<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

(Mark one)

[X]  Annual Report pursuant to Section 13 or 15(d) of the
     Securities Exchange Act of 1934 for the fiscal year ended
     December 31, 2000

[ ]  Transition Report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934 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)

                             6502 South Archer Road
                          Bedford Park, Illinois 60501
             (Address of principal executive offices with Zip Code)

                                 (708) 563-9200
              (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:   None

Securities registered pursuant to Section 12(g) of the Act:   common stock
($0.0001 par value per share)

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 [ ].

The aggregate market value of common stock held by non-affiliates of the
registrant was $2,098,375 based on the average of the closing bid and ask prices
of $1.22 per share on March 31, 2001. The number of shares outstanding of the
registrant's common stock as of March 31, 2001 was 42,999,500.

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On October 31, 2000, the registrant declared a 1-for-5 reverse stock split of
its common stock, reducing the number of issued and outstanding shares of stock
by a factor of 5. Outstanding common stock data in this report have been
adjusted to reflect this reverse stock split.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation SB 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]


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                              BIOMUNE SYSTEMS, INC.

                         2000 FORM 10-KSB ANNUAL REPORT

                                TABLE OF CONTENTS


<TABLE>
                                     Part 1.
<S>                                                                                                             <C>
Item 1.  Description of Business................................................................................-1-
Item 2.  Description of Properties ............................................................................-13-
Item 3.  Legal Proceedings.....................................................................................-13-
Item 4.  Submission of Matters to a Vote of Security Holders...................................................-14-

                                                      Part II
Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters.................................-14-
Item 6.  Management's Discussion and Analysis or Plan of Operation.............................................-16-
Item 7.  Financial Statements and Supplementary Data...........................................................-17-
Item 8.  Changes or Disagreements with Accountants.............................................................-18-

                                                     Part III
Item 9.   Directors and Executive Officers.....................................................................-18-
Item 10.  Executive Compensation...............................................................................-21-
Item 11.  Security Ownership of Certain Beneficial Owners and Management.......................................-23-
Item 12.  Certain Relationships and Related Transactions.......................................................-24-
Item 13.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....................................-25-
</TABLE>


                           FORWARD LOOKING STATEMENTS

--------------------------------------------------------------------------------
This report and the documents incorporated by reference in this report contain
forward-looking statements. These forward-looking statements are based on our
current expectations, estimates and projections about our industry, management's
beliefs and certain assumptions made by us. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates" and variations
of these words or similar expressions are intended to identify forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, our actual results could differ materially from those
expressed or forecasted in any forward-looking statements as a result of a
variety of factors, including those set forth in "Description of Business -
Certain Business Considerations and Risk Factors" above and elsewhere in, or
incorporated by reference into, this report. We undertake no obligation to
update publicly any forward-looking statements for any reason, even if new
information becomes available or other events occur in the future.
--------------------------------------------------------------------------------


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                                     Part 1.

Item 1.  Description of Business

         On November 3, 2000, pursuant to an amended stock purchase agreement
and an amended asset purchase agreement between Biomune Systems Inc. and Donlar
Corporation, Biomune issued 41,279,520 million shares of common stock, par value
$0.0001 per share, representing approximately 96% of Biomune's shares
outstanding on a fully diluted basis, in a private placement to Donlar. Biomune
issued those shares in exchange for $2,413,500 in cash and the transfer to
Biomune from Donlar of the exclusive right to distribute and the exclusive right
to all future sales from Donlar's crop nutrition management and oil field
products. In addition, Donlar transferred to Biomune all technology, know how
and patents for the crop management and oil field businesses created after
November 3, 2000, as well as all technology resulting from Donlar pharmaceutical
research and development activities after November 3, 2000. At the time of these
transactions, Mr. Michael G. Acton, then President and Chief Executive Officer
of Biomune, entered into an agreement with Donlar, pursuant to which Mr. Acton
will act as a consultant to Donlar for a period of one year in exchange for a
consulting fee of $125,000 payable in equal monthly installments for the term of
the agreement. In addition, four senior executives of Donlar became employees of
Biomune. For a more complete description of the assets acquired by Biomune, see
"Historical Donlar Business" contained below.

         On January 19, 2001, pursuant to its organizational plan adopted in
2000, Donlar transferred to Biomune the balance of its assets, except for
Donlar's existing patent rights and all intellectual property relating to
Donlar's genetic (recombinant DNA) research activities, as a capital
contribution. In addition, Donlar's employees became employees of Biomune, whose
name shall be changed at the 2001 annual meeting of shareholders to Donlar
Biosyntrex Corporation. Donlar intends to grant Biomune an exclusive license to
Donlar's existing patents on commercially reasonable terms.

         As a result of the foregoing transactions, all of Donlar's operational
activities, except for its genetic research activities, are conducted by
Biomune. Biomune's administrative, marketing, sales and distribution operations
are conducted from Donlar's headquarters in Bedford Park, Illinois, and its
manufacturing operations are conducted from Donlar's Peru, Illinois facility,
which has been transferred to Biomune.

         The foregoing transactions have been accounted for as a reverse
acquisition of Biomune by Donlar. Accordingly, the financial statements included
in this report are based on Donlar's historical financial statements until
November 3, 2000, the date of acquisition, and thereafter, include the activity
of both Donlar and Biomune.

         Biomune's reorganized businesses are now conducted through three
business segments:

         -  BioPolymers, consisting of the performance chemicals business
            acquired from Donlar;


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         -  AgriSciences, consisting of the agricultural businesses acquired
            from Donlar; and

         -  Optim Nutrition, consisting of Biomune's nutritional and
            nutraceuticals business.

         Biomune is also conducting research and development activities in the
pharmaceuticals area.

         Historical Biomune and Donlar descriptions are contained below.

Historical Biomune Business

         Biomune was incorporated in Nevada in 1981. Biomune, with its wholly
owned subsidiary, Optim Nutrition, Inc., a Utah corporation, is engaged in the
distribution and sale of biologic nutraceutical supplements and sports and
nutrition bars. Certain of the nutraceutical supplements incorporate patented
natural protein technology derived from milk products (whey), exclusively
licensed to Biomune. These products are designed to provide or increase
protective immunities from and immune response to disease and to provide
nutritional supplementation. 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's fiscal year end was changed to December 31
starting with 2000. All references to fiscal years prior to 2000 represent a
fiscal year end of September 30.

         Biomune's subsidiary Optim Nutrition was organized to market and sell
nutraceutical products. Optim Nutrition's principal products are ProMune and
Optimune, nutritional dietary supplements utilizing whey protein containing high
levels of immunoglobulins and marketed primarily to people who are HIV positive
or have AIDS or other immune-compromised individuals, and Maximune, a
nutritional dietary supplement similar in composition to Optimune and marketed
primarily to healthy people who desire weight maintenance or management
assistance. ProMune is marketed to major nutraceutical distributors and
wholesalers. Optimune and Maximune are marketed directly to the medical and
consumer markets.

         As part of its plan to increase emphasis on the nutrition market, in
1998 Biomune acquired the exclusive rights to distribute and sell a line of
sports and energy nutrition bars. These products are manufactured for Biomune by
contract manufacturers. Biomune has been granted the exclusive world-wide
marketing and distribution rights to these products in return for the payment of
royalties based on net sales of the products. The bars are sold to national and
regional wholesale and retail chains under the brand Mountain Lift(TM).
Currently, the bars are sold principally through reorders from existing
customers.

         Biomune has an exclusive license from New Zealand Milk Products
("NZMP") to market and sell the patented natural protein technology in the
pharmaceutical and nutraceutical markets, solely for human applications, in the
United States, Canada, Kenya, Ivory Coast, Zimbabwe, Ghana, Zambia, and Nigeria,
and their possessions and territories. The license includes the rights under
four U.S. patents relating to methodologies to produce large proteins containing
immunoglobulins on a mass production basis. The license runs through March 28,
2006. NZMP


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may terminate the license if Biomune fails to observe or perform any of the
covenants, terms, conditions or provisions of the agreement or if it breaches
any representation or warranty and fails to cure the breach within 30 days after
receipt of written notice. The license may also be terminated by NZMP if Biomune
becomes bankrupt or otherwise goes out of business.

         Products are obtained through third-party contract manufacturers.
Contract manufacturers produce and package Biomune's products in accordance with
Standard Operating Procedures for Good Manufacturing Practices by the U.S. Food
and Drug Administration ("FDA"). Raw materials are purchased from approved
suppliers and inspected by the contract manufacturer as they are received into
the production facilities. They are labeled to indicate source of supply, lot
number and date of receipt, and samples are kept for a minimum of two years from
the date received.

         Biomune's biologic nutraceutical supplements are regulated by the FDA
and others. The manufacturing, packaging, labeling, advertising, distribution
and sale of Biomune's nutrition food bars are also subject to regulation by
various government agencies, principally the FDA. The FDA regulates these
products and activities pursuant to the Federal Food, Drug and Cosmetic Act
("FDCA") and the Fair Packaging and Labeling Act ("FLPA"), and regulations under
these acts. The FDCA is intended, among other things, to ensure that foods are
wholesome, safe to eat, and produced under sanitary conditions, and that food
labeling is truthful and not deceptive. The FLPA provides requirements for the
content and placement of information on consumer packages to ensure that
labeling is useful and informative.

         As of December 31, 2000, Biomune had five full-time employees. On
November 3, 2000, in connection with the transactions described above, Biomune's
five current full-time employees left Biomune and four senior executives and one
clerical employee of Donlar became employees of Biomune.

Historical Donlar Business

         Donlar Corporation was organized in 1990 to develop, manufacture and
market an entirely new protein technology with the potential to replace a
generation of older, non-biodegradable and potentially toxic chemicals. This
new family of biopolymers, known as thermal polyaspartates ("TPA"), is
non-hazardous, non-toxic, hypoallergenic, environmentally friendly and
biodegradable. These proteins are used in a broad range of industrial,
agricultural and consumer markets. Donlar has 121 global patents that protect
its technology, products and marketplace. The U.S. Government recognized the
environmental benefits of this technology in 1996 when it awarded Donlar the
first Presidential Green Challenge Chemistry Award.

         TPA products are beta proteins (biopolymers) manufactured from the
common biological amino acid, L-aspartic acid. TPA is a highly active biopolymer
that is completely soluble in water. By varying the manufacturing method,
different properties can be built into the biopolymer, tailoring it to a
specific use. Products are formulated and packaged into both powder and liquid
forms.


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         In the performance chemicals markets, Donlar offers products utilizing
TPA that are believed to be environmentally superior to non-biodegradable and
environmentally non-friendly polyacrylates, phosphonates and phosphates used in
a wide variety of industrial and consumer products. These products are used to
prevent mineral scale and metal corrosion in industrial processes using high
volumes of water, such as offshore oil and gas production and industrial cooling
water. TPA is also used as a biodegradable antiredeposition agent for
detergents. Antiredeposition agents are those detergent ingredients that prevent
dirt particles from re-attaching to the fabric in the wash cycle once the fabric
has been cleaned. The following are Donlar's main products and their uses in the
performance chemicals markets:

         -  Donlar's A-5D, A-3C and SCI-5C products inhibit both mineral scale
            and metal corrosion in oil production worldwide.

         -  Donlar's A-5D product controls and prevents mineral scale and metal
            corrosion due to the use of water in heating, cooling and pumping
            systems in the chemical, utility, mining and process industries.

         -  Donlar's products are also used in laundry and dishwasher detergents
            to prevent already removed soil and dirt particles from re-attaching
            to fabrics and surfaces.

         In agriculture, Donlar products are believed to significantly increase
the effectiveness of fertilizers, while reducing ground water contamination. TPA
helps the plant absorb fertilizer more efficiently, and therefore less remains
to run-off or leach into the ground water. Donlar also holds patents under which
it is developing products that will have the effect of dramatically reducing the
use of herbicides and insecticides. Donlar believes that since herbicides and
insecticides are made more efficacious when mixed with TPA, significantly less
herbicide and insecticide needs to be applied. The products thereby benefit
growers and farmers through increased yields and reduced crop inputs. The
products also benefit the environment through a reduction in ground water
contamination by fertilizers, herbicides and insecticides. Additionally, TPA
biodegrades harmlessly in the soil after having served its function. The
following are Donlar's main products and their uses in the agricultural market:

         -  Donlar's AmiSorb(R), AmiSorb(R) 10G, Magnet(R), Magnet(R) 10G and
            Volt(R) products are used to attract and collect nutrients for more
            efficient fertilizer uptake by plants thereby increasing yields,
            improving crop output traits and promoting a significant reduction
            in both fertilizer use and ground water contamination.

         -  Donlar's products are used to reduce the levels of herbicides and
            insecticides required for efficacy by concentrating their
            effectiveness and, as a result, significantly reducing ground water
            contamination.

         -  Donlar's products are used to coat seeds and are believed to
            significantly improve the growth of the resulting seedling.

         Donlar Pharmaceutical Corp., a 90% owned research subsidiary of Donlar,
operates under four pharmaceutical patents covering the use of its protein
technology in arresting the allergic reactions of asthma, hay fever,
conjunctivitis and other allergic conditions. A joint development agreement has
been signed between The Mayo Medical School and Donlar to facilitate the
development of this technology.


                                       -4-

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Certain Business Considerations and Risk Factors

         The short and long-term success of Biomune is subject to certain risks,
many of which are substantial in nature. Shareholders and prospective
shareholders in Biomune should consider carefully the following factors, in
addition to other information contained in this report.

         History of Operating Losses; Uncertainty of Future Profitability.
Biomune has incurred significant net operating losses since formation. As of
December 31, 2000, Biomune had an accumulated deficit of $75,765,098. The
factors contributing to these significant operating losses include:

         -  marketing expenditures;

         -  acquisition expenses and costs;

         -  expansion of its research and development programs;

         -  costs associated with pre-clinical studies and clinical trials;

         -  nutritional studies;

         -  regulatory compliance requirements;

         -  trials for other products under development; and

         -  implementation of programs to market products ultimately approved
            for distribution, if any.

         Biomune's future success and ability to achieve profitability depends
primarily upon its ability to successfully operate the Donlar businesses
transferred to it and, to a lesser extent, its ability to market and sell its
existing products. There can be no assurance that Biomune will ever achieve
significant revenues or profitable operations.

         Going Concern. The consolidated financial statements of Biomune have
been prepared on the assumption that Biomune will continue as a going concern.
Biomune's independent public accountants have issued their report dated March 2,
2001 that includes an explanatory paragraph stating that Biomune's recurring
losses and accumulated deficit, among other things, raise substantial doubt
about its ability to continue as a going concern. Biomune's historical product
line is limited and it has been necessary to rely upon financing from the sale
of its equity securities to sustain operations. Biomune has no experience in
operating the Donlar businesses transferred to it and is completely dependent on
the Donlar personnel to mange these businesses.

         Sale of Equity Securities; Future Dilution. Biomune may need to sell
additional equity securities or obtain other forms of financing to fund its
operations. Absent such additional financing, Biomune may find it necessary to
postpone or cancel some or all of its planned business activities. This could
adversely affect Biomune's ability to conduct its business operations, generate
future revenues and introduce new products. 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. Furthermore, if additional
funds are raised by issuing


                                       -5-

<PAGE>   9
shares of common stock or securities convertible into common stock, those sales
or conversion will result in further and possibly substantial dilution of
Biomune's shareholders. Substantial dilution may make it more difficult for
investors to sell their shares or may result in a lower price of Biomune's
securities.

         Dependence on Licensed Technology. Biomune is dependent upon licenses
granted by third parties for its historical product line. The failure to observe
or perform a material covenant, term, condition or provision in a license
agreement or the material breach of a representation or warranty made by
Biomune, may result in a termination or restriction of its rights under these
agreements. Termination of any of the licenses or any restriction or limitation
of Biomune's rights would adversely affect its historical operations.

         Volatility of Stock Price. The trading price of Biomune's common stock
has been and is likely to continue to be subject to wide fluctuations in
response to the quarter-to-quarter variations in Biomune's operating results,
material announcements by Biomune or its competitors, governmental regulatory
action, conditions in the industries in which it operates, or other events or
factors, many of which are beyond Biomune's control. Biomune's operating results
in future quarters may be below the expectations of securities analysts and
investors. In such event, the price of the common stock would likely decline,
perhaps substantially. In addition, the stock market has historically
experienced extreme price and volume fluctuations. Moreover, Biomune's common
stock may be even more prone to volatility than the securities of other
businesses in light of the relatively small number of shares held by
non-affiliates of Biomune. Given such a relatively small public float, there can
be no assurance that the prevailing market price of common stock will not be
artificially inflated or deflated by trading even of relatively small amounts of
common stock.

         Absence of Dividends. Biomune has never declared or paid cash dividends
on its common stock and it does not anticipate that any cash dividends will be
declared on its common stock in the foreseeable future.

         The following business conditions and risk factors pertain to the
Donlar operations that have been transferred to Biomune.

         Stages of Commercialization of Donlar's Products. Donlar was founded in
1990 and until 1996 was engaged principally in research and development
activities, and from 1996 through 2000, market development activities. While
Donlar has commenced marketing its TPA products in the crop nutrition area, it
has not achieved full commercialization, and its product applications are in
various stages of commercialization. As a result, Donlar's TPA products have
been sold only in limited quantities and there can be no assurance that a
significant market will develop for such products with respect to any of their
potential applications. Donlar's crop nutrition and performance chemical
products have been used commercially for only a short period of time. Current
and potential customers in the agricultural, performance chemicals, and other
fields in which Donlar's products have potential applications require
predictable and consistent performance. Although certain products incorporating
Donlar's TPA technology have passed


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<PAGE>   10
product performance and reliability testing in both laboratory and commercial
use, there can be no assurance that they will continue to do so consistently in
the future, will meet future customer performance standards or will offer
sufficient price or performance advantages required to achieve commercial
success. Biomune's failure to develop, manufacture and commercialize TPA
products on a timely and cost effective basis would have a material adverse
effect on Biomune's business, results of operations and financial condition.

         Need for Acceptance by Agricultural Customers. Biomune's future success
in agriculture depends largely on acceptance of Donlar's TPA technology by
agricultural customers and the ability of Biomune to educate those customers
about the proper methods and rates of application required to obtain the levels
of increased yield that the TPA products are capable of generating.
Traditionally, agricultural end users have been slow to adopt new technologies
until their consistent effectiveness and economic value have been evidenced over
several growing seasons. Successful introduction of Donlar's products will also
depend to a large extent on recommendations of prior users. Although Donlar's
research data has shown that its crop nutrition products result in increased
yields, the level of such increase and, thus, the economic return from use of
such products, depends on the method and rate of application and the type of
crop and prevailing weather and soil conditions. There can be no assurance that
Biomune will be able to demonstrate that the purchase of Donlar's crop nutrition
products will be consistently cost effective for the intended users.

         Donlar's crop nutrition products have been the subject of agricultural
industry media reports and articles. While a handful of these reports and
articles have been skeptical or negative in tone, Donlar attributes this
critical comment to natural skepticism associated with new products and
technologies, competitive issues, and the limited number, and general public
unavailability, of farm field trial results. In addition, while some reported
university studies have suggested inconsistent performance results from Donlar's
products, management believes that these results may have been affected by
nonconformity with the recommended methods and rates of application and by such
variables as weather and soil conditions. Further, the purpose of many of these
studies was to establish recommended methods and rates of application, rather
than to validate the product's effectiveness. Biomune's future success will
depend, in large part, on its ability to replicate Donlar's field trial
successes on an expanding scale in each crop growing season and to publicly
disseminate the results of those trials, not only to agricultural industry
media, but also directly to potential end users. There can be no assurance that
Biomune will be successful in overcoming user resistance resulting from adverse
publicity regarding Donlar's products.

         Dependence on Patents and Protection of Proprietary Information.
Biomune's success will depend, in part, on its ability to obtain patent
protection for the TPA processes, materials, and methods of use, to preserve
their trade secrets, and to operate without infringing the patent or other
proprietary rights of others. Donlar has been granted 46 United States patents.
Each time that Donlar filed a patent application in the United States, it filed
similar applications in foreign jurisdictions that Donlar believed were
important to its future business and that afford reasonable protection to
intellectual property rights. Donlar has been granted 75 foreign patents,
including


                                       -7-

<PAGE>   11
patents granted by the European Community, South Africa, Israel, Japan, Mexico,
Russia and Egypt, and currently has numerous patent applications pending in such
jurisdictions. No assurance can be given that the patent applications filed by
Donlar, will result in issued patents or that the scope and breadth of any
claims allowed in any patents issued to Donlar or Biomune will exclude
competitors or provide competitive advantages to Biomune. In addition, there can
be no assurance that any patents issued to Donlar or Biomune will be held valid
if subsequently challenged, that others will not claim rights in the patents and
other proprietary technology owned by Donlar or Biomune, or that others have not
developed or will not develop similar products or technologies without violating
any of Donlar's or Biomune's proprietary rights.

         Donlar's and Biomune's inability to obtain patent protection, preserve
their trade secrets or operate without infringing the proprietary rights of
others, as well as their loss of any rights to technology that they now have or
acquire in the future, could have a material adverse effect on Biomune's
business, results of operations and financial condition. Litigation, which could
result in substantial cost to, and diversion of effort by, Donlar and Biomune,
may be necessary to enforce patents issued to Donlar or Biomune, to defend
Donlar or Biomune against infringement claims made by others, or to determine
the ownership, scope or validity of the proprietary rights of Donlar, Biomune
and others. An adverse outcome in any such litigation could subject Donlar and
Biomune to significant liabilities to third parties, require them to seek
licenses from third parties, and/or require them to cease using certain
technology, any of which could have a material adverse effect on Biomune's
business, results of operations and financial condition.

         Donlar or Biomune may also become involved in interference proceedings
declared by the United States Patent and Trademark Office ("PTO") in connection
with one or more of Donlar's or, in the future, Biomune's patents or patent
applications to determine priority of invention. Any such proceeding could
result in substantial cost to Donlar or Biomune, as well as a possible adverse
decision as to priority of invention of the patent or patent application
involved. In addition, Donlar or Biomune may become involved in reissue or
reexamination proceedings in the PTO in connection with the scope or validity of
their patents. Any such proceeding could have a material adverse effect on their
business, results of operations and financial condition, and an adverse outcome
in such proceeding could result in a reduction of the scope of the claims of any
such patents or such patents being declared invalid. In addition, from time to
time, to protect their competitive position, Donlar and Biomune, or either of
them, may initiate reexamination proceedings in the PTO with respect to patents
owned by others. Such proceedings could result in substantial cost to, and
diversion of effort by, Donlar and Biomune, and an adverse decision in such
proceedings could have a material adverse effect on Biomune's business, results
of operations and financial condition.

         Donlar relied and, Biomune now relies on trade secrets and proprietary
know- how in the conduct of the Donlar operations which have been transferred to
Biomune. Donlar has used and, Biomune now uses employee and third-party
confidentiality and non-disclosure agreements to protect such trade secrets and
know-how. There can be no assurance that the obligation to maintain the
confidentiality of such trade secrets or proprietary information will not
wrongfully be breached by employees, consultants, advisors or others, that
Donlar and Biomune will have


                                       -8-

<PAGE>   12
adequate remedies for any breach, or that the trade secrets or proprietary
know-how will not otherwise become known or be independently developed or
discovered by third parties.

         Projected Future Demand for Raw Material Exceeds Current Worldwide
Supply. The primary raw material in the TPA products, produced and sold by
Biomune, is L-aspartic acid. Because L-aspartic acid accounts for approximately
67% of Biomune's finished goods costs, any material increase in the price of
this raw material could have a material adverse effect on Biomune. There are
only a limited number of suppliers of L-aspartic acid worldwide and
substantially all of the commercially available L-aspartic acid is produced by
non-domestic sources. Biomune currently purchases primarily from sources outside
the United States. While Biomune believes that the world supply of L-aspartic
acid is sufficient to meet its needs over the near term, Biomune also believes
that, by the year 2005, it will require amounts of L-aspartic acid exceeding the
current annual world merchant supply. It is thus important for Biomune's
long-term growth that it secure a low cost and consistent supply of L-aspartic
acid.

         Competition. While Biomune is not aware of any technology directly
competitive with its TPA products in the agricultural field, there are numerous
types of products that make claims as plant growth regulators and stimulants
that affect a plant's genetic or immune system. In the performance chemicals
field there is substantial competition, primarily from polyacrylates, but also
from other manufacturers of polyaspartates such as Bayer and Rohm & Haas using
production methods that may be outside the scope of Donlar's production patents
and in target applications that may be outside the scope of Donlar's methods of
use patents. The producers of polyacrylates, primarily BASF and Rohm & Haas,
have substantially greater financial and technical resources, larger research
and development staffs, and greater manufacturing and marketing capabilities
than Biomune. There can be no assurance that Biomune's performance chemicals
products will compete effectively against products produced by such competitors.

         Limited Manufacturing Capacity and Experience. Biomune's success will
depend, in part, on its ability to manufacture its products in significant
quantities, with consistent quality, at acceptable costs and on a timely basis.
Donlar has limited, and Biomune has no experience in high-volume manufacturing.
With respect to Donlar's Peru, Illinois manufacturing facility which is being
transferred to Biomune, Biomune may incur significant continuous operation costs
and unforeseen expenses in bringing that facility up to capacity. In addition,
Biomune will need to add new manufacturing equipment to the Peru facility in the
near future in order to manufacture sufficient quantities of its products.
Biomune also anticipates constructing an L-aspartic acid manufacturing facility
beginning in 2004, with expected completion in 2005. No assurance can be given
that Biomune will be able to successfully make the transition to high volume
polyaspartate production or construct and operate an L-aspartic facility on a
timely or economical basis.

         Reliance on a Single Manufacturing Facility. The Peru, Illinois plant
transferred to Biomune will be Biomune's sole manufacturing facility and the
only facility capable of producing its products in quantities sufficient to meet
its projected needs. While Biomune maintains business interruption insurance in
the amount of $15 million, any material disruption in the Peru


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<PAGE>   13



plant's operations, whether due to fire, natural disaster, or otherwise, and
whether or not covered by that insurance, could have a material adverse effect
on Biomune's business, results of operations and financial condition.

         Uncertainty of Regulatory Approvals. Biomune's crop nutrition products
may not be distributed in the various states without regulatory approval by the
applicable state agricultural agency. Obtaining such approval generally requires
that Biomune demonstrate that the products are safe and efficacious over a
defined time period. Donlar has already obtained such approvals for its crop
nutrition products from the applicable agencies of 46 states. Because it has not
yet been able to provide performance data spanning a sufficient number of years,
Donlar has not received approvals from the agriculturally significant state of
Mississippi, or from California for use on crops other than corn, sweet corn,
turf, wheat and cotton. Though Biomune has no reason to believe that such
approvals will not be granted, there can be no assurance that such approvals
will be granted on a timely basis, if at all. In addition, Biomune's products
are subject to approval by foreign regulatory authorities.

         Reliance on Single Technology. Although Donlar has obtained numerous
patents covering manufacturing processes, composition and methods of use, all of
Biomune's products are based on its TPA technology. The fields in which Biomune
intends to sell its products are highly competitive and intensive research and
development is always being undertaken by governmental entities, educational
institutions and private enterprises with respect to products having practical
effects such as those of certain of Biomune's products. There can be no
assurance that competitive products will not be introduced by third parties or
that competing materials based on different or new technologies may not become
commercially available. There can be no assurance that Biomune's competitors
will not succeed in developing or marketing materials, technologies or products
that exhibit superior performance or are more commercially desirable or more
cost effective than those developed and marketed by Biomune. Any of the
foregoing could have a material adverse effect on Biomune's business, results of
operations and financial condition.

         Risks Associated with Rapid Growth. Donlar's rate of growth has placed
and Biomune's proposed growth will place significant demands on Biomune's
management, as well as its administrative, operational and financial resources.
Biomune's ability to manage its future growth will require Biomune to implement
new, and improve existing, operational, financial and management information
systems. Biomune's success will depend, in large part, upon its ability to
attract and retain highly qualified research and development, management,
manufacturing and marketing and sales personnel and to continue to motivate and
manage its work force, particularly its sales force. If Biomune is unable to
effectively manage any of these factors, Biomune's business, its financial
condition and results of operations could be materially and adversely affected.
No assurance can be given that Biomune will experience growth or that it will be
successful in managing its growth, if any.

         Limited Marketing Experience. While Donlar's sales force, transferred
to Biomune as part of the business restructuring, has experience in marketing
products to agricultural and


                                      -10-

<PAGE>   14
performance chemicals end users, Donlar has limited and Biomune has no
experience in marketing and selling the TPA products. To market its products
effectively, Biomune will be required to develop an expanded marketing and sales
force that can effectively demonstrate the advantages of, and recommended
methods and rates of application for, the TPA product applications. The crop
nutrition products will also rely heavily on the availability of recommendations
of prior users. Biomune currently maintains arrangements with third parties for
distribution of certain of its TPA products in the performance chemicals field
and Biomune expects to enter into additional arrangements with third parties for
the commercialization and marketing of its products. Biomune's future success
will depend in part on the continued relationships with distributors, its
ability to enter into other similar arrangements, the continuing interest of the
existing distributors in current and potential product applications and,
eventually, the distributors' success in marketing and willingness to purchase
Biomune's products. There can be no assurance that Biomune will be successful in
its marketing efforts, that it will be able to establish adequate sales and
distribution capabilities, that it will be able to enter into or maintain
marketing or distribution arrangements with third parties on financially
acceptable terms, or that any third parties with whom it enters into such
arrangements will be successful in marketing its products.

         Reliance on Key Personnel. Donlar's principal executive officers, who
have become the principal executive officers of Biomune as part of the business
reorganization described above, have an average of over 25 years of collective
experience in chemicals research, development and sales. The loss of the
services of these executive officers or other key personnel, or the failure of
Biomune to attract and retain other skilled and experienced personnel on
acceptable terms, could have a material adverse effect on Biomune's business,
results of operations and financial condition.

         Customer Concentration. Donlar, and now Biomune, have only recently
begun commercial sales of its products. Biomune sells its crop nutrition
products primarily to agricultural distributors and its performance chemicals
products to chemical service companies. While Biomune expects to significantly
increase its sales in these product lines and to focus its sales efforts on a
more specifically targeted group of agriculture and chemical distributors, sales
may continue to be concentrated among a relatively small group of customers,
though not necessarily those that currently represented the largest portions of
Donlar's sales in the past. Thus, the loss of any single customer could have a
material adverse effect on Biomune, its results of operations and its financial
condition.

         Markets for Crop Nutrition Products are Seasonal and Volatile. Demand
for Biomune's crop nutrition products can be expected to be significantly
affected by agricultural conditions, which can be unpredictable and volatile as
a result of a number of factors. The most important factors are weather
conditions and patterns, current and projected grain stocks and prices, and
governmental agricultural policies, including those that directly or indirectly
influence the number of acres planted, the level of grain stocks, the mix of
crops planted, and crop prices. Because of its dependence on agricultural
markets, the crop nutrition business is seasonal and Biomune's operating results
may vary significantly from quarter to quarter.


                                      -11-

<PAGE>   15

         Environmental and Other Regulatory Matters. Like other manufacturers,
Biomune is subject to a broad range of Federal, state, local and foreign laws
and requirements, including those governing discharges in the air and water, the
handling and disposal of solid and hazardous substances and wastes, the
remediation of contamination associated with the release of hazardous
substances, work place safety and equal employment opportunities. Donlar has
made, and Biomune will continue to make, expenditures to comply with such laws
and requirements. Biomune believes, based on information currently available to
management, that it is in compliance with applicable environmental and other
legal requirements and that it will not require material capital expenditures to
maintain compliance with such requirements in the foreseeable future.

         Governmental authorities have the power to enforce compliance with such
laws and regulations, and violators may be subject to penalties, injunctions or
both. Third parties may also have the right to enforce compliance with such laws
and regulations. As Biomune develops new formulations for TPA products and
combine the TPA with other products, such as herbicides and insecticides, those
products may become subject to additional review and approval requirements
governing the sale and use of products such as those produced by Biomune.
Biomune's manufacturing processes do not currently result in the generation of
hazardous wastes. However, there can be no assurance that this will always be
the case, and there can be no assurance that material costs or liabilities will
not be incurred by Biomune in the future as a result of the manufacturing
operations. It is also possible that other developments, such as additional or
increasingly strict requirements of laws and regulations of these types, or
enforcement policies thereunder, could significantly increase Biomune's costs of
operations.

         Liability Risk. Products sold by Biomune may expose it to potential
liability for personal injury or property damage claims relating to the use of
those products, particularly if used in a manner not in conformity with
Biomune's instructions. Although product liability claims historically have not
had a material adverse effect on Donlar, there can be no assurance that Biomune
will not be subject to or incur liability for such claims in the future.
Although Donlar has maintained and Biomune intends to maintain product liability
insurance in amounts that management deems commercially reasonable, a
significant claim that is uninsured or partially insured could result in loss or
deferral of revenues, diversion of resources, or damage to Biomune's reputation,
any of which could have a material adverse effect on Biomune's business,
operating results, and financial condition.

         Special Statement Concerning Forward-looking Statements. This report,
in particular the "Business" and "Management's Discussion and Analysis or Plan
of Operation" sections, contains forward-looking statements concerning the
expectations and anticipated operating results of Biomune. All of the
forward-looking statements contained in this report are made in reliance upon
the safe harbor protection for forward-looking statements provided by the
Securities Act and the Exchange Act. Numerous factors govern whether any
forward-looking statement made by Biomune will be or can be achieved. Any one of
those factors could cause actual results to differ materially from those
projected by the forward-looking statements made in this report. These
forward-looking statements include plans and objectives of management for future


                                      -12-

<PAGE>   16
operations, including plans and objectives relating to the products and the
future economic performance of Biomune. Forward-looking statements are based on
current expectations that may be affected by a number of risks and
uncertainties. They are also based on certain assumptions.

         Assumptions involve judgments with respect to, among other things,
future economic, competitive and market conditions and future business
decisions, which are difficult or impossible to predict accurately and may be
beyond the control of Biomune. Although Biomune believes that the assumptions
underlying the forward-looking statements in this report are reasonable, any of
these assumptions could prove inaccurate. Therefore, there can be no assurance
that the results contemplated in any of the forward-looking statements will be
realized. Budgeting and other management decisions are subjective in many
respects and are susceptible to interpretations and periodic revision based on
actual experience and business developments, the impact of which may cause
Biomune to alter its marketing capital expenditure plans or other budgets. This
will affect Biomune's results of operations. In light of the significant
uncertainties inherent in the forward-looking statements, any such statement
should not be regarded as a representation by Biomune or any other person that
the objectives or plans of Biomune will be achieved.

Item 2.  Description of Properties

         Biomune and Optim Nutrition have moved all of their marketing, sales,
distribution and administrative operations to Donlar's headquarters in Bedford
Park, Illinois and Biomune conducts its manufacturing operations in Donlar's
Peru, Illinois plant which is being transferred to Biomune.

         Donlar's headquarters consist of approximately 9,000 square feet of
office and laboratory space. This property is leased by Donlar from the Illinois
Institute of Technology. Biomune is currently negotiating a new lease for this
facility.

         To meet its initial projected production requirements for TPA, Donlar
constructed a TPA manufacturing facility in Peru, Illinois on a 40-acre parcel
purchased by Donlar in 1996. This 50,000 square foot facility currently contains
two chemical reactors, the larger of which is designed to produce 30 million
pounds of TPA products annually. The facility is large enough to accommodate
five such reactors and Biomune anticipates adding the other four reactors
serially over the next several years as demand for its products increases. This
expansion process is essentially modular and is not expected to involve
substantial engineering or technical expenses or delays. The Peru facility is
strategically located near barge, rail and road transportation facilities. As
part of the business reorganization described in Item 1. - "Description of
Business," this facility will be transferred to Biomune.

Item 3.  Legal Proceedings

         In 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


                                      -13-

<PAGE>   17
Roman Sterlin (Civil No. 2:95CV-0944G). The Complaint, as subsequently amended,
named as defendants, Biomune, David G. Derrick (Biomune's former Chief Executive
Officer and Chairman of the Board), Aaron Gold (a former director), Charles J.
Quantz (a former director), Jack D. Solomon (a founder of Biomune and a former
member of its Business Advisory Board), Genesis Investment Corporation (a
stockholder) and The Institute for Social & Scientific Development, Inc. (a
stockholder). The plaintiff alleged violations by the defendants of Sections
10(b), 20(a) and 20(A)(a) of the Securities Exchange Act of 1934, Rule 10b-5
promulgated under such Act and general misappropriation of material non-public
information. Biomune and other defendants prevailed in a motion to dismiss the
lawsuit based, among other grounds, on the expiration of applicable statutes of
limitation. The plaintiff appealed the decision of the District Court to the
United States Court of Appeals for the Tenth Circuit (No. 95-CV-944) in Denver,
Colorado. On September 2, 1998, the Court of Appeals reversed in part the
decision of the trial court and remanded the case for a determination by the
trial court of whether the complaint had been timely filed in light of the
decision of the appellate court. The trial court permitted the parties to
conduct additional discovery before a hearing on the issue. On March 3, 2000,
the defendants filed a joint motion to dismiss or alternatively for summary
judgment. A hearing on these motions was held on May 23, 2000. On September 27,
2000, the trial court granted defendant's motion for summary judgment. On
November 14, 2000, the trial court entered a judgment against the plaintiff
dismissing the action in its entirety because the applicable one year statute of
limitations barred the plaintiff's claims. Plaintiff appealed and by order of
the Court of Appeals filed on December 4, 2000, the court granted plaintiff's
motion to voluntarily dismiss the action. As a result, this litigation is now
ended.

Item 4.  Submission of Matters to a Vote of Security Holders

         None.

                                     Part II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

         Biomune's common stock was listed on the National Association of
Securities Dealers Automated Quotation ("Nasdaq") SmallCap Market under the
primary symbol "BIME." On November 27, 2000, Biomune's common stock was delisted
from the Nasdaq SmallCap Market. Biomune's stock is currently quoted on the NASD
over-the-counter bulletin board under the symbol "BIME." The following table
contains information about the range of high and low bid prices for the common
stock for each full quarterly period within the two most recent fiscal years,
based upon quotations on the Nasdaq SmallCap Market (and giving effect to all
stock splits occurring during such period or prior to the issuance of this
report):


                                      -14-

<PAGE>   18


 Quarter Ended            High(1)        Low(1)

December 31, 2000        $  1.04       $   0.79
September 30, 2000       $  2.35       $   2.04
June 30, 2000            $  4.07       $   3.29
March 31, 2000           $  8.60       $   7.50

December 31, 1999        $  7.04       $   5.63
September 30, 1999       $  5.00       $   4.85
June 30, 1999            $ 10.00       $   5.16
March 31, 1999           $ 11.57       $  11.10

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

(1)      The source of these high and low prices through November 26, 2000 was
         Nasdaq, and subsequent to November 26, 2000 was the NASD
         over-the-counter bulletin board. The Nasdaq quotations reflect
         inter-dealer prices, without retail mark-up, mark-down or commission,
         may not represent actual transactions, and have been rounded up to the
         next highest two decimal places. Subsequent to November 26, 2000, the
         high represents the best (highest) price a prospective buyer is
         prepared to pay that day and the low represents the best (lowest) price
         at which someone who owns the security offers to sell it.

         The market price of the common stock is subject to significant
fluctuations in response to variations in Biomune's quarterly operating results,
general trends in the market for Biomune's products and product candidates, and
other factors, over many of which Biomune has little or no control. In addition,
broad market fluctuations, as well as general economic, business and political
conditions, may adversely affect the market for Biomune's common stock,
regardless of Biomune's actual or projected performance. On March 31, 2001, the
average of the closing bid and ask prices of the common stock on the NASD
over-the-counter bulletin board was $1.22 per share.

         On March 31, 2001, there were approximately 1,269 holders of record of
Biomune's common stock.

         Biomune has never declared or paid cash dividends on its common stock
and does not anticipate paying any cash dividend on its common stock in the
foreseeable future.

         As of March 31, 2001, Biomune had the following series of preferred
stock outstanding:

         Series A 10% Cumulative Convertible Preferred Stock - 39,124 shares
outstanding, convertible into 232 shares of common stock; and

         Series B 10% Cumulative Convertible Preferred Stock - 449 shares
outstanding, convertible into 3 shares of common stock.

Recent Sales of Unregistered Equity Securities

         None during the period covered by this report.


                                      -15-

<PAGE>   19
Item 6.  Management's Discussion and Analysis or Plan of Operation

         The following discussion and analysis of Biomune's financial condition
and results of operations should be read in conjunction with the consolidated
financial statements and the notes thereto appearing elsewhere in this report.
See Item 7. - "Financial Statements and Supplementary Data."

Overview

         Since 1997, Biomune has been engaged primarily in the distribution and
sale of nutritional and nutraceutical products. Biomune's principal products are
biologic nutraceutical supplements and sports and nutrition bars.

         As described in Part I, Item 1. "Description of Business" of this
report, as a result of the transaction that were completed in 2000 and in early
2001, all of the operational activities of Donlar, except for Donlar's genetic
research activities, are conducted by Biomune. Biomune's marketing, sales,
distribution and administrative operations are conducted from Donlar's
headquarters in Bedford Park, Illinois, and its manufacturing operations are
conducted from Donlar's Peru, Illinois facility, which has been transferred to
Biomune.

         Biomune's reorganized businesses are conducted through three business
segments:

         -  BioPolymers, consisting of the performance chemicals business
            acquired from Donlar;

         -  AgriSciences, consisting of the agricultural business acquired from
            Donlar; and

         -  Optim Nutrition, consisting of Biomune's nutritional and
            nutraceuticals business.

         Biomune is also conducting research and development activities in the
pharmaceuticals area.

Results of Operations

         During the year ended December 31, 2000, Biomune had revenues of
$1,381,994, compared to $793,723 for the year ended December 31, 1999. The
increase in revenues was due to growth in the BioPolymers segment from new
customers and new products.

         Cost of revenues was $2,097,189 in 2000, compared to cost of revenues
of $3,634,861 in 1999. This decrease was due to a large inventory write down in
1999 to reduce the inventory to lower of cost or market value.

         Operating expenses were $4,811,693 for 2000, compared to $4,896,524 in
1999. This slight decrease was due cost reduction initiatives implemented by the
Company, partially offset by costs associated with the Donlar transaction.



                                      -16-

<PAGE>   20



         Interest expense increased from $4,443,756 in 1999 to $7,236,982 in
2000. This increase was due to increases in borrowings and in the amortization
of debt discount.

         During 2000, Biomune had a net loss of $13,713,973, compared to a net
loss of $12,149,702 during 1999. This increase in the net loss was attributable
primarily to the foregoing items.

Liquidity and Capital Resources

         Historically, Biomune has been unable to finance its operations from
cash flows from operating activities. Biomune expects it will require
substantial funds to continue operations. As of December 31, 2000, Biomune had
cash of $876,435 and no plan for its continued financing. As part of the
transactions described in Part I, Item 1. "Description of Business," Donlar
transferred $2,413,500 million in cash and certain business rights to Biomune.
Biomune intends to continue in existence by operating the Donlar businesses
transferred to it as well as Biomune's historical business.

         The audited consolidated financial statements of Biomune have been
prepared on the assumption that it will continue as a going concern. Biomune's
independent public accountants have issued their report dated March 2, 2001,
that includes an explanatory paragraph stating that Biomune's recurring losses,
among other things, raise substantial doubt about Biomune's ability to continue
as a going concern.

         On November 3, 2000, pursuant to an amended stock purchase agreement
and an amended asset purchase agreement between Biomune and Donlar, Biomune
issued 41,279,520 million shares of common stock, par value $0.0001 per share,
representing approximately 96% of Biomune's shares outstanding on a fully
diluted basis, in a private placement to Donlar. Biomune issued those shares in
exchange for $2,413,500 in cash and the transfer to Biomune from Donlar of the
exclusive right to distribute, and the exclusive right to all future sales from
Donlar's crop nutrition management and oil field products. In addition, Donlar
transferred to Biomune all technology, know how and patents for the crop
management and oil field businesses created after November 3, 2000, as well as
all technology resulting from Donlar pharmaceutical research and development
activities after November 3, 2000.

Item 7.  Financial Statements and Supplementary Data

         Index to Consolidated Financial Statements:

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

           Consolidated Balance Sheet as of December 31, 2000..............  F-2

           Consolidated Statement of Operations for the Years Ended
             December 31, 2000 and 1999 ...................................  F-3

           Consolidated Statement of Shareholders' Equity for the Years
             Ended December 31, 2000 and 1999..............................  F-4

           Consolidated Cash Flows for the Years Ended
             December 31, 2000 and 1999 ...................................  F-5

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


                                      -17-

<PAGE>   21

Item 8.  Changes or Disagreements with Accountants

         None. Reference is made to Item 4. of the Current Report on Form 8-K
filed by Biomune on December 4, 2000.

                                    Part III

Item 9.  Directors and Executive Officers

         The following table lists the executive officers and directors of
Biomune as of January 4, 2001.


--------------------------------------------------------------------------------
NAME                            AGE       POSITION
--------------------------------------------------------------------------------
Larry P. Koskan                 58        Chief Executive Officer, President and
                                          Chairman of the Board
--------------------------------------------------------------------------------

Joel H. Lurquin                 35        Controller and Treasurer
--------------------------------------------------------------------------------
Robert P. Pietrangelo           60        Vice President
--------------------------------------------------------------------------------
Joseph F. Prochaska             55        Vice President
--------------------------------------------------------------------------------
Robert W. Cooper (1)(2)         72        Director
--------------------------------------------------------------------------------
Dr. Robert G. Martin (2)        59        Director
--------------------------------------------------------------------------------
Thomas C. Dorr (1)(3)           55        Director
--------------------------------------------------------------------------------
Dean R. Kleckner (1)(2)         69        Director
--------------------------------------------------------------------------------

(1)      Member of Audit Committee
(2)      Member of Compensation Committee


                                      -18-

<PAGE>   22

(3)      Mr. Dorr resigned as a director of the Company on February 21, 2001
         following his nomination to a position with the United States
         Department of Agriculture.

         The foregoing officers and directors of Biomune were elected on
November 3, 2000, replacing the former officers and directors of Biomune.

         Larry P. Koskan, Donlar's founder, has served as a director, President
and Chief Executive Officer of Donlar since its inception in 1990, and as
Chairman of the Board of Donlar since 1992. Prior to founding Donlar, Mr. Koskan
held several research and development and manufacturing positions during a 23
year career with Nalco Chemical Company. As Corporate Research Development
Director for Nalco, his duties included establishing large-volume market
opportunities for innovative, specialty polymers. He also served as Vice
President of Research and Development of Nalco's Water and Waste Treatment
Division. Mr. Koskan holds a B.S. in Education and Chemistry from the University
of Kansas and an M.S. in Organic Chemistry from Loyola University of Chicago and
is the inventor or co-inventor of over 20 U.S. patents.

         Joel H. Lurquin joined Donlar in 1995 as Controller. Prior to joining
Donlar, Mr. Lurquin was an accountant with Bansley and Kiener, Certified Public
Accountants. He has a B.S. in Accounting from DePaul University.

         Robert P. Pietrangelo joined Donlar in April 1997 as its Vice
President, Sales and Marketing of the Performance Chemicals Division and in
October 1997 was named President of that division. Prior to joining Biomune, Mr.
Pietrangelo held various management positions in the performance chemicals
industry, including marketing manager with CPS Chemical (1989 to 1996), and
Strategic Business Unit Manager with Rohm & Haas Company (1984 to 1989). Mr.
Pietrangelo has a B.A. in Chemistry and Mathematics from LaSalle University and
an M.B.A. in Marketing and Finance from Drexel University.

         Joseph F. Prochaska joined Donlar in June 1997 as its Senior Vice
President of the Agricultural Products Division and, in October 1997, was named
President of that division. Prior to joining Donlar, Mr. Prochaska was President
and Chief Executive Officer of Willmar Manufacturing, a manufacturer of
agricultural application equipment from 1993 to 1997. Prior to that time, Mr.
Prochaska held various sales and marketing positions with Ciba-Geigy Corp. Mr.
Prochaska has a B.S. in Forestry/Agriculture from Michigan State University, an
M.B.A. from Capital University and an M.A. in Management from Claremont Graduate
School.

         Robert W. Cooper has served as a director of Donlar since June 1992. He
has been a principal of Cooper-Pruyn Architects, Ltd. since 1996 and President
and Chief Executive Officer of R.W. Cooper and Associates, a company providing
engineering and management services to the food processing, chemical and
building materials industries, since 1983. Mr. Cooper is a Registered
Professional Engineer in Illinois and is a member of ASCE and the Illinois
Society of Professional Engineers.


                                      -19-

<PAGE>   23



         Dr. Robert G. Martin has served as a director of Donlar since June
1992. Dr. Martin, a cataract surgeon, has been a principal of Carolina Eye
Associates, a 15-office ophthalmic practice, since 1977. He is Chairman of the
Board of the Society for Excellence in Eye Care and past president of the
American Board of Eye Surgery. Dr. Martin holds a B.S. in Chemistry and an M.D.
from the University of North Carolina at Chapel Hill.

         Thomas C. Dorr has been a consultant to Donlar since 1991 and a
director since November 3, 2000. He is President and Chief Executive Officer of
a 3,000-acre farm and agricultural business in Iowa. Mr. Dorr was a member of
the Iowa Board of Regents from May 1, 1991 to April 30, 1997. From January 1,
1992 to December 31, 1997, Mr. Dorr was a director of the Federal Reserve Bank
in Chicago.

         Dean R. Kleckner has served as a director of Donlar since November 3,
2000. He has been a President of the American Farm Bureau Federation since 1986.
Mr. Kleckner also operates a 350-acre corn, soybean and hog farm in Iowa.

         No family relationships exist between or among any of Biomune's
officers and directors. Board of Directors Committees.

Board of Directors

         The Board of Directors has established a Compensation Committee and an
Audit Committee.

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 receive
options under Biomune's stock option plans and the number of options to be
granted.

Audit Committee

         The Audit Committee makes recommendations to the Board of Directors
with respect to the engagement of Biomune's independent public accountants and
reviews the scope and effect of the audit engagement.

Section 16(a) Beneficial Ownership Reporting Compliance

         Section 16(a) of the 1934 Act requires Biomune's directors and
executive officers, and persons who own more than 10% of a registered class of
Biomune's equity securities, to file with the SEC initial reports of ownership
and reports of changes in ownership of Biomune's common


                                      -20-

<PAGE>   24



stock and other equity securities. Officers, directors and greater than 10%
shareholders are required by SEC Regulations to furnish Biomune with copies of
all Section 16(a) reports they file. Based solely upon a review of the copies of
such reports Biomune furnished to Biomune and written representations that no
other reports were required, Biomune believes that there was compliance for the
fiscal year ended December 31, 1999 with all Section 16(a) filing requirements
applicable to Biomune's officers, directors and greater than 10% beneficial
owners.

Item 10. Executive Compensation

         The following table sets forth the annual and long-term compensation in
fiscal years 2000, 1999 and 1998 for Biomune's Chief Executive officer. No other
executive officer of Biomune received salary or bonus compensation exceeding
$100,000 in 2000.



                                      -21-

<PAGE>   25
                           Summary Compensation Table

<TABLE>
<CAPTION>
                                 Annual Compensation                                    Long Term Compensation
                                                                                        Awards                     Payouts
         (a)                   (b)       (c)      (d)         (e)          (f)          (g)            (h)         (i)
------------------------------------------------------------------------------------------------------------------------------------
                                                                                       Securities
                                                                         Restricted    Underlying
                                                          Annual         Stock         Options/      LTIP          All Other
Name and Principal position    Year     Salary    Bonus   Compensation   Awards        SARs (#)(3)   Payouts ($)   Compensation ($)
---------------------------  --------  --------  -------  -------------  -----------   -----------  ------------   ----------------
<S>                          <C>       <C>       <C>      <C>            <C>           <C>          <C>            <C>
Larry P. Koskan              2000 (1)  $ 30,833    -0-        -0-           -0-             -0-        -0-                -0-
Michael G. Acton (4)         2000 (2)  $100,000    -0-        -0-           -0-             -0-        -0-            $20,000 (5)
                             1999 (2)  $100,000    -0-        -0-           -0-          48,000        -0-                -0-
                             1998 (2)  $100,000    -0-        -0-           -0-             -0-        -0-                -0-

</TABLE>

(1)      Mr. Koskan replaced Mr. Acton on November 3, 2000 as Chief Executive
         Officer.

(2)      Ended September 30th of each of the fiscal years indicated.

(3)      Adjusted to reflect all stock splits prior to the issuance of this
         report.

(4)      Mr. Acton was the chief accounting officer and, later, the chief
         financial officer of Biomune until June 1998. Amounts shown for Mr.
         Acton for periods prior to July 1998 were paid to Mr. Acton in his
         position as Chief Financial officer of Biomune.

(5)      Represents fair market value of 8,000 shares of common stock of Biomune
         granted to Mr. Acton on December 22, 1999.

Stock Plans

         As of December 31, 2000, 49,769 shares of Biomune's common stock were
subject to options and issuable upon exercise of options granted under the 1992
Stock Incentive Plan, the 1993 Stock Incentive Plan, the 1995 Stock Incentive
Plan and the 1996 Stock Incentive Plan. No further options will be issued under
these plans. The 1992 and the 1993 Stock Incentive Plans have been terminated
and the 1995 and 1996 Stock Incentive Plans will be terminated. All new grants
will be under a new stock option plan which Biomune intends to implement in the
future.

                        Option Grants in Fiscal Year 2000

         The following table sets forth information concerning the grant of
stock options and stock appreciation rights (SARS) made under Biomune's plans
during the fiscal year ended December 31, 2000 to the Chief Executive Officer:

         None.

Aggregated Option Exercises and Fiscal Year-end Option Value



                                      -22-

<PAGE>   26
         The following table sets forth information with respect to the exercise
of stock options by Biomune's Chief Executive Officer and President during the
fiscal year ended December 31, 2000, as well as the aggregate number and value
of unexercised options held by such officer on December 31, 2000.


                 Aggregated Option Exercises in Last Fiscal Year
                        and Fiscal Year-end Option Value


<TABLE>
<CAPTION>
                                                                   Number of securities
                                                                   Underlying                  Value of Unexercised
                                                                   Unexercised options         In-the-Money Options
                                                                   At December 31, 2000        at December 31, 2000
                       Shares Acquired                             (#) Exercisable/            ($) Exercisable/
Name                   On Exercises (#)     Value Realized ($)     Unexercisable               Unexercisable
---------------------  ---------------      ------------------     --------------------        --------------------
<S>                    <C>                  <C>                    <C>                         <C>
Michael G. Acton            48,000 (1)             $520,500                  500/-0-                  N/A (2)/-0-
</TABLE>

         (1)  All share amounts and exercise prices were adjusted to reflect all
              stock splits prior to the issuance of this report.
         (2)  At December 31, 2000, none of the options were in the money.

Compensation of Directors

         Members of the Board of Directors who are not directly or indirectly
employed by Biomune are paid $500 for each Board meeting attended, in addition
to having their expenses reimbursed in connection with attending meetings of the
Board of Directors. No stock options were granted during 2000 to any such
Directors for their service on the board. However, during 2000, three board
members received 2,000 shares each and one board member received 4,000 shares
in director compensation.

         Biomune had a Consulting Agreement with Christopher D. Illick, one of
Biomune's directors and a member of its Compensation and Audit Committees. That
Consulting Agreement provided for Mr. Illick's services as a director of Biomune
and as a member of Biomune's Compensation and Audit Committees. Pursuant to that
Consulting Agreement, Biomune issued Mr. Illick 45 shares of common stock each
month during his service as director.

Item 11.  Security Ownership of Certain Beneficial Owners and Management

         To Biomune's knowledge, the following table sets forth information
regarding ownership of Biomune's outstanding common stock on March 31, 2001 by
beneficial owners of more than 5% of the outstanding shares of common stock. No
director or executive officers of Biomune owns any common stock.


                                      -23-

<PAGE>   27



                                                   Shares of Common stock
                                                    Beneficially Owned
Name and Address                                       Percentage
of Beneficial Owner (1)                Number           of Class
----------------------------------  ----------    -----------------------
Donlar Corporation                  41,279,520               96%
6502 South Archer Road
Bedford Park, IL 60501


         (1)  A person is deemed to be the beneficial owner of securities that
              can be acquired by such person within 60 days from the date on
              which beneficial ownership is calculated, upon the exercise of
              options or warrants or otherwise. Each beneficial owner's
              percentage of ownership is determined by assuming that options,
              warrants, or other rights to acquire shares, held by such person
              (but not those held by any other person) and exercisable within
              sixty (60) days from the date hereof have been fully exercised.
              Percentages are calculated based on 42,999,500 shares of common
              stock outstanding as of March 31, 2001 (as adjusted for shares
              deemed to be beneficially owned by such shareholder).

Item 12.  Certain Relationships and Related Transactions

         Donlar Corporation - Donlar acquired 96% of Biomune on November 3,
2000.

         On November 3, 2000, pursuant to an amended stock purchase agreement
and an amended asset purchase agreement between Biomune and Donlar, Biomune
issued 41,279,520 million shares of common stock, par value $0.0001 per share,
representing approximately 96% of Biomune's shares outstanding on a fully
diluted basis, in a private placement to Donlar. Biomune issued those shares in
exchange for $2,413,500 in cash and the transfer to Biomune from Donlar of the
exclusive right to distribute, and the exclusive right to all future sales from
Donlar's crop nutrition management and oil field products. In addition, Donlar
transferred to Biomune all technology, know how and patents for the crop
management and oil field businesses created after November 3, 2000, as well as
all technology resulting from Donlar pharmaceutical research and development
activities after November 3, 2000.

         Calvin Black Trust Loan

         In 1998, Biomune borrowed $600,000 from the Calvin Black Trust. The
trustee of the Trust is Phil B. Acton, the brother of Biomune's former President
and CEO, Michael G. Acton. The loan to Biomune was secured by assets, including
accounts receivable and inventory. The note was due February 28, 1999. On March
31, 1999, Biomune entered into an agreement with IMG, Ltd., a Utah limited
liability company, for the sale of 300,000 shares of Bioxide Corporation common
stock owned by Biomune. The purchase price for these securities was $3.00 per
share and was paid in cash totalling $341,000 and the assumption of the Calvin
Black Trust Loan note by IMG. At March 31, 1999, principal and accrued interest
due under the Note was $570,552. In connection with the assumption of the note,
the Trust and IMG entered into a separate agreement pursuant to which the Trust
released its claims against Biomune.


                                      -24-

<PAGE>   28

         Christopher D. Illick - Mr. Illick was the Chairman of Biomune's Board
of Directors until he resigned in the fourth quarter of 2000.

         Biomune had a Consulting Agreement with Christopher D. Illick, one of
Biomune's directors and a member of its Compensation and Audit Committees. That
Consulting Agreement provided for Mr. Illick's services as a director of Biomune
and as a member of Biomune's Compensation and Audit Committees. Pursuant to that
Consulting Agreement, Biomune issued Mr. Illick 45 shares of common stock each
month during his service as a director.

Item 13.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

         (a)  Documents filed as part of this Form 10-KSB:

              1.  Financial Statements (included in Part II, Item 8)
                  Report of Independent Certified Public Accountants
                  Consolidated Balance Sheet as of December 31, 2000
                  Consolidated Statement of Operations for the Years Ended
                  December 31, 2000 and 1999
                  Consolidated Statement of Shareholders' Equity for the Years
                  Ended December 31, 2000 and 1999
                  Consolidated Cash Flows for the Years Ended December 31, 2000
                  and 1999
                  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-KSB:

              Exhibit No.                  Description of Exhibit

               2.1$$$         Stock Purchase Agreement, dated as of August 7,
                              2000, between Biomune Systems, Inc. and Donlar
                              Corporation.

               2.2$$$         Asset Purchase Agreement, dated as of August 7,
                              2000, between Biomune Systems, Inc. and Donlar
                              Corporation.

               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


                                      -25-

<PAGE>   29

               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

               3.8++          Certificate and Statement of Determination of
                              Rights and Preferences of Series E, 8% Cumulative
                              Convertible Preferred Stock

               3.9++          Certificate of Amendment of Determination of
                              Rights and Preferences of Series F, 8% Cumulative
                              Convertible Preferred Stock

               3.10++         Amendment to Determination of Rights and
                              Preferences of Series F Preferred

               3.11++         Certificate and Statement of Determination of
                              Rights and Preferences of Series G, 8% Cumulative
                              Preferred Stock

               3.12++         Amendment to Designation of Rights and Preferences
                              of Series G Preferred

               3.13++         Certificate and Statement of Determination of
                              Rights and Preferences of the Series J, 8%
                              Cumulative Convertible 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



                                      -26-

<PAGE>   30



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

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

               4.7++          Form of Series E Certificate

               4.8++          Form of Series F Certificate

               4.9++          Form of Series G Amendment

               4.10++         Form of Series J Certificate

               10.43*         Office Lease 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

               10.60#         Amended License Agreement with PTI

               10.77#         1995 Stock Incentive Plan

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

               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



                                      -27-

<PAGE>   31



               10.95+         Lease Agreement with Young Electric Sign company

               10.97+         Form of Registration Rights Agreement (Series C
                              Preferred)

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

               10.108+        License Agreement with Biomed Patent Development
                              LLC

               10.112+        First Amendment to Amended License Agreement with
                              PTI

               10.113++       Contract with ML Industries

               10.114++       Contract with Medical Foods, Inc.

               10.115++       Contract with Harrogate Marketing LLC

               10.116++       Rockwood Purchase Agreement, as amended

               10.117+++      Marketing and Consulting Services Agreement
                              between Biomune Systems, Inc., and Harrogate
                              Marketing, L.L.C. dated as of August 14, 1999

               10.118$        Contract with Amerifit Nutrition, Inc.

               10.119$        License Agreement with Amerifit Nutrition, Inc.

               10.120$        Contract with ICN Pharmaceutical

               10.121$        Schedules to ICN Pharmaceutical Contract

               10.122$        Non-Competition Agreement with Amerifit Nutrition,
                              Inc.

               10.123$$       1999 Stock Option and Incentive Plan of Biomune
                              effective as of January 1, 1999

               10.124$$       Form of Incentive Stock Option Grant and Agreement
                              between Biomune and certain directors, officers
                              and employees of Biomune

               10.125$$       Form of Stock Option Grant and Agreement between
                              Biomune and certain directors, officers and
                              employees of Biomune

               10.126$$       Form of Stock Award Letter.



                                      -28-

<PAGE>   32



               10.123$$$      Promissory Note in the principal amount of
                              $1,115,024.80, dated as of August 7, 2000.

               23.1           Consent of Grant Thornton LLP

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

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

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

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

         +     Incorporated by reference to Biomune's Annual Report on Form
               10-KSB for the fiscal year ended September 30, 1996.

         ++    Incorporated by reference to Biomune's Annual Report on Form
               10-KSB for the fiscal year ended September 30, 1998.

         +++   Incorporated by reference to Biomune's Annual Report on Form
               10-KSB for the fiscal year ended September 30, 1999.

         $     Incorporated by reference to Biomune's Annual Report on Form
               10-QSB for the period ending December 31, 1999.

         $$$   Incorporated by reference to Biomune's Annual Report on Form S-8
               filed on February 2, 2000.

         $$$   Incorporated by reference to Biomune's Annual Report on Form 8-K
               filed on August 15, 2000.

         (b)   Reports on Form 8-K were filed during the last quarter of the
               period covered by this report.

               A Report on Form 8-K was filed on December 4, 2000, reporting
               that a transaction took place on November 3, 2000, pursuant to
               the terms of an Asset Purchase Agreement dated August 8, 2000, as
               amended, between Donlar and Biomune. Furthermore, this Form 8-K
               reported that on November 3, 2000,


                                      -29-

<PAGE>   33



               Biomune elected to appoint Grant Thornton LLP ("Grant Thornton")
               to replace Tanner + Co. ("Tanner") as its independent auditors.

               A Report on Form 8-K/A was filed on December 14, 2000, reporting
               that the exhibits to the Report on Form 8-K filed on December 4,
               2000 are amended to include a letter from Tanner addressed to the
               Securities and Exchange Commission.



                                      -30-

<PAGE>   34
                                   Signatures

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


                                          BIOMUNE SYSTEMS, INC.
                                          (Registrant)

                                          /s/ Larry P. Koskan
                                          --------------------------------------
                                          By: Larry P. Koskan
                                          Its: President and Chief Executive
                                               Officer
                                          Date: April 12, 2001

         In accordance with the Exchange Act, 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/ Larry P. Koskan                   Director, Chairman        April 12, 2001
----------------------------
    Larry P. Koskan


/s/ Robert W. Cooper                  Director                  April 12, 2001
----------------------------
    Robert W. Cooper


/s/ Dr. Robert G. Martin              Director                  April 12, 2001
----------------------------
    Dr. Robert G. Martin


/s/ Dean R. Kleckner                  Director                  April 12, 2001
----------------------------
    Dean R. Kleckner


                                      -31-

<PAGE>   35
                     BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                   Index to Consolidated Financial Statements

                                                                         Page

Report of Independent Certified Public Accounts                          F-1

Consolidated Balance Sheet as of December 31, 2000                       F-2

Consolidated Statement of Operations for the
Years Ended December 31, 2000 and 1999                                   F-3

Consolidated Statement of Shareholders' Equity for the
Years Ended December 31, 2000 and 1999                                   F-4

Consolidated Cash Flows for the
Years Ended December 31, 2000 and 1999                                   F-5

Notes to Consolidated Financial Statements                               F-7



                                      -32-

<PAGE>   36

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors and Shareholders
   Biomune Systems, Inc.

We have audited the consolidated balance sheet of Biomune Systems, Inc. and
subsidiaries as of December 31, 2000, and the related consolidated statements of
operations, shareholders' deficit, and cash flows for the years ended December
31, 2000 and 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
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 December 31, 2000, and the consolidated
results of their operations, shareholders' deficit and cash flows for the years
ended December 31, 2000 and 1999, in conformity with accounting principles
generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note B to the
consolidated financial statements, the Company has had substantial recurring
losses from operations, and has relied upon financing from the sale of its
equity securities to satisfy its obligations. These conditions raise substantial
doubt about the ability of the Company to continue as a going concern.
Management's plans in regard to this matter are also described in note B. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.


         GRANT THORNTON LLP

Chicago, Illinois
March 2, 2001



                                      F-1
<PAGE>   37

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000

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

                                   ASSETS

Current assets
  Cash                                                             $    876,435
  Receivables, less allowance for doubtful accounts of $14,125          194,294
  Notes receivable, net                                                  74,639
  Inventories, net                                                    2,691,014
  Prepaid expenses                                                      216,840
  Other current assets                                                  148,200
                                                                   ------------

          Total current assets                                        4,201,422

Investment in equity securities                                         864,434
Property and equipment, net                                          10,419,796
Investment and advances to affiliate, net                                     -
Other assets
  Deposits                                                                6,657
  Goodwill, net of accumulated amortization of $38,615                1,500,338
  Other                                                                  23,579
                                                                   ------------

                                                                   $ 17,016,226
                                                                   ============

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

                    LIABILITIES AND SHAREHOLDERS' DEFICIT

Current liabilities
  Current portion of convertible debt                              $  1,235,820
  Payables and accrued expenses                                       4,669,225
  Short term notes payable                                            1,476,902
                                                                   ------------

          Total current liabilities                                   7,381,947

Notes payable                                                        10,385,583
Convertible debt                                                     16,587,506

Shareholders' deficit
  Preferred stock, $.0001 par value                                     197,797
  Common stock, $.0001 par value                                              -
  Additional paid-in capital                                         58,543,186
  Stock subscriptions receivable                                        (31,987)
  Deferred stock compensation                                          (282,708)
  Accumulated deficit                                               (75,765,098)
                                                                   ------------

          Total shareholders' deficit                               (17,338,810)
                                                                   ------------

                                                                   $ 17,016,226
                                                                   ============


The accompanying notes are an integral part of this statement.


                                       F-2
<PAGE>   38

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,

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

<TABLE>
<CAPTION>
                                                                    2000              1999
                                                                ------------      ------------
<S>                                                             <C>               <C>
Revenues                                                        $  1,381,994      $    793,723

Cost of revenue                                                    2,097,189         3,634,861
Research and Development                                           1,121,749         1,743,371
Selling, general and administrative                                3,689,944         3,153,153
                                                                ------------      ------------

          Total operating expenses                                 6,908,882         8,531,385
                                                                ------------      ------------

Loss from operations                                              (5,526,888)       (7,737,662)

Other income (expense)
  Interest income                                                          -            31,716
  Interest expense                                                (7,236,982)       (4,443,756)
  Gain on sale of product line                                       100,000                 -
                                                                ------------      ------------

          Total other expense                                     (7,136,982)       (4,412,040)
                                                                ------------      ------------

Loss before income taxes                                         (12,663,870)      (12,149,702)
Provision for income taxes                                                 -                 -
                                                                ------------      ------------

          Net loss before extraordinary item                     (12,663,870)      (12,149,702)

Extraordinary loss on retirement of debt                          (1,050,103)                -
                                                                ------------      ------------

          Net loss                                               (13,713,973)      (12,149,702)

Preferred stock dividends and beneficial conversion premium           (2,625)                -
                                                                ------------      ------------

          Net loss applicable to common shares                   (13,716,598)      (12,149,702)
                                                                ------------      ------------

Per common share:
Basic:
  Net loss before extraordinary item                                    (.38)            (5.20)
  Net loss                                                              (.41)            (5.20)

Diluted:
  Net loss before extraordinary item                                    (.38)            (5.20)
  Net loss                                                              (.41)            (5.20)

Weighted average shares of common stock outstanding:
  Basic                                                           33,339,356         2,335,519
  Diluted                                                         33,339,356         2,335,519
</TABLE>



The accompanying notes are an integral part of these statements.

                                       F-3
<PAGE>   39

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
DECEMBER 31, 2000 AND 1999

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

<TABLE>
<CAPTION>
                                                       Common stock              Series A Preferred Stock
                                                  Shares          Amount          Shares          Amount
                                               ------------    ------------    ------------    ------------
<S>                                            <C>             <C>             <C>             <C>
Balance at January 1, 1999                          223,523    $     61,457      18,239,482    $ 12,007,202

Net loss                                                  -               -               -               -

Capital contribution                              2,610,012       2,000,000               -               -

Exercise of warrants and stock options               15,200           4,560             160              70

Rights offering                                           -               -      13,617,473       2,889,321

Vesting of stock options and warrants                     -               -               -               -

Conversion of convertible debt                            -               -         233,956       1,000,000

Issuance of warrants                                      -               -               -               -

Litigation settlement                                     -               -      20,278,457      15,614,411
                                               ------------    ------------    ------------    ------------

Balance at December 31, 1999                      2,848,735       2,066,017      52,369,528      31,511,004

Net loss                                                  -               -               -               -

Issuance of warrants for services                         -               -               -               -

Repayment of shareholder receivable                       -               -               -               -

Exercise of warrants                             19,559,432         195,917      20,756,150       3,804,083

Issuance of warrants in connection with debt              -               -               -               -

Amortization of deferred compensation                     -               -               -               -

Capital contribution                              2,764,961       1,776,614               -               -

Vesting of stock options and warrants                     -               -               -               -

Reverse merger transaction                      (25,173,128)     (4,038,548)    (73,125,678)    (35,315,087)
                                                 42,999,500               -          38,599         188,432

Preferred stock dividends                                 -               -             525           2,625
                                               ------------    ------------    ------------    ------------

Balance at December 31, 2000                     42,999,500    $          -          39,124    $    191,057
                                               ============    ============    ============    ============

<CAPTION>
                                                Series B Preferred Stock       Series C Preferred Stock
                                                  Shares         Amount         Shares          Amount
                                               ------------   ------------   ------------    ------------
<S>                                            <C>            <C>            <C>             <C>
Balance at January 1, 1999                                -   $          -      6,019,530    $      1,000

Net loss                                                  -              -              -               -

Capital contribution                                      -              -              -               -

Exercise of warrants and stock options                    -              -              -               -

Rights offering                                           -              -              -               -

Vesting of stock options and warrants                     -              -              -               -

Conversion of convertible debt                            -              -              -               -

Issuance of warrants                                      -              -              -               -

Litigation settlement                                     -              -     (6,019,530)         (1,000)
                                               ------------   ------------   ------------    ------------

Balance at December 31, 1999                              -              -              -               -

Net loss                                                  -              -              -               -

Issuance of warrants for services                         -              -              -               -

Repayment of shareholder receivable                       -              -              -               -

Exercise of warrants                                      -              -              -               -

Issuance of warrants in connection with debt              -              -              -               -

Amortization of deferred compensation                     -              -              -               -

Capital contribution                                      -              -              -               -

Vesting of stock options and warrants                     -              -              -               -

Reverse merger transaction                              449          6,740              -               -
                                                          -              -              -               -

Preferred stock dividends                                 -              -              -               -
                                               ------------   ------------   ------------    ------------

Balance at December 31, 2000                            449   $      6,740              -    $          -
                                               ============   ============   ============    ============

<CAPTION>
                                                  Additional       Shareholder        Deferred      Accumulated
                                               paid-in capital   note receivable    compensation      deficit          Total
                                               ---------------   ---------------    ------------    ------------    ------------
<S>                                            <C>               <C>                <C>             <C>             <C>
Balance at January 1, 1999                       $  8,671,386     $    (44,332)     $          -    $(49,898,798)   $(29,202,085)

Net loss                                                    -                -                 -     (12,149,702)    (12,149,702)

Capital contribution                                        -                -                 -               -       2,000,000

Exercise of warrants and stock options                      -                -                 -               -           4,630

Rights offering                                             -         (414,503)                -               -       2,474,818

Vesting of stock options and warrants                 479,311                -                 -               -         479,311

Conversion of convertible debt                              -                -                 -               -       1,000,000

Issuance of warrants                                6,020,409                -                 -               -       6,020,409

Litigation settlement                                       -                -                 -               -      15,613,411
                                                 ------------     ------------      ------------    ------------    ------------

Balance at December 31, 1999                       15,171,106         (458,835)                -     (62,048,500)    (13,759,208)

Net loss                                                    -                -                 -     (13,713,973)    (13,713,973)

Issuance of warrants for services                     540,000                -          (295,000)              -         245,000

Repayment of shareholder receivable                         -          414,503                 -               -         414,503

Exercise of warrants                                        -                -                 -               -       4,000,000

Issuance of warrants in connection with debt        3,663,282                -                 -               -       3,663,282

Amortization of deferred compensation                       -                -            12,292               -          12,292

Capital contribution                                        -                -                 -               -       1,776,614

Vesting of stock options and warrants                  22,680                -                 -               -          22,680

Reverse merger transaction                         39,146,118           12,345                 -               -        (188,432)
                                                            -                -                 -               -         188,432

Preferred stock dividends                                   -                -                 -          (2,625)              -
                                                 ------------     ------------      ------------    ------------    ------------

Balance at December 31, 2000                     $ 58,543,186     $    (31,987)     $   (282,708)   $(75,765,098)   $(17,338,810)
                                                 ============     ============      ============    ============    ============
</TABLE>



The accompanying notes are an integral part of these statements.


                                       F-4
<PAGE>   40

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,

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

<TABLE>
<CAPTION>
                                                                       2000              1999
                                                                   ------------      ------------
<S>                                                                <C>               <C>
Cash flows from operating activities
  Net loss                                                         $(13,713,973)     $(12,149,702)
  Adjustments to reconcile net loss to net cash
   used in operating activities
     Depreciation and amortization                                      934,939         1,570,516
     Compensation expense related to options and warrants               267,680           479,311
     Gain on sale of product line                                      (100,000)                -
     Interest expense related to amortization of debt discount        3,431,547         1,175,161
     Writedown of inventory to market                                         -         1,967,339
     Extraordinary loss on early debt extinguishment                  1,050,103                 -
     Change in assets and liabilities
       Receivables                                                      (30,984)          (47,661)
       Inventories                                                      404,516           352,263
       Prepaid expenses and other assets                               (135,292)           76,977
       Accounts payable                                                  34,281           122,317
       Accrued expenses                                               1,240,504         1,060,908
                                                                   ------------      ------------

          Net cash used in operating activities                      (6,616,679)       (5,392,571)

Cash flows from investing activities
  Investments in patents                                                      -          (216,538)
  Purchase of property and equipment                                    (84,717)          (42,435)
  Acquisition costs                                                    (338,953)                -
                                                                   ------------      ------------

          Net cash used in investing activities                        (423,670)         (258,973)

Cash flows from financing activities
  Principal repayments of convertible notes                            (392,203)          (80,864)
  Issuance of Series A preferred stock                                        -         2,474,818
  Proceeds from notes payable                                         3,000,000         6,131,507
  Issuance of common stock                                            1,776,614         2,000,000
  Proceeds from exercise of stock options and warrants                4,000,000             4,630
  Payments received on stock subscription receivable                    414,503                 -
  Litigation settlement                                                       -        (8,000,000)
  Principal repayment of notes payable                               (4,253,408)       (5,000,000)
  Proceeds from issuance of convertible notes                         2,917,000         5,888,154
  Borrowings on line of credit                                           75,000                 -
                                                                   ------------      ------------

          Net cash provided by financing activities                   7,537,506         3,418,245
                                                                   ------------      ------------

Net increase (decrease) in cash and cash equivalents                    497,157        (2,433,299)

Cash and cash equivalents at beginning of year                          379,278         2,812,577
                                                                   ------------      ------------

Cash and cash equivalents at end of year                           $    876,435      $    379,278
                                                                   ============      ============
</TABLE>




The accompanying notes are an integral part of these statements.




                                       F-5
<PAGE>   41

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
YEAR ENDED DECEMBER 31,

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

<TABLE>
<CAPTION>
                                                                               2000            1999
                                                                            -----------     -----------
<S>                                                                         <C>             <C>
Supplemental disclosure of cash flow information:
  Interest paid                                                             $ 1,925,137     $ 1,215,311
  Income tax paid                                                                     -               -

Non-cash portion of the settlement agreement transaction
  Cancellation of royalty obligation                                                  -       7,613,411
  Cancellation of 1,000 shares of Donlar Corporation's Series C                       -           1,000
    preferred stock
  Issuance of note payable                                                            -       9,000,000
  Conversion of note payable, $25,000,000 face value, into
    20,278,457 shares of Series A preferred stock of Donlar Corporation               -      15,614,411
</TABLE>

Other non-cash transactions

Biomune Systems, Inc. was acquired by Donlar through an Asset Purchase Agreement
in exchange for approximately 96% of Biomune's stock.

The transaction was accounted for as a reverse acquisition and the fair value of
the Company was allocated as follows:

          Accounts receivable                     $    18,355
          Notes receivable                             74,639
          Fixed assets                                125,000
          Inventory                                   168,040
          Investments                                 864,434
          Goodwill                                  1,213,120
          Other assets                                 38,236
          Acquisition costs                           338,953
          Liabilities assumed                      (1,140,777)
                                                  -----------

                                                  $ 1,700,000
                                                  ===========








The accompanying notes are an integral part of these statements.


                                       F-6
<PAGE>   42

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999

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

NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Biomune Systems, Inc. ("Biomune") and subsidiaries (collectively the "Company")
are in the market development stage of a new family of environmentally friendly
biodegradable polymers, known as thermal polyaspartates ("TPA"). The Company
manufactures and distributes these polymers, in limited quantities, to
agricultural and industrial markets. In the agricultural market, the products
increase a plant's ability to absorb nutrients more efficiently and have been
focused toward winter wheat, corn, cotton and vegetables. In the industrial
markets, the products replace nonbiodegradable chemicals, such as polyacrylates,
and have been focused toward the oil production, water treatment, detergents and
cleaners, and personal care fields. The Company markets these products to
nutritional companies and distributors and manufacturers primarily in the United
States and Europe.

The Company also is engaged in the distribution and sale of biologic
nutraceutical supplements and sports and nutrition bars. Certain of the
nutraceutical supplements incorporate a patented whey protein technology
licensed by the Company and designed to provide or increase protective
immunities to disease and to provide nutritional supplementation. Nutraceutical
products are food supplements that are derived from a food base and are marketed
as a beneficial source of nutrients to promote good health. The Company sells
these products primarily to nutritional companies located in the United States.

PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

The consolidated financial statements have been adjusted to reflect the reverse
acquisition further described in note C. The transaction was accounted for as a
reverse acquisition whereby Donlar Corporation ("Donlar") was treated as the
acquirer and Biomune as the acquiree. The enclosed financial statements are
based on Donlar's historical financial statements until the date of acquisition,
November 3, 2000. From this date on, the financial statements include the
activity of both Biomune and Donlar.

The consolidated financial statements also include the accounts of Biomune's
wholly-owned subsidiary, Optim Nutrition, Inc., and Donlar's 90%-owned
subsidiary, Donlar Pharmaceutical Corporation. All significant intercompany
balances and transactions have been eliminated.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

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




                                      F-7
<PAGE>   43

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999

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

NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

INVESTMENT IN EQUITY SECURITIES

The Company's investment in equity securities are carried in the financial
statements at fair market value. Realized gains and losses, determined using the
specific identification method, are included in earnings.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company estimates that the fair value of all financial instruments at
December 31, 2000, does not differ materially from the aggregate carrying values
of its financial instruments recorded in the accompanying balance sheet. The
estimated fair value amounts have been determined by the Company using available
market information and appropriate valuation methodologies. Considerable
judgment is necessarily required in interpreting market data to develop the
estimates of fair value and, accordingly, the estimates are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange.

CASH AND CASH EQUIVALENTS

For purposes of the statements of cash flows, cash includes all cash and
investments purchased with maturities of three months or less.

INVENTORIES

Inventories are stated at the lower of cost or market value, using the first-in,
first-out method.

During 1999, the Company recorded a $1,967,339 charge to product costs to
reflect an adjustment of inventory costs to estimated market value.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost less accumulated depreciation.
Depreciation and amortization are determined using the straight-line method over
the estimated useful lives of the assets. Expenditures for maintenance and
repairs are expensed when incurred and betterments are capitalized. Gains and
losses on sale of property and equipment are reflected in operations.

EARNINGS PER COMMON, COMMON EQUIVALENT AND REVERSE STOCK SPLITS

The computation of basic earnings per common share is based on the weighted
average number of common shares outstanding during the year.

The weighted average shares for fiscal year 1999 and the period from January 1,
2000 to November 3, 2000, is computed using Donlar's outstanding shares for the
period, in proportion to Donlar's ownership percentage after the transaction.



                                      F-8
<PAGE>   44

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999

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

NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

EARNINGS PER COMMON, COMMON EQUIVALENT AND REVERSE STOCK SPLITS - CONTINUED

The computation of diluted earnings per common share is based on the weighted
average number of common shares outstanding during the year plus common stock
equivalents which would arise from the exercise of stock options and warrants
outstanding using the treasury stock method and the average market price per
share during the year. Common stock equivalents are not included in the diluted
earnings per share calculation when their effect is anti-dilutive.

Preferred stock dividends and the impact of beneficial conversion premiums
increase the net loss attributable to common stockholders for purposes of
computing the net loss per common share.

On October 31, 2000, Biomune recorded a 1-for-5 reverse stock split on its
common stock. Biomune also recorded a 1-for-10 reverse stock split in November
1997 and December 1998. All of the per share data has been adjusted to reflect
these changes. Biomune has not adjusted the number of preferred shares in the
financial statements; however, the conversion rights of the convertible
preferred shares have been adjusted to reflect each reverse stock split.

At December 31, 2000, there were 39,573 shares of Biomune's preferred stock
outstanding, convertible into 235 shares of common stock.

GOODWILL

Goodwill was established as a result of the reverse acquisition of Biomune by
Donlar. Costs associated with the Donlar purchase of Biomune were also
capitalized. The goodwill is being amortized over five years.

INVESTMENTS

The Company accounts for its investments in affiliates using the lower of cost
or market method.

REVENUE RECOGNITION

Revenue is recognized upon shipment of the product.

CONSULTING, RESEARCH, AND DEVELOPMENT  EXPENSES

Consulting, research, and development expenses include amounts paid to
third-party and related-party consultants for marketing, investment banking, and
other business advisory services, as well as costs related to the Company's
nutraceutical product research and development activities. Costs associated with
research and development of new products are expensed as incurred.



                                       F-9
<PAGE>   45

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999

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

NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

ADVERTISING

The Company expenses the cost of advertising when the advertising occurs. For
the years ended December 31, 2000 and 1999, advertising expenses totaled
approximately $250,000 and $216,000, respectively, and are included in other
general and administrative expenses in the accompanying statements of
operations.

INCOME TAXES

The Company recognizes deferred income tax assets or liabilities for the
expected future tax consequences of events that have been recognized in the
financial statements or tax returns. Under this method, deferred income 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.

ACCOUNTING FOR STOCK-BASED COMPENSATION

In 1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 ("Statement 123"), "Accounting for Stock-Based
Compensation." The Company has adopted the disclosure-only provisions of
Statement 123 with respect to its employees' and directors' noncompensatory
stock options and warrants. The expense associated with stock options and
warrants issued to nonemployees and nondirectors is reflected in the
consolidated financial statements in accordance with Statement 123. As permitted
by Statement 123, the intrinsic value of compensatory stock options is reflected
in the consolidated financial statements in accordance with Accounting
Principles Board Opinion No. 25.

CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject the Company to concentration of
credit risk consist primarily of receivables. In the normal course of business,
the Company provides credit terms to its customers. Accordingly, the Company
performs ongoing credit evaluations of its customers and maintains allowances
for possible losses which, when realized, have been within the range of
management's expectations.

The Company maintains its cash in bank deposit accounts which may, at times,
exceed federally insured limits. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant credit risk on
cash and cash equivalents.

RECLASSIFICATIONS

Certain accounts in the 1999 financial statements have been reclassified to
conform with the current year presentation.


                                      F-10
<PAGE>   46

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999

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

NOTE B - GOING CONCERN

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As of December 31, 2000, the
Company had an accumulated deficit of $75,765,098 and has had substantial
recurring losses. The consolidated operations of the Company have not achieved
profitability and the Company has relied upon financing from the sale of its
equity securities and liquidation of other assets to satisfy its obligations.
These conditions raise substantial doubt about the ability of the Company to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.

The Company's ability to continue as a going concern is subject to the
attainment of profitable operations or obtaining necessary funding from outside
sources. Management's plan with respect to this uncertainty includes raising
additional equity funding through the sale of the Company's securities,
evaluating new products and markets, and minimizing overhead and other costs.
However, there can be no assurance that management will be successful.


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

NOTE C - ACQUISITION

On August 7, 2000, Donlar entered into an agreement with Biomune to purchase
427,311 shares of Biomune's common stock, approximately 19.9% of the outstanding
shares, in exchange for a $1,115,025, 10% note due December 31, 2000. On
November 3, 2000, Donlar and Biomune amended this agreement. The restructured
transaction took place in three phases. First, Biomune completed a 1 for 5
reverse split of its common stock. Secondly, Donlar paid $563,500 in cash as a
partial payment on the $1.1 million note and received 1,127,000 shares of
Biomune's common stock.

Thirdly, Donlar transferred the exclusive right to distribute and the exclusive
right to all future sales from Donlar's crop nutrition management and oil field
products to Biomune. Biomune also received the rights to certain research and
development activity of Donlar and $1,850,000 in cash in exchange for issuing
40,152,520 additional shares of Biomune's common stock to Donlar, so that upon
completion of these transactions Donlar owned 96% of Biomune's common stock.
Donlar also agreed to transfer to Biomune the balance of its assets and related
liabilities, except for Donlar's existing patent rights and all intellectual
property relating to Donlar's genetic research activities.

Assets transferred from Donlar to Biomune collateralize certain notes payable
and convertible debt of Donlar. In addition, other notes payable, convertible
debt and other liabilities will be assumed by Biomune in the future. Therefore,
in accordance with SEC staff Accounting Bulletin No. 73, such debt has been
"pushed down" to Biomune and is reflected in Biomune's financial statements.




                                      F-11
<PAGE>   47

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999

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

NOTE C - ACQUISITION - CONTINUED

Since the foregoing transactions represent a change in control of Biomune, they
will be accounted for as a reverse acquisition and a purchase of Biomune by
Donlar. The financial statements include the activity of Donlar as of and for
the years ended December 31, 2000 and 1999. The financial statements also
include the activity of Biomune subsequent to the date of acquisition, (November
3, 2000 through December 31, 2000). The purchase price of Biomune is considered
to be the estimated fair value of 4% of Donlar's stock, or $1,700,000, plus
acquisition costs incurred of $338,953. The acquisition price was allocated as
follows:

Cash                         $     1,780
Accounts receivable               91,214
Inventory                        168,040
Investments                      864,434
Other assets                      38,236
Fixed assets                     125,000
Goodwill                       1,552,073
Liabilities assumed           (1,140,777)
                             -----------

                             $ 2,038,953
                             ===========

This was accounted for by the purchase method and the excess of the acquisition
price over the fair value of the assets acquired is accounted for as goodwill
and is being amortized over five years.

Following are the summarized unaudited pro forma combined results of operations
for the years ended December 31, 2000 and 1999, assuming the acquisition had
taken place at the beginning of each of those fiscal years. The unaudited pro
forma results are not necessarily indicative of future results or results that
would have been reported had the acquisitions been completed when assumed.

                                               (unaudited)          (unaudited)
                                                   2000                1999
                                               ------------        -------------

Net sales                                      $  1,893,508        $  1,276,750
Loss before extraordinary item                  (18,654,135)        (14,331,822)
Net loss                                        (19,704,238)        (14,332,822)
Basic loss per share                                  (2.38)             (23.96)



                                      F-12
<PAGE>   48

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999

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

NOTE D - DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS

Inventories
   Finished goods                                                   $ 2,499,687
   Raw materials                                                      1,938,590
   Reserve for obsolescence                                          (1,747,263)
                                                                    -----------

                                                                    $ 2,691,014
                                                                    ===========

Payables and accrued expenses
   Trade payables                                                   $   942,898
   Accrued interest                                                   2,187,015
   Accrued other                                                      1,539,312
                                                                    -----------

                                                                    $ 4,669,225
                                                                    ===========


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

NOTE E - INVESTMENT IN EQUITY SECURITIES

The Company owns 216,030 shares of common stock in Purizer Corporation, formerly
Bioxide, which was valued at $864,434 at December 31, 2000.


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

NOTE F - PROPERTY AND EQUIPMENT

Property, plant and equipment, along with corresponding estimated useful lives,
consisted of the following:

                                             Useful
Description                                   Life               Amount
--------------------------------           ----------         -----------

Land                                                          $   566,782
Building                                     30 years           5,826,412
Laboratory and plant equipment             5-10 years           7,431,774
Furniture and fixtures                      5-7 years             205,151
Leasehold improvements                      1-4 years              56,008
                                                              -----------
         Total property, plant
             and equipment                                     14,086,127

Less-accumulated depreciation
    and amortization                                            3,666,331
                                                              -----------
         Property, plant and
             equipment, net                                   $10,419,796
                                                              ===========




                                      F-13
<PAGE>   49

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999

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

NOTE G - NOTES RECEIVABLE

Notes receivable are due from related parties and consist of the
   following:

Notes receivable plus accrued interest from entities, which are
   shareholders or are controlled by an advisory board chairman,
   unsecured, interest at various rates and due on demand.            $ 183,396

Note receivable plus accrued interest from an individual who is a
   relative of a shareholder of Biomune, at an interest rate of
   1% over prime, unsecured and due on demand.                           31,243

Less reserve for doubtful accounts                                      140,000
                                                                      ---------

                                                                      $  74,639
                                                                      =========


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

NOTE H - INVESTMENT AND ADVANCES TO AFFILIATE

Biomune has advanced, loaned and invested a total of $2,156,377 to three
companies under common control (Rockwood Company LLC, Twin Eagles LLC and
Cypress) during 1998 and 1999. The note was for $500,000 and bears interest at
8% and matures on January 15, 2006. No interest income has been received on the
note during 2000. These advances, loan and investments were fully reserved for
prior to Donlar's acquisition of Biomune and had a net book value of $0 at
December 31, 2000.


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

NOTE I - NOTES PAYABLE

All of the notes payable mentioned below, except the line of credit, are the
obligations of Donlar, which have been "pushed down" to Biomune in connection
with the acquisition of Biomune by Donlar.




                                      F-14
<PAGE>   50

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999

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

NOTE I - NOTES PAYABLE - CONTINUED

Notes payable consisted of the following:

Short-term notes payable
  Line of credit                                                   $    75,000
  Unsecured note payable to shareholder and director of
     Donlar, due April 30, 2001, bearing interest at prime
     plus 2%, net of unamortized debt discount of $1,598,098
     at December 31, 2000.                                           1,401,902
                                                                   -----------

                                                                   $ 1,476,902
                                                                   ===========

Long-term notes payable

  Notes payable to venture capital shareholders of Donlar,
     $7,000,000 due June 2, 2006, and $2,000,000 due
     December 31, 2006, bearing interest at 10% per annum,
     payable quarterly in cash or in kind at Donlar's
     option, collateralized by a third lien on Donlar's
     patents and a second lien on all Donlar's other assets.       $ 9,000,000
  Unsecured note payable to a shareholder and director of
     Donlar, due September 30, 2002, bearing interest at 11%
     per annum, collateralized by a second lien on Donlar's
     patents, net of unamortized debt discount of $745,924
     at December 31, 2000.                                           1,385,583
                                                                   -----------

                                                                   $10,385,583
                                                                   ===========


On October 2, 2000, Biomune entered into a $400,000 line of credit agreement
with a financial corporation. The line of credit charges interest at 12% and has
a maturity date of February 2001. This line of credit is collateralized by
200,000 shares of Purizer common stock, discussed in note E and at December 31,
2000, $75,000 was outstanding.

On October 23, 2000, Donlar issued a note to Dr. Robert G. Martin, a Donlar
director and shareholder in the amount of $3,000,000. This note bears interest
at prime plus 2% (11.5% at December 31, 2000) and has a maturity date of April
30, 2001. Donlar issued Dr. Martin warrants to purchase shares of its common
stock at $0.01 a share. The total amount of warrants is equal to 15% of the
total common stock of Donlar (19,558,320 shares) and will be increased to 30% of
the total common stock if the note is not paid in full at the maturity date.
These warrants have an expiration of December 31, 2006. The value of the
warrants was $14,864,323, computed using the Black-Scholes option pricing
method. The $3,000,000 proceeds were allocated to the note ($503,798)and paid-in
capital for the warrants ($2,496,202) based on the relative fair value of
securities issued.




                                      F-15
<PAGE>   51

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999

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

NOTE I - NOTES PAYABLE - CONTINUED

In August 1996, Donlar received $26,000,000 in exchange for (a) unsecured notes
payable which are convertible into shares of Donlar's Series A and B preferred
stock, (b) Series C preferred stock of Donlar, (c) shares in one of the Donlar's
subsidiaries, (d) warrants to purchase common stock of Donlar and (e) future
royalty payments. The proceeds were allocated to the equity instruments and
liabilities based upon estimated fair market value as follows. The fair value of
the expected stream of royalty payments was estimated to be $3,500,000. The
Series C preferred stock's primary feature was voting rights. The stock had no
liquidation preference or redemption or conversion features, nor did it provide
for dividends. Since this stock had only minimal value, a nominal $1,000 was
estimated to be the fair market value. The shares of Donlar's subsidiary were
assigned a value of $1,000, since the subsidiary had no operations and the
subsidiary was subsequently dissolved. The value of the warrants was estimated
to be zero since they were performance-based warrants which management estimated
would not be exercisable based on projections. The face amount of the
convertible notes was $26,000,000. A debt discount totaling $3,502,000 was
recorded and was amortized over the three-year period of the related debt.

The convertible notes contained an automatic conversion provision. In 1997,
holders of convertible notes aggregating $4,000,000 (face amount) surrendered
their notes following a notice and request by Donlar for conversion. On December
31, 1999, the holders of the notes aggregating $22,000,000 entered into a
settlement agreement with Donlar. Under the terms of the settlement agreement
(a) Donlar paid at closing on December 31, 1999, a combined $8 million in cash
and a $9 million in 10% seven-year notes to the holders of the notes (b) the
warrants and royalties and Donlar's Series B and C preferred stock were
cancelled, (c) the convertible notes were converted into 20,278,456 shares of
Donlar's Series A preferred stock. These convertible note holders are entitled
to receive one share of Donlar's common or Series A preferred stock for every
three shares of common or Series A preferred stock issued by Donlar in the
future as a result of the exercise or conversion of options, warrants and
convertible debt of Donlar outstanding at December 31, 1999, with exercise or
conversion prices greater than $1.00 per share.

On October 8, 1999, Donlar borrowed $5,131,507 from Dr. Martin, in exchange for
a $5,131,507, 11% note payable due on September 30, 2002. The note requires
quarterly interest only payments prior to the lump-sum principal repayment in
2002. The note is collateralized by a second lien on Donlar's patents.

In connection with this transaction, Donlar issued Dr. Martin seven-year
warrants to purchase 12 million shares of Donlar's Series A preferred stock at
$0.23 per share. The proceeds from issuance of the note and warrants,
$5,131,507, were allocated to the note ($2,052,603) and paid-in capital
($3,078,904) based on the relative fair values of the securities issued.




                                      F-16
<PAGE>   52

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999

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

NOTE I - NOTES PAYABLE - CONTINUED

On December 31, 2000, Donlar paid down $3,000,000 on the $5,131,507 note due to
Dr. Martin. This was done simultaneously with Dr. Martin's exercise of warrants
for 16,408,324 shares of Donlar's Series A preferred stock at exercise prices
ranging from $0.01 to $0.23 a share, and his exercise of warrants for 19,559,430
shares of Donlar's common stock at exercise prices ranging from $0.01 to $0.30
per share. Donlar recorded an extraordinary loss on this paydown of debt of
$1,050,103, equal to the difference between the face value of the debt,
$3,000,000 and its book value, $1,949,897.

A $1,000,000 note of Donlar held by Dr. Martin was converted into 233,956 shares
of Donlar's Series A preferred stock in 1999.

Dr. Martin deposited into an escrow account $1 million, which was paid to
holders of convertible notes in connection with closing the settlement agreement
transaction on December 31, 1999. In exchange for the $1 million, Donlar issued
to Dr. Martin a one-year unsecured note, bearing interest at 10%, due on
December 31, 2000. In addition, Donlar issued to Dr. Martin seven-year warrants
to purchase 4,347,826 shares of Donlar's Series A preferred stock at $0.23 per
share. The value of the warrants was $2,811,739, computed using the
Black-Scholes option pricing method. The $1,000,000 proceeds were allocated to
the note ($262,348 net of debt discount) and paid-in capital ($737,652) for the
warrants based on the relative fair value of the securities issued. The note was
paid in full on December 31, 2000.

Included in notes payable above is $11,787,485 (net of debt discount) at
December 31, 2000, in notes which were issued to shareholders of Donlar.

CONVERTIBLE DEBT

All of the convertible notes payable mentioned below, are the obligations of
Donlar and are convertible into shares of Donlar's common or Series A preferred
stock. The note payment obligations have been "pushed down" to Biomune in
connection with the acquisition by Biomune of Donlar. The stock issuance
obligations remain with Donlar.





                                      F-17
<PAGE>   53

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999

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

NOTE I - NOTES PAYABLE - CONTINUED

CONVERTIBLE DEBT - CONTINUED

Convertible debt consisted of the following:

  Unsecured notes payable, due April 15, 2001, bearing interest
     at 12%, convertible into a variable number of shares of
     Donlar's Series A preferred stock at 90% of the per share
     value of an initial public offering of Donlar or strategic
     investment, net of unamortized debt discount of $51,785 at
     December 31, 2000.                                             $   711,715
  Note payable to bank, secured by all Donlar's tangible and
     intangible assets, due January 1, 2005, bearing interest at
     10% per annum, convertible into shares of Donlar's common
     stock at $1.01 per share, net of unamortized debt discount
     of $1,763,083 at December 31, 2000.                             15,484,362
  Unsecured notes payable, due on various dates in 2005, bearing
     interest at 15%, convertible into a variable number of
     shares of Donlar's Series A preferred stock at $1.01 per
     share, or $0.505 per share upon an initial public offering
     of Donlar, net of unamortized debt discount of $374,397 at
     December 31, 2000.                                               1,392,603
  Unsecured note payable, due July 17, 2005, bearing interest at
     12%, convertible into a variable number of shares of
     Donlar's Series A preferred stock at $1.01 per share, or
     $0.505 per share upon an initial public offering of Donlar.        150,000
  Unsecured notes payable to a shareholder and director of
     Donlar, due on various dates in 2005, bearing interest at
     15%, convertible into a variable number of shares of
     Donlar's Series A preferred stock at $0.77 per share, or
     $0.385 per share upon an initial public offering of Donlar,
     net of unamortized debt discount of $915,354 at December 31,
     2000.                                                               84,646
                                                                    -----------

                                                                     17,823,326

Less current portion                                                  1,235,820
                                                                    -----------

                                                                    $16,587,506
                                                                    ===========



                                      F-18
<PAGE>   54

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999

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

NOTE I - NOTES PAYABLE - CONTINUED

CONVERTIBLE DEBT - CONTINUED

In 1998, Donlar received $763,500 from certain shareholders in exchange for (a)
12% three-year notes convertible into Donlar's Series A preferred stock at 90%
of the per share value of an initial public offering or a future equity
investment in Donlar of at least $15,000,000; and (b) ten-year warrants for
$763,500 in Donlar's Series A preferred stock, exercisable at the per share
value of the next equity investment in Donlar of at least $15,000,000. A debt
discount of $551,000 recorded to reflect the value of the warrants is being
amortized over a 36-month period beginning April 15, 1998. The number of shares
into which the notes are convertible is subject to a minimum such that, if
necessary, at the time of an initial public offering or the next equity
investment in Donlar of at least $15,000,000, the value of participating
shareholders' shares, options and warrants would be at least 150% of the
shareholders' $2,763,586 basis in these and prior investments.

During 1997, Donlar borrowed $5 million from a commercial bank, supported by the
commitment of a group of insurance companies which were shareholders of Donlar
to purchase the applicable note and mortgage from the bank. The note bore
interest at 9.77% and required quarterly interest only payments in 1998 and
quarterly interest and principal payments based on a 15-year amortization
schedule for the next four years with the remaining balance due on January 1,
2003. The loan was required to be repaid on completion of an initial public
offering with a 1% prepayment penalty if an offering were completed in 1998. The
note was collateralized by a mortgage on Donlar's Peru, Illinois real estate and
its equipment.

In 1998, the $5 million note payable described in the preceding paragraph and
915,000 shares of Donlar's Series A preferred stock owned by the group of
insurance companies (referred to above) was purchased by Donlar and restructured
into a 7% five-year note convertible into shares of common stock at $5.00 per
share or 85% of the per share value of a future public offering or strategic
equity investment in Donlar of at least $15,000,000. Cash proceeds to the Donlar
were $1,400,000. Interest of $478,067 was recorded over the seven-month period
until the outstanding obligation equaled the face amount of the note,
$12,032,357, on February 1, 1999. Thereafter, Donlar was required to make
quarterly principal and interest payments on a 15-year amortization schedule and
a final balloon payment on April 1, 2003. The convertible note was
collateralized by all the tangible assets of Donlar.

With the agreement of the note holder, the two $323,465 payments of principal
and interest scheduled for July 1 and October 1, 1999, were deferred until
December 30, 1999, at which time, Donlar and the noteholder restructured the
note, accrued interest and late fees on the note as well as an additional $5
million of cash proceeds to Donlar, into a new $17,639,648 convertible note.



                                      F-19
<PAGE>   55

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999

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

NOTE I - NOTES PAYABLE - CONTINUED

CONVERTIBLE DEBT - CONTINUED

The amended and restated note bears interest at 10% and requires quarterly
interest and principal payments based on a 15-year amortization schedule, with
the remaining balance due January 1, 2005. The note is convertible in whole or
in part into shares of Donlar's Series A preferred stock at an exercise price of
$1.01 per share. The note is collateralized by all Donlar's tangible and
intangible assets. In connection with the issuance of the note, Donlar granted
the insurance companies a 7-year warrant for the purchase of 6,025,171 shares of
Donlar's common stock at an exercise price of $0.01 per share. The $5,000,000
proceeds were allocated to the note $2,796,146 and paid-in capital $2,203,854
based on the relative fair value of the securities issued.

In 2000, Donlar received $1,767,000 from certain shareholders in exchange for
(a) five year 15% notes convertible into shares of Donlar's Series A preferred
stock at $1.01 per share, or $0.505 per share in the event of an initial public
offering, and (b) five year warrants to purchase 773,062 shares of Donlar's
Series A preferred stock at $0.01 per share. The cash proceeds were allocated to
the note and warrant based on the relative fair value of the securities issued.
The value of the warrants was $587,527 calculated using the Black Scholes option
pricing formula. The $1,767,000 proceeds were allocated to the note $1,326,079
and paid-in-capital for the warrants $440,921 based on the relative fair value
of securities issued.

In 2000, Dr. Martin paid $1,000,000 for (a) five year 15% notes convertible into
shares Donlar's Series A preferred stock at $0.77 per share, or $0.385 per share
in the event of in initial public offering and (b) five year warrants to
purchase 4,069,262 shares of Donlar's Series A stock at $0.01 per share. Dr.
Martin was also granted a 1% royalty on all Donlar sales for five years. The
cash proceeds were allocated to the note, warrant and royalty obligation based
on the relative fair value of the securities issued and the present value of the
projected revenue stream. The value of the warrants was $3,092,639 calculated
using the Black Scholes option pricing formula. The $1,000,000 proceeds were
allocated to the note ($244,341) and paid-in-capital for the warrants ($755,659)
based on the relative fair value of securities issued. An additional debt
discount was recorded on this note because of its beneficial conversion factor.
This additional discount left the book value of the note at $-0-.

Another investor purchased for $150,000 a five year 12% note convertible into
shares of Donlar's Series A preferred stock at $1.01 per share, or $.505 per
share in the event of an initial public offering.

Included in convertible debt above is $17,555,381 (net of debt discount) at
December 31, 2000, in notes which were issued to shareholders of Donlar.




                                      F-20
<PAGE>   56

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999

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

NOTE I - NOTES PAYABLE - CONTINUED

DEBT MATURITIES

At December 31, 2000, the notes payable and convertible debt mature as follows:

2001 .............................................................   $ 4,424,672
2002 .............................................................     2,778,533
2003 .............................................................       714,144
2004 .............................................................       788,367
2005 .............................................................     3,787,176
2006 and beyond ..................................................    22,641,511
                                                                     -----------

                                                                      35,134,453

Less imputed interest ............................................     5,448,642
                                                                     -----------

                                                                     $29,685,811
                                                                     ===========


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

NOTE J - INCOME TAXES

The benefit for income taxes is different than amounts which would be provided
by applying the statutory Federal income tax rate to loss before benefit for
income taxes for the following reasons:

                                                               Years ended
                                                               December 31,
                                                            -------------------
                                                             2000         1999
                                                            ------       ------

Federal income tax benefit at statutory rate                 34.0%        34.0%
State income tax benefit                                      4.6          4.6
Permanent differences                                       (13.2)        (5.5)
Valuation allowance                                         (25.4)       (33.1)
                                                            ------       ------

                                                                0%           0%
                                                            ======       ======




                                      F-21
<PAGE>   57

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999

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

NOTE J - INCOME TAXES - CONTINUED

Deferred tax assets (liabilities) are comprised of the following:

Net operating loss carryforwards                  $ 21,152,000
Write-down of assets                                   663,000
Allowance for bad debts                                  5,000
Inventory                                               87,000
Other accounts                                          30,000
Valuation allowance                                (21,937,000)
                                                  ------------

                                                  $          -
                                                  ============

The Company's valuation allowance was also reduced for the expiration of both
the investment tax credit carryforward and a portion of the net operating loss
carryforward.

As of December 31, 2000, the Company had net operating loss carryforwards
("NOLs") for Federal income tax reporting purposes of approximately $55,000,000.
These NOLs will expire over time between the fiscal years ended 2001 through
2020. There can be no assurance that all of these NOLs will be available to
offset future taxable income, if any. A NOL generated in a particular year will
expire for Federal income tax purposes if not utilized within 15 to 20 years,
dependent on when the NOLs were generated. 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. In accordance
with SFAS No. 109, a valuation allowance is provided when it is more likely than
not that some portion of the deferred income tax asset will not be realized. Due
to the uncertainty with respect to the ultimate realization of the NOLs, the
Company has established a valuation allowance for all of its deferred income tax
assets.

The Company could be subject to alternative minimum tax, which the NOLs cannot
be used to offset; however, an assessment has not yet been determined.


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

NOTE K - GAIN ON SALE OF PRODUCT LINE

In January 2000, the Company sold its Nite Bite product line for $1,482,000. A
retention reserve of 10% was established in the amount of $148,200. The
retention reserve had an allowance booked against it at the date Biomune was
acquired by Donlar. In February 2001, the Company received the full retention
reserve of $148,200 and determined that at December 31, 2000, no reserve was
necessary and a gain of $100,000 was recorded.


                                      F-22
<PAGE>   58

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999

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

NOTE L - COMMITMENTS AND CONTINGENCIES

HARROGATE MARKETING

On April 1, 2000, the Company terminated its marketing agreement with
HarrogateMarketing ("Harrogate") and entered into a settlement agreement. This
agreement required the Company to pay $400,000 in cash for full satisfaction of
all payments and commissions under the marketing agreement. In addition,
Harrogate incurred additional liabilities in connection with the distribution of
the Company's products under the agreement. The parties agreed that the Company
would pay up to $200,000 of these costs. If additional liabilities exist,
Harrogate would receive up to $300,000 of proceeds on any sale of the right to
the Mountain Lift bar (a product distributed by the Company) which exceeded
$1,000,000. The parties have agreed that the Company is responsible for
approximately $120,000 of payables which are included in trade payables as of
December 31, 2000.

TECHNOLOGY

The Company has the exclusive right and license to utilize a patented natural
protein technology for pharmaceutical and nutraceutical products, solely for
human applications, in the United States and Canada, and their possessions and
territories. This license expires in March 2006.

The license may be terminated if the Company fails to observe or perform any of
the covenants, terms, conditions or provisions of the agreement or if it
breaches any representation or warranty and fails to cure the breach within 30
days after receipt of written notice.

LITIGATION

In 1995, a proported class action complaint was filed against the Company and
certain of its officers and directors for violation of Federal securities laws.
The complaint alleged various violations of the Securities and Exchange At of
1934. On April 2, 1997, the district court dismissed with prejudice all claims
of the plaintiff and assessed costs of the litigation against the plaintiff. In
May 1997, the plaintiff appealed the decision. In September 1998, the Court of
Appeals reversed the decision of the trial court and remanded the case for a
determination by the trial court whether the complaint had been timely filed. On
March 3, 2000, the defendants filed a motion for summary judgment. On September
28, 2000, the trial court granted defendants' motion for summary judgment and
plaintiff appealed. By order filed on December 4, 2000, the Court of Appeals
granted plaintiffs' motion to voluntarily dismiss the action. This order is
final and the litigation has ended.




                                      F-23
<PAGE>   59

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999

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

NOTE M - COMMON AND PREFERRED STOCK

The following is a listing of Biomune's authorized common and preferred stock as
of December 31, 2000.

Biomune has authorized 500,000,000 shares of common stock with a par value of
$0.0001.

Biomune has authorized 50,000,000 shares of preferred stock with a par value of
$0.0001. The preferred shares have been designated as follows, however the
entire amount authorized has not been allocated to specific series:

-    Series A 10% cumulative, 1,075,000 shares authorized, these shares convert
     on a one for one basis for common stock, subject to adjustment for stock
     splits, stock dividends, and the like.

-    Series B 10% cumulative, 1,000,000 non-voting shares authorized, these
     shares convert on a one for one basis for common stock, subject to
     adjustment for stock splits, stock dividends, and similar items.

-    Series E 8% cumulative, 7,000,000 non-voting shares authorized, these
     shares convert to common stock by dividing the stated value of Series E by
     the lessor of $1.10 or per share fair value of Company's common stock.

-    Series F 8% cumulative, 7,000,000 non-voting shares authorized, these
     shares convert to common stock by dividing the stated value of Series F by
     the lessor of $1.10 or per share fair value of Company's common stock.

-    Series J 10% cumulative, 2,000 non-voting shares authorized, these shares
     are convertible by dividing the stated value of Series J by the market
     price of the common stock on such date.

No shares of Series E, F or J preferred stock were outstanding as of December
31, 2000.


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

NOTE N - STOCK OPTIONS AND WARRANTS

Biomune has established certain Stock Incentive Plans (collectively, the
"Plans"), which allow for the granting of incentive stock options, nonqualified
stock options, stock appreciation rights and the award of common stock to
certain individuals, including employees, officers, directors, consultants, and
others as designated by the Board of Directors. Under the terms of the Plans,
the exercise prices for incentive stock options shall not be less than the fair
market value at the date of grant. The exercise price for nonqualified stock
options 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.


                                      F-24
<PAGE>   60

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999

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

NOTE N - STOCK OPTIONS AND WARRANTS

Options are exercisable within periods determined by the Board of Directors but
may not exceed ten years from the date of grant.

A summary of Biomune's stock option activity is as follows. Stock option
activity for Donlar is not included.

<TABLE>
<CAPTION>
                                          Number of         Exercise           Weighted average
                                           shares          Price range          exercise price
                                          ---------      ----------------      ----------------
<S>                                       <C>            <C>                   <C>
Outstanding at January 1, 1999              84,074       $ 2.50-$1,190.00         $1,146.00
   Granted                                 130,000                   5.00              5.00
   Exercised                               (60,000)                 10.00             10.00
   Canceled                                 (4,905)        10.00-1,290.00          1,284.05
                                          --------       ----------------         ---------

Outstanding at December 31, 1999           149,169          2.50-1,190.00             33.80
   Granted                                       -                      -                 -
   Exercised                               (94,000)             2.50-5.00              3.70
   Canceled                                 (5,400)        10.00-1,170.00            569.55
                                          --------       ----------------         ---------

Exercisable at December 31, 2000            49,769       $ 2.50-$1,190.00         $   28.25
                                          ========       ================         =========
</TABLE>

When accounting for the issuance of stock options and warrants, financial
accounting standards allow entities the choice between adopting a fair value
method or an intrinsic value method with footnote disclosures of the pro forma
effects if the fair value method had been adopted. Biomune has opted for the
latter approach. Had Biomune's options and warrants been determined based on the
fair value method, the results of operations would have been reduced to the pro
forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                 Years ended
                                                                 December 31,
                                                       ------------------------------
                                                           2000              1999
                                                       ------------      ------------
<S>                                                    <C>               <C>
Net loss applicable to common shares - as reported     $(13,713,973)     $(12,149,702)
Net loss applicable to common shares - pro forma        (13,713,973)      (12,078,596)
Basic loss per common share - as reported                      (.38)            (5.20)
Basic loss per common share - pro forma                        (.38)            (5.17)
</TABLE>




                                      F-25
<PAGE>   61

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999

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

NOTE N - STOCK OPTIONS AND WARRANTS - CONTINUED

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:

                                                     December 31,
                                           -------------------------------
                                              2000                 1999
                                           ----------           ----------

Expected dividend yield                    $       -            $       -
Expected stock price volatility                   80%                  80%
Risk-free interest rate                         5.25%                5.25%
Expected life of options                      2 years              2 years

The weighted average fair value of options granted during 1999 was $4.80.

During the year ended December 31, 2000, the Board of Directors of Biomune
elected to change the exercised price of the options to purchase 84,000 shares
issued during 1999, from $5.00 per share to $2.50 per share. These options are
treated as variable options under Accounting Principles Board Opinion No. 25 and
related interpretations, and Biomune recorded compensation expense of $520,500
prior to the reverse acquisition transaction.

The following table summarizes information about Biomune's stock options
outstanding at December 31, 2000:

<TABLE>
<CAPTION>
                     Outstanding                                              Exercisable
------------------------------------------------------       ---------------------------------------------

                                            Weighted
                                             average
                                            remaining         Weighted                           Weighted
      Range of             Number          contractual        average            Number           average
      exercise           outstanding          life            exercise         exercisable       exercise
       prices                at              (years)           price               at              price
---------------------    -----------       -----------       ----------        -----------       ---------
<S>                      <C>               <C>               <C>                <C>              <C>
$   5.00 to $87.50          48,000             3.33          $    16.70           48,000         $   16.70
  185.00 to 344.00           1,509             1.72              196.25            1,509            196.25
  835.00 to 1,190.00           260             0.56            1,185.40              260          1,185.40
---------------------       ------             ----          ----------           ------         ---------

$   5.00 to $1,190.00       49,769             3.27          $    28.25           49,769         $   28.25
=====================       ======             ====          ==========           ======         =========
</TABLE>



                                      F-26
<PAGE>   62

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999

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

NOTE N - STOCK OPTIONS AND WARRANTS - CONTINUED

A summary of Biomune's warrant activity is as follows. Warrant activity for
Donlar is not included.

                                       Number of   Exercise    Weighted average
                                        shares    price range   exercise price
                                       ---------  -----------  ----------------

Outstanding as of January 1, 1999             -      $  -            $  -
   Granted                                    -         -               -
   Exercised                                  -         -               -
   Canceled                                   -         -               -
                                        -------      ----            ----

Outstanding as of December 31, 1999           -         -               -
   Granted                              650,000       .01             .01
   Exercised                                  -         -               -
   Canceled                                   -         -               -
                                        -------      ----            ----

Outstanding as of December 31, 2000     650,000      $.01            $.01
                                        =======      ====            ====

In August 2000, Donlar entered into agreement with an investment advisor in
which the advisor received warrants to purchase a total of 400,000 shares of
Biomune's common stock at a purchase price of $0.01 per share. The excess of the
fair value of Biomune's stock at date of grant has been recorded as management,
consulting and research expense in the amount of $245,000.

In November 2000, Biomune entered into a consulting agreement in which the
consultant is to receive three year warrants to purchase a total of 250,000
share of Biomune's common stock at a purchase price of $0.01 per share. The
excess of the fair value of Biomune's stock at date of grant over the exercise
price has been recorded as deferred compensation. This is being amortized over
the two-year life of the agreement.


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

NOTE O - BENEFIT PLANS

On January 1, 1996, Donlar adopted a 401(k) savings plan. Employees meeting
certain eligibility requirements, as defined, may contribute a percentage of
pretax gross wages up to the legally defined deferral limit. Donlar may make
discretionary contributions. As of December 31, 2000, Donlar has not made any
contributions to the plan.


                                      F-27
<PAGE>   63

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999

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

NOTE P - RELATED PARTY TRANSACTIONS

During the year ended December 31, 2000:

Donlar entered into a management consulting agreement with a shareholder and
director of Donlar. The agreement provides that in consideration of the services
provided by the consultant, a consulting fee will be earned, equivalent to 1% of
all sales of polymer products that occur during each year of the term of the
agreement. The initial payment is to be made on or before April 15, 2001, and a
final payment on or before April 15, 2010.

Donlar entered into an agreement with the former president of Biomune, whereby
he will act as a consultant to Donlar for a period of one year in exchange for a
consulting fee of $125,000 payable on equal monthly installments.

Donlar entered into multiple debt agreements with certain shareholders, see note
I.

Donlar has also entered into an employment agreement with a shareholder and key
employee described in note R.


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

NOTE Q - OPERATING LEASES

The Company leases its facilities related to continuing operations under
noncancellable operating leases, which expire through March 2003. Lease expense
for years ended December 31, 2000 and 1999, was approximately $51,000 and
$100,000, respectively. Future minimum lease commitments are as follows:

Fiscal year                                                              Amount
-----------                                                             --------

2001                                                                    $118,044
2002                                                                      30,787
2003                                                                         397
                                                                        --------

                                                                        $149,228
                                                                        ========


                                      F-28
<PAGE>   64

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999

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

NOTE R - COMMITMENTS AND CONTINGENCIES

In 1994, Donlar entered into a licensing agreement with a shareholder for the
use of patent rights. The licensing agreement requires Donlar to pay $7,500,000
in cumulative royalties. Annual payments are based upon sales volume except that
minimum annual payments of $50,000 are required to be made beginning year 2000.
Royalty payments, as a percentage of sales, are 4% for the first $2,000,000 in
royalties, decreasing one percentage point to a floor of 1% for each $2,000,000
in royalties paid until $7,500,000 in cumulative royalties is paid. Royalty
expense relating to this agreement was $10,874 and $16,664 for the years ended
December 31, 2000 and 1999, respectively. While royalties have been accrued
based on 4% of agricultural sales, royalties were first paid beginning July
1999.

Donlar maintains an employment agreement expiring on June 30, 2001, renewable
for two additional years at the employee's option, with a certain key employee
providing for minimum aggregate annual payments of $185,000 and severance in the
event of termination. Under the agreement, the employee is also eligible for
cash and stock bonuses. Donlar has also agreed to provide $550,000 in life
insurance coverage for the employee.

Donlar and Dr. Gerald Gleich, Vice President of Research of its subsidiary,
Donlar Pharmaceutical Corporation, entered into an agreement in May, 1997,
whereby Donlar purchased certain patents relating to the use of polyaspartates
in a wide variety of allergic conditions. In return for those patents, Dr.
Gleich was granted a 10% interest in Donlar Pharmaceutical Corporation and the
right to receive royalties on sales of products based on those patents at rates
ranging from 0.5% to 2.0%, to a maximum aggregate royalty of $10 million. No
value has been assigned to the acquired patents. The length of time involved in
realizing the value from a pharmaceutical patent makes such a valuation not
determinable.


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

NOTE S - SIGNIFICANT SOURCE OF REVENUES

The Company had sales to certain customers that have accounted for at least 10%
of the Company's net revenue. Customer information is as follows for the years
ended December 31, 2000 and 1999.

                                                       Percentage of
                    Percentage of net revenues      accounts receivable
                    --------------------------      -------------------
                      2000               1999              2000
                      ----               ----              ----
Agri Sciences
Customer A            8.7%               13.1%                0%

BioPolymers
Customer B           29.1%               21.2%             22.6%
Customer C           10.3%                0.8%             31.5%




                                      F-29
<PAGE>   65

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999

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

NOTE T- SEGMENT DISCLOSURE

The Company has three reportable segments: Agri Sciences, BioPolymers and Optim
Nutrition. All three are in the market development stage of operation. The Agri
Sciences segment has derived its revenues to date from the agricultural market
in the United States, in which its products are used as a plant nutrient
absorption enhancer. The BioPolymers segment has derived its revenues to date
from the water technology and detergents industries in Europe. The products
perform as biodegradable scale and corrosion inhibitors in water processing and
as anti-redeposition agents in detergents. The third segment, Optim Nutrition,
derives its revenue from nutraceutical distributors and wholesalers. These
products provide nutraceutical supplements designed to provide or increase
protective immunities to disease and to provide nutritional supplementation.

The Agri Sciences and BioPolymers segments rely on common manufacturing
facilities in the United States. Excess capacity costs associated with those
facilities and the write-down of raw material inventory to market value are
charged to cost of product, but are not allocated to segments. The Optim
Nutrition segment uses a third party to manufacture the product and only serves
as a distributor. Unallocated costs relating to corporate headquarters in the
United States include legal, accounting, administrative and certain general
research costs. Costs incurred outside the United States are not material. Long
lived assets and related depreciation, as well as inventory are not separately
identified by segment. Interest income and expense is not allocated by segment.

                                                      Years ended December 31,
                                                   -----------------------------
                                                       2000              1999
                                                   -----------       -----------
Revenues
   Agri Sciences                                   $   307,073       $   415,692
   BioPolymers                                         890,488           378,031
   Optim Nutrition                                     184,433                 -
                                                   -----------       -----------

         Total                                       1,381,994           793,723
                                                   -----------       -----------

Allocated costs
   Life Sciences                                     1,292,851         2,829,519
   BioPolymers                                       1,470,976         1,164,575
   Optim                                               155,114                 -
Unallocated costs
   Cost of product                                   1,347,310         3,309,681
   Selling, general and administrative               2,540,071         1,227,153
   Other expenses                                    7,239,542         4,412,497
                                                   -----------       -----------

         Loss before income tax                    $12,663,870       $12,149,702
                                                   ===========       ===========



                                      F-30
<PAGE>   66

BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2000 AND 1999

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

NOTE U - SUBSEQUENT EVENTS

In January 2001, the group of insurance companies which provided the financing
described in note I, purchased 1,500,000 shares of Donlar's common stock for
$714,593.

In January 2001, substantially all assets of Donlar, with the exception of the
intellectual property, were transferred to the Company.

In February 2001, the Company was forgiven of its outstanding liability on its
line of credit for $75,000 in exchange for the related party notes receivable
plus account interest described in note G. The Company recorded a gain of $361
on the transaction.

In January 2001, the Company entered into an agreement with a media relations
firm. This agreement is for a period of one year, and the Company has issued the
firm warrants to purchase 1,250,000 shares of Biomune's common stock at an
exercise price of $0.01 per share. These warrants can only be exercised if
Biomune's common stock trades above $5.00 a share for a period of 60 consecutive
days.







                                      F-31