SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K
(Mark one)

(X)  Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934 [Fee Required] for the fiscal year ended September 30, 1996, or

( )  Transition Report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934 [No Fee Required] for the transition period from 
     _______________ to ______________.


                           Commission File No. 0-11472

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

                              BIOMUNE SYSTEMS, INC.
             (Exact name of registrant as specified in its charter)

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

               Nevada                                    87-0380088
   (State or other jurisdiction of          (I.R.S. Employer Identification No.)
   incorporation or organization)

        2401 South Foothill Drive                        84109-1405
          Salt Lake City, Utah                           (Zip Code)
(Address of principal executive offices)

                                 (801) 466-3441
                         (Registrant's telephone number,
                              including area code)

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

Securities registered pursuant to Section 12(b) of the Act:

         Title of each class          Name of each exchange on which registered
                None                                    None

Securities registered pursuant to Section 12(g) of the Act:

                   Common Stock ($0.0001 par value per share)
                                (Title of class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)

The aggregate market value of the voting stock held by non-affiliates of
the registrant is $43,743,654 calculated using a closing/last trade price of
$2.25 on November 12, 1996. For purposes of this calculation, the registrant has
only included the number of shares held by its officers and directors directly
as of November 12, 1996 (and not counting shares beneficially held on that date)
in determining the shares held by non-affiliates. As of September 30, 1996,
including accrued but unpaid dividends through that date, 19,887,034 shares of
Common Stock, 135,589 shares of Series A 10% Cumulative Convertible Preferred
Stock, 11,058 shares of Series B 10% Cumulative Convertible Non-Voting Preferred
Stock and 5,000 shares of Series C 8% Cumulative Convertible Non-Voting
Preferred Stock were reflected as issued and outstanding.

                           Exhibit Index is on page 49
                                  Page 1 of 406



                              BIOMUNE SYSTEMS, INC.

                          1996 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS

                                     Part I
                                                                            Page

Item  1.   Business..........................................................  1
Item  2.   Properties.........................................................18
Item  3.   Legal Proceedings..................................................18
Item  4.   Submission of Matters to a Vote of Security Holders................19

                                     Part II

Item  5.   Market for Registrant's Common Equity and Related
             Stockholder Matters..............................................20
Item  6.   Selected Financial Data............................................24
Item  7.   Management's Discussion and Analysis of Financial Condition
             and Results of Operations........................................25
Item  8.   Financial Statements and Supplementary Data........................30
Item  9.   Changes in and Disagreements with Accountants on Accounting
             and Financial Disclosure.........................................31

                                    Part III

Item 10.   Directors and Executive Officers of the Registrant.................32
Item 11.   Executive Compensation.............................................36
Item 12.   Security Ownership of Certain Beneficial Owners and Management.....43
Item 13.   Certain Relationships and Related Transactions.....................44

                                     Part IV

Item 14.   Exhibits, Financial Statement Schedules, and Reports on
             Form 8-K.........................................................49


                                     PART I

ITEM 1.  BUSINESS

GENERAL

     Biomune Systems, Inc. ("Biomune") is a development stage biopharmaceutical
and nutraceutical company that, along with its wholly owned subsidiary, Optim
Nutrition, Inc. ("Optim"), is engaged primarily in the business of research,
development, production and marketing of biologic pharmaceutical products and
nutraceutical food supplements derived from Biomune's patented technology (the
"Technology"), which produces immune enhancing protein and replicates the
nutritional aspects of colostrum. Colostrum is the primary substance by which
most mammals develop passive immunity. Biomune, along with its two wholly owned
subsidiaries are sometimes, collectively, referred to herein as the "Company."
Nutraceutical products are food supplements that are derived from a food base
and marketed as a beneficial source of nutrients to promote good health. The
Company believes that the Technology may be utilized to develop products to
treat various gastrointestinal and infectious diseases in humans and that
products derived from the Technology may help increase the body's immune
response. The Company also believes that certain products derived from the
Technology may provide nutritional supplementation for certain individuals who
are nutritionally deprived or immune stressed or compromised.

     The Company has filed Investigational New Drug Applications ("IND") with
the United States Food and Drug Administration (the "FDA"), the United States
government agency that regulates drugs for humans, on two biological
pharmaceutical drug candidates developed from the Technology: BWPT-301(TM)
(formerly known as Immuno-C), which the Company believes may prevent and/or
treat cryptosporidiosis, a gastrointestinal disease caused by the
cryptosporidium parvum (C. parvum) microorganism, which causes acute and severe
diarrhea in humans; and BWPT- 302(TM), which the Company believes may be used
in the treatment of infection by the life-threatening bacteria, Escherichia
coli, strain 0157:H7 ("E. coli, strain 0157:H7"), a disease that causes severe
bloody diarrhea, and in children, a hemolytic uremic syndrome associated with
a high risk of permanent kidney damage. The Company is currently conducting
Phase II clinical trials on its BWPT-301(TM) drug candidate and plans to
commence Phase II clinical trials on its BWPT-302(TM) drug candidate. See
"-- Biologic Pharmaceutical Activities."

     Based upon data obtained from clinical trials and other studies involving
protein concentrate (the "Base Product") and BWPT-301(TM), which suggest
potential health-related nutritional benefits from the use of nutraceutical
products developed utilizing the Technology, the Company, through Optim,
developed and is now commercially marketing a nutraceutical product based on the
Technology. Optimune(TM) is marketed to immune-compromised individuals who need
nutritional supplementation for any number of reasons. The preliminary test
marketing launch (the "pre-launch") on Optimune(TM) commenced on June 17, 1996.
Commercial Marketing of Optimune(TM) commenced on July 8, 1996. See "--
Nutraceutical Activities" and "-- Market Potential for the Company's Products --
Optimune(TM) and other Nutraceuticals."

     Through Biomune's other wholly owned subsidiary, Volu-Sol, Inc.
("Volu-Sol"), the Company is also engaged in the manufacture and distribution of
medical diagnostic stains.

     In addition, the Company owns the rights to certain medical waste
technologies consisting of (i) a device for the sterilization and
decontamination of medical devices and wastes, (ii) a bioremediation process to
detoxify and degrade hazardous substances and (iii) a device and process for the
safe treatment of used medical stains. In May 1996, the Company granted a
license to a third party, Biomed Patent Development, L.L.C., to use the
technology related to the medical sterilization and decontamination device in
return for certain royalties. See "-- License of Medical Device Sterilization
Technology".

     The Company has generated no revenues from the sale of any biological drugs
or biological drug candidate, although Optim has generated a small amount of
revenues to date from the sale of its first nutraceutical product, Optimune(TM),
since the market launch of that product on July 8, 1996. Although the Company
has received and continues to receive revenues from the sale of Volu-Sol's
medical diagnostic stains, Volu-Sol's business has been operating at a net loss
since it was acquired by the Company in December 1991. There can be no assurance
that the Company will ever generate revenues from sales of biological
drugs/pharmaceutical products, or if the Company were to generate revenues from
any such products or product candidates, that such revenues would be at
commercially viable levels, that such revenues would result in gross or net
profits or positive operating margins, or that such revenues would result in a
positive cash flow.

BIOMUNE'S PROTEIN TECHNOLOGY

     The Technology is a licensed, patented process of filtering specific
proteins from bovine whey, a by-product of cheese production, to produce the
Base Product, from which various drugs and product candidates are formulated.
The Technology was developed based on numerous pre-clinical studies that
indicate colostrum, a substance every mother mammal imparts to its newly-born
infant, provides a mechanism for the infant to receive passive immunity. In
analyzing colostrum, scientists have discovered that it contains thousands of
immune enhancing proteins known as immunoglobulins (or antibodies). The Company
believes that when antibodies from whey are concentrated, the beneficial effects
of those antibodies duplicate the effects of colostrum. Disease fighting
antibodies can be found not only in colostrum, but also in cows' milk, and can
be extracted from ordinary whey. Biomune's patented Technology utilizes a
filtration process that produces high concentrations of antibodies, as well as
protein and molecules that may be beneficial in the treatment of infectious
diseases in humans. The Company has the exclusive right and license (through a
License Agreement dated May 21, 1991, which was subsequently amended as of
December 15, 1995, with Protein Technology, Inc.) to utilize the Technology
solely for human applications in the United States and Canada and each of their
territories and possessions.

     The Technology differs significantly from other existing technologies, such
as hyper-immunization and colostrum-based or colostrum-like technologies.
Hyper-immunization involves the injection or other exposure of a cow to a
particular disease and the extraction from the cow's milk or colostrum of
antibodies that are produced by the cow. The Company believes that utilization
of the Technology's process of filtering and concentrating bovine whey
represents a new and possibly more effective and possibly more economical
approach in the development of pharmaceuticals for the treatment and/or
prevention of certain diseases in humans and in the development of nutraceutical
products for the promotion of good health in humans. The Company's approach
utilizes readily available whole milk from cows that have not been
hyper-immunized and also achieves the goal of higher antibody titers by
filtration and concentration rather than by hyper-immunization. The Company
believes hyper-immunization precludes the use of the cows' milk or colostrum for
anything other than the intended purpose. The Company seeks to utilize whole
milk rather than colostrum because whole milk is available from each cow daily
throughout the year, whereas colostrum is generally available for only several
days per year from each cow.

     Based on the results of Phase I and Phase II clinical trials that were
conducted using the Company's BWPT- 301(TM) pharmaceutical product candidate,
the Company believes that products developed based on the Technology may be
successful in improving and promoting gastrointestinal health, especially in (i)
people who are HIV positive or have AIDS, (ii) immune-compromised patients such
as those undergoing high-dose antibiotic or chemotherapy treatment and (iii)
post-surgical and chronic care patients.

     The Company is currently focusing on the prevention and/or treatment of
cryptosporidiosis and E. coli, strain 0157:H7, with its biologic pharmaceutical
drug candidates BWPT-301(TM) (formerly known as Immuno-C) and BWPT-302(TM),
respectively. In addition, the Company believes that pharmaceutical products
developed through the utilization of the Technology may be useful in the
prevention and/or treatment of other diseases, although the Company has not
prepared or filed an IND with the FDA with respect to any such potential
pharmaceutical drug candidates. Some of the other diseases or microbial
infections that the Company believes may be preventable and/or treatable include
certain infectious bacteria known to be enteric pathogens (including, for
example, Helicobacter pylori ("H. pylori"), Clostridium difficile ("C.
difficile"), Campylobacter jejuni ("C. jejuni"), Yersinia enterocolitica ("Y.
enterocolitica") and Staphylococcus acreus ("Staph. aureus)) and certain
non-infectious immunologically-based syndromes, diseases and other conditions
(including, for example, certain cancers, such as prostate cancer, arthritis,
irritable bowel syndrome, traveler's diarrhea and acne).

     In addition, based upon data obtained from clinical trials and other
studies involving the Base Product and BWPT-301(TM), the Company believes that,
through Optim, the Technology may be used to develop several nutraceutical
products for the promotion of good health in humans. Optim has developed one
nutraceutical product, Optimune(TM), which is a nutritional dietary supplement
marketed to people who are HIV positive or have AIDS. The marketing pre-launch
of Optimune(TM) was commenced on June 17, 1996 and commercial marketing began on
July 8, 1996. See "-- General" and "-- Nutraceutical Activities."

BIOLOGIC PHARMACEUTICAL ACTIVITIES

     Clinical Trials

     BWPT-301(TM). The Company completed Phase I clinical trials on BWPT-301(TM)
(formerly known as Immuno- C) in October 1994 resulting in the establishment of
its safety profile in healthy humans within certain dose range parameters.

     A pediatrics protocol was submitted to the FDA in October 1995 for the
treatment of six pediatrics patients with advanced AIDS and chronic
cryptosporidiosis. No patients have yet been enrolled in this study.

     The FDA approved the Company's Emergency IND No. 6679 in June 1996 for the
treatment of one pediatric patient with advanced AIDS and cryptosporidiosis. The
patient was treated according to the Company's pediatrics protocol, which allows
for 90 days of dosing with the Base Product at a maximum dose of 3.0 g/kg/day.
the patient is under the care of Dr. Margarita Silio, who is affiliated with Dr.
Russell Van Dyke, head of the pediatric AIDS section at Tulane University and
Louisiana State University. The patient, a 12 year old girl with advanced AIDS,
had cryptosporidiosis for several months before beginning the study and was
experiencing diarrhea in excess of 1,000 g/day at the commencement of the study.
The patient had a CD4 cell count of 1/uL on June 10, 1996 and weighed only 51.7
lbs. No pathogens other than cryptosporidium parvum ("C. parvum") were
identified in the patient's stools. After 65 days of treatment at a dose of 2
g/kg/day, the study investigator reported that the girl's weight had increased
18%, to 59.6 lbs, with marked clinical improvement. By the end of the study, the
girl's diarrhea had improved dramatically; stool frequency had decreased and
stool consistency was more formed. The study was completed in September 1996.

     On March 20, 1996, the Company announced the results from an open-label,
dose escalating Phase II study of the tolerance, safety and efficacy of
BWPT-301(TM) in the treatment of cryptosporidiosis in individuals with AIDS.
That study was conducted with six adult AIDS patients over a 10-day period at
St. Luke's-Roosevelt Hospital Center in New York City, New York by Dr. Donald P.
Kotler. The resulting data will be utilized to design and conduct additional
Phase II dose-ranging studies on BWPT-301(TM).

     BWPT-302(TM). The Company filed an IND with the FDA on December 15, 1995 in
connection with the development of its second pharmaceutical product candidate,
BWPT-302(TM). The Company has now concluded its adult Phase I clinical trials on
BWPT-302(TM) and, after the analysis of the data from those trials, is planning
to commence a Phase I/II clinical trial to continue gathering data on
BWPT-302(TM).

     The Company filed this second IND focusing on certain strains of
Escherichia coli because of the amount of existing animal data supporting the
efficacy of products developed utilizing the Technology for the treatment of
Escherichia coli. A product similar to BWPT-302(TM) was developed, utilizing the
same technology, for animal applications, which product received approval from
the United States Department of Agriculture with a specific claim for the
treatment of a certain strain of Escherichia coli. The Company has no rights
with respect to that animal product. There is presently no effective drug to
treat certain strains of Escherichia coli (and particularly E. coli, strain
0157:H7) in humans. The Company believes there may be as many as 20,000 cases of
E. coli, strain 0157:H7, in humans in the United States each year, resulting in
approximately 250 deaths. This bacterial strain, which is acquired from
undercooked hamburger meat or from other sources, can cause severe bloody
diarrhea, and in children, a hemolytic uremic syndrome associated with a high
risk of permanent kidney damage. This IND has recently been expanded to include
strains of Escherichia coli that are entero adherent Escherichia coli (EAEC),
which the Company believes may substantially increase the market potential for a
drug that proves to be effective.

     The Company has completed the administration of BWPT-302(TM) to healthy
individuals in Phase I dose tolerance trials. Through those dose tolerance
trials, the Company gained a general understanding of how well various doses of
BWPT-302(TM) are tolerated and additional follow up trials are planned. Data
compilation and analysis of those trials is ongoing.

     Other Pharmaceutical Applications

     The Company intends to continue its research and pre-clinical development
efforts in order to assess the feasibility of filing additional INDs, followed
by clinical trials, in respect of potential drug candidates to be developed,
utilizing the Technology, for the treatment of certain infectious bacteria
(including, for example, H. pylori, C. difficile, C. jejuni, Y. enterocolitica
and Staph. aureus) and certain non-infectious immunologically-based syndromes,
diseases and conditions (including, for example, certain cancers, such as
prostate cancer, arthritis, irritable bowel syndrome and acne).

     Pre-Clinical Studies

     On November 1, 1994, the Company reported the results of animal studies
conducted by Dr. Joseph A. Smith, Jr. and Dr. Mitchell S. Steiner at Vanderbilt
University showing the efficacy of drug candidates derived from the Technology
in reducing the growth rate of prostate cancer tumors by 11%. These animal
studies were sponsored by the Company. Based on data from a separate study done
at Vanderbilt University, which study discovered an over-production of an immune
suppressing agent in the presence of prostate cancer cells, the Vanderbilt
University researchers selected the Technology to test the theory that an
immuno-modulating agent (such as the Base Product) may counteract the
immuno-suppression caused by cancer cells and thus act to control, reduce and/or
eliminate the tumor. In addition, research on cancer is being conducted by
Joseph A. Smith, Jr., M.D. at the Vanderbilt University Medical Center. Dr.
Smith is studying the possible effects of the Base Products against renal
carcinoma cell tumors extracted from humans and inducted into mice. This study
is currently ongoing but no study data or results have yet been released to the
Company.

     On May 15, 1995, the Company reported the results of an in vivo study on
rats conducted by Dr. Mitchell Steiner at Vanderbilt University. This follow up
study confirmed the data derived from the earlier study conducted at Vanderbilt
University and demonstrated that, when administered prophylactically to rats who
had been injected with prostate cancer tumor cells, there was a retardant effect
on the growth on the prostate tumor cells.

     Dr. Frederick Clayton at the Regional Veterans Administration Hospital in
Salt Lake City, Utah has been conducting indirect immuno-fluorescence testing of
the Base Product on various pathogenic enteric microorganisms. Preliminary
results from that research indicate a possible immuno-reaction against several
gastrointestinal tract pathogenic bacteria. This research is continuing and the
Company expects further results sometime in late-1996 or early-1997.

     Dr. Samuel Cohen at Associated Regional University Pathologists in Salt
Lake City, Utah is conducting studies on the effect of the Technology on
Propionibacterium acnes (P. acnes), a bacterium associated with acne vulgaris, a
common skin disorder of major significance to adolescents.

NUTRACEUTICAL ACTIVITIES

     Based upon the results of and the information obtained from clinical trials
and other studies involving the Base Product and BWPT-301(TM), which trials and
studies suggest potential health-related benefits from the use of nutraceutical
products derived from the Technology, the Company, during fiscal 1995, undertook
an analysis of the nutraceutical market. Nutraceutical products are food-based
nutritional supplements marketed as a beneficial source of nutrients to promote
good health in humans. On October 31, 1995, the Company incorporated Optim
Nutrition, Inc. as a wholly-owed subsidiary for the purpose of developing and
marketing nutraceutical products.

     FDA approval is not required to commence the marketing and sale of
nutraceutical products. However, in order to make broad and non-specific claims
regarding the benefits of using a particular nutraceutical product, studies must
be conducted to substantiate those claims. In addition, the Company's
nutraceutical products must be appropriately labeled in accordance with the
Dietary Supplement Health and Education Act of 1994 (the "Dietary Supplement
Act"). At any time subsequent to a company's commencement of marketing of a
nutraceutical product, both the FDA and the United States Federal Trade
Commission (the "FTC") have the right to review the accuracy of the product
claims being made. A company marketing nutraceutical products cannot make claims
such as the ability of a product to cure a particular disease or illness.
Rather, claims must be broadly made and may not be made with respect to
diagnosis, treatment, cure, mitigation or prevention of a specific disease or
illness.

     Optim recently completed a nutritional study that was monitored by
Clinimetric Research Associates, a contract research organization
("Clinimetric"). This study was conducted at two sites: St. Francis Memorial
Hospital in San Francisco, California and the East Bay AIDS Clinic in Berkeley,
California. Participant recruitment was completed in mid-May 1996 and patients
were monitored through the end of June 1996. Preliminary data from that study
have been provided to the Company, although no analysis of such data has been
completed by either the Company or Clinimetric and no analysis of those data is
expected to be completed until approximately February 1997. However, based upon
certain preliminary data from that study, the Company is cautiously optimistic
about its first nutraceutical product, Optimune(TM). Those preliminary data
prompted the Company to continue the implementation of the product launch of
Optimune(TM). Optim commenced the pre-launch on Optimune(TM) on June 17, 1996.
Several AIDS treatment sites were identified in different regions of the United
States to participate in the marketing pre-launch of Optimune(TM). Optim
anticipates the pre-launch will run for approximately two months for each
participant and is designed to provide, at no cost, a two month supply of
Optimune(TM). The aggregate cost of the nutritional study and the cost to launch
Optimune(TM) in a full marketing campaign is estimated to be approximately $2.5
million. The Company commenced the commercial distribution of Optimune(TM) on
July 8, 1996.

     Dr. Donald P. Kotler at St. Lukes-Roosevelt Hospital Center in New York
City, New York has begun a year long metabolic study. Other study sites that
began less rigorous studies are located in California, Florida, New York and
Oklahoma. These nutritional studies are designed to yield anecdotal and
corroborating data of the previous studies and provide new data that may
encourage the Company to introduce potential customers for Optimune(TM) to
Optim.

LICENSES AND PATENTS RELATING TO THE TECHNOLOGY

     Pursuant to a License Agreement dated May 21, 1991, and subsequently
amended as of December 15, 1995 (as amended, the "License"), Protein Technology,
Inc. ("PTI") granted the Company the exclusive right and license to utilize the
Technology in connection with the marketing and sale of pharmaceutical and
nutraceutical products, solely for human applications, in the United States and
Canada and each of their territories and possessions. By First Amendment to
Amended License Agreement entered into effective as of September 13, 1996, the
Company and PTI amended the License to expand the territories in which the
Company is licensed to market and sell products utilizing the Technology to
include the following countries and areas and their respective territories and
possessions: (i) the United States of America; (ii) Canada; (iii) Kenya; (iv)
the Ivory Coast; (v) Zimbabwe; (vi) Ghena; (vii) Zambia; and (viii) Nigeria. The
License includes the rights to human applications of the Technology contained
under four United States patents, each of which relates to methodologies to
produce large proteins (immunoglobulins) on a mass production basis. PTI has not
represented or warranted the quality or coverage of any of those patents, and
therefore the Company does not and cannot provide any assurance regarding PTI's
rights therein. The License expires in May 1999, unless the Company, prior to
such date, has generated annual gross revenues from the sale of products
developed utilizing the Technology of not less than $2 million, in which event
the License will be automatically extended until the expiration date of the
latest patent to expire covered by the License (including any extensions to such
patent registrations). Based on the patents currently licensed thereunder, the
License, if so extended, would expire on March 28, 2006.

     The License further provides that PTI may terminate the License upon the
Company's failure to observe or perform any of the covenants, terms, conditions
or provisions contained therein or in the event of a breach of any
representation or warranty made by the Company that is not cured within 30 days
after receipt of written notice thereof from PTI. The License may also be
terminated by PTI if the Company commences or has commenced against it any
proceeding under applicable bankruptcy law, makes a general assignment for the
benefit of its creditors, has a trustee or receiver appointed, suffers the
attachment, execution or judicial seizure of substantially all of its assets, or
becomes insolvent or liquidates or dissolves.

     The License also provides that promptly following the issuance of
authorization or approval by the FDA for sales of any pharmaceutical products
covered by the License, the Company and PTI will negotiate in good faith for the
grant of licensing rights for pharmaceutical products in other parts of the
world. In addition, upon achieving sales of $1 million during any 12 month
period with respect to nutraceutical products covered by the License, the
Company and PTI will negotiate in good faith for the grant of licensing rights
in other parts of the world.

     The Company is required to pay PTI royalties in the amount of 5% of gross
receipts from the sale of all products covered by the License with respect to
the first $3.5 million of sales during each annual period and 7% of gross
receipts with respect to all sales in excess of $3.5 million during such annual
period. In addition, in the event the License is extended past May 1999, the
Company is required to pay PTI annual advances to be applied against royalties
in the amount of $100,000 for the first year of such extension, and increasing
by $10,000 each year thereafter.

     In December 1995, a patent application was filed on behalf of certain
individuals relating to a method for enhancing the immune system using the
Technology and the Base Product. That patent application relates to an increase
in CD4 cell count in immune-compromised individuals. The patent application and
the invention covered thereby have been assigned to the Company. The title of
this patent application is "A Method for Enhancing the Immune System using
Immunologically-Active Bovine Whey Protein Concentrate." The authors on that
patent are Frank A. Eldredge, Ph.D., the Company's Executive Vice President --
New Product Development, David O. Lucas, Ph.D., a member of the Company's
Scientific Advisory Board, and Craig D. Moffat, M.D., a consultant to the
Company. Under the terms of the License, the improvements to the Technology that
are the subject of this patent application will be owned by PTI.

MANUFACTURING AND BASE PRODUCT SUPPLY ARRANGEMENT

     Optim is ordering all of its requirements for the Base Product for
Optimune(TM), and the Company will order all of its requirement for the Base
Product for BWPT-301(TM) and BWPT-302(TM), from PTI, which, in turn, places
orders with a distributor in New Zealand. This distributor contracts with a
single manufacturer to manufacture all of such requirements at its New Zealand
facilities.

     The Base Product to be used by the Company in connection with the Phase III
clinical trials of the Company's drug candidates must be manufactured in
accordance with current FDA-established Good Manufacturing Practices ("GMP").
The FDA's GMP standards establish stringent practices and procedures that must
be adhered to by a manufacturer in order to ensure the consistency of the
product and minimize the possibility of product contamination or adulteration.
The Base Product utilized during Phase III clinical trials must be produced at a
manufacturing facility that meets the FDA's then-current GMP standards.

     The BWPT-301(TM) that was utilized during the initial Phase II clinical
trials and that will be utilized during the Company's expanded Phase II and
Phase III clinical trials was and will be manufactured in New Zealand. On
October 25, 1994, the Company retained the consulting firm of Kemper-Masterson,
Inc. of Bethesda, Maryland to consult with and advise the Company regarding
those manufacturing facilities and their conformance to then-current FDA GMP
requirements. In November 1994, Kemper-Masterson, Inc. inspected the New Zealand
manufacturing facilities and reported to the Company that those manufacturing
facilities at that time were substantially in compliance with current GMP
standards. The Company has conducted a follow up inspection of the New Zealand
manufacturing facilities based upon the Kemper-Masterson, Inc. inspection and
believes that those facilities will be in full compliance with current GMP
standards on or prior to the intended date for the commencement of marketing and
distribution of the Company's first biologic pharmaceutical drug candidate. The
Company believes the manufacturing facilities to be used for the production of
the Base Product, BWPT-301(TM) and BWPT-302(TM) will be at FDA GMP certifiable
levels prior to commencement of marketing of any biologic pharmaceutical
products. The Company intends to file or have the manufacturer in New Zealand
file, as may be appropriate, an Establishment License Application ("ELA"). The
establishment license may be granted without inspection, but the facility is
subject to inspection by the FDA at least once every two years.

MARKET POTENTIAL FOR THE COMPANY'S PRODUCTS

     Optimune(TM) and Other Nutraceuticals

     On July 8, 1996, Optim commenced commercial marketing of Optimune(TM) as a
nutritional dietary supplement to people who are HIV positive or have AIDS and
who are suffering from weight loss. Optim believes that in the United States
there are approximately 275,000 individuals with AIDS, many of whom suffer from
severe chronic weight loss. Furthermore, Optim believes that there are numerous
individuals with AIDS who experience some level of weight loss, but who have not
yet been diagnosed with severe chronic weight loss. In addition, Optim believes
that, in the United States, there are approximately one million individuals who
are HIV positive, but not yet diagnosed with AIDS, many of whom are believed to
be concerned about weight maintenance and weight loss. The Company estimates
that a small percentage of the users and potential users of Optimune(TM) may be
eligible for third-party reimbursement.

     Optim may in the future also market Optimune(TM) or a similar nutraceutical
product as a nutritional dietary supplement for people experiencing weight loss
as a result of intensive antibiotic or chemotherapy treatment, as well as to
elderly persons experiencing weight loss problems. Optim believes that the
market for Optimune(TM) or a similar nutraceutical product for these patient
populations currently consists of approximately five million individuals in the
United States alone.

     Each of these markets represents a significant opportunity for the
marketing and distribution of Optimune(TM) and/or similar nutraceutical
products. However, other than with respect to the AIDS and HIV market, where
marketing has already commenced, there can be no assurance that Optim will
commence commercial marketing of Optimune(TM) or any other nutritional or
nutraceutical product to the above-described markets or to any other market, nor
can there be any assurance that if commercial marketing is commenced, such
effort would be successful.

     BWPT-301(TM)

     Cryptosporidiosis is caused by the water-borne parasite C. parvum, which
has been reported to have been detected in approximately 85% of United States
surface water. In 1993, for example, the water supply for the City of Milwaukee,
Wisconsin was contaminated by C. parvum, debilitating 25% of the city's
population and accounting for approximately 100 deaths. The immune-compromised,
the very young and the elderly are particularly susceptible to this parasite. On
May 1, 1996, the United States Environmental Protection Agency (the "EPA")
ordered the nation's 353 largest municipal water suppliers to begin testing for
C. parvum. During 1995, approximately 500,000 individuals in the United States
were diagnosed with cryptosporidiosis. The Company believes that there are
numerous additional undiagnosed and misdiagnosed cases of cryptosporidiosis
that, if properly diagnosed, would increase this market opportunity.

     BWPT-302(TM)

     E. coli, strain 0157:H7, infection causes severe bloody diarrhea, and in
children, a hemolytic uremic syndrome associated with a high risk of permanent
kidney damage. E. coli, strain 0157:H7, has been found to be the cause of severe
illness and death in certain cases of ingestion of tainted hamburger meat. While
the Company believes that this market only involves approximately 20,000 cases
per year in the United States, resulting in approximately 250 deaths, because of
the severity of this condition, the Company believes that an important market
opportunity exists.

     Other Gastrointestinal Microorganisms and Syndromes

     While the Company is currently focusing its efforts and resources on its
two pharmaceutical drug candidates (BWPT-301(TM) and BWPT-302(TM)) and its
nutraceutical product (Optimune(TM)), in the future it may begin research and
development utilizing the Technology for other possible disease indications,
including, but not limited to, H. pylori, prostate cancer, C. jejuni, irritable
bowel syndrome, arthritis, traveler's diarrhea, acne and certain immunological
disorders and infections by microorganisms.

MARKETING AND DISTRIBUTION ARRANGEMENTS

     Optim began marketing Optimune(TM) on a non-prescription or "doctor
recommended" basis. Optimune(TM) is being marketed and distributed directly by
Optim primarily to people who are HIV positive or have AIDS. The Company began
its marketing pre-launch, which consists of a direct mail effort, a free
sampling program, marketing efforts directed toward AIDS support groups and
other efforts. There can be no assurance that the Company or Optim will ever be
able to market and distribute Optimune(TM) profitably or that the Company or
Optim will be successful in establishing any distribution relationships.

     Optim commenced the marketing pre-launch of Optimune(TM) on June 17, 1996.
Several AIDS treatment study sites have been identified in different regions of
the United States to participate in the marketing pre-launch of Optimune(TM).
Optim anticipates that the pre-launch will run for approximately two months for
each participant and is designed to provide a two month supply of Optimune(TM)
at no cost.

     The Company has not yet formulated any plans with respect to the marketing
and distribution of its biological pharmaceutical drug candidates, BWPT-301(TM)
and BWPT-302(TM). The Company anticipates that it may be necessary to establish
a third-party alliance for such purposes.

     The License (as amended by the First Amendment to Amended License Agreement
entered into effective as of September 13, 1996) with PTI grants the Company the
exclusive right and license to utilize the Technology in connection with the
marketing and sale of pharmaceutical and nutraceutical products, solely for
human applications, in the following countries and areas and their respective
territories and possessions: (i) the United States of America; (ii) Canada;
(iii) Kenya; (iv) the Ivory Coast; (v) Zimbabwe; (vi) Ghena; (vii) Zambia; and
(viii) Nigeria. The License provides that PTI shall, directly or through a duly
authorized third-party manufacturer, be the exclusive supplier of all Base
Product for all products marketed and sold by the Company that utilize the
Technology. The License also provides that PTI will sell to the Company, and the
Company will purchase from PTI, all of the Company's requirements of Base
Product for use in the products marketed and sold by the Company that embody the
Technology. By its terms, the License allows the Company to market and sell
products embodying the Technology solely within the following countries and
areas: (i) the United States of America; (ii) Canada; (iii) Kenya; (iv) the
Ivory Coast; (v) Zimbabwe; (vi) Ghena; (vii) Zambia; and (viii) Nigeria, and
also allows the Company to sell or otherwise market such products to purchasers
for use or resale solely within those countries and areas. In addition, the
License further provides that promptly following the issuance of authorization
or approval by the FDA for sales of any products using the Technology for
pharmaceutical purposes, PTI and the Company will negotiate in good faith
possible product registrations and licensing compensation arrangements for other
parts of the world. Additionally, the License provides that promptly following
the achievement of $1 million in gross receipts in a period not to exceed 12
months from products using the Technology that do not require marketing approval
from the FDA (i.e., nutraceutical products), PTI and the Company will discuss
possible product registrations and licensing arrangements for other parts of the
world where neither PTI nor any of its affiliates has any existing similar
business in operation or any plans for the expansion of a similar business in
that part of the world.

COMPETITION

     At present, there are several companies, such as ImmuCell Corporation and
GalaGen, Inc., that are involved in the research and development of drugs
derived from colostrum and hyper-immunized cows, which companies are or could
become competitors of the Company. In addition, the Company also faces potential
competition from numerous pharmaceutical and other biopharmaceutical companies
that are currently developing products, utilizing unrelated technologies, for
the treatment and/or prevention of many of the diseases, infections and
syndromes identified by the Company for application of its product candidates.

     Competition in the pharmaceutical and medical and diagnostic technology
industries is extremely intense. The Company competes with many other companies
that have substantially greater capital resources, research and development
capabilities, manufacturing and marketing resources, and experience than does
the Company. The Company is not aware of any competitor or potential competitor
that has developed and successfully commercialized any pharmaceutical that
effectively treats cryptosporidiosis in humans. Although certain drugs have been
found to be effective against some strains of the Escherichia coli bacteria, the
Company is not aware of any drugs that have proven effective against the strain
of Escherichia coli that the Company has identified for treatment with its BWPT-
302(TM) drug candidate (i.e., E. coli, strain 0157:H7). Several potential
competitors are currently researching and developing colostrum-based or
colostrum-like and hyper-immunization drugs for the treatment of
cryptosporidiosis and other diseases in humans. Some of these competitors are
currently seeking FDA approval for their respective drugs. If a competitor were
successful in developing a competing product and in receiving FDA approval to
market prior to the Company receiving such FDA approval on BWPT-301(TM),
BWPT-302(TM) and/or any other drug candidate developed by the Company, the
value, viability and marketability of BWPT-301(TM), BWPT-302(TM) and/or any such
other drug candidate could be materially adversely affected and the Company's
business prospects severely negatively impacted.

     In addition, competition among the producers of nutraceutical products is
extremely intense. Two nutraceutical products are produced and distributed by
the Ross Products Division of Abbott Laboratories--Ensure(R) and Advera(R). The
Company believes that Ensure(R) is currently marketed to the elderly and others
as a nutritional supplement or meal replacement, while Advera(R) is being
marketed to individuals who are HIV positive or have AIDS as a nutritional
supplement or meal replacement and as a way to manage their weight. The Company
believes that the Ross Products Division of Abbott Laboratories currently
controls approximately 70% of the nutritional supplement and meal replacement
markets. While Optim intends only to market Optimune(TM) as a dietary supplement
(and not as a meal replacement), because Advera(R) is being marketed to people
who are HIV positive or have AIDS, there is a possibility that Optimune(TM) may
compete with Advera(R).

GOVERNMENT REGULATION

     All of the biopharmaceutical products and technologies owned by or licensed
to the Company are heavily regulated by the FDA, the EPA and/or other regulatory
authorities pursuant to applicable federal, state and/or local laws, rules and
regulations. While the Company's nutraceutical products will probably not be
subject to premarket approval by the FDA, they will be regulated on a
post-marketing basis by the FDA and be regulated by the FTC and other regulatory
authorities pursuant to applicable federal, state and/or local laws, rules and
regulations. The Company is in the process of seeking FDA approval for
BWPT-301(TM) and BWPT-302(TM). In addition, after the marketing launch,
Optimune(TM) or any other nutraceutical products labeling and promotional
materials may be reviewed by the FTC and the FDA. The medical diagnostic stains
produced by Volu-Sol are subject to the rules and regulations adopted by the
Occupational Safety and Health Administration. Moreover, Volu-Sol's
manufacturing process is regulated by the EPA and the FDA and is subject to
various federal, state and local environmental and health and safety laws, rules
and regulations. The Company has incurred and will continue to incur substantial
costs in complying with applicable laws, rules and regulations to which it and
its operations and products and product candidates are subject. The Company
believes that it is currently in compliance in all material respects with all
applicable laws, rules and regulations governing its operations and products and
product candidates.

     In addition, the Company is subject to the Dietary Supplement Act with
respect to its nutraceutical products. The Dietary Supplement Act governs the
labeling of and certain other matters related to dietary supplements. While the
FDA has adopted regulations that could apply to such supplements, the FDA has
decided to date not to enforce certain of those regulations. The FDA has
proposed new regulations applicable to nutraceutical products that will
supersede the existing regulations, which are anticipated to be adopted in
early-1997. The Dietary Supplement Act does, and the proposed regulations (which
proposed regulations are recommended to be followed by the FDA) if adopted will,
dictate the labeling requirements for dietary supplements (such as
Optimune(TM)). The Company believes it is currently in compliance with the
Dietary Supplement Act and the proposed regulations recommended to be followed
by the FDA.

LICENSE OF MEDICAL DEVICE STERILIZATION TECHNOLOGY

     The Company owns a 90% interest in a certain technology relating to the
sterilization and decontamination of medical devices and waste (the
"Sterilization Technology"). Pursuant to a License Agreement dated as of May 6,
1996 (the "Sterilization License"), the Company granted a 15 year license to
Biomed Patent Development L.L.C. ("Biomed"), the owner of the remaining 10%
interest in the Sterilization Technology, for the exclusive use of the
Sterilization Technology in connection with the manufacture and distribution of
medical devices based on the Sterilization Technology and the provision of
services relating thereto.

     Under the Sterilization License, the Company will receive royalties for the
first year of the Sterilization License (which royalties are due by November 2,
1996) equal to the greater of (i) 7.5% of gross sales or (ii) $45,000. In
addition, the Company is entitled to receive royalties for all subsequent years
equal to the greater of (i) 0.9% of gross sales or (ii) $90,000.

     The Company has represented and warranted to Biomed that the Company is the
owner of a 90% interest in the Sterilization Technology and that the
Sterilization Technology, to the best of the Company's knowledge, does not
infringe any patent rights, copyrights, trade secret rights or other proprietary
rights of others. Notwithstanding the foregoing, Biomed has entered into a
license with a third party in settlement of an alleged infringement claim by
such third party relating to the Sterilization Technology and Biomed has
indemnified the Company against any damages resulting from claims of such third
party. In addition, the Company's liability under the Sterilization License has
been limited to the aggregate royalties payable to the Company under the
Sterilization License.

EMPLOYEES

     As of September 30, 1996, the Company employed 21 full-time employees and
two part-time employees, as follows: Biomune -- eight full-time employees and
one part-time employee; Optim -- eight full-time employees and Volu-Sol -- five
full-time employees and one part-time employee. The Company is dependent upon
the efforts and abilities of certain of its senior management personnel and
scientific staff, and, particularly David G. Derrick, the Company's Chief
Executive Officer and Chairman of the Board, Milton G. Adair, the Company's
President, Frank A. Eldredge, Ph.D., the Company's Executive Vice President --
New Product Development, and David O. Lucas, Ph.D., one of the members of the
Company's Scientific Advisory Board. The loss of any of those individuals could
have a material adverse effect on the Company and its operations and prospects.

     The Company contracts with certain third parties for all of its legal
requirements and for a significant portion of its research and development
requirements, and intends to continue to do so in the future. None of the
Company's employees are subject to a collective bargaining agreement.

     While certain of the Company's employees have experience in the medical
products and biotechnology fields, and all of the members of the Company's
Scientific Advisory Board are experienced physicians with varying areas of
expertise, such experience may not necessarily be indicative of the Company's
ability to achieve profitable operations.

CERTAIN BUSINESS CONSIDERATIONS AND RISK FACTORS

     There are certain significant risks facing the Company, many of which are
substantial in nature. Shareholders and prospective shareholders in the Company
should consider carefully the following risk factors, in addition to other
information contained herein.

     Development Stage; Technological Uncertainty. The Company is a development
stage company. Except for the activities of its subsidiary Volu-Sol, the Company
has not produced or marketed any products (other than the marketing launch of
the Company's first nutraceutical product Optimune(TM), which marketing launch
commenced on July 8, 1996) and, accordingly, has not generated any revenues from
any of its pharmaceutical drug candidates and has not begun to generate any
revenues to date from the commercialization of Optimune(TM). To date, the
Company's resources have been dedicated to the research and development of
pharmaceutical drug and nutraceutical product candidates utilizing the
Technology and pre-clinical studies and clinical trials on those drug candidates
and studies on the Company's only nutraceutical product, Optimune(TM). The
Company has developed only two pharmaceutical drug candidates and one
nutraceutical product to date. The commercialization of the Company's
pharmaceutical drug candidates will require significant additional investment,
research and development, pre-clinical and clinical testing, and regulatory
approvals, while continued commercialization of the Company's first
nutraceutical product will require significant additional investment, research
and development, and nutritional studies. There can be no assurance that the
Company will be able to develop, produce at a reasonable cost, or market
successfully, any of its product candidates. Further, those product candidates
may prove to have undesirable or unintended side effects that may prevent and/or
limit their commercial use and salability. All of the Company's pharmaceutical
drug candidates, including BWPT-301(TM) and BWPT-302(TM), will require
regulatory approval before they can be commercialized and will be subject to
regulatory oversight upon commencement of commercial use. There can be no
assurance that any products that ultimately are developed by the Company will
generate substantial revenues or that the Company will ever be profitable.

     History of Operating Losses; Uncertainty of Future Profitability. The
Company has incurred significant operating losses since its inception. As of
September 30, 1996, the Company had an accumulated deficit of $23,372,299. The
Company expects to continue to incur significant operating losses over the next
several years, primarily due to the continued market launch of Optimune(TM) and
related marketing expenditures, expansion of the Company's research and
development programs, including pre-clinical studies and clinical trials for its
existing pharmaceutical product candidates, nutritional studies for its existing
nutraceutical product, Optimune(TM), regulatory compliance requirements related
to the Company's pharmaceutical drug candidates, studies and trials for other
products that the Company or its subsidiaries may develop, and the
implementation of programs to market those products that are ultimately approved
for distribution, if any. The Company's ability to achieve profitability depends
upon its ability to successfully launch Optimune(TM) and discover and develop
new products, obtain any necessary regulatory approvals of its proposed
products, and enter into agreements for product development, manufacturing and
commercialization. There can be no assurance that the Company will ever achieve
significant revenues or profitable operations from the sale of its proposed
products.

     Need for Additional Funds; Issuance of Securities; Future Dilution. The
Company expects to continue to incur significant operating losses over the next
12 months, primarily due to the market launch of Optimune(TM) and related
marketing expenditures, expansion of its research and development programs,
including pre-clinical studies and clinical trials for its existing
pharmaceutical drug candidates, nutritional studies for its existing
nutraceutical product, Optimune(TM), regulatory compliance requirements relating
to its pharmaceutical drug candidates, studies and trials for other products
that the Company or its subsidiaries may develop, and the implementation of
programs to market those products that are ultimately approved for distribution,
if any. Other factors such as extended pre- clinical and clinical trials,
difficulty in obtaining regulatory approvals, competition and unforeseen market
developments, unforeseen or unexpected difficulties in securing Base Product
used in the production of the Company's products from its sole supplier in New
Zealand, changes in existing research relationships, the Company's ability to
maintain and establish additional collaborative arrangements and unexpected
expenditures relating to the Company's operations could result in the Company's
need for additional funds sooner than anticipated.

     Notwithstanding revenues that may be produced through sales of Optimune(TM)
or other nutraceutical products that may be developed by the Company, the
Company anticipates that additional funds will be required to continue the
necessary levels of research and development to meet the Company's long-term
goals. The Company intends to seek such additional funding through additional
public or private financings. There can be no assurance, however, that
additional financing will be available, or, if available, that it will be
available on acceptable terms or in required amounts. If additional funds are
raised by issuing additional shares of the Company's Common Stock, further
dilution of the equity ownership of the Company's existing holders of Common
Stock may result. If adequate funds are not available, the Company may be
required to delay, scale back or eliminate one or more of its drug candidates
and/or product development programs, and/or obtain funds through arrangements
with collaborative partners or others that may require the Company to relinquish
rights to certain of its product candidates and/or technologies or products that
the Company would not otherwise relinquish.

     Dependence on Licensed Technology. The Company is dependent upon the
License granted to it by PTI for the use of the Technology. The Company's
existing pharmaceutical drug candidates (i.e., BWPT-301(TM) and BWPT-302(TM)),
Optimune(TM) and all additional products currently under research and
development, are derived from and based upon the Technology. The License expires
in May 1999, unless the Company, prior to such date, has generated annual gross
revenues from the sale of products developed utilizing the Technology of not
less than $2 million, in which event the License will be automatically extended
until the expiration date of the latest patent to expire covered by the License
(including any extensions to such patent registrations). Based on the patents
currently licensed thereunder, the License, if so extended, would expire on
March 28, 2006. If the License is terminated for any reason, the Company would
lose all rights to the Technology, which would have a material adverse effect on
the Company's operations and could possibly result in the termination of the
Company's business.

     Government Regulation; No Assurance of Product Approval; Extensive Clinical
Testing Required. All pharmaceutical products that may be developed by the
Company will be subject to stringent government regulations, including, without
limitation, those administered by the FDA and state and local counterparts.
Similar regulatory frameworks exist in other countries, including Canada, where
the Company is also licensed to distribute its products pursuant to the License.
The Company is planning to market its pharmaceutical drugs in foreign markets if
it becomes licensed to distribute its products outside of the United States and
Canada and their territories and possessions, and has already begun to market
Optimune(TM), the Company's first nutraceutical product, in certain foreign
markets. To date, the Company has completed extensive clinical trials on
BWPT-301(TM) pursuant to the submission with the FDA of an IND and has had
substantial contact with the FDA concerning such product candidate. The Company
has also commenced clinical trials on BWPT-302(TM) pursuant to a second IND,
although communications with the FDA concerning such product candidate are at a
very early stage. Prior to marketing either of such drug candidates or any other
pharmaceutical drug candidate that the Company may develop, such drug candidates
must undergo extensive clinical trials and an extensive regulatory approval
process. Any denials or delays in obtaining the requisite approvals would likely
have a material adverse effect on the Company.

     The pharmaceutical regulatory process includes extensive pre-clinical
safety, pharmacology and toxicological testing. Pre-clinical data is required
for the filing of an IND with the FDA to conduct clinical testing to establish
safety, efficacy, purity and potency of any investigational biological product.
With respect to each biologic pharmaceutical product candidate, the developer
must initially conduct a limited Phase I (safety) study, then more extensive
Phase II studies, followed by a Phase III study. This testing can take several
years and require the expenditure of substantial capital and other resources.
There can be no assurance that this testing will be completed on a timely basis
or at all. Delays or denials of marketing approval are encountered regularly.
These delays may be encountered both domestically and abroad. Prior to a company
commencing marketing of a pharmaceutical product, it must file a Product License
Application ("PLA") and an Establishment License Application ("ELA") with the
FDA and be issued the appropriate product license and establishment license. A
PLA relates to the product itself, while an ELA relates to the manufacturing
facilities to be used to manufacture the product. Both a PLA and an ELA are
required before product marketing can begin. There can be no assurance that even
after clinical testing, regulatory approval of a PLA or an ELA will ever be
obtained. If obtained, PLA and ELA regulatory approval may entail limitations on
the indicated uses for which any product may be marketed. Following regulatory
approval, if any, a product and its manufacturer are subject to continuing
regulatory oversight and review. Later discovery of problems with a product or
its manufacturer may result in restrictions on such product or its manufacturer.
These restrictions may include withdrawal of the marketing approval for the
product. Violation of FDA requirements in general can lead to recall or seizure
of products, injunction against production, distribution, sales and marketing,
and criminal prosecution, among other sanctions.

     The cost to the Company of conducting extensive human clinical trials for
any potential biopharmaceutical product can vary dramatically based on a number
of factors, including, but not limited to, the order and timing of clinical
indications pursued, the size of the patient population, the number of
participating institutions and the number and type of end points subject to data
collection. Because of the intense competition in the market in which the
Company operates, the Company may have difficulty obtaining sufficient
populations or clinician support to conduct its clinical trials as planned and
may have to expend substantial additional funds to obtain access to such
resources, or delay or modify its plans significantly. There can be no assurance
that the Company will have sufficient resources to complete the required
clinical testing and regulatory review and approval process or that the Company
could survive the inability to obtain, or delays in obtaining, such approvals.
Moreover, there can be no assurance that clinical testing of the Company's
product candidates will provide sufficient evidence of safety and efficacy in
humans, that regulatory approvals will be granted for any product candidate, or
that it will be economically feasible to commercialize any product candidate for
which regulatory approval is ultimately granted.

     In addition, the Company is also subject to the Dietary Supplement Act with
respect to its nutraceutical products. The Dietary Supplement Act governs the
labeling of and certain other matters related to dietary supplements. While the
FDA has adopted regulations that could apply to such supplements, the FDA has
decided to date not to enforce certain of those regulations. The FDA has
proposed new regulations applicable to nutraceutical products that are
anticipated to be adopted in early-1997. While the Company believes it is
currently in compliance with the Dietary Supplement Act and the FDA's proposed
regulations, there can be no assurance that the proposed regulations will be
adopted in the form proposed, that additional legislation will not be adopted in
the future to regulate nutraceutical products, or that the Company will be able
to comply with any such future laws or regulations.

     Uncertainty Regarding Patents and Proprietary Rights. The pharmaceutical
industry places considerable importance on obtaining patent and trade secret
protection for new technologies, products and processes. The success of the
Company will depend in large part on its ability or on the ability of its
current licensor under the License, PTI, to defend existing or future patents,
and on their ability, and on the ability of the Company's potential future
licensors, to maintain trade secrets and operate without infringing upon the
proprietary rights of others, both in the United States and in foreign
countries. Patent protection is highly uncertain and involves complex legal and
factual questions and issues. The Company relies on four patents issued to PTI
on the Technology and a patent applied for by the Company relating to the
enhancement of the Technology, and may also rely on additional United States
patents and pending United States and foreign patent applications relating to
various aspects of its present product candidates and future product candidates
and processes that may be issued in the future. The patent application and
issuance process can be expected to take several years and could entail
considerable expense to the Company, as it may be responsible for such costs
under the terms of any technology agreements. There can be no assurance that
patents will issue as a result of any applications or that the existing patents
and any patents resulting from such applications, will be sufficiently broad to
afford protection against competitors with similar or competing technology. In
addition, there can be no assurance that such patents will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
competitive advantages to the Company. The commercial success of the Company
will also depend upon avoiding infringement of any patents issued to
competitors. A United States patent application is maintained under conditions
of confidentiality while the application is pending, so the Company cannot
determine the inventions being claimed in pending patent applications filed by
third parties, if any. Litigation may be necessary to defend or enforce the
Company's patent and license rights or to determine the scope and validity of
others' proprietary rights. Defense and enforcement of patent claims can be
expensive and time consuming, even in those instances in which the outcome is
favorable, and could result in the diversion of substantial resources and
management time and attention from the Company's other activities. An adverse
outcome could subject the Company to significant liability to third parties,
require the Company to obtain licenses from third parties, require the Company
to alter its products or processes, or cease altogether any related research and
development activities or product sales, any of which may have a material
adverse effect on the Company's business, results of operations and financial
condition.

     With respect to the patents and other proprietary technology licensed by
the Company from PTI, PTI has not provided any representations or warranties to
the Company relating to non-infringement of third party proprietary rights and
has not indemnified the Company against any damages or expenses arising out of
any such claims of infringement. To the extent that the Technology or any
portion thereof is found to infringe the proprietary rights of any other person
or entity, the Company could be liable for the payment of substantial damages
without the likelihood of any contribution by PTI. Such event could have a
material adverse effect on the Company's operations.

     The Company also relies on trade secrets, know-how and continuing
technological advancement to maintain its competitive position. Although the
Company has entered into confidentiality agreements with its employees and
consultants, no assurance can be given that others will not gain access to those
trade secrets, that such agreements will be honored, or that the Company will be
able to effectively protect its rights to its trade secrets. Moreover, no
assurance can be given that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets.

     Technological Changes. The Company currently is engaged in the fields of
nutraceuticals, pharmaceuticals and diagnostics, all of which are characterized
by extensive research efforts and rapid technological progress and change. New
process developments are expected to continue at a rapid pace in both industry
and academia. The Company's future success will depend on its ability to develop
and commercialize its existing pharmaceutical drug and nutraceutical product
candidates and to develop new products. There can be no assurance that the
Company will successfully complete the development of any of its existing
product candidates or that any of its future products will be commercially
viable or achieve market acceptance or success. In addition, there can be no
assurance that research and development and discoveries by others will not
render some or all of the Company's programs or potential pharmaceutical drug
and nutraceutical product candidates uncompetitive or obsolete.

     Dependence on Third-Party Manufacturer; Limited Source of Supply. The
Company is dependent on a single third-party manufacturer to manufacture the
Base Product used in the production of its product candidates and anticipates
the use of third-party manufacturers for the manufacture of the Base Product in
connection with the production of all products it may develop, if any, for the
foreseeable future. Pursuant to the License with PTI, the Company has agreed to
purchase all of its requirements for the Base Product from one supplier, PTI,
which, in turn, places orders for such required Base Product with a distributor
in New Zealand, which distributor contracts with a single manufacturer to
manufacture all of such requirements at its New Zealand facilities. Although the
License permits the Company to utilize alternate sources of supply during any
period in which PTI is unable to satisfy all of the Company's requirements for
the Base Product, in the event PTI or the sole manufacturer of the Base Product
fail to supply any or all of the Company's requirements for the Base Product,
there can be no assurance that alternate sources of supply will be available to
the Company at a reasonable cost or at all, and, if available at a reasonable
cost, whether the Company will be able to secure such alternate sources in a
timely manner. If such alternate sources of supply are not available on a timely
basis or on reasonable economic terms, the Company's results of operations could
be severely adversely affected.

     In addition, the manufacturing facilities in which the Company's
pharmaceutical products are manufactured must conform to current FDA established
Good Manufacturing Practices ("GMP"). Although the New Zealand manufacturing
facilities have received a rating from the United States Department of
Agriculture with respect to the manufacture of the Base Product for animal
applications, those facilities have not, as of the date hereof, received FDA
approval necessary for pharmaceutical human applications. The Company has
retained a consulting firm to advise it regarding compliance by those
manufacturing facilities with current GMP standards because the Company's
pharmaceutical product candidates will be manufactured at those facilities. The
Company's consultant has reported that those manufacturing facilities are
substantially in compliance with current GMP standards. The Company cannot
commence marketing and/or distribution of its pharmaceutical product candidates
until the manufacturing facilities have been properly licensed by the FDA, which
license cannot be obtained until the facilities meet then-current GMP standards.
Those standards must be met on an ongoing basis and the licensed facilities are
subject to inspection by the FDA at least once every two years. The failure of
the manufacturing facilities to meet such GMP standards in a timely manner could
result in delays in the marketing and sale of the Company's pharmaceutical
product candidates until modifications are made to comply with such standards.
In the event that the New Zealand manufacturer is unable or unwilling to make
such changes, the Company would be required to find an alternate source to
manufacture its pharmaceutical product candidates. If alternate manufacturing
sources are not available on a timely basis or on reasonable economic terms, the
Company's results of operations could be materially adversely affected. See "--
Manufacturing and Base Product Supply Arrangement."

     Moreover, the Base Product for Optimune(TM) and possibly certain of the
Company's future nutraceutical products that are based on the Base Product, if
any, also will be manufactured at that same New Zealand manufacturing facility
pursuant to the License with PTI. The New Zealand manufacturing facility
currently meets all requirements for the production of the Base Product for
Optimune(TM), the Company's first nutraceutical product. While the FDA does not
currently regulate the manufacturing facilities for nutraceutical products
(other than to require that such facilities comply with its current GMP
standards), there can be no assurance that the FDA at some time in the future
will not begin regulating such manufacturing facilities. If the FDA were to
begin regulating the manufacturing facilities for nutraceuticals and if the New
Zealand manufacturing facilities did not meet those standards, the production of
the Base Product for Optimune(TM) (or any other nutraceutical product that may
be developed) will be delayed until the necessary modifications are made to
comply with those standards. If the New Zealand manufacturer were unable or
unwilling to make the necessary modifications, the Company would be required to
find an alternate source to manufacture the Base Product for Optimune(TM) (or
any other nutraceutical product that may be developed that utilizes the Base
Product).

     Competition. The Company competes with a number of entities that are
currently developing pharmaceutical drugs derived from or that include
antibodies extracted from various by-products of cow's milk or colostrum,
including several companies that are developing and producing products and
product candidates to prevent and/or treat cryptosporidiosis. In addition, the
Company competes with a number of other companies that utilize other
technologies and that target the same infections, organisms or diseases in
humans. Such competitors include numerous academic and research organizations
and pharmaceutical and biotechnology companies pursuing production from the
colostrum of hyper-immunized cows and/or colostrum-based or colostrum-like drugs
(e.g., ImmuCell Corporation and GalaGen, Inc.). Hyper-immunization involves the
injection or other exposure of a cow with a particular disease or microorganism
and the extraction from the cow's milk or colostrum of the antibodies that are
produced by the cow. Many of these competitors have substantially greater
capital resources, research and development capabilities, and manufacturing and
marketing resources, capabilities and experience than does the Company. The
Company's competitors may succeed in developing products that are more effective
or less costly than any products that may be developed by the Company, or that
gain regulatory approval prior to any of the Company's products.

     The Ross Products Division of Abbott Laboratories, which the Company
believes currently dominates the United States market in sales of nutritional
supplements and meal replacements, is now marketing two products
commercially--Ensure(R) and Advera(R). Ensure(R) is being marketed to the
elderly and others as a nutritional supplement or meal replacement, while
Advera(R) is being marketed to people who are HIV positive or have AIDS as a
nutritional supplement or meal replacement and as a way to manage their weight
loss. Both of those products can be used as either a nutritional supplement or
as a meal replacement, depending upon the ability of the person to eat and
digest solid foods. Advera(R) is currently being advertised primarily for its
weight loss characteristics, and thus is being targeted to the same market at
which Optimune(TM) is being targeted, although Optim intends only to market
Optimune(TM) as a nutritional supplement (and not as a meal replacement).
Accordingly, Optimune(TM) may compete with Advera(R).

     In addition, other companies have competitive pharmaceutical drugs that are
in more advanced stages of clinical testing than are the Company's product
candidates. The Company also expects that the number of market entrants, and
thus its competitors and potential competitors, will increase as more
colostrum-based products receive commercial marketing approvals from the FDA or
analogous foreign regulatory agencies. Any of these entrants may be more
successful than the Company in manufacturing, marketing and distributing their
products. There can be no assurance that the Company will be able to compete
successfully in any market.

     Uncertainty of Pharmaceutical Pricing and Reimbursement; Health Care
Reform. The future revenues and profitability of and availability of capital for
biotechnology and biopharmaceutical companies may be affected by the continuing
efforts of governmental and third-party payors to contain or reduce the cost of
health care through various means. For example, in certain foreign markets, the
profitability of prescription pharmaceuticals is subject to governmental
regulation and control. There have been, and there may continue to be, a number
of federal and state proposals to implement similar governmental regulation and
controls in the United States. It is uncertain what form any health care
legislation may take or what actions federal, state and private payors may take,
if any, in response to the proposed reforms. The Company cannot predict whether
any reforms will ever be implemented, or the effect, if any, of any implemented
reform on the Company's business. Moreover, there can be no assurance that any
implemented reform will not have a material adverse effect on the Company's
results of operations or future performance. The Company's long-term ability to
market any of its product candidates successfully may depend in part on the
extent to which reimbursement for the cost of such products and related
treatments will be available from public and private health insurers and other
organizations. Third-party payors are increasingly challenging the cost of
medical products and services. The reimbursement status of newly-approved health
care products is highly uncertain and, accordingly, there can be no assurance
that third-party coverage will enable the Company to maintain price levels
sufficient to realize an appropriate return on investment or to operate
profitably.

     Dependance on Qualified Personnel; Potential Conflict of Interest;
Part-Time Consultants. The Company's success is dependant upon its ability to
attract and retain qualified scientific and management personnel. The loss of
the services of certain of the principal members of the Company's management and
scientific staff, and particularly David G. Derrick, the Company's Chief
Executive Officer and Chairman of the Board, Milton G. Adair, the Company's
President and a director of the Company, Frank A. Eldredge, Ph.D., the Company's
Executive Vice President -- New Product Development, and David O. Lucas, Ph.D.,
one of the members of the Company's Scientific Advisory Board, could have a
substantial adverse effect on the Company. In order to commercialize its
products and product candidates, the Company must maintain and expand its
personnel, particularly in the areas of clinical trial management and product
sales and marketing. The Company faces intense competition for such personnel
from other companies, academic institutions, government entities and other
research organizations. There can be no assurance that the Company will be
successful in attracting and hiring or retaining qualified personnel. Moreover,
managing the integration of new personnel and Company growth generally could
pose significant risks to the Company's development and progress. The Company
relies on consultants and advisors, including the members of its Scientific
Advisory Board, to assist the Company in formulating its research and
development strategy. All of the Company's consultants and advisors only devote
a portion of their time to the business of the Company and may from time to time
serve as officers, directors, consultants or advisors to other pharmaceutical or
biotechnology companies. There can be no assurance that such other companies
will not in the future have interests that conflict with those of the Company.
While the Company provides its management and key employees with incentive
compensation, including stock options and bonuses, that the Company believes are
competitive with incentive compensation provided by other companies in the
biopharmaceutical industry, none of the Company's management or key employees
other than David G. Derrick, the Company's Chief Executive Officer and Chairman,
are retained pursuant to an employment agreement and, therefore, the Company has
no assurances as to the commitment of any of such employees for any period of
time. All of the Company's employees have entered into confidentiality
agreements with the Company not to disclose any of the Company's confidential
information.

     Product Liability Exposure; Insurance. Product liability risk is inherent
in the testing, manufacture, marketing and sale of the Company's products and
product candidates, and particularly the Company's pharmaceutical drugs, and
there can be no assurance that the Company will be able to avoid significant
product liability exposure. Product liability insurance for the pharmaceutical
industry, when available, is extremely expensive. The Company currently
maintains a general liability insurance policy with coverage limits of $1
million per occurrence and a product liability insurance policy with coverage
limits of $20 million per occurrence, the latter of which insurance policy is
required under the License with PTI. There can be no assurance that the Company
will be able to maintain such insurance in sufficient amounts to protect the
Company against such liabilities at a reasonable cost. In addition, the Company
is required to indemnify PTI against any product liability claims incurred by
PTI as a result of any products developed and commercialized or sold by the
Company. PTI has not made, and is not expected to make, any representations as
to the safety or efficacy of the Base Product or as to any products that may be
made or used under rights granted pursuant to the License. Any future product
liability claim against the Company and/or PTI (with respect to products
developed using the Technology) could result in the Company paying substantial
damages, which may have a material adverse effect on the business and financial
condition of the Company.

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

     All forward-looking statements contained herein are deemed by the Company
to be covered by and to qualify for the safe harbor protection provided by the
Private Securities Litigation Reform Act of 1995 (the "1995 Act"). Shareholders
and prospective shareholders should understand that several factors govern
whether any forward-looking statement contained herein will be or can be
achieved. Any one of those factors could cause actual results to differ
materially from those projected herein. These forward-looking statements include
plans and objectives of management for future operations, including plans and
objectives relating to the products and the future economic performance of
Biomune and its two wholly owned subsidiaries, Optim and Volu-Sol. The forward-
looking statements and associated risks set forth herein relate to (i) market
acceptance of Optimune(TM) and the development of other nutraceutical products
by Optim; (ii) production efficiencies and increased gross margin from Volu-Sol;
(iii) the total research and development, general and administrative and other
direct costs associated with obtaining final FDA approval on BWPT-301(TM); (iv)
the dollar amount expected to be expended during fiscal years 1997 and 1998 on
the BWPT-301(TM) clinical trials; (v) the estimated date of receipt of final FDA
approval on BWPT- 301(TM); (vi) the estimated commencement date of Phase III
clinical trials and the completion of those clinical trials on BWPT-301(TM); and
(vii) the Company having sufficient cash to fund its projected operations and
budgeted research and development for fiscal year 1997. The forward-looking
statements included herein are based on current expectations that involve a
number of risks and uncertainties. The forward-looking statements included
herein are based on assumptions, among others, (a) that the efficacy of
BWPT-301(TM) will be established during the ongoing Phase II clinical trials and
the Phase III clinical trials; (b) that the Company will be able to successfully
undertake and complete clinical trials on BWPT-302(TM); (c) that the Company
will be able to successfully commercialize Optimune(TM), the Company's first
nutraceutical product, and successfully develop and commercialize other
nutraceutical products; (d) that the Company will be able to successfully
develop and commercialize the Technology; (e) that the Company will need to
conduct additional Phase II clinical trials on BWPT-301(TM) and may need to
conduct clinical trials that are different from those that have been conducted
to date or that are currently contemplated by the Company; and (f) that the
Company will be able to timely and properly quantify and analyze the data
derived from its clinical trials. Assumptions relating to the foregoing involve
judgments with respect to, among other things, future economic, competitive and
market conditions, future business decisions, and the results of the clinical
trials and the time and money required to successfully complete those trials,
all of which are difficult or impossible to predict accurately and many of which
are beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of those assumptions could prove inaccurate and, therefore,
there can be no assurance that the results contemplated in any of the
forward-looking statements contained herein will be realized. This is
particularly true given the dynamic nature of the process in which the Company
is involved with respect to BWPT-301(TM) and BWPT- 302(TM). Budgeting and other
management decisions are subjective in many respects and thus susceptible to
interpretations and periodic revision. Based on actual experience and business
developments, the impact of which may cause the Company to alter its marketing,
capital expenditure plans or other budgets, which may in turn affect the
Company's results of operations. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of any
such statement should not be regarded as a representation by the Company or any
other person that the objectives or plans of the Company will be achieved.

ITEM 2.  PROPERTIES

     Biomune's and Optim's Headquarters. As of September 30, 1996, the corporate
headquarters for Biomune and Optim were located at 540 Arapeen Drive, Suite 202,
Salt Lake City, Utah. Biomune moved to that address in June 1994 and entered
into a two year Office Lease Agreement with Evans & Sutherland Computer
Corporation effective as of June 1, 1994 regarding those corporate headquarters.
That Office Lease Agreement expired on May 31, 1996. Biomune negotiated an
extension of that Office Lease through December 31, 1996 and occupied those
premises along with Optim pursuant to such extension until October 11, 1996.
Biomune executed a three year Lease Agreement with Young Electric Sign Company
for the lease of new corporate headquarters effective as of October 1, 1996.
That Lease Agreement expires on September 30, 1999. The headquarters for Biomune
and Optim were relocated to 2401 South Foothill Drive, Salt Lake City, Utah,
effective as of October 11, 1996. The Lease Agreement with Young Electric Sign
Company involves the lease for Biomune and Optim of approximately 3,500 square
feet of office space (approximately 2,800 square feet of which is being utilized
by Biomune and the approximately 700 remaining square feet of which are being
utilized by Optim) and approximately 800 square feet of research space at a
total monthly rent for both Biomune's and Optim's space of $7,500, which rent
increase to $7,875 per month for the second year of the Lease Agreement and to
$8,268.75 per month for the third and final year. The building to which Biomune
and Optim relocated their corporate headquarters effective October 11, 1996 is
suitable for their needs for the foreseeable future and is in good condition and
repair. Biomune is utilizing approximately 80% of the approximately 2,800 square
feet of office space and approximately 100% of the approximately 800 square feet
of research space at those new corporate headquarters. The Company believes that
those facilities will accommodate Biomune's projected needs through the
expiration of the Lease Agreement on September 30, 1999.

     Optim's Headquarters. Since October 11, 1996, Optim's headquarters have
been located at 2401 South Foothill Drive, Salt Lake City, Utah. Optim leases
approximately 700 square feet of office space at that address. See Item 2,
Properties, "Biomune's and Optim's Headquarters," above. In addition, Optim
leases approximately 3,800 square feet of warehouse space in West Valley City,
Utah. Optim is utilizing approximately 50% of the approximately 700 square feet
of office space and approximately 25% of the approximately 3,800 square feet of
warehouse space. The Company believes that those facilities will accommodate
Optim's operations and projected growth for the foreseeable future.

     Volu-Sol's Headquarters. Volu-Sol's headquarters are located at 5095 West
2100 South, West Valley City, Utah. This location has approximately 2,500 square
feet of office space and approximately 9,000 square feet of warehouse space.
Volu-Sol is utilizing approximately 100% of the 2,500 square feet of office
space and approximately 100% of the 9,000 square feet of warehouse space at its
West Valley City, Utah headquarters. The Company entered into a five-year
Commercial and Industrial Lease for Volu-Sol's headquarters effective as of
October 16, 1995, with an option to renew for an additional five years. The
building in which Volu-Sol maintains its headquarters is in good condition and
repair and the Company believes that those facilities will accommodate
Volu-Sol's operations and projected growth for the foreseeable future.

ITEM 3.  LEGAL PROCEEDINGS

     On October 12, 1995, a Proposed Class Action Complaint for Violations of
the Federal Securities Laws was filed in the United States District Court for
the District of Utah, Central Division, by Roman Sterlin (Civil No.
2:95CV-0944G) (the "Complaint"). The Complaint names as defendants the Company,
David G. Derrick (the Company's Chief Executive Officer and Chairman of the
Board), Aaron Gold (a director of the Company), Charles J. Quantz (a director of
the Company), Jack D. Solomon (a founder of the Company and a member of the
Company's Business Advisory Board), Genesis Investment Corporation (a
shareholder of the Company) and The Institute for Social & Scientific
Development, Inc. (a shareholder of the Company). The Complaint, among other
things, alleges violations of Sections 10(b), 20(a) and 20A(a) of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), Rule 10b-5 promulgated under
the 1934 Act and general misappropriation of material non-public information.
The Company was served with the Complaint on October 26, 1995. On November 27,
1995, the Company filed an Answer to the Complaint and denied the allegations
therein. On May 10, 1996, the court ordered the plaintiff to file an Amended
Complaint. The plaintiff filed his Amended Complaint on or about August 6, 1996.
The Amended Complaint alleges violations of Sections 10(b), 20(a) and 20A(a) of
the 1934 Act and Rule 10b-5 promulgated thereunder, and general misappropriation
of material non-public information. The Company filed a Motion to Dismiss the
Amended Complaint on September 25, 1996. The Company believes that the
allegations in the Amended Complaint are baseless and the Company believes it
has meritorious defenses. However, at this stage of the litigation the Company
is unable, with any degree of certainty, to predict the outcome of the
litigation. The Company intends to vigorously defend against the lawsuit.

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

     There were no matters submitted to a vote of the security holders during
the fourth quarter of fiscal 1996.


                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
         MATTERS

COMMON STOCK

     The Company's Common Stock is listed on the National Association of
Securities Dealers Automated Quotation ("NASDAQ") SmallCap Market. The Company's
Common Stock trades under the symbol "BIME" and was listed on the NASDAQ
SmallCap Market on April 6, 1994. Prior to that date, the Company's Common Stock
had been traded in the over-the-counter market. The following table is based
upon information available to the Company and sets forth the range of the high
and low bid prices for the Company's Common Stock (on a post-split basis) for
each full quarterly period within the two most recent fiscal years, based upon
quotations on the NASDAQ SmallCap Market, except as otherwise indicated:


       Security                 Quarter Ended     High Bid(1)     Low Bid(1)

Common Stock, $0.0001        September 30, 1996     $2.00           $1.97
par value per share          June 30, 1996          $3.00           $2.13
                             March 31, 1996         $2.74           $1.94
                             December 31, 1995      $2.56           $2.34

                             September 30, 1995     $3.44           $3.13
                             June 30, 1995          $3.00           $2.75
                             March 31, 1995         $3.13           $3.00
                             December 31, 1994      $4.03           $3.97
--------------------

(1) The source of these high and low bid prices was the National Association of
    Securities Dealers, Inc. These quotations reflect inter-dealer prices,
    without retail mark-up, mark-down or commission and may not represent actual
    transactions. These high and low bid prices are post-split prices and
    reflect the effect of the 1-for-100 reverse stock split of the Company's
    Common Stock that was effective as of March 22, 1993 and the effect of the
    stock split of the Company's Common Stock that was effected as a 200% stock
    dividend effective as of June 14, 1994. The high and low bids prices listed
    have been rounded up to the next highest two decimal places.

     The market price of the Company's Common Stock is subject to significant
fluctuations in response to variations in the Company's quarterly operating
results, general trends in the market for the Company's products and product
candidates, and other factors, many of which the Company has little or no
control over. In addition, broad market fluctuations, as well as general
economic, business and political conditions, may adversely effect the market for
the Company's Common Stock, regardless of the Company's actual or projected
performance.

     The approximate number of holders of record of the Company's Common Stock
as of November 12, 1996 was 1,090. This number does not represent the actual
number of beneficial owners of shares of the Company's Common Stock because
shares are frequently held in "street name" by securities dealers and others for
the benefit of individual owners who have the right to vote their shares. The
Company has not paid or declared any cash dividends on its Common Stock since
its incorporation and does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future. The Company currently anticipates that
all of its earnings, if any, will be retained for use in the operation and
expansion of its business. Any future determination as to cash dividends will
depend upon the earnings and financial position of the Company and such other
factors as the Board of Directors may deem appropriate.

PREFERRED STOCK

     As of September 30, 1996, the Company had three series of Preferred Stock
outstanding, as follows: Series A 10% Cumulative Convertible Preferred Stock
(the "Series A Preferred"); Series B 10% Cumulative Convertible Non-Voting
Preferred Stock (the "Series B Preferred"); and Series C 8% Cumulative
Convertible Non-Voting Preferred Stock (the "Series C Preferred"). In addition,
during a portion of fiscal 1996 the Company also had outstanding shares of its
Series D 8% Cumulative Convertible Non-Voting Preferred Stock (the "Series D
Preferred"), all of which shares of Series D Preferred were converted into
shares of Common Stock during fiscal 1996 or were cancelled as of September 30,
1996 in connection with the issuance of the issued and outstanding shares of
Series C Preferred. Summaries of the Series A Preferred, the Series B Preferred
and the Series C Preferred follow:

     Series A Preferred. The Designation of Rights and Preferences related to
the Series A Preferred requires that interest be paid at the rate of 10% per
annum, or $0.50 per share of Series A Preferred, prior to the payment of
dividends on any class or series of shares of the Company's equity securities
that are junior to the Series A Preferred, unless full cumulative dividends have
been paid or contemporaneously are declared and paid or set apart for payment on
the Series A Preferred. Dividends on the Series A Preferred may, however, at the
option of the Company's Board of Directors, be paid in either cash or additional
shares of Series A Preferred. Shares of Series A Preferred are convertible into
the number of shares of the Company's Common Stock equal to the aggregate value
of the Series A Preferred to be converted (determined by multiplying the number
of shares of Series A Preferred to be converted by $5.00 per share), and
dividing that value by the then-applicable Series A Conversion Price (as that
term is defined in the Series A Preferred Designation of Rights and
Preferences). The initial Series A Conversion Price was $5.00. Each share of
Series A Preferred is currently convertible into three shares of the Company's
Common Stock (after giving effect to the stock split on the Company's Common
Stock, which stock split was effected as a 200% stock dividend effective as of
June 14, 1994). Shares of Series A Preferred became redeemable at the option of
the Company on January 1, 1996 at a price of $5.00 per share, plus accrued and
unpaid dividends. Thus, for example, if a holder of 100 shares of Series A
Preferred desired to convert all 100 of such shares into shares of the Company's
Common Stock at a time when the Series A Conversion Price was $5.00 per share,
the number of shares of Common Stock that would be issued would be calculated as
follows:

100 shares Series A Preferred x $5.00 = $500.00/$5.00 = 100 shares Common Stock
                                                        ===

     However, the Designation of Rights and Preferences related to the Series A
Preferred provides, among other things, that in the event the Company declares a
stock dividend on the Company's Common Stock payable in additional shares of
Common Stock, the Series A Conversion Price in effect immediately prior to such
event will be appropriately adjusted. Accordingly, as a result of the stock
split effected as a 200% stock dividend effective as of June 14, 1994, the
Series A Conversion Price was increased to $15.00 per share (from $5.00 per
share, the original Series A Conversion Price), resulting in the following
Series A Preferred conversion calculation in the above example (after taking
into consideration the effect of the 200% stock dividend that was effective as
of June 14, 1994):

100 shares Series A Preferred x $15.00=$1,500.00/$5.00 = 300 shares Common Stock
                                                         ===

     Thus, as a result of the stock split effected as a 200% stock dividend
effective as of June 14, 1994, one share of Series A Preferred can now be
converted into three shares of the Company's Common Stock (on a post-split
basis).

     Series B Preferred. The Designation of Rights and Preferences related to
the Series B Preferred requires that interest be paid at the rate of 10% per
annum, or $1.50 per share of Series B Preferred, prior to the payment of
dividends on any class or series of shares of the Company's equity securities
that are junior to the Series B Preferred unless full cumulative dividends have
been paid or contemporaneously are declared and paid or set apart for payment on
the Series B Preferred. Dividends on the Series B Preferred may, however, at the
option of the Company's Board of Directors, be paid in either cash or additional
shares of Series B Preferred. Shares of the Company's Series B Preferred are
convertible on a one-for-three basis (after taking into consideration the effect
of the stock split effected as a 200% stock dividend effective as of June 14,
1994) into shares of the Company's Common Stock. Each share of Series B
Preferred is currently convertible into three shares of the Company's Common
Stock (after giving effect to the stock split of the Company's Common Stock,
which stock split was effected as a 200% stock dividend effective as of June 14,
1994). Shares of Series B Preferred became redeemable at the option of the
Company on January 1, 1996 at a price of $5.00 per share (after taking into
consideration the effect of the 200% stock dividend), plus accrued and unpaid
dividends. Thus, for example, if a holder of 100 shares of Series B Preferred
desired to convert all 100 of such shares into shares of the Company's Common
Stock, the number of shares of Common Stock that would be issued is calculated
as follows:

      100 shares Series B  Preferred x 3 = 300 shares Common Stock
                                           ===

     Series C Preferred. The Designation of Rights and Preferences related to
the Series C Preferred requires that dividends be paid at the rate of 8% per
annum, subject to the rights of the holders of shares of Series A Preferred,
Series B Preferred and Series D Preferred, prior to and in preference to any
declaration or payment of any dividends on the Company's Common Stock.
Accordingly, the annual dividend per outstanding share of Series C Preferred is
$80.00. Dividends on the Series C Preferred may, however, at the option of the
Company's Board of Directors, be paid in either cash or additional shares of
Series C Preferred. Subject to certain conversion limitations on the Series C
Preferred as set forth in the Series C Preferred Designation of Rights and
Preferences, each share of Series C Preferred may be converted into the number
of shares of Common Stock determined by dividing $1,000 plus any accrued and
unpaid regular or special dividends on the Series C Preferred by an amount equal
to the Market Price (as that term is defined below) less 25%; provided, however,
that the discount from the Market Price shall be 20% for all shares of Series C
Preferred converted prior to January 1, 1997. "Market Price" shall mean the
average closing bid price of the Company's Common Stock for the three NASDAQ
trading days immediately preceding the Conversion Date (as that term is defined
in the Series C Preferred Designation of Rights and Preferences), as reported by
the NASDAQ or such other inter-dealer system as may list the Company's Common
Stock. In addition to the conversion restrictions on the Series C Preferred set
forth in the Series C Preferred Designation of Rights and Preferences, the
Company has contractually agreed with the purchasers of the Series C Preferred
to certain additional conversion restrictions. Thus, for example, if a holder of
100 shares of Series C Preferred desired to convert all 100 of such shares into
shares of the Company's Common Stock (disregarding for purposes of this example
the contractually agreed upon conversion restrictions) and at a time when no
regular or special dividends on the Series C Preferred are accrued and when the
discount from the Market Price is 20% and the Market Price of the Common Stock
is $4.00 per share, the number of shares of Common Stock that would be issued is
calculated as follows:

         100 shares Series C Preferred x [($1,000 + $-0-)/($4.00 x 80%)] =
                           31,250 shares Common Stock
                           ======

     Series D Preferred. While all of the issued and outstanding shares of
Series D Preferred were either converted into shares of the Company's Common
Stock or cancelled in connection with the issuance of the Series C Preferred on
September 30, 1996, a discussion of the Series D Preferred follows because all
of such shares of Series D Preferred were issued and converted or cancelled
during fiscal 1996. On December 29, 1995, the Company entered into a
Subscription Agreement for the sale of a total of 5,200 shares of its Series D
Preferred for $5.2 million (or $1,000 per share). Pursuant to the terms of the
Offshore Securities Subscription Agreement related to such sale of shares of
Series D Preferred, the Company received a total of $3 million (less certain
costs and expenses of the offering, including 200 shares of Series D Preferred)
on January 3, 1996, with the $2 million balance being subject to a
Non-Negotiable Promissory Note dated December 17, 1995 (the "Note") payable to
the Company. The Note, by its terms, was due and payable to the Company on March
31, 1996 without interest; provided, however, that the Note provided that the
Company had the right, prior to payment, upon not less than 45 days prior
written notice, to cancel the Note, in whole or in part. On March 15, 1996, the
Company and the maker of the Note agreed to extend the due date of the Note to
April 30, 1996 and to revise the Company's right of cancellation thereunder.
Subsequently, by letter agreement dated April 14, 1996, the Company and the
maker of the Note agreed to extend the due date of the Note to September 30,
1996. By Funding Termination Agreement dated effective as of September 30, 1996,
the Company and the maker of the Note agreed to terminate the Note. The Series D
Preferred bore an 8% cumulative dividend payable annually in cash or in
additional shares of Series D Preferred, at the election of the Company's Board
of Directors, and each share of Series D Preferred was convertible into shares
of the Company's Common Stock commencing 40 days after the date of the Series D
Preferred Designation of Rights and Preferences by dividing $1,000 by an amount
equal to the Market Price (as that term is defined in the Series D Preferred
Designation of Rights and Preferences) per share of the Company's Common Stock
less 25%; provided, however, that shares of Series D Preferred converted within
90 days of the closing date were convertible by dividing $1,000 by an amount
equal to the lesser of (a) the bid price for the Company's Common Stock on the
closing date or (b) the Market Price of the Company's Common Stock less 20%, but
in neither event could such denominator be less than $1.60. On or about March
10, 1996, the subscriber of the Series D Preferred was granted warrants to
purchase a total of 1,295,657 restricted shares of the Company's Common Stock
(the "Series D Warrant"), which Series D Warrant was exercisable for two years
from the date of grant. The exercise price of the Series D Warrant initially was
$2.38, the closing bid price of the Common Stock on December 28, 1995, the day
prior to the closing date of the Series D Preferred offering. In connection with
the sale of the Series D Preferred, the Company paid commissions totaling
$645,000, which commissions were paid as follows: (a) $235,000 in cash paid
during November 1995; (b) 200 shares of the Company's Series D Preferred (valued
at $1,000 per share) issued during December 1995; and (c) $210,000 in cash paid
subsequent to December 31, 1995. In connection with the Series C Preferred
offering, the Series D Warrant was amended to increase the number of shares of
the Company's Common Stock thereunder to 1,470,588 at an exercise price of
$2.125 per share; provided, however, that the holder of the Series D Warrant
grant the Company an option to purchase the unexercised portion of the Series D
Warrant (or any portion thereof, at the Company's sole election) at a price of
$2.875 per share for a period of 12 months from September 30, 1996.

RECENT SALES OF UNREGISTERED EQUITY SECURITIES

     On September 30, 1996, the Company entered into an Investor Questionnaire
and Subscription Agreement for the sale of a total of 5,000 shares of its Series
C Preferred for $5 million in cash (or $1,000 per share). Pursuant to the terms
of the Series C Preferred Investor Questionnaire and Subscription Agreement, the
Company received a total of $1.5 million in cash (less certain costs and
expenses of the offering) as of September 30, 1996, and the $3.5 million balance
was recorded as a subscription receivable as of September 30, 1996. The $3.5
million balance was received by the Company in cash subsequent to September 30,
1996. The Series C Preferred bears an 8% cumulative dividend payable annually
either in cash or in additional shares of Series C Preferred, at the election of
the Company's Board of Directors. In connection with the sale of the Series C
Preferred, the Company paid a finder's fee of $500,000, or 10% of the gross
offering amount from the subscription of the Series C Preferred, and certain
costs and expenses related to the offering, including, but not limited to, legal
fees, accounting fees and escrow fees. No underwriter or placement agent was
utilized in connection with the offer and sale of the Series C Preferred, which
securities were offered and sold solely to "accredited investors," as that term
is defined in Rule 501(a) promulgated under the Securities Act of 1933, as
amended (the "1933 Act"). Subject to certain conversion limitations on the
Series C Preferred as set forth in the Series C Preferred Designation of Rights
and Preferences, each share of Series C Preferred may be converted into the
number of shares of Common Stock determined by dividing $1,000 plus any accrued
and unpaid regular or special dividends on the Series C Preferred by an amount
equal to the Market Price less 25%; provided, however, that the discount from
the Market Price shall be 20% for all shares of Series C Preferred converted
prior to January 1, 1997. See also, "Market for Registrant's Common Equity and
Related Stockholder Matters," subheading "Preferred Stock--Series C Preferred,"
above, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," subheading "Liquidity and Capital Resources--Series C
Preferred," below. The Series C Preferred offering was made in reliance on
Regulation D and Regulation S promulgated under the 1933 Act.

ITEM 6.  SELECTED FINANCIAL DATA

     The selected financial information presented below has been derived from
the Company's audited financial statements. This selected financial information
should be read in conjunction with Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations", below.

<TABLE>

                                                  As of and for the Fiscal Years Ended September 30,


<CAPTION>
Consolidated Statement of
Operations Data:                      1996           1995           1994            1993            1992
---------------                       ----           ----           ----            ----            ----

<S>                               <C>            <C>          <C>               <C>             <C>
Revenues                          $  436,691     $  458,981   $    365,189      $   357,578     $     ---
Net Loss                          (6,422,620)    (3,622,973)    (4,298,373)      (4,164,316)       (879,751)
Net Loss per
  Common Share                         (0.35)*        (0.22)         (0.35)           (0.41)          (0.10)

Consolidated Balance Sheet Data:

Total Assets                       9,272,002      6,718,420      9,617,345        4,638,051       3,686,573
Long-term Debt                         ---            ---            ---            950,740       1,525,560
Shareholders' Equity               8,646,525      6,329,175      9,404,636        1,384,701       1,289,304
Cash Dividends per
  Common Share                         ---            ---            ---              ---             ---

-----------------------------
*  Based on weighted average outstanding common shares of 18,799,194.
</TABLE>


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

     The following discussion should be read in conjunction with the
consolidated financial statements and the notes thereto appearing elsewhere in
this Annual Report on Form 10-K. See Item 8, "Financial Statements and
Supplementary Data", below.

GENERAL

     The Company believes that in the future its results of operations could be
impacted by factors such as the results of the Company's research and
development efforts and the clinical trials on BWPT-301(TM), BWPT-302(TM) and
any other future pharmaceutical drugs based on or derived from the Technology,
as well as market acceptance of the Company's nutraceutical products (and
particularly Optimune(TM), the Company's first nutraceutical product) and
pharmaceutical drugs, increased competitive pressures, changes in raw material
sources and costs, and adverse changes in general economic conditions in any of
the countries in which the Company conducts or is able to conduct business under
the License with PTI. The Company's ability to develop and market nutraceutical
products and pharmaceutical drugs will have a significant and direct impact on
the Company's results of operations. The Company believes that the majority of
its anticipated future revenues will come from new nutraceutical products and
pharmaceutical drugs. The Company cannot determine the ultimate effect that new
nutraceutical products and pharmaceutical drugs will have on revenues, earnings
or the price of the Company's Common Stock.

     Due to factors noted above and elsewhere in "Management's Discussion and
Analysis of Financial Condition and Results of Operations", the Company's future
earnings and stock price may be subject to significant volatility, particularly
on a quarterly basis. Past financial performance should not be considered a
reliable indicator of future performance and shareholders should not use
historical trends to anticipate results or trends in future periods. Any
shortfall in revenues, earnings or greater than projected losses from the levels
anticipated by securities analysts could have an immediate and significant
effect on the trading price of the Company's Common Stock in any given period.
Additionally, the Company may not learn of such shortfalls or increased losses
until late in a fiscal quarter, which could result in an even more immediate and
adverse effect on the trading price of the Company's Common Stock.

     The Company's primary focus and efforts have been on commercializing
Optimune(TM) and on seeking approval from the FDA on BWPT-301(TM) for the
treatment of cryptosporidiosis in people with AIDS and on BWPT-302(TM) for the
treatment of E. coli, strain 0157:H7, in humans. For the fiscal year ended
September 30, 1996, $434,690 of the Company's revenues were generated by
Volu-Sol, while $2,001 of the Company's revenues were generated by Optim from
the sale of Optimune(TM).

     The Company also anticipates that it will incur significant losses during
fiscal 1997 as a direct result of: (a) the on-going Phase II clinical trials and
the Phase III clinical trials on BWPT-301(TM) anticipated to begin in 1997; (b)
the Phase I clinical trials on BWPT-302(TM) that the Company began during fiscal
1996; (c) the studies associated with Optim; and (d) the cost of the efforts to
further improve Volu-Sol's results of operations.

     The Company is currently focusing its resources and efforts on (a) the
commercialization of Optimune(TM); (b) BWPT-301(TM) for the treatment of
cryptosporidiosis in humans; (c) BWPT-302(TM) for the treatment of E. coli,
strain 0157:H7, in humans; (d) the improvement of Volu-Sol's results of
operations; and (e) the development of one or more additional nutraceutical
products based on the Technology.

RESULTS OF OPERATIONS

     Fiscal 1996 Compared to Fiscal 1995

     During the fiscal year ended September 30, 1996, the Company generated
revenues totaling $436,691, of which $434,690 was derived from Volu-Sol, the
Company's medical diagnostic stain subsidiary, and $2,001 of which was derived
from Optim Nutrition, the Company's nutraceutical product subsidiary from the
sale of Optimune(TM). Those two subsidiaries are wholly owned by the Company and
comprise the Company's only revenue-generating operations. The total 1996
revenues compare to $458,981 in revenues generated by Volu-Sol for the fiscal
year ended September 30, 1995.

     Management, consulting and research fees increased from $2,467,305 in
fiscal 1995 to $4,077,887 in fiscal 1996. This increase was due to the Company
using outside consultants for filing the IND on BWPT-302(TM) and for the
Company's fund raising activities. The Company anticipates that it will incur
increased management, consulting and research fees in the foreseeable future,
especially as (a) the Phase II clinical trials on BWPT-301(TM) continue and
Phase III clinical trials on BWPT-301(TM) commence (assuming efficacy is
established during the Phase II clinical trials), (b) the Phase I clinical
trials on BWPT-302(TM) are concluded and the Phase II clinical trials on
BWPT-302(TM) commence (assuming satisfactory results of the Phase I trials are
obtained upon the completion of the analysis of the data from those trials), and
(c) as additional nutraceutical studies are commenced and completed. The Company
believes these increased management, consulting and research fees will have the
effect of increasing the Company's accumulated deficit through the time the
Company successfully produces and commercializes a product based on the
Technology or sells technology to a third party.

     General and administrative expenses increased from $1,717,658 during fiscal
1995 to $2,626,598 during fiscal 1996. The increase in general and
administrative expenses was primarily a result of increased activity in
connection with: (1) the development and commercialization of Optimune(TM), the
Company's first nutraceutical product, and the addition of sales, marketing and
support personnel for Optim, (2) increased activity in preparing and filing the
Company's IND on BWPT-302(TM) for submission to the FDA for E. coli, strain
0157:H7, and to report to the FDA on the results of the Phase I clinical trials
on BWPT-301(TM) and the preliminary results of the initial Phase II clinical
trials on BWPT-302(TM) and (3) the addition of physical space for Optim. The
Company expects that general and administrative expenses will increase in fiscal
1997 as compared to fiscal 1996, as the Phase II clinical trials on BWPT-301(TM)
progress and additional nutraceutical studies commence. This increase in general
and administrative expenses will have the effect of increasing the Company's net
operating loss for fiscal 1997 as compared to the net operating loss for fiscal
1996.

     Interest income decreased from $472,382 for fiscal 1995 to $271,690 for
fiscal 1996. This decrease was primarily attributable to the use of cash for
management, consulting and research, as well as general and administrative
expenses. The Company incurred no interest expense in either fiscal 1996 or
fiscal 1995.

     The Company incurred a net loss of $(6,513,899) (after accounting for the
payment of stock dividends on the outstanding shares of Series A Preferred and
Series B Preferred in fiscal 1996, as compared to a net loss of $(3,740,444) in
fiscal 1995. This increase in net loss is attributable to an increase in
management, consulting and research fees and general and administrative
expenses, offset in part by a decrease in stock dividends paid on the Series A
Preferred and the Series B Preferred because of the conversion of shares of
Series A Preferred and Series B Preferred into shares of the Company's Common
Stock during fiscal 1996. The net loss per share of Common Stock increased from
$(0.22) for fiscal 1995 to $(0.35) for fiscal 1996. The net loss per common
share would have increased even more except for the fact that the weighted
average number of shares of the Company's Common Stock outstanding increased as
a result of conversions of shares of Series A Preferred, Series B Preferred and
Series D Preferred into shares of Common Stock. Preferred Stock dividends
decreased from $117,471 in 1995 to $91,199 in 1996 also due to these conversions
of shares of Preferred Stock into shares of Common Stock. The Company expects to
incur a net loss for fiscal 1997.

     The Company has incurred significant net operating losses, which totaled
$23,372,299 through September 30, 1996 (not considering the impact of Preferred
Stock dividends). Certain of the net operating loss carry forward ("NOLs")
related thereto are limited by an ownership change (as that term is defined in
Section 382 of the Internal Revenue Code of 1986, as amended) that may have
occurred as of December 10, 1991. See Note 10 to the consolidated financial
statements for a detailed discussion of the Company's NOLs.

     Fiscal 1995 Compared to Fiscal 1994

     During the fiscal year ended September 30, 1995, the Company generated
$458,981 of revenues from Volu- Sol, the Company's medical diagnostic stain
subsidiary, and the only revenue-generating operation of the Company at that
time, compared to $365,189 of revenues generated by Volu-Sol (then operated as
the Volu-Sol Medical Division) for the fiscal year ended September 30, 1994.

     Management, consulting and research fees decreased from $3,427,437 in
fiscal 1994 to $2,467,305 in fiscal 1995. This decrease was due to the Company
relying more on the effort of employees and less on outside consultants. During
most of fiscal 1995 and as of September 30, 1995, Biomune had six full-time
employees and one independent contractor. Volu-Sol had six full-time employees
and six part-time employees during most of fiscal 1995.

     General and administrative expenses increased from $1,163,128 for fiscal
1994 to $1,717,658 for fiscal 1995. The increase in general and administrative
expenses was primarily a result of increased activity in preparing the Company's
IND on BWPT-302(TM) for submission to the FDA for E. coli, strain 0157:H7, and
to report to the FDA the results of the Phase I clinical trials on BWPT-301(TM)
and the preliminary results of the initial Phase II clinical trials on
BWPT-302(TM).

     Interest income increased from $192,759 for fiscal 1994 to $472,382 for
fiscal 1995. This increase was primarily attributable to the investment of the
proceeds from the sale by the Company of its Series A Preferred and Series B
Preferred. Interest expense decreased from $15,635 for fiscal 1994 to $-0- for
fiscal 1995 because the Company repaid all of its outstanding debt out of the
proceeds of the sale of shares of its Series A Preferred and Series B Preferred.

     The Company incurred a net loss of $(3,740,444) (after accounting for the
payment of stock dividends on the outstanding shares of Series A Preferred and
Series B Preferred) for fiscal 1995, as compared to a net loss of $(4,746,718)
for fiscal 1994. This decrease in net loss was attributable to a decrease in
management, consulting and research fees, as well as a decrease in stock
dividends paid on the Series A Preferred and the Series B Preferred because of
the conversion of certain shares of Series A Preferred and Series B Preferred
into shares of the Company's Common Stock during fiscal 1995. The net loss per
share of Common Stock decreased from $(0.35) for fiscal 1994 to $(0.22) for
fiscal 1995. The decrease in net loss per share of Common Stock was attributable
to the decrease in net loss applicable to common shares, as well as an increase
in the weighted average number of shares of the Company's Common Stock
outstanding, resulting primarily from conversions of shares of Series A
Preferred and Series B Preferred into shares of Common Stock. In addition, a
portion of the decrease in net loss per common share was attributable a
reduction in Preferred Stock dividends from $448,345 in 1994 to $117,471 in
1995.

LIQUIDITY AND CAPITAL RESOURCES

     The Company is currently unable to finance its operations from its cash
flows from operating activities. Substantial funds and time will be required to
commercialize Optimune(TM), the Company's first nutraceutical product, to
complete Phase II and Phase III clinical trials on BWPT-301(TM) (assuming
efficacy is established during the Phase II clinical trials), to complete the
necessary clinical trials on BWPT-302(TM), to obtain regulatory approval for and
commercialize products utilizing the Technology, to achieve profitability in
Volu-Sol's operations, and to develop and commercialize additional nutraceutical
products based on the Technology. Because revenue-generating operating
activities are not in place at significant levels and because the Company will
require significant capital to accomplish the objectives set forth above,
additional equity and/or debt funding will most likely be required, although
such funding may not be available or may not be available on favorable terms.

     As of September 30, 1996, the Company had a cash and cash equivalents
balance of $4,192,868 and working capital of $7,713,917, as compared to a cash
balance of $5,206,112 and working capital of $5,378,398 as of September 30,
1995.

      Series A Preferred and Series B Preferred. The Series A Preferred bears a
10% cumulative dividend payable annually in cash or in additional shares of
Series A Preferred, at the election of the Company's Board of Directors, The
Series B Preferred bears a 10% cumulative dividend payable annually in cash or
in additional shares of Series B Preferred, at the election of the Company's
Board of Directors. As of September 30, 1996, the Company had recorded dividends
on the Series A Preferred and the Series B Preferred totaling an aggregate
dollar value of $91,199, which dividends the Company intends to pay in
additional shares of Series A Preferred or Series B Preferred, as appropriate.

     Series D Preferred. On December 29, 1995, the Company entered into a
Subscription Agreement for the sale of a total of 5,200 shares of its Series D
Preferred for $5.2 million (or $1,000 per share). Pursuant to the terms of the
Offshore Securities Subscription Agreement related to such sale of shares of
Series D Preferred, the Company received a total of $3 million (less certain
costs and expenses of the offering, including 200 shares of Series D Preferred)
on January 3, 1996, with the $2 million balance being subject to a
Non-Negotiable Promissory Note dated December 17, 1995 (the "Note") payable to
the Company. The Note, by its terms, was due and payable to the Company on March
31, 1996 without interest; provided, however, that the Note provided that the
Company had the right, prior to payment, upon not less than 45 days prior
written notice, to cancel the Note, in whole or in part. On March 15, 1996, the
Company and the maker of the Note agreed to extend the due date of the Note to
April 30, 1996 and to revise the Company's right of cancellation thereunder.
Subsequently, by letter agreement dated April 14, 1996, the Company and the
maker of the Note agreed to extend the due date of the Note to September 30,
1996. By Funding Termination Agreement dated effective as of September 30, 1996,
the Company and the maker of the Note agreed to terminate the Note and the sale
of the 2,000 shares of Series D Preferred. Accordingly, as a result of the
offering of shares of the Company's Series D Preferred, the Company received
during fiscal 1996 a total of $3 million (less certain costs and expenses of the
offering totaling $645,000).

     Series C Preferred. On September 30, 1996, the Company entered into an
Investor Questionnaire and Subscription Agreement for the sale of a total of
5,000 shares of its Series C Preferred for $5 million in cash (or $1,000 per
share). Pursuant to the terms of the Series C Preferred Investor Questionnaire
and Subscription Agreement, the Company received a total of $1.5 million in cash
(less certain costs and expenses of the offering) as of September 30, 1996, and
the $3.5 million balance was recorded as a subscription receivable as of
September 30, 1996. The $3.5 million balance was received by the Company in cash
subsequent to September 30, 1996. The Series C Preferred bears an 8% cumulative
dividend payable annually either in cash or additional shares of Series D
Preferred at the election of the Company's Board of Directors. In connection
with the sale of the Series C Preferred, the Company paid a finder's fee of
$500,000, or 10% of the gross offering amount, from the subscription of the
Series C Preferred, and certain costs and expenses related to the offering,
including, but not limited to, legal fees, accounting fees and escrow fees. In
addition to the regular dividend on the Series C Preferred set forth above, the
Company has contractually agreed with the purchaser of the Series C Preferred
that one or more special dividend in the amount of 1-1/2% of the share purchase
price for each share of Series C Preferred, or $15.00 per share, will be paid in
cash every two weeks if the shares of the Company's Common Stock underlying the
Series C Preferred have not been registered with the United States Securities
and Exchange Commission (the "SEC"), on an effective registration statement by
January 24, 1997. The special dividend, which will equal $75,000 every two
weeks, or $150,000 per month (assuming all 5,000 shares of Series C Preferred
are outstanding at that time), must be paid in cash on the 1st and 15th day of
each month that the shares of Common Stock underlying the Series C Preferred
have not been registered with the SEC, commencing with January 24, 1997.

     During fiscal 1996, the Company's operating activities used $4,344,857 of
cash, which had previously been provided by the issuance of shares of Series A
Preferred, Series B Preferred and Series D Preferred. During fiscal 1995, the
Company's operating activities used $2,443,314 of cash, also principally
provided by the raising of capital from the issuance of shares of Series A
Preferred and Series B Preferred.

     The Company currently estimates that the total research and development,
general and administrative, and other direct costs associated with reaching the
stage of obtaining final FDA approval on BWPT-301(TM) in treating
cryptosporidiosis in people with AIDS will, in the aggregate, approximate $16 -
$18 million, some of which has been and will be paid in cash and some of which
has been and likely will be paid in shares of the Company's Common Stock. The
Company cannot currently predict, however, how much of the approximately $16 -
$18 million will be paid in cash and how much will be paid in shares of Common
Stock. As of September 30, 1996, approximately $12.7 million had been spent. An
estimated $1.5 million will be expended during fiscal 1997 and fiscal 1998 as
the Phase II clinical trials on BWPT-301(TM) continue and the Phase III clinical
trials on BWPT-301(TM) are undertaken. Final FDA approval on BWPT-301(TM) is
currently estimated to be received possibly as early as 1998. Phase II clinical
trials on BWPT-301(TM) commenced in November 1994 and are currently expected to
be completed during 1997 (assuming approximate institutional review board
approvals can be timely obtained and patient recruitment can be accomplished on
a timely basis). Assuming efficacy of BWPT-301(TM) is established during the
Phase II clinical trials, the Company currently anticipates commencing Phase III
clinical trials on BWPT-301(TM) sometime in 1997 and currently expects that it
may be able to complete those trials as early as 1998.

     The Company currently estimates that the total research and development,
general and administrative, and other direct costs associated with reaching the
stage of obtaining final FDA approval on BWPT-302(TM) in treating E. coli,
strain 0157:H7, will, in the aggregate, approximate $8 - $10 million, some of
which has been and will be paid in cash and some of which has been and likely
will be paid in shares of the Company's Common Stock. The Company cannot
currently predict, however, how much of the approximately $8 - $10 million will
be paid in cash and how much will be paid in shares of Common Stock. As of
September 30, 1996, approximately $450,000 had been spent. An estimated $1
million will be expended during fiscal 1997 and fiscal 1998 as the Phase I
clinical trials on BWPT- 302(TM) continue and the Phase II clinical trials on
BWPT-302(TM) are undertaken. Final FDA approval on BWPT-302(TM) is currently
estimated to be received possibly as early as 1999. Phase I clinical trials on
BWPT-302(TM) commenced on March 21, 1996.

     As of September 30, 1996, the Company has spent approximately $530,000
related to developing and marketing Optimune(TM), the Company's first
nutraceutical product. During fiscal 1997, the Company anticipates incurring
direct costs of approximately $2 - $4 million in conducting additional
nutritional studies and in marketing Optimune(TM).

     The Company anticipates a need to continue raising funds to finance the
continued commercialization of Optimune(TM), the Company's first nutraceutical
product, and the commercialization of products utilizing the Technology,
including BWPT-301(TM), BWPT-302(TM) and any additional nutraceutical products
that the Company may develop and attempt to commercialize or bring to market.

     The Company has no credit facility with any lending institution. However,
the Company has in the past, from time to time, borrowed money from certain
shareholders but has no formal financing arrangement, agreement or understanding
with any of its shareholders or any other related or unrelated party to do so in
the future.

     The Company is continuing to focus on building the sales and profitability
of Volu-Sol. However, the Company may need to continue to fund losses incurred
by Volu-Sol if profitability is not achieved.

     The Company currently estimates that it has sufficient cash to fund its
projected operations and budgeted research and development efforts for fiscal
1997.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements and Schedules

Financial Statements:

 Report of Independent Public Accountants...................................F- 1

 Consolidated Balance Sheets as of September 30, 1996 and 1995 .............F- 2

 Consolidated Statements of Operations for the Years Ended
   September 30, 1996, 1995 and 1994 and for the Period
   from Inception to September 30, 1996.....................................F- 4

 Consolidated Statements of Shareholders' Equity for the Years Ended
   September 30, 1996, 1995 and 1994 and for the Period from
   Inception to September 30, 1996..........................................F- 5

 Consolidated Statements of Cash Flows for the Years Ended September 30,
   1996, 1995 and 1994 and for the Period from Inception to
   September 30, 1996.......................................................F- 8

 Notes to Consolidated Financial Statements................................F- 10


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To Biomune Systems, Inc.:

We have audited the accompanying consolidated balance sheets of BIOMUNE SYSTEMS,
INC. (a Nevada corporation in the development stage) and subsidiaries as of
September 30, 1996 and 1995, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended September 30, 1996 and for the period from inception (December
31, 1981) to September 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with 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 audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Biomune
Systems, Inc. and subsidiaries as of September 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1996 and for the period from inception (December
31, 1981) to September 30, 1996 in conformity with generally accepted accounting
principles.


ARTHUR ANDERSEN LLP


Salt Lake City, Utah
  November 5, 1996


                     BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)

                           CONSOLIDATED BALANCE SHEETS


                                     ASSETS

                                                            September 30,
                                                     -------------------------
                                                        1996           1995
                                                     ----------     ----------
CURRENT ASSETS:
  Cash and cash equivalents                          $4,192,868     $5,206,112
  Accounts receivable, net of allowance
    for doubtful accounts
     of $13,200 in 1996 and $10,400 in 1995              74,784         98,402
  Inventories                                           556,742        100,324
  Preferred stock subscription receivable             3,500,000              -
  Amounts due from related parties                       15,000        362,805
                                                     ----------     ----------
         Total current assets                         8,339,394      5,767,643
                                                     ----------     ----------

PROPERTY AND EQUIPMENT:
  Furniture, fixtures and equipment                     222,133        219,356
  Leasehold improvements                                324,781         85,207
                                                     ----------     ----------
                                                        546,914        304,563
  Accumulated depreciation and amortization            (112,709)      (198,800)
                                                     ----------     ----------
         Net property and equipment                     434,205        105,763
                                                     ----------     ----------

OTHER ASSETS:
  Technology and patents, net                           480,809        842,224
  Other                                                  17,594          2,790
                                                     ----------     ----------
         Total other assets                             498,403        845,014
                                                     ----------     ----------
                                                     $9,272,002     $6,718,420
                                                     ==========     ==========


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



                      LIABILITIES AND SHAREHOLDERS' EQUITY

                                                             September 30,
                                                     -------------------------
                                                         1996           1995
                                                     ----------     ----------
CURRENT LIABILITIES:                  
   Accounts payable                                  $  351,565    $   235,155
   Preferred stock dividends payable                     91,199        117,471
   Unearned revenue                                      84,000              -
   Accrued payroll and payroll taxes                     60,451         36,619
   Other accrued liabilities                             38,262              -
                                                     ----------    -----------
       Total current liabilities                        625,477        389,245

COMMITMENTS AND CONTINGENCIES
   (Notes 2, 6, 11 and 12)

SHAREHOLDERS' EQUITY:
   Preferred stock, $.0001 par value;
     50,000,000 shares authorized-
       Series A, 10% Cumulative, Convertible;
         135,589 and 213,833 shares outstanding,
         respectively                                    652,199        994,049
       Series B, 10% Cumulative, Convertible
         Non-Voting; 11,058 and 10,058 shares
         outstanding, respectively                       163,837        148,837
       Series C, 8% Cumulative, Convertible
         Non-Voting; 5,000 shares outstanding
         in 1996                                       4,171,500              -
  Common stock, $.0001 par value; 500,000,000
    shares authorized, 19,877,034 and
     17,439,189 shares outstanding, respectively           1,988          1,744
   Additional paid-in capital                         26,392,477     22,707,916
   Deficit accumulated during the development stage  (23,372,299)   (16,858,480)
   Deferred consulting expense                          (246,450)      (674,891)
   Outstanding warrants                                  883,273         10,000
                                                     -----------   ------------
   Total shareholders' equity                          8,646,525      6,329,175
                                                     -----------   ------------
                                                     $ 9,272,002   $  6,718,420
                                                     ===========   ============

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


<TABLE>
                     BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                                                Period from
                                                                                               Inception to
<CAPTION>
                                                         Year Ended September 30,              September 30,
                                                  1996             1995            1994        1996 (Note 1)
                                              ------------     ------------    ------------    -------------  
<S>                                           <C>              <C>             <C>             <C>
REVENUES                                      $    436,691     $    458,981    $    365,189    $   2,224,191
                                              ------------     ------------    ------------    ------------- 

OPERATING EXPENSES:
  Cost of revenues                                 357,471          369,373         250,121        1,439,713
  Management, consulting and research fees
                                                 2,467,305       3,427,437         14,645,045
                                                 
  Other general and administrative               2,626,598        1,717,658       1,163,128        9,310,147
       Total operating expenses                  7,061,956        4,554,336       4,840,686       25,394,905
                                              ------------     ------------    ------------     ------------
LOSS FROM OPERATIONS                            (6,625,265)      (4,095,355)     (4,475,497)     (23,170,714)
                                              ------------     ------------    ------------     ------------
OTHER INCOME (EXPENSE):
  Interest income                                  271,690          472,382         192,759        1,369,256
  Interest expense                                       -                -         (15,635)        (859,283)
  Other expense, net                               (69,045)               -               -          (54,543)
                                              ------------     ------------    ------------     ------------
       Total other income, net                     202,645          472,382         177,124          455,430
                                              ------------     ------------    ------------     ------------
NET LOSS                                        (6,422,620)      (3,622,973)     (4,298,373)     (22,715,284)

PREFERRED STOCK DIVIDENDS                          (91,199)        (117,471)       (448,345)        (657,015)
                                              ------------     ------------    ------------     ------------
NET LOSS APPLICABLE TO
  COMMON SHARES                               $ (6,513,819)    $ (3,740,444)   $ (4,746,718)    $(23,372,299)
                                              ============     ============    ============     ============
NET LOSS PER COMMON SHARE                     $       (.35)    $       (.22)   $       (.35)
                                              ============     ============    ============
WEIGHTED AVERAGE COMMON
  SHARES OUTSTANDING                            18,799,194       17,114,407      13,630,334
                                              ============     ============    ============


                The accompanying notes to consolidated financial
                    statements are an integral part of these
                            consolidated statements.
</TABLE>


                                                                     Page 1 of 3
                     BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                                                                                               
                                            Series A              Series B              Series C              Series D         
                                        Preferred Stock       Preferred Stock       Preferred Stock       Preferred Stock      
                                        ----------------      ----------------      ----------------      ----------------     
                                        Shares    Amount      Shares    Amount      Shares    Amount      Shares    Amount     
                                        ------    ------      ------    ------      ------    ------      ------    ------     
<S>                                      <C>      <C>         <C>       <C>         <C>       <C>         <C>       <C>      
Sale of common stock for cash
  on February 9, 1982                       --    $   --          --    $   --          --    $   --          --    $   --   

Issuance of common stock for
  services and expense reimbursement
  on February 9, 1982                       --        --          --        --          --        --          --        --   

Contributed capital for expense
  reimbursements from October 1,
  1982 to December 31, 1982                 --        --          --        --          --        --          --        --   

Sale of common stock on March 31, 1983                --          --        --          --        --          --        --   

Sale of common stock and warrants
  in initial public offering
  on September 2, 1983                      --        --          --        --          --        --          --        --   

Common stock issued during fiscal
  year 1984                                 --        --          --        --          --        --          --        --   

Common stock issued during fiscal
  year 1985                                 --        --          --        --          --        --          --        --   

Common stock issued during fiscal
  year 1986                                 --        --          --        --          --        --          --        --   

Common stock issued during fiscal
  year 1987                                 --        --          --        --          --        --          --        --   

Issuance of common stock during
  fiscal year 1988:
    Acquisition of technology                         --          --        --          --        --          --        --   
    Services                                --        --          --        --          --        --          --        --   

Issuance of common stock during
  fiscal year 1989:
    Acquisition of technology and patents   --        --          --        --          --        --          --        --   
    Services                                --        --          --        --          --        --          --        --   
    Conversion of debt                      --        --          --        --          --        --          --        --   
Expiration of stock warrants                --        --          --        --          --        --          --        --   

Issuance of common stock during
  fiscal year 1990:
    Acquisition of patents                  --        --          --        --          --        --          --        --   
    Cash                                    --        --          --        --          --        --          --        --   
    Services and bonuses                    --        --          --        --          --        --          --        --   

Issuance of common stock during
  fiscal year 1991:
    Conversion of debt                      --        --          --        --          --        --          --        --   
    Cash                                    --        --          --        --          --        --          --        --   
    Services and bonuses                    --        --          --        --          --        --          --        --   
                                       ---------  --------  ----------  --------    --------  --------    --------  --------
Subtotals for Page 1                        --    $   --          --    $   --          --    $   --          --    $   --   
                                       ---------  --------  ----------  --------    --------  --------    --------  --------


           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)

<CAPTION>

                                                                                      Deficit
                                                                                    Accumulated             Receivable
                                            Common Stock      Additional             During the  Deferred   Related to
                                          ---------------      Paid-in  Outstanding  Development Consulting  Sale of
                                          Shares   Amount      Capital    Warrants      Stage     Expense     Stock     Total  
                                          ------   ------      -------    --------      -----     -------     -----     -----  
<S>                                       <C>      <C>         <C>       <C>         <C>       <C>         <C>       <C>      
Sale of common stock for cash
  on February 9, 1982                     289,425  $     29    $ 45,726  $   --      $   --    $   --      $   --    $ 45,755

Issuance of common stock for
  services and expense reimbursement
  on February 9, 1982                    1,360,575      136     303,033      --          --        --          --     303,169

Contributed capital for expense
  reimbursements from October 1,
  1982 to December 31, 1982                  --        --        42,889      --          --        --          --      42,889

Sale of common stock on March 31, 1983     75,000         8         242      --          --        --          --         250

Sale of common stock and warrants
  in initial public offering
  on September 2, 1983                    600,000        60    1,599,118     --          --         200        --   1,599,378

Common stock issued during fiscal
  year 1984                                 4,896         1      12,197      --          --        --          --      12,198

Common stock issued during fiscal
  year 1985                                 4,569      --           314      --          --        --          --         314

Common stock issued during fiscal
  year 1986                               196,851        20     185,645      --          --        --          --     185,665

Common stock issued during fiscal
  year 1987                                31,065         3      42,342      --          --        --          --      42,345

Issuance of common stock during
  fiscal year 1988:
    Acquisition of technology              13,251         1      13,251      --          --        --          --      13,252
    Services                               11,571         1      13,674      --          --        --          --      13,675

Issuance of common stock during
  fiscal year 1989:
    Acquisition of technology and patents 289,221        29     145,441      --          --        --          --     145,470
    Services                               83,142         8      88,425      --          --        --          --      88,433
    Conversion of debt                     30,000         3      49,997      --          --        --          --      50,000
Expiration of stock warrants                 --        --           200      --          --        (200)       --        --

Issuance of common stock during
  fiscal year 1990:
    Acquisition of patents                150,000        15       6,235      --          --        --          --       6,250
    Cash                                    9,000         1       5,999      --          --        --          --       6,000
    Services and bonuses                    1,800      --         1,650      --          --        --          --       1,650

Issuance of common stock during
  fiscal year 1991:
    Conversion of debt                  2,243,694      224     747,674       --          --        --          --     747,898
    Cash                                   75,000         8      44,992      --          --        --          --      45,000
    Services and bonuses                   60,750         6      35,494      --          --        --          --      35,500
                                        ---------  --------  ----------  ----        ----      ----        ----    ----------
Subtotals for Page 1                    5,529,810  $    553  $3,384,538  $   --      $   --    $   --      $   --  $3,385,091
                                        ---------  --------  ----------  ----        ----      ----        ----    ----------

</TABLE>



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

<PAGE>



                                                                     Page 2 of 3

                     BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)


<TABLE>
<CAPTION>

                                                                                                                               
                                              Series A                     Series B             Series C          Series D
                                           Preferred Stock              Preferred Stock      Preferred Stock   Preferred Stock
                                          ----------------             ----------------      ---------------   ----------------
                                           Shares   Amount             Shares    Amount       Shares Amount     Shares Amount
                                           ------   ------             ------    ------       ------ ------     ------ ------ 
<S>                                        <C>        <C>              <C>       <C>             <C> <C>           <C> <C> 
Subtotals from Page 1                        --       $      --          --      $       --      -   $      --     -   $     -- 

Issuance of common stock during
    fiscal year 1992:
  Conversion of amounts due related
    parties                                  --              --          --              --      -          --     -         -- 
  Conversion of long-term debt               --              --          --              --      -          --     -         -- 
  Conversion of accounts payable             --              --          --              --      -          --     -         -- 
  Acquisition of assets from major
    shareholder                              --              --          --              --      -          --     -         -- 
  Cash                                       --              --          --              --      -          --     -         -- 
  Services and bonuses                       --              --          --              --      -          --     -         -- 

Sale of Series A Preferred Stock,
    net of offering costs, during
  fiscal year 1993                        323,000       1,453,500        --              --      -          --     -         -- 

Issuance of common stock during
  fiscal year 1993:
    Cash                                     --              --          --              --      -          --     -         -- 
    Services and bonuses                     --              --          --              --      -          --     -         -- 
    Future consulting services               --              --          --              --                 --     -         -- 
    Conversion of amounts due
        related parties                      --              --          --              --      -          --     -         -- 

Grants of stock warrants resulting
    in consulting and interest expense
    during fiscal year 1993                  --              --          --              --      -          --     -         -- 

 Increase in note receivable related
    to sale of stock during
  fiscal year 1993                           --              --          --              --      -          --     -         -- 

Deficit accumulated from inception to
    September 30, 1993                       --              --          --              --      -          --     -         -- 
                                          -------     -----------      ------    ------------  ----   --------  -----    ------   
Balance at September 30, 1993             323,000       1,453,500        --              --      -          --     -         -- 

Sale of Series A Preferred Stock,
net of offering costs                     677,000       3,046,500        --              --      -          --     -         -- 
Sale of Series B Preferred Stock,
  net of offering costs                      --              --       366,600       4,950,000    -          --     -         -- 
Issuance of common stock:
  Cash                                       --              --          --              --      -          --     -         -- 
  Conversion of Series A Preferred Stock (668,000)     (3,006,000)       --              --      -          --     -         -- 
  Conversion of Series B Preferred Stock     --              --      (356,600)     (4,814,975)   -          --     -         -- 
  Services (current and future)              --              --          --              --      -          --     -         -- 
  Conversion of accounts payable             --              --          --              --      -          --     -         -- 
  Conversion of related party debt           --              --          --              --      -          --     -         -- 
Sale of assets                               --              --          --              --      -          --     -         -- 
Amortization of deferred expense             --              --          --              --      -          --     -         -- 
Preferred stock dividends                  63,600         318,001       8,690         130,344    -          --     -         -- 
Net loss                                     --              --          --              --      -          --     -         -- 
                                          -------     -----------      ------    ------------  ----   --------  -----    ------   
Balance at September 30, 1994             395,600     $ 1,812,001      18,690    $    265,369    -    $     --     -     $   -- 
                                          -------     -----------      ------    ------------  ----   --------  -----    ------   


           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)

<CAPTION>

                                                                                                   
                                                                                                   
                                                   Common Stock           Additional                 
                                              ---------------------         Paid-in       Outstanding 
                                              Shares         Amount         Capital         Warrants  
                                              ------         ------       ----------      ----------- 
<S>                                           <C>         <C>            <C>             <C>         
Subtotals from Page 1                         5,529,810   $        553   $  3,384,538    $       --   

Issuance of common stock during
    fiscal year 1992:
  Conversion of amounts due related
    parties                                     349,434             35        119,294            --   
  Conversion of long-term debt                  300,000             30        499,970            --   
  Conversion of accounts payable                 36,000              4         18,996            --   
  Acquisition of assets from major
    shareholder                               3,000,000            300      1,945,239            --   
  Cash                                          225,252             22        203,904            --   
  Services and bonuses                          163,470             16        275,975            --   

Sale of Series A Preferred Stock,
    net of offering costs, during
    fiscal year 1993                                 --             --             --              --   

Issuance of common stock during
  fiscal year 1993:
    Cash                                        150,000             15        124,985            --   
    Services and bonuses                      1,457,952            146      3,010,459            --   
    Future consulting services                  174,000             18       347,982             --
    Conversion of amounts due
        related parties                         982,575             98        477,427            --   

Grants of stock warrants resulting
    in consulting and interest expense
    during fiscal year 1993                        --             --          800,000            --   

 Increase in note receivable related
    to sale of stock during
    fiscal year 1993                               --             --             --              --   

Deficit accumulated from inception to
    September 30, 1993                             --             --             --              --   
                                             ----------   ------------   ------------    ----------   
Balance at September 30, 1993                12,368,493          1,237     11,208,769            --   

Sale of Series A Preferred Stock,
net of offering costs                              --             --             --              --   
Sale of Series B Preferred Stock,
  net of offering costs                            --             --             --              --   
Issuance of common stock:
  Cash                                          412,994             42        454,550            --   
  Conversion of Series A Preferred Stock      2,004,000            200      3,005,800            --   
  Conversion of Series B Preferred Stock      1,069,800            107      4,814,868            --   
  Services (current and future)                 348,000             35      1,949,966            --   
  Conversion of accounts payable                 12,483              1         49,930            --   
  Conversion of related party debt              359,784             36        359,748            --   
Sale of assets                                     --             --       (1,021,987)           --   
Amortization of deferred expense                   --             --             --              --   
Preferred stock dividends                          --             --             --              --   
Net loss                                           --             --             --              --   
                                             ----------   ------------   ------------    ----------   
Balance at September 30, 1994                16,575,554   $      1,658   $ 20,821,644    $       --   
                                             ----------   ------------   ------------    ----------   


           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)

<CAPTION>

                                             Deficit                                   
                                           Accumulated                       Receivable         
                                            During the       Deferred        Related to         
                                           Development      Consulting        Sale of            
                                              Stage           Expense          Stock            Total   
                                           -----------      ----------       ----------     -----------
                                          
<S>                                        <C>             <C>             <C>             <C>
Subtotals from Page 1                      $       --      $       --      $       --      $  3,385,091

Issuance of common stock during
    fiscal year 1992:
  Conversion of amounts due related
    parties                                        --              --              --           119,329
  Conversion of long-term debt                     --              --              --           500,000
  Conversion of accounts payable                   --              --              --            19,000
  Acquisition of assets from major
    shareholder                                    --              --          (952,570)        992,969
  Cash                                             --              --              --           203,926
  Services and bonuses                             --              --              --           275,991

Sale of Series A Preferred Stock,
    net of offering costs, during
  fiscal year 1993                                 --              --              --         1,453,500

Issuance of common stock during
  fiscal year 1993:
    Cash                                           --              --              --           125,000
    Services and bonuses                           --              --              --         3,010,605
    Future consulting services                     --          (348,000)           --              --
    Conversion of amounts due
        related parties                            --              --              --           477,525

Grants of stock warrants resulting
    in consulting and interest expense
    during fiscal year 1993                        --          (537,500)           --           262,500

 Increase in note receivable related
    to sale of stock during
  fiscal year 1993                                 --              --           (69,417)        (69,417)

Deficit accumulated from inception to
    September 30, 1993                       (8,371,318)           --              --        (8,371,318)
                                           ------------    ------------    ------------    ------------
Balance at September 30, 1993                (8,371,318)       (885,500)     (1,021,987)      2,384,701

Sale of Series A Preferred Stock,
net of offering costs                              --              --              --         3,046,500
Sale of Series B Preferred Stock,
  net of offering costs                            --              --              --         4,950,000
Issuance of common stock:
  Cash                                             --              --              --           454,592
  Conversion of Series A Preferred Stock           --              --              --              --
  Conversion of Series B Preferred Stock           --              --              --              --
  Services (current and future)                    --          (378,000)           --         1,572,001
  Conversion of accounts payable                   --              --              --            49,931
  Conversion of related party debt                 --              --              --           359,784
Sale of assets                                     --              --         1,021,987            --
Amortization of deferred expense                   --           885,500            --           885,500
Preferred stock dividends                      (448,345)           --              --              --
Net loss                                     (4,298,373)           --              --        (4,298,373)
                                           ------------    ------------    ------------    ------------
Balance at September 30, 1994              $(13,118,036)   $   (378,000)   $       --      $  9,404,636
                                           ------------    ------------    ------------    ------------

</TABLE>


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


<PAGE>


                                                                     Page 3 of 3

                     BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)


<TABLE>
<CAPTION>

                                                    Series A                        Series B                    Series C
                                                 Preferred Stock                 Preferred Stock             Preferred Stock
                                              --------------------            ---------------------          ----------------    
                                              Shares        Amount            Shares         Amount          Shares    Amount    
                                              ------        ------            ------         ------          ------    ------    
<S>                                         <C>         <C>                   <C>       <C>                  <C>       <C>
Balance at September 30, 1994                395,600    $  1,812,001          18,690    $    265,369            --     $       --   

  Issuance of common stock:
    Cash                                        --              --              --              --              --             --   
    Conversion of Series A Preferred Stock  (181,767)       (817,952)           --              --              --             --   
    Conversion of Series B Preferred Stock      --              --            (8,632)       (116,532)           --             --   
    Services                                    --              --              --              --              --             --   
  Settlement of shares                          --              --              --              --              --             --   
  Issuance of warrants and options:
    Cash                                        --              --              --              --              --             --   
    Services                                    --              --              --              --              --             --   
  Amortization of deferred expense              --              --              --              --              --             --   
  Preferred stock dividends                     --              --              --              --              --             --   
  Net loss                                      --              --              --              --              --             --   
                                             -------    ------------          ------    ------------           -----   ------------
Balance at September 30, 1995                213,833         994,049          10,058         148,837            --             --   

Sale of Series D Preferred Stock, net
  of offering costs                             --              --              --              --              --             --   
  
Sale of Series C Preferred Stock, net
  of offering costs                             --              --              --              --             5,000      4,171,500
Issuance of common stock:
    Cash                                        --              --              --              --              --             --   
    Conversion of Series A Preferred Stock   (98,738)       (444,321)           --              --              --             --   
    Conversion of Series D Preferred Stock      --              --              --              --              --             --   
    Services                                    --              --              --              --              --             --   
Issuance of warrants and options for
   services                                     --              --              --              --              --             --   
Amortization of deferred consulting
    expense                                     --              --              --              --              --             --   
Cancellation of Series D Preferred
    Stock subscription                          --              --              --              --              --             --   
Preferred stock dividends                     20,494         102,471           1,000          15,000            --             --   
Net loss                                        --              --              --              --              --             --   
                                             -------    ------------          ------    ------------           -----   ------------
Balance at September 30, 1996                135,589    $    652,199          11,058    $    163,837           5,000   $  4,171,500
                                             =======    ============          ======    ============           =====   ============


           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)

<CAPTION>

                                                   Series D             
                                                Preferred Stock                  Common Stock           Additional                 
                                               ----------------             ---------------------         Paid-in       Outstanding
                                               Shares    Amount             Shares         Amount         Capital         Warrants
                                               ------    ------             ------         ------       ----------      -----------
<S>                                            <C>       <C>              <C>           <C>             <C>             <C>
Balance at September 30, 1994                   --      $       --        16,575,554    $      1,658    $ 20,821,644    $       -- 

  Issuance of common stock:
    Cash                                        --              --            30,000               3          67,497            -- 
    Conversion of Series A Preferred Stock      --              --           545,301              54         817,898            -- 
    Conversion of Series B Preferred Stock      --              --            25,896               3         116,529            -- 
    Services                                    --              --           441,438              44         929,330            -- 
  Settlement of shares                          --              --          (179,000)            (18)       (419,982)           -- 
  Issuance of warrants and options:
    Cash                                        --              --              --              --              --            10,000
    Services                                    --              --              --              --           375,000            -- 
  Amortization of deferred expense              --              --              --              --              --              -- 
  Preferred stock dividends                     --              --              --              --              --              -- 
  Net loss                                      --              --              --              --              --              -- 
                                            --------    ------------      ------------  ------------    ------------    ------------
Balance at September 30, 1995                   --              --        17,439,189           1,744      22,707,916          10,000

Sale of Series D Preferred Stock, net         5,200        4,010,227            --              --              --           544,773
  of offering costs
Sale of Series C Preferred Stock, net
  of offering costs                             --              --              --              --              --           328,500
Issuance of common stock:
    Cash                                        --              --            40,000               4          32,496            -- 
    Conversion of Series A Preferred Stock      --              --           296,214              30         444,291            -- 
    Conversion of Series D Preferred Stock    (3,200)     (2,467,936)      1,884,419             188       2,467,748            -- 
    Services                                    --              --           217,212              22         522,835            -- 
Issuance of warrants and options for
   services                                     --              --              --              --           674,900            -- 
Amortization of deferred consulting
    expense                                     --              --              --              --              --              -- 
Cancellation of Series D Preferred
    Stock subscription                        (2,000)     (1,542,291)           --              --          (457,709)           -- 
Preferred stock dividends                       --              --              --              --              --              -- 
Net loss                                        --              --              --              --              --              -- 
                                            --------    ------------      ------------  ------------    ------------    ------------
Balance at September 30, 1996                   --      $       --        19,877,034    $      1,988    $ 26,392,477    $    883,273
                                            ========    ============      ============  ============    ============    ============


           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)

<CAPTION>


                                               Deficit                                   
                                             Accumulated                       Receivable         
                                             During the        Deferred        Related to         
                                             Development      Consulting        Sale of            
                                                Stage           Expense          Stock            Total   
                                             -----------      ----------       ----------     -----------
                                          
<S>                                        <C>             <C>             <C>             <C>
Balance at September 30, 1994                $(13,118,036)   $   (378,000)   $       --      $  9,404,636

  Issuance of common stock:
    Cash                                             --              --              --            67,500
    Conversion of Series A Preferred Stock           --              --              --              --
    Conversion of Series B Preferred Stock           --              --              --              --
    Services                                     (401,453)           --           527,921
  Settlement of shares                               --              --              --          (420,000)
  Issuance of warrants and options:
    Cash                                             --              --              --            10,000
    Services                                         --          (273,438)           --           101,562
  Amortization of deferred expense                   --           378,000            --           378,000
  Preferred stock dividends                      (117,471)           --              --          (117,471)
  Net loss                                     (3,622,973)           --              --        (3,622,973)
                                             ------------    ------------    ------------    ------------
Balance at September 30, 1995                 (16,858,480)       (674,891)           --         6,329,175


Sale of Series D Preferred Stock, net                --              --        (2,000,000)      2,555,000
  of offering costs
Sale of Series C Preferred Stock, net
  of offering costs                                  --              --              --         4,500,000
Issuance of common stock:
    Cash                                             --              --              --            32,500
    Conversion of Series A Preferred Stock           --              --              --              --
    Conversion of Series D Preferred Stock           --              --              --              --
    Services                                         --          (238,783)           --           284,074
Issuance of warrants and options for
   services                                          --          (329,000)           --           345,900
Amortization of deferred consulting
    expense                                          --           996,224            --           996,224
Cancellation of Series D Preferred
    Stock subscription                               --              --         2,000,000            --
Preferred stock dividends                         (91,199)           --              --            26,272
Net loss                                       (6,422,620)           --              --        (6,422,620)

                                             ------------    ------------    ------------    ------------
Balance at September 30, 1996                $(23,372,299)   $   (246,450)   $       --      $  8,646,525
                                             ============    ============    ============    ============

</TABLE>


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


<TABLE>
                     BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                Increase (Decrease) in Cash and Cash Equivalents

<CAPTION>
                                                                                                       Period from
                                                                  Year Ended September 30,            Inception to
                                                         ----------------------------------------     September 30,
                                                             1996           1995          1994        1996 (Note 1)
                                                         -----------    -----------   -----------    ---------------
<S>                                                      <C>            <C>           <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                               $(6,422,620)   $(3,622,973)  $(4,298,373)   $(22,715,284)
  Adjustments to reconcile net loss to net cash
     used in operating activities:
    Depreciation and amortization                            197,121        174,635       164,451         761,556
    Loss on disposal of fixed assets                          69,043              -             -          69,043
    Loss on write-off of investment in technology            244,839              -             -         244,839
    Issuance of common stock and warrants for services       629,975        629,483     1,572,001       6,285,366
    Amortization of deferred consulting expense              996,224        378,000       885,500       2,272,226
    Reduction in related party note receivable               125,660              -             -         125,660
    Interest expense recognized on grants of
      stock warrants                                               -              -             -         250,000
    Interest income imputed on note receivable                     -              -             -        (317,449)
    Interest expense paid by transfer of
      nonmonetary asset                                            -              -             -          45,347
    Interest expense imputed on note payable                       -              -             -          18,456
    Issuance of long-term debt for services                        -              -             -          43,477
    Changes in assets and liabilities, net of effects
       of nonmonetary asset acquisitions-
      Accounts receivable                                     23,618        (24,584)       (2,661)        (16,526)
      Inventories                                           (456,418)       (36,940)       17,403        (415,701)
      Prepaid expenses                                             -              -             -           5,350
      Other assets                                           (14,805)             -             -         (18,745)
      Accounts payable                                       116,410         28,161        70,760         371,147
      Unearned revenue                                        84,000              -             -          84,000
      Accrued payroll and payroll taxes                       23,832         30,904       (64,049)         48,912
      Other accrued liabilities                               38,264              -             -          97,684
                                                         -----------    -----------   -----------    ------------
            Net cash used in operating activities         (4,344,857)    (2,443,314)   (1,654,968)    (12,760,642)

CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from sale of technology                                 -              -       500,000         580,000
  Investment in technology                                         -              -             -        (150,000)
  Cash acquired in nonmonetary asset acquisition                   -              -             -           7,187
  Purchase of property and equipment                        (478,030)       (45,974)      (43,159)       (695,724)
  Proceeds from sale of equipment                                  -              -             -          70,551
  Net (advances to) repayments from related parties          222,143        102,679      (465,484)       (140,662)
  Payments received on notes receivable                            -              -             -         799,628
  Issuance of notes receivable                                     -              -             -        (224,317)
                                                         -----------    -----------   -----------    ------------
           Net cash provided by (used in) investing
             activities                                     (255,887)        56,705        (8,643)        246,663
                                                         -----------    -----------   -----------    ------------

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

</TABLE>
<TABLE>
                     BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                Increase (Decrease) in Cash and Cash Equivalents

<CAPTION>
                                                                                                       Period from
                                                                  Year Ended September 30,            Inception to
                                                         ----------------------------------------     September 30,
                                                             1996           1995          1994        1996 (Note 1)
                                                         -----------    -----------   -----------    ---------------
<S>                                                      <C>            <C>           <C>            <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of common stock                 $    32,500    $    67,500   $    454,592   $  3,123,884
  Proceeds from issuance of Series A and B
    convertible preferred stock                                    -              -     10,025,000     10,500,000
  Proceeds from issuance of Series C and D
    convertible preferred stock and related warrants       4,500,000              -             -       4,500,000
  Offering costs for Series A and B preferred stock                -              -    (1,050,000)     (1,050,000)
  Offering costs for Series C and D preferred stock         (945,000)             -             -        (945,000)
  Proceeds from issuance of long-term debt                         -              -             -           6,075
  Proceeds from issuance of warrants                               -         10,000             -          10,000
  Increase (decrease) in amounts due to
    related parties                                                -              -      (232,586)      1,394,752
  Principal payments on notes payable                              -              -       (93,551)       (412,864)
  Cash settlement for shares of common stock                       -       (420,000)            -        (420,000)
                                                         -----------    -----------   -----------    ------------
           Net cash provided by (used in) financing
             activities                                    3,587,500       (342,500)    9,103,455      16,706,847
                                                         -----------    -----------   -----------    ------------
NET INCREASE (DECREASE) IN CASH
  AND CASH EQUIVALENTS                                    (1,013,244)    (2,729,109)    7,439,844       4,192,868

CASH AND CASH EQUIVALENTS AT
  BEGINNING OF PERIOD                                      5,206,112      7,935,221       495,377               -
                                                         -----------    -----------   -----------    ------------
CASH AND CASH EQUIVALENTS AT
  END OF PERIOD                                         $  4,192,868   $  5,206,112   $ 7,935,221    $  4,192,868
                                                         ===========   ============   ===========    ============
</TABLE>

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

During the fiscal years ended September 30, 1996, 1995 and 1994, the
Company paid interest of $0, $0 and $15,635, respectively.

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES

During fiscal year 1996, 98,738 shares of Series A convertible preferred
stock with a recorded value of $444,321 were converted into 296,214 shares of
common stock. In addition, 3,200 shares of Series D convertible preferred stock
with a recorded value of $2,467,936 were converted into 1,884,419 shares of
common stock. During fiscal year 1996, the Company declared cumulative preferred
stock dividends of $91,199. The Company intends to issue 15,239 shares of Series
A convertible preferred stock and 1,000 shares of Series B convertible preferred
stock as payment of these dividends. During fiscal year 1996, the Company
exercised its option to cancel subscriptions for 2,000 shares of Series D
convertible preferred stock.

During fiscal year 1995, 181,767 shares of Series A convertible preferred
stock with a recorded value of $817,952 were converted into 545,301 shares of
common stock. In addition, 8,632 shares of Series B convertible preferred stock
with a recorded value of $116,532 were converted into 25,896 shares of common
stock. During fiscal year 1995, the Company declared cumulative preferred stock
dividends of $117,471. The Company issued 20,495 shares of Series A convertible
preferred stock and 1,000 shares of Series B convertible preferred stock as
payment of these dividends during fiscal year 1996.

During fiscal year 1994, the Company purchased certain Medical Waste
Technologies in exchange for a note receivable (see Note 5). During fiscal year
1994, the Company paid off notes payable and accrued interest totaling
$1,509,784 by transferring real estate valued at $1,150,000 to Genesis
Investment Corporation ("Genesis"), and Genesis exercised existing warrants for
359,784 shares of common stock at an exercise price of $1 per share. During
fiscal year 1994, 668,000 shares of Series A convertible preferred stock with a
recorded value of $3,006,000 were converted into 2,004,000 shares of common
stock. In addition, 356,600 shares of Series B convertible preferred stock with
a recorded value of $4,814,975 were converted into 1,069,800 shares of common
stock. On September 30, 1994, the Company issued 63,600 shares of Series A
convertible preferred stock and 8,690 shares of Series B convertible preferred
stock as payment of cumulative preferred stock dividends of $448,345.

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


                     BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                          (A Development Stage Company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)  NATURE OF OPERATIONS

Biomune Systems, Inc. ("Biomune") was incorporated in Nevada on December 31,
1981. Biomune is a development stage biopharmaceutical and nutraceutical company
that, along with its wholly owned subsidiary Optim Nutrition, Inc. ("Optim"), is
engaged primarily in researching, developing, producing and marketing biologic
pharmaceutical products and nutraceutical food supplements derived from Biomune
patented technology (the "Technology"). Nutraceutical products are food
supplements that are derived from a food base and marketed as a beneficial
source of nutrients to promote good health. Biomune believes that the Technology
may be utilized to develop products to treat various gastrointestinal and
infectious diseases in humans and that products derived from the Technology may
help increase the body's immune response. Biomune also believes that certain
products derived from the Technology may provide nutritional supplementation for
certain individuals who are nutritionally deprived, including individuals with
severely compromised immune systems and patients undergoing intensive antibiotic
or chemotherapy treatment.

Another wholly owned subsidiary, Volu-Sol, Inc. ("Volu-Sol"), engages in
researching, developing, manufacturing, marketing and distributing medical
diagnostic stains and, through September 30, 1996, was the primary
revenue-generating business of the consolidated group of companies.


(2)  SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of 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.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
Biomune and its wholly owned subsidiaries, Optim and Volu-Sol (collectively, the
"Company"). All significant intercompany balances and transactions have been
eliminated in consolidation.

Development Stage Presentation

The Company is a development stage company. Except for the activities of its
subsidiary, Volu-Sol, and the marketing launch of the Company's first
nutraceutical product (Optimune(TM), which commenced in July 1996), the Company
has not produced or marketed any products, and has not generated any significant
revenues to date from the commercialization of any pharmaceutical product
candidates or from Optimune(TM). To date the Company's financial resources have
been dedicated to the research and development of pharmaceutical drug and
nutraceutical product candidates utilizing the Technology, including
pre-clinical studies and clinical trials on those product candidates and studies
on the Company's only nutraceutical product, Optimune(TM). The Company has
developed two pharmaceutical drug candidates, BWPT-301(TM) and BWPT-302(TM), and
one nutraceutical product, Optimune(TM). The Company is currently focusing on
the prevention and/or treatment of cryptosporidiosis and Escherichia Coli,
strain 0157:H7, with its biologic pharmaceutical drug candidates BWPT-301(TM)
and BWPT-302(TM), respectively. The commercialization of the Company's
pharmaceutical drug candidates will require significant additional financial
investment, research and development, pre-clinical and clinical testing and
regulatory approvals. The commercialization of the Company's nutraceutical
product will require significant additional financial investment, research and
development and nutritional studies.

The Company expects to continue to incur significant operating losses over the
next several years, primarily due to the marketing expenditures associated with
the market launch of Optimune(TM), expansion of its research and development
programs (including pre-clinical studies and clinical trials for its existing
pharmaceutical drug candidates), nutritional studies for its existing
nutraceutical product, regulatory compliance requirements related to its
pharmaceutical drug candidates, studies and trials for other drugs or products
that the Company may develop, and the implementation of programs to market any
drugs that are ultimately approved for distribution.

The Company estimates that the total research and development, general and
administrative and other direct costs associated with reaching the stage of
obtaining final FDA approval on BWPT-301(TM) will, in the aggregate, approximate
$16 - $18 million and for BWPT-302(TM) will, in the aggregate, approximate $8 -
$10 million, some of which has been and will be paid in cash and some of which
has been and likely will be paid in shares of common stock. As of September 30,
1996, approximately $12.7 million had been spent on BWPT-301(TM) and
approximately $450,000 had been spent on BWPT-302(TM). It is estimated that
approximately $1.5 - $2.5 million will be expended during fiscal 1997 and fiscal
1998 as the Phase II clinical trials continue and the Phase III clinical trials
are undertaken on BWPT-301(TM) and the Phase I clinical trials continue and the
Phase II clinical trials are undertaken on BWPT-302(TM).

As of September 30, 1996, the Company had spent approximately $530,000 related
to developing and marketing Optimune(TM). During the next twelve months the
Company anticipates incurring direct costs of approximately $2 - $4 million in
conducting additional nutritional studies and marketing Optimune(TM).

The Company is subject to special risk factors due to its development stage
status that may impact its ability to become an operating enterprise. These risk
factors include:

a)   There can be no assurance that the Company will be able to develop, produce
     at a reasonable cost or market successfully, any of its drug or product
     candidates. Further, those drug and product candidates may prove to have
     undesirable or unintended side effects that may prevent and/or limit their
     commercial use.

b)   Although the Company believes that it has or will have sufficient cash
     available to fund its operations for the next twelve months, additional
     funds may be required in the event the Company has not begun to generate
     significant revenues from sales of Optimune(TM). As a result, the Company
     may find it necessary to postpone or cancel some of its planned marketing
     and research and development programs, which could effect future revenues
     and new drug or product introductions. Other factors such as extended
     pre-clinical and clinical trials, difficulty in obtaining regulatory
     approvals, competition and unforeseen or unexpected difficulties in
     securing product used in the production of the Company's drugs and products
     from its sole supplier in New Zealand, changes in existing research
     relationships, the Company's ability to maintain and establish additional
     collaborative arrangements and unexpected expenditures relating to the
     Company's operations, could result in the Company's need for additional
     funds sooner than anticipated. The Company intends to seek such additional
     funding through additional public or private financings; however, there can
     be no assurance that additional funding will be available or if available,
     that it will be available on acceptable terms or in required amounts.

c)   The Company is dependent upon a License granted to it by Protein
     Technology, Inc. (see Note 4) for the use of the Technology. If the License
     is terminated for any reason, the Company would lose all rights to the
     Technology, which would have a material adverse effect on the Company's
     operations.

d)   Prior to marketing its existing pharmaceutical drug candidates or any other
     pharmaceutical drug candidates that the Company may develop, such drug
     candidates must undergo extensive clinical trials and an extensive
     regulatory approval process. Any denials or delays in obtaining the
     requisite approvals would likely have a material adverse effect on the
     Company.

e)   The Company is dependent on a single third-party manufacturer to
     manufacture the protein concentrate (the "Base Product") used in the
     production of its drug and product candidates. In the event the sole
     manufacturer of the Base Product fails to supply any or all of the
     Company's requirements, there can be no assurance that alternate sources of
     supply will be available to the Company at a reasonable cost or in a timely
     manner. If such alternate sources are not available, the Company's results
     of operations could be severely adversely affected.

f)   At present, there are several companies that are involved in the research
     and development of drugs derived from colostrum and hyper-immunized cows,
     which companies are or could become competitors of the Company. In
     addition, the Company also faces potential competition from numerous
     pharmaceutical and other biopharmaceutical companies that are currently
     developing products, utilizing unrelated technologies, for the treatment
     and/or prevention of many of the diseases, infections and syndromes
     identified by the Company for application of its product candidates.

     Competition in the pharmaceutical and medical and diagnostic
     technology industries is extremely intense. The Company competes with many
     other companies that have substantially greater capital resources, research
     and development capabilities, manufacturing and marketing resources, and
     experience than does the Company. If a competitor were successful in
     developing a competing product and in receiving FDA approval to market
     prior to the Company receiving such FDA approval on BWPT-301(TM),
     BWPT-302(TM) and/or any other drug or nutraceutical product candidate
     developed by the Company, the value, viability and marketability of
     BWPT-301(TM), BWPT-302(TM) and/or any such other drug candidate could be
     materially adversely affected and the Company's business prospects severely
     negatively impacted.

g)   The Company is highly-dependent upon the efforts and abilities of certain
     of its senior management personnel. The loss of any of these individuals
     could have a material adverse effect on the Company, its operations and its
     prospects.

Revenue Recognition

The Company records revenues related to Volu-Sol and Optim when the products are
shipped. Deferred revenues represent deposits received from customers that will
be recognized as revenues when the products are shipped to the customers.

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or
market value. Inventories consist of the following:

                                                              September 30,
                                                         ----------------------
                                                           1996         1995
                                                         --------      --------
        Instruments, biological stains and reagents      $ 50,181      $ 41,915
        Nutraceutical finished goods                      168,644             -
        Raw materials, packaging and supplies             337,917        58,409
                                                         --------      --------
                                                         $556,742      $100,324
                                                         ========      ========

Property and Equipment

Property and equipment are stated at cost and are depreciated using the
straight-line method over their estimated useful lives of two to ten years.

Major renewals and betterments are capitalized. Maintenance, repairs and minor
renewals are expensed as incurred. When an asset is retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the
accounts and any resulting gain or loss is included in the determination of net
income or loss.

Other Assets

Other assets consist of technologies and other assets as follows:

                                                               September 30,
                                                         ----------------------
                                                           1996           1995
                                                         --------      --------

        Medical Waste Technologies (see Note 5)          $629,383      $629,383
        Medical Diagnostic Technologies (Volu-Sol)              -       466,358
        The Technology (see Note 4)                        70,000        70,000
        Other                                              17,595         2,790
                                                         --------      --------
                                                          716,978     1,168,531
        Accumulated amortization                         (218,575)     (323,517)
                                                         --------      --------
            Total other assets                           $498,403      $845,014
                                                         ========      ========

The Medical Waste Technologies and the Technology are amortized using the
straight-line method over estimated lives of ten years. During 1996, the Company
determined that facts and circumstances warranted the write off of the remaining
net book value of approximately $245,000 related to the Medical Diagnostic
Technologies. This determination was based on the continued operating losses and
negative cash flows from Volu-Sol's operations.

Net Loss Per Common Share

Net loss per common share is computed based on the weighted average number of
common shares outstanding during the year. Convertible preferred stock, warrants
and options outstanding are not included in the computations because any
assumption regarding conversion would be antidilutive, thereby decreasing the
net loss per common share. Preferred stock dividends increase the net loss for
purposes of computing the net loss per common share.

Income Taxes

The Company recognizes deferred tax assets or liabilities for expected future
tax consequences of events that have been recognized in the financial statements
or tax returns. Under this method, deferred tax assets or liabilities are
determined based upon the difference between the financial statement and income
tax bases of assets and liabilities using enacted tax rates expected to apply
when differences are expected to be settled or realized.

Cash and Cash Equivalents

The Company considers all highly-liquid, short-term investments that have an
initial maturity of 90 days or less to be cash equivalents.

Recent Accounting Pronouncements

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The new
standard is effective for fiscal years beginning after December 15, 1995 and
would change the Company's method of determining impairment of long-lived
assets.

In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation." This new standard is effective for
fiscal years beginning after December 15, 1995. The standard encourages, but
does not require, companies to recognize compensation expense for grants of
stock, stock options, and other equity instruments to employees based on fair
value. Companies that do not adopt the fair value accounting rules must disclose
the impact of adopting the new method in the notes to the financial statements.
Transactions in equity instruments with non-employees for goods or services must
be accounted for on the fair value method.

The Company will adopt SFAS No. 121 and SFAS No. 123 in fiscal year 1997
and no determination has been made as to the impact on the Company's
consolidated financial statements when implemented.


(3)  COMMON STOCK SPLIT

During fiscal year 1994, the Company's Board of Directors approved a 3-for-1
common stock split in the form of a 200 percent common stock dividend effective
June 14, 1994. All common share amounts and per share information in the
accompanying consolidated financial statements have been retroactively adjusted
to reflect this common stock split.


(4)  THE TECHNOLOGY LICENSE

Pursuant to a License agreement dated May 21, 1991, and subsequently amended as
of December 15, 1995, Protein Technology, Inc. ("PTI") has granted the Company
the exclusive right and license to utilize the Technology in connection with the
marketing and sale of pharmaceutical drugs and nutraceutical products, solely
for human applications, in the United States and Canada and each of their
territories and possessions. By First Amendment to the License Agreement entered
into effective as of September 13, 1996, the Company and PTI agreed to expand
the territories in which the Company is licensed to market and sell products
utilizing the Technology to include the following countries and areas and their
respective territories and possessions: (i) Kenya, (ii) the Ivory Coast, (iii)
Zimbabwe, (iv) Ghana, (v) Zambia, and (vi) Nigeria. The License expires in May
1999, unless the Company, prior to such date, has generated annual gross
revenues from the sale of products developed utilizing the Technology of not
less than $2 million, in which event the License will be automatically extended
until the expiration date of the latest patent to expire covered by the License,
including any extensions to such patent registrations. Based on the patents
currently covered by the License, it would expire on March 28, 2006. The Company
is required to pay PTI royalties in the amount of 5 percent of gross receipts
from the sale of all products covered by the License with respect to the first
$3.5 million of sales during each annual period and 7 percent of gross receipts
in excess of $3.5 million during such annual period. In addition, in the event
the License is extended past May 1999, the Company is required to pay PTI annual
advances to be applied against royalties in the amount of $100,000 for the first
year of such extension and increasing by $10,000 each year thereafter. There
have been no royalties paid to date.


(5)  MEDICAL WASTE TECHNOLOGIES

On November 30, 1993, the Company purchased from Bryan Furtek, Ph.D., the
proprietary rights, trade secrets and interests in certain technologies
(collectively, the "Medical Waste Technologies"). The Medical Waste Technologies
consist of the following: 1) a device for the sterilization and decontamination
of medical devices and wastes, 2) a bioremediation process to detoxify and
degrade hazardous substances through the use of certain microbes, and 3) a
device and process for the safe treatment of used medical stains. An independent
appraiser evaluated the Medical Waste Technologies and found the concepts
scientifically valid and feasible for commercialization and further development.
The Medical Waste Technologies were initially recorded at $1,129,383.

On December 15, 1993, Mercedita Holdings, Inc. (an indirect shareholder of the
Company) purchased a 10 percent interest in the Medical Waste Technologies for
$500,000 ($50,000 in cash and $450,000 in a secured promissory note bearing
interest at prime plus one percent). The promissory note was paid in full during
fiscal year 1994, along with interest totaling approximately $16,000. The
Company accounted for this sale of the 10 percent interest in the Medical Waste
Technologies using the cost recovery method. As a result, the cash received
reduced Biomune's investment in the Medical Waste Technologies.

Pursuant to a license agreement dated May 6, 1996, the Company granted a 15-year
license to Biomed Patent Development L.L.C. ("Biomed") for the exclusive use of
a portion of the Medical Waste Technologies, known as the "Sterilization
Technology," in connection with the manufacture and distribution of medical
devices. Under the agreement, the Company will receive royalties for the first
year of the license equal to the greater of (a) 7.5 percent of gross sales or
(b) $45,000. The Company is entitled to receive royalties for all subsequent
years equal to the greater of (a) 0.9 percent of gross sales or (b) $90,000. The
Company will record royalty revenue as payments are received. Biomed has entered
into a license with a third party in settlement of an alleged infringement claim
by such third party relating to the Sterilization Technology and Biomed has
indemnified the Company against any damages resulting from the claims of such
third party. In addition, the Company's liability under this license agreement
has been limited to the aggregate royalties payable to the Company under the
license agreement.


(6)  COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases facilities under noncancelable operating leases which expire
at various dates through 2001. Lease expense for the years ended September 30,
1996, 1995 and 1994, was approximately $121,000, $108,000 and $71,000,
respectively. Future minimum lease commitments as follows:

                         Year          Amount
                         ----         --------
                         1997         $165,008
                         1998          169,508
                         1999          174,233
                         2000           75,008
                         2001           22,312
                                      --------  
                                      $606,069
                                      ========

Litigation

The Company and certain of its officers and directors are currently involved in
a lawsuit filed by a shareholder. On October 12, 1995, a Proposed Class Action
Complaint for Violations of the Federal Securities Laws (the "Sterlin
Complaint") was filed in the United States District Court for the District of
Utah, Central Division, by Roman Sterlin. The Sterlin Complaint names as
defendants the Company, David G. Derrick (the Company's Chief Executive Officer
and Chairman of the Board), Aaron Gold (a director of the Company), Charles J.
Quantz (a director of the Company), Jack D. Solomon (a founder of the Company
and a member of the Company's Business Advisory Board), Genesis Investment
Corporation (a shareholder of the Company) and The Institute for Social &
Scientific Development, Inc. (a shareholder of the Company). The Sterlin
Complaint, among other things, alleges violations of Sections 10(b), 20(a) and
20A(a) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and
Rule 10b-5 promulgated under the 1934 Act. The Company believes that the
allegations made in the Sterlin Complaint are baseless and that the Company has
meritorious defenses. The Company intends to vigorously defend against this
lawsuit. The Sterlin Complaint seeks, among other things, an award of
compensatory damages in an unspecified amount and an award of Mr. Sterlin's
costs and expenses incurred in connection with this action. In November 1995,
the Company filed its answer to the Sterlin Complaint and along with Aaron Gold,
Charles J. Quantz and David G. Derrick denied the allegations. On May 10, 1996,
the court ordered the plaintiff to file an amended complaint. The plaintiff
filed his amended complaint in August 1996 alleging violations of Sections
10(b), 20(a) and 20A(a) of the 1934 Act and Rule 10b-5 promulgated thereunder,
and general misappropriation of material nonpublic information. The Company
filed a motion to dismiss the amended complaint on September 25, 1996.

By letter dated April 17, 1995, Yoni Shaked Ashkenazi, a holder of a total of
158,000 shares of Biomune common stock, demanded that the Company repurchase
said shares of common stock for an aggregate of $1,045,000. Mr. Ashkenazi's
demand letter alleges, among other things, that David G. Derrick, the Company's
Chief Executive Officer and Chairman of the Board, wrongfully induced Mr.
Ashkenazi into purchasing such shares of common stock in or about July 1994,
through various alleged false and misleading statements and misrepresentations.
The Company denies any wrongdoing and further denies all of the allegations set
forth in Mr. Ashkenazi's April 17, 1995 demand letter. The Company prepared a
response to Mr. Ashkenazi's April 17, 1995 demand letter and transmitted the
same to Mr. Ashkenazi on or about May 12, 1995. To date, no response to that
letter has been received by the Company.

In the opinion of management, after consultation with legal counsel, the
ultimate outcomes of these two matters are not determinable at this time. The
Company has not accrued any liabilities with respect to these two disputed
matters.


(7)  PREFERRED STOCK

Series A Convertible

On November 10, 1993, the Board of Directors amended Biomune's Articles of
Incorporation to designate 1,000,000 preferred shares as Series A 10% Cumulative
Convertible Preferred Stock ("Series A"). During fiscal years 1994 and 1993, the
Company sold a total of 1,000,000 shares of Series A for $5,000,000. The Company
paid commissions of $500,000, which were reflected as a reduction in the amount
recorded as equity. Series A has a 10 percent cumulative dividend and each share
is currently convertible into three shares of common stock. Dividends are
payable each year in either additional shares of Series A at $5 per share or
cash. Shares of Series A became redeemable at the option of the Company on
January 1, 1996 at a price of $5 per share plus any accrued and unpaid
dividends. On March 21, 1995 and July 3, 1996, the Board of Directors amended
the Company's Articles of Incorporation to designate an additional 75,000 and
45,000 shares of Series A, respectively, to be utilized by the Company for stock
dividends accrued on the outstanding shares of Series A. For fiscal years 1996,
1995 and 1994, the Company recorded dividends totaling an aggregate dollar
amount of $76,199, $102,471 and $318,001, respectively. The fiscal year 1996
dividends of $76,199 are accrued as of September 30, 1996 and the fiscal years
1995 and 1994 dividends were paid by issuing 20,494 and 63,600 additional shares
of Series A for each respective year. During fiscal years 1996, 1995 and 1994,
98,738, 181,767 and 668,000 shares of Series A with recorded values of $444,321,
$817,952 and $3,006,000 were converted into 296,214, 545,301 and 2,004,000
shares of common stock, respectively.

Series B Convertible

On April 26, 1994, the Board of Directors amended Biomune's Articles of
Incorporation to designate 1,000,000 preferred shares as Series B 10% Cumulative
Convertible Non-Voting Preferred Stock ("Series B"). During fiscal year 1994,
the Company sold 366,600 shares of Series B for $5,500,000. Commissions of
$550,000 were paid by the Company, and were reflected as a reduction in the
amount recorded as equity. Series B has a 10 percent cumulative dividend and
each share currently is convertible into three shares of common stock. Dividends
are payable each year in either additional shares of Series B or cash. Shares of
Series B became redeemable at the option of the Company on January 1, 1996 at a
price of $15 per share plus any accrued and unpaid dividends. For fiscal years
1996, 1995 and 1994, the Company recorded dividends totaling an aggregate dollar
amount of $15,000, $15,000 and $130,344, respectively. The fiscal year 1996
dividends of $15,000 are accrued as of September 30, 1996 and the fiscal year
1995 and 1994 dividends were paid by issuing 1,000 and 8,690 shares of Series B,
respectively. During fiscal years 1995 and 1994, 8,632 and 356,600 shares of
Series B with recorded values of $116,532 and $4,814,975 were converted into
25,896 and 1,069,800 shares of common stock, respectively.

Series C Convertible

On September 23, 1996, the Board of Directors amended the Company's Articles of
Incorporation to designate 10,000 preferred shares as Series C 8% Cumulative
Convertible Non-Voting Preferred Stock ("Series C"). As of September 30, 1996,
the Company has sold a total of 5,000 shares of Series C for $5,000,000 of which
$1,500,000 was received in cash in September 1996 and $3,500,000 was recorded as
subscriptions receivable for which cash was received by the Company subsequent
to year-end. The Company incurred offering costs of $500,000 which were
reflected as a reduction of the amount recorded as equity. Series C has an 8
percent cumulative dividend payable in cash or in additional shares of Series C
at the discretion of the Board of Directors. A special dividend in the amount of
1 1/2 percent of the stated value of Series C is payable in cash if the shares
of the Company's common stock underlying the Series C have not been registered
with the Securities and Exchange Commission by January 24, 1997. The Series C is
convertible at the investor's option into the number of shares of common stock
determined by dividing $1,000 plus any accrued and unpaid dividends by an amount
equal to the Market Price, as defined in the agreement, less 25%; provided
however, that the discount from the Market Price shall be 20% for all shares
converted prior to January 24, 1997. However, in the event a registration
statement does not become effective by January 24, 1997, the investors will not
be allowed to convert shares into common stock until after January 24, 1997. The
Company has the right to redeem up to 66 2/3 percent of the shares of Series C
beginning 50 days from the date of the closing of the private placement. The
Company's redemption price will be 125% of a conversion price as established by
the Company if the conversion is done prior to January 24, 1997 and 133% of such
price if such conversion occurs after January 23, 1997. In the event of the
Company's liquidation, the Series C shareholder will be entitled to $1,000 per
share plus all accrued and unpaid dividends multiplied by 125% if such
liquidation occurs prior to Janaury 24, 1997 or 133% if such liquidation occurs
after January 23, 1997.

In connection with the sale of Series C, the Company issued warrants to purchase
500,000 restricted shares of the Company's common stock to the purchasers of
Series C. These warrants are exercisable for two years from the date of grant at
$2.81 per share and the Company has the right to repurchase these warrants at
$4.00 per share in accordance with the terms of the Series C Preferred Stock
sale agreement. The Company determined the relative values of the Series C and
common stock warrants which resulted in a value of $328,500 being assigned to
the warrants.

Series D Convertible

In December 1995, Biomune amended its Articles of Incorporation by filing a
designation of rights and preferences of Series D 8% Cumulative Convertible
Non-Voting Preferred Stock ("Series D") with the Nevada Secretary of State. The
Series D consists of 6,000 shares of preferred stock, $.0001 par value per
share. Subject to the rights of the holders of the Company's Series A and Series
B preferred stock, the holders of shares of Series D are entitled to receive an
annual dividend at the rate of 8 percent per annum, payable either in cash or in
additional shares of Series D, at the election of the Company's Board of
Directors.

In December 1995, the Company had signed subscription agreements for 5,200
shares of Series D at $1,000 per share. The Company received a total of $3
million (less certain costs and expenses of the offering, including 200 shares
of Series D, which costs totaled $645,000) on January 3, 1996 in exchange for
3,000 shares of Series D. The Company also received a $2 million non-negotiable
promissory note (the "Note") dated December 17, 1995, payable to the Company on
September 30, 1996 (as extended), without interest, in exchange for 2,000 shares
of Series D. However, the Company had the right to cancel the Note and the sale
of the 2,000 shares of Series D, in whole or in part. Effective September 30,
1996, the Company canceled the Note and the sale of the 2,000 shares of Series
D. Also during fiscal year 1996, the 3,200 issued shares of Series D with a
recorded value of $2,467,936 were converted into 1,884,419 shares of common
stock.

In connection with the sale of Series D, the Company issued warrants to purchase
1,470,588 restricted shares of the Company's common stock to the purchaser of
Series D. These warrants are exercisable for two years from the date of grant at
$2.125 per share. The holder of these warrants has granted the Company an option
to purchase the unexercised portion of these warrants at a price of $2.875 per
share for a period of twelve months from September 30, 1996. The Company
determined the relative values of the Series D and common stock warrants based
on an analysis prepared by the Company's investment bankers which resulted in a
value of $544,773 being assigned to the warrants.


(8)  COMMON STOCK TRANSACTIONS

During fiscal years 1996, 1995 and 1994, the Company issued 217,212, 441,438 and
348,000 shares of common stock, respectively, in exchange for services and
bonuses. These issuances have been recorded at prices which represent the fair
market value of the services received or the fair market value of the stock
issued, whichever was more readily determinable.

The Company sold 40,000 30,000, and 412,994 shares of restricted common stock
for $32,500, $67,500 and $454,592 in fiscal years 1996, 1995 and 1994,
respectively. The fiscal years 1996 and 1995 shares issued resulted from the
exercise of existing warrants at prices ranging from $0.33 to $2.25 per share.
The fiscal year 1994 sales included 7,500 shares sold at a price of $4 per share
and 405,494 shares issued through the exercise of existing warrants at prices
ranging from $1 to $4 per share.

At September 30, 1996, certificates for 20,890 shares of the total shares
reflected in the accompanying consolidated financial statements as being issued
and outstanding were not physically issued. However, the Company was obligated
to, and is in the process of, issuing such stock certificates.


(9)  STOCK OPTIONS AND WARRANTS

The Company has from time to time granted certain stock options and warrants. A
summary of the stock option and warrant activity for fiscal years 1996, 1995 and
1994 is as follows.
                                                                     Range of
                                                    Number of    Exercise Prices
                                                      Shares    Prices per Share
                                                                          
Options/warrants outstanding at September 30, 1993   3,330,0000   $0.33 - $2.25
 Exercised                                             (777,761)  $1.00 - $4.00
 Canceled                                              (210,000)      $2.25
 Granted                                                965,000   $4.00 - $5.00
                                                     ----------

Options/warrants outstanding at September 30, 1994   3,307,2390   $0.33 - $5.00
 Exercised                                              (99,322)          $2.25
 Canceled                                              (475,400)  $2.25 - $3.50
 Granted                                              3,714,700   $2.00 - $6.00
                                                     ----------

Options/warrants outstanding at September 30, 1995   6,447,2170   $0.33 - $6.00
 Exercised                                              (40,000)  $0.33 - $2.25
 Canceled                                              (460,000)  $0.67 - $6.00
 Granted                                              3,374,088   $2.13 - $3.75
                                                     ----------

Options/warrants outstanding at September 30, 1996   9,321,3050   $1.67 - $6.00
                                                     ==========

All outstanding options/warrants, except for 50,000 at September 30, 1996, are
exercisable and expire at various dates through September 2001. The 50,000
options, become exercisable in fiscal year 1997.

During fiscal year 1993, the Company adopted the Biomune Systems, Inc. 1992
Stock Incentive Plan and the Biomune Systems, Inc. 1993 Stock Incentive Plan.
During fiscal year 1995, the Company adopted the Biomune Systems, Inc. 1995
Stock Incentive Plan. During fiscal year 1996, the Company adopted the Biomune
Systems, Inc. 1996 Stock Incentive Plan. The 1993, 1995 and 1996 Stock Incentive
Plans provide for the granting of incentive stock options ("ISOs") as defined
under the Internal Revenue Code and nonqualified stock options ("NSOs"). The
1992 Plan only provides for the granting of NSOs. The 1992, 1993, 1995 and 1996
Stock Incentive Plans (collectively, the "Plans") also allow Biomune to award
shares of common stock and designate shares to be purchased by certain
individuals. The Plans are administered by the Board of Directors of the
Company. The Company has designated 900,000 shares of common stock for issuance
under the 1992 plan, 1,500,000 shares under the 1993 plan, 2,250,000 shares
under the 1995 plan and 2,500,000 shares under the 1996 plan. Under the terms of
the Plans, the exercise price for ISOs shall not be less than the fair market
value at the date of grant. The exercise price for NSOs shall not be less than
the lesser of: 1) the book value per share of common stock as of the end of the
fiscal year of Biomune immediately preceding the date of grant, or 2) 50 percent
of the fair market value per share of common stock on the date of grant. Options
are exercisable within periods determined by the Board of Directors but may not
exceed ten years from the date of grant. As of September 30, 1996, 669,000,
334,500, 0 and 1,928,396 shares were available for issuance under the 1992,
1993, 1995 and 1996 plans, respectively. The 1992, 1993, 1995 and 1996 plans
expire in December 1997, September 1998, February 2005 and March 2006,
respectively.


(10)  INCOME TAXES

As of September 30, 1996 and 1995, the Company had net operating loss
carryforwards ("NOLs") for federal income tax reporting purposes of
approximately $22,785,000 and $17,297,000, respectively, which result in
deferred tax assets of approximately $8,499,000 and $6,452,000, respectively.
There can be no assurance that all of these NOLs will be available to offset
future taxable income, if any. An NOL generated in a particular year will expire
for federal tax purposes if not utilized within 15 years. Additionally, the
Internal Revenue Code contains other provisions which could reduce or limit the
availability and utilization of these NOLs. For example, limitations are imposed
on the utilization of NOLs if certain ownership changes have taken place or will
take place. In accordance with SFAS No. 109, a valuation allowance is provided
when it is more likely than not that some portion of the deferred tax asset will
not be realized. Due to the uncertainty with respect to the ultimate realization
of the NOLs, the Company established a valuation allowance for the entire amount
of the deferred tax asset.

The Company has determined that as of December 10, 1991 an ownership change (as
that term is defined in Section 382 of the Internal Revenue Code) may have
occurred. The impact of this ownership change is to limit the use of
approximately $3,565,000 of the Company's total NOLs. The Company estimates that
the use of these NOLs would be limited to approximately $502,000 per year (on a
cumulative basis). The NOLs that may have been limited by the possible ownership
change expire in the years and in the amounts indicated below:

              Year                         Year of
           Generated       Amount        Expiration
           ---------    ------------     ----------
              1982      $    399,000        1997
              1983         1,129,000        1998
              1984           333,000        1999
              1985            10,000        2000
              1986           148,000        2001
              1987           149,000        2002
              1988           137,000        2003
              1989           234,000        2004
              1990           252,000        2005
              1991           226,000        2006
              1992           172,000        2007
                        ------------
             Total      $  3,189,000
                        ============

The Company's NOLs that are not limited expire in the years and in the amounts
indicated below:

              Year                         Year of
           Generated       Amount        Expiration
           ---------    ------------     ----------
              1992      $    625,000        2007
              1993         6,386,000        2008
              1994         3,417,000        2009
              1995         3,217,000        2010
              1996         5,951,000        2011
                        ------------
                        $ 19,596,000
                        ============


(11)  RELATED-PARTY TRANSACTIONS

Capital Funding Option Arrangement

Subsequent to year-end, the Company granted to each of its Chief Executive
Officer and Vice Chairman of the Board, options in the amount of 100,000 shares
of common stock upon the Company's successful raising of $5 million in gross
capital proceeds. These options were issued at the average of the closing bid
and asked prices of the Company's common stock on the date of grant.

ADP Management Corporation and David G. Derrick

Biomune had an agreement with ADP Management Corporation ("ADP") to manage
Biomune as well as to provide Biomune with a chief executive officer for a
two-year period beginning October 1, 1995. Biomune was obligated to pay ADP
$16,667 per month and reimburse ADP for all direct expenses incurred on behalf
of Biomune.

Effective June 15, 1996, the agreement with ADP was terminated and David G.
Derrick, Chief Executive Officer, was hired as an employee of the Company. The
employment agreement with Mr. Derrick has an initial term that expires on
September 30, 1997. Under the employment agreement Mr. Derrick has a base salary
of $200,000 per year. In addition, during fiscal year 1996, the Company granted
options to purchase 600,000 shares of common stock at $2.00 per share which vest
over the term of the employment agreement. The Company recorded $187,500 of
compensation expense related to those options of which $93,750 is deferred as of
September 30, 1996 and will be recognized over the remaining vesting period of
the options.

Genesis Investment Corporation

The Company has a consulting agreement with Genesis Investment Corporation
("Genesis"), whereby Genesis receives $10,000 per month and reimbursement of any
out-of-pocket expenses, which currently expires August 1, 1997. The services
provided to the Company by Genesis include primarily financial and general
business consulting services and introductions to the scientific, medical,
financial and business communities. The Company recorded consulting expense of
$120,000 in each of the three fiscal years ended September 30, 1996, 1995 and
1994 related to this consulting agreement. Effective October 1, 1996, the
consulting agreement with Genesis was terminated.

During fiscal years 1995 and 1994 the Company made certain loans to Genesis
totaling $2,975,800 and $2,192,552, respectively. These loans were unsecured,
bore interest rates of twelve percent and were repaid to the Company as of
September 30, 1995.

The Institute for Social & Scientific Development, Inc.

During fiscal year 1995, the Company made loans aggregating $77,607 to The
Institute for Social & Scientific Development, Inc. These loans bore interest at
an annual rate of twelve percent and were repaid with interest of $1,655 as of
September 30, 1995.

Federal Land and Development Corporation

During fiscal years 1995 and 1994, the Company made loans totaling $430,000 and
$30,000, respectively, to Federal Land and Development Corporation. These loans
were unsecured and bore interest at an annual rate of twelve percent, and were
due on demand. As of September 30, 1995, $182,811 remained outstanding on these
loans which amount was repaid in full, including interest, to the Company during
fiscal year 1996.

E. Wayne Nelson

On August 1, 1995, Biomune entered into an agreement with E. Wayne Nelson
("Nelson") that extended through September 30, 1996, whereby Nelson provided
services to Biomune as its Corporate Secretary and Treasurer in exchange for
10,800 shares of common stock. Biomune recorded $27,000 of consulting expense
associated with this agreement, of which $23,100 was deferred as of September
30, 1995 and recognized as expense in fiscal year 1996.

James J. Dalton

Biomune entered into an agreement with James J. Dalton ("Dalton"), the Vice
Chairman of the Board, whereby Dalton provided management and financial
consulting services to the Company for the period of March 15, 1994 through
March 15, 1995. Biomune issued options to purchase 75,000 shares of common stock
at an exercise price of $4 per share as compensation for the services performed.
The options were valued at a price determined to be equal to the trading price
of Biomune's common stock on the date the warrants were granted. Effective
October 23, 1996, these options were extended for a five-year period and the
price was adjusted to the average of the bid and asked prices on that date. In
addition, Biomune had committed to pay Dalton $3,000 per month, reimbursement of
expenses, and 50 percent of the net profits of Volu-Sol, if any (after Biomune
had been repaid a $100,000 advance made to Volu-Sol), for a period of three
years after the expiration of this agreement and any extension thereof.

On April 1, 1995, the Company entered into an agreement with Dalton that
extended through April 1, 1996, whereby Dalton provided services in exchange for
$3,000 in cash per month and 72,000 shares of Biomune common stock. The Company
recorded $216,000 of consulting expense associated with the issuance of common
stock, of which $90,000 was deferred as of September 30, 1995 and was recognized
as expense in fiscal year 1996. On July 20, 1995, Dalton received options to
purchase 120,000 shares of common stock at $2.00 per share with a five-year
exercise period.

Effective February 1, 1996, the Company extended its agreement with Dalton
through January 31, 1997 and agreed to pay Dalton $5,000 per month and 6,000
shares of common stock per month (a total of 72,000 shares). In addition, Dalton
received warrants to purchase 100,000 shares of common stock at $2.31 per share.
The Company recorded consulting expense of $175,500 related to the common shares
of which $58,500 was deferred as of September 30, 1996 and will be recognized
over the remaining term of the agreement. The Company recorded $106,000 of
consulting expense related to those warrants of which $35,333 was deferred as of
September 30, 1996 and will be recognized over the remaining term of the
agreement. Effective October 23, 1996, Dalton's remuneration was increased to
$161,000 per year and five-year options were granted to Dalton to purchase
72,000 shares of common stock for employment during each of fiscal year 1997 and
1998 at exercise prices equal to the average bid and asked prices of the
Company's common stock on that date.

During fiscal years 1995 and 1994, Biomune made loans aggregating $175,000 and
$90,000, respectively, to Dalton. These loans were unsecured, bore interest at
an annual rate of twelve percent, and were due on demand. During fiscal years
1996, 1995 and 1994, Dalton made principal and interest payments totaling
$60,000, $16,605 and $90,000, respectively, on these loans. In January 1996, the
Company agreed to eliminate the remaining principal and interest balances on
these loans, which totaled approximately $126,000, in exchange for Dalton's
relinquishment of his rights to receive 50 percent of the future net profits of
Volu-Sol, if any, under the existing consulting agreement.

Christopher D. Illick

Effective March 1, 1996 and expiring on February 28, 1997, the Company entered
into a consulting agreement with Christopher D. Illick ("Illick"), one of the
Company's directors, to provide services in developing and maintaining relations
with institutional investors. The agreement provides that Illick receive 2,250
shares of unrestricted common stock each month (a total of 27,000 shares) during
the twelve month term of the agreement. The Company recorded consulting expense
related to this agreement of $63,280 of which $26,325 was deferred as of
September 30, 1996 and will be recognized over the remaining term of the
agreement.

Other

During fiscal year 1994, Biomune loaned a total of $410,000 to two shareholders
of Biomune. These loans bore annual interest rates of twelve percent. These
amounts and related interest were repaid in full during fiscal year 1995.


(12)  OTHER CONSULTING AGREEMENTS

Daliz Associates

In accordance with a consulting agreement with Daliz Associates ("Daliz"),
during fiscal year 1994, the Company issued a total of 174,000 shares of
unrestricted common stock and had agreed to issue an additional 216,000 shares
of common stock. The agreement required Daliz to assist Biomune in locating
business opportunities and extended through April 1995. For various reasons,
Biomune and Daliz terminated the consulting agreement by entering into another
agreement effective as of February 1, 1995. Pursuant to the February 1, 1995
agreement, and during fiscal year 1995, Biomune paid Daliz $150,000 in cash and
issued a total of 140,000 shares of common stock in settlement of Biomune's
obligation under the prior agreement. Also, the February 1, 1995 agreement
required Biomune to pay Daliz $5,000 per month and issue a total of 2,000 shares
of common stock per month for services provided to Biomune thereunder. The
February 1, 1995 agreement expired January 31, 1996. Effective February 1, 1996,
the Company extended the agreement through January 31, 1997 and agreed to pay
Daliz $5,000 per month and issue a total of 2,000 shares of common stock per
month (a total of 24,000 shares). However, this agreement was terminated on
November 4, 1996.

The Company recorded consulting expense totaling $117,400, $76,800 and
$1,104,000 in fiscal years 1996, 1995 and 1994, respectively, under the
agreements. Consulting expense related to common stock issuances under the
agreements was recorded using the fair market value of Biomune stock on the
dates the agreements were executed.

Barretto Pacific Corporation

Effective September 12, 1996, the Company entered into a six-month consulting
agreement with Barretto Pacific Corporation ("Barretto") to provide investment
advisory services. Under the agreement, the Company agreed to pay $90,000 in
cash and issued options to purchase 50,000 shares of common stock at $2.38 per
share. These options are currently exercisable. The Company also issued options
to purchase 50,000 shares of common stock at $3.38 per share, which options will
become exercisable on January 12, 1997. The Company recorded consulting expense
of $35,500 relating to the options of which approximately $32,500 is deferred as
of September 30, 1996 and will be recognized over the remaining term of the
agreement. The options expire March 12, 1997 if not exercised.

On November 1, 1996, in accordance with the agreement, the Company notified
Barretto that it was terminating the agreement. As a result, all options expire
if not exercised by December 12, 1996.

AAM Group, Inc.

On August 11, 1995, the Company entered into an agreement with AAM Group, Inc.
("AAM") that extended through February 10, 1996, whereby AAM provided services
to the Company in exchange for 90,000 shares of Biomune common stock. The
Company recorded $225,000 of consulting expense associated with this agreement.

Allen Lewin

On May 1, 1996, the Company entered into an agreement with Allen Lewin ("Lewin")
to provide consulting services to the Company. In connection with this
agreement, Lewin was granted warrants to purchase 100,000 shares of common stock
at $2.38 per share. The Company recorded consulting expense of $110,000 related
to the issuance of these warrants.

Aurora Consultants, LLC

Effective January 1, 1996, the Company entered into an agreement with Aurora
Consultants, LLC ("Aurora") to provide consulting services through June 1997, as
extended. Aurora is to receive cash for services performed and was granted
warrants to purchase 30,000 shares of common stock at $2.34 per share, which
warrants include "piggyback" registration rights on the underlying shares. The
Company recorded consulting expense of $32,400 related to the issuance of these
warrants.

Allen & Company, Inc.

On June 21, 1995, the Company entered into an agreement with Allen & Company,
Inc. ("Allen") that extended through June 20, 1996, whereby Allen provided
services to the Company in exchange for warrants to purchase 1,000,000 shares of
Biomune common stock exercisable at $2.25 per share. The fair market value on
June 21, 1995 was $2.63 per share. The Company recorded $375,000 of consulting
expense associated with this agreement, of which $273,400 was deferred as of
September 30, 1995 and recognized as expense during fiscal year 1996. Also, as
part of this agreement, the Company paid Allen $37,500 in cash per quarter. The
warrants expire on June 21, 2000 if not exercised.

Alan Sarroff

During fiscal year 1995, Biomune issued warrants to purchase 250,000, 125,000
and 125,000 shares of Biomune's common stock at $2.375 (the fair market value of
the common stock on the date of grant), $4.00 and $6.00 per share, respectively,
in exchange for $10,000 in cash and consulting services provided to the Company
by Alan Sarroff. During fiscal year 1996, the Company modified the exercise
price on the warrants to purchase 125,000 shares at $4.00 and 125,000 shares at
$6.00, both to an exercise price of $3.00 per share. The expiration date was
also extended to August 1, 2001. In connection with these modifications, the
Company recorded consulting expense of $182,500.

Replicate Management Group

On July 26, 1995, the Company entered into an agreement with Replicate
Management Group ("RMG") that extended through June 30, 1996, whereby RMG
provided services to the Company in exchange for warrants to purchase 175,000
shares of Biomune's common stock at $2.00 per share. The fair market value of
the common stock on July 26, 1995 was $2.00. The Company did not recognize any
consulting expense related to this agreement. The warrants expire on July 26,
1998 if not exercised by RMG.

David Pomerantz

On February 1, 1995, the Company entered into an agreement with David Pomerantz
("Pomerantz") that extended through December 31, 1995, whereby Pomerantz
provided services to the Company in exchange for 60,000 shares of common stock.
The Company recorded $140,000 of consulting expense associated with this
agreement, of which $38,200 was deferred as of September 30, 1995 and recognized
in fiscal year 1996.

Consolidated General Ltd.

Effective October 23, 1996, the Company entered into a one-year consulting
agreement with Consolidated General Ltd. In exchange for consulting services to
be rendered, the Company agreed to issue 200,000 shares of restricted common
stock with "piggy back" registration rights. The agreement allows for
termination at the option of the Company upon five days written notice in which
instance the compensation would be pro rated to the termination date.


(13)  SIGNIFICANT CUSTOMER

During fiscal years 1996, 1995 and 1994, sales to Barret Healthcare Corporation
("Barret") accounted for approximately 12 percent, 17 percent and 15 percent,
respectively, of the Company's total revenues. No other single customer
accounted for more than 10 percent of the Company's total revenues in any of the
years presented. During fiscal year 1996, the Company discontinued selling
products to Barret and wrote off outstanding accounts receivable balances of
approximately $55,000.


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

     None.


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     As of October 14, 1996, the directors and executive officers of the Company
were as follows:

Name                         Age   Position
-------------------------    ---   ---------------------------------------
David G. Derrick             44    Chief Executive Officer,
                                   Director and  Chairman of the Board

James J. Dalton              54    Director and Vice Chairman of the Board

Milton G. Adair              63    President and Director

Frank A. Eldredge, Ph.D.     56    Executive Vice President--
                                   New Product Development

E. Wayne Nelson              53    Secretary and Treasurer

Michael G. Acton             33    Chief Financial Officer and Controller

Thomas Q. Garvey III, M.D.   54    Director

Dr. Aaron Gold               69    Director

Charles J. Quantz            69    Director

Christopher D. Illick        57    Director

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

     A brief biographical summary of each of the Company's officers and
directors follows:

     David G. Derrick. Mr. Derrick served as the Company's President from May
1989 through December 1995 and has served as its Chief Executive Officer since
January 1996. Mr. Derrick has also served as the Chief Executive Officer of
Optim since May 1, 1996. Prior to his service to the Company, Mr. Derrick was
the Managing Partner of Derrick Enterprises, a real estate development and
management services company, from April 1980 until September 1988. Prior to
organizing Derrick Enterprises, Mr. Derrick was a partner in Kirton Land
Company, an investment and real estate development company, from September 1976
until April 1980. Mr. Derrick also currently serves as President of Derrick
Properties Corporation, an investment company, and has served in that capacity
since 1986. Due primarily to adverse real estate conditions, Mr. Derrick filed a
petition for relief under Chapter 7 of the United States Bankruptcy Code in
1990, and received a discharge in that same year. From September 1979 to June
1983, Mr. Derrick was a faculty member at the University of Utah College of
Business, Department of Finance. Mr. Derrick graduated from the University of
Utah College of Business with a Bachelor of Science degree in Economics in 1975
and with a Masters in Business Administration degree with an emphasis in Finance
in 1976.

     James J. Dalton. Mr. Dalton has served as a director of the Company and as
the Vice Chairman of the Board since February 1996. He has also served as a
director of Optim and as the Vice Chairman of its Board of Directors since May
1996. Mr. Dalton has been a consultant to the Company since April 1993 and
served as General Manager of Volu-Sol from that date until January 1996. From
1987 to present, Mr. Dalton has been the owner and President of Dalton
Development, a real estate development company, and in that capacity has
developed and managed several real estate projects.

     Milton G. Adair. Mr. Adair has been the Company's President since January
1996 and has served as a director since February 1996. In addition, Mr. Adair
also has served as the Secretary and Treasurer of Volu-Sol since May 1, 1996 and
has been a director of and served as the President of Optim since May 1, 1996.
From October 1990 to June 1995, Mr. Adair was President and Chief Executive
Officer of Gull Laboratories, Inc., a medical diagnostic company. From 1984 to
1991, Mr. Adair was President and Chief Executive Officer of Mountain Medical
Equipment, Inc., a home health care medical equipment company. In addition, Mr.
Adair has 15 years of pharmaceutical sales and marketing experience with Pfizer,
Inc. and seven years of immunoassay and medical products experience with
Becton-Dickinson. Mr. Adair graduated from the College of the Pacific in 1955
with a Bachelor of Arts degree in Business Administration and a minor in
Psychology.

     Frank A. Eldredge, Ph.D. Dr. Eldredge has been the Company's Executive Vice
President--New Product Development since October 1994. From April 15, 1993 to
October 1994, Dr. Eldredge was one of the primary scientific consultants to the
Company. Prior to serving as scientific consultant to the Company, Dr. Eldredge
spent 14 years in the medical products development field. Between 1991 and 1993,
Dr. Eldredge was an independent scientific consultant in the medical and health
video industry. Dr. Eldredge received a Ph.D. degree in Genetics and Applied
Sciences from the University of Utah in 1972.

     E. Wayne Nelson. Since June 1993, Mr. Nelson has provided services to the
Company as corporate Secretary and has served as Treasurer since October 1994.
From April 1992 to June 1993, Mr. Nelson served as the Company's corporate
Secretary and Chief Financial Officer. Mr. Nelson has been employed as a Temple
Recorder for the Corporation of the President of the Church of Jesus Christ of
Latter-day Saints (the holding company for The Church of Jesus Christ of
Latter-day Saints) since January 1996. From May 1992 to December 1995, while
also serving as the Company's corporate Secretary and Treasurer, Mr. Nelson was
the Chief Executive Officer of the Utah Health Cost Management Foundation. Prior
to joining the Company in April 1992, Mr. Nelson was President and Chief
Executive Officer of Comlink International Corporation, a computer company
located in Salt Lake City, Utah.

     Michael G. Acton, CPA. Mr. Acton has been Chief Financial Officer and
Controller of the Company since October 1994. He also has been the President of
Volu-Sol since March 15, 1996. From June 1989 through October 1994, Mr. Acton
was employed by Arthur Andersen LLP in Salt Lake City, Utah where he performed
various tax, audit and business advisory services. Mr. Acton received a Bachelor
of Science degree in Accounting in 1988 and a Master of Professional Accountancy
degree in 1989, both from the University of Utah. He is a Certified Public
Accountant in the State of Utah.

     Thomas Q. Garvey III, M.D. Dr. Garvey has been a director of the Company
since April 1994 and has served on the Company's Scientific Advisory Board and
as a scientific and regulatory consultant to the Company since November 1992.
Dr. Garvey has also served as a director of Optim since May 1, 1996. Dr. Garvey
has been a gastroenterologist in private medical and scientific consulting
practice with Garvey Associates, Inc. in Potomac, Maryland since 1981. Prior to
that time, Dr. Garvey was the Supervisory Medical Officer of the Cardiorenal
Drug Products, Center of Drug Evaluation at the FDA for approximately five
years. Prior to that he was in private practice with the Massachusetts General
Hospital in Boston, Massachusetts and with the National Cancer Institute at the
National Institute of Health. As a consultant to various pharmaceutical
companies, Dr. Garvey has developed, written and consulted on many new drug
applications. Dr. Garvey assisted the Company in preparing its IND on
BWPT-301(TM) for the treatment of cryptosporidiosis in individuals with AIDS and
the development of the protocols for the clinical trials on BWPT-301(TM) and
BWPT-302(TM).

     Dr. Aaron Gold. Dr. Gold has been a director of the Company since April
1984 and a director of Optim since May 1, 1996. Dr. Gold has been a businessman
and religious leader in San Diego, California since 1974. Between July 1974 and
September 1992, Dr. Gold was a rabbi with the Tiferth Israel Synagogue in San
Diego, California. From July 1994 to the present he has been a rabbi with the
Nertamid Synagogue in Rancho Bernardo, California. He holds a Doctor of Divinity
degree from the Jewish Theological Seminary of America. He also holds a
Doctorate in Philosophy from Columbia University.

     Charles J. Quantz. Mr. Quantz has been a director of the Company since
April 1984 and a director of Optim since May 1, 1996. Mr. Quantz was a
practicing attorney in California for 26 years prior to his retirement in 1981.
In 1991, Mr. Quantz filed bankruptcy under Chapter 7 of the United States
Bankruptcy Code and was discharged in bankruptcy that same year.

     Christopher D. Illick. Mr. Illick has been a director of the Company since
February 1995 and a director of Optim since May 1, 1996. Mr. Illick has been a
limited partner in the investment banking firm of Oakes Fitzwilliams & Co., L.P.
in New York City, New York, since March 1995. He has also been a general partner
of Illick Brothers, a real estate and management concern, since 1965, and was
the founder and President of the U.S. subsidiary of Robert Fleming Holding
Limited, of London, England, from 1973 to 1983. Mr. Illick is also a member of
the Board of Directors of National Transaction Network, Inc.

COMMITTEES OF THE BOARD OF DIRECTORS

     The Company has established a Compensation Committee and an Audit
Committee. The Board of Directors does not have and does not intend to establish
a Nominating Committee, and such functions will continue to be performed by the
entire Board of Directors.

     Compensation Committee. The Compensation Committee makes recommendations to
the Board of Directors with respect to the compensation of management employees
and administers plans and programs relating to employee benefits, incentives and
compensation. The Compensation Committee also determines the persons to whom
options should be granted under the Company's stock option plans and the number
of options to be granted to each person. The current members of the Compensation
Committee are David G. Derrick, Thomas Q. Garvey III, M.D., and Christopher D.
Illick. Mr. Derrick abstains from all votes of the Compensation Committee with
respect to his compensation package.

     Audit Committee. The Audit Committee makes recommendations to the Board of
Directors with respect to the engagement of the Company's independent public
accountants and reviews the scope and effect of the audit engagement. The
current members of the Audit Committee are David G. Derrick, Charles J. Quantz
and Christopher D. Illick.

SCIENTIFIC ADVISORY BOARD

     The Company has assembled a Scientific Advisory Board comprised of medical
practitioners and distinguished academicians and scientists in the field of
medicine to assist the Company with the development of its pharmaceutical drug
candidates and nutraceutical products. The Company's management periodically
consults with members of the Scientific Advisory Board as and when needed with
respect to issues arising within a particular member's area of expertise.
Although the Company periodically receives guidance from certain of the members
of the Scientific Advisory Board, all of the members of the Company's Scientific
Advisory Board except David O. Lucas, Ph.D., Thomas Q. Garvey III, M.D. and
Allan H. Barker, M.D., are employed on a full-time basis by others and,
accordingly, are able to devote only a small portion of their time to the
Company. David O. Lucas, Ph.D. currently provides approximately 80 hours per
month advising the Company, while Thomas Q. Garvey III, M.D. provides
approximately 5 hours per month and Allan H. Barker, M.D. provides approximately
50 hours per month advising the Company. None of the members of the Scientific
Advisory Board are members of the Company's Board of Directors except Thomas Q.
Garvey III, M.D., biographical information with respect to whom is set forth
above. Each member of the Scientific Advisory Board has entered into a
Confidentiality Agreement with the Company and has agreed not to disclose any of
the Company's confidential information during the period in which such person
serves on the Scientific Advisory Board and for a period of five years
thereafter. The members of the Scientific Advisory Board with whom the Company
consulted during fiscal 1996 are as follows:

     Allan H. Barker, M.D. Dr. Barker has been a Clinical Associate Professor of
Internal Medicine at the University of Utah, College of Medicine since 1965, and
the President of the Salt Lake Clinic Research Foundation since 1967. Dr. Barker
has over 40 years of experience in the field of internal medicine and has been
the principal investigator in over 30 drug study projects and has overseen
clinical trials on over 36 drugs. Dr. Barker has published approximately 40
books and papers primarily on the subject of internal medicine.

     Erwin W. Gelfand, M.D. Dr. Gelfand has been the Chairman of the Department
of Pediatrics, National Jewish Center for Immunology and Respiratory Medicine in
Denver, Colorado and has also been a professor of microbiology and immunology at
that institution. Dr. Gelfand has written over 300 published books and papers on
these subjects. Dr. Gelfand was a research fellow at Harvard Medical School and
at the Max Planck Institute in West Germany.

     David O. Lucas, Ph.D. Dr. Lucas has been the President of PediaPharm
Corporation, a development stage pharmaceutical company based in California,
since 1994. Dr. Lucas has over 25 years of experience in the fields of
microbiology and immunology and serves as a consultant to Technology Resources
Group, a biomedical company based in California. From 1991 to 1994, Dr. Lucas
was Vice President of the Children's Hospital Medical Center of Northern
California, and prior to that, from 1986 to 1990, was Vice President of PTI, the
company from which the Company licenses the Technology pursuant to the License.
From 1970 to 1986, Dr. Lucas was an associate professor of Microbiology and
Immunology at the University of Arizona, College of Medicine. While at the
University of Arizona, Dr. Lucas and Dr. Gerald Stott began research on what
ultimately resulted in the Technology. Dr. Lucas is a named inventor on the
patents that are the subject of the License with PTI.

     Joseph A. Smith, Jr., M.D. Dr. Smith has been Professor of Surgery and
Chairman of the Department of Urology at the Vanderbilt University Medical
Center in Nashville, Tennessee since 1991. Prior to that time, Dr. Smith was a
Professor of Surgery and Chairman of the Division of Urology at the University
of Utah Medical Center. Dr. Smith was a research fellow at the Memorial
Sloan-Kettering Cancer Center in New York. Dr. Smith specializes in the
treatment of cancer and immune-compromised patients as a result of chemotherapy
treatment. He has written and published 105 articles, participated in writing 48
books and is the sole author of nine books.

     Thomas Q. Garvey III, M.D. Please refer to biographical information set
forth above. See Item 10, "Directors and Executive Officers of the Registrant",
subheading "Thomas Q. Garvey III, M.D."

     Except for (1) David O. Lucas, Ph.D., who is a party to a Consulting
Agreement with the Company, (2) Thomas Q. Garvey III, M.D., who has a separate
agreement with the Company, and (3) Allan H. Barker, M.D., who has a separate
agreement with the Company, members of the Scientific Advisory Board are paid
either $250 per hour or $1,000 per day for their services, depending on the
individual. Dr. Lucas's Consulting Agreement provides for the payment of $5,000
per month for his services and the issuance of shares of the Company's Common
Stock with an aggregate fair market value of $4,000 for each three month period
during the term of his Consulting Agreement. The term of Dr. Lucas's Consulting
Agreement expires on December 31, 1996. Dr. Garvey's agreement with the Company
provides for the payment of $400 per hour, $1,500 per half-day and $3,000 per
full day for his services. Dr. Barker's agreement with the Company provides for
the payment of $250 per hour.

BUSINESS ADVISORY BOARD

     The Company has also established a Business Advisory Board, the purpose of
which is to advise the Company's management and the Board of Directors regarding
the Company's development and future growth. None of the members of the Business
Advisory Board are members of the Company's Board of Directors. The Company's
management periodically consults with members of the Business Advisory Board, as
and when necessary. The members of the Business Advisory Board with whom the
Company consulted during fiscal 1996, including a brief biographical summary of
each member, are as follows:

     Royden G. Derrick. Mr. Derrick has been a prominent business and civic
leader. Mr. Derrick has served on numerous boards, including as Chairman of the
Board of U & I Corporation, member-director of the Federal Reserve, Salt Lake
City Branch and as a director of First Security Corporation. He founded and
owned Western Steel Company, which eventually merged into Joy Manufacturing. As
a civic leader, Mr. Derrick was Chairman of the University of Utah Board of
Regents, Chairman of Partners of the Americas and a General Authority for The
Church of Jesus Christ of Latter-day Saints. Royden G. Derrick is David G.
Derrick's father.

     David A. Duke, Ph.D. Mr. Duke is now retired, but formerly was
Vice-Chairman of Corning, Incorporated, with responsibility for Corning's
worldwide technology and materials management. In addition to serving on
Corning's Executive Committee and Board of Directors, Mr. Duke is a member of
the boards of Dow Corning Corporation, Siecor Corporation and Armco, Inc., in
addition to being a Trustee of the Corning Foundation and a member of several
advisory committees. He played a key role in the development of fiber optics and
opto- electronic technologies and helped make Corning a leader in this field.

     Wilford W. Kirton, Jr., J.D. Mr. Kirton is a prominent lawyer who founded
the Salt Lake City, Utah- based law firm of Kirton & McConkie. Mr. Kirton has
served on numerous boards, including Lawyers Title Company, Murdock Travel and
the American Bar Association.

     E. Wayne Nelson. Mr. Nelson currently works part-time as the Company's
corporate Secretary and Treasurer. See Item 10, "Directors and Executive
Officers of the Registrant", subheading "E. Wayne Nelson", above.

     John M. Sabin, J.D., M.B.A. Mr. Sabin is an attorney and Certified Public
Accountant and is presently Vice President--Finance for Manor Care, Inc. Prior
to that, Mr. Sabin was an adjunct professor at the University of Arizona and at
Brigham Young University. Mr. Sabin was a founder and is an officer of the
Adheron Corporation, which is in the business of researching patented marine
biotechnology. Mr. Sabin has been a member of the Company's Business Advisory
Board since 1992.

     Jacob ("Jack") D. Solomon. Mr. Solomon was one of the Company's founders
and has served as a consultant to the Company since its incorporation. Mr.
Solomon was also a founder and director of First Federal Financial Corporation
and the American Bank of Commerce. He has been Chairman and Chief Executive
Officer of Federal Electronics Corporation, International Technical Development
Corporation and Advanced Patent Technology Corporation. Mr. Solomon has served
on numerous corporate boards, including Cinecolor Corporation, Western
Transistor Corporation and Federal Research and Development Corporation. During
the Johnson and Kennedy Administrations, Mr. Solomon was the National Director
of the Equal Opportunities Foundation. See Item 13, "Certain Relationships and
Related Transactions", below.

ITEM 11.   EXECUTIVE COMPENSATION

SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION

     The following table sets forth the annual and long-term compensation for
services in all capacities to the Company of David G. Derrick, the Chief
Executive Officer, and Allan H. Barker, M.D., the former Executive Vice
President--Research and Clinical Trials, the only executive officers of the
Company whose total annual salary and bonuses exceeded $100,000 during the
relevant period (collectively, the "Named Officers"), for the fiscal years ended
September 30, 1996, 1995 and 1994. No other current or former executive officer
of the Company received salary or bonus compensation exceeding $100,000 in any
of the referenced periods. No options or long-term incentive plan awards were
granted or made to the referenced executive officers during the referenced
periods, except as provided below:

<TABLE>
                                           SUMMARY COMPENSATION TABLE

                                              Annual Compensation                       Long-Term Compensation
                                      --------------------------------------   ----------------------------------
                                                                                       Awards           Payouts
<CAPTION>
                                                                               ---------------------- -----------
           (a)                (b)          (c)         (d)          (e)           (f)         (g)         (h)            (i)
----------------------------------------------------------------------------------------------------------------------------------
                                                                                          Securities
                                                                   Other      Restricted  Underlying
                                                                   Annual       Stock      Options/      LTIP         All Other
Name and Principal Position  Year(1)     Salary       Bonus     Compensation    Awards      SARs(#)   Payouts ($)  Compensation($)
---------------------------  -------     ------       -----     ------------   -------     --------   -----------  ---------------
                                                                                  ($)

<S>                            <C>      <C>            <C>           <C>          <C>     <C>             <C>            <C>
David G. Derrick,             1996     $203,000(2)     -0-           -0-          -0      600,000         -0-            -0-   
    Chief Executive Officer   1995     $150,000        -0-           -0-          -0-     580,000         -0-            -0-
   Chairman of the Board(3)   1994     $120,000        -0-           -0-          -0-       -0-           -0-            -0-

Allan H. Barker, M.D.,        1996     $126,625        -0-           -0-          -0-      21,622(4)      -0-            -0-
    former Executive          1995        --           -0-           -0-          -0-        --           -0-            -0-
    Vice President--          1994        --           -0-           -0-          -0-        --           -0-            -0-
    Research and Clinical
    Trials(5)
</TABLE>

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

(1) As of September 30th of each of the fiscal years indicated.

(2) Represents salary pursuant to the June 15, 1996 Employment and
    Non-Competitive Agreement plus $3,000 in director's fees paid to Mr. Derrick
    between October 1, 1995 and June 15, 1996, during which time Mr. Derrick was
    the Chairman of the Board but not an employee of the Company.

(3) Pursuant to a Management Agreement between the Company and ADP Management
    Corporation ("ADP"), during fiscal 1994 and fiscal 1995, as well as through
    June 15, 1996, ADP provided the Company with the management and
    administrative services necessary to manage the daily business operations
    and affairs of the Company and, in addition, furnished the Company with a
    president or chief executive officer (i.e., David G. Derrick). The
    Management Agreement with ADP was terminated effective as of June 15, 1996.
    While that Management Agreement was in force, the Company's Board of
    Directors determined the dollar amount of compensation that was paid to Mr.
    Derrick (through ADP). Mr. Derrick and his wife own ADP. See "Certain
    Relationships and Related Transactions-- Transactions with Management and
    Others," subheading, "ADP Management Corporation and David G. Derrick",
    below. Mr. Derrick resigned as the Company's President effective December
    31, 1995, but continues in the capacity as the Company's Chief Executive
    Officer and as Chairman of the Board of Directors.

(4) Represents 21,622 shares of the Company's Common Stock granted to Dr. Barker
    by Letter Agreement dated effective as of October 1, 1995 that were issued
    for medical consultation services to be provided through May 31, 1996.

(5) Dr. Barker resigned as Executive Vice President--Research and Clinical
   Trials effective as of February 12, 1996 but continued as a consultant to
    the Company after that date.

     In addition to the Named Officers listed in the above Summary Compensation
Table, the following officers, directors and employees of the Company were
granted options in the amounts and exercise prices indicated below during fiscal
1996: (a) James J. Dalton, Vice Chairman of the Board -- 100,000 options at
$2.31 per share; (b) Milton G. Adair, President and director -- 75,000 options
at $2.34 per share; (c) Frank A. Eldredge, Executive Vice President--New Product
Development -- 20,000 options at $2.31 per share; (d) E. Wayne Nelson, Secretary
and Treasurer -- 10,800 options at $2.50 per share; (e) Christopher D. Illick,
director -- 15,750 options at $2.34 per share; (f) R. James Jones, Executive
Vice President of Optim Nutrition -- 60,000 options at $2.50 per share and
20,000 options at $2.25 per share; (g) Cynthia Donovan, Regulatory Affairs
Specialist -- 2,500 options at $2.34 per share; (h) Treesa J. Parker, Operations
Manager for Optim Nutrition -- 2,000 options at $2.25 per share; (i) Jeffrey S.
Smith, Corporate Dietitian for Optim Nutrition -- 3,000 options at $2.25 per
share; (j) Eric S. Cohan, Eastern Region Sales Manager for Optim Nutrition --
5,000 options at $2.25 per share; (k) Dawn T. Purdue, Director of Production
Operations for Optim Nutrition -- 5,000 options at $2.25 per share; (l) Saundra
J. Biggs, Assistant Product Manager for Optim Nutrition -- 500 options at $2.25
per share; and (m) David W. Fredricks, Shipping/Receiving Coordinator -- 500
options at $2.25 per share.

EMPLOYMENT AGREEMENT WITH DAVID G. DERRICK

     The Company employed the services of David G. Derrick pursuant to a
Management Agreement with ADP through and until June 15, 1996. Such Management
Agreement was terminated as of such date and replaced by an Employment and
Non-Competition Agreement between the Company and Mr. Derrick. The initial term
of that Employment and Non-Competition Agreement expires on September 30, 1997.
That Employment and Non- Competition Agreement employs Mr. Derrick as the
Company's Chief Executive Officer and requires him to provide specified services
to the Company, including, but not limited to, negotiating all business and
financial transactions, investment banking agreements, secondary stock
offerings, and private placement transactions. Pursuant to that Employment and
Non-Competition Agreement, the Company has agreed to pay Mr. Derrick a base
salary of $200,000 per year and to provide Mr. Derrick with the same benefits
that other employees of the Company are given. Mr. Derrick was also granted an
option, as of December 20, 1995, to purchase up to 600,000 shares of the
Company's Common Stock, 300,000 shares of which became vested and exercisable on
September 30, 1996 and the remaining 300,000 of which will vest and become
exercisable on September 30, 1997.

     All of the Company's executive officers and directors have entered into
Confidentiality Agreements with the Company and have agreed not to disclose any
of the Company's confidential information during the period of service with the
Company and for a period of five years thereafter.

     On May 1, 1989, the Company entered into a Management Agreement with ADP
pursuant to which ADP agreed to provide the Company with a president or chief
executive officer and to provide management and administrative services to the
Company initially for $6,000 per month (subsequently increased to $12,500 per
month) plus reimbursement of all expenses associated with the management of the
Company. In addition, effective at the beginning of fiscal 1996, the management
fee under the ADP Management Agreement was increased to $16,667 per month until
it was terminated on June 15, 1996.

     In December 1992, July 1993, February 1995 and March 26, 1996, the
Company's Board of Directors approved the 1992 Stock Incentive Plan, the 1993
Stock Incentive Plan, the 1995 Stock Incentive Plan, and the 1996 Stock
Incentive Plan, respectively. Under the 1992 Stock Incentive Plan and the 1993
Stock Incentive Plan, non-qualified stock options could be granted and stock
bonuses or issuances made to qualified recipients, while under the 1995 Stock
Incentive Plan and the 1996 Stock Incentive Plan, incentive stock options and
non-qualified stock options could be granted and stock bonuses or issuances made
to qualified recipients. As of September 30, 1996, 669,000 shares of the
Company's Common Stock (on a post-split basis) were reserved for issuance under
the 1992 Stock Incentive Plan, 334,500 shares of Common Stock (on a post-split
basis) were reserved for issuance under the 1993 Stock Incentive Plan, -0-
shares of Common Stock (on a post-split basis) were reserved for issuance under
the 1995 Stock Incentive Plan, and 1,928,396 shares of Common Stock (on a
post-split basis) were reserved for issuance under the 1996 Stock Incentive
Plan.

STOCK OPTION AND STOCK APPRECIATION RIGHTS

     The following table sets forth information concerning the grant of stock
options and stock appreciation rights (SARs) made under the Company's 1995
Incentive Stock Option Plan for the fiscal year ended September 30, 1996 to the
Named Officers:

<TABLE>
                                       OPTION/SAR GRANTS IN LAST FISCAL YEAR

                                                                                             Potential Realizable Value at Assumed
                                                                                                   Annual Rates of Stock Price
<CAPTION>
                                     Individual Grants                                            Appreciation for Option Term
------------------------------------------------------------------------------------------  ----------------------------------------
       (a)               (b)             (c)                  (d)                 (e)           (f)            (g)
                                      % of Total
                      Number of       Options/SA
                      Securities          Rs
                      Underlying      Granted to                  Market Price
                     Options/SARs     Employees     Exercise or    on Date of
                     Granted (#)      in Fiscal     Base Price       Grant      Expiration
      Name                               Year        ($/Share)     ($/Share)       Date          5% ($)       10% ($)       0% ($)
------------------  -------------   -------------  ------------  -------------  ----------- ----------------------------------------
<S>                    <C>              <C>           <C>             <C>       <C>           <C>           <C>          <C>
David G. Derrick       600,000          75.6%         $2.00           $2.31     12/20/2000    $255,300      $324,600     $186,000

Allan H. Barker, M.D.    -0-             --            --               --         --             --            --           --
</TABLE>


EXECUTIVE COMPENSATION REPORT OF THE COMPENSATION COMMITTEE

     Notwithstanding anything to the contrary set forth in any of the previous
filings made by the Company under the 1933 Act or the 1934 Act that might
incorporate future filings, including, but not limited to, this Annual Report on
Form 10-K, in whole or in part, the following Executive Compensation Report and
the performance graph appearing herein shall not be deemed to be incorporated by
reference into any such future filings.

     This Executive Compensation Report discusses the Company's executive
compensation policies and the basis for the compensation paid to the Company's
executive officers, including its Chief Executive Officer, David G. Derrick,
during the fiscal year that ended September 30, 1996.

Compensation Policy

     The Company's policy with respect to executive compensation has been
designed to:

o    Adequately and fairly compensate executive officers in relation to their
     responsibilities, capabilities and contributions to the Company and in a
     manner that is commensurate with compensation paid by companies of
     comparable size or within the Company's industry;

o    Reward executive officers for the achievement of short-term operating goals
     and for the enhancement of the long-term value of the Company; and

o    Align the interests of the executive officers with those of the Company's
     shareholders with respect to short-term operating goals and long-term
     increases in the price of the Company's Common Stock.

     The components of compensation paid to executive officers consists of: (a)
base salary, (b) incentive compensation in the form of annual bonus payments and
stock options awarded by the Company under the Company's Stock Incentive Plans
and (c) certain other benefits provided to the Company's executive officers. The
Company's Compensation Committee is responsible for reviewing and approving cash
compensation paid by the Company to its executive officers and members of the
Company's senior management team, including annual bonuses and stock options
awarded under the Company's Stock Incentive Plans, selecting the individuals who
will be awarded bonuses and stock options under the Stock Incentive Plans, and
for determining the timing, pricing and amount of all stock options granted
thereunder, each within the terms of the Company's Stock Incentive Plans.

     The Company's executive compensation program has historically emphasized
the use of incentive-based compensation to reward the Company's executive
officers and members of senior management for the achievement of goals
established by the Board of Directors. The Company uses stock options to provide
an incentive for a substantial number of its officers and employees, including
selected members of management, and to reward such officers and employees for
achieving goals that have been established for the Company. The Company believes
its incentive compensation plan rewards management when the Company and its
shareholders have benefited from achieving the Company's goals and targeted
research and development objectives, all of which the Compensation Committee
feels will dictate, in large part, the Company's future operating results. The
Compensation Committee believes that its policy of compensating officers and
employees with incentive-based compensation fairly and adequately compensates
those individuals in relation to their responsibilities, capabilities and
contribution to the Company, and in a manner that is commensurate with
compensation paid by companies of comparable size or within the Company's
industry.

Components of Compensation

     The primary components of compensation paid by the Company to its executive
officers and senior management personnel, and the relationship of such
components of compensation to the Company's performance, are discussed below:

     Base Salary. Each year the Compensation Committee reviews and approves the
base salary paid by the Company to its executive officers and members of the
senior management team. Annual adjustments to base salaries are determined based
upon a number of factors, including the Company's performance (to the extent
such performance can fairly be attributed or related to each executive's
performance), as well as the nature of each executive's responsibilities,
capabilities and contributions. In addition, the Compensation Committee
periodically reviews the base salaries of its senior management personnel in an
attempt to ascertain whether those salaries fairly reflect job responsibilities
and prevailing market conditions and rates of pay. The Compensation Committee
believes that base salaries for the Company's executive officers have
historically been reasonable in relation to the Company's size and performance
in comparison with the compensation paid by similarly sized companies or
companies within the Company's industry.

     Incentive Compensation. As discussed above, a substantial portion of each
executive officer's compensation package is in the form of incentive
compensation designed to reward the achievement of short-term operating goals
and long-term increases in shareholder value. The Company's Stock Incentive
Plans allow the Board of Directors or the Compensation Committee to grant stock
options to executive officers and employees for the purchase of shares of the
Company's Common Stock. Under the terms of the Stock Incentive Plans, the Board
of Directors and the Compensation Committee have authority, within the terms of
the Stock Incentive Plans, to select the executive officers and employees who
will be granted stock options and to determine the timing, pricing and number of
stock options to be awarded. The Compensation Committee believes that the stock
options granted under the Stock Incentive Plans reward executive officers only
to the extent that shareholders have benefited from increases in the value of
the Company's Common Stock.

     Other Benefits. The Company maintains certain other plans and arrangements
for the benefit of its executive officers and members of senior management. The
Company believes these benefits are reasonable in relation to the executive
compensation practices of other similarly sized companies or companies within
the Company's industry.

Compensation of the Chief Executive Officer

     The Company had a Management Agreement with ADP Management Corporation
("ADP"), pursuant to which ADP agreed to manage the Company and provide it with
a president or chief executive officer for a two-year period beginning October
1, 1995. The Company was obligated to pay ADP $16,667 per month and reimburse
ADP for all direct expenses incurred on the Company's behalf. The Management
Agreement with ADP was terminated effective as of June 15, 1996 and at that time
David G. Derrick, the Company's Chief Executive Officer, became an employee of
the Company pursuant to an Employment and Non-Competition Agreement dated
effective as of June 15, 1996. Prior to June 15, 1996, David G. Derrick was made
available to the Company by ADP pursuant to the Management Agreement with ADP.
ADP is owned 10% by Mr. Derrick and 90% by Mr. Derrick's wife. The Employment
and Non-Competition Agreement with Mr. Derrick has an initial term that expires
on September 30, 1997 and provides for a monthly base salary of $16,667 (or
$200,000 per year). The Compensation Committee believes that Mr. Derrick's
monthly compensation adequately and fairly compensates Mr. Derrick in relation
to his responsibilities, capabilities, contributions and dedication to the
Company and secures for the Company the benefit of Mr. Derrick's leadership,
management and financial and fund raising skills and capabilities. Moreover, the
Compensation Committee believes that Mr. Derrick's monthly base salary under his
Employment and Non- Competition Agreement with the Company is reasonable in
relation to Mr. Derrick's responsibilities, capabilities, contributions and
dedication to the Company and is warranted to keep Mr. Derrick's annual salary
in line with the compensation earned by chief executive officers employed by
companies of comparable size or within the Company's industry.

     Mr. Derrick did not receive a bonus during fiscal 1996. However, in
December 1995, Mr. Derrick was granted stock options under the 1996 Stock
Incentive Plan for a total of 600,000 shares of Common Stock at $2.00 per share.
Based upon these factors and considering the leadership, management and
financial and fund raising skills and capabilities and individual efforts of Mr.
Derrick in guiding the overall performance and development of the Company, as
well as recognizing his continuing and increasingly active role in representing
the Company in the business and financial communities, the Compensation
Committee elected to pay Mr. Derrick a monthly base salary of $16,667 in his
Employment and Non-Competition Agreement.

Conclusion

    The Compensation Committee believes that the concepts discussed above
further the shareholders' interests because a significant part of executive
compensation is based upon the Company achieving its research and development
goals and other specific goals set by the Board of Directors. At the same time,
the Compensation Committee believes that the program encourages responsible
management of the Company in the short-term. The Compensation Committee
regularly considers plan design so that the total program is as effective as
possible in furthering shareholder interests. The Compensation Committee bases
its review on the experience of its own members, on information requested from
management personnel, and on discussions with and information compiled by
various independent consultants retained by the Company.


                           Compensation Committee:

                           David G. Derrick
                           Thomas Q. Garvey III, M.D.
                           Christopher D. Illick


STOCK PERFORMANCE GRAPH

     The following graph compares the yearly cumulative total returns from the
Company's Common Stock during the five fiscal year period ended September 30,
1996, with the cumulative total return on the Media General Index and the
Standard Industrial Classification (SIC) Code Index for that same period. The
comparison assumes $100 was invested on October 1, 1991 in the Company's Common
Stock and in the Common Stock of the companies in the referenced Indexes and
further assumes reinvestments of dividends.

                                  [LINE GRAPH]

     In the printed graph, there is a line chart representing the following:


                     BIOMUNE SYSTEMS,     MEDIA GENERAL
                           INC.               INDEX         SIC CODE INDEX

   10/1/91               100.00              100.00             100.00

   10/1/92               167.00              106.77              81.74

   10/1/93               167.00              126.06              80.44

   10/1/94               475.00              132.26              59.60

   10/1/95               312.50              159.79              93.97

   10/1/96               197.00              188.46              89.32


     Compensation of Directors. Members of the Board of Directors who are not
directly or indirectly employed by the Company are paid $500 for each Board
meeting attended, in addition to being reimbursed for their expenses incurred in
connection with attending meetings of the Board of Directors. The total number
of stock options each director was granted during fiscal 1996 is as follows:
David G. Derrick--600,000; James J. Dalton--100,000; Milton G. Adair-- 75,000.
Each of those stock options was granted pursuant to the Company's Amended 1995
Stock Incentive Plan and are exercisable for five years from the date of grant
at exercise prices between $2.00 and $2.34 per share.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

     Section 16(a) of the 1934 Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC initial reports of
ownership and reports of changes in ownership of the Company's Common Stock and
other equity securities. Officers, directors and greater than 10% shareholders
are requested by SEC Regulations to furnish the Company with copies of all
Section 16(a) reports they file.

     Based solely upon a review of the copies of such reports furnished to the
Company and written representations that no other reports were required, the
Company believes that there was compliance for the fiscal year ended September
30, 1996 with all Section 16(a) filing requirements applicable to the Company's
officers, directors and greater than 10% beneficial owners.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth information as of November 12, 1996
regarding beneficial ownership of the Company's Common Stock by (i) each person
(or group of affiliated persons) who is known by the Company to own beneficially
more than 5% of the outstanding shares of the Company's Common Stock, (ii) each
of the Company's directors, (iii) each of the Company's executive officers, and
(iv) all executive officers and directors of the Company as a group.

                                     Shares of Common Stock
Name and Address                     Beneficially  Owned(2)
of Beneficial Owner(1)               ----------------------
                                     Number         Percent
                                     ------         -------

David G. Derrick(3)                1,298,503          6.20%

James J. Dalton(4)                   467,000          2.28%
P.O. Box 3621
Park City, UT 84060

Dr. Aaron Gold(5)                    204,612          1.01%
4363 Sheldon Drive
LaMesa, CA 92401

Charles J. Quantz(6)                  87,150           *
P.O. Box 8186
Emeryville, CA 94662

Leviticus Trust(7)                 2,107,553         10.49%
1233 Beech Street, #315
Atlantic Beach, NY 11509

Milton G. Adair(8)                    75,000           *

Frank A. Eldredge(9)                 102,832           *

E. Wayne Nelson(10)                   75,000           *
2681 East Willowbend Drive
Sandy, UT 84093

Michael G. Acton(11)                 235,438          1.16%

Thomas Q. Garvey III, M.D.(12)       105,000           *
10125 Gary Road
Potomac, MD 20854

Christopher D. Illick(13)            132,000           *
22 Mountain Avenue
Princeton, NJ 08540

Allan H. Barker(14)                  181,051           *

All executive officers and
directors as a group (10 persons)  2,782,535         12.52 %

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

* Less than 1%

(1)  Unless otherwise indicated, such person's address is the same as the
     Company's address.

(2)  A person is deemed to be the beneficial owner of securities that can be
     acquired by such person within 60 days from November 12, 1996 upon the
     exercise of options or warrants. Each beneficial owner's percentage of
     ownership is determined by assuming that options or warrants held by such
     person (but not those held by any other person) and exercisable within 60
     days from November 12, 1996 have been fully exercised. Unless otherwise
     noted, the Company believes the persons named in this table have sole
     voting and investment power with respect to all shares of Common Stock
     shown as being beneficially owned. Percentages are calculated based on
     20,094,490 shares of Common Stock outstanding as of November 12, 1996 (as
     adjusted for shares deemed to be beneficially owned by such shareholder).

(3)  Mr. Derrick owns 458,503 shares of Common Stock directly and options to
     purchase 840,000 shares of Common Stock.

(4)  Mr. Dalton owns 72,000 shares of Common Stock directly and options to
     purchase 395,000 shares of Common Stock.

(5)  Dr. Gold owns 69,612 shares of Common Stock directly and options to
     purchase 135,000 shares of Common Stock.

(6)  Mr. Quantz owns 12,150 shares of Common Stock directly and options to
     purchase 75,000 shares of Common Stock.

(7)  The Leviticus Trust owns 2,107,553 shares of Common Stock directly.

(8)  Mr. Adair owns -0- shares of Common Stock directly and options to purchase
     75,000 shares of Common Stock.

(9)  Dr. Eldredge owns 7,832 shares of Common Stock directly and options to
     purchase 95,000 shares of Common Stock.

(10) Mr. Nelson owns -0- shares of Common Stock directly and options to purchase
     75,000 shares of Common Stock.

(11) Mr. Acton owns 438 shares of Common Stock directly and options to purchase
     235,000 shares of Common Stock.

(12) Dr. Garvey owns 5,331 shares of Common Stock directly and options to
     purchase 99,669 shares of Common Stock.

(13) Mr. Illick owns 27,000 shares of Common Stock directly and options to
     purchase 105,000 shares of Common Stock.

(14) Dr. Barker owns 51,051 shares of Common Stock directly and options to
     purchase 130,000 shares of Common Stock.

     Approximately 13% of the issued and outstanding shares of the Company's
Common Stock are beneficially owned by current directors and executive officers
of the Company. There are no arrangements known to the Company, the operation of
which may, at a subsequent date, result in a change of ownership or control of
the Company.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

TRANSACTIONS WITH MANAGEMENT AND OTHERS

     ADP Management Corporation and David G. Derrick. The Company entered into
an Employment and Non- Competition Agreement with David G. Derrick, the
Company's Chief Executive Officer and Chairman of the Board, effective as of
June 15, 1996. The initial term of that Employment and Non-Competition Agreement
expires on September 30, 1997. That Employment and Non-Competition Agreement
employs Mr. Derrick as the Company's Chief Executive Officer and requires him to
provide specified services to the Company, including, but not limited to,
negotiating all business and financial transactions, investment banking
agreements, secondary stock offerings, and private placement transactions.
Pursuant to the Employment and Non-Competition Agreement, the Company has agreed
to pay Mr. Derrick a base salary of $200,000 per year. In addition, subsequent
to fiscal year end 1996, the Company granted Mr. Derrick options in the amount
of 100,000 shares of Common Stock for raising capital for the Company.
Subsequent to September 30, 1996, Mr. Derrick was successful in raising the
desired capital and was issued those options at the fair market value of the
Company's Common Stock on that date. See Item 11, Executive Compensation,
"Employment Agreement With David G. Derrick," above.

     James J. Dalton. The Company entered into a Consulting Agreement with James
J. Dalton, the Vice Chairman of the Board, effective as of February 1, 1996 and
expiring on January 31, 1997. That Consulting Agreement provides for Mr.
Dalton's services as a director of the Company and as Vice Chairman of the
Board. Pursuant to that Consulting Agreement, the Company agreed to pay Mr.
Dalton a fee of $5,000 per month and to issue Mr. Dalton 6,000 shares of Common
Stock each month during the term of the Consulting Agreement (for a total of
72,000 shares). Mr. Dalton was also granted effective as of February 1, 1996 a
five year warrant exercisable for 100,000 shares of the Company's Common Stock
at an exercise price of $2.31 per share. In addition, subsequent to fiscal year
end 1996, the Company granted options to Mr. Dalton in the amount of 100,000
shares of Common Stock for raising capital for the Company. Subsequent to
September 30, 1996, Mr. Dalton was successful in raising the desired capital and
was issued those options at the fair market value of the Company's Common Stock
on that date. Pursuant to the February 1, 1996 agreement, the Company also
forgave a loan to Mr. Dalton in the amount of approximately $126,000. In
addition, on March 15, 1994, the Company entered into an Agreement with Mr.
Dalton, who at that time was a consultant to the Company but not a member of the
Board of Directors. Mr. Dalton subsequently became a director of the Company and
the Vice Chairman of the Board on February 1, 1996. That Agreement required Mr.
Dalton to provide management and financial consulting services to the Company's
then-Volu- Sol Medical Division (now known as Volu-Sol, a wholly-owned
subsidiary of the Company) for the period March 15, 1994 through March 14, 1995.
The Company issued warrants to purchase a total of 75,000 shares of the
Company's Common Stock at an exercise price of $4.00 per share as compensation
for the services to be performed by Mr. Dalton under that Agreement. Those
warrants were valued at a price determined to be equal to the trading price of
the Company's Common Stock on the date they were granted and expired if not
exercised within two years from the date of grant. Those warrants expired on
March 15, 1996. In addition, the Company committed to pay Mr. Dalton $3,000 per
month, reimburse him for expenses incurred, and pay him 50% of the net profits
of the Volu- Sol Medical Division (after the Company had been repaid a $100,000
advance made to the Volu-Sol Medical Division) for a period of three years after
the expiration of that Agreement and any extension thereof. On April 1, 1995,
the Company entered into an Agreement with Mr. Dalton that extended through
March 31, 1996, pursuant to which Mr. Dalton provided services to Volu-Sol in
exchange for a total of 72,000 shares of the Company's Common Stock. The Company
recorded $216,000 of consulting expense associated with the April 1, 1995
Agreement, of which $90,000 was deferred as of September 30, 1995 and recognized
as expense in fiscal 1996.

     Christopher D. Illick. The Company entered into a Consulting Agreement with
Christopher D. Illick, one of the Company's directors and a member of its
Compensation and Audit Committees, effective as of March 1, 1996 and expiring on
February 28, 1997. That Consulting Agreement provides for Mr. Illick's services
as a director of the Company and as a member of the Company's Compensation and
Audit Committees. Pursuant to that Consulting Agreement, the Company agreed to
issue Mr. Illick 2,250 shares of Common Stock each month during the term of the
Consulting Agreement (for a total of 27,000 shares).

     Thomas Q. Garvey III, M.D. Dr. Garvey is paid on an hourly basis. During
fiscal 1996, the Company paid Dr. Garvey $89,192.

     E. Wayne Nelson. On August 1, 1995, the Company entered into a Compensation
Contract with E. Wayne Nelson ("Nelson") that extended through September 30,
1996, whereby Nelson is providing services to the Company as its corporate
Secretary and Treasurer in exchange for a total of 10,800 shares of the
Company's Common Stock.

CERTAIN BUSINESS RELATIONSHIPS

     ADP Management Corporation. Effective May 1, 1989, the Company entered into
a Management Agreement with ADP to manage the Company, as well as to provide the
Company with an individual who would serve as the Company's president or chief
executive officer. ADP is owned by David G. Derrick, the Company's Chief
Executive Officer and Chairman of the Board, and his wife. Under that Management
Agreement, as amended as of the beginning of fiscal 1996, the Company was
required to pay ADP a management fee of $16,667 per month or $200,000 per year.
David G. Derrick was made available to the Company by ADP pursuant to that
Management Agreement through June 15, 1996, during which time Mr. Derrick
devoted substantially all of his time to the management and operation of the
Company. Under the Management Agreement with ADP, the Company recorded
management fees of $141,667 and reimbursed expenses of $-0- during fiscal 1996.
The Company's Board of Directors determined the dollar compensation paid to Mr.
Derrick under the Management Agreement with ADP. See Item 11, Execution
Compensation, "Employment Agreement with David G. Derrick," above.

     Genesis Investment Corporation. In August 1991, the Company entered into an
Agreement with Genesis whereby Genesis would receive $10,000 per month plus
reimbursement of any out-of-pocket expenses incurred by Genesis on behalf of the
Company in connection with the consulting services provided thereunder. This
Agreement was renewed in August 1992. The Company recorded consulting fees of
$120,000 in fiscal 1996 related to this Agreement. The services provided to the
Company by Genesis include primarily financial and general business consulting
services and introductions to the scientific, medical, financial and business
communities.

INDEBTEDNESS OF RELATED PARTIES

     James J. Dalton. During fiscal 1995 and fiscal 1994, the Company made loans
aggregating $175,000 and $90,000, respectively, to James J. Dalton, a director
of the Company and Vice Chairman of the Board. These loans were unsecured, bore
interest at an annual rate of 12% and were due on demand. During fiscal 1996,
1995 and 1994, Mr. Dalton made principal and interest payments totaling $60,000,
$16,605 and $90,000, respectively, on those loans. On January 29, 1996, the
Company agreed to eliminate the remaining principal and interest balances on
these loans, which totaled approximately $126,000, in exchange for Mr. Dalton
relinquishing his right to receive 50% of the future net profits of Volu-Sol, if
any, for three years after the expiration of his Agreement with the Company (or
any extension thereof). Mr. Dalton was a consultant to the Company through
fiscal 1996 and, during fiscal 1996, became a director of the Company and the
Vice Chairman of the Company's Board of Directors. Effective October 15, 1996,
Mr. Dalton became an employee of the Company with the title of Senior Executive
Vice President--Investor Relations.

     Federal Land and Development Corporation. During fiscal 1995 and 1994, the
Company made loans totaling $430,000 and $30,000, respectively, to Federal Land
and Development Corporation ("FLDC"). These loans were unsecured, bore interest
at an annual rate of 12% and were due on demand. As of September 30, 1995,
$182,811 remained outstanding on these loans, which were repaid in full,
including interest, during fiscal 1996.

CONSULTING RELATIONSHIPS WITH UNRELATED PARTIES

     Aurora Consultants. On December 14, 1995, the Company entered into a letter
agreement effective as of January 1, 1996 with Aurora Consultants, LLC (the
"Letter Agreement") for consulting services through June 1997. Aurora
Consultants, LLC has received and will continue to receive cash from the Company
for the consulting services it provides to the Company through June 1997 and was
granted warrants to purchase a total of 30,000 shares of the Company's Common
Stock at $2.34 per share, which warrants include "piggyback" registrations right
on the underlying shares of Common Stock.

     Allen & Company, Inc. On June 21, 1995, the Company entered into an
Agreement with Allen & Company, Inc. ("Allen") that extended through June 20,
1996, whereby Allen provided services to the Company in exchange for warrants to
purchase 1,000,000 shares of the Company's Common Stock exercisable at $2.25 per
share. The fair market value of the Company's Common Stock on June 21, 1995 was
$2.63 per share. The Company recorded $375,000 of consulting expense associated
with this Agreement, of which $273,400 was deferred as of September 30, 1995 and
recognized as expense during fiscal 1996. In addition, as part of this
Agreement, the Company paid Allen $37,500 in cash per quarter. These warrants
expire on June 21, 2000 if not exercised by Allen. This Agreement expired on
June 20, 1996.

     Daliz Associates. On April 1, 1994, the Company entered into a Consulting
Agreement with Daliz Associates ("Daliz"), whereby Daliz agreed to provide
certain consulting services to the Company in exchange for a total of 216,000
shares of the Company's Common Stock. For various reasons, the Company and Daliz
terminated that Consulting Agreement by an Agreement dated effective as of
February 1, 1995. Pursuant to the February 1, 1995 Agreement, and during the
fiscal year ended September 30, 1995, the Company paid Daliz $150,000 in cash
and issued a total of 140,000 shares of the Company's Common Stock in settlement
of the Company's obligations under the April 1, 1994 Consulting Agreement. The
February 1, 1995 Agreement required the Company to pay Daliz $5,000 per month
and issue a total of 2,000 shares of the Company's Common Stock per month for
the services provided to the Company thereunder. The February 1, 1995 Agreement
expired on January 31, 1996. Effective February 1, 1996, the Company extended
the Agreement through January 31, 1997 and agreed to pay Daliz $5,000 per month
and issue a total of 2,000 shares of the Company's Common Stock per month. The
Company recorded consulting expense totaling $117,400, $76,800 and $1,104,000 in
fiscal 1996, 1995 and 1994, respectively, under those Agreements.

     Replicate Management Group. On July 26, 1995, the Company entered into an
Agreement with Replicate Management Group ("Replicate Management") that extended
through June 30, 1996, whereby Replicate Management provided services to the
Company in exchange for warrants to purchase a total of 175,000 shares of the
Company's Common Stock at $2.00 per share. The fair market value of the
Company's Common Stock on July 26, 1995 was $2.00 per share. The Company did not
recognize any consulting expense related to this Agreement. These warrants
expire on July 26, 1998 if not exercised by Replicate Management.

     David Pomerantz. On February 1, 1995, the Company entered into an Agreement
with David Pomerantz that extended through December 31, 1995, whereby Mr.
Pomerantz provided services to the Company in exchange for a total of 60,000
shares of the Company's Common Stock. The Company recorded $140,000 of
consulting expense associated with this Agreement, of which $38,200 was deferred
as of September 30, 1995 and recognized as expense in fiscal 1996.

     AAM Group, Inc. On August 11, 1995, the Company entered into an Agreement
with AAM Group, Inc. that extended through February 10, 1996, whereby AAM Group,
Inc. provided services to the Company in exchange for a total of 90,000 shares
of the Company's Common Stock. The Company recorded $225,000 of consulting
expense associated with that Agreement.

     David O. Lucas, Ph.D. On June 21, 1995, the Company entered into an
Agreement with David O. Lucas, Ph.D., a member of the Company's Scientific
Advisory Board ("Lucas"), that extended through December 31, 1995, whereby Lucas
provided services to the Company in exchange for 4,000 shares of the Company's
Common Stock. The Company recorded $16,000 of consulting expense associated with
this Agreement, of which $8,000 was deferred as of September 30, 1995 and was
recognized as expense as the services were performed. The June 21, 1995
Agreement also required the Company to pay Lucas $5,000 per month through
December 31, 1995 for the services provided to the Company thereunder.

     Alan Sarroff. On January 1, 1995, for $10,000 in cash and certain
consulting services provided to the Company by Alan Sarroff, the Company issued
warrants to purchase 250,000, 125,000 and 125,000 shares of Common Stock at
$2.375 (the fair market value of the Company's Common Stock on the date of a
grant), $4.00 and $6.00 per share, respectively. During fiscal 1996, the Company
modified the exercise price of the warrants to purchase 125,000 shares at $4.00
and of the warrants to purchase 125,000 shares at $6.00, both to an exercise
price of $3.00 per share. The expiration date of both of those warrants was also
extended to August 1, 2001.

     Barretto Pacific Corporation. Effective September 12, 1996, the Company
entered into a six-month Consulting Agreement with Barretto Pacific Corporation
("Barretto") to provide investment advisory services. Under the Consulting
Agreement, the Company agreed to pay $90,000 in cash and issued options to
purchase a total of 50,000 shares of the Company's Common Stock at $2.38 per
share. These options are currently exercisable. The Company also issued options
to purchase a total of 50,000 shares of its Common Stock at $3.38 per share. The
Company recorded consulting expense of $35,500 relating to the options, of which
approximately $32,500 is deferred as of September 30, 1996 and will be
recognized over the remaining term of the Consulting Agreement. By letter dated
November 1, 1996, the Company notified Barretto that it is cancelling this
Consulting Agreement and notified Barretto that it has until December 12, 1996
to exercise those options.

     Allen Lewin. On May 1, 1996, the Company entered into an Agreement with
Allen Lewin to provide consulting services to the Company. In connection with
this Agreement, Mr. Lewin was granted warrants to purchase a total of 100,000
shares of the Company's Common Stock at $2.38 per share. The Company recorded
consulting expense of $110,000 related to the issuance of these warrants.


                                     PART IV

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

(A) Documents filed as part of this Form 10-K:

     1.   Financial Statements (included in Part II, Item 8)

          Consolidated Balance Sheets as of September 30, 1996 and 1995

          Consolidated Statements of Operations for the Years Ended
          September 30, 1996, 1995 and 1994 and for the Period from Inception to
          September 30, 1996

          Consolidated Statements of Shareholders' Equity for the Years
          Ended September 30, 1996, 1995 and 1994 and for the Period
          from Inception to September 30, 1996

          Consolidated Statements of Cash Flows for the Years Ended
          September 30, 1996, 1995 and 1994 and for the Period from
          Inception to September 30, 1996.

          Notes to Consolidated Financial Statements

     2.   Financial Statement Schedules: Financial statement schedules have been
          omitted because they are not required or are not applicable, or
          because the required information is shown in the financial statements
          or notes thereto.

     3.   Exhibits: The following Exhibits are filed with this Form 10-K:

          Exhibit No.      Description of Exhibit

          3.1      Amended and Restated Articles of Incorporation

          3.2      Amended and Restated Bylaws (adopted March 22, 1996)

          3.3      Certificate and Statement of Determination of Rights and
                   Preferences of Series A 10% Cumulative Convertible Preferred
                   Stock

          3.4      Certificate and Statement of Determination of Rights and
                   Preferences of Series B 10% Cumulative Convertible Non-Voting
                   Preferred Stock

          3.5      Certificate and Statement of Determination of Rights and
                   Preferences of Series D 8% Cumulative Convertible Non-Voting
                   Stock

          3.6      Certificate of Amendment to the Designation of Rights and
                   Preferences Related to Series A 10% Cumulative Convertible
                   Preferred Stock
   
          3.7      Certificate and Statement of Determination of Rights and
                   Preferences of Series C 8% Cumulative Convertible Non-Voting
                   Preferred Stock

          4.1**    Form of Common Stock Certificate

          4.3**    Form of Series A 10% Cumulative Convertible Preferred Stock
                   Certificate

          4.4*     Form of Series B 10% Cumulative Convertible Preferred Stock
                   Certificate

          4.5#     Form of Series D 8% Cumulative Convertible Preferred Stock
                   Certificate

          4.6      Form of Series C 8% Cumulative Convertible Preferred Stock
                   Certificate

          10.37**  Genesis Investment Corporation Agreement

          10.38*   Berkeley Securities Corporation Consulting Agreement

          10.39*** Daliz Associates Agreement

          10.40**  Sovran Financial Corporation Consulting Agreement

          10.41**  Ladenburg, Thalmann & Co. Inc. Agreement

          10.42**  William Baquet Business Consulting Agreement

          10.43*   Office Lease Agreement

          10.44*   Volu-Sol Stipulation and Order Regarding Lease
                   Extension

          10.45*   Norman Rothstein Consulting Agreement

          10.46*   Daliz Associates Consulting Agreement

          10.47*   Salt Lake Clinic Research Foundation Statement of Agreement
                   (Protocol No. IMC-94-001)

          10.48*   Salt Lake Clinic Research Foundation Statement of Agreement
                   (Protocol No. IMC-94-002)

          10.49*   Allan H. Barker Indemnification Agreement

          10.50*   Thomas Q. Garvey, III Indemnification Agreement

          10.51*   St. Luke's-Roosevelt Hospital Center Statement of Agreement

          10.52*   Michael G. Acton Agreement

          10.53*   Frank A. Eldredge Agreement

          10.54*   James Dalton Agreement

          10.55*   Genesis Investment Corporation Promissory Note

          10.56*   James E. Cannon Promissory Note

          10.57*   Ronald L. Wigington Promissory Note

          10.58*   Ronald L. Wigington Amended Promissory Note

          10.59*   Royden G. Derrick Promissory Note

          10.60#   Amended License Agreement with PTI

          10.61#   Commercial and Industrial Lease--Volu-Sol, Inc.

          10.62#   Agreement with Daliz Associates (February 1, 1995)

          10.63#   Agreement with Sovran Financial Corporation (February 1,
                   1995)

          10.64#   Agreement with Norman Rothstein (May 8, 1995)

          10.65#   Agreement with James Dalton (April 1, 1995)

          10.66#   Agreement with Allen & Company, Inc. (June 21, 1995)

          10.67#   Agreement with Allen Sarroff

          10.68#   Agreement with Replicate Management Group (July 25, 1995)

          10.69#   Compensation Contract with E. Wayne Nelson (August 1, 1995)

          10.70#   Agreement with Robert Pomerantz (August 1, 1995)

          10.71#   Agreement with David Pomerantz (February 1, 1995)

          10.72#   Agreement with AAM Group, Inc. (August 11, 1995)

          10.73#   Agreement with David Lucas (June 1995)

          10.74#   Offshore Securities Subscription Agreement (Series D
                   Preferred)

          10.75#   Non-Negotiable Promissory Note (Series D Preferred)

          10.76#   Agreement with Ladenberg, Thalmann & Co., Inc. (February 1,
                   1995)

          10.77#   1995 Stock Incentive Plan

          10.78#   Invoice from Robert J. Pomerantz (January 19, 1995)

          10.79#   Employment Agreement with Michael G. Acton (May 4, 1995)

          10.80#   Incentive Stock Option Agreement with Michael G. Acton
                   (May 4, 1995)

          10.81#   Consulting Agreement with David O. Lucas (August 30, 1994)
                   (including June 19, 1995 Amendment to Consulting Agreement)

          10.82#   Amended 1995 Stock Incentive Plan

          10.83#   Non-Qualified Stock Option Agreement with Christopher D.
                   Illick

          10.84#   Schedule Identifying Other Non-Qualified Stock Option
                   Agreements

          10.85#   Incentive Stock Option Agreement with Frank A. Eldredge

          10.86#   Schedule Identifying Other Incentive Stock Option Agreements

          10.87#   Letter Agreement with Bruce M. Kartchner (Extended
                   Computerware, Inc.)

          10.88#   Addendum to Fee Schedule with Lora Lea Mock (Professional
                   Recruiters, Inc.)

          10.89#   Employment Agreement with Etta Jane Bechtel

          10.90#   Consulting Agreement with David Zuchero (Zuchero &
                   Associates)

          10.91#   Consulting Contract with E. Wayne Nelson

          10.92#   Business Consulting Agreement with Robert J. Pomerantz
                   (August 15, 1995)

          10.93#   Loan and Consulting Agreement with Summit Financial
                   Marketing, Inc. (August 14, 1995)

          10.94#   Agreement with Commonwealth Associates (May 18, 1995)

          10.95    Lease Agreement with Young Electric Sign Company

          10.96    Employment and Non-Competition Agreement with David G.
                   Derrick

          10.97    Form of Registration Rights Agreement (Series C Preferred)

          10.98    Form of Investor Questionnaire and Subscription Agreement
                   (Series C Preferred)

          10.99    401(k) Plan

          10.100   First Amendment to Stock Purchase Warrant - A.L. Sarroff
                   (Warrant B-1000)

          10.101   First Amendment to Stock Purchase Warrant - A.L. Sarroff
                   (Warrant C-1000)

          10.102   Commercial and Industrial Lease with RJF Companies, Ltd.

          10.103   Barretto Letter Agreement

          10.104   ADUN & Company Purchase Agreement

          10.105   Agreement with Clinimetrics Research Associates

          10.106   David G. Derrick Non-Qualified Stock Option Agreement
                   (600,000 shares)

          10.107   Commercial and Industrial Lease - Volu Sol, Inc.

          10.108   License Agreement with Biomed Patent Development LLC

          10.109   Letter Agreement with Aurora Consultants, LLC

          10.110   Letter Agreement with Aurora Capital Corp.

          10.111   Termination and Mutual Release Agreement with Aurora Capital
                   Corporation and Aurora Consultants, L.L.C.

          10.112   First Amendment to Amended License Agreement with Protein
                   Technology, Inc.

          23       Consent of Arthur Andersen LLP

          27       Financial Data Schedule

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

#    Incorporated by reference to the Company's Annual Report on Form 10-K/A for
     the fiscal year ended September 30, 1995.

*    Incorporated by reference to the Company's Annual Report on Form 10-KSB for
     the fiscal year ended September 30, 1994.

**   Incorporated by reference to the Company's Annual Report on Form 10-K for
     the fiscal year ended September 30, 1993 and the two month period ended
     November 30, 1993.

***  Incorporated by reference to the Company's Annual Report on Form 10-K for
     the fiscal year ended September 30, 1992.

     (B)  Reports filed on Form 8-K during the last quarter of the fiscal year
          ended September 30, 1996: None.


                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 15th day of
November, 1996.

                                    BIOMUNE SYSTEMS, INC.
                                    (Registrant)

                                    By:    /s/  David G. Derrick
                                       _________________________
                                         David G. Derrick
                                    Its: Chief Executive Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.


             Signature                    Title                      Date

/s/ David G. Derrick          Chief Executive Officer and      November 15, 1996
-------------------------     Chairman of the Board of
David G. Derrick              Directors (Principal Executive
                              Officer)

/s/ James J. Dalton           Vice Chairman of the Board       November 15, 1996
-------------------------
James J. Dalton

/s/ Milton G. Adair           Director and President           November 15, 1996
-------------------------
Milton G. Adair

/s/ Michael G. Acton          Chief Financial Officer and      November 15, 1996
-------------------------     Controller (Principal Financial
Michael G. Acton              and Accounting Officer)

/s/ Aaron Gold                Director                         November 15, 1996
-------------------------
Aaron Gold

/s/ Charles J. Quantz         Director                         November 15, 1996
-------------------------
Charles J. Quantz

/s/ Thomas Q. Garvey III      Director                         November 15, 1996
-------------------------
Thomas Q. Garvey III

/s/ Christopher D. Illick     Director                         November 15, 1996
-------------------------
Christopher D. Illick