determine whether to
affirm or withdraw the declaration.

The DSHEA also has increased the ability of sellers of dietary supplements
to provide information about their products to consumers. Prior to the enactment
of the DSHEA, the FDA position was that any publication used in connection with
the sale of a dietary supplement could be regulated by the FDA as "labeling".
Further, if the publication in question contained information claiming or
suggesting that an ingredient present in a dietary supplement might be used in
the cure, mitigation, treatment or prevention of any disease, such supplement
would be subject to regulation under the FDA Act as a drug. Under the DSHEA,
however, a publication, including an article, a book or chapter in a book, or an
official abstract of a peer reviewed scientific publication that appears in an
article and was prepared by the authors or the editors of a publication, is not
considered labeling and may be used in connection with the sale of a dietary
supplement to consumers if such publication is reprinted and it

<PAGE>

(i) is not false or misleading; (ii) does not promote a particular manufacture
or brand of a dietary supplement; (iii) is displayed or presented with other
items on the same subject matter so as to present a balanced view of the
available scientific information; (iv) is physically separate from dietary
supplements if displayed in an establishment where such products are sold; and
(v) does not have appended to it any information by sticker or any other method.
The United States has the burden of proof to establish that a publication is
false or misleading if a proceeding is established to prevent a publication. The
DSHEA specifically provides that it does not restrict a retailer or wholesaler
of dietary supplements in any way whatsoever from selling books or other
publications as a part of its business. These provisions of the DSHEA may
indirectly affect the Company because they will make it easier for retailers and
wholesalers that sell the Company's products to display and sell publications
that are related to the Company's business and discuss the benefits of dietary
supplements such as the ones that the Company manufactures and distributes.

FDA regulations published prior to the enactment of the DSHEA and pursuant
to the Nutrition Labeling and Education Act prohibit the use of any health claim
in the labeling of any food products, including brochures, unless the claim of
such labeling is first approved by the FDA by regulation. Under the DSHEA,
companies that manufacture and distribute dietary supplements are allowed to
make any of the following four types of statements with regard to nutritional
support on labeling without FDA approval: (i) a statement that claims a benefit
related to a classical nutrient deficiency disease and discloses the prevalence
of such disease in the United States; (ii) a statement that describes the role
of a nutrient or dietary ingredient intended to affect structure or function in
humans; (iii) a statement that characterizes the documented mechanism by which a
nutrient or dietary ingredient acts to maintain or function; or (iv) a statement
that "describes general well-being" from consumption of a nutrient or dietary
ingredient. In addition to making sure that a statement meets one of these four
criteria, a manufacturer of the dietary supplement must have substantiation that
such statement is truthful and not misleading, must not claim to diagnose,
mitigate, treat, cure, or prevent a specific disease or class of diseases, and
must contain the following disclaimer, prominently displayed in boldface type:
"This statement has not been evaluated by the Food and Drug Administration. This
product is not intended to diagnose, treat, cure, or prevent any disease."
Additionally, the manufacturer must notify the Secretary of Health and Human
Services no later than 30 days after the first marketing of the dietary
supplement to which such statement relates. In addition, a dietary supplement
must list the name and quantity of each ingredient and the total weight of a
proprietary blend, be identified as a "dietary supplement", and identify the
part of a plant from which any herb or botanical ingredient is derived. Special
rules for branding apply if there is an official FDA monograph covering the
class of product in which the dietary supplement is classified.

The DSHEA did not limit the FDA's ability to regulate manufacturing but
authorized the FDA to prescribe good manufacturing practice regulations for
dietary supplements which are to be modeled after current good manufacturing
practice regulations for food. Since the manufacturers which are involved in
manufacturing the Company's products are experienced in producing products
subject to FDA manufacturing standards, the Company does not believe that new
regulations regarding manufacture of dietary supplements will adversely affect
the Company or its suppliers.

The effect of new federal regulations and standards is that, although the
authority of the FDA to regulate dietary supplements has been limited, it and
other government agencies, particularly the Department of Health and Human
Services, have been granted substantial new policing authority to stop the
distribution of a dietary supplement if government personnel believe they can
show that the product is not safe. The Company is not able to predict with
certainty the long term impact of this regulatory scheme on its activities.

PATENTS AND TRADEMARKS

The Company received a United States patent in December 1996 covering the
use of ciwujia, the principal active herb in ENDUROX, to improve physical
performance and stamina during exercise, and for enhancing recovery after
exercise is completed. The Company has applied for foreign patents on ciwujia in
Canada, Mexico, all Western European countries and in 51 other principal
European,

<PAGE>

South American and Asian countries. To the extent the Company does not have
patents on its products, there can be no assurance that another company will not
replicate one or more of the Company's products, nor is there any assurance that
patents which are obtained, including the ciwujia patent, will provide
meaningful protection or significant competitive advantages over competing
products. For example, the Company's use patent on ciwujia would not prevent
sale of the herb with a claim or for a use that was not covered by the Company's
patent.

The Company believes that certain of its proposed products also may be
eligible for "use" patents, and patent coverage will be considered in seeking to
license products developed by others. There is no assurance, however, that the
Company will receive any additional patents, or that any patents which it does
have or may obtain will provide meaningful protection. The Company does not
believe that patent protection will be as significant to its growth as such
factors as product selection and the extent and effectiveness of its advertising
and other marketing and promotional activities.

The Company has federal trademark registrations for ENDUROX(Registered) and
has trademark applications pending to register ARNICYN(Trademark),
PROSOL(Trademark), ENDUROX(Registered) ProHeart(Trademark) and
ENDUROX(Registered) EXCEL(Trademark) pending with the United States Patent and
Trademark Office. See "BUSINESS -- Proposed Products". The Company also has
filed the ENDUROX trademark in all Western European countries, Canada, Mexico
and Japan. The Company's policy is to pursue registrations for all of the
trademarks associated with its key products, and to protect its legal rights
concerning the use of its trademarks. The Company relies on common law trademark
rights to protect its unregistered trademarks.

EMPLOYEES

At the present time, the Company has seven full time employees at its
Woodbridge, NJ offices. Of these, two employees are executive and
administrative, two are in sales and marketing, and two are in accounting and
operations. The Company also employs two persons on a part-time basis in its
Beijing, People's Republic of China, office in research and development, and
employs a number of consultants who devote limited portions of their time to the
Company's business. The Company intends to expand its staff following this
offering, through the addition of five individuals, principally for sales and
marketing purposes. None of the Company's employees are represented by a union,
and the Company believes that its employee relations are good.

OFFICES AND OTHER FACILITIES

The Company presently leases approximately 2,645 square feet of office
space from CSC Associates, a company owned by Robert Portman, President and a
Director, and David Portman, Secretary and a Director, of the Company at a
monthly rental of $2,645, plus utilities. The Company's lease with CSC
Associates expires January 31, 2000. See "Certain Relationships and Related
Transactions".

The Company also leases laboratory and office space from the INFH at 29 Nan
Wei Road, Beijing, at a yearly cost of $4,000.

The Company believes that its facilities are adequate for its present
needs.

LEGAL PROCEEDINGS

The Company is not a party to, or involved in, any legal proceedings.

<PAGE>

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The current directors and executive officers of the Company are as follows:

<TABLE>
<S> <C>
Robert Portman, PhD............... President and Chief Executive Officer, Treasurer
and Chairman of the Board of Directors
Jonathan D. Rahn.................. Executive Vice President, Chief Financial Officer
and Director
David I. Portman.................. Secretary and Director
T. Colin Campbell, PhD............ Director
Irving I.A. Tabachnick, PhD....... Director
</TABLE>

DR. ROBERT PORTMAN, age 53, has served as President, Treasurer and Chairman
of the Board of Directors of the Company since its inception. Dr. Portman has a
PhD in Biochemistry and worked as a senior scientist at Schering Laboratories
before co-founding M.E.D. Communications in 1974 with his brother, David
Portman. In 1987, Dr. Portman started a consumer agency and, in 1993, he merged
both agencies to form C&M Advertising. C&M Advertising, with billings in excess
of $100 million, handled national advertising for such diverse accounts as
Berlex Laboratories, Ortho-McNeil Laboratories, Tetley Tea, Radisson Hotels and
HIP of New Jersey. Effective June 1, 1995, Dr. Portman relinquished his
responsibilities as Chairman of C&M Advertising (which since has been renamed
"The Sawtooth Group") to assume his present positions with the Company on a full
time basis, and, in September 1996, Dr. Portman sold his interest in that
company. Dr. Portman is a minority stockholder (less than 2%) of the
Underwriter.

In April 1988, Dr. Portman incorporated a company to develop and market a
patented dental device. A prototype of the device was developed in conjunction
with researchers at the University of Pennsylvania. In 1993, Dr. Portman
determined that the investment of additional funds for the purpose of marketing
and advertising the product was not warranted, and the company, HydroDent
Laboratories, Inc., of which Dr. Portman then was the President and principal
stockholder and creditor, was liquidated in the U.S. Bankruptcy Court for the
District of New Jersey.

JONATHAN D. RAHN, age 53, is the Executive Vice President and Chief
Financial Officer, as well as a director, of the Company. From the inception of
the Company to his employment by the Company in July 1996, Mr. Rahn served as a
consultant to the Company in financial and certain operational matters. Mr.
Rahn, a certified public accountant, has over 30 years experience in accounting
and financial analysis, and has held various executive positions for a number of
diverse businesses, both public and private. For approximately three years
immediately preceding his employment by the Company, he was a self-employed
consultant involved in the evaluation, due diligence and structuring of
investments in and acquisitions of development-stage companies.

DAVID I. PORTMAN, age 56, has served as Secretary and a Director of the
Company from its inception. Mr. Portman has a BS in Pharmacy and an MBA. He
worked as a sales representative and marketing manager for Eli Lilly,
Beecham-Massengill, Winthrop Laboratories and Sandoz Pharmaceuticals before
co-founding M.E.D. Communications in 1974. In 1988, Mr. Portman sold his
interest in M.E.D. Communications to Robert Portman, and became President of
TRIAD Development, a real estate company that has numerous commercial and rental
properties in New Jersey, a position that he still holds. Mr. Portman also has
served as a director of the Underwriter since 1993, and is a minority
stockholder (less than 1%) of the Underwriter.

Robert Portman and David Portman are brothers.

DR. T. COLIN CAMPBELL, age 63, has served as a Director of the Company
since its inception. Dr. Campbell also serves as Chairman of the Company's U.S.
Scientific Advisory Board. Dr. Campbell has been Jacob Gould Schurman Professor
of Nutritional Biochemistry of Cornell University since 1985. Over the past
three decades, Dr. Campbell, has been directing research correlating diet,
lifestyle and disease. In 1979, Dr. Campbell, with the encouragement of the
Chinese government, initiated the

<PAGE>

largest epidemiological study ever undertaken focusing on the relationship
between nutrition and disease. The China-Cornell Research Project is expected to
continue well into the 21st Century. Dr. Campbell is an honorary professor at
the Chinese Academy of Preventive Medicine.

DR. IRVING I.A. TABACHNICK, age 73, was elected a director of the Company
in December 1997. Dr. Tabachnick has served as a consultant to Schering Plough
Corporation, a New York Stock Exchange listed company, since 1989. Prior to
1989, he was employed by Schering Plough Corporation in a number of positions,
including Vice President -- Drug Safety and Metabolism, Senior Director --
Biological Research and Development, and Director -- Biological Sciences and
Director -- Physiology and Biochemistry.

In connection with a private placement of 10% Convertible Preferred Stock,
completed in January 1996 for which the Underwriter acted as placement agent,
the Company agreed to use its best efforts to elect to its Board of Directors
one nominee designated by the Underwriter and as to whom the Company had no
reasonable objection, and a second nominee mutually selected by the Company and
the Underwriter. Prior to this offering, Jonathan D. Rahn was the designee
mutually selected by the Company and the Underwriter. While the Company expects
him to continue to serve as a director, Mr. Rahn is not now serving as and will
not in the future be a designee of the Underwriter. Pursuant to the underwriting
arrangements for this offering, the Company has agreed for a period of five
years from the date of this Prospectus to cause a person designated by the
Underwriter to be elected to the Company's Board of Directors. See
"Underwriting." This agreement supersedes earlier agreements between the Company
and the Underwriter relating to election of persons designated by the
Underwriter to the Company's Board of Directors. The Underwriter has not advised
the Company of any designee to serve on the Board of Directors and, further, has
advised the Company that it does not intend to exercise its right to designate a
nominee for election as a director in the near future.

Under corporate governance rules applicable to issuers with securities
listed on the Nasdaq SmallCap Market, the issuer must have a minimum of two
independent directors and an audit committee with a majority of independent
directors. At the present time, the Company considers T. Colin Campbell and
Irving I.A. Tabachnick to be "independent" directors, and has formed an Audit
Committee consisting of Dr. Campbell, Dr. Tabachnick and Jonathan D. Rahn.

OTHER KEY ADVISORS AND CONSULTANTS

In addition to its executive officers, the Company considers Dr. Junshi
Chen to be a key advisor. Dr. Chen, age 62, is Chairman of the Company's Chinese
Scientific Advisory Board, and is a Professor and Deputy Director of the INFH.
Besides directing the research activities of the INFH, Dr. Chen is a recognized
expert in China on nutritional status and cancer mortality and the antioxidant
properties of various dietary constituents. Dr. Chen also is a member of the
Political Consultative Group of China, a select group of individuals who serve
as advisors to the government and the People's Congress, and a member of the
government committee which reviews and approves new drug applications in China.

COMPENSATION OF EXECUTIVE OFFICERS

Robert Portman is the only executive officer of the Company with a
fixed-term employment agreement. Under this agreement, Dr. Portman is employed
for a three year term commencing January 1, 1998, at an annual salary of
$150,000 for the first two years, and at a salary to be determined by the
Compensation Committee of the Company's Board of Directors during the third
year. In addition to salary, Dr. Portman is entitled to receive a bonus of
$25,000 if the Company's net, pre-tax income in the fiscal year ending December
31, 1998, exceeds $25,000, and a further bonus equal to five percent of the
amount, if any, by which the Company's net, pre-tax income exceeds $1,000,000 in
the fiscal years ending December 31, 1998 and 1999.

Dr. Portman's employment agreement also provides for the grant of options
under the Company's Incentive Stock Option Plan, described below, to purchase up
to 475,000 shares of Common Stock at a price of $6.00 per share, the initial
public offering price of shares in this Offering. This option vests as to
one-third of the shares issuable upon full exercise of the option as of the
first, second and third anniversaries of the effective date of the employment
agreement, provided that Dr. Portman is employed by the Company at such dates.
To the extent not previously vested, the option also will vest

<PAGE>

if Dr. Portman's employment is terminated by the Company without cause. In
addition, if Dr. Portman's employment is terminated by the Company without
cause, or by Dr. Portman with cause, Dr. Portman will be entitled to receive
payment of an amount equal to the lesser of full salary for one year or for the
remaining term of the agreement.

The table below sets forth information concerning compensation paid to Dr.
Portman in 1996. No other executive officer of the Company received compensation
of $100,000 or more in fiscal 1996.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM COMPENSATION
--------------------------------------------
AWARDS PAYOUTS
------------------------ -----------------
SECURITIES ALL
RESTRICTED UNDER- OTHER
ANNUAL COMPENSATION OTHER ANNUAL STOCK LYING LTIP COMPEN-
NAME AND PRINCIPAL ---------------------- COMPENSATION AWARD(S) OPTIONS/ PAYOUTS SATION
POSITION YEAR SALARY ($) BONUS ($) ($) ($) SARS (#) ($) ($)
------------------ ---- ---------- --------- ------------- ----------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert Portman........ 1996 162,500(1) -0- (2) -0- 225,000 -0- -0-
</TABLE>

- ------------------
(1) Includes $37,500 accrued in respect of 1995 salary which was paid in 1996.

(2) Less than 10% of annual salary and bonus.

The following table sets forth certain information regarding the options
granted to Dr. Portman in fiscal 1996:

OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE
---- ------------ ---------------- -------- ----------
<S> <C> <C> <C> <C>
Robert Portman....................................... 225,000 32% 3.75 3/31/01
</TABLE>

The following table sets forth information with respect to the number of
unexercised options and the value of unexercised "in-the-money" options held by
Dr. Portman at December 31, 1996.

AGGREGATED OPTION/SAR EXERCISES IN 1996 LAST FISCAL YEAR AND
OPTION/SAR VALUES AT 12/31/96

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
ACQUIRED OPTIONS/SARS AT FISCAL THE-MONEY OPTIONS/SARS
ON YEAR-END (#) AT DECEMBER 31, 1996 ($)
EXERCISE VALUE --------------------------- ---------------------------
NAME (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert Portman................. -0- -0- 100,000 425,000 200,000 456,250
</TABLE>

For the purpose of computing the value of "in-the-money" options at
December 31, 1996, in the above table, the fair market value of the Common Stock
at December 31, 1996, is deemed to be $4.00 per share, as determined by the
Board of Directors of the Company and equal to the last price at which the
Company sold its Common Stock in 1996.

DIRECTORS' COMPENSATION

None of the Company's directors received compensation for their services as
directors in 1996. T. Colin Campbell, a director of the Company, received an
option to purchase 5,000 shares of Common Stock pursuant to the Company's 1995
Incentive Stock Option Plan in recognition of his services as Chairman of the
Company's U.S. Scientific Advisory Board. The option is exercisable at a price
of $3.75 per share, and expires March 1, 2001.

<PAGE>

STOCK OPTION PLAN

1995 Plan: In August 1995, the Company adopted an Incentive Stock Option
Plan (the "1995 Plan") and reserved 582,000 shares of Common Stock for issuance
upon the exercise of options granted under the 1995 Plan. The number of shares
reserved for issuance under the 1995 Plan subsequently was increased to
1,500,000 shares. Options under the 1995 Plan are not designed to qualify for
special tax treatment as statutory "incentive stock options" under Section 422
of the Internal Revenue Code of 1986. As a result, persons who exercise options
under the 1995 Plan are subject to federal income taxation on the difference
between the exercise price of the option and the fair market value of the shares
purchased upon exercise as of the date of exercise, and the Company is eligible
for a corresponding deduction in computing its income for tax purposes.

The 1995 Plan is administered by the Board of Directors, or a committee of
the Board if it elects to delegate administration of the 1995 Plan to a
committee. To date, the Board has not done so.

The Board has full discretion to determine the persons or entities to
receive options under the Plan, including non-employee consultants and advisors
to the Company. The Board also has substantial discretion as to the terms and
duration of the options granted, provided that the exercise price of options may
not be less than the lower of (i) "market value" of the Common Stock, as
determined by the Board, on the date the option is granted, or (ii) 50% of the
then current conversion price of the Company's 10% Convertible Preferred Stock.
Unless sooner terminated, the 1995 Plan terminates on December 31, 2004. There
presently are outstanding options to purchase 1,420,200 shares of Common Stock
at prices ranging from $2.00 to $6.00 granted under the 1995 Plan.

In connection with obtaining regulatory clearances to conduct this offering
in certain states, the Company has agreed that it will not issue or grant
additional employee stock options a warrant for a period of one year from the
date of this Prospectus.

Bonus Option Program: In July 1996, the Company adopted a Bonus Stock
Option Award Program (the "Bonus Option Program") expressly for Robert Portman.
The Bonus Option Program provided for the grant to Dr. Portman of options to
purchase 25,000 shares of Common Stock for each $1,000,000 increase in the
Company's valuation, as defined in the Program, between June 30, 1996 and
December 31, 1996, December 31, 1996 and December 31, 1997, and December 31,
1997 and December 31, 1998. Any options granted were to be exercisable for a
period of five years from the date of grant at a price equal to the fair market
value of the Common Stock at the date of grant.

The Bonus Option Program was cancelled in connection with Dr. Portman
entering into a new employment agreement with the Company, which is effective
January 1, 1998. See "Compensation of Executive Officers" above.

SCIENTIFIC ADVISORY BOARDS

The Company has established U.S. and Chinese Scientific Advisory Boards to
provide it with on-going advice and counsel regarding research direction,
product development, analysis of data and general counseling. As a need rises,
the Company consults with individual members of these Boards on a non-scheduled
basis. A brief description of the backgrounds of the Advisory Boards' member are
set forth below.

U.S. Scientific Advisory Board:

T. Colin Campbell, a Director of the Company, is Chairman of the Company's
U.S. Advisory Board. Its other members are:

David Kritchevsky, PhD, Institute Professor, Wistar Institute, Professor of
Biochemistry in Surgery. Dr. Kritchevsky is an expert in lipid biochemistry,
atherosclerosis and the relationship between nutrition and aging and nutrition
and cancer. He has published on the effects of dietary fiber on colon cancer,
circulating cholesterol and the effects of dietary fat and energy on
experimental carcinogenesis. He was a member of the 1982 National Academy of
Sciences Committee on Diet, Nutrition and Cancer, is a member of numerous
professional societies, serves as editor of several professional annuals and was
Western Hemisphere Editor of the journal, Atherosclerosis.

<PAGE>

William Pryor, PhD, Thomas and David Boyd Professor, Departments of
Chemistry and Biochemistry; Director, Biodynamics Institute, Louisiana State
University. Dr. Pryor is an authority in free radical chemistry and biology. He
has published on the role that various reactive oxygen species play in the
production of degenerative tissue damage, such as cancer and atherosclerotic
diseases. His publications number over 500. Dr. Pryor wrote the first textbook
on free radicals (McGraw-Hill 1966) and was the founder and first editor of the
journal, Free Radical Biology & Medicine.

David J. Jenkins, PhD, Dsc, Professor of Medicine & Nutritional Sciences,
University of Toronto; Director, Clinical Nutrition & Risk Factor Modification
Center, St. Michael's Hospital. Dr. Jenkins has extensively researched the
effects of soluble and insoluble dietary fiber upon various biochemical factors
associated with, or predictive of, cardiovascular disease, diabetes and
colorectal and prostate cancers. Dr. Jenkins is a member of several professional
nutrition societies, in Canada, Great Britain and the United States. He has
served on a number of international committees involved in the treatment and
prevention of diabetes.

Chinese Scientific Advisory Board:

Professor Junshi Chen, MD, is Deputy Director of the Institute of Nutrition
& Food Hygiene at the Chinese Academy of Preventive Medicine and a Director of
the Company. Professor Chen is the Chair of the Chinese Scientific Advisory
Board.

Professor Boping Wu, Former Director of Medicine Information, Research
Institute, Academy of Traditional Chinese Medicine; Member, Expert Committee,
Academy of Traditional Chinese Medicine ("TCM"); Advisory, Chinese
Administration of TCM. Dr. Wu is one of the leading experts on Traditional
Chinese Medicine. Although his professional expertise concerns treatment of
immune function disorders, he was responsible for creating a comprehensive
database on medicinal herbs. Dr. Wu is a member of Chinese AIDS prevention
committee and has developed TCM anti-AIDS formulas that are being tested in
Africa and England.

Professor Weiyi Yang, Chair, Department of Clinical Research, Beijing
University of TCM; Advisor, Chinese Administration of TCM; Consultant, World
Health Organization. Professor Yang's research interests are in the theory and
mechanism of TCM. His research program has focused on explaining the
effectiveness of TCM using modern technology. His work also involves expanded
application of TCM. Recently Professor Yang was asked to coordinate a nationwide
effort to identify herb combinations that could increase performance of Chinese
athletes.

Professor Ganzhong Liu, Director, Department of Pharmacological Research,
Beijing Sino-Japan Hospital; Secretary General, Chinese Society of Pharmacology;
Professor, Department of Pharmacology, Beijing Medical College. Dr. Liu's
research interests concern neuro-pharmacology and toxicology of agents used in
TCM. He has published 20 articles and edited several books including Recent
Advances in Chinese Herb Drugs-Actions and Uses and TCM Pharmacology and
Clinical Research. As Secretary General of the Society of Pharmacology, Dr. Liu
remains extremely current in TCM research conducted throughout China.

Professor Mingzhi Xie, Department of Phytopharmacology, Institute of
Materia Medica, Chinese Academy of Medical Sciences. Dr. Xie has worked in
phytopharmacology for more than 30 years. She is a member of the Review Board
for New Drugs. Her current research interests focus on the mechanism of TCM
compounds in treating obesity and diabetes.

<PAGE>

PRINCIPAL SHAREHOLDERS

As of December 15, 1997, the Company had outstanding 2,985,672 shares of
Common Stock, giving effect to the cancellation effective as of the date of this
Prospectus of 200,000 shares issued in connection with the organization of the
Company. The Company also had outstanding 143,896 shares of 10% Convertible
Preferred Stock, each share of which presently is convertible into 2.5 shares of
Common Stock.

The following table sets forth information concerning the present ownership
of the Company's Common Stock and 10% Convertible Preferred Stock by the
Company's directors, executive officers and each person known to the Company to
be the beneficial owner of more than five percent of either of such classes of
the capital stock, the beneficial ownership of these securities by such persons
following the offering, and the total voting power represented by the securities
owned by such persons.

<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
COMMON 10% CONVERTIBLE COMMON STOCK VOTING POWER(4)
STOCK PREFERRED STOCK AS ADJUSTED(1)(3) -------------------------
NAME AND ADDRESS (% OF CLASS)(1) (% OF CLASS)(2) (% OF TOTAL) OUTSTANDING AS ADJUSTED
- ---------------- --------------- --------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Robert Portman (5) ................... 1,032,267 -0- 1,032,267 28.2% 21.2%
President, Chief Executive Officer (31.3%) (22.9%)
and a Director
188 Igoe Road
Morganville, NJ 07751
Jonathan D. Rahn (6) ................. 343,000 -0- 343,000 10.0% 7.4%
Executive Vice President, Chief (11.1%) (8.0%)
Financial Officer and a Director
413 Gatewood Road
Cherry Hill, NJ 08003
David I. Portman ..................... 185,000 -0- 185,000 5.5% 4.1%
Secretary and a Director (6.2%) (4.4%)
19 Pal Drive
Wayside, NJ 07712
T. Colin Campbell (7) ................ 172,954 -0- 172,954 5.4% 4.0%
Director (5.8%) (4.1%)
26 Beckett Way
Ithaca, NY 14850
Irving Tabachnik, Director ........... -0- -0- -0- -0- -0-
9 Woodland Avenue
North Caldwell, NJ 07006
Jemeson Investment Co. (8) ........... 222,222 -0- 222,222 6.6% 4.9%
320 Park Place (7.4%) (5.3%)
Birmingham, AL 35203
Mark M. Carter, M.D. ................. 105,220(8) 42,088 105,220(9) 3.1% 2.3%
105 Lantern Wick Place (3.4%) (29.2%) (2.5%)
Ponte Verda Beach, FL 32082
Ronald & Alberta Weinisch, JTWROS .... 45,458(8) 18,183 45,458(9) (10) (10)
902 East 8th Street (1.5%) (12.6%) (1.1%)
Brooklyn, NY 11230
Grumet Partners LP ................... 29,725(8) 11,890 29,725(9) (10) (10)
Jack Grumet, General Partner (1.0%) (8.3%) (0.7%)
19 Seven Oaks Drive
Holmdel, NJ 07733
Officers and Directors as a group 1,733,220 -0- 1,733,220 46.1% 34.9%
(5 persons) ........................ (50.9%) (37.7%)
</TABLE>

(footnotes on following page)

<PAGE>

(footnotes from previous page)
- ------------------

(1) Common Stock which is issuable (a) upon the exercise of a stock option
which is presently exercisable or which becomes exercisable within sixty
days, or (b) upon conversion of outstanding 10% Convertible Preferred
Stock, is considered outstanding for the purpose of computing the
percentage ownership (x) of persons holding such options or Preferred
Stock, and (y) of officers and directors as a group with respect to all
options and Preferred Stock held by officers and directors. Gives effect to
the cancellation of 200,000 shares contributed back to the Company and
cancelled effective as of the date of this Prospectus.

(2) The 143,896 shares of 10% Convertible Preferred Stock outstanding are
convertible into Common Stock on the basis of two and one-half (2 1/2)
shares of Common Stock per share of 10% Convertible Preferred. The number
of shares of Common Stock into which shares of Preferred Stock can be
converted will be reduced to 1.667 shares (i.e., a "conversion price" of
$6.00) effective January 1, 1998, and remain at that ratio until December
31, 2000. Thereafter the conversion price will remain $6.00 unless the
Company's Common Stock is traded in The Nasdaq Stock Market or on a
national securities exchange, in which case the conversion price will be
90% of the then current market value of the Common Stock. Holders of
outstanding 10% Convertible Preferred are entitled to vote on all matters
as a single class with holders of Common Stock, with each shares of
Preferred Stock representing a number of votes equal to the shares of
Common Stock into which such share of Preferred Stock is then convertible.

(3) Assumes that all Shares are sold, and that the Over-allotment Option is not
exercised. Represents shares of Common Stock and percentage ownership of
Common Stock only. Percentages do not reflect total voting power since the
voting power of the Company's capital stock is divided between holders of
Common Stock (89.2% at September 30, 1997) and 10% Convertible Preferred
Stock (10.8% at September 30, 1997). See "Description of Securities."

(4) Total voting power outstanding represents the voting power of the persons
indicated taking into account all shares of all classes deemed to be
outstanding and beneficially owned by such persons. See footnotes (1) and
(2) above. Total voting power as adjusted assumes all Shares are sold, and
that the Over-allotment Option is not exercised.

(5) Includes (i) a presently-exercisable option issued pursuant to the
Company's 1995 Incentive Stock Option Plan (a "1995 Plan Option") to
acquire 200,000 shares at a price of $2.00 per share, (ii) a
presently-exercisable 1995 Plan Option to acquire an additional 112,500
shares at a price of $3.75 per share. Does not include (x) 200,000 shares
of Common Stock owned by Jennifer Portman, Dr. Portman's wife, individually
and as Trustee for his and her minor children, as to which Dr. Portman
disclaims beneficial ownership, (y) 1995 Plan Options to purchase an
additional 687,500 shares which are not vested and do not vest within sixty
days.

(6) Includes a 1995 Plan Option to acquire 100,000 shares at a price of $3.75
per share. Does not include a 1995 Plan Option to purchase 100,000 shares
which is not vested and does not vest within sixty days.

(7) Includes a 1995 Plan Option to acquire 5,000 shares at a price of $3.75 per
share. Does not include 38,900 shares of Common Stock owned by Dr.
Campbell's wife or 160,521 shares of Common Stock owned by Dr. Campbell's
adult children, as to which he disclaims beneficial ownership.

(8) The principal shareholders of Jemeson Investment Co., Inc. ("Jemeson") and
their respective equity ownership of Jemeson are as follows: H. Corban Day
(24%), Margaret L. Jemeson (20%) and John S. Jemeson, III (19%). The
remaining equity interest is owned in varying percentages by eight other
family members.

(9) Represents shares of Common Stock issuable upon conversion of 10%
Convertible Preferred Stock.

(10) Less than one percent.

<PAGE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ORGANIZATIONAL TRANSACTIONS

In connection with its organization, the Company issued a total of
1,200,000 shares of Common Stock to Robert Portman, David Portman, T. Colin
Campbell, Junshi Chen, Ming Li and T. Nelson Campbell. These shares were issued
for par value, i.e. $.0025 per share. All of these initial shareholders, who may
be deemed founders or promoters of the Company, are parties to a Shareholders
Agreement which provided, among other things, for the composition of the initial
Board of Directors of the Company, appointment of Dr. Portman as Chief Executive
Officer, and obtaining additional financing. The Stockholders Agreement also
limits the parties' ability to engage in certain competitive activities, and
provides rights of first refusal to other parties if any party wishes to make a
transfer of shares, other than certain permitted transfers. Robert Portman, the
Company's President, has contributed back to the Company, effective as of the
date of this Prospectus, 200,000 of the shares which he acquired in connection
with the organization of the Company.

Also in connection with the Company's organization, the Company sold at par
value a total of 68,000 shares of Common Stock to Daniel Berkowitz (25,000
shares), T. George Harris (15,000 shares) and Jonathan D. Rahn (18,000 shares),
and to the four members of its U.S. Scientific Advisory Board (2,500 shares
each).

In June 1995, the Company sold to Robert Portman, David Portman, T. Colin
Campbell and Jonathan D. Rahn a total of 310,000 shares of Common Stock and
387,500 shares of Founders Preferred Stock for an aggregate cash consideration
of $325,000. In December 1995, all holders of Founders Preferred Stock converted
such shares into an aggregate 620,000 shares of Common Stock.

A portion of the Common Stock acquired by Robert Portman, T. Colin
Campbell, Junshi Chen, Ming Li and T. Nelson Campbell in the transactions
described above subsequently was transferred to their respective spouses and
children and/or certain business associates of the Company.

Junshi Chen, one of the Company's founding shareholders and Chairman of its
Chinese Scientific Advisory Board, is a Deputy Director of the INFH. The Company
has agreed, after the Company achieves a defined level of profitability
sufficient to "recapture" all organizational, administration, pre-operative and
operating expenses incurred from inception, to pay a royalty (starting at 2% and
declining to 0.5%) to the INFH based upon sales of products utilizing natural
constituents exported from China or developed in China, or based in whole or in
part on such constituents. No royalties have been paid to date, and the Company
does not believe that royalties will be payable before the fiscal year ending
December 31, 1999, at the earliest.

CERTAIN OTHER TRANSACTIONS

The Company rents approximately 2,645 square feet of office space, utilized
for executive and administrative offices, from CSC Associates, a company owned
by Robert Portman, Chairman of the Board and Chief Executive Officer of the
Company, and David Portman, Secretary and a Director of the Company, is at a
rent of $2,645 per month, plus utilities, under a three year lease which expires
January 31, 2000. The Company believes that the terms upon which it obtains its
executive offices are at least as favorable to it as could be obtained from an
unrelated party through arms-length negotiations.

The terms of the Company's lease with CSC Associates were approved
unanimously by the Company's Board of Directors, including all "independent" and
"disinterested" directors. The Company considers T. Colin Campbell to be an
"independent" director and for the purpose of considering the Company's lease
with CSC Associates considers both Dr. Campbell and Jonathan D. Rahn to be
"disinterested" directors. The Company also considers Irving I. A. Tabachnick,
who was elected a director following approval of these transactions, to be an
independent director.

Except as described in this Prospectus, the Company has not entered into
any material transactions or series of transactions which, in the aggregate,
would be considered material in which any officer, director or beneficial owner
of 5% or more of any class of capital stock of the Company had a personal
interest. It is the Company's policy that transactions in which an officer or
director has a personal interest must be on terms no less favorable to the
Company than could be obtained in arms-length negotiation with non-affiliated
parties, that all such transactions be approved by a majority of

<PAGE>

independent, disinterested directors, and that the Company bear all legal and
other reasonable expenses, if any, incurred by its disinterested, independent
directors in considering and acting upon any such matter.

DESCRIPTION OF SECURITIES

The Company's authorized capital stock consists of 10,000,000 shares of
Common Stock, $.0025 par value, of which 2,985,672 shares are outstanding as of
December 15, 1997, and 1,000,000 shares of Preferred Stock, $.01 par value, of
which 350,000 shares have been designated 10% Convertible Preferred Stock,
143,896 shares of which are outstanding at December 15, 1997.

COMMON STOCK

Holders of Common Stock are entitled to one vote for each share of Common
Stock owned of record on all matters to be voted on by stockholders, including
the election of directors. Holders of Common Stock do not have cumulative voting
rights and, accordingly, the holders of more than 50% of the outstanding shares
can elect the entire Board of Directors. Any director or the entire Board of
Directors may be removed, with or without cause, by the holders of a majority of
the shares then entitled to vote at an election of directors.

The holders of Common Stock are entitled, upon liquidation or dissolution
of the Company, to receive pro rata all assets remaining available for
distribution to stockholders. The Common Stock has no preemptive or other
subscription rights, and there are no conversion rights or redemption
provisions. All outstanding shares of Common Stock are validly issued, fully
paid, and nonassessable.

PREFERRED STOCK

The Company's Board of Directors has the authority by resolution to issue
up to 1,000,000 shares of preferred stock in one or more series and fix the
number of shares constituting any such series, the voting powers, designations,
preferences and relative, participating, optional or other special rights and
qualifications, limitations, or restrictions thereof, including the dividend
rights, dividend rate, terms of redemption (including sinking fund provisions),
redemption price or prices, conversion rights and liquidation preferences of the
shares constituting any series, without any further vote or action by the
stockholders. For example, the Board of Directors is authorized to issue,
without any further vote or action by stockholders, a series of preferred stock
that would have the right to vote, separately or with any other series of
preferred stock, on any proposed amendment to the Company's Certificate of
Incorporation or any other proposed corporate action, including business
combinations and other transactions, or which might otherwise adversely affect
the voting power of the holders of Common Stock. In connection with this
offering, however, the Company has agreed that no Preferred Stock will be issued
to directors, officers or promoters of the Company without stockholder approval.

10% CONVERTIBLE PREFERRED STOCK

The Company has designated 350,000 shares of its Preferred Stock as "10%
Convertible Preferred Stock", 143,896 of which have been issued as of November
17, 1997. The Company has no present plans to issue additional shares of 10%
Convertible Preferred Stock (hereinafter "Convertible Preferred") except as
dividends on shares presently outstanding. If additional shares of 10%
Convertible Preferred Stock were needed for this purpose, the Company's Board of
Directors has the authority to increase the number of such shares authorized.

Holders of Convertible Preferred are entitled to annual dividends of $1.00
per share, payable quarterly to holders of record as of March 31, June 30,
September 30 and December 31 in each year. Dividends are payable, at the option
of the Company, in cash or in additional shares of 10% Convertible Preferred
valued for this purpose at $10.00 per share (i.e., the purchase price pair for
such shares). Through September 30, 1997, the Company has issued 23,896 shares
of Convertible Preferred as dividends on previously outstanding shares.

Convertible Preferred is convertible at the option of its holder into two
and one-half (2 1/2) shares of Common Stock, i.e., at a conversion price of
$4.00 per share of Common Stock based upon the original purchase price of the
Convertible Preferred, until December 31, 1997. Thereafter, until December 31,
2000, shares of Convertible preferred are convertible at a conversion price of
$6.00 per share of Common Stock. After December 31, 2000, the conversion price
will remain $6.00 per share unless the Common Stock is then admitted for trading
on The Nasdaq Stock Market (SmallCap Market

<PAGE>

or National Market System) or a national securities exchange, in which case the
conversion price will be 90% of the then current market value of the Common
Stock. Conversion prices of the Convertible Preferred will be adjusted in the
event of any stock splits, dividends on Common Stock payable in Common Stock or
similar events.

Holders of Convertible Preferred are entitled to a number of votes per
Share in the election of directors and on all other matters submitted to
shareholders for their approval or consent equal to the number of shares of
Common Stock into which a share of Convertible Preferred is convertible at the
time of the meeting at which the vote is cast or, in the case of an action of
shareholders taken without a formal meeting, on the date of such action. Holders
of Convertible Preferred vote as a class with holders of Common Stock, except
that, without the vote or consent of the holders of at least a majority of the
shares of Convertible Preferred then outstanding, the Company may not (i) create
or issue or increase the authorized number of shares of any class or classes or
series of stock ranking prior to the Convertible Preferred upon liquidation,
(ii) amend or alter or repeal any of the provisions of the Company's Certificate
of Incorporation so as to affect adversely the preferences or rights of the
Convertible Preferred, or (iii) authorize any reclassification of the
Convertible Preferred.

The Company has the right to redeem the Convertible Preferred at any time
after December 31, 1997, at a price of $10.50 per Share, until December 31,
2002, and thereafter at a price of $10.00 per Share, in each case plus accrued
dividends, if any. Convertible Preferred not previously redeemed or converted
into Common Stock is subject to mandatory redemption by the Company on December
31, 2005. If the Company is prohibited by law from redeeming the Convertible
Preferred at that time, holders of the Convertible Preferred will be notified,
and the Company will be required to redeem the Convertible Preferred thereafter
as soon as the legal prohibition is eliminated.

STOCK OPTIONS AND WARRANTS

As described under the caption "Management -- Stock Option Plans" and
"Management -- Compensation of Executive Officers", the Company has adopted an
incentive stock option plan (the "1995 Plan") and reserved 1,500,000 shares of
Common Stock for issuance upon the exercise of options granted under such Plan.
As of the date of this Prospectus, options to purchase 1,420,200 shares at
prices ranging from $2.00 to $6.00 have been granted under the 1995 Plan. No
options have been exercised to date.

The Company also has granted an option to purchase 25,000 shares at the
initial offering price of the Shares to Big Sky, Inc., the Company used by Joe
Montana for his endorsement and similar contracts. Big Sky, Inc. has agreed,
however, that it will not exercise this option for a period of nine months after
the date of this Prospectus without the Company's prior written consent. This
option will expire five years after the date of this Prospectus.

The Company has outstanding Warrants to purchase 255,500 shares of Common
Stock: 227,500 shares at a price of $3.75, and 28,000 shares at a price of
$6.25. These warrants were issued to the Underwriter and certain of its officers
and employees in connection with prior financings, and expire on July 29, 2000
and August 8, 2000, respectively.

In order to obtain regulatory clearances for this offering in certain
states, the Company has agreed that it will not issue additional stock options
or warrants for a period of one year following the date of this Prospectus,
apart from the warrants to be sold to the Underwriter in connection with this
offering. See "Underwriting."

DIVIDEND POLICY

The holders of the Company's Convertible Preferred are entitled to
dividends, as described above. The holders of Common Stock are entitled to
receive such dividends, if any, as may be declared from time to time by the
Board of Directors, in its discretion, from funds legally available therefor,
but cannot be declared so long as an arrearage exists in dividend payments on
the 10% Convertible Preferred Stock. The Company does not presently anticipate
paying dividends on its Common Stock.

TRANSFER AGENT

StockTrans, Inc., 7 East Lancaster Avenue, Ardmore PA 19003-2318, serves as
the registrar and transfer agent for the Company's Common Stock.

<PAGE>

CERTAIN CHARTER AND DELAWARE LAW PROVISIONS

Limitation of Director Liability: The Company's Certificate of
Incorporation contains a provision permitted by Delaware law which eliminates
the personal liability of the Company's directors for monetary damages for
breach or alleged breach of their fiduciary duty of care which arises under
state law. Although this does not change the directors' duty of care, it limits
legal remedies which are available for breach of that duty to equitable
remedies, such as an injunction or rescission. This provision of the Company's
Certificate of Incorporation has no effect on directors' liability for: (1)
breach of the directors' duty of loyalty; (2) acts or omissions not in good
faith or involving intentional misconduct or known violations of law; and (3)
approval of any transactions from which the directors derive an improper
personal benefit, nor does it relieve the Company or its directors from
compliance with federal or state securities laws.

Indemnification: The Certificate of Incorporation and the Bylaws of the
Company require indemnification, to the fullest extent permitted by the Delaware
General Corporation Law, of any person who is or was involved in any manner in
any investigation, claim or other proceeding by reason of the fact that such
person is or was a director or officer of the Company, or of another corporation
serving at the request of the Company, against all expenses and liabilities
actually and reasonably incurred by such person in connection with the
investigation, claim or other proceeding. Prior to the offerings, the Company
also plans to obtain officer and director liability insurance with respect to
certain matters, including matters arising under the Securities Act.

Section 203 of the Delaware General Corporation Law: Following this
offering, the Company will be subject to Section 203 of the Delaware General
Corporation Law which, in general, prohibits a publicly held Delaware
corporation from engaging in various "business combination" transactions with
any "interested stockholder" for a period of three years after the date for the
transaction in which the person became an "interested stockholder", unless (i)
the transaction is approved by the Board of Directors of the corporation prior
to the date the interested stockholder obtained such status, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owns at least 85% of the
outstanding voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding, those shares owned, by (a) persons who are directors and
also officers and (b) employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer, or (iii) on or subsequent
to such date, the business combination is approved by the Board of Directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3 of the outstanding voting
stock which is not owned by the interested stockholder. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to a stockholder. An "interested stockholder" is a person who, together
with affiliates and associates, owns (or, within three years, did own) 15% or
more of the corporation's voting stock. The statute could prohibit or delay the
accomplishment of mergers or other takeover or change in control attempts with
respect to the Company and, accordingly, may discourage attempts to acquire the
Company.

<PAGE>

UNDERWRITING

First Montauk Securities Corp. (the "Underwriter" has agreed, subject to
the terms and conditions of the underwriting agreement between the Company and
the Underwriter (the "Underwriting Agreement") to purchase from the Company, and
the Company has agreed to sell to such Underwriter, an aggregate of 1,200,000
Shares. The Underwriter's obligations are subject to approval of certain legal
matters by counsel and various conditions.

The Underwriter has advised the Company that it proposes to offer the
Shares offered hereby to the public at the offering price set forth on the cover
of this Prospectus and that it may allow to certain dealers, who are members of
the National Association of Securities Dealers, Inc. ("NASD"), concessions of
not in excess of $.30 per Share, of which not in excess of $.15 may be reallowed
to other dealers who are members of the NASD.

The Underwriter is committed on a "firm commitment" basis to purchase all
of the Shares offered hereby, if any are purchased. The Underwriter has advised
the Company that it does not intend to confirm sales to any account over which
it exercises discretionary authority.

The Company has granted an option to the Underwriter, exercisable during
the 45 day period after the date of this Prospectus, to purchase up to an
aggregate of 180,000 additional Shares at the public offering price, less the
underwriting discounts and commissions. The Underwriter may purchase such Shares
only to cover over-allotments made in connection with the sale of the Shares
offered hereby.

The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriter against certain liabilities in connection with
the Registration Statement, including liabilities under the Act.

The Company has agreed to pay the Underwriter a non-accountable expense
allowance of 3% of the aggregate offering price of the Shares offered hereby
(including any shares purchased pursuant to the Underwriter's over-allotment
option), of which $30,000 has been paid to date.

The Company has also agreed to sell to the Underwriter or its designees,
warrants (the "Underwriter's Warrants") to purchase 120,000 shares of Common
Stock at a price of $.001 per warrant or an aggregate of $120.00. The
Underwriter's Warrants will be exercisable for a period of four years,
commencing one year after the date of this Prospectus, at an initial per share
exercise price equal to 145% of the initial public offering price per share of
Common Stock or $8.70 per share. The Common Stock underlying the Underwriter's
Warrants are identical in all respects to the Common Stock to be issued to the
public. The Underwriter's Warrants cannot be transferred, assigned, or
hypothecated for one year from the date of their issuance, except that they may
be assigned in whole or in part, to any successor, officer or partner of the
Underwriter (or any officer or partner of any such successor or partner).
Thereafter, the Underwriter's warrants may be transferred to officers,
employees, directors or consultants of the Underwriters. The Underwriter's
Warrants will contain anti-dilution provisions providing for appropriate
adjustment upon the occurrence of certain events.

The Underwriter and persons affiliated with the Underwriter also own (a)
warrants granted in August 1996 which expire July 31, 2000, to purchase 102,375
shares of Common Stock at a price of $3.75 per share, (b) warrants which expire
on August 9, 2000, to purchase 12,000 shares at $6.25 per share and (c) 75,000
shares of Common Stock, which shares and warrants were sold and issued to the
Underwriter as compensation in connection with financings completed in 1996 in
which the Underwriter acted as the Company's placement agent.

The Company has agreed that it will, on any one occasion during the
four-year period commencing one year from the date hereof, register the
Underwriter's Warrants and the underlying securities, at the Company's expense,
at the request of holders of a majority of the shares of Common Stock issuable
upon exercise of the Underwriter's Warrants. The Company has also agreed, during
the six year period commencing one year from the date hereof, to certain
"piggy-back" registration rights for holders of the Underwriter's Warrants and
the underlying securities.

For the life of the Underwriter's Warrants, the holders are given, at
nominal cost, the opportunity to profit from a rise in the market price for the
Common Stock of the Company without assuming the risk of ownership, with a
resulting dilution in the interest of other security holders. As long as the
Underwriter's Warrants remain unexercised, the terms under which the Company
could obtain additional capital may be adversely affected. Moreover, the holders
of the Underwriter's Warrants might be expected to exercise them at a time when
the Company would, in all likelihood, be able to

<PAGE>

obtain needed capital by a new offering of its securities on terms more
favorable than those provided by the Underwriter's Warrants. Additionally, if
the Underwriter should exercise its registration rights to effect a distribution
of the Underwriter's Warrants or underlying securities, the Underwriter, prior
to and during such distribution, may be unable to make a market in the Company's
securities. If the Underwriter must cease making a market, the market and market
price for such securities may be adversely affected and holders of such
securities may be unable to sell such securities. See "Risk Factors --
Underwriter's Warrants".

The Company has agreed pursuant to the Underwriting Agreement that for a
period of one year after the completion of this offering, neither the Company
nor any of its officers, directors or "affiliate" shareholders shall offer,
issue, sell, contract to sell, grant any option for the sale of or otherwise
dispose of any securities of the Company without the Underwriter's prior written
consent, except for shares issued upon the exercise of existing options and
rights, upon exercise of the overallotment option and the Underwriter's
Warrants, and shares of 10% Convertible Preferred Stock, issued as dividends on
outstanding shares.

The Company has also agreed pursuant to the Underwriting Agreement for a
period of five years following the date of this Prospectus, to use its best
efforts to cause an individual designated by the Underwriter to be elected to
the Company's Board of Directors. This individual may be an associate or
affiliate of the Underwriter, though no individual has been designated as of the
date of this Prospectus. The Underwriter has no plans to select such individual
in the immediate future. In the alternative, if the Underwriter does not
designate an individual to be elected to the Company's Board of Directors, the
Underwriter shall have the right to designate an advisor to attend all meetings
of the Board of Directors, which advisor shall have the right to receive notice
of all Board meetings. In addition, the Company and Underwriter have agreed that
upon the consummation of the offering, they will enter into a financial
consulting agreement for a period of two years at a monthly fee of $2,000. The
agreement also entitles the Underwriter to receive 5% of the first $5,000,000,
and 2 1/2% of the excess, if any, over $5,000,000, of the consideration paid in
connection with any business transactions between the Company and a party
introduced to the Company by the Underwriter.

The foregoing does not purport to be a complete statement of the terms and
conditions of the Underwriting Agreement and related documents, copies of which
are on file at the offices of the Underwriters, the Company and the Securities
and Exchange Commission.

Prior to the offering, there has been no public market for the Shares.
Consequently, the public offering price of the Shares has been determined by
arms' length negotiation between the Company and the Underwriter and is not
necessarily related to the Company's value, net worth, or any other established
criteria of value.

The Underwriter was formed and first registered as a broker-dealer in 1983.
During the last three years, the Underwriter has been the lead underwriter in
only one public offering prior to this offering, but has participated in more
than 200 public offerings as a syndicate or selling group member. Prospective
purchasers of the Shares should consider the Underwriter's limited experience as
a lead underwriter in evaluating the securities offered hereby.

In connection with the offering, the Underwriter and selling group members
(if any) and its affiliates may engage in transactions that stabilize, maintain
or otherwise affect the market price of the Common Stock. Such transactions may
include stabilization transactions effected in accordance with Rule 104 of
Regulation M, pursuant to which such persons may bid for or purchase Common
Stock for the purpose of stabilizing its market price. The Underwriter also may
create a short position for the account of the Underwriter by selling more
Common Stock in connection with this offering than it is committed to purchase
from the Company, and in such case may purchase Common Stock in the open market
following completion of this offering to cover all or a portion of such short
position. In addition, the Underwriter may impose "penalty bids" under
contractual arrangements whereby it may reclaim from a dealer participating in
this offering for its account, the selling concession with respect to the Common
Stock that is distributed in this offering but subsequently purchased for its
account in the open market. Any of the transactions described in this paragraph
may result in the maintenance of the price of the Common Stock at a level above
that which might otherwise prevail in the open market. None of the transactions
described in this paragraph is required, and, if any is undertaken, may be
discontinued at any time.

<PAGE>

SHARES AVAILABLE FOR FUTURE SALE

The Company has 2,985,672 shares of Common Stock issued and outstanding,
and up to 359,740 additional shares of Common Stock are issuable upon conversion
of outstanding shares of 10% Convertible Preferred Stock. These shares of Common
Stock are, or will be when issued, "restricted securities" as defined in Rule
144 promulgated under the 1933 Act.

Rule 144 governs resale of "restricted securities" for the account of any
person (other than an issuer), and restricted and unrestricted securities for
the account of an "affiliate" of the issuer (i.e., generally, officers,
directors and owners of 10% or more of the voting securities of an issuer).
Restricted securities generally include any securities such as the Company's
outstanding securities which are acquired directly or indirectly from an issuer
or its affiliates other than in connection with a public offering. Under Rule
144 unregistered resales of restricted securities cannot be made until the
securities have been held for one year from the later of acquisition from the
issuer or an affiliate of the issuer. Thereafter, restricted securities may be
resold without registration subject to compliance with Rule 144's volume
limitation, aggregation, broker transaction, notice filing requirements and
requirements concerning publicly available information about the Company ("Rule
144 Requirements"). Resales of both restricted and unrestricted securities by
affiliates of an issuer are subject to the Rule 144 Requirements. The volume
limitations provide that a person (or persons who must aggregate their sales)
cannot, within any three-month period, sell more than the greater of one percent
of the then outstanding shares, or the average weekly reported trading volume
during the four calendar weeks preceding each such sale. A non-affiliate may
resell restricted securities which have been held for two years or more free of
the Rule 144 Requirements.

With respect to the Company's presently outstanding shares of Common Stock
and shares issuable upon conversion of outstanding 10% Convertible Preferred
Stock ("Conversion Shares"), 3,345,412 outstanding shares of Common Stock, and
any Conversion Shares when issued will satisfy the "one year" holding
requirements and thus be saleable under Rule 144 upon compliance with the other
Rule 144 Requirements. The remaining shares of the Company's outstanding
restricted Common Stock will satisfy the one year holding requirement beginning
in December 1997, and all will have satisfied that requirement by May 1998.

In addition to the Underwriter's "lock up" agreements, officers, directors
and one other shareholder of the Company have entered into agreements with the
Company which further restrict their ability to sell shares of the Company's
Common Stock which they own. These agreements preclude the sale of shares
subject to the agreements (the "escrow shares") by such shareholders for a
period of one year from the date of this Prospectus, and limit sales of the
escrowed shares in the second year following the date of this Prospectus to
2 1/2% of the total number of escrowed shares owned by each such shareholder.
The shareholders who have entered into these agreements and the number of
escrowed shares subject to their respective agreements are as follows: Robert
Portman and Jennifer Portman, individually and as trustee for the Portman's
minor children -- 887,198 shares); Jonathan D.

<PAGE>

Rahn -- 228,098 shares; David Portman -- 163,431 shares; T. Colin Campbell and
Karen Campbell -- 199,893 shares; and Jemeson Investment Co. -- 26,144 shares.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Connolly Epstein Chicco Foxman Engelmyer & Ewing, Philadelphia, PA.
Certain legal matters in connection with the Common Stock will be passed upon
for the Underwriter by Goldstein & DiGioia, LLP, New York, New York.
Shareholders of the firm of Connolly Epstein Chicco Foxman Engelmyer & Ewing own
an aggregate of 10,000 shares of the Company's Common Stock.

EXPERTS

The financial statements of the Company and its affiliates as of December
31, 1996, and for the years ending December 31, 1996 and 1995, appearing in this
Prospectus and Registration Statement have been audited by Schiffman Hughes
Brown, Blue Bell, PA, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities Act of
1933 with respect to the shares of Common Stock offered by this Prospectus. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits thereto. For further information with respect to the Company and the
Common Stock, reference is made to the Registration Statement and the exhibits
and financial statement schedules filed as a part thereof. Statements made in
this Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. All of these documents may be inspected without charge at the
Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549,
or at the Regional Offices of the Commission at 210 South Dearborn Street, Room
1204, Chicago, Illinois 60604; and at 7 World Trade Center, New York, New York
10048. Copies of such material may be obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549.

DISCLOSURE OF COMMISSION POSITION
ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES

Section 145 of the Delaware General Corporation Law, as amended, authorizes
the Company to indemnify any director or officer under certain prescribed
circumstances and subject to certain limitations against certain costs and
expenses, including attorneys' fees actually and reasonably incurred in
connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which such person is a party by reason of
being a director or officer of the Company if it is determined that such person
acted in accordance with the applicable standard of conduct set forth in such
statutory provisions. Article 9 of the Company's Certificate of Incorporation
provides for the indemnification of directors and officers to the full extent
permitted by Delaware law.

The Company may also purchase and maintain insurance for the benefit of any
director or officer which may cover claims for which the Company could not
indemnify such person.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore unenforceable.

<PAGE>

PACIFICHEALTH LABORATORIES, INC.

INDEX TO FINANCIAL STATEMENTS

PAGE
--------
Independent Auditors' Report................................ F-2

Financial Statements:

Balance Sheets............................................ F-3

Statements of Operations.................................. F-4

Statement of Stockholders' Equity......................... F-5

Statements of Cash Flows.................................. F-6

Notes to Financial Statements............................... F-7-F-13

F-1

<PAGE>

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

SCHIFFMAN
HUGHES
BROWN
------------------------------

A PROFESSIONAL CORPORATION
CERTIFIED PUBLIC ACCOUNTANTS

INDEPENDENT AUDITOR'S REPORT

To the Board of Directors and Stockholders
of PacificHealth Laboratories, Inc.

We have audited the accompanying balance sheets of PacificHealth Laboratories,
Inc. as of December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1996 and the
period from April 13, 1995 (inception) to December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PacificHealth Laboratories,
Inc. as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for the year ended December 31, 1996 and from April 13, 1995
(inception) to December 31, 1995, in conformity with generally accepted
accounting principles.

Schiffman Hughes Brown
Blue Bell, Pennsylvania
December 12, 1997

- --------------------------------------------------------------------------------
790 Penllyn Pike, Suite 302, Blue Bell, PA 19422
(215) 646-2000 -- Fax (215) 646-1937

F-2

<PAGE>

PACIFICHEALTH LABORATORIES, INC.

BALANCE SHEETS
DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1995 1997
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 2)........... $ 743,313 $1,071,850 $ 112,020
Accounts receivable, net (Note 3)............ 2,020,545 592,965
Inventories (Note 4)......................... 905,950 118,592 700,179
Prepaid expenses............................. 268,800 19,100 261,100
Other........................................ 29,854 6,750 6,926
Deferred tax asset........................... 38,012
---------- ---------- ----------
Total current assets...................... 4,006,474 1,216,292 1,673,190
---------- ---------- ----------
Property and equipment, net (Note 5)........... 178,339 2,223 115,161
---------- ---------- ----------
Other assets:
Deferred offering costs...................... 43,748
Organization costs, net of accumulated
amortization (Note 6)..................... 10,468 13,647 8,083
---------- ---------- ----------
$ 10,468 $ 13,647 $ 51,831
---------- ---------- ----------
$4,195,281 $1,232,162 $1,840,182
========== ========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........ $ 669,227 $ 116,221 $ 529,697
Reserve for product replacement (Note 4)..... 752,250
---------- ---------- ----------
Total current liabilities................. 669,227 116,221 1,281,947
---------- ---------- ----------
Commitments (Notes 8 and 15)
Stockholders' equity:
10% convertible preferred stock, $.01 par
value; authorized 1,000,000 shares; issued
and outstanding 133,666 shares in 1996,
119,903 shares in 1995 and 143,896 shares
at September 30, 1997..................... 1,337 1,199 1,439
Common stock, $.0025 par value; authorized
10,000,000 shares; issued and outstanding
2,953,450 shares in 1996, 2,198,000 shares
in 1995 and 3,185,672 shares at September
30, 1997.................................. 7,384 5,495 7,964
Additional paid-in capital................... 3,694,990 1,305,879 4,790,662
Accumulated deficit.......................... (177,657) (196,632) (4,241,830)
---------- ---------- ----------
3,526,054 1,115,941 558,235
---------- ---------- ----------
$4,195,281 $1,232,162 $1,840,182
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of the financial statements

F-3

<PAGE>

PACIFICHEALTH LABORATORIES, INC.

STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE PERIOD FROM APRIL 13, 1995 (INCEPTION) TO DECEMBER 31, 1995

<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1997 1996
---------- ---------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.............................. $3,085,726 $ -0- $ 2,834,236 $1,043,082
---------- ---------- ----------- ----------
Cost of goods sold:
Inventory, beginning................ 118,592 905,950 118,592
Purchases........................... 1,537,670 118,592 1,000,198 887,681
---------- ---------- ----------- ----------
1,656,262 118,592 1,906,148 1,006,273
Less: inventory, ending............. (905,950) (118,592) (700,179) (725,838)
---------- ---------- ----------- ----------
750,312 -0- 1,205,969 280,435
---------- ---------- ----------- ----------
Gross profit.......................... 2,335,414 -0- 1,628,267 762,647
---------- ---------- ----------- ----------
Selling, general and administrative
expenses............................ 2,224,683 186,892 4,923,936 1,278,681
Research and development (Note 12).... 25,331 21,502 39,637 23,729
Amortization expense.................. 3,180 2,253 2,385 2,385
Depreciation expense.................. 29,064 57,198 15,729
Provision for replacement of product
(Note 4)............................ 564,749
---------- ---------- ----------- ----------
2,282,258 210,647 5,587,905 1,320,524
---------- ---------- ----------- ----------
Net operating income (loss)........... 53,156 (210,647) (3,959,638) (557,877)
Other income (expense):
Interest income..................... 53,583 14,026 36,442 41,028
---------- ---------- ----------- ----------
Income (loss) before income taxes..... 106,739 (196,621) (3,923,196) (516,849)
Provision (benefit) for income taxes
(Note 11)........................... (38,012) -0- 38,212 290
---------- ---------- ----------- ----------
Net income (loss)..................... $ 144,751 $ (196,621) $(3,961,408) $ (517,139)
========== ========== =========== ==========
Primary net income (loss) per share of
common stock........................ $ .05 $ (.12) $ (1.15) $ (.20)
========== ========== =========== ==========
Fully diluted net income (loss) per
share of common stock............... $ .04 $ (.12) $ (1.15) $ (.20)
========== ========== =========== ==========
Primary weighted average shares
outstanding......................... 2,689,063 1,630,420 3,454,878 2,620,702
========== ========== =========== ==========
Fully diluted weighted average shares
outstanding......................... 3,447,050 1,806,421 4,697,229 3,215,472
========== ========== =========== ==========
</TABLE>

The accompanying notes are an integral part of the financial statements

F-4

<PAGE>

PACIFICHEALTH LABORATORIES, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE PERIOD FROM APRIL 13, 1995 (INCEPTION) TO DECEMBER 31, 1995

<TABLE>
<CAPTION>
TOTAL
PREFERRED COMMON PAID IN ACCUMULATED STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT EQUITY
--------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, April 13, 1995 (inception)..... $ -0- $ -0- $ -0- $ -0- $ -0-
Issuance of 387,500 shares of Founder's
preferred stock....................... 3,875 212,792 216,667
Conversion of 387,500 shares of
Founder's preferred stock for 620,000
shares of common stock................ (3,875) 1,550 2,325 -0-
Issuance of 3,945,000 shares of common
stock (subsequently reduced to
1,578,000 shares after reverse stock
split)................................ 3,945 107,558 111,503
Issuance of 118,750 shares of 10%
convertible preferred stock........... 1,188 983,204 984,392
Issuance of 1,153 shares of 10%
convertible preferred stock as a
dividend.............................. 11 (11) -0-
Net loss for the period ended December
31, 1995.............................. (196,621) (196,621)
------ ------ ---------- ----------- ----------
Balance, December 31, 1995.............. 1,199 5,495 1,305,879 (196,632) 1,115,941
Issuance of 755,000 shares common
stock................................. 1,888 2,249,820 2,251,708
Issuance of 450 shares of common stock
for services.......................... 1 1,799 1,800
Issuance of 1,250 shares of 10%
convertible preferred stock........... 13 12,487 12,500
Issuance of 12,513 shares of 10%
convertible preferred stock as a
dividend.............................. 125 125,005 (125,130)
Cash dividends.......................... (646) (646)
Net income for the year ended December
31, 1996.............................. 144,751 144,751
------ ------ ---------- ----------- ----------
Balance, December 31, 1996.............. 1,337 7,384 3,694,990 (177,657) 3,526,054
Issuance of 232,222 shares of common
stock................................. 580 993,474 994,054
Issuance of 10,230 shares of 10%
convertible preferred stock as a
dividend.............................. 102 102,198 (102,300)
Cash dividend........................... (465) (465)
Net loss for the period ended September
30, 1997.............................. (3,961,408) (3,961,408)
------ ------ ---------- ----------- ----------
Balance, September 30, 1997
(Unaudited)........................... $1,439 $7,964 $4,790,662 $(4,241,830) $ 558,235
====== ====== ========== =========== ==========
</TABLE>

The accompanying notes are an integral part of the financial statements

F-5

<PAGE>

PACIFICHEALTH LABORATORIES, INC.

STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE PERIOD FROM APRIL 13, 1995 (INCEPTION) TO DECEMBER 31, 1995

<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1997 1996
---------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................... $ 144,751 $ (196,621) $(3,961,408) $ (517,139)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Loss on retirement of fixed assets.... 58,061
Depreciation.......................... 29,064 57,198 15,729
Amortization.......................... 3,180 2,253 2,385 2,385
Deferred taxes........................ (38,012) 38,012
Issuance of common stock for
services............................ 1,800
Deferred offering..................... (43,748)
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable.......................... (2,020,545) 1,427,580 (533,956)
(Increase) decrease in prepaid
expenses............................ (249,700) (19,100) 7,700 (122,381)
(Increase) decrease in inventory...... (787,358) (118,592) 205,771 (607,246)
(Increase) decrease in other current
assets.............................. (23,104) (6,750) 22,928 (10,371)
Increase in accounts payable and
accrued expenses.................... 553,006 116,221 (139,530) 288,694
Increase in reserve for product
replacement......................... 752,250
---------- ----------- ----------- -----------
Net cash used by operating activities........ (2,386,918) (222,589) (1,572,801) (1,484,285)
---------- ----------- ----------- -----------
Cash flows for investing activities:
Purchase of fixed assets................... (151,928) (52,082) (98,927)
Incurred organizational costs.............. (15,900)
Purchase of furniture and fixtures......... (53,252) (2,223)
---------- ----------- ----------- -----------
Net cash used in investing activities........ (205,180) (18,123) (52,082) (98,927)
---------- ----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock................... 2,251,707 111,503 994,055 2,191,707
Issuance of preferred stock................ 12,500 1,201,059 12,500
Dividends paid............................. (646) (465) (531)
---------- ----------- ----------- -----------
Net cash provided by financing activities.... 2,263,561 1,312,562 993,590 2,203,676
---------- ----------- ----------- -----------
Net increase (decrease) in cash.............. (328,537) 1,071,850 (631,293) 620,464
Cash, beginning balance...................... 1,071,850 -0- 743,313 1,071,850
---------- ----------- ----------- -----------
Cash, ending balance......................... $ 743,313 $ 1,071,850 $ 112,020 $ 1,692,314
========== =========== =========== ===========
Supplemental disclosure of cash flow
information:
Taxes paid................................. $ 150 $ -0- $ -0- $ 290
========== =========== =========== ===========
Non-cash financing activity:
Preferred stock dividend................... $ 125,130 $ 115 $ 102,300 $ 92,640
========== =========== =========== ===========
Issuance of common stock for services...... $ 1,800 $ -0- $ -0- $ -0-
========== =========== =========== ===========
</TABLE>

The accompanying notes are an integral part of the financial statements

F-6

<PAGE>

PACIFICHEALTH LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995

1. BUSINESS:

PacificHealth Laboratories, Inc. (the Company) (PHL) was organized on April
13, 1995 to develop and market innovative natural products that have been
clinically shown to improve health and well being. At the present time, the
Company's ENDUROX line of products represents 100% of revenues.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Cash and cash equivalents:

For purposes of reporting cash flows, the Company considers all cash
accounts which are not subject to withdrawal restrictions or penalties, and
certificates of deposit with original maturities of 90 days or less, to be cash
or cash equivalents.

Accounts receivable:

The Company provides an allowance for doubtful accounts, as needed, for
accounts deemed uncollectible.

Inventory:

Inventory is recorded at the lower of cost or market using the first-in,
first-out (FIFO) method.

Equipment and depreciation:

Property and equipment are carried at cost. Depreciation is calculated
using the straight-line method over their estimated useful lives ranging from 3
to 10 years. Depreciation expense for the years ended December 31, 1996 and 1995
was $29,064 and $0, respectively. Depreciation expense for the nine months ended
September 30, 1997 and 1996 was $57,198 and $15,729, respectively.

Organization costs:

Organization costs are capitalized and amortized over 5 years.

Earnings per share:

Primary earnings per share are computed by dividing net income (loss) by
the weighted average number of shares of common stock and the equivalent number
of common shares of convertible preferred stock. Fully diluted earnings per
share reflect the dilutive effect of stock options and warrants. For the year
ended December 31, 1995 and the nine months ended September 30, 1997 and 1996,
the computation of fully diluted loss per share was antidilutive; therefore, the
amounts reported for primary and fully dilutive loss per share were the same.

Research and development:

Research and development costs consist of expenditures incurred by the
Company during the course of planned search and investigation aimed at the
discovery of new knowledge which will be used to develop and market natural
products which improve health and well being. The Company expenses all such
research and development costs as they are incurred.

F-7

<PAGE>

PACIFICHEALTH LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

Income taxes:

Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of balance sheet items for
financial and income tax reporting. The only difference between the basis for
financial and income tax reporting was the booking of tax benefit for the net
operating loss carryforward.

3. ACCOUNTS RECEIVABLE:

DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1995 1997
------------ ------------ -------------
(UNAUDITED)

Accounts receivable................ $2,020,545 $-0- $614,465
Less: allowance for
doubtful accounts................ -0- -0- 21,500
---------- ---- --------
$2,020,545 $-0- $592,965
========== ==== ========

4. INVENTORIES:

Inventories at December 31, 1996, 1995 and September 30, 1997 consisted of
the following:

DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1995 1997
------------ ------------ -------------
Raw materials...................... $112,734 $118,592 $ 95,065
Work-in-process.................... 223,675 258,373
Finished goods..................... 569,541 346,741
-------- -------- --------
$905,950 $118,592 $700,179
======== ======== ========

At the beginning of 1997, the Company decided to reformulate its ENDUROX
product into a caplet rather than a capsule, because the capsule form was very
hygroscopic and became altered in size and color in conditions of high heat and
humidity. As a result, the Company abandoned its inventory of capsules and,
whenever necessary, either exchanged its retailers' inventory of capsules with
caplets or issued a credit for returned capsules. The exchange of caplets for
capsules was recorded as a charge to the provision for product replacement.
Refunds were recorded as a reduction of revenue.

At September 30, 1997, the Company's management estimated that
approximately 170,000 packages of capsule product were in retailers' inventory
and recorded a reserve totaling $752,250. The estimate assumed that seventy-five
percent of the packages would be returned for replacement and twenty-five
percent would be returned for refunds. The cost of the replacement inventory,
$433,500, was charged to the provision and the estimated refunds, $318,750, was
recorded as a reduction of revenue.

Both ENDUROX EXCEL and ENDUROX ProHeart were introduced in a caplet form.

F-8

<PAGE>

PACIFICHEALTH LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995

5. PROPERTY AND EQUIPMENT:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1995 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and equipment.................... $111,158 $2,223 $119,554
Molds and dies............................. 96,245 48,417
-------- ------ --------
207,403 2,223 167,971
Less:
Accumulated depreciation................. 29,064 52,810
-------- ------ --------
$178,339 $2,223 $115,161
======== ====== ========
</TABLE>

6. ORGANIZATION COSTS:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1995 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Cost....................................... $15,900 $15,900 $15,900
Less:
Accumulated amortization................. 5,432 2,223 7,817
------- ------- -------
$10,468 $13,647 $ 8,083
======= ======= =======
</TABLE>

7. STOCK:

Capital stock:

The total number of shares of all classes of stock which the Company has
authority to issue is 11,000,000 shares, consisting of (a) ten million
(10,000,000) shares of Common Stock, par value $.0025 per share, and (b) one
million (1,000,000) shares of Preferred stock, par value $.01 per share. The
preferred stock may be issued in one or more series, and may have such voting
powers, full or limited, or no voting powers, and such designations, preferences
and relative, participating, optional or other special rights and
qualifications, limitations or restrictions as shall be stated in the resolution
or resolutions providing for the issue thereof adopted by the Board of Directors
of the Company from time to time.

Common stock:

In 1995, 3,945,000 shares were issued and subsequently reduced to 1,578,000
by a 2.5 for 1 reverse split. In 1996, the Company issued 680,000 shares of
common stock for $2,453,750 and 450 shares for $1,800 in services. Also in 1996
under the terms of the Placement Agency Agreement relating to the sale of 10%
convertible preferred stock described below, the Company sold 75,000 shares of
common stock to the placement agent for $18,000. During the nine months ended
September 30, 1997, the Company issued 232,222 shares of common stock for
$1,044,999.

Founders preferred stock:

In 1995, 387,500 shares of Founder's preferred stock were issued. Each
share of Founders preferred stock entitled its holder to receive an annual cash
dividend of $.06 per share (payable from retained earnings). Each share of the
Founder's preferred stock is convertible into 4 shares of common stock. The
Founder's preferred stock was converted into 620,000 shares of the Company's
common stock after giving effect to a subsequent 2.5 for 1 reverse split in
August 1995.

F-9

<PAGE>

PACIFICHEALTH LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995

7. STOCK (CONTINUED):
10% convertible preferred stock:

In 1996 and 1995, the Company sold a total of 120,000 shares of its 10%
convertible preferred stock for $1,200,000.

Holders of shares of the 10% convertible preferred stock are entitled to
receive an annual dividend of $1.00 per share, payable in quarterly installments
of $.25 per share. Dividends may be paid in cash or in additional shares at the
discretion of the Board of Directors of the Company. Each share of preferred
stock may be converted into two and one half shares of common stock through
December 31, 1997 and, thereafter each share of 10% convertible preferred stock
may be converted into one and two-thirds shares of the Company's common stock.

Activity for the periods ended is summarized as follows:

DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1995 1997
------------ ------------ -------------
(UNAUDITED)
Stock dividends
(shown as shares)................ 12,513 1,153 10,230
======= ====== =======
Cash dividends..................... $ 646 $ -0- $ 465
======= ====== =======

8. COMMITMENTS:

Strategic Alliance Agreement:

The Company entered into an exclusive relationship with the Institute of
Nutrition & Food Hygiene (INFH), an institution located in The People's Republic
of China, for the purpose of commercializing various products, know how and/or
intellectual property outside of China. Per the Agreement, the INFH will attempt
to locate and enter into exclusive licensing agreements with other institutions
located in China to supply the Company with an array of herbs, non-prescription
drugs, nutritional supplements, intellectual property and technology for
developing products derived from natural sources which can be used in the
maintenance of health and well being. Any future products licensed by the INFH
will be assigned to the Company subject to terms and conditions of the
Agreement.

When the Company has achieved profitability on a cumulative basis it shall
pay royalties to the INFH applicable to the net revenues of any products
exported from China, developed in China or products which are based on extracts
from China. The royalties to be paid are as follows:

NET REVENUES ROYALTY
------------ -------
$0 - 25 million............................. 2%
$25 - 100 million........................... 1 1/2%
$100 - 200 million.......................... 1%
Over $200 million........................... 1/2%

F-10

<PAGE>

PACIFICHEALTH LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995

8. COMMITMENTS (CONTINUED):
For all royalties which are earned by INFH in excess of $25 million but
less than $100 million, PHL shall receive a 30% credit. This credit shall be
escrowed by PHL and be applied to "Special Services" performed by the INFH,
institutions or individuals with whom the INFH has entered into a licensing
agreement. Unused credits shall carry over beyond the year in which it was
earned. For purposes of the Agreement, Special Services shall be defined as:

(1) Clinical studies/research

(2) Laboratory studies/research

(3) Toxicology studies/research

(4) Formulation and/or product development

(5) Quality control studies/services

(6) Payment to Chinese consultants for work including, but not limited
to, clinical and/or research design, product development, quality
control, manufacturing and/or sourcing.

Line of credit:

In May, 1997, the Company entered into a line of credit agreement with its
bank which enables the Company to borrow up to 80% of their current accounts
receivable (defined as less than 90 days old), up to a maximum of $1,000,000. At
September 30, 1997, the Company had not borrowed any monies from this line of
credit.

Employment and consulting agreements:

The Company has entered into an employment contract with the Chairman and
CEO that provides for minimum annual compensation of $150,000. The Company is
the beneficiary of a keyman life insurance policy (on the Chairman's life) for
$2,000,000. It also has consulting agreements with certain shareholders and
others who have expertise of value to the Company.

9. INCENTIVE STOCK OPTION PLAN:

In 1995, the Company established an incentive stock option plan (the Plan)
and presently has reserved 1,500,000 shares of the Company's common stock for
issuance under the Plan. Options granted pursuant to the Plan at December 31,
1996 were 904,500, and those options were granted to certain officers, key
employees and/or consultants to the Company. Exercise prices range from $2 to $4
per common share, and vest over varying periods of time. In the first nine
months of 1997, 15,700 options were granted to certain officers, key employees
and/or consultants to the Company. Exercise prices on the options granted in
1997 range from $4.25 to $4.50 per common share, and vest over varying periods
of time. All issuances were granted at the fair market value of the Company's
common stock at time of grant. As of September 30, 1997, no options have been
exercised.

F-11

<PAGE>

PACIFICHEALTH LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995

9. INCENTIVE STOCK OPTION PLAN (CONTINUED):
Transactions in the Plan since inception are as follows:

<TABLE>
<CAPTION>
EXERCISE PRICE WEIGHTED AVERAGE
GRANTED VESTED PER VESTED EXERCISE PRICE PER
SHARES SHARES COMMON SHARE VESTED COMMON SHARE
--------- ------- -------------- -------------------
<S> <C> <C> <C> <C>
Balance, April 13, 1995.... -0- -0-
Activity during period..... 300,000 -0-
--------- -------
Balance, December 31,
1995..................... 300,000 -0-
--------- -------
Activity during the year
ended December 31,
1996..................... 604,500 144,500 $2.00 - $4.00 $2.57
--------- -------
Balance, December 31,
1996..................... 904,500 144,500
--------- -------
Activity during the nine
months ended September
30, 1997................. 15,700 388,200 $2.00 - $4.50 $3.36
--------- -------
Balance, September 30,
1997..................... 920,200 532,700 $3.14
========= =======
</TABLE>

The Company accounts for stock-based compensation in accordance with SFAS
No. 123, Accounting for Stock-Based Compensation which permits the use of the
intrinsic value method described in APB Opinion No. 25, Accounting for Stock
Issued to Employees, and requires the Company to disclose the pro forma effects
of accounting for stock-based compensation using the fair value method as
described in the optional accounting requirements of SFAS No. 123. As permitted
by SFAS No. 123, the Company will continue to account for stock-based
compensation under APB Opinion No. 25, under which the Company has recognized no
compensation expense.

Had compensation cost for the Company's stock option plan been determined
based on the fair value of the Company's common stock at the dates of awards
under the fair value method of SFAS No. 123, the Company's net income and net
income per common share would have been reduced to the pro forma amounts
indicated below:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1995 1997
------------ ------------ -------------
<S> <C> <C> <C>
Net income:
As reported............................. $ 144,751 $(196,621) $(3,961,408)
Pro forma............................... (92,305) (229,934) (4,227,079)
Net income per common share:
As reported............................. .05 (.12) (1.15)
Pro forma............................... (.03) (.14) (1.22)
</TABLE>

Significant assumptions used to calculate the above fair value of the
awards are as follows:

Risk free interest rates of return............... 5.75%
Expected option life............................. 60 months
Expected dividends............................... $-0-

10. WARRANTS:

At September 30, 1997, the Company has warrants outstanding for the
purchase of 255,500 shares of the Company's common stock at exercise prices
ranging between $3.75 to $6.25 per common share. The warrants expire at the
close of business on July 31, 2000 (112,375 warrants exercisable at $3.75 per
share) and August 8, 2000 (12,000 warrants exercisable at $6.25 per share). As
of September 30, 1997, no warrants have been exercised.

F-12

<PAGE>

PACIFICHEALTH LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995

11. INCOME TAXES:

Income tax provision (benefit) consists of the following:

DECEMBER 31, SEPTEMBER 30,
----------------- --------------
1996 1995 1997 1996
---------- ---- ------- ----
Current:
Federal.................................. $ -0- $-0- $ -0- $-0-
State.................................... -0- -0- 200 290
---------- ---- ------- ----
-0- -0- 200 290
---------- ---- ------- ----
Deferred:
Federal.................................. (30,067) -0- 30,067 -0-
State.................................... (7,945) -0- 7,945 -0-
---------- ---- ------- ----
(38,012) -0- 38,012 -0-
---------- ---- ------- ----
$ (38,012) $-0- $38,212 $290
========== ==== ======= ====

The Company has $88,432 in Federal and state net operating loss carryovers
which can be used to offset future taxable income. The net operating loss
carryforwards expire in the year 2010. In 1996, management of the Company
assessed its then current earnings along with the then existing sales backlog
and budgeted sales for 1997 and had determined that it was more likely than not
that the net operating loss carryforwards would be utilized in 1997 thus a
deferred tax asset of $38,012 was recorded on the books. This deferred tax asset
was calculated using effective tax rates for federal and state. However, as a
result of reassessment by the Company at September 30, 1997, it appears that net
operating loss carryforwards will not be recognized in 1997 and has thus
reversed the deferred tax asset recorded at December 31, 1996.

12. RESEARCH AND DEVELOPMENT COSTS:

For the year ended December 31, 1996 and for the period from April 13, 1995
to December 31, 1995, research and development costs were $25,331 and $21,502,
respectively. Research and development costs for the nine months ended September
30, 1997 and 1996 were $39,637 and $23,729, respectively.

13. FINANCIAL INSTRUMENTS:

Cash accounts are secured by the Federal Deposit Insurance Corporation up
to $100,000. At December 31, 1996 and September 30, 1997, cash deposits exceeded
federally insured limits by approximately $400,000 and $12,020, respectively.

14. SIGNIFICANT CUSTOMERS:

For the year ended December 31, 1996, the Company had revenues from one
customer which accounted for approximately 45% of total revenue. During the nine
months ended September 30, 1997, the Company had three customers with billings
in excess of 10% of total revenues. These three customers accounted for
approximately 49% of total revenues.

15. RELATED PARTY:

The Company leases its offices from a company owned equally by the
president and secretary of PacificHealth Laboratories, Inc. The three year lease
starting February 1, 1997 requires monthly payments of $2,645, plus a monthly
charge for the Company's portion of certain common area costs. Rent expense for
the nine months ended September 30, 1997 was $30,308.

F-13

<PAGE>

NO DEALER, SALESPERSON OR ANY OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED BY THIS PROSPECTUS, OR AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IS
UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS SHALL NOT, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE OF THE PROSPECTUS.

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

TABLE OF CONTENTS

PAGE
----

Prospectus Summary...................... 3
Risk Factors............................ 6
Dilution................................ 14
Use of Proceeds......................... 15
Capitalization.......................... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 17
Business of the Company................. 20
Management.............................. 30
Principal Shareholders.................. 35
Certain Relationships and Related
Transactions.......................... 37
Description of Securities............... 38
Underwriting............................ 41
Shares Available for Future Sale........ 43
Legal Matters........................... 44
Experts................................. 44
Additional Information.................. 44
Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities........................... 44
Index to Financial Statements........... F-1

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

UNTIL JANUARY 14, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

1,200,000 SHARES

PACIFICHEALTH
LABORATORIES, INC.

COMMON STOCK

-------------------
PROSPECTUS
-------------------

[FIRST MONTAUK SECURITIES LOGO]

DECEMBER 19, 1997