CARING PRODUCTS INTERNATIONAL INC, 10KSB40, 1998-07-13

CARING PRODUCTS INTERNATIONAL INC
10KSB40, 1998-07-13
MISCELLANEOUS FABRICATED TEXTILE PRODUCTS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- -------------------------------------------------------------------------------
FORM 10-KSB

(Mark One)
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 1998

/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ________ to _________

Commission file number 33-96882-LA
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CARING PRODUCTS INTERNATIONAL, INC.
(Name of small business issuer in its charter)

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DELAWARE 98-0134875
(State or other jurisdiction of (IRS Employer Identification No.)

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200 FIRST AVENUE WEST, SUITE 200, SEATTLE, WASHINGTON 98119
(Address of principal executive offices)

(206) 282-6040
(Issuer's telephone number, including area code)

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

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

Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
Warrants to purchase common stock.

Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes _X_ No ___

Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in

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definitive proxy or information statements incorporated by reference in Part
III of this Form 10-KSB. /X/

State issuer's revenue for its most recent fiscal year. $ 1,973,063.

State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was
sold, or the average bid and asked prices of such stock, as of a specified
date within the past 60 days. (See definition of affiliate in Rule 12b-2 of
the Exchange Act.) $5,393,138.
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ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS

Not applicable.

APPLICABLE ONLY TO CORPORATE REGISTRANTS

State the number of shares outstanding of each of the issuer's classes
of common equity, as of June 10, 1998: 2,781,343 shares of common stock,
$.01 par value (the "Common Stock").

Transitional Small Business Disclosure Format (check one):
Yes ___ No _X_

DOCUMENTS INCORPORATED BY REFERENCE

Part III - Certain exhibits Included in prior filings made
Listed in response to Item 13(a) under the Securities Act of 1933.

<PAGE>

PART I
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ITEM 1. DESCRIPTION OF BUSINESS.

GENERAL

Caring Products International, Inc. and its subsidiaries (collectively,
the "Company" or "CPI") has designed and markets a line of proprietary
urinary incontinence products with disposable liners which are sold under the
Rejoice name. These products provide a practical, convenient and cost
effective solution to the special needs of incontinent adults and children
over the age of four. All of the Company's products incorporate a two-piece
incontinence management system consisting of a reusable light-weight cotton
pant specifically designed to look and feel like conventional underwear and a
disposable, highly absorbent liner.

In order to focus more of its resources on marketing its products, the
Company subcontracts the manufacture of its pants and liners, as well as the
conversion, storage and delivery (fulfillment) services necessary to bring
the products to market. The Company's primary sales efforts are dedicated to
expanding distribution of the Rejoice adult and children's incontinence
product line in the United States and entering international markets. The
Company's marketing efforts are designed to capitalize upon niche market
opportunities in the retail and healthcare incontinence product markets.

CORPORATE HISTORY

The Company, Caring Products International, Inc., a Delaware
corporation, resulted from a series of corporate reorganizations and related
transactions, as follows:

First West Canada Capital Corporation ("FWCC") was originally
incorporated under the laws of the Province of British Columbia on December
6, 1984. On December 20, 1993, FWCC renounced its original jurisdiction of
incorporation and became a Wyoming corporation. On December 23, 1993, FWCC
merged into FWCC Merger Corp., a wholly owned subsidiary of FWCC, which was
incorporated in the State of Delaware on December 7, 1993. Prior to the
merger, which effected the reincorporating of FWCC as a Delaware corporation,
FWCC was an inactive corporation whose shares were listed for trading on the
VSE.

On November 4, 1992, Caring Products International, Inc. was
incorporated under the laws of the State of Delaware ("Old Caring Products").
On December 30, 1993, Old Caring Products merged with and into FWCC Merger
Corp., and FWCC Merger Corp. became the surviving corporation. In connection
with this merger, the then existing officers and directors of FWCC Merger
Corp. resigned, the then existing officers and directors of Old Caring
Products became the officers and directors of FWCC Merger Corp. and the name
of the surviving entity was changed to Caring Products International, Inc.

Caring Products Industries, Ltd., a British Columbia corporation, is a
wholly owned subsidiary of Caring Products International, Inc. and until
March 1996 principally engaged in pant production activities. C.P.
International, Inc., a Delaware corporation, is also a wholly owned
subsidiary of Caring Products International, Inc., and its principal business
is the sale and marketing of the Company's products. The term, the "Company"
as used herein, refers to the surviving entity in the

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merger, Caring Products International, Inc. and its wholly owned
subsidiaries, Caring Products Industries, Ltd. and C.P. International, Inc.

Unless otherwise indicated, all share and per share data contained herein
gives effect to a one-for-six reverse stock split and a one-for-four reverse
stock split (the "Reverse Stock Splits") of the Company's Common Stock
effected on June 16, 1997 and October 20, 1997, respectively.

PRODUCTS

The Company has designed and is marketing a line of adult and children's
incontinence products that it believes offers to those who suffer from light
and moderate incontinence a highly effective, more dignified and less costly
alternative to their traditional options, such as bulky disposable diapers,
belted undergarments or guards. By enabling incontinence sufferers to wear a
fashionably-styled pair of underwear specifically designed to accommodate a
highly absorbent, disposable liner, the Company believes its products give
incontinence sufferers the ability to engage in many activities that would
otherwise be difficult or impossible for them to undertake. The competing
incontinence products designed for individuals with light bladder control
problems are similar to many feminine hygiene products, which can be bulky
and do not prevent side seepage when a person is moving or sitting down. The
Company has not designed products for the incontinence sufferer, usually
bedridden individuals, who require products for heavier bladder control and
protection for bed linen.

The Company believes that the daily cost of using Rejoice incontinence
products is significantly less than the cost of using competing brand name
disposable diapers, belted undergarments and guards. The Company's products
incorporate a two-piece incontinence management system which includes a
reusable light-weight cotton pant specifically designed to look and feel like
conventional underwear and a disposable, highly absorbent, thin liner. The
liner fits securely into a patented channel in each pant which the Company
believes provides reliable protection against side seepage even when the
wearer is moving or sitting down. The Company's pants are manufactured in a
pull-on style and are available in men's, women's, boy's and girl's sizes.

The Company believes that the performance of its two-piece incontinence
management system with the proprietary channel design and high absorbency
characteristics of its disposable liner is significantly better than other
incontinence products. The Company believes that its channel technology and
superabsorbent polymer liner offer the following advantages:

PANT CHANNEL TECHNOLOGY. The Company's proprietary pant design, with a
built-in fabric channel or "Safety Splash Guard" at the crotch of each pant,
is designed to hold the liner in place. In addition, the channel may contain
some excess fluid prior to absorption by the disposable liner especially when
the wearer is walking or sitting. The channel is made of a fluid-resistant
fabric that is heat sealed at the seams, not simply stitched, to help protect
against leakage. In November 1994, the Company was issued a United States
patent for its channel design. See "Patents, Trademarks and Proprietary
Rights."

SUPERABSORBENT POLYMER LINER. The other component of the Company's
two-piece incontinence management system is a highly absorbent disposable
liner. The raw material for the liner is supplied under an agreement, which
expires in August 2003 and is exclusive with respect to the supply of liners
for a two-piece pant and liner system. The liner contains airlaid non-woven
paper throughout, with thermally bonded superabsorbent polymers ("SAPs") that
have been dispersed to

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increase product strength, absorbency and surface dryness. The thermal
bonding of the SAPs keeps the liner from bunching and crimping when the liner
is wet, which allows the entire liner (not just the surface like most
incontinence products that use SAPs) to retain its shape over longer periods
of time, benefiting individuals who may not be able to change frequently.
The SAPs used in the liner are designed to contain moisture within the liner
even when pressure is applied from sitting for long periods. This
superabsorbent design feature assists in the reduction of moisture, allowing
the wearer to maintain a higher degree of dryness and comfort while reducing
the potential for diaper rash and odor. In addition to the liners' absorbency
features, the Company's liners are substantially smaller in size than
conventional disposable diapers used for urinary incontinence.

The Company currently offers for sale the following Rejoice products
specifically designed for the adult and children's incontinence markets:

REJOICE. Rejoice, the Company's principal product, is a men's and
women's pull-on pant with an 11-inch disposable liner. Rejoice pants have
been designed to look and feel like conventional underwear. Rejoice is
targeted for more active people presently using a full-sized disposable
diaper, belted undergarment or guard in a consumer outpatient setting. Other
users of Rejoice include patients within a home healthcare or outpatient
rehabilitation setting, disabled individuals, especially people using
wheelchairs, individuals with disease-related incontinence and individuals
recovering from a stroke or who have serious arthritis and cannot manage a
disposable diaper or standard pull-on underwear by themselves. Rejoice is
available in several discreet, non-bulky pull-on cotton pant sizes and
complementary liner that are easy to change and offer enhanced leg mobility
while providing leak protection to people with disabilities.

REJOICE EXTRACARE. Rejoice ExtraCare is an 18-inch disposable liner
product designed as an enhancement for disposable or reusable diaper products
worn by bedridden patients. Rejoice ExtraCare can be used as a substitute for
other diaper enhancement products such as disposable bed sheets or "chux".

REJOICE FOR CHILDREN. Rejoice for Children is a line of pant products
for older children with incontinence due to disease, birth defects or
enurisis. Each Rejoice for Children pant, in either boys' or girls' sizes, is
designed to accommodate either Rejoice 11-inch or the Rejoice ExtraCare
18-inch liner. Historically, parents of these older children with specialized
needs have purchased smaller-sized adult diapers, reusable training pant
products, disposable bed sheets, plastic underpads for protection or have
used baby diapers to be placed inside a plastic pant.

OTHER PRODUCTS

The Company has developed a toddler toilet training product which
incorporates the Company's two-piece incontinence system. The product was
designed for boys and girls aged 18 months to four years to ease the
transition from diapers to conventional underwear. The Company believes that
the commercialization of its toilet training products will require the
expenditure of greater resources for marketing and advertising than its
Rejoice products because of the highly competitive nature of the market.
Accordingly, the Company is seeking a licensing or joint venture partner or
partners to assist in bringing this product line to the national and
international retail markets. There is no assurance that the Company will be
able to locate a suitable partner or that this product line will be
successfully brought to market.

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SALES AND MARKETING

The Company's marketing efforts for the Rejoice products are focused
both in the retail and the healthcare markets. The Company has developed and
is implementing different marketing strategies for the retail and healthcare
segments of its business. For the retail side of the Company's operations,
the Company has organized a nationwide network of brokers or manufacturers'
representatives who assist in securing meetings with buyers and monitor store
placement and sale activity. With regard to certain healthcare markets in
the United States, the Company has packaged its basic Rejoice pant and liner
product into a more suitable package for healthcare market distribution
through hospital supply companies and drug wholesalers.

RETAIL MARKET. The Company has focused on sales to the ultimate
end-user or the consumer who purchases incontinence products for a family
member. To gain market share in the growing outpatient consumer market, the
Company is concentrating on establishing, through its nationwide network of
brokers and manufacturer representatives, distribution relationships with
drug store chains, grocery store chains which offer pharmacy services and
retail chains. In addition, the Company seeks to establish direct
distribution through various catalog companies, drug wholesalers and
independent pharmacies. The Company also has arrangements with several mail
order suppliers of healthcare products to service home consumers who call the
Company for immediate product delivery because they live too far away from
retail or drug stores that sell Rejoice or are homebound.

The Company began selling Rejoice in retail locations in the United
States in September 1995, and the product is now available in several drug
chains, independent pharmacies, and surgical supply stores including
Walgreens, SAV-ON, OSCO, K&B-Rite Aid, Thrifty-Pay Less (renamed Rite Aid),
Long's Drug Stores, Bartell's, Genovese, Hills and others. As is customary
in the industry, the Company does not have any supply agreements with any of
such stores. There is no assurance that the number of retail accounts will be
maintained or continue to grow or that Rejoice will gain long-term market
acceptance in the varied retail markets, which are very competitive.
Consolidation of drug store chains, which has happened in the past, could
result in the Company having a small number of customers that, on an
individual basis, account for a significant percentage of the Company's
revenues, the loss of any of which could have a material adverse effect on
the Company.

The Company intends to continue to aggressively try to appeal to home
consumers with light and moderate incontinence. The Company is also targeting
individuals recovering from surgery, with neurological diseases, women with
interstitial cystitis and other chronic bladder infections, and individuals
with spinal injuries. These individuals are likely to have permanent rather
than temporary incontinence problems and require greater daily usage of
liners than individuals with very light or light incontinence.

The Company is seeking to educate the home consumer through public
relations, print and radio advertising, free liner samples and literature
programs, pharmacist education programs, attendance at consumer-based trade
shows and referrals from medical professionals.

HEALTHCARE MARKETS. The primary market for healthcare sales of
incontinence products is to inpatient and outpatient hospital facilities,
rehabilitation facilities, home healthcare providers, nursing homes, hospice
centers and surgical supply stores. The Company's marketing strategy for the
healthcare market is to sell its products through hospital distribution
companies, home healthcare

<PAGE>

companies, medical/surgical suppliers and distributors, durable medical
equipment ("DME") suppliers and hospital buying groups.

The Company is targeting healthcare accounts, which serve patients
during recovery and rehabilitation. Rejoice is being positioned as a more
dignified, comfortable product, which does not restrict or discourage patient
movement or participation during physical therapy.

The Company is marketing various Rejoice products to healthcare markets
through trade show participation, direct mail of product information to
physicians' offices and healthcare buyers, the marketing support of the
Company's medical advisory board and public relations activities. To date,
sales to the healthcare market have not been material. There is no assurance
that the Rejoice products will gain acceptance in the varied healthcare
markets, which are very competitive.

MARKETING PROGRAMS. The Company expects to devote funds to advertising
and educating members of the medical community and home consumers about the
product advantages of Rejoice. The marketing activities are expected to
include, but not be limited to, providing direct mail product information
when requested by urologists, gynecologists, gerontologists and home
healthcare specialists, trade show attendance, delivery of product samples to
home consumers, store and product brochures and appropriate press releases to
the media. The Company also expects to use a portion of its marketing
resources for medical community promotional materials and institutional
in-service training programs.

MANUFACTURING AND FULFILLMENT

In order to devote more of its resources to sales and in an effort to
maintain a streamlined system of operations and product delivery, the Company
"outsources" certain processes and functions, and it expects to continue to
do so for the foreseeable future. The Company currently subcontracts
production of pants in Mexico and conversion of thermally-bonded raw liner
material in the United States.

The Company subcontracts its production of pants in Mexico (Teycon s.a.
de c.v.). The Company has been advised by the Mexican subcontractor that it
has the capacity to produce 90,000 pants per month, which it can expand to
meet any foreseeable demand by the Company. Although the Company has made
the strategic decision to subcontract its pant manufacturing, it is not
dependent on any single contractor and believes it could quickly commence
production with other manufacturers in Mexico, Puerto Rico, Taiwan or China.

LINER MANUFACTURING AND CONVERSION. The raw material for the Company's
liners is manufactured in an airlaid thermal bonding process using SAPs.
This process creates cloth-like products made from natural cellulose fibers
that are stronger, softer and more absorbent than other conventional wet laid
paper products. In the airlaid process, wood pulp is dried into individual
fibers, transported by air (rather than water as in conventional papermaking)
and then deposited uniformly with the assistance of a vacuum. Once the
fibers are laid uniformly, the rest of the paper making process concentrates
on progressively strengthening the material through compression under heat
and pressure and the application of adhesive binders. The use of an airlaid
process allows multi-layer introduction of SAPs uniformly over the entire
liner product.

<PAGE>

The raw material for the Company's liners is manufactured under a supply
agreement, which expires in August 2003 with Buckeye Cellulose Corporation,
formerly known as Merfin Hygienic Products Ltd. ("Buckeye"), a leading
producer of air-laid paper. Under the Buckeye agreement, the Company is
required to meet certain annual minimum purchase requirements, and until such
minimums are met, is required to purchase all of its requirements from
Buckeye. The price at which the Company is entitled to purchase the material
from Buckeye is negotiated on an annual basis. The agreement provides that
Buckeye may not sell its SAP raw material to any other company that uses a
two-piece system incorporating a liner, thereby making the agreement
exclusive for the Company's purposes. To date, the Company has not met its
annual minimum purchase requirements, and Buckeye could, as a result,
terminate the agreement. However, Buckeye has continued to accept purchase
orders from the Company and has indicated its willingness to continue to
build its own sales revenues through its relationship with the Company. To
date, the Company has not encountered any difficulties in obtaining its
requisite supply of liner raw material from Buckeye, and the Company believes
Buckeye's capacity to provide raw material for the Company's product liners
will be sufficient to meet the Company's needs for the foreseeable future.
In addition to the supply arrangement, the Company expects that Buckeye's
research and development department will work with the Company in the future
on further product improvements.

The Company believes that there are alternative sources of the liner raw
material available from a limited number of suppliers. Accordingly, the
Company believes that a termination of its supply arrangement with Buckeye
would not have a material adverse impact on the Company's operations or
financial results.

The liner rollstock material produced by Buckeye is shipped to
subcontractors in the United States where it is converted into finished
liners according to the Company's specifications. The process of liner
conversion involves slitting the finished rolls of raw materials into
designated liner lengths, covering each liner with a soft cotton-like
coverstock, adding a self-adhesive strip to each liner and packaging the
liners for shipment to one of the company's fulfillment centers in
Harrisburg, Pennsylvania, Sparks, Nevada, Dallas, Texas or in Vancouver,
Canada. See " - Warehousing and Shipping."

The Company's liners have been converted by two conversion companies in
the United States, both of whom have advised the Company that they have ample
capacity to satisfy the Company's liner conversion needs. There are several
companies located in the United States who could perform liner conversion
services for the Company.

WAREHOUSING AND SHIPPING. The Company currently uses various companies
for warehousing and shipping (fulfillment) services in Harrisburg,
Pennsylvania, Sparks, Nevada, Dallas, Texas and Vancouver, Canada. However,
the Company believes that there are numerous options for obtaining
warehousing and fulfillment services and that it would not be difficult to
make arrangements for additional or different service providers.

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RESEARCH AND DEVELOPMENT

In prior years, the Company has devoted time and financial resources to
research and development activities to develop its current products and
improvements to those products. These costs have declined in recent years,
with expenditures of $ 8,679 and $48,053 in 1997 and 1998, respectively. The
Company does not anticipate that research and development will represent a
significant portion of its expenses in the future.

BACKLOG

The Company generally ships within three to ten days of receipt of a purchase
order depending upon the size of the order. Accordingly, backlog is not
significant for the Company.

COMPETITION

The disposable incontinence products industry is highly competitive and
consists of several large and medium sized companies as well as numerous
smaller companies. Many of the Company's competitors have financial,
marketing and other resources substantially greater than those of the
Company's, as well as a substantially longer history of operations than the
Company. Competition in the industry is generally based on price,
performance and comfort. The Company believes that its ability to compete
depends on elements both within and outside its control, including the
success and timing of new product developments by the Company and its
competitors, product performance and price, distribution and customer
service. The Companies believes that its competitive position is based
primarily on the characteristics of its products which represent an
improvement over plastic-cased diaper products in terms of consumer comfort
and dignity, cost, product discretion and protection against side seepage.
Although the Company believes it offers products with price and performance
characteristics competitive with other manufacturer's products, there is no
assurance that products can be developed, manufactured or marketed
successfully in the future. In order to be successful, the Company must
continue to respond promptly and effectively to its competitors' innovations.
There is no assurance that the Company will be able to compete successfully
in the disposable incontinence products industry.

The retail market is dominated by major national brand product
manufacturers including Kimberly Clark's Depend-Registered Trademark- and
Poise-Registered Trademark- brands, Johnson & Johnson's Serenity-Registered
Trademark- brand and Proctor & Gamble's Attends-Registered Trademark- brand.
In addition to these companies which collectively dominate the market, the
retail market for disposable incontinence products is made up of medium sized
and small companies, as well as a small, but fast growing, private label
segment currently dominated by Confab, Inc.

Proctor & Gamble Company, Kimberly Clark Corporation and INBRAND
Corporation dominate the healthcare market. Several medium sized and
numerous smaller firms account for the balance of the healthcare market.

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PATENTS AND TRADEMARKS

In November 1994, the U.S. Patent and Trademark Office issued a patent
to the Company covering the Company's channel pant design, that expires on
July 30, 2012. Management believes that favorable rulings on certain patent
claims will help protect against new entrants into the combination two-piece
incontinence and training pant market with similar designs that specifically
guard against side-seepage.

There is no assurance that additional products that the Company develops
will be patentable, that the issued patent will provide the Company with any
competitive advantages or will not be challenged by any third parties, or
that the patents of others will not have an adverse effect on the Company's
business. Furthermore, there is no assurance that competitors will not be
able to design around the Company's patented products or develop or acquire
substantially equivalent trade secrets and proprietary technology independent
of the Company. Competitors of the Company may have filed applications for,
or may have received patents and may obtain additional patents and
proprietary rights relating to products that compete with those of the
Company. Litigation and other proceedings, which could result in substantial
cost to the Company, may be necessary to enforce any patents issued to the
Company to determine the scope and validity of third party proprietary
rights. In addition, there is no assurance that any patents issued to the
Company will not be challenged, invalidated or circumvented, or that the
rights granted thereunder will provide proprietary protection or commercial
advantage to the Company.

The Company uses a number of trademarks and logos in connection with the
sale and advertising of its products. The Company believes that its
trademarks and logos are of considerable value to its business and intends to
continue to protect them to the fullest extent possible.

The Company also relies upon trade secrets, know-how, improvements to
technology, confidentiality agreements and the pursuit of collaborative and
licensing opportunities to develop and maintain its competitive positions.
Although the Company protects its proprietary technology in part by
confidentiality, agreements with its employees, consultants and certain
contractors, there can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach or that
the Company's trade secrets will not otherwise become known or be
independently discovered by its competitors.

EMPLOYEES

As of March 31, 1998, the Company employed approximately 15 persons on a
full-time basis. Of these employees, 7 are employed in operations and
marketing, 5 in sales and 3 in administration and finance. In addition, the
Company employs approximately 10 on a part-time basis. These employees
largely perform customer service, marketing and administrative functions for
the Company. The Company does not have a collective bargaining agreement
with any of its employees, and the Company considers its employee relations
to be satisfactory.

ITEM 2. DESCRIPTION OF PROPERTIES

The Company maintains its executive and marketing office at 200 First
Avenue West, Suite 200, Seattle, Washington. The office, covering
approximately 4,800 square feet, is rented pursuant to a lease from First
Avenue West Building LLC, which, to the best of the Company's knowledge, has
no

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affiliation with any of the officers, directors or principal stockholders of
the Company. The lease expires in July 2000, and the annual base rent is
$76,895 ($6,408 per month).

ITEM 3. LEGAL PROCEEDINGS

None.

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

The Company did not submit any matters to a vote of its security holders
during the fourth quarter of the fiscal year ending March 31, 1998.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

(a) (1) MARKET INFORMATION

The Company's Common Stock traded on the Vancouver Stock Exchange
("VSE") under the symbol "CPI" since January 1994, following its merger with
FWCC Merger Corp., and under the symbol "CRP" since June 16, 1997, and under
the symbol "CPM" since November 4, 1997, and has also traded on the OTC
Bulletin Board under the symbol "CGPD" since August 14, 1997 and under the
symbol "CGPDD" from October 21, 1997 through November 20, 1997, and
commencing November 21, 1997, under the symbol "CGPD". On December 15, 1997,
the Common Stock began trading on the Nasdaq SmallCap Market under the symbol
"BDRY".

The following table sets forth the high and low closing prices for the
Common Stock on the VSE for the periods indicated (i) stated in Canadian
dollars and, except as noted, without giving effect to the Reverse Stock
Splits and (ii) as adjusted, in U.S. dollars and retroactively giving effect
to the Reverse Stock Splits.

<TABLE>
<CAPTION>
AS ADJUSTED
ACTUAL (Cdn.$) (US$) (1)
-------------- -------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
Fiscal Year Ended March 31, 1996
First Quarter . . . . . . . . . . . . . . . . . . . . . . $1.61 $1.56 $27.28 $26.43
Second Quarter . . . . . . . . . . . . . . . . . . . . . 1.65 .86 27.95 14.57
Third Quarter. . . . . . . . . . . . . . . . . . . . . . 1.32 .85 22.36 14.40
Fourth Quarter. . . . . . . . . . . . . . . . . . . . . . 1.25 .98 21.18 16.60
Fiscal Year Ended March 31, 1997
First Quarter . . . . . . . . . . . . . . . . . . . . . . $1.25 $ .50 $21.18 $ 8.47
Second Quarter . . . . . . . . . . . . . . . . . . . . . .97 .65 16.43 11.01
Third Quarter . . . . . . . . . . . . . . . . . . . . . . 1.10 .38 18.64 6.44
Fourth Quarter. . . . . . . . . . . . . . . . . . . . . . 1.00 .52 16.94 88.16
Fiscal Year Ended March 31, 1998
First Quarter through June 16, 1997 . . . . . . . . . . . $ .85 $ .51 $14.40 $ 8.64
First Quarter from June 17, 1997(2) . . . . . . . . . . . 4.00 2.50 11.29 7.06
Second Quarter(2) . . . . . . . . . . . . . . . . . . . . 3.00 1.10 8.47 3.11
Third Quarter(3)(4) . . . . . . . . . . . . . . . . . . . 7.00 1.50 19.77 10.87
Fourth Quarter through January 23, 1998(3)(4)(5). . . . . 5.00 4.80 14.12 13.55

</TABLE>

<PAGE>

(1) Canadian dollars have been converted at the noon buying rate on March
31, 1998 of U.S.$1.00 = Cdn. $1.4166. These adjusted prices are not
indicative of what the price might have been if the Reverse Stock Splits
had occurred prior to June 16, 1997 or October 20, 1997, as the case may
be, nor is any representation made that the Canadian dollar amounts
could have been, or could be, converted into U.S. dollars at such rate
or at any other rate on March 31, 1998.
(2) Reflects the Reverse Stock Split effected on June 16, 1997.
(3) Reflects the Reverse Stock splits effected on June 16, 1997 and October 20,
1997.
(4) At the request of the Company, the Common Stock was not traded on the
VSE from October 20, 1997 until November 3, 1997 in order to permit the
Company to comply with certain requirements of the VSE, attendant to the
Reverse Stock Split effected on October 20, 1997.
(5) On December 15, 1997, the Company applied to cease trading on the VSE,
which was effective January 23, 1998.

The following table sets forth the high and low bid prices for the Common
Stock on the OTC Bulletin Board for the periods indicated. All prices are
stated in U.S. dollars and reflect the Reverse Stock Splits as indicated.

<TABLE>
<CAPTION>
ACTUAL
HIGH LOW
---- ---
<S> <C> <C>
Fiscal Year Ending March 31, 1997
Second Quarter from August 14, 1997 through September 30, 1997(1) . . . . . . $1.88 $1.00
Third Quarter through October 20, 1997 (1). . . . . . . . . . . . . . . . . . 1.63 1.13
Third Quarter from October 21, 1997 through December 15, 1997(2). . . . . . . 6.50 2.625
</TABLE>

- ---------
(1) Reflects only the Reverse Stock Split effected on June 16, 1997.
(2) Reflects the Reverse Stock Splits effected on June 16, 1997 and October 20,
1997.

The following table sets forth the high and low bid prices for the Common
Stock on the Nasdaq SmallCap Market for the periods indicated. All prices
are stated in U.S. dollars:

<TABLE>
<CAPTION>
ACTUAL
HIGH LOW
---- ---
<S> <C> <C>
Fiscal Year Ending March 31, 1998
Third Quarter from December 15 through December 31, 1997. . . . . . $3.87 $3.00
Fourth Quarter . . . . . . 4.00 2.625
</TABLE>

On June 10, 1998, the closing price of the Common Stock on the Nasdaq
SmallCap Market was $2.00.

(a) (2) RECENT SALES OF UNREGISTERED SECURITIES

No securities that were not registered under the Securities Act of 1933
as amended (the "Act") have been issued or sold by the Registrant within the
past three years, except as described below. The share information below does
not reflect the Reverse Stock Splits except as otherwise noted.

<PAGE>

1. On April 28, 1995, the Registrant issued an aggregate of 50 units,
for aggregate gross proceeds of $2,500,000. Each unit consisted of one
$50,000 12% convertible secured promissory note and one two-year warrant
entitling the holder to purchase up to 7,000 shares of Common Stock at an
exercise price of $0.05 per share until the first anniversary of issuance and
$.01 per share thereafter. The units were issued to the following accredited
investors:

<TABLE>
<CAPTION>
NUMBER OF UNITS
NAME OF INVESTOR PURCHASED AMOUNT INVESTED
- ---------------- --------------- -------------------
<S> <C> <C>
HUB, Inc. (1) 10 $ 500,000
Harold G. Goodman
1984 Grantor
Trust (2) 5 250,000
Thomas M. Vertin 10 500,000
Stirling Unit Trust (3) 25 1,250,000
</TABLE>

- ---------------
(1) The beneficial owners include Charles E. Underbrink and Douglas E. Heitne.
(2) The beneficial owners include H. Greg Goodman and Alan D. Feinsilver.
(3) No one person holds a greater than 10% beneficial ownership interest in the
Stirling Unit Trust. The settlor of the Trust is the Blake Settlement.

Offers and sales were made in a private offering to sophisticated
investors in reliance upon the exemption provided by Section 4(2) of the Act.
Each investor was furnished with information regarding the offering and the
Registrant and each had the opportunity to verify the information supplied.
Additionally, the Registrant obtained a representation from each investor of
such investor's intent to acquire the securities for the purpose of
investment only, and not with a view toward the subsequent distribution
thereof. The securities bear appropriate restrictive legends.

All of the foregoing offers and sales were made to individuals or entities
that had access to information enabling them to evaluate the merits and risks
of the investment by virtue of their relationship to the Company or their
economic bargaining power. The share certificates representing all shares
issued in non-public offerings were stamped with a legend restricting
transfer of the Common Stock represented thereby, and the Registrant issued
stop transfer instructions to its transfer agent.

2. On September 28, 1995, the Company borrowed $2,500,000 on a secured
basis, and issued warrants to purchase 281,190 shares of Common Stock,
exerciseable at Cdn. $1.20 until October 1, 1996 and at Cdn. $1.38 until
October 1, 1997, on which date the warrants expired unexercised. The lender,
Trimin Enterprises, Inc., is a non U.S. person, the beneficial owners of
which include a widely-held Canadian public company listed on The Toronto
Stock Exchange, the sole beneficial owner of 10% or more of the outstanding
shares of which is James D. Meekison, an Ontario resident. The Company
issued the securities in accordance with Regulation S.

3. On October 5, 1995, the Registrant issued an aggregate 10,000,000
Special Warrants for aggregate gross proceeds of Cdn. $8,775,000
(approximately U.S. $6,500,000) to a total of 11 investors, all of whom are
non-U.S. persons. As of February 27, 1996, the Special Warrants were deemed
converted, for no additional consideration, into 416,667 shares (post Reverse
Stock Splits) and warrants to purchase up to 208,334 additional shares (post
reverse splits) of Common Stock,

<PAGE>

exerciseable at Cdn. $19.44 per share through October 5, 1996 and Cdn. $22.68
per share until October 5, 1997 and, as extended, until October 5, 1998. The
Special Warrants were issued to the following non-U.S. investors:

<TABLE>
<CAPTION>
NUMBER OF SPECIAL
NAME OF INVESTOR WARRANTS PURCHASED AMOUNT INVESTED (CDN.$)
- ---------------- ------------------ -----------------------
<S> <C> <C>
BPI Capital Management Corp. . . . . . . . . . . . 2,577,000 $2,261,317.50
Comite de retraite et des assurance
Collectives (MCPED) . . . . . . . . . . . . . . 905,000 794,137.50
Laurentian American Equity Ltd . . . . . . . . . . 660,000 579,150.00
Laurentian International, Ltd. . . . . . . . . . . 335,000 293,962.50
Robert G. Atkinson . . . . . . . . . . . . . . . . 820,000 719,550.00
James R. Tuer . . . . . . . . . . . . . . . . . . 225,000 197,437.50
Royal Canadian Small Cap Fund . . . . . . . . . . 1,300,000 1,140,750.00
AGF Growth Equity Fund Ltd . . . . . . . . . . . . 1,136,000 996,840.00
Montreal Trust Company of Canada . . . . . . . . . 1,700,000 1,491,750.00
Michael Steele . . . . . . . . . . . . . . . . . . 171,000 150,052.50
Griffith McBurney & Partners . . . . . . . . . . . 171,000 150,052.50
----------- -------------
Total. . . . . . . . . . . . . . . . . . . . . . 10,000,000 $8,775,000.00
----------- -------------
</TABLE>

Offers and sales were made in an offshore transaction to non-U.S.
Persons in reliance upon Regulation S promulgated under the Act. With the
exception of Messrs. Atkinson, Tuer and Steele, all of whom are individuals
and purchased their Special Warrants beneficially, and with the exception of
Montreal Trust Company of Canada, each of the purchasers is a widely-held
Canadian investment fund which, the Company believes, has purchased on behalf
of specific mutual funds. Montreal Trust Company of Canada is a widely-held
federally chartered Canadian trust company which, the Company believes,
purchased on behalf of fully managed accounts for clients.

In connection with this offering, Brenark Securities Ltd., which acted
as agent, was issued a special right (the "Special Right"), which is
exerciseable for warrants to purchase 33,333 shares (post reverse splits) of
Common Stock, at Cdn. $19.44 per share through October 5, 1996 and Cdn.
$22.68 per share from October 5, 1996 to October 5, 1997 and, as extended, to
October 5, 1998. These warrants were also issued pursuant to Regulation S.

On May 5, 1998, the Company reduced the exercise price of the Special
Warrants to $1.875 per share (representing the closing price per share of the
common stock on that date). In addition, the number of shares entitled to be
purchased were increased as follows:

<TABLE>
<CAPTION>
NAME OF INVESTOR NUMBER OF WARRANTS
- ---------------- ------------------
<S> <C>
Brant Investments Limited c/o Royal Trust
Corp. of Canada . . . . . . . . . . . . . . . . . 18,186
Robert G. Atkinson. . . . . . . . . . . . . . . . . . 13,372
RBC Dominion Securities, Inc. ITF A/C 214
Robert G. Atkinson . . . . . . . . . . . . . . . .
Brenark Securities Ltd. . . . . . . . . . . . . . . . 8,558
Roytor & Co. c/o The Royal Bank of Canada 23,288
Michael Steele . . . . . . . . . . . . . . . . . . . . 1,830
James R. Tuer . . . . . . . . . . . . . . . . . . . . 2,407
-------
Total . . . . . . . . . . . . . . . . . . . . . . . 67,855
-------
</TABLE>

<PAGE>

4. On May 8, 1997, the Company obtained an additional bank line of
credit and issued to the guarantor thereof, Bradstone Equity Partners Inc.
(f/k/a H.J. Forest Products Inc.), warrants to purchase 31,667 shares (post
reverse splits) of Common Stock at $7.44 per share at any time until May 8,
1998 and thereafter at $8.64 per share until May 8, 1999. Bradstone Equity
Partners Inc. is a Canadian publicly held corporation. These warrants were
issued pursuant to Regulation S. On May 5, 1998, the Company reduced the
exercise price of the Special Warrants to $1.875 per share (representing the
closing price per share of the common stock on that date).

5. From time to time during the past three years, the Company has
granted options and issued warrants to officers, directors and employees of
the Company. The grants of options have been made at exercise prices ranging
from $12.00 to $24.00 per share and the grants of warrants have been made at
exercise prices ranging from $7.44 to Cdn. $28.80 per share. An aggregate of
537,626 shares of Common Stock has been issued upon exercise of warrants
since March 31, 1995 and no options have been exercised. On May 5, 1998, the
Company canceled and reissued all options outstanding under the 1993 and 1996
Stock Incentive Plans and reduced the exercise price to $1.875 per share
(representing the closing price per share of the common stock on that date).
To the extent options or warrants have been issued by the Company to U.S.
persons, they have been issued to sophisticated investors pursuant to the
exemption for transactions not involving a public offering provided in
Section 4(2) of the Act, and the securities have been appropriately legended.

6. In connection with the settlement of certain litigation, on October
22, 1997, the Company issued to three plaintiffs two-year warrants to
purchase an aggregate of 8,000 shares of Common Stock at an exercise price of
Cdn. $5.04 per share. These warrants were issued to sophisticated investors
pursuant to the exemption for transactions not involving a public offering
provided in Section 4(2) of the Act, and the securities have been
appropriately legended.

7. On December 15, 1997, the Company completed a public offering ("the
Offering") of 1,750,000 units at $5.00 per unit, each unit consisting of one
share of the Company's Common Stock and a five-year warrant to purchase one
additional share at a price equivalent to 150% of the unit price.

8. On May 5, 1998, the Company issued to Bradstone Equity Partners,
Inc. warrants to purchase 50,000 shares of Common Stock at $1.875 per share
at any time until May 4, 2000. Bradstone Equity Partners, Inc. is a Canadian
publicly held corporation. These warrants were issued pursuant to Regulation
S.

(b) HOLDERS

The number of record holders of the Company's Common Stock as of March 31,
1998 was 68.

The Company has never paid a dividend on its Common Stock. It is the
present policy of the Company not to pay cash dividends on the Common Stock.
Any payment of cash dividends on the Common Stock in the future will be
dependent upon the Company's financial condition, results of operations,
current and anticipated cash requirements, plans for expansion, as well as
other factors that the Board of Directors deems relevant.

<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

THE FOLLOWING ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL
CONDITION OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, OF THE COMPANY CONTAINED
ELSEWHERE IN THIS FORM 10-KSB.

OVERVIEW

From the date of the Company's incorporation in November 1992 through
September 1995 when it began marketing Rejoice, the Company was principally
engaged in various activities, including product development, technology
acquisition, recruitment of employees, identification of sources of
subcontracted production, organization of marketing and production
headquarters, market research and testing, trademark and patent filings and
the raising of funds to support the Company's substantial development
expenses. Revenues from various product test-marketing programs in retail,
catalog, direct mail and healthcare markets during that period were nominal.

In order to consolidate the Company's marketing and production
management activities into a single location, the Company moved its
headquarters to Seattle, Washington from New York in August 1995.

Until March 1996, the Company produced pants in its own facility in
Burnaby, British Columbia. Thereafter, the facility provided cutting and
other services to support its Canadian pant subcontractor. The Company
secured a new source of pant production during the fiscal year ended March
31, 1997 from a large underwear manufacturer located in Northern Mexico.
That producer offers the Company a lower per unit pant cost than the
Company's per unit pant cost at its own facility in Canada or through a
Canadian-based pant subcontractor. During Fiscal 1998, the Company closed its
manufacturing facility in Burnaby. The Company anticipates that it will
continue to manufacture its pant and liner products through subcontractors
located in the United States and Mexico.

In September 1995, the Company shipped product to its first drug store
chain for storewide distribution and shelf placement in approximately 300
stores. In each subsequent fiscal quarter the number of drug stores,
independent pharmacies and surgical supply stores that sell the Company's
products has increased.

As discussed below, the fiscal years ended March 31, 1997 and March 31,
1998 were characterized by nominal sales offset by significant expenses
associated with financing, manufacturing and promoting the Company's
products. The Company expects to continue to incur losses during the rollout
of its products to the healthcare, retail and international markets.

<PAGE>

RESULTS OF OPERATIONS

COMPARISON OF THE FISCAL YEAR ENDED MARCH 31, 1997 TO THE FISCAL YEAR ENDED
MARCH 31, 1998

The components of the Company's revenues for the fiscal year ended March
31, 1997 ("Fiscal 1997") and the fiscal year ended March 31, 1998 ("Fiscal
1998") were as follows:

<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Rejoice pants. . . . . . . . . . . . . $ 889,149 $ 743,703
Rejoice liners . . . . . . . . . . . . 1,390,611 1,229,360
Other. . . . . . . . . . . . . . . . . 7,737 -
---------- ----------
Total. . . . . . . . . . . . . . . . . $2,287,497 $1,973,063
---------- ----------
---------- ----------
</TABLE>

Revenues decreased from $2,287,497 in Fiscal 1997 to $1,973,063 in
Fiscal 1998, a decrease of 14%. During Fiscal 1997, the Company increased
the number of retail outlets carrying the Rejoice products through
broad-based promotional activities to support brand introduction and consumer
awareness of the brand. The Company shipped initial orders to two large drug
chains during Fiscal 1998. These orders were shipped during the first and
fourth quarters when advertising programs were in effect. However, during
the second and third quarters of Fiscal 1998, the lack of cash available for
radio advertising resulted in significantly lower re-order activity. The
Company reinstated its radio advertising program late in the fourth quarter
of Fiscal 1998, and as such, did not have sufficient time to positively
impact the fiscal year end results. There was no significant change in the
Company's pricing to its customers from Fiscal 1997 to Fiscal 1998. The
average consumer needs to purchase more disposable liners than reusable
pants; therefore, total liner sales are expected to continue to be higher
than pant sales.

Cost of sales decreased from $1,727,607 in Fiscal 1997 to $1,322,375 in
Fiscal 1998, a decrease of 23%. Although the decrease is impacted by lower
sales for Fiscal 1998 compared to Fiscal 1997, the decrease is primarily the
result of the introduction of retail pants produced by the Company's lower
unit priced pant subcontractor in Mexico during the latter part of the
Company's fiscal year ended March 31, 1997. The Company also realized a
significant reduction in Canadian-based production staff and facility costs
during Fiscal 1998. The Canadian manufacturing facility was closed during
the fourth quarter of Fiscal 1998 and these costs will not recur in future
fiscal years. The Company also obtained a lower cost per liner from its
United States liner subcontractor during Fiscal 1998.

Gross profit on sales increased from $559,890 in Fiscal 1997 to $650,688
in Fiscal 1998, an increase of 16%. The increase in gross profit margin
primarily reflects the lower unit priced pant produced in Mexico and the
significant reduction in Canadian-based staff and facility costs. In
addition, the Company paid a lower cost per liner from its United States
liner subcontractor. Gross profit margins were also impacted by the mix
between healthcare and retail sales and the sale of the remaining inventory
produced in Canada, which has a lower gross profit margin. Gross profit
margins

<PAGE>

may fluctuate in the future depending on changes in the mix of products sold
the mix of sales distribution channels and other factors such as the sale of
inventory with lower gross profit margins.

Total operating expenses increased from $3,362,288 in Fiscal 1997 to
$3,721,927 in Fiscal 1998, an increase of 11%. The increase was primarily
attributable to increased participative promotional expenses such as
chain-specific in-store programs, the absorption of set-up costs for retail
customers, expenses associated with initial market testing within the
healthcare market, and higher inventory storage costs. The Company also had
increased legal fees associated with the settlement of all outstanding
lawsuits, and increases in administrative expenses.

Selling costs increased 5% from $2,083,173 in Fiscal 1997 to $2,197,210
in Fiscal 1998. The increase was primarily attributable to increased
promotional expenses for chain-specific in-store programs for large retail
customers, and the absorption of significant start-up costs for new chain
customers. These costs include slotting fees, listing allowances, and one-
time merchandising racks and trays. The Company also incurred higher expenses
in association with training and marketing activities within the healthcare
market, and higher inventory storage costs resulting from higher inventory
levels caused by lower than anticipated levels of sales.

General and administrative expenses increased 17% from $1,198,148 in
Fiscal 1997 to $1,406,035 in Fiscal 1998. The increase in general and
administrative expenses was primarily the result of increased legal fees
associated with the settlement of all of the Company's outstanding
litigation. In addition, accounting fees were substantially higher than
anticipated during Fiscal 1998, as well as increased operating costs
associated with the improvement in the Company's accounting and computer
systems.

The Company generated $163,986 in interest income during Fiscal 1997 as
compared to $104,245 during Fiscal 1998, a decrease of 36%. The decrease in
interest income is attributable to lower average deposit balances. Interest
expense increased from $204,203 in Fiscal 1997 to $384,666 in Fiscal 1998, an
increase of 88%. The increase in interest expense related to the increase in
short-term and long-term borrowing, as well as the recognition of the
unamortized deemed interest as expense upon the repayment of borrowings under
the Company's line of credit in December 1997.

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically financed its operations through private
placements of its equity securities as well as various debt financing
transactions. During Fiscal 1996, the Company received net proceeds of
$5,707,123 from the sale of 416,667 special warrants (the "Private
Placement"). During Fiscal 1996, the Company supported its operations from
the proceeds of several small borrowings and incurred short-term debt of $2.5
million in the form of promissory notes issued together with warrants as part
of a bridge financing. These notes were subsequently repaid with the
proceeds of a short-term secured promissory note issued by the Company to a
single investor in September 1995. In October 1995, the Company secured a
revolving line of credit in the amount of $2.5 million from Seattle First
National Bank and repaid the secured promissory note issued in September
1995. The loan bore interest at 6.91% per annum, payable monthly, and was
secured by a deposit of $2.5 million. The loan was repaid in full in July
1997.

During Fiscal 1997, the Company supported its operations from various
short-term, unsecured borrowings from related parties, which totaled $571,300
at March 31, 1997. In April 1997, $366,300 of such borrowings were repaid
and the $205,000 balance of such borrowings was repaid in June 1997, in both
cases using proceeds received from the Company's bank line of credit.

<PAGE>

In April 1997, Bradstone Equity Partners Inc., f/k/a/ H.J. Forest
Products Inc. ("Bradstone"), guaranteed a Cdn. $1.75 million credit facility
for the Company from the Toronto Dominion Bank. In July 1997, the guarantee
was increased by $1.25 million to an aggregate of approximately $3 million.
The guarantee was through April 1, 1998. Borrowings under the line of
credit bore interest at the Canadian prime rate plus .25% and were due on
demand. The Company issued to the guarantor warrants to purchase 31,667
shares of Common Stock exercisable at $7.44 per share at any time until May
8, 1998 and thereafter at $8.64 per share until May 8, 1999. The warrants
were recorded on issuance at their estimated fair market value of $163,592
with a corresponding reduction in the recorded value of the line of credit.
The debt discount was being amortized to interest expense over the term of
the line of credit. In May 1997, the Company borrowed $780,000 out of a
total possible draw down of $1.25 million under a note payable to Bradstone.
In July 1997, the Company received the remaining $470,000 under the note
payable to Bradstone. Interest was payable thereunder at the Canadian prime
rate plus 3% and the principal was due in May 1998. In December 1997, the
note payable to Bradstone was repaid, including accrued interest of $65,983.

In October 1997, Paulson Investment Company, Inc. ("Paulson"), one of
the representatives of the underwriters of the Company's public offering
completed in December 1997, made a $200,000 non-interest bearing loan to the
Company, and, in November 1997, Paulson made a $350,000 non-interest bearing
loan to the Company. The loans were to be repaid by the Company out of the
net proceeds of the public offering. The Company repaid these loans in
December 1997.

On December 15, 1997, the Company completed a public offering ("the
Offering") of 1,750,000 units at $5.00 per unit, each unit consisting of one
share of the Company's common stock and a five-year warrant to purchase one
additional share at a price equivalent to 150% of the unit price. Proceeds
from the Offering were $6,823,972, net of offering costs.

As of March 31, 1998, the Company's principal sources of liquidity included
cash of $3,415,569, net accounts receivable of $600,795 and inventories of
$2,263,333. The Company's operating activities used cash of $3,061,440 for
the year ended March 31, 1998. The increase in accounts receivable and
accounts payable and decrease in inventory reflects the Company's maintenance
of relatively unchanged levels of sales and operations. The Company
anticipates that the levels of both inventories and accounts receivable will
vary commensurate with the Company's sales and, if sales increase, may
negatively impact cash resources.

OTHER MATTERS

<PAGE>

DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

During 1998, the Company adopted the provisions of SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS
131") which establishes standards for the way public business enterprises are
to report information about operating segments in annual financial statements
and requires those enterprises to report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes the related disclosures about products and services, geographic
areas, and major customers. The adoption of SFAS 131 had no significant
impact on the Company's consolidated financial statements.

<PAGE>

FORWARD LOOKING STATEMENTS

This Form 10-KSB and other reports and statements filed by the Company
from time to time with the Securities and Exchange Commission (collectively
the "Filings") contain or may contain forward-looking statements and
information that are based upon beliefs of, and information currently
available to, the Company's management, as well as estimates and assumptions
made by the Company's management.

When used in the Filings, the words "anticipate", "believe", "estimate",
"expect", "future", "intend", "plan" and similar expressions, as they relate
to the Company or the Company's management, identify forward-looking
statements. Such statements reflect the current view of the Company with
respect to future events and are subject to risks, uncertainties and
assumptions relating to the Company's operations and results of operations,
competitive factors and pricing pressures, shifts in market demand, the
performance and needs of the industries which constitute the customers of the
Company, the costs of product development and other risks and uncertainties,
including, in addition to any uncertainties with respect to management of
growth, increases in sales, the competitive environment, hiring and retention
of employees, pricing, new product introductions, product productivity,
distribution channels, enforcement of intellectual property rights, possible
volatility of stock price and general industry growth and economic
conditions. Should one or more of these risks or uncertainties materialize,
or should the underlying assumptions prove incorrect, actual results may
differ significantly from those anticipated, believed, estimated, expected,
intended or planned.

ITEM 7. FINANCIAL STATEMENTS.

The following consolidated financial statements of Caring Products
International, Inc. are included in Item 7:

Consolidated Balance Sheets at March 31, 1997 and 1998.

Consolidated Statements of Operations for the Years Ended March 31, 1997
and 1998.

Consolidated Statements of Stockholders' Equity for the Years Ended
March 31, 1997 and 1998.

Consolidated Statements of Cash Flows for the Years Ended March 31, 1997
and 1998.

Notes to Consolidated Financial Statements.

<PAGE>

CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES

Consolidated Financial Statements

March 31, 1997 and 1998

(With Independent Auditors' Reports Thereon)

<PAGE>

INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------

The Board of Directors
Caring Products International, Inc.

We have audited the accompanying consolidated balance sheet of Caring
Products International, Inc. and subsidiaries as of March 31, 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.

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

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

/s/ GRANT THORNTON LLP
Seattle, Washington
June 19, 1998

<PAGE>

INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------------------

The Board of Directors
Caring Products International, Inc.

We have audited the accompanying consolidated balance sheet of Caring
Products International, Inc. and subsidiaries as of March 31, 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Caring
Products International, Inc. and subsidiaries as of March 31, 1997, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.

/s/ KPMG Peat Marwick LLP
Seattle, Washington
June 13, 1997

<PAGE>

CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended March 31, 1997 and 1998

1997 1998
- -------------------------------------------------------------------
<S> <C> <C>
Revenues $ 2,287,497 $ 1,973,063
Cost of sales 1,727,607 1,322,375
----------------------------
Gross profit 559,890 650,688
----------------------------

Operating expenses:
Selling 2,083,173 2,197,210
General and administrative 1,198,148 1,406,035
Research and development 8,679 48,053
Amortization and depreciation 72,288 70,629
----------------------------

Total operating expenses 3,362,288 3,721,927
----------------------------

Loss from operations (2,802,398) (3,071,239)
----------------------------

Other income (expense):
Interest income 163,986 104,245
Interest expense (204,203) (384,666)
Other, net (62,271) (101,020)
----------------------------
(102,488) (381,441)
----------------------------
Net loss $ (2,904,886) $ (3,452,680)
----------------------------
----------------------------

Net loss per common share $ (2.94) $ (2.24)
----------------------------

Weighted average common shares 987,014 1,539,562
----------------------------
----------------------------

</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31, 1997 and 1998

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
1997 1998
- ---------------------------------------------------------------------
<S> <C> <C>
ASSETS
----------------------------------
Current assets:
Cash $ 118,573 $3,415,569
Restricted cash 2,694,671 -
Accounts receivable, less allowance
for doubtful accounts of $91,694 in
1997 and $23,279 in 1998 625,085 600,795
Inventories 2,432,583 2,263,333
Prepaid expenses 19,041 15,782
------------------------
Total current assets 5,889,953 6,295,479

Equipment, net 251,503 221,245
Intangible assets, net 238,146 204,205
Other assets 8,935 18,041
------------------------
$6,388,537 $6,738,970
------------------------
------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 1,029,418 $ 1,040,096
Accrued liabilities 137,092 49,600
Line of credit 2,500,000 -
Notes payable to related parties 571,300 -
Current portion of lease obligations 13,046 8,770
Current portion of long-term debt 12,126 -
----------------------------
Total current liabilities 4,262,982 1,098,466

Commitments, contingencies and subsequent
events

Lease obligations, less current portion 24,868 10,418
Long-term debt, less current portion 5,485 -
----------------------------
Total liabilities 4,293,335 1,108,884
----------------------------
Stockholders' equity:
Preferred stock, no shares outstanding - -
Common stock, 1,031,343 shares
outstanding at March 31, 1997 and
2,781,343 shares at March 31, 1998 10,314 27,814
Additional paid-in capital 12,716,051 19,686,115
Accumulated deficit (10,631,163) (14,083,843)
----------------------------
Total stockholders' equity 2,095,202 5,630,086
----------------------------
$ 6,388,537 $ 6,738,970
----------------------------
----------------------------
</TABLE>

See accompanying notes to consolidated financial statements.

26
<PAGE>

CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Years ended March 31, 1997 and 1998

Total
Common stock Additional stock
------------------------ paid-in Accumulated holders'
Shares Amount capital deficit equity
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at April 1, 1996 919,551 $ 9,196 $11,208,485 $ (7,726,277) $ 3,491,404

Issuance of common stock for cash on
exercise of warrants 111,792 1,118 1,507,566 - 1,508,684
Net loss - - - (2,904,886) (2,904,886)
------------------------------------------------------------------------
Balance at March 31, 1997 1,031,343 10,314 12,716,051 (10,631,163) 2,095,202

Fair value of warrants issued with line
of credit guarantee - - 163,592 - 163,592
Proceeds from offering of common stock,
net of issuance costs 1,750,000 17,500 6,806,472 6,823,972
Net loss - - - (3,452,680) (3,452,680)
------------------------------------------------------------------------
Balance at March 31, 1998 2,781,343 $27,814 $19,686,115 $(14,083,843) $ 5,630,086
------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>

1997 1998
---------------------------- ----------------------------
Preferred Common Preferred Common
stock stock stock stock
---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
Par value $ 0.01 $ 0.01 Par value $ 0.01 $ 0.01
Authorized 1,000,000 75,000,000 Authorized 1,000,000 75,000,000
Issued - 1,031,343 Issued - 2,781,343
Outstanding - 1,031,343 Outstanding - 2,781,343

</TABLE>

See accompanying notes to consolidated financial statements.

27
<PAGE>

CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended March 31, 1997 and 1998

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
1997 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,904,886) $(3,452,680)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization and depreciation 127,821 94,426
Loss from disposal of equipment - 28,564
Deemed interest - 163,592
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable (344,407) 24,290
Decrease (increase) in inventories (623,591) 169,250
Decrease in prepaid expenses 103,683 3,259
Increase in other assets (8,935) (9,106)
Increase in accounts payable 609,257 10,678
Increase (decrease) in accrued liabilities 58,122 (87,492)
----------------------------
Net cash used in operating activities (2,982,936) (3,055,219)
----------------------------

Cash flows from investing activities:
Capital expenditures (43,555) (72,697)
Acquisition of intangible assets - (3,834)
Proceeds from disposal of equipment - 17,740
----------------------------
Net cash used in investing activities (43,555) (58,791)
----------------------------

Cash flows from financing activities:
Net proceeds from issuance of common stock and
capital contributions 1,508,684 6,823,972
Decrease in restricted cash, net 6,679 2,694,671
(Repayment) of lines of credit - (2,500,000)
Proceeds from long-term debt 25,998 -
Repayment of long-term debt (38,374) (17,611)
Proceeds from notes payable to related parties 571,300 1,994,650
Repayment of notes payable to related parties - (2,565,950)
Repayment of lease obligations (11,642) (18,726)
----------------------------

Net cash provided by financing activities 2,062,645 6,411,006
----------------------------
Increase (decrease) in cash (963,846) 3,296,996

Cash at beginning of period 1,082,419 118,573
----------------------------

Cash at end of period $ 118,573 $ 3,415,569
----------------------------
----------------------------

Supplemental disclosure of cash flow information - cash
paid during the period for interest $ 168,401 $ 384,666
Supplemental schedule of noncash investing and
financing activities:
Capital expenditures included in accounts payable at
end of period $ 68,849 -
Assets acquired through capital leases $ 32,075 -
</TABLE>

See accompanying notes to consolidated financial statements.

28
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1997 and 1998

(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

(a) DESCRIPTION OF BUSINESS

Caring Products International, Inc. (CPI) is organized under the laws
of the state of Delaware. CPI's business is the marketing of
proprietary urinary incontinence products for adults and children over
the age of four, primarily in the United States and Canada.

(b) BASIS OF PRESENTATION

These consolidated financial statements are prepared in accordance
with generally accepted accounting principles (GAAP) in the U.S. and
present the financial position, results of operations and changes in
financial position of CPI and its wholly-owned subsidiaries
(collectively, the "Company"). All material intercompany balances and
transactions have been eliminated in consolidation.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) RESTRICTED CASH

Restricted cash includes a short-term certificate of deposit of
$2,500,000 at March 31, 1997, which was held as security against a
line of credit. The line of credit, against which the certificate of
deposit was security, was paid off during fiscal year 1998. In
addition, $194,671 of short-term Canadian government securities
included in restricted cash were held as collateral for guarantees
made by the Company at March 31, 1997.

(b) INVENTORIES

Inventories are stated at the lower of cost, as determined by the
first-in, first-out method, or market (replacement cost for raw
materials and packaging and net realizable value for finished goods).

Equipment is stated at cost. Equipment under capital leases is stated
at the lower of the fair market value of the assets or the present
value of minimum lease payments at the inception of the leases.

Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets ranging from 2 to 5 years.
Equipment held under capital leases is amortized using the straight-
line method over the shorter of the estimated useful lives of the
assets or the lease terms, ranging from 2 to 5 years.

29
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1997 and 1998

Expenditures for maintenance and repairs are charged to expense as
incurred. Upon sale or retirement, the cost and related accumulated
depreciation or amortization are removed from the accounts and any
resulting gain or loss is reflected in other income or expense.

(d) INTANGIBLE ASSETS

Intangible assets, representing technology purchased and costs of
patents and trademarks, are stated at cost. Amortization is recorded
using the straight-line method over the assets' estimated useful lives
which do not exceed 10 years.

(e) REVENUE RECOGNITION

The Company recognizes revenue and establishes provisions for
estimated product returns when its products are shipped to customers.
Products of the Company held by various third party storage and
delivery companies are not recognized in revenue, but are included in
inventory.

(f) MARKETING AND ADVERTISING

The Company recognizes the production costs of advertising in the
period the services are provided. Costs related to one-time listing
allowances (slotting fees) to enter large, retail chains are expensed
as incurred.

(g) RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred.

(h) FOREIGN CURRENCY TRANSLATION

The Company considers the U.S. dollar to be its functional currency.
The Company has a wholly owned subsidiary, located in Canada.
Accordingly, transactions by the subsidiary denominated in Canadian
dollars are re-measured at the exchange rates in effect at the date of
the transaction. At each balance sheet date, monetary balances
denominated in currencies other than the U.S. dollar are re-measured
using current exchange rates.

Gains and losses resulting from foreign currency transactions are
included in other, net in the consolidated statements of operations.
Gains and losses arising from these transactions for each of the years
ended March 31, include a loss of $44,367 and $73,502 for 1997 and
1998, respectively.

30
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1997 and 1998

(i) INCOME TAXES

The Company follows the asset and liability method of accounting for
income taxes. Under the asset and liability method of accounting for
income taxes, deferred tax assets and liabilities are recognized based
on the estimated future tax consequences attributable to differences
between the financial statement carrying amount of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.

(j) LOSS PER SHARE

The Company adopted Statement of Financial Accounting Standards
No. 128, EARNINGS PER SHARE, ("SFAS 128") in Fiscal 1998. SFAS 128
establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock or
potential common stock.

In accordance with SFAS No. 128, the computation of diluted EPS shall
not assume conversion, exercise, or contingent issuance of securities
that would have an antidilutive effect on earnings per share. SFAS
No. 128 also states that although including those potential common
shares in the other diluted per-share computations may be dilutive to
their comparable basic per-share amounts, no potential common shares
shall be included in the computation of any diluted per-share amount
when a loss from continuing operations exists, even if the entity
reports net income.

Due to the net loss position of the Company, the basic net loss per
common share is the same as the diluted net loss per common share.
Net loss per share is computed based on the weighted average number
of shares of common stock outstanding during the year. In accordance
with SFAS 128, prior year statements have been restated to reflect
adoption of this standard.

31
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1997 and 1998

(k) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

During 1998, the Company adopted the provisions of SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
("SFAS 131") which establishes standards for the way public business
enterprises are to report information about operating segments in
annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial
reports issued to shareholders. It also establishes the related
disclosures about products and services, geographic areas, and major
customers. The adoption of SFAS 131 had no significant impact on the
Company's consolidated financial statements.

(l) USE OF ESTIMATES

The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.

<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1997 and 1998

(3) REVERSE STOCK SPLITS

In June 1997, the Company completed a one-for-six reverse stock split of
its issued and outstanding common stock, and in October 1997, the Company
completed an additional one-for-four reverse stock split of its issued and
outstanding common stock. These consolidated financial statements have
been restated to reflect the reverse stock splits.

(4) CONCENTRATION OF RISK

The Company maintains cash equivalents with various financial institutions
located in the U.S. and Canada. The Company's policy is to limit the
exposure at any one financial institution and to invest solely in highly
liquid investments that are readily convertible to cash.

The Company sells its products to various customers located in the U.S. and
Canada. The Company performs ongoing credit evaluations of its customers'
financial condition, and generally requires no collateral as security
against accounts receivable. Total sales to Canadian customers represented
approximately 25% of total revenues for the year ended March 31, 1997 and
less than 1% of total revenues for the year ended March 31, 1998.

Approximately 48% of the Company's revenues were from two customers
during the year ended March 31, 1998, of which both accounted for
approximately 24% each. During the year ended March 31, 1997, two
customers accounted for approximately 33% of total revenues, one for
approximately 21% and the other for approximately 12%.

At March 31, 1997 and 1998, one customer accounted for approximately 84%
and 75%, respectively, of the net accounts receivable balance, as the
result of an initial purchase near the Company's year-end.

33
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1997 and 1998

The Company currently purchases its products from a limited number of
suppliers, some of which are located in Canada or Mexico. As there are other
manufacturers of products similar to the Company's products, management believes
that other suppliers could provide the company's products on comparable terms.
Management does not believe a change in suppliers would cause a significant
delay in obtaining sufficient product quantities or result in a significant loss
of sales.

(5) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, March 31,
1997 1998
---- ----
<S> <C> <C>
Finished goods $1,848,802 $2,154,395
Work in process - 86,228
Raw materials 553,466 15,409
Packaging 30,315 7,301
--------- ---------
$2,432,583 $2,263,333
--------- ---------
</TABLE>

(6) EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
March 31, March 31,
1997 1998
---- ----
<S> <C> <C>
Computer equipment $103,592 $106,100
Office equipment 43,795 26,762
Plant equipment 234,251 122,445
Leasehold improvements 5,670 5,670
Capital leases:
Plant equipment 36,950 -
Office equipment 40,076 40,076
------- -------
464,334 301,053
Less accumulated depreciation and amortization 212,831 79,808
------- -------
Net equipment $251,503 $221,245
------- -------
</TABLE>

(7) INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
March 31, March 31,
1997 1998
---- ----
<S> <C> <C>
Purchased technology $250,000 $250,000
Patents and trademarks 127,088 130,922
------- -------
377,088 380,922
Less accumulated amortization 138,942 176,717
------- -------
Net intangible assets $238,146 $204,205
------- -------
</TABLE>

34
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1997 and 1998

(8) RELATED PARTIES

At March 31, 1997 and 1998, accounts payable include $68,849 and $8,710 in
payables to related parties, respectively.

During the year ended March 31, 1997, the Company purchased $106,043 in
plant equipment from and paid approximately $72,000 in consulting fees to
related parties. During the year ended March 31, 1998, the Company paid
approximately $56,500 in consulting fees to a related party.

(9) LINE OF CREDIT

At March 31, 1997, the Company had a $2,500,000 line of credit with a bank
expiring August 1997. Borrowings under the line of credit bore interest at
a fixed rate of 6.91%. The line of credit was secured by a $2,500,000
certificate of deposit. The line of credit was repaid in July 1997.

In April 1997, the Company obtained a line of credit with Toronto Dominion
Bank in the amount of Cdn. $1,750,000. Borrowings bore interest at the
Canadian prime rate plus .25%. The Company issued to the guarantor,
Bradstone Equity Partners, Inc., f/k/a H. J. Forest Products, Inc.
("Bradstone"), warrants to purchase 31,667 shares of the Company's Common
Stock. The warrants were recorded on issuance at their estimated fair
market value of $163,592 with a corresponding reduction in the recorded
value of the line of credit. The debt discount was being amortized to
interest expense over the term of the line of credit. In July 1997, the
guarantee was increased by $1.25 million to an aggregate of approximately
$3 million.

The Company repaid borrowings under the line of credit in December 1997
totaling $1,252,715, net of deemed interest of $163,592.

(10) NOTES PAYABLE TO RELATED PARTIES

In May and July 1997, the Company borrowed at total of $1,250,000 under a
note payable to Bradstone. Interest on the note was payable monthly at the
Canadian prime rate plus 2%. In December 1997, the note payable to
Bradstone was repaid, including accrued interest of $65,983.

In October and November 1997, Paulson Investment Company, Inc.,
("Paulson"), one of the representatives of the underwriters of the
Offering, loaned the Company a total of $550,000. The loans were non-
interest bearing and were to be repaid by the Company out of the net
proceeds of the Offering. The Company repaid these loans in December 1997.

(11) LONG-TERM DEBT

Long-term debt at March 31, 1997 consisted of a loan in the principal
amount of $17,611, payable in equal monthly installments of Cdn. $1,767
(U.S. $1,155 at March 31, 1997), including interest at the Canadian prime
rate plus 1%. The Company repaid this loan in December 1997.

35
<PAGE>

CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1997 and 1998

(12) CAPITAL LEASES

The Company leases equipment under capital lease agreements that expire
through December 2002. Aggregate minimum payments to be made under these
agreements at March 31, 1998 are as follows for each of the following
fiscal year-ends:

<TABLE>
<CAPTION>
<S> <C>
1999 $10,229
2000 9,611
2001 1,834
------
21,674
Less amount representing interest at 9% (2,486)
------
$19,188
------
</TABLE>

At March 31, 1997, a capital lease for plant equipment was secured by a
letter of credit in the amount of $20,000. This capital lease was paid off
in December 1997, and the letter of credit was released at that time.

(13) OPERATING LEASES

The Company leases office facilities and certain equipment under operating
lease agreements that expire through November 2000. Aggregate minimum
rental payments to be made under these agreements at March 31, 1998 are as
follows for each of the following fiscal year ends:

Total rent expense for operating leases during the years ended March 31,
1997 and 1998 amounted to $134,176 and $100,889, respectively.

36
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1997 and 1998

(14) STOCKHOLDERS' EQUITY

CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1997 and 1998

(a) Public Offering

On December 15, 1997, the Company completed a public offering ("the
Offering") of 1,750,000 units at $5.00 per unit, each unit consisting
of one share of the Company's common stock and a five-year warrant to
purchase one additional share at a price equivalent to 150% of the
unit price. Proceeds from the Offering were $6,823,972, net of
offering costs. All of the Company's outstanding debt was repaid in
December 1997 with proceeds from the Offering.

(b) WARRANTS

At March 31, 1998, the Company had warrants outstanding to purchase
common shares as follows:

<TABLE>
<CAPTION>
MARCH 31
--------
1997 1998
---- ----
<S> <C> <C>
Warrants issued in conjunction with the Private Placement
whereby one warrant entitles the holder to purchase one
share at Cdn. $22.68 extended until October 5, 1998 135,708 135,708
Warrants issued pursuant to the second short-term loan
whereby one warrant entitles the holder to purchase one
share at Cdn. $28.80 until October 1, 1997 11,716 -
Warrants issued pursuant to the guarantee of the bank line
of credit whereby one warrant entitles the holder to
purchase one share at $7.44 through May 8, 1998 and
thereafter at $8.64 through May 8, 1999 - 31,667
Warrants issued whereby one warrant entitles the holder to
purchase one share at Cdn. $5.04 until October 21, 1999 - 8,000
Warrants issued in conjunction with completion of public
offering at a price of $7.50 through December 15, 2002 - 1,750,000
------- ---------
Total warrants outstanding 147,424 1,925,375
------- ---------
</TABLE>

On May 5, 1998, the Company reduced the exercise price of the Special
Warrants and the Bradstone Warrants to $1.875 per share (representing the
closing price per share of the common stock on that date). In addition, on May
5, 1998, the number of shares of common stock entitled to be purchased by the
following holders of Special Warrants were increased as follows:

37
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1997 and 1998

<TABLE>
<CAPTION>
NAME OF INVESTOR NUMBER OF WARRANTS
---------------- ------------------
<S> <C>
Brant Investments Limited c/o Royal Trust
Corp. of Canada . . . . . . . . . . . . . . . . . 18,186
Robert G. Atkinson. . . . . . . . . . . . . . . . . . 13,372
RBC Dominion Securities, Inc. ITF A/C
Robert G. Atkinson . . . . . . . . . . . . . . . . 214
Brenark Securities Ltd. . . . . . . . . . . . . . . . 8,558
Roytor & Co. c/o the Royal Bank of Canada 23,288
Michael Steele. . . . . . . . . . . . . . . . . . . . 1,830
James R. Tuer . . . . . . . . . . . . . . . . . . . . 2,407
-------
Total . . . . . . . . . . . . . . . . . . . . . . . . 67,855
-------
</TABLE>

On May 5, 1998, the Company issued warrants to Bradstone Equity Partners,
Inc. to purchase 50,000 shares of Common Stock at $1.875 per share at any
time until May 4, 2000. Bradstone Equity Partners, Inc. is a Canadian
publicly held corporation. These warrants were issued pursuant to Regulation
S.

(15) EMPLOYEE BENEFIT PLANS

(a) RETIREMENT PLAN

In March 1997, the Company established a 401(k) savings and retirement
plan covering all full time employees who are at least 21 years of age
and have at least three months of service. Under the plan, employees
may defer up to 15% of their pretax salary, but not more than the
statutory limits. The Company did not match employee contributions to
the plan for the years ended March 31, 1997 and March 31, 1998.

(b) STOCK OPTION PLANS

As of March 31, 1998, the Company had two stock option plans which are
described below. The Company applied APB Opinion No. 25 and related
interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its stock option awards.
Had compensation cost for the Company's stock option awards been
determined consistent with SFAS No. 123, the Company's net loss would
have been increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-------------------
1997 1998
---- ----
<S> <C> <C>
Net loss:
As reported $2,904,886 $3,452,680
Pro forma 3,228,949 3,583,052

Net loss per share:
As reported $ 2.94 $ 2.24
Pro forma 3.27 2.33
</TABLE>

38
<PAGE>

CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1997 and 1998

The fair value of option grants is estimated using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants in
fiscal year 1997: expected volatility of 55%; risk free interest rate of 6.50%;
expected lives of four years; and a zero percent dividend yield. The following
weighted average assumptions were used for grants in fiscal year 1998: expected
volatility of 83.4%; risk free interest rate of 6.50%; expected lives of four
years; and a zero percent dividend yield.

A summary of the plans is as follows:

- - 1993 INCENTIVE PROGRAM: Under the 1993 Incentive Program, as amended and
restated, 87,167 shares of common stock plus 10% of any increase in the
number of shares of common stock issued and outstanding from the date of
the program agreement to the date the program was formally adopted by the
Company's Board of Directors are available for grant to eligible employees
and consultants of the Company. The aggregate fair market value of stock
which becomes exercisable by an individual grantee pursuant to the plan is
limited to $100,000 in any calendar year.

Stock options under the 1993 Incentive Program vest immediately for
individuals on the Board of Directors of the Company, after two years of
service for all employees, and after two years of affiliation with the
Company for consultants. Although the program allows stock options to be
issued for a maximum term of ten years, all stock options outstanding have
a maximum term of five years from the date of grant. Stock options are
granted at an exercise price equal to the closing bid price on the date of
the Board of Directors' approval.

In November 1996, the Company's Board of Directors resolved that no
additional stock options would be granted under the 1993 Incentive
Program. At March 31, 1997 and 1998, 89,733 and 88,650 stock options
remained outstanding, respectively, under the 1993 Incentive Program.

- - 1996 INCENTIVE PROGRAM: Under the 1996 Incentive Program, 208,333 shares
of common stock less any shares outstanding under the 1993 Incentive
Program, plus any shares forfeited under the 1996 and 1993 Incentive
Programs, shares purchased by the Company on the open market and shares
surrendered to the Company in payment of the exercise price of stock
options issued under the 1996 and 1993 Incentive Programs are available for
grant to eligible employees and consultants of the Company. No award may
be granted which will result in the awards outstanding under the plan to be
more than 25% of the total number of shares the Company has outstanding.

Stock options under the 1996 Incentive Program vest immediately for
individuals on the Board of Directors of the Company, after two years of
service for all employees and after two years of affiliation with the
Company for consultants. Although the program allows stock options to be
issued for a maximum term of ten years, all stock options outstanding have
a maximum term of five years from the date of grant. Stock options are
granted at an exercise price equal to the closing bid price on the date of
the Board of Directors' approval.

39
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1997 and 1998

In August 1997, the Company amended its 1996 Incentive Program to, among
other things, modify the total shares of common stock available for grant to
eligible employees and consultants of the Company from 208,333 to 625,000. The
amendment was approved by the Company's stockholders in October 1997.

At March 31, 1997 and 1998, 53,000 and 350,708 stock options, respectively,
are outstanding and 65,600 and 185,642 are available for future grant under the
1996 Incentive Program.

A summary of the Company's stock option plans' activity is presented below:

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
--------------------
1997 1998
----------------- ------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE
STOCK OPTIONS OPTIONS PRICE(1) OPTIONS PRICE (1)
------- -------- ------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of
Period 86,067 $19.68 142,733 $16.08
Granted 70,083 12.00 306,250 5.00
Canceled - - (6,250) 5.00
Forfeited (13,417) 18.48 (3,375) 19.68
------- -------
Outstanding at end of period 142,733 16.08 439,358 8.51
------- -------
Options exercisable at period-end 119,067 16.80 198,525 12.21
------- -------

Weighted-average fair value of
options granted during the
period $5.04 $ .78
</TABLE>

(1) Reflects the 1:6 reverse stock split effective June, 1997 and the 1:4
reverse stock split effective October 1997.

In March 1996, the Company modified the exercise price on 28,500 stock
options granted in February 1994 from $30.00 to $19.68.

In August 1997, the Company granted 306,250 stock options, subject to
certain contingencies, at an exercise price of $5.00. The options are
exercisable on various dates beginning in January 1998.

On May 5, 1998, the Company canceled all options outstanding under the 1993
and 1996 Incentive Programs and issued new options to purchase such shares
pursuant to the 1996 Incentive Program, as amended, at an exercise price of
$1.875 per share.

40
<PAGE>
CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1997 and 1998

The following is a summary of stock options outstanding at March 31, 1997:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------
WEIGHTED-AVERAGE
NUMBER REMAINING NUMBER OF OPTIONS
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISEABLE
--------------- ----------- ---------------- ------------
<S> <C> <C> <C>
$19.68 74,942 3.50 years 74,192
12.00 67,791 4.69 years 44,875
</TABLE>

The following is a summary of stock options outstanding at March 31, 1998:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------
WEIGHTED-AVERAGE
NUMBER REMAINING NUMBER OF OPTIONS
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISEABLE
--------------- ----------- ---------------- ------------
<S> <C> <C> <C>
$19.68 73,858 2.90 73,858
12.00 65,500 3.66 49,667
5.00 300,000 4.41 75,000
</TABLE>

(16) INCOME TAXES

The Company had net deferred tax assets, primarily consisting of net
operating loss carryforwards, of approximately $3,468,000 and $1,650,000
for the years ended March 31, 1997 and 1998, respectively. Total U.S.
Federal net operating loss carryforwards of approximately $8,900,000 at
March 31, 1998 expire in the years 2009 to 2013, but are further limited
as discussed below.

The Company has not recorded an income tax benefit in the years ended
March 31, 1997 and 1998 due to the recording of a valuation allowance as
an offset to the net deferred tax assets. A valuation allowance is
provided due to uncertainties relating to the realization of the
deferred tax assets. During Fiscal 1998, the deferred tax asset and
corresponding valuation allowance were decreased by approximately
$1,818,000 to reflect limitations due to an effective change of
ownership arising from a sale of common stock. A significant portion of
the U.S. Federal net operating loss will expire unused because of this
change. Utilization of operating loss carryforwards of approximately
$1,700,000 generated subsequent to the Offering are not limited.

The income tax provision reconciled to the tax computed at the statutory
Federal rate was:

<TABLE>
<S> <C>
Tax benefit at statutory rate $ 1,174,000

Change in valuation allowance 1,818,000

Change in control resulting in net
operating loss limitations (2,992,000)
-----------
$ --
-----------
</TABLE>

(17) FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments include cash, money market funds,
certificates of deposit, receivables, accounts payable, line of credit,
notes payable and long-term debt. The fair value of these financial
instruments approximates their carrying amounts based on current market
indicators, such as prevailing interest rates.

41
<PAGE>

CARING PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1997 and 1998

(18) COMMITMENTS, CONTINTENCIES AND SUBSEQUENT EVENTS

During Fiscal 1998, the Company settled all outstanding litigation. The
Company is subject to various claims and contingencies related to lawsuits,
taxes and other matters arising in the normal course of business.
Management believes the ultimate liability, if any, arising from such
claims or contingencies is not likely to have a material adverse effect on
the Company's results of operations or financial condition.

(19) GEOGRAPHIC INFORMATION

The Company operates in one industry: the marketing of proprietary urinary
incontinence products for adults and children over the age of four. A
summary of the Company's operations by geographic area follows:

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-------------------
1997 1998
---- ----
<S> <C> <C>
Revenues:
U.S. $1,916,263 $1,771,373
Canada 371,234 201,690
--------- ---------
Total revenues $2,287,497 $1,973,063
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-------------------
1997 1998
---- ----
<S> <C> <C>
Net loss:
U.S. $2,082,450 $2,853,774
Canada 822,436 598,906
--------- ---------
Total net losses $2,904,886 $3,452,680
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-------------------
1997 1998
---- ----
<S> <C> <C>
Assets:
U.S. $4,939,873 $5,923,494
Canada 1,448,664 815,476
--------- ---------
Total assets $6,388,537 $6,738,970
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-------------------
1997 1998
---- ----
<S> <C> <C>
Net assets of Canadian subsidiary $1,340,171 $ 765,332
--------- ---------
</TABLE>

42
<PAGE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

(a) CHANGES IN ACCOUNTANTS

On March 18, 1998, the Company filed Form 8-K describing a change in its
accountants from KPMG Peat Marwick LLP to Peterson Sullivan P.L.L.C., which
stated the following:

KPMG (chartered accountants) and KPMG Peat Marwick LP, collectively
KPMG, were previously the principal accountants for Caring Products
International, Inc. On March 11, 1998, KPMG's appointment as principal
accountants was terminated and on March 12, 1998, Peterson Sullivan P.L.L.C.
was engaged as principal accountants. The decision to change accountants was
recommended by the audit committee of the board of directors and was approved
by the board of directors.

In connection with the audits of the two fiscal years ended March 31,
1997, and the subsequent interim period through March 11, 1998, there were no
disagreements with KPMG on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements if not resolved to their satisfaction would have caused them to
make reference in connection with their opinion to the subject matter of the
disagreement.

Under dates of August 29, 1997 and December 23, 1997, KPMG reported to
the board of directors and the audit committee of the board of directors,
respectively, a reportable condition that KPMG considered to be a material
weakness under standards established by the American Institute of Certified
Public Accountants. Reportable conditions are matters coming to KPMG's
attention that, in their judgment, relate to significant deficiencies in the
design or operations of internal control and could adversely affect the
Registrant's ability to record, process, summarize and report financial data
consistent with the assertions of management in the consolidated financial
statements. A material weakness is a reportable condition in which the
design or operation of internal control does not reduce to a relatively low
level the risk that errors or irregularities in amounts that would be
material to the consolidated financial statements may occur and not be
detected and corrected within a timely period by employees in the normal
course of performing their assigned duties.

KPMG indicated the Company had material weaknesses. The identified
material weaknesses related to deficiencies in the Company's accounting and
reporting function. The principal deficiencies included: ineffective
monthly account analyses and reconciliations; inaccurate inventory records;
unrecorded monthly journal entries for recurring accruals; and improper
accounting for foreign currency transactions.

In addition, KPMG reported that some personnel were not effectively
supervised to ensure satisfactory performance of their duties and did not
possess the requisite accounting knowledge to comply with generally accepted
accounting principles.

In May 1997, subsequent to the aforementioned material weakness being
identified, Registrant consulted with and engaged Peterson Sullivan P.L.L.C.
to assist Registrant with its accounting as of and for the year ended March
31, 1997, and for periods subsequent thereto. Accounting assistance
included, but was not limited to, account analysis, review and follow-up of
unusual items, and preparation of journal entries and general ledger trial
balances. In September 1997, the Registrant hired a new chief financial
officer. These actions were taken by the Registrant to mitigate its material
weakness related to the accounting and reporting function.

The audit reports of KPMG on the consolidated financial statements of
Caring Products International, Inc. and subsidiaries as of and for the years
ended March 31, 1997 and 1996, did not contain any adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles.

On May 6, 1998, the Company filed Form 8-K describing a change in its
accountants from Peterson Sullivan P.L.L. C. to Grant Thornton LLP.

None.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

Section 16(A) of the Exchange Act requires the Company's executive
officers and directors, and persons who own more than ten percent of the
common stock of the Company to file reports of ownership and change in
ownership with the Securities and Exchange Commission and the exchange on
which the common stock is listed for trading. Executive officers, directors
and more than ten percent stocholders are required by regulations promulgated
under the exchange act to furnish the Company with copies of all Section
16(a) reports filed. Based solely on the Company's review of copies of the
Section 16(a) reports filed for the fiscal year ended March 31, 1998, the
company believes that all reporting requirements applicable to its executive
officers, directors, and more than ten percent stockholders were complied
with for the fiscal year ended March 31, 1998.

The following table sets forth information concerning the directors and
executive officers of the Company as of March 31, 1998:

43
<PAGE>

NAME AGE POSITION
---- --- --------
William H.W. Atkinson (1) (2) 55 Chairman of the Board
And Chief Executive Officer

Susan A. Schreter (1) 37 President, Director

Priscilla Cain 40 Chief Operating Officer

Sandra L. Sternoff 40 Chief Financial Officer

Anthony A. Cetrone (1) (3) 69 Director

Michael M. Fleming (2) (3) 49 Director

Paul Stanton (2) 60 Vice Chairman of the Board

Dr. Herbert Sohn 70 Director

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.

The Company's by-laws provide that the size of the Board of Directors shall
initially be fixed by the Incorporator, and thereafter may be changed by
resolution of the Board. The Company's Board of Directors currently is
fixed at eight members, and there are two vacancies. Members of the Board
serve until the next annual meeting of stockholders and until their
successors are elected and qualified. Meetings of the Board are held when
and as deemed necessary or appropriate, but the Board has two regularly
scheduled meetings per year. Officers are appointed by and serve at the
discretion of the Board. There are no family relationships among any of
the Company's officers and directors.

WILLIAM H.W. ATKINSON co-founded the Company in November 1992 and has been
Chairman of the Board since inception. He became the Company's Chief
Executive Officer in May 1994. Since January 1994, Mr. Atkinson also has
served as the Chairman of the Board of Caring Products Industries, Ltd.,
Burnaby, British Columbia, a subsidiary of the Company that engaged in
healthcare product manufacturing and distribution. From September 1987
through April 1994, Mr. Atkinson was Vice-Chairman and a Trustee of Mercer
International, Vancouver, British Columbia, a Nasdaq-traded company with
interests in the financial services, natural resources and pulp and paper
businesses in Europe.

SUSAN A. SCHRETER co-founded the Company in November 1992 and has served as
president and a director since inception. From July 1985 to December 1992,
she was founder and President of Beta International, Inc., New York, New
York, a firm providing consulting services to growing companies, private
business investors and buy-out funds in the areas of acquisition due
diligence, cash flow planning, strategic business planning and capital
investment. From February 1992 to January 1995, Ms. Schreter served as a
director of Omnicorp Limited, a provider of environmental services.

44
<PAGE>

PRISCILLA A. CAIN has been the Vice President of Operations since August
1996 and was promoted to Chief Operating Officer on June 22, 1998. She
was the director of Cain Consulting from February 1998 through July
1998, providing information systems and manufacturing expertise to
emerging growth companies. From 1988 through July 1996 she served as
the Corporate Manager of Information Systems for Derby Cycle
Corporation, the producer of private label and name-brand pleasure and
racing bicycles.

SANDRA L. STERNOFF joined the Company as Chief Financial Officer on October
1, 1997. From October 1994 to September 1997, she served as Vice
President of Finance for John F. Throne & Co., a firm providing insurance
brokerage services to the aviation and transportation industries. From
October 1993 to September 1994, she was Controller for Jones/Rodolfo
Corporation, a designer and manufacturer of men's and women's golf and
casual apparel. From September 1990 through September 1993, Ms. Sternoff
was managing partner of Sternoff Development Company, a real estate
development and management company.

ANTHONY A. CETRONE, a director of the Company since September 1993, has
been President and Chief Executive Officer of Micron Medical Products
("Micron Medical"), Fitchburg, Massachusetts, a medical products company,
since April 1988. Micron Medical has been a subsidiary of Arrhythmia
Research Technology, Inc., Austin, Texas, a company that manufactures
cardiological medical products ("Arrhythmia Research") since November 1992.
Since October 1991, he has also served as the Chairman of the Board of
Micron Products, the parent of Micron Medical. From January 1993 to
February 1995, Mr. Cetrone also served as the President and Chief Executive
Officer of Arrhythmia Research and has served on Arrhythmia's Board since
November 1992.

MICHAEL M. FLEMING has been affiliated with the law firm of Ryan, Swanson &
Cleveland, Seattle, Washington, since November 1992, where he has
specialized in real estate, dispute resolution, securities and
environmental matters. He was associated with the firm on an "of counsel"
basis from November 1992 until January 1996, at which time, he became a
partner in the firm. Since July 1988, Mr. Fleming has also served as the
President and owner of Kidcentre, Inc., a provider of childcare services in
Seattle, Washington. Since April 1985, he has also been the President and
owner of Fleming Investment Co., Seattle, Washington, a private investment
company. Mr. Fleming was elected to the Company's Board of Directors in
November 1992.

DR. HERBERT SOHN was elected to the Board of Directors in August 1997.
Since 1989, Dr. Sohn has served as an attending urologist at the Louis A.
Weiss Memorial Hospital in Chicago. He has also served as a clinical
associate professor of surgery at the Abraham Lincoln School of Medicine
at the University of Illinois since 1973. A graduate of the Chicago
Medical School, Dr. Sohn completed residencies in urology and surgery at
the University Hospitals of Cleveland. He also received a Juris Doctorate
degree from the John Marshall Law School.

PAUL STANTON was elected to the Board of Directors in September 1996 and
has served as Vice Chairman of the Board since joining the board. He also
has served as a consultant to the Company since February 1996. Mr. Stanton
has been employed as President of Paul Stanton & Associates, which provides
strategic analysis and consulting services to product manufacturers and
retail drug chains, since January 1996. From February 1986 to December
1995, he was Vice President of General Merchandise and Drug Store
Merchandising of Pathmark, an East Coast supermarket chain.

45
<PAGE>

COMMITTEES OF THE BOARD OF DIRECTORS

The Company's Board of Directors has established three committees:
Executive Committee, Compensation Committee and Audit Committee. The Board
appoints the members of the various committees and those members serve at
the discretion of the Board.

The Executive Committee, consisting of three members, has been delegated
the authority to exercise all powers and authority of the Board of
Directors in the management of the business and affairs of the Company,
including the right to authorize: (i) the purchase of stock; (ii) adopt an
agreement of merger or consolidation; (iii) recommend to the stockholders
the sale, lease or exchange of all or substantially all of the Company's
properties or assets; (iv) recommend to the stockholders a dissolution of
the Company or a revocation of dissolution; (v) amend the by-laws; or (vi)
authorize the declaration of a dividend. The Executive committee meets at
such times, as it deems appropriate.

The Compensation Committee has been established to review and make
recommendations to the Board regarding the compensation to be paid by the
Company and its subsidiaries to their executive officers, key employees and
consultants, including, without limitation, the grant of incentive awards
under the Company's incentive program. See - "Stock Option Plans." The
Compensation Committee consists solely of independent directors and meets
at such times, as it deems appropriate.

The Audit Committee has been established to review and monitor the general
policies and practices of the Company and its subsidiaries with regard to
accounting, financial reporting, internal auditing and financial controls
and to serve as a channel of communication between the Board of Directors
and the Company's independent certified accountants. At least a majority
of the Audit Committee consists of independent directors. The Audit
Committee meets at such times, as it deems appropriate.

ITEM 10. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE. The following table sets forth the annual and
long-term compensation for services in all capacities to the Company for the
three fiscal years ended March 31, 1996, 1997 and 1998 of the Company's Chief
Executive Officer and President (the "Named Executive Officers"). No other
executive officer of the Company received salary and bonuses of $100,000 or more
in the fiscal year ended March 31, 1998.

SUMMARY COMPENSATION TABLE*
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
------------ ------
SALARY OPTIONS/SAR'S
NAME OF PRINCIPAL POSITION YEAR ($) (#)
- -------------------------- ---- ------- -------
<S> <C> <C> <C>
William H.W. Atkinson 1998 $125,000 112,500
Chief Executive Officer and Chairman 1997 125,000 13,583
1996 96,000 11,075

Susan A. Schreter 1998 $125,000 112,500
President and Director 1997 125,000 13,583
1996 96,000 11,075
</TABLE>

46
<PAGE>
_ _ _ _ _ _ _ _ _

* Columns in the Summary Compensation Table that were not relevant to the
compensation paid to the Named Executive Officers were omitted.

No employee of the Company receives any additional compensation for his or her
services as a director. Non-management directors receive no salary for their
services as such, but receive a fee of $2,500 for each meeting attended, and may
participate in the Company's stock option plans. The Board of Directors has
authorized payment of reasonable travel or other out-of-pocket expenses incurred
by non-management directors in attending meetings of the Board of Directors and
committees thereof.

EMPLOYMENT AGREEMENTS. In December 1993, the Company entered into three-year
employment agreements with Mr. Atkinson and Ms. Schreter, the Company's Chief
Executive Officer and President, respectively. Both agreements were
subsequently amended as of March 1996 to provide, among other things, for an
additional three-year term. Each agreement may be terminated for "cause" (as
defined in the agreements) and under circumstances set forth in the agreements.
Under the terms of the agreements, Mr. Atkinson and Ms. Schreter are both
entitled to receive an annual base salary of $125,000, or such higher salary as
may be approved by the Board of Directors from time to time. Each year during
the term of their agreements, Mr. Atkinson and Ms. Schreter are entitled to
receive stock options in an amount equal to at least 20% of the aggregate number
of options offered under the Company's option and incentive plans to all
officers, key executives, directors, professional or administrative employees or
consultants or advisors, any of its subsidiaries or any of its agents (as
defined in the respective plans), or to a cash payment to compensate for the
shortfall in the event this provision is not complied with. Mr. Atkinson and
Ms. Schreter also are entitled to participate in any bonus or profit sharing
plan that may be adopted from time to time by the company, and to specified
additional bonus payments and option grants upon termination under certain
specified circumstances. Upon a change in control, as defined in the
agreements, Mr. Atkinson and Ms. Schreter will be entitled to receive, in
addition to other compensation and benefits due them, his or her then-effective
base salary for a period of three years from the date of termination, plus all
benefits, other than the bonus and stock options (or the value thereof), to
which they would have been entitled had they continued their employment. In
addition, the agreements provide that Mr. Atkinson and Ms. Schreter are entitled
to receive all rights, privileges and fringe benefits afforded to other senior
executives of the Company and to payment or reimbursement for reasonable
expenses incurred in the performance of his or her respective services under
the agreement. The agreements also contain confidentiality provisions.

OPTION GRANTS. The following tables shows at March 31, 1998, certain
information regarding options granted to the Named Executive Officers.

OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
NUMBER OF PERCENT TO
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE OR BASE EXPIRATION
NAME GRANTED (#) FISCAL YEAR (1) PRICE ($/SHARE) DATE
- ---- ----------- --------------- --------------- ----
<S> <C> <C> <C> <C>
William H.W. Atkinson 112,500 (2) 37% $ 5.00 8/27/02

Susan A. Schreter 112,500 (2) 37% $ 5.00 8/27/02
</TABLE>
_ _ _ _ _ _ _ _ _

47
<PAGE>

(1) Based on options to purchase 306,250 shares of Common Stock granted to
employees, directors and consultants, including executive officers, in
Fiscal 1997.
(2) The terms of such options are consistent with those of options granted to
other employees and directors under the Company's Stock Option Plans. The
options vested immediately because of length of service. The Plans
provisions permitting the Board of Directors to, among other things,
accelerate vesting of options in the event of a change in control of the
Company.

FISCAL YEAR END OPTIONS/OPTION VALUES TABLE. The following table sets forth
information regarding exercises of stock options during the fiscal year ended
March 31, 1998 by the Named Executive Officers and the year-end values of
exercised and unexercised options by such Named Executive Officers:

AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR ENDED MARCH 31, 1998
AND FISCAL YEAR-END OPTION/SAR VALUE
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
NUMBER OF IN-THE-MONEY
UNEXERCISED OPTIONS AT
OPTIONS AT FISCAL FISCAL YEAR
SHARES YEAR END (#) END (#)
ACQUIRED ON VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE
---- ------------ --- ------------- -------------
<S> <C> <C> <C> <C>
William H.W. Atkinson 0 $0 140,325(1)/0(2) $0(1)/$0(2)

Susan A. Schreter 0 $0 140,325(1)/0(2) $0(1)/$0(2)
</TABLE>
_ _ _ _ _ _ _ _ _
(1) Exercisable options.

(2) Unexercisable options.

On August 27, 1997, the Company awarded Susan A. Schreter stock options to
purchase 112,500 shares of Common Stock (the "Schreter Options) and William H.W.
Atkinson stock options to purchase 112,500 shares of Common Stock (the "Atkinson
Options"), under an amendment to the 1996 Stock Option Plan adopted by the Board
of Directors on such date and subsequently approved by the requisite vote of the
stockholders. The number of the Schreter Options and the Atkinson Options (the
"Options") will be reduced pro rata if the total number of stock options held by
Mr. Atkinson (including the Atkinson Options) exceeds 7.7% of the total number
of shares of Common Stock issued and outstanding (excluding shares issuable upon
exercise of outstanding options and warrants) upon completion of the Offering.
The exercise price per share of the Options is $5.00. The Options vest in four
equal semi-annual installments commencing six months from the date of grant.
The Options terminate upon the expiration of five years from the date of grant,
or, if sooner, three months after termination of Ms. Schreter or Mr. Atkinson,
as the case may be, as an employee of the Company for any reason (or such
shorter period as required by the VSE, if any) and, if her r his employment is
terminated for cause, their respective Options terminate immediately. In
addition, the Options are subject to the terms and conditions of the 1996 Stock
Option Plan. See "Management - Stock Option Plans."

48
<PAGE>

STOCK OPTION PLANS

The Company's 1993 Incentive Program (the "1993 Stock Option Plan") was
adopted by the Board of Directors and approved by the Company's stockholders in
November 1993. The Company's 1996 Incentive Program (the "1996 Stock Option
Plan") was adopted by the Board of Directors and approved by the Company's
stockholders in November 1996. Pursuant to the terms of the 1996 Stock Option
Plan, no further awards will be made under the 1993 Stock Option Plan. The 1993
Stock Option Plan and the 1996 Stock Option Plan are sometimes collectively
referred to as the "Stock Option Plans." The Stock Option Plans were adopted to
provide a means by which selected officers, employees, directors and consultants
to the Company could be given an opportunity to purchase stock in the Company.
The purpose of the Stock Option Plans is to promote the growth of the Company by
enabling the Company to attract and retain the best available persons for
positions of substantial responsibility and to provide certain key employees
with additional incentives to contribute to the success of the Company.

Under the 1993 Stock Option Plan, 87,167 were initially reserved for
issuance. The 1993 Stock Option Plan further provides for an increase of 10% of
any increase in the number of shares issued and outstanding over the number of
shares outstanding on December 20, 1993, the date the 1993 Stock Option Plan was
adopted. As of March 31, 1998, a total of 88,650 options were outstanding under
the 1993 Stock Option Plan. No further awards will be made under the 1993 Stock
Option Plan.

Under the 1996 Incentive Program, the aggregate number of shares of
Common Stock that may be issued or transferred is 208,333 (the "Base
Amount"), plus (i) any shares of Common Stock which are forfeited under the
1993 Stock Option Plan or the 1996 Stock Option Plan after the Board's
adoption of the 1996 Stock Option Plan; plus (ii) the number of shares of
Common Stock repurchased by the Company in the open market and otherwise with
an aggregate price no greater than the cash proceeds received by the Company
from the sale of shares under the 1993 Stock Option Plan or the 1996 Stock
Option Plan; plus (iii) any shares of Common Stock surrendered to the Company
in payment of the exercise price of options issued under the 1993 Stock
Option Plan or the 1996 Stock Option Plan; provided, that the aggregate
number of shares available for grants at any given time will be reduced by
the aggregate of all shares previously issued or transferred pursuant to the
Stock Option Plans plus the aggregate of all shares which may become subject
to issuance or transfer under then-outstanding and then-currently exercisable
grants under the Stock Option Plans; and provided, further, that no award may
be issued that would bring the total of all outstanding awards under the 1996
Stock Option Plan to more than 25% (the "Maximum Percentage") of the total
number of the shares of Common Stock at the time outstanding. The maximum
number of shares for which options may be granted under the 1996 Stock Option
Plan to any person during any calendar year is 41,667 (the "Annual Amount").

On August 27, 1997, the Board of Directors adopted an amendment to the
1996 Stock Option Plan (the "Amendment"), pursuant to which the Base Amount
was increased from 208,333 shares to 625,000 shares, the Annual Amount was
increased from 41,667 shares to 150,000 shares and the Maximum Percentage was
increased from 25% to 35%. The Company's stockholders approved the Amendment
on October 6, 1997, as required, which was subject by its terms and under
applicable regulatory requirements to the completion of the Offering which
was completed in December 1997. Pursuant to the Amendment, stock option
grants may be made prior to such stockholder approval, but in no event may
such grants be exercised until such approval is obtained. As of March 31,
1998, a total of 350,708 options were outstanding under the 1996 Stock
Option Plan.

49
<PAGE>

At March 31, 1997 and 1998, 53,000 and 350,708 stock options, respectively,
are outstanding and 65,600 and 185,642 are available for future grant under the
1996 Incentive Program.

The Stock Option Plans provide for the grant of incentive stock options,
non-qualified stock options, stock appreciation rights in tandem with stock
options or freestanding, restricted stock grants and restored grants
(collectively, "Grants") as approved by the Board of Directors or a committee
thereof (the "Committee"). Incentive stock options granted under the Stock
Option Plans are intended to qualify as "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"). Non-qualified stock options granted under the Stock Option Plans
are intended not to qualify as incentive stock options under the Code.

Eligible participants under the Stock Option Plans include executive,
professional or administrative employees, directors, executive officers,
consultants or advisors of the Company and its direct or indirect subsidiaries,
all of whom are collectively referred to as "Grantees." Incentive stock options
may be granted under the Stock Option Plans only to selected employees
(including officers) of the Company and its affiliates. All Grantees may be
awarded Grants other than incentive stock options.

The maximum term of incentive stock options under the Stock Option Plans
is 10 years, except that in certain cases, as discussed below, the maximum
term is five years. The exercise price of incentive stock options under the
Stock Option Plans may not be less than the fair market value of the Common
Stock subject to the option on the date of the option grant and, in some
cases, as discussed below, may not be less than 110% of such fair market
value. The exercise price of non-qualified options under the Stock Option
Plans is determined by the Board, which has agreed not to grant non-qualified
options that have an exercise price less than 85% of the fair market value of
the Common Stock subject to the option on the date of the option grant.

No incentive stock option may be granted under the Stock Option Plans to
any person who, at the time of the grant, owns (or is deemed to own) stock
possessing more than 10% of the total combined voting power of the Company or
any affiliate of the Company, unless the option exercise price is at least
110% of the fair market value of the stock subject to the option on the date
of grant, and the term of option does not exceed five years from the date of
grant. For incentive stock options granted under the Stock Option Plans, the
aggregate fair market value, determined at the time of grant, of the shares
of Common Stock with respect to which such options are exercisable for the
first time by any Grantee during any calendar year (under all such plans of
the Company and it affiliates) may not exceed $100,000.

Grants under the 1993 Stock Option Plan terminate within such period
determined by the Board up to 90 days after the grantee ceases to be employed
by the Company or any affiliate of the Company, unless (I) termination of
employment is due to such person's permanent and total disability (as defined
in the Code), in which case the Grant may be exercised at any time within
twelve months of such termination; (ii) the grantee dies while employed by
the Company or any affiliate of the Company, in which case the Grant may be
exercised (to the extent the option was exercisable at the time of the
grantee's death) within such period determined by the Board between six and
twelve months of the grantee's death by the person or persons to whom the
rights to such option passed by will or by the laws of descent and
distribution; or (ii) the Grant by its terms specifically provides otherwise.
Grants under the 1996 Stock Option Plan may be exercised only while the
Grantee is in the employment or consultancy of the Company, except that the
Board or Committee may provide for partial or complete exceptions to this
requirement. The Stock Option Plans terminate on the tenth

50
<PAGE>

anniversary of their respective effective dates unless terminated earlier by
the Board or extended by the Board.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The following table sets forth certain information, as of March 31, 1998
(adjusted to reflect the Reverse Stock Splits effected on June 16, 1997 and
October 20, 1997) with respect to the beneficial ownership of the Company's
Common Stock by (I) each stockholder known by the Company to be the beneficial
owner of more than five percent of the Company's Common Stock; (ii) each
director, (iii) the Named Executive Officers and (iv) all executive officers and
directors as a group.

<TABLE>
<CAPTION>
NUMBER OF
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES (1) PERCENT OWNED
OFFERING
- ------------------------------------ ---------- -------------
<S> <C> <C>
Wayne M. Hamersly 175,000 6.3%
811 Southwest Front Avenue, Suite 200
Portland, Oregon 97204

Susan A. Schreter (2) 126,095 4.5%
200 First Avenue West, Suite 200
Seattle, WA 98119

William H.W. Atkinson (3) 126,142 4.5%
290 Montroyal
Vancouver, BC
Canada

Priscilla Cain (4) 22,917 *

Anthony A. Cetrone (5) 9,512 *

Michael M. Fleming (5) 9,512 *

Paul Stanton (6) 12,500 *

Dr. Herbert Sohn (7) 2,083 *

All Executive Officers and Directors
as a Group (7 persons) (8) 308,761 11.1%

</TABLE>
(SEE FOOTNOTES ON FOLLOWING PAGE.)
_ _ _ _ _ _ _ _ _ _
* Less than 1%.
(1) Beneficial ownership of directors, officers and 5% or more stockholders
includes both Outstanding Common Stock and shares issuable upon exercise of
warrants or options that are currently exercisable or will become
exercisable within 60 days of July 4, 1998. Except as indicated in the
footnotes to this table and pursuant to applicable community property laws,
the persons named in the table have sole voting and investment power with
respect to all shares of Common Stock beneficially owned by them.

51
<PAGE>

(2) Includes 87,200 shares issuable upon exercise of currently outstanding
stock options.
(3) Includes 88,242 shares issuable upon exercise of currently outstanding
stock options.
(4) Includes 22,917 shares issuable upon exercise of currently exercisable
stock options.
(5) Includes 9,417 shares issuable upon exercise of currently exercisable
stock options.
(6) Includes 12,500 shares issuable upon exercise of currently exercisable
stock options.
(7) Includes 2,083 shares issuable upon exercise of currently exercisable
stock options.
(8) Includes 222,359 shares issuable upon exercise of currently exercisable
stock options.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Paul Stanton, the Vice-Chairman of the Board of Directors of the Company,
has provided consulting services to the Company since June 1996. Pursuant to an
oral arrangement with the Company, Mr. Stanton received consulting fees of
$56,500 in Fiscal 1998.

It is the policy of the Company with respect to insider transactions, that
all transactions between the Company, its officers, directors, principal
stockholders and their affiliates be on terms no less favorable to the Company
than could be obtained from unrelated third parties in arms-length transactions,
and that all such transactions shall be approved by a majority of the
disinterested members of the Board of Directors. The Company believes that the
transactions described above complied with such policy.

In October 1997, Paulson Investment Company, Inc. ("Paulson"), one of the
Representatives of the underwriters of the Offering, loaned the Company a total
of $550,000. The loans were non-interest bearing and were repaid by the Company
out of the net proceeds of the Offering in December 1997.

ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K.

(a) EXHIBITS:

27.1 Financial Data Schedule

(a) REPORTS ON FORM 8-K.

On March 18, 1998, the Company filed Form 8-K indicating a change in
auditors from KPMG Peat Marwick LLC to Peterson Sullivan P.L.L.C., which
stated the following:

On May 6, 1998, the Company filed Form 8-K indicating a change in auditors
from Peterson Sullivan P.L.L.C. to Grant Thornton LLP.

52
<PAGE>

SIGNATURES

In accordance with the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Seattle,
Washington, on July 13, 1998.

CARING PRODUCTS INTERNATIONAL, INC.

By: /s/ William H.W. Atkinson
-------------------------------
- William H.W. Atkinson
- Chairman of the Board and
Chief Executive Officer

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

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

/s/ William H.W. Atkinson Chairman of the Board July 13, 1998
- - - - - - - - - - - - - - and Chief Executive Officer
William H.W. Atkinson (Principal Executive Officer)

/s/ Susan A. Schreter President and Director July 13, 1998
- - - - - - - - - - - - - -
Susan A. Schreter

/s/ Anthony A. Cetrone Director July 13, 1998
- - - - - - - - - - - - - -
Anthony A. Cetrone

/s/ Michael M. Fleming Director July 13, 1998
- - - - - - - - - - - - - -
Michael M. Fleming

/s/ Paul Stanton Director July 13, 1998
- - - - - - - - - - - - - -
Paul Stanton

/s/ Herbert Sohn Director July 13, 1998
- - - - - - - - - - - - - -
Herbert Sohn

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-KSB FOR THE ANNUAL PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 3,415,569
<SECURITIES> 0
<RECEIVABLES> 624,074
<ALLOWANCES> 23,279
<INVENTORY> 2,263,333
<CURRENT-ASSETS> 6,295,479
<PP&E> 301,053
<DEPRECIATION> 79,808
<TOTAL-ASSETS> 6,738,970
<CURRENT-LIABILITIES> 1,098,466
<BONDS> 0
0
0
<COMMON> 27,814
<OTHER-SE> 5,602,272
<TOTAL-LIABILITY-AND-EQUITY> 6,738,970
<SALES> 1,973,063
<TOTAL-REVENUES> 1,973,063
<CGS> 1,322,375
<TOTAL-COSTS> 3,721,927
<OTHER-EXPENSES> (381,441)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (384,666)
<INCOME-PRETAX> (3,452,680)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,452,680)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,452,680)
<EPS-PRIMARY> (2.24)<F1>
<EPS-DILUTED> 0
<FN>
<F1>DUE TO THE NET LOSS POSITION OF THE COMPANY, THE BASIC NET LOSS PER COMMON
SHARE IS THE SAME AS THE DILUTED NET LOSS PER COMMON SHARE. NET LOSS PER SHARE
IS COMPUTED BASED ON THE WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING DURING THE YEAR.
</FN>

</TABLE>