OF OPERATIONS

RESULTS OF OPERATIONS

     The following  information for the three-month and six-month  periods ended
June  30,  2004  and  June  30,  2003  have  been  derived  from  our  unaudited
consolidated  financial  statements and should be read in  conjunction  with our
Annual  Report on Form  10-KSB  for the year  ended  December  31,  2003 and the
consolidated audited financial statements included therein.

<CAPTION>
                                       Three months ended June 30,           Six months ended June 30,
                                -------------------------------------  ------------------------------------
                                       2004                2003               2004              2003
                                ------------------  -----------------  -----------------  -----------------
                                                            (amounts in thousands)
<S>
Net sales                       $ 4,383      100.0% $ 4,265     100.0% $ 8,932     100.0% $ 8,081     100.0%
Gross profit                      1,759       40.1    1,791      42.0    3,698      41.4    3,382      41.9
Operating expenses:
    Selling                         865       19.7      803      18.8    1,643      18.4    1,546      19.2
    General and
    administrative                  392        9.0      390       9.1      853       9.5      840      10.4
    Research and development        469       10.7      381       9.0      929      10.4      770       9.5
    Amortization                     49        1.1       49       1.2       98       1.1       98       1.2
(Loss) income from operations       (16)       0.4      168       3.9      175       2.0      128       1.6
Interest expense, net                64        1.4       55       1.3      106       1.2       97       1.2
Provision for income taxes            6        0.1        6       0.1        8       0.1       16       0.2
Minority interest                    (7)       0.1       --        --       16       0.2       --        --
Net (loss) income                   (79)       1.8      107       2.5       45       0.5       15       0.2

Net sales. Net sales increased by $118,000, or 2.8%, to $4,383,000 for the three months ended June 30, 2004 from $4,265,000 for the same period last year and increased by $851,000, or 10.5%, to $8,932,000 for the six months ended June 30, 2004 from $8,081,000 for the comparable six-month period of 2003. The increases were principally attributable to a higher volume of existing flavor and fragrance product sales and new product launches.

Gross profit. Gross profit, as a percentage of sales, decreased 1.9% to 40.1% on net sales of $4,383,000 for the three months ended June 30, 2004 from 42.0% on net sales of $4,265,000 for the same period last year, and decreased 0.5% to 41.4% on net sales of $8,932,000 for the six months ended June 30, 2004 from 41.9% on net sales of $8,081,000 for the same period last year. Such decreases in 2004 were due to higher manufacturing operating costs due principally in increases in packaging materials, operating supplies, insurance and outside contract services.

OPERATING EXPENSES:

Selling expenses. Selling expenses for the three months ended June 30, 2004 increased by $62,000, or 7.7%, to $865,000 from $803,000 for the same period last year and for the six months ended June 30, 2004 increased by $97,000, or
6.3%, to $1,643,000 from $1,546,000 for the same period last year. Such increases for the three-month and six-month periods were principally attributable to the hiring of additional sales personnel.

General and administrative expenses. General and administrative expenses for the three month and six-month periods ended June 30, 2004 of $392,000 and $853,000, respectively, were consistent with such expenses in the comparable periods last year of $390,000 and $840,000, respectively.

Research and development expenses. Research and development expenses for the three months ended June 30, 2004 increased by $88,000, or 23.1%, to $469,000 from $381,000 for the same period last year and for the six months ended June 30, 2004 increased by $159,000, or 20.6%, to $929,000 from $770,000 for the same period last year due principally to the hiring of additional technical personnel and increases in outside contract services.

Amortization expense. Amortization expense for the three months and six months ended June 30, 2004 of $49,000 and $98,000, respectively, was the same with such expenses in the comparable 2003 periods.

Total operating expenses. Total operating expenses increased by $152,000, or 9.4%, to $1,775,000 for the three months ended June 30, 2004 from $1,623,000 for the comparable period in 2003 and increased by $269,000, or 8.3%, to $3,523,000 for the six months ended June 30, 2004 from $3,254,000 for the comparable six-month period of 2003 as a result of the factors described above.

Interest expense, net. Interest expense increased by $9,000, or 16.4%, to $64,000 for the three months ended June 30, 2004 from $55,000 for the comparable 2003 period and increased by $9,000, or 9.3%, to $106,000 for the six months ended June 30, 2004 from $97,000 for the comparable six-month period of 2003 due principally to higher levels of outstanding borrowing under our revolving credit facility.

Provision for income taxes. Provision for income taxes principally represents state franchise taxes and Federal alternative minimum tax. There were no Federal income tax provisions for 2004 and 2003 since we had available net operating loss carryforwards for which valuation allowances have been recorded.

Net (loss) income. Net (loss) income was $(79,000) and $45,000 for the three-month and six-month periods ended June 30, 2004 as compared to net income for the comparable 2003 periods of $107,000 and $15,000, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Historically, our financing needs have been met through issuance of equity and debt securities and commercial bank loans. In April 2002, we entered into a five-year term Loan and Security Agreement with a lender. We call this new revolving credit facility the 2002 Credit Facility. The maximum line of credit under the 2002 Credit Facility was initially set at $3,000,000 and was increased, at our option, to $3,500,000 on June 30, 2004.

Outstanding borrowings under the 2002 Credit Facility bear interest at a rate equal to a prime lending rate plus one-quarter of a percentage point (4.25% at June 30, 2004). Borrowings under the 2002 Credit Facility are subject to certain eligibility requirements relating to our receivables and inventories. Outstanding borrowings are secured by substantially all of our assets, including our product formulations. We must comply with certain financial and other covenants contained in the Loan and Security Agreement, including maintaining tangible net worth of at least $3,200,000, achieving annual cash flow, as defined, of at least $1.00 and incurring expenditures for capital assets of not more than $500,000 each year, excluding those capital expenditures made from proceeds of the Industrial Development Agency (IDA) Bonds financing in January 2002. Our subsidiaries have guaranteed our obligations under the 2002 Credit Facility. Borrowings under the 2002 Credit Facility at June 30, 2004 were $2,272,000 and $1,228,000 was available for additional borrowings in accordance with the terms of the 2002 Credit Facility.

At June 30, 2004, our working capital increased by $87,000, or 2.9%, to $3,037,000 from $2,950,000 at December 31, 2003. We are committed under non-cancellable operating and capital leases for the upcoming year of approximately $274,000.