Management's Discussion and Analysis

The Company's strategic focus is now on expanding the use of its existing patented compounds to other consumer product companies on a worldwide basis and the development of its internally developed Natural Attraction and other proprietary lines of mood enhancing based products. In addition, the Company has added ER 303 to this group of products for which a use patent has been filed.

The Company's business model results in the generation of two types of revenue, licensing income and product sales income. Under some agreements, the licensee will opt to pay a higher price for the compounds it purchases and a lower royalty rate; other companies will select the alternate - lower compounds costs with a higher royalty rate.

In the past year, the Company's first multinational licensee significantly scaled back production of the final fragrance products containing our pheromone compound. This licensee had been purchasing the pheromones and a relatively high price per gram, but did not pay a royalty on sales. As such, product revenue was significantly reduced as compared with the prior year. However, the Company is party to other agreements which provide for lower sales prices per gram, but include a royalty payment on the licensee's sales. The Company would expect increases in licensing revenue as a percentage of total revenue in future periods.

New product development expenses and the launch timetable are determined by the licensee. The licensee also works closely with its ultimate consumer and better understands the thought process and mood of the end user than the Company does.
As such, it is difficult for the Company to definitively assess how national and world economic weakness may effect the licensee's sales of products containing our compounds/technology, and the resulting impact on the Company.

Year ended December 31, 2008 compared with the year ended December 31, 2007

Net sales and revenues for the year ended December 31, 2008 were $992,000 compared to $1,291,000 for the prior year, a decrease of $299,000, or 23%.
License revenues for the years ending December 31, 2008 and 2007 were $604,000 and $526,000, respectively, a 15% increase of $78,000. The increase is attributable to the Schwarzkopf and Henkel license agreement signed in May 2007.
The license with Schwarzkopf and Henkel produced $148,000 for the year ended December 31, 2008 compared to $28,000 of license revenue for year ended December 31, 2007. The increase in revenues was attributed to a full year of domestic product sales and partial year of international sales. Revenue recognized under the PPC license totaled $457,000 in 2008, $248,000 for first discussion work, $163,000 license fee amortization and $46,000 for consulting services. In 2007 the license revenues were $498,000, $292,000 for first discussion work, $149,000 license fee amortization and $57,000 for consulting services.

Net product revenues of $388,000 for the year ending December 31, 2008 was $377,000 less than last year's $765,000. Decreased purchases by two long standing customers accounted for 32% of the sales decrease. A multinational fragrance launched ten years ago seems to have finally run to the end of its life cycle and a national retailer which successfully marketed a limited edition product in 2007 did not market a similar product in 2008 which attributed 42% of the decline in 2008. A third customer converted from being a private label purchaser of finished goods to a compound only customer. International sales have fallen by 48% partially due to the high cost of transporting finished goods overseas. The Company is continuing to seek new licensees and expand discussions with potential licensees in consumer product markets.

                                          Year ending December 31,
                                           2008               2007
                                      (in thousands)     (in thousands)
               Net revenue by type:
               License revenue      $        604       $        526
               Product revenue               388                765
               Total                $        992       $      1,291

Gross profit for the year decreased by $245,000, to $670,000 in 2008 from $915,000 in 2007. Gross margin in 2008 was 68% of revenue as compared with 71% in the prior year. The slight decrease is primarily attributable to decreased revenue from the higher margin compound sales from two customers with reduced orders in 2008.

Research and development expenses for 2008 and 2007 were $47,000 and $49,000, respectively. Research expenditures of $137,000 that were incurred in 2008, and $150,000 incurred in 2007, to support the PPC license have been charged as cost of goods sold. The total research and development costs incurred for the current year, including the amount recorded as license costs, was $184,000 which was $15,000 less than the prior year's $199,000. The decrease of the research expenditures was the result of a decreased rent expense at the University of Utah which began on September 1, 2008, and decreased consulting costs with the completion of ER 303 testing.

Selling, general and administrative expenses decreased $53,000 to $889,000 for the year ending December 31, 2008 from $942,000 for year ending December 31, 2007. Sales, marketing and distribution expenses decreased $12,000, while other administrative expenses increased by $41,000. The decrease in sales and marketing expenses was due to the Company bringing in-house the fulfillment of the Natural Attraction product sales. Administrative expenses of $38,000 that were incurred in 2008, and $56,000 incurred in 2007, to support the PPC license have been charged as cost of goods sold. The total administrative cost incurred for the current year, including the amount recorded as license costs, was $854,000 which was $56,000 less than the prior year's $910,000. Decreased audit and tax fees of $30,000, and stock option grant compensation decrease of $27,000 were the primary cause of the decrease. General operating expense increases were offset by lower liability insurance costs and decreased legal fees.

Total other income decreased by $35,000 to $30,000 for the year ending December 31, 2008 from $65,000 in 2007. Net interest income for 2008 was $30,000 and in 2007 the net interest income was $65,000. The decrease in net interest income was due to decreased cash balances as the year progressed.

In 2008 the Company recorded a $3,000 tax provision and in 2007 the Company recorded a $5,000 tax provision for state minimum taxes.

As of December 31, 2008 the Company's gross deferred tax asset, which relates primarily to net operating losses carried forward, was approximately $5,361,000.
However, a full valuation allowance was provided for the gross deferred tax asset as management could not determine that it is more likely than not that the deferred tax asset will be realized.

Liquidity and Capital Resources

At December 31, 2008, the Company had cash and cash equivalents of $907,000, working capital of $609,000, and no bank borrowings outstanding. These balances at December 31, 2007 were $1,437,000 and $1,009,000, respectively with no bank borrowings outstanding. Net cash used in operating activities was $530,000 for the year ended 2008 as compared with net cash used by operating activities of $501,000 for the year ended December 31, 2007. The cash used in operations for 2008 increased by $29,000 and is comparable to the prior year.

The Company is aware of its liquidity position and the inconsistent revenue stream it experiences, the long lead times involved in product development, the time involved in executing new license agreements and now the current economic condition that we are all facing. The Company continues to limit spending to necessary operating expenses. Although the Company's current cash position and projected results of operations for the next twelve months are not expected to require additional outside financing, the Company must be successful in the next year with its licensing of its current technology and its new compounds ER 303 and ER 99. If these efforts are not successful the Company will need to secure additional financing opportunities. The Company may not be able to obtain such additional funding on commercially reasonable terms if such funding is required.

The Company adopted Financial Accounting Standards Board statement No. 157, Fair Value Measurements ("SFAS 157") on January 1, 2008, which did not have a material impact on its financial condition and results of operations. In September 2006, the Financial Accounting Standards Board issued SFAS 157 which defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, with earlier application encouraged. In February 2008, the Financial Accounting Standards Board issued FASB Staff Position No. FAS 157-2 "Effective Date of FASB Statement No. 157" ("FSP 157-2"), which delays the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, at least annually to fiscal years beginning after November 15, 2008.

In March 2008, the FASB released FAS No. 161, Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133.
FAS No. 161 requires enhanced disclosures about an entity's derivative instruments and hedging activities and thereby improves the transparency of financial reporting. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Management does not believe the adoption of FAS No. 161 will have a material impact on the Company's financial position or results of operations.

In May 2008, the FASB released FAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. FAS No. 162 identifies the sources of accounting principles and framework for selecting principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP Hierarchy). This statement is effective sixty days following the SEC's approval of Public Company Accounting Oversight Board amendments to AU
Section 411. Management does not believe the adoption of FAS No. 162 will have a material impact on the Company's financial position or results of operations.

In May 2008, the FASB released FAS No. 163, Accounting for Financial Guarantee Insurance Contracts - an interpretation of FASB Statement No. 60. The scope of FAS No. 163 is limited to financial guarantee insurance contracts focusing on the recognition and measurement of claim liabilities. This statement is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Management does not believe the adoption of FAS No. 163 will have any impact on the Company as the scope of the FAS is outside the Company's business activities.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial conditions and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and disclosures on the date of the financial statements. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to revenue recognition and license fees. We use authoritative pronouncements, historical experience and other assumptions as the basis for making judgments. Actual results could differ from those estimates.
We believe that the following critical accounting policies affect our more significant judgments and estimates in the preparation of our financial statements.

Stock Option Policy

The Company adopted SFAS 123 (R) "Share-Based Payment", to account for its stock options effective with the fiscal year beginning January 1, 2006. The fair value of each option granted is estimated on the date of the grant using the Black-Scholes option-pricing model. The Black-Scholes pricing model has assumptions for the risk free interest rates, dividends, stock volatility and expected life of an option grant. The risk free interest rate is based on the U.S. Treasury Bill rate with a maturity based on the expected life of the option and on the closest day to an individual stock option grant. Dividend rates are based on the Company's dividend history. The stock volatility factor is based on the past seven years of market prices of the Company's common stock. The expected life of an option grant is based on various factors including historical exercise rates in addition to the life of the stock option. The Company adjusts compensation expense by a forfeiture factor based on historical experience. The fair value of each option grant is recognized as compensation expense over the vesting period of the option on a straight line basis.

The Company did not record the stock compensation expense net of taxes since there was no material provision for income taxes for the periods ended December 31, 2008 and 2007 as the Company incurred net operating losses for which no benefit was recognized, nor were tax loss carryforwards utilized. The tax benefit is a component of the deferred tax asset disclosed in the income taxes footnote.

Use of Estimates

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

Revenue Recognition

Revenue is recorded at the time of merchandise shipment, net of provisions for returns. The Company records revenues from sales initiated by sales agents net of the sales commissions earned following the interpretative guidance provided by FASB Emerging Issue Task Force (EITF) No. 99-19 Reporting Revenue Gross as a Principal versus Net as an Agent. License fees are earned over the license period according to the terms of the license agreement and interpretative guidance provided by Staff Accounting Bulletin (SAB) No. 101 Revenue Recognition in Financial Statements and SAB No. 104 Revenue Recognition. The Company records multiple-element arrangements in accordance with EITF 00-21 Revenue Arrangements with Multiple Deliverables.

Multiple-element arrangements are assessed to determine whether they can be separated into more than one unit of accounting. A multiple-element arrangement is separated into more than one unit of accounting if all of the following criteria are met.

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The delivered items or service has value to the customer on a stand alone basis.

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There is objective and reliable evidence of the fair value of the undelivered items or service.

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If the delivery or performance of the undelivered items or service is considered probable and substantially in our control.

If these criteria are not met, then revenues are deferred until such criteria are met or until the period(s) over which the last undelivered element is delivered. If there is objective and reliable evidence of fair value for all units of accounting in an arrangement, the consideration is allocated to the separate units of accounting based on each unit's relative fair value.

Our agreement with Personal Products Company (hereinafter referred to as PPC) represents a multiple-element arrangement and includes post signing consulting support to PPC as needed to assist them in claims development and manufacturing processes, an exclusive right of first discussion for new compounds that the Company develops and documents supportable claims of effectiveness, and an exclusive right to our existing patented compounds in specific consumer product fields. A portion of the initial payment received as part of the PPC agreement is being recognized as the Company incurs expenses and resources towards fulfilling the obligations to PPC, based on interpretative guidance provided by EITF 00-21.

The PPC agreement was entered into on August 18, 2006 and will expire when the initial patents on the licensed technology expire, in March 2012. For the services and rights granted in the agreement the Company received an initial payment of $1,750,000 in September 2006 and will earn royalties on products developed and sold by PPC until the patents expire. The Company records revenue for the consulting services and right of first discussions as the Company incurs expenses and resources towards fulfilling its obligations to PPC. License revenue is being recognized on a straight-line basis over the life of the agreement of sixty-seven months. The Company began recognizing revenue from all three units during the quarter ending September 30, 2006.

A summary of the revenue recognized for these multiple units of accounting follows (in thousands):

                                            Year ending December 31,
                                              2008            2007
              Right of first discussion     $    248        $    292
              Exclusive license                  163            149
              Consulting services                46              57
               Total                        $    457        $    498

The deferred revenue related to the PPC agreement as of December 31, 2008 and 2007 was $612,000 and $1,068,000, respectively.

The Company granted Schwarzkopf & Henkel a non-exclusive license for the development, manufacture, sale and distribution of certain licensed hair styling products using the Company's patented technology. Schwarzkopf & Henkel paid a license fee of $20,000 plus royalties based on net sales of licensed products in specified countries. The license was effective May 1, 2007 and expires on April 30, 2010. The license was amended on February 15, 2008 to include other hair products on a non-exclusive basis.

The $20,000 license fee is being recognized on a straight-line basis over the life of the license of thirty-six months. There is no discernable service to be provided by the Company to warrant an alternative revenue recognition method.

A summary of the revenue recognized for the Schwarzkopf & Henkel license follows (in thousands):

                                       Year ending December 31,
                                         2008            2007
                  Royalty revenues     $    141        $     24
                  License fee                 7               4
                   Total               $    148        $     28

The deferred revenue related to the Schwarzkopf & Henkel agreement as of December 31, 2008 and 2007 was $9,000 and $16,000, respectively.

Income Taxes

The Company accounts for income taxes under SFAS 109 "Accounting for Income Taxes". Deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities in the Company's financial statements and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that all or some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would ultimately be sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more-likely-than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Off-Balance-Sheet Arrangements

As of December 31, 2008, the Company did not have any off-balance-sheet arrangements as defined in Item 303(a)(4) of SEC Regulation S-K.