SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K


(Mark one)

 [X]     Annual Report pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934 for the fiscal year ended September 30, 1998, or

 [ ]     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)

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

                                 (801) 466-3441
              (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  $1,878,212,  based on a  closing  price of $2.00  per  share on
January 4, 1999.  The number of shares  outstanding of the  registrant's  common
stock as of January 4, 1999 was  1,316,662.  On November 10, 1997,  and December
31, 1998,  the  registrant  declared a  one-for-ten  reverse  stock split of its
common  stock,  in each instance  reducing the number of issued and  outstanding
shares of stock by a factor of 10.  Outstanding common stock data in this report
have been adjusted to reflect these reverse stock splits.

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




                                                          
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<TABLE>
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                              BIOMUNE SYSTEMS, INC.

                          1997 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS

                                     Part I

                                                                                                        Page

<S>                                                                                                     <C>
Item  1.  Business.........................................................................................3
Item  2.  Properties......................................................................................11
Item  3.  Legal Proceedings...............................................................................12
Item  4.  Submission of Matters to a Vote of Security Holders............................................N/A

                                     Part II

Item  5.  Market for Registrant's Common Equity and Related Stockholder Matters...........................13
Item  6.  Selected Financial Data.........................................................................15
Item  7.  Management's Discussion and Analysis of Financial Condition and
               Results of Operations......................................................................16
Item  8.  Financial Statements and Supplementary Data.....................................................28
Item  9.  Changes in and Disagreements with Accountants on Accounting and
               Financial Disclosure.......................................................................29

                                    Part III

Item 10.  Directors and Executive Officers of the Registrant..............................................29
Item 11.  Executive Compensation..........................................................................32
Item 12.  Security Ownership of Certain Beneficial Owners and Management..................................39
Item 13.  Certain Relationships and Related Transactions..................................................41

                                     Part IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................42

                                       -2-
</TABLE>

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                                     PART I

ITEM 1.  BUSINESS

Introduction

         Biomune  Systems,   Inc.,  a  Nevada  corporation   ("Biomune"  or  the
"Company"),  with its wholly owned  subsidiary,  Optim  Nutrition,  Inc., a Utah
corporation ("Optim") and majority owned subsidiary,  Rockwood Companies, LLC, a
California limited liability company  ("Rockwood"),  is engaged in the research,
development,   distribution  and  sale  of  biologic  pharmaceutical   products,
nutraceutical  and medical food products and supplements,  and health and beauty
aids.  Certain  of  these  products  have  been  developed  by the  Company  and
incorporate  a patented whey protein  technology  (the  "Technology,"  sometimes
referred  to as  "BWPT" or  "ProMune(TM)"),  which is  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.  Among other things, the Company believes that
ProMune may be utilized to develop  products to treat  various  gastrointestinal
and infectious  diseases and that products  derived from the Technology may help
increase the body's  immune  response.  The Company also  believes  that certain
products   derived   from   the   Technology   provide   important   nutritional
supplementation for persons who are nutritionally deprived or immune stressed or
compromised.

         In years prior to 1998, the Company  invested  significant  sums in the
research and development of the Technology and related  products.  These efforts
were funded almost entirely and independently by the Company,  primarily through
the sale of its  securities.  In fiscal year 1997,  the Company  scaled back its
pharmaceutical  product development effort, due primarily to limited capital. In
addition,  the Company  determined to focus its resources on the development and
marketing of nutraceutical products. Future research and development, if any, in
pharmaceutical  products  will  require  funding  from joint  venture  partners,
strategic alliances, private or governmental grants or other third-party funding
sources.  There can be no  assurance  that such sources will be available to the
Company  or that the terms on which  such  funding  may be offered in the future
will be favorable. Absent such third-party involvement,  the Company anticipates
that it will continue to severely  curtail  research and  development  involving
existing or potential pharmaceutical product candidates based on the Technology,
and may postpone such efforts until third party participation becomes available.

         As a result of its increased  emphasis on the nutrition market, in 1998
the Company  acquired  the  exclusive  rights to  distribute  and sell a line of
sports  and  energy  nutrition  bars and a  patented  medical  food bar  created
specifically  for diabetics.  These products are manufactured for the Company by
contract  manufacturers.  The Company 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 Company intends to acquire
additional products under license or by purchase of product rights. The bars are
sold to  national  and  regional  wholesale  and retail  chains  under the names
Mountain Lift(TM) and NiteBite(TM).

         During 1998, the Company also acquired a majority interest in Rockwood,
a California  company that sells health and beauty aids and related  products to
national and wholesale  chains.  Primary products of Rockwood include  shampoos,
lotions  and  conditioners,   marketed  under  brand  names  Aroma  Gardens(TM),
Monterrey Naturals(TM) and Orchard Blends(TM).

         In  1998,  the  Company  sold  its  rights  in  certain  medical  waste
technologies consisting of a device for the sterilization and decontamination of
medical  devices and wastes,  a  bioremediation  process to detoxify and degrade
hazardous  substances  and) a device and process for the safe  treatment of used
medical stain. The technologies  were purchased by Bioxide  Corporation,  a Utah
corporation. In connection with the sale of these technologies, the Company also
terminated a license  previously  granted to Bioxide's  predecessor.  Bioxide is
owned or controlled by certain shareholders and former executive officers of the
Company.

         The Company filed  Investigational  New Drug Applications  ("IND") with
the US Food and Drug  Administration  (the "FDA"),  the  government  agency that
regulates drugs for humans in the United States, on two

                                       -3-

<PAGE>



biologic   pharmaceutical   drug  candidates   developed  from  the  Technology:
BWPT-301(TM)  (formerly  known as  Immuno-C),  which the  Company  believes  may
prevent and/or treat cryptosporidiosis, a gastrointestinal disease caused by the
cryptosporidium  parvum  microorganism  that produces acute and severe diarrhea;
and BWPT- 302(TM),  which the Company  believes to be useful in the treatment of
infection by the  life-threatening  bacteria,  Escherichia coli, strain 0157:H7.
This disease  causes severe bloody  diarrhea,  and a hemolytic  uremic  syndrome
associated  with a  high  risk  of  permanent  kidney  damage,  particularly  in
children.

         Data  obtained from clinical  trials and other studies  involving  whey
protein  concentrate  (the  "Base  Product")  and  BWPT-301,  suggest  potential
health-related  nutritional  benefits  from  the use of  nutraceutical  products
developed  utilizing  the  Technology.  The  Company  has  developed  and is now
marketing   Optimune(TM).   The   principal   market   for   this   product   is
immune-compromised  individuals  who need  nutritional  supplementation  for any
number of reasons.

Products

         The Company's products include  nutraceuticals,  supplements and sports
and nutrition bars, medical food bars and biologic pharmaceuticals. Beginning in
1997,  the Company  shifted its primary focus to the  development,  acquisition,
marketing and sale of nutraceutical and functional food products.

Nutraceutical Activities

         Since 1997,  the Company has  concentrated  its  resources and business
activity primarily on the development,  distribution and sale of nutritional and
nutraceutical  products,  including  products  based upon the results of and the
information  obtained from clinical trials and other studies  involving the Base
Product and BWPT-301.  These data suggest potential  health-related benefits may
derive from the use of nutraceutical products using the Technology.  Interest in
nutraceutical  applications  of the  Technology  dates  back to  1995,  when the
Company  undertook  an  analysis  of  the  nutraceutical  market.  Nutraceutical
products are food-based nutritional  supplements marketed as a beneficial source
of nutrients to promote good health. Significant milestones in these development
activities of the Company include the following:

         o        October 1995, the Company  incorporates  Optim for the purpose
                  of developing and marketing nutraceutical products.  Optim has
                  developed two  nutraceutical  products:  Optimune,  which is a
                  nutritional  dietary  supplement  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,  but  manufactured  in
                  capsule  form and  marketed  primarily  to healthy  people who
                  desire weight maintenance or management assistance.

        o         December  1995, a patent  application  is filed  relating to a
                  method for enhancing  the immune  system using the  Technology
                  and the Base  Product.  The patent  application  relates to an
                  increase in CD4 cell count in immune-compromised  individuals.
                  The  title  of  this  patent  application  is  "A  Method  for
                  Enhancing  the  Immune  System  using   Immunologically-Active
                  Bovine Whey  Protein  Concentrate."  The authors of the patent
                  are Frank A. Eldredge, Ph.D., formerly the Company's Executive
                  Vice  President  -- New Product  Development,  David O. Lucas,
                  Ph.D., a member of the Company's  Scientific  Advisory  Board,
                  and Craig D. Moffat,  M.D., a consultant  to the Company.  The
                  patent has been assigned to the Company.

        o         May to June 1996,  the Company  completes a nutritional  study
                  monitored  by  Clinimetric  Research  Associates,  a  contract
                  research organization. This study was conducted at St. Francis
                  Memorial Hospital in San Francisco,  California,  and the East
                  Bay AIDS Clinic in Berkeley,  California. This pilot study was
                  designed  to examine  the  effects of two  different  doses of
                  ProMune on wasting  syndrome.  Secondary  objectives  included
                  examining  effects of ProMune on Karnofsky  Performance  Score
                  and quality of life as measured by  HIV-Medical  Outcome Study
                  (MOS).  Patients were  randomized to either 20g ProMune powder
                  daily or 60g ProMune powder daily (20g, 3 times a day),  mixed
                  with cold food or beverage. The study period was 6 weeks after
                  which  patients  could elect to continue  for an  additional 6
                  weeks.   BCM  was  measured  using   bioelectrical   impedance
                  analysis.

                                       -4-

<PAGE>
                  Study  staff  were  trained  to use  the  equipment  prior  to
                  beginning  the study.  Quality of life was measured  using the
                  MOS-HIV  30-Item Form developed by the Medial  Outcomes Trust.
                  35 patients were  randomized,  29 patients  completed 5 weeks,
                  and 23 patients  completed 12 weeks. There were no significant
                  differences  detected between the 2 doses, and results of this
                  study showed that 75.9% of the study participants were able to
                  reverse their involuntary weight loss. 83% of the participants
                  stated that their quality of life was the same or better,  and
                  the doctor  stated  that 87% of the  participants'  quality of
                  life was the same or better.

        o         October  1997,  Dr.  Kotler  at St.  Lukes-Roosevelt  Hospital
                  Center in New York completes a year-long metabolic study. Less
                  rigorous  studies are conducted in  California,  Florida,  New
                  York  and  Oklahoma.  Study  results  from the  Associates  in
                  Medical  and Mental  Health  (the  Oklahoma  site)  indicate a
                  significant  increase in body cell mass (muscle),  body weight
                  and quality of life after 8 weeks on  ProMune.  Body cell mass
                  increased  an average of 0.9kg (1.9 lbs.) an increase  for 79%
                  of study participants.  These nutritional studies are designed
                  to yield  anecdotal  and  corroborating  data of the  previous
                  studies  and  provide  new  data  that may  encourage  broader
                  exposure for  Optimune.  There is  presently no timetable  for
                  completing  studies at other sites.  The results of this study
                  will be publicly available at a future date in accordance with
                  the protocols and guidelines governing such studies.

         The market for a weight gain,  immune-enhancing nutrition supplement is
very competitive and relatively  difficult to penetrate,  particularly given the
limited financial resources presently available to the Company. The Company will
continue  to promote its  products  in these  markets,  while  pursuing  its new
marketing plan of seeking  broader  applications  of the Technology for products
with general market appeal. The Company will also devote considerable  resources
to marketing the  nutrition,  sports and energy bars and medical food bars added
to its product line in September, 1998.

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

Rockwood

         In April 1998, the Company acquired a controlling equity interest (52%)
in Rockwood.  The purchase price was approximately $360,000 cash, which had been
paid and  expensed by the Company to the minority  member in a previous  year, a
commitment to issue 500,000 shares of preferred stock should certain  benchmarks
(in  sales)  be  obtained,  and  covenants  on the part of the  Company  to loan
Rockwood or its affiliates  approximately  $1,500,000 over a one-year period. In
1997, the Company had entered into an agreement that it subsequently  abandoned,
to purchase 100%of Rockwood's predecessor. Rockwood distributes and sells health
and beauty aids to wholesale and retail chains.  Under the terms of the purchase
agreement and related  agreements,  Rockwood has the right to redeem part of the
Company's member interest if the Company fails to keep its covenants  concerning
the further  loans to Rockwood.  Among other things,  Rockwood  could reduce the
Company's  interest to  approximately  20% of the total  issued and  outstanding
member  interests.  As of the date of this Report,  the Company has not advanced
all of the funds required by the purchase  agreement.  Its ability to do so will
depend in part on the Company's  success in obtaining  additional debt or equity
financing and increasing sales of its products, for all of which there can be no
assurance. See "Certain Relationships and Related Transactions."

Optim

         In  September  1998,  the  Company  acquired  the  exclusive  worldwide
marketing  and  distribution  rights to the  Mountain  Lift  sports  and  energy
nutrition  bars.  The  licensor  of these  rights is ML  Industries  of  Encino,
California.

                                       -5-

<PAGE>
Under the  agreement,  which has an initial term of 10 years and  continues on a
year-to-year basis thereafter, the Company pays ML Industries a royalty of 7% of
net sales  generated by the licensed  products.  The Mountain  Lift product line
includes four flavors,  Peanut Crunch,  Chocolate,  Cappuccino  Crunch and Berry
Crunch.  Each  bar is  formulated  with all  natural  herbs  to  improve  oxygen
utilization,  increase energy and reduce muscle fatigue. The bars provide a full
supplement of ginseng and ginkgo biloba,  together with 100% of the  Recommended
Daily Allowance of 12 essential  vitamins and major  antioxidants.  The bars are
low in fat and high in  protein.  "Inside  Tracks"  fitness  magazine  voted the
Mountain  Lift bar the  "best  tasting  and most  nutritious  bar in the USA" in
November  1997.  The  license  agreement  includes  an option for the Company to
acquire ML Industries.

         The  distribution  of the Mountain Lift bars  introduces the Company to
the total energy and nutrition bar market, estimated by industry publications to
be more  than  $300,000,000  in  1998,  with  annual  growth  estimated  at 40%.
According to industry reports,  distribution into grocery channels is growing at
an even greater rate per year.  Industry markets in which the Mountain Lift bars
compete  include  Snacks/Candy  ($60  billion  per  year),  Healthy  Snacks/Meal
Replacements ($49 billion annually),  Natural Foods ($6.9 billion annually), and
Healthy Snacks,  which include granola and grain-based snacks, fruit snacks, and
nutrition bars ($3.8 billion per year).

         Also in September 1998, the Company entered into an agreement acquiring
the  exclusive  worldwide  distribution  rights to a  time-release  glucose  bar
developed to prevent hypoglycemia (low blood sugar) in diabetics.  This product,
developed from research  conducted at the Beth Israel Deaconess  Medical Center,
Harvard Medical School, in Boston, Massachusetts,  is licensed to the Company by
Medical Foods, Inc., a Delaware  corporation.  Under the agreement,  the Company
pays Medical Foods a 12% royalty on net sales of the patented product,  which is
marketed under the trade name NiteBite(TM). Minimum annual royalties of $150,000
are payable in 1999,  with gradual  increases  annually  thereafter  through the
10-year term of the agreement.  Both the Mountain Lift bars and the NiteBite bar
are manufactured for the Company under contract by third parties.

         Hypoglycemia   is  a   life-threatening   low  blood  sugar   condition
experienced  primarily by people with diabetes whose condition  requires them to
use insulin to regulate  their blood sugar.  It is estimated  that this includes
approximately  4.3 million of the 9.6  million  diabetics  in the United  States
(according to 1998 National  Institutes  of Health  data).  NiteBite  brings the
Company into the expanding "medical food" industry,  with food products designed
specifically to address medical  conditions  historically  treated with drugs or
medications.  The  industry may be more  broadly  described  as the  "functional
foods" or "medical  foods"  industry and  includes  any food or food  ingredient
considered to provide medical or health  benefits,  including the prevention and
treatment   of   disease.    This   industry    segment    overlaps   both   the
pharmaceutical/drug industry and the nutritional/dietary supplement industry, in
which the Company historically  conducted its research, and represents a natural
extension of the Company's product development efforts. A recent study conducted
at the  Joslin  Diabetes  Center in Boston  reported  that  exercising  diabetes
patients were able to consume fewer  kilocalories with the NiteBite medical food
bar and experience less  hyperglycemia with no greater incidence in hypoglycemia
compared with the  higher-kilocalorie  standard snack regimen. The conclusion of
the report on the study,  published in "Diabetes  Care,"  October 1998,  stated,
"[T]his  medical food bar should be a reliable  snack for subjects with diabetes
who  regularly  engage in  exercise.  In this  study,  subjects  using the snack
containing  ingredients with varying glycemic indices [NiteBite]  consumed fewer
kilocalories  with  less  hyperglycemia  and the same  low rate of  hypoglycemia
compared with a higher-kilocalorie snack."

Biologic Pharmaceutical Activities

         Between 1994 and early 1997, the Company  invested  heavily in clinical
and non-clinical  development of pharmaceutical  applications of the Technology.
Toward the end of fiscal 1997, and continuing  throughout  fiscal year 1998, the
Company  shifted its business focus to completing the  development and marketing
of nutraceutical  products.  The emphasis on nutraceutical  products resulted in
postponement of further  pharmaceutical  development until such time, if any, as
funding  from  private or  governmental  grants,  joint  ventures or other third
parties may become available to the Company.


                                       -6-
<PAGE>
         The key milestones of the Company's biologic pharmaceutical development
activities include the following:

         o        October 1994, the Company completes Phase I clinical trials on
                  BWPT-301,  resulting in the  establishment of a safety profile
                  in healthy humans within certain dose range parameters.

         o        November   1994,   the   Company   reports   the   results  of
                  Company-sponsored  animal  studies  conducted by Dr. Joseph A.
                  Smith,   Jr.  and  Dr.   Mitchell  S.  Steiner  at  Vanderbilt
                  University  showing the  efficacy of drug  candidates  derived
                  from the  Technology  in reducing  the growth rate of prostate
                  cancer  tumors by 11%.  Based on data from a  separate  study,
                  which discovered an  over-production  of an immune suppressing
                  agent in the  presence of prostate  cancer  cells,  Vanderbilt
                  University  researchers  selected the  Technology  to test the
                  theory  that an  immuno-modulating  agent  (such  as the  Base
                  Product)  may  counteract  the  immuno-suppression  caused  by
                  cancer cells and thus act to control,  reduce and/or eliminate
                  the tumor.  Dr. Smith continues to study the possible  effects
                  of the  Base  Product  against  renal  carcinoma  cell  tumors
                  extracted from humans and inducted into mice. No study data or
                  results from this on-going study have yet been released.

         o        May 1995, the Company  reports the results of an in vivo study
                  on rats  conducted by Dr.  Steiner at  Vanderbilt  University.
                  This  follow  up  study  confirmed  the data  derived  from an
                  earlier   study   conducted  at  Vanderbilt   University   and
                  demonstrated  that there was a retardant  effect on the growth
                  of prostate tumor cells in rats previously  injected with such
                  cells.

         o        October  1995, a  pediatrics  protocol is submitted to the FDA
                  for the  treatment of six  pediatrics  patients  with advanced
                  AIDS and  chronic  cryptosporidiosis.  There is  presently  no
                  time-table  for  commencing  this  study,  and there can be no
                  assurance that the Company will ever commence clinical studies
                  under this research protocol.

         o        December  1995,  the  Company  files  an IND  with  the FDA in
                  connection with the  development of BWPT-302.  The Company has
                  concluded  adult  Phase I  clinical  trials.  This  second IND
                  focuses on certain strains of Escherichia  coli. In 1996, this
                  IND  was  expanded  to  include  strains  of  entero  adherent
                  Escherichia coli. The Company has completed the administration
                  of BWPT-302 to healthy  individuals  in Phase I dose tolerance
                  trials.  Through  those dose  tolerance  trials,  the  Company
                  gained a general  understanding  of how well various  doses of
                  BWPT-302(TM)  are  tolerated.  There is presently no timetable
                  for continuing studies associated with this IND.

         o        January 1996 to December  1996, Dr.  Frederick  Clayton at the
                  Regional Veterans  Administration  Hospital in Salt Lake City,
                  Utah conducts indirect immuno-fluorescence testing of the Base
                  Product  on   various   pathogenic   enteric   microorganisms.
                  Preliminary  results from that  research  indicated a possible
                  immuno-reaction   against   several   gastrointestinal   tract
                  pathogenic  bacteria.  There is  presently  no  timetable  for
                  continuing research in these areas.

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

         o        June 1996,  the FDA approves an Emergency  IND (No.  6679) for
                  the treatment of one pediatric  patient with advanced AIDS and
                  cryptosporidiosis.  The patient was treated  according  to the
                  Company's  pediatrics  protocol,  which  allows for 90 days of
                  dosing  with  the  Base  Product  at a  maximum  dose  of  3.0
                  g/kg/day.  The  patient  was  treated  under  the  care of Dr.
                  Margarita  Silio, who is affiliated with Dr. Russell Van Dyke,
                  head of the pediatric  AIDS section at Tulane  University  and
                  Louisiana State  University.  The patient,  a 12 year old girl
                  with advanced AIDS, had  cryptosporidiosis  for several months
                  before  beginning the study and was  experiencing  diarrhea in
                  excess of 1,000 g/day at the

                                       -7-

<PAGE>
                  commencement  of the study.  After 65 days of  treatment  at a
                  dose of 2 g/kg/day,  the study investigator  reported that the
                  girl's  weight had  increased  18%,  to 59.6 lbs,  with marked
                  clinical  improvement.  By the end of the  study in  September
                  1996, the patient's diarrhea had improved dramatically.

The Technology

         The  Technology is a patented  process of filtering  specific  proteins
from  bovine  whey,  a  by-product  of cheese  production,  to produce  the Base
Product.  The Company uses the Base  Product to  formulate  its drug and product
candidates.  The Technology was developed based on numerous pre-clinical studies
that indicate that a mother's  colostrum provides a mechanism for her infants to
receive  passive  immunity.  Colostrum  contains  thousands of immune  enhancing
proteins known as  immunoglobulins  (or  antibodies).  The Company believes that
when  antibodies  from whey are  concentrated,  the beneficial  effects of those
antibodies  duplicate  the effects of colostrum.  Antibodies  are found in cows'
milk (in  addition  to  colostrom)  and can be  extracted  from  ordinary  whey.
Biomune's   Technology   utilizes  a  filtration   process  that  produces  high
concentrations of antibodies, as well as protein and other molecules that may be
beneficial  in the  treatment  of  infectious  diseases.  The  Company  has  the
exclusive  right and license granted by Protein  Technology,  Inc.  ("PTI"),  to
utilize  the  Technology  solely for human  applications  in the United  States,
Canada, Kenya, Ivory Coast,  Zimbabwe,  Ghana and Nigeria and in the territories
and possessions of these countries.

         The Technology differs significantly from competing technologies,  such
as  hyper-immunization  and  colostrum-based  or  colostrum-like   technologies.
Hyper-immunization  involves  the  injection  or  other  exposure  of a cow to a
particular  disease  and the  extraction  from the cow's  milk or  colostrum  of
antibodies  that are  produced by the cow.  The Company  believes its process of
filtering and concentrating  bovine whey represents a new and more effective and
economical  approach in the  development  of  pharmaceuticals  for the treatment
and/or  prevention of certain  diseases and in the development of  nutraceutical
products for the  promotion  of good health.  The  Technology  utilizes  readily
available whole milk from cows that have not been hyper-immunized and achieves a
higher degree of concentration of antibodies than hyper-immunization.  Whole cow
milk is more readily available than colostrum,  which is produced by the cow for
only a few days each year.

         Based on the results of Phase I and Phase II clinical  trials that were
conducted  using the  BWPT-301  pharmaceutical  product  candidate,  the Company
believes  that  BWPT-based   products  may  successfully   improve  and  promote
gastrointestinal health, especially in people who are HIV positive or have AIDS,
immune-compromised  patients such as those  undergoing  high-dose  antibiotic or
chemotherapy treatment, and post-surgical and chronic care patients.

Other Pharmaceutical Applications

         Until such time as there are funds  available to the Company from joint
venture  partners or grants from  government  or other third party  sources,  of
which there can be no assurance,  the Company has ceased further direct research
and pre-clinical or clinical  development  efforts.  Future studies, if and when
undertaken  by the Company or on its  behalf,  will  assess the  feasibility  of
filing  additional INDs,  followed by clinical  trials,  in respect of potential
drug candidates.  It is anticipated that such drugs would utilize the Technology
and  be  designed  to  treat  illness  caused  by  certain  infectious  bacteria
(including,  for example, H. pylori, C. difficile,  C. jejuni, Y. enterocolitica
and Staph. aureus) and certain non-infectious  immunologically-based  syndromes,
diseases and  conditions  (including,  for  example,  certain  cancers,  such as
prostate  cancer,  arthritis,  irritable bowel syndrome and acne). At this time,
there can be no assurance that sufficient  financial resources will be available
when and in the amounts needed,  or that the development  efforts of the Company
will  be  successful  or  that  commercially  viable   pharmaceutical   products
incorporating the Company's Technology will ever be developed.

Technology License

     The Company has the exclusive  right and license to utilize the  Technology
for marketing and selling pharmaceutical and nutraceutical products,  solely for
human applications,  in the United States, Canada, Kenya, Ivory Coast, Zimbabwe,
Ghana, Zambia, and Nigeria,  and their possessions and territories.  The license
granted by PTI  includes the rights under four United  States  patents,  each of
which relates to methodologies to produce large proteins  (immunoglobulins) on a
mass  production  basis.  PTI has not  represented  or warranted  the quality or
coverage of any of those patents,  and therefore the Company does not and cannot
provide any assurance  regarding PTI's rights  therein.  This license expires in

                                       -8-

<PAGE>
May 1999 and the Company is presently negotiating with PTI to extend the term of
the license.  The term of the license  would be extended  automatically  through
March 2006,  if the Company  generated  annual gross  revenues  from the sale of
products  utilizing the Technology of not less than  $2,000,000.  However,  this
minimum  sales  target  has not been  achieved  and,  unless  minimum  sales are
achieved in that amount or an extension of the license is agreed to by PTI prior
to the expiration date, the Company may lose its exclusive rights or its ability
to continue using the Technology.

         PTI also may  terminate  the license 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  thereof from PTI.  Among other
things, the License requires that the Company maintain certain levels of product
liability  insurance  coverage.  The Company presently does not maintain product
liability insurance coverage in the amounts required by the license. The Company
does, however,  have product liability insurance in amounts that it believes are
sufficient in light of its obligations  under the license,  present sales levels
and  its  independent   product  liability   exposure.   Based  on  its  current
relationship  with PTI, the Company does not believe that its technical  failure
to comply with the  insurance  coverage  covenant of the license  will result in
termination of the license by PTI. In addition,  the Company anticipates that it
will  provide  the full  amount of  coverage  required  under the  license  when
revenues justify such an expense.  There can be no assurance,  however, that PTI
will not  assert  that the  license  has been  breached  in a  material  respect
justifying  termination,  and seek to enforce its rights under the license.  The
license may also be terminated by PTI if the Company  commences or has commenced
against it any  proceeding  under  applicable  bankruptcy  law,  makes a general
assignment  for  the  benefit  of  its  creditors,  has a  trustee  or  receiver
appointed,   suffers  the   attachment,   execution   or  judicial   seizure  of
substantially  all  of  its  assets,  or  becomes  insolvent  or  liquidates  or
dissolves.

         The PTI license also provides  that promptly  following the issuance of
authorization  or approval by the FDA for sales of any  pharmaceutical  products
covered by the license, the Company and PTI will negotiate in good faith for the
grant of license rights for pharmaceutical products in other parts of the world.
In addition, upon achieving nutraceutical product sales of $1,000,000 during any
12 month period,  the Company and PTI will negotiate in good faith for the grant
of license rights in other parts of the world.

         The  Company is required  to pay PTI  royalties  in the amount of 5% of
gross receipts from the sale of all products covered by the license with respect
to the first  $3,500,000  of sales  during  each  annual  period and 7% of gross
receipts  with respect to all sales in excess of  $3,500,000  during such annual
period.  Under the current agreement,  if the license is extended past May 1999,
the  Company is  required  to pay PTI  annual  advances  to be  applied  against
royalties  in the amount of $100,000 for the first year of such  extension,  and
increasing  by $10,000  each year  thereafter.  As of September  30,  1998,  the
Company had not paid any royalties to PTI under the License.

Manufacturing

         The Company does not own or operate any  manufacturing  facilities.  It
sources  all  of  its  products  through  third-party  contract   manufacturers.
Outsourcing allows the Company to enhance  production  flexibility and capacity,
leverage its working capital,  transfer risk, and focus its energy and resources
on marketing and sales, while  substantially  reducing capital  requirements and
avoiding the costs of managing a production workforce.  The Company believes its
contract manufacturers have the capacity to fulfill its planned production needs
for at least the next 12 months.  In  addition,  if  arrangements  with  current
manufacturers were not satisfactory,  or if they were either unable or unwilling
to  continue  production  at rates  satisfactory  to the  Company,  the  Company
believes it could locate and qualify other  contract  manufacturers  to meet its
production  needs.  Contract  manufacturers  produce and  package the  Company's
products in accordance  with Standard  Operating  Procedures for GMP by the 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.  The
ingredients  are mixed into batches under  supervision of two quality  assurance
contract   manufacturer   employees  to  verify   adherence  to  the   Company's
formulations  and ensure taste  consistency.  The  finished  products are passed
through metal detectors, weighed, wrapped, and date coded. After each production
run, samples are analyzed to test the product for micro-impurities and to ensure
accurate labeling.

                                       -9-

<PAGE>
         The Company  orders all of its  requirements  for the Base Product from
PTI,  which  purchases the product from a distributor  in New Zealand.  The Base
Product used by the Company in connection  with clinical trials of the Company's
drug candidates must be manufactured in accordance with current  FDA-established
Good  Manufacturing   Practices  ("GMP").  The  FDA's  GMP  standards  establish
stringent  practices and procedures  that must be followed by a manufacturer  in
order to ensure the  consistency of the product and minimize the  possibility of
product   contamination  or  adulteration.   Currently,   all  Base  Product  is
manufactured in New Zealand.  Based on initial  inspections and follow-up visits
of the New Zealand facilities by consultants engaged by the Company, the Company
believes that those  facilities  are and will continue to be in full  compliance
with current GMP standards. The Company intends to file or have the manufacturer
in New Zealand file, as may be appropriate, an Establishment License Application
("ELA").  The establishment  license may be granted without inspection,  but the
facility is subject to inspection by the FDA at least once every two years.

Marketing

         The Company markets  Optimune as a nutritional  dietary  supplement for
people who are HIV positive or have AIDS and who are suffering from weight loss.
It is also pursuing the marketing of Optimune or a similar nutraceutical product
as a nutritional  dietary  supplement for people  experiencing  weight loss as a
result of intensive  antibiotic or  chemotherapy  treatment,  as well as elderly
persons experiencing weight loss problems.

         The Company markets its sports and energy  nutrition bars as "nutrition
for peak  performance." The Mountain Lift bars have been voted the "best tasting
and most  nutritious  bar" in the United  States.  The marketing  efforts of the
Company are designed to draw attention to the vitamin and antioxidant content of
the bars and their effect on enhanced oxygen and increased energy for sports and
outdoor  enthusiasts.  Current marketing and advertising is designed to increase
consumer awareness of and demand for the products. The NiteBite medical food bar
is marketed as a supplement  for diabetes  patients who must use insulin.  It is
the first medical food bar in the diabetes medical market.

         The  Company's  objective  is to  develop  or  acquire  and  distribute
scientific  products  formulated on natural  substances  designed to enhance the
body's mechanisms. The products of the Company are promoted as "natural products
for a healthier world." The president of Optim,  Randy Olshen, is experienced in
sales and marketing of pharmaceuticals,  clinical nutrition products, functional
and  medical  foods.  Prior to joining the Company in August  1998,  Mr.  Olshen
developed  and  launched  functional  and  medical  foods  for  other  nutrition
companies,  including the NiteBite bar. Mr. Olshen's services and those of other
marketing and sales  personnel,  are provided  under an agreement with Harrogate
Marketing  LLC, a Utah  limited  liability  company  owned by David G. Derrick a
former officer and director of the Company.

Competition

         The Company's products compete in the medical food,  nutrition and drug
industries.   At  present,  there  are  several  companies,   such  as  ImmuCell
Corporation and GalaGen, Inc., that are involved in the research and development
of drugs derived from  colostrum  and  hyper-immunized  cows.  In addition,  the
Company   faces   competition   from   numerous    pharmaceutical    and   other
biopharmaceutical  companies that are currently developing  products,  utilizing
unrelated technologies, for the treatment or prevention of many of the diseases,
infections  and  syndromes  identified  by the  Company for  application  of its
product candidates. Many of the Company's competitors have substantially greater
capital  resources,  research and development  capabilities,  manufacturing  and
marketing resources, and experience than the Company.

         Two  nutraceutical  products are produced and  distributed  by the Ross
Products Division of Abbott Laboratories - Ensure(R) and Advera(R).  The Company
believes  that  Ensure is  currently  marketed  to the  elderly  and others as a
nutritional  supplement or meal  replacement,  while Advera is being marketed to
individuals  who are HIV positive or have AIDS, as a  nutritional  supplement or
meal replacement and as a way to manage their weight.  The Company believes that
the  Ross  Products   Division  of  Abbott   Laboratories   currently   controls
approximately  70% of the nutritional  supplement and meal replacement  markets.
The Company is also subject to increasing competition from companies that market
various  powders  and  proteins  for weight  management  and  general  health to
otherwise healthy individuals.


                                      -10-

<PAGE>



         The  Company's  principal  competitors  in the nutrition bar market are
PowerBar,  ClifBar,  Met-Rx,  and  Balance  Bar. It believes  its  products  are
differentiated  from other nutrition bars by their taste and, in the case of the
medical food bar, the scientific and medical base of the product. However, these
competitors  are larger,  enjoy  greater  market  recognition  and have  greater
financial  resources  than the Company  allowing them to more widely promote and
market their products.

Government Regulation

         The biopharmaceutical products and technologies owned by or licensed to
the Company  are  heavily  regulated  by the FDA,  the EPA and other  regulatory
authorities  pursuant to  applicable  federal,  state and local laws,  rules and
regulations. The manufacturing,  packaging, labeling, advertising, distribution,
and sale of the  Company's  nutrition  and medical 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 and the Fair  Packaging  and Labeling  Act, 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.

         The Company's products are generally  regulated and classified as foods
under the FDCA and are not subject to premarket  approval by the FDA, unlike the
drug candidates and  biopharmaceutical  products of the Company.  However,  food
products are subject to  comprehensive  labeling and safety  regulations  of the
FDA, the  violation of which could result in product  seizure and  condemnation,
injunction of business activities,  or criminal or civil penalties. In addition,
if the FDA determines, on the basis of labeling, promotional claims or marketing
practices  of the  Company,  that the  promoted  or  intended  use of any of the
Company's  products  is for  the  diagnosis,  cure,  mitigation,  treatment,  or
prevention of disease,  it could  regulate  those products as drugs and require,
among other  things,  premarket  approval for safety and  efficacy.  The Company
believes  that it presently  complies in all material  respects with these rules
and regulations.  However, there can be no assurance that non-compliance, or the
cost of future compliance with such laws or regulations will not have a material
adverse  effect on the  Company's  business,  results of operations or financial
condition.

         The Company's  advertising is subject to regulation by the FTC pursuant
to the Federal Trade Commission Act, which prohibits unfair or deceptive acts or
practices,  including  the  dissemination  of false or  misleading  advertising.
Violations  of the FTCA may result in a cease and desist order,  injunction,  or
civil  or  criminal  penalties.  The FTC  monitors  advertising  and  entertains
inquiries and complaints from competing companies and consumers. It also reviews
referrals from industry self-regulatory organizations.

Employees

         As of September 30, 1998, the Company had 3 full-time employees.  Since
September 1, 1998,  the Company leases 7 full-time  employees  under a marketing
agreement with Harrogate.  The Harrogate employees staff the marketing and sales
operations  of  Optim,  and  include  its  President,  Randy  Olshen.  Under the
agreement  with  Harrogate,  the  Company  pays  Harrogate a fee of 45% of gross
revenues from the  nutrition  bar and medical food  products  marketed by Optim.
Harrogate pays Mr. Olshen and the other employees and costs  associated with its
duties under the agreement.  Harrogate also received options to purchase 308,000
shares of Biomune  common stock at a price of $2.00 per share,  which it may use
as incentives and for compensation of its employees providing services to Optim.
None  of  the  Company's  employees  are  subject  to  a  collective  bargaining
agreement. See "Certain Relationships and Related Transactions."

ITEM 2.  PROPERTIES

     The corporate  headquarters for Biomune and Optim are located at 2401 South
Foothill Drive,  Salt Lake City, Utah under a written lease agreement with Young
Electric Sign Company,  an unrelated third party (the "Lease  Agreement").  That
Lease Agreement expires on September 30, 1999. The Lease Agreement  involves the
lease for Biomune and Optim of  approximately  3,500 square feet of office space
(approximately  2,800 square feet of which is being  utilized by Biomune and the

                                      -11-

<PAGE>
approximately  700 remaining  square feet of which are being  utilized by Optim)
and  approximately  800 square feet of research space. The monthly rent for both
Biomune's  and Optim's  space in 1998 was $7,875 per month in 1998 and increased
to $8,268.75 per month in 1999. The Company believes that its current  corporate
headquarters is suitable for its needs for the foreseeable future up through and
including the  termination of the Lease  Agreement on September 30, 1999, and is
in good  condition and repair.  As of September 30, 1998,  Biomune was utilizing
approximately  90% of the  approximately  2,800  square feet of office space and
subletting  the  approximately  800  square  feet of  research  space to Bioxide
Corporation.

         In addition to the corporate  headquarters,  Optim leases approximately
3,800 square feet of warehouse space in West Valley City, Utah.  Presently Optim
uses  approximately  75% of the warehouse space. The Company believes that those
facilities  will  accommodate  Optim's  operations and projected  growth for the
foreseeable future.  Rockwood occupies approximately 4,000 square feet in leased
space in an office building in Los Angeles, California.

ITEM 3.  LEGAL PROCEEDINGS

         On October 12, 1995, a Proposed  Class Action  Complaint for Violations
of the Federal Securities Laws was filed in the United States District Court for
the District of Utah,  Central  Division,  by Roman Sterlin  (Civil No.  2:95CV-
0944G).  The  Complaint,  as  subsequently  amended,  named as  defendants,  the
Company,  David G. Derrick (the  Company's  former Chief  Executive  Officer and
Chairman of the  Board),  Aaron Gold (a  director  of the  Company),  Charles J.
Quantz (a director of the  Company),  Jack D.  Solomon (a founder of the Company
and a member of the  Company's  Business  Advisory  Board),  Genesis  Investment
Corporation  (a  shareholder  of the  Company)  and The  Institute  for Social &
Scientific  Development,  Inc. (a shareholder of the Company). The plaintiff has
alleged  violations by the defendants of Sections  10(b),  20(a) and 20(A)(a) of
the Exchange  Act,  Rule 10 b-5  promulgated  under the Exchange Act and general
misappropriation  of  material  non-public  information.  The  Company 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  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.
No date has been set for a rehearing  in the trial court.  The Company  believes
that the allegations  made in the Complaint are wholly without merit and intends
to  vigorously  oppose the  claims of the  plaintiff.  However,  there can be no
assurance that the Company's  defense will be successful.  Until September 1998,
the  Company has paid the legal fees and related  expenses  associated  with the
defense of this action on behalf of the Company and the other named defendants.

         On  September  29,  1998,  Bryan  Furtek  filed a lawsuit  in the Third
Judicial  District Court for Salt Lake County,  Salt Lake  Department,  State of
Utah (Civil No. 9890909809),  naming the Company, Bioxide Corporation,  David G.
Derrick,  Jack  Solomon,  Genesis  Investment  Corporation,  and  Biomed  Patent
Development as defendants.  The  plaintiff's  claims  allegedly arose out of his
role  in  the  development  of  certain  waste  disposal   technologies.   Those
technologies  were  included  in the  property  sold by the  Company  in 1998 to
Bioxide Corporation. The defendants, including the Company, filed answers to the
complaint,  denying  all of  plaintiff's  principal  allegations  and claims and
asserting  counterclaims  against Mr.  Furtek,  including,  among other  things,
unjust  enrichment  and a claim that Furtek  misrepresented  his  authority  and
ability to patent the technology at the core of the  litigation.  The litigation
is presently in the discovery phase. The Company believes  Furtek's claims to be
without merit and will vigorously defend itself in this action.

         By agreement with the Company,  entered into September 1998,  Harrogate
has agreed to assume and pay all costs,  including legal fees, of the Company in
connection with both of these matters.


                                      -12-
<PAGE>
                                     PART II

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

         The  Company's  common stock is listed on the National  Association  of
Securities Dealers Automated Quotation ("Nasdaq") SmallCap Market. The Company's
common  stock  trades  under the primary  symbol  "BIME" and was included on the
Nasdaq SmallCap Market  commencing April 6, 1994. Prior to that date, the common
stock was traded in the  over-the-counter  market.  The following table is based
upon  information  available to the Company and sets forth the range of the high
and low bid prices for the 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):

                   Quarter Ended                       High(1)          Low(1)

         September 30, 1998                         $    4.06         $    4.00
         June 30, 1998                              $    9.38         $    8.75
         March 31, 1998                             $   10.16         $    9.38
         December 31, 1997                          $    8.13         $    6.56

         September 30, 1997                         $   43.80         $   37.50
         June 30, 1997                              $   50.00         $   46.90
         March 31, 1997                             $  131.30         $  118.80
         December 31, 1996                          $  146.90         $  121.90
---------------------

(1)      The source of these high and low prices was the National Association of
         Securities Dealers,  Inc. These quotations reflect inter-dealer prices,
         without retail  mark-up,  mark-down or commission and may not represent
         actual  transactions.  These high and low prices are post-split prices,
         reflecting the 1-for-10 reverse stock split effective November 10, 1997
         and the 1-for-10  reverse stock split effective  December 31, 1998. The
         high and low prices listed have been rounded up to the next highest two
         decimal places.

         The  market  price  of the  common  stock  is  subject  to  significant
fluctuations  in response to  variations in the  Company's  quarterly  operating
results,  general  trends in the market for the  Company's  products and product
candidates,  and other factors,  over many of which the Company 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 the
Company's  common  stock,  regardless  of  the  Company's  actual  or  projected
performance.  On January  4,  1999,  the  closing  price of the common  stock as
reported by Nasdaq was $2.00 per share.

         On January 4, 1999, there were approximately 1,204 holders of record of
the Company's common stock and approximately 5,400 beneficial owners,  including
shares of common stock held in street name.

         The Company has never  declared  or paid cash  dividends  on its common
stock and does not  anticipate  paying any cash dividends on its common stock in
the foreseeable  future. The Company currently  anticipates that all of its cash
will be retained for use in the operation  and  expansion of its  business.  Any
future  determination  as to cash  dividends  will depend upon the  earnings and
financial  position  of the  Company  and such  other  factors  as the  Board of
Directors  may deem  appropriate.  Cash  dividend  payments to holders of common
stock are subject to preferred dividend payments to the holders of the Company's
preferred stock.

         As of  January  4,  1999,  the  Company  had the  following  series  of
preferred stock outstanding:

         o        Series A 10% Cumulative  Convertible  Preferred Stock - 39,774
                  shares  outstanding,  convertible  into 1,193 shares of common
                  stock;


                                      -13-

<PAGE>

         o        Series  B 10%  Cumulative  Convertible  Preferred  Stock - 449
                  shares  outstanding,  convertible  into 14  shares  of  common
                  stock;

         o        Series E 8% Cumulative  Convertible Non-Voting Preferred Stock
                  - 322.68 shares  outstanding,  convertible into 278,173 shares
                  of common stock,  based on conversion feature of the lesser of
                  42% discount to market or $0.60 per share.

         o        Series F 8% Cumulative  Convertible Non-Voting Preferred Stock
                  - 1,318,749 shares  outstanding.  Subsequent to the end of the
                  fiscal  year  covered by this report the holders of a majority
                  of the issued  and  outstanding  shares of Series F  Preferred
                  consented  to an amendment  of the  designation  of rights and
                  preferences  of the Series F Preferred  whereby  each share of
                  Series F  Preferred  will be  convertible  to .3 of a share of
                  common stock,  however, not more than 250,000 shares of common
                  stock may be  issued in the  aggregate  in  conversion  of all
                  shares of Series F Preferred  unless  stockholder  approval is
                  received  for  the  issuance  of  more  than  250,000  shares.
                  Unconverted  shares of Series F  Preferred  may be redeemed by
                  the Company at a price of $.80 per share.

         o        Series G 8% Non-Convertible,  Non-Voting Preferred Stock. This
                  stock  is  to  be  issued  in  connection  with  the  Rockwood
                  acquisition.  750,000 shares are authorized,  of which 500,000
                  will be issued.  The stock is entitled to annual  dividends of
                  8% ($.80) per share, payable quarterly in additional shares of
                  stock or cash, at the option of the Company, and a liquidation
                  preference  of $1.33 per  share.  It is not  convertible  into
                  common stock and is therefore anti-dilutive.

         o        Series J 10%  Convertible,  Non-Voting  Preferred Stock - this
                  series has been authorized by the board of directors,  but the
                  designation  was not been filed with the State of Nevada until
                  December  31,  1998.  The  series  consists  of  2,000  shares
                  authorized,  with a stated value of $1,000 per share.  Holders
                  are entitled to a dividend of $100 per share annually, payable
                  quarterly in stock or cash at the option of the Company.  Each
                  share is convertible  to shares of common stock  calculated by
                  dividing  $1,000 by the market price of the  Company's  common
                  stock on the date of  conversion;  subject to an  aggregate of
                  250,000  shares  of  common  stock,   as  with  the  Series  F
                  Preferred. As of September 30, 1998, the Company was obligated
                  to  issue a total  of  1,135  shares  of  Series  J  Preferred
                  following  the  acceptance  of the  designation  by the  state
                  authorities.

Recent Sales of Unregistered Equity Securities

         The  following  information  sets  forth  certain  information  for all
securities  the Company  sold during the past three years  without  registration
under the Securities Act.

         In September 1998, the Company issued  restricted  shares of its common
stock and  options to purchase  restricted  shares of common  stock.  A total of
32,910 shares of restricted stock were issued,  primarily to satisfy outstanding
payables  of  Rockwood  and  for  services   provided  to  the  Company  or  its
subsidiaries.  The shares  were  issued at market  value  ($4.00) on the date of
issue.  In addition,  the Company  issued one vendor  options to purchase  1,000
shares of common stock at a price of $7.50 per share. In each case,  issuance of
the securities was accomplished without registration under the Securities Act of
1933, as amended (the  "Securities  Act"), in reliance on the exemption from the
registration  requirement  afforded by Section 4(2) of the  Securities  Act that
pertains to issuances  not  involving  any public  offering of  securities.  The
certificates  representing  such shares,  and the  documents  representing  such
options bear legends  containing  ordinary  and  customary  terms and may not be
resold except pursuant to  registration  under the Securities Act or pursuant to
an available exemption from the registration requirement of the Securities Act.

         In September 1998, the Company accepted  subscriptions in cash totaling
$675,000 for purchase of shares of its Series J Preferred  Stock. The purchasers
of such  shares  were  accredited  investors  as that term is defined  under the
Securities Act and the rules and regulations  promulgated  under such Act. These
transactions were made pursuant to exemptions from the registration requirements
of  the  Securities  Act  for  sales  of  restricted  securities  to  accredited
investors.

                                      -14-
<PAGE>

         On August 1, 1997, the Company issued 1,000 shares of restricted common
stock and options to purchase  2,500 shares of restricted  common stock to three
consultants  for  services  provided to the  Company.  The shares of  restricted
common stock issued were valued at $37.50 per share,  and the exercise  price of
the options is $37.50 per share,  which  price was the fair market  value of the
Company's common stock on the date of issuance of such securities,  adjusted for
intervening   reverse  stock  splits.   The  issuance  of  such  securities  was
accomplished  without  registration under the Securities Act of 1933, as amended
(the  "Securities  Act"),  in reliance on the  exemption  from the  registration
requirement  afforded by Section  4(2) of the  Securities  Act that  pertains to
issuances not  involving any public  offering of  securities.  The  certificates
representing  such  shares,  and the  documents  representing  such options bear
legends  containing  ordinary and  customary  terms and may not be resold except
pursuant to  registration  under the  Securities Act or pursuant to an available
exemption from the registration requirement of the Securities Act.

         In fiscal  year 1996,  the  Company  sold 5,000  shares of its Series C
Preferred for $5 million in cash (or $1,000 per share).  The Company  received a
total of $1.5 million in cash (less  certain costs and expenses of the offering)
as of  September  30,  1996,  and the $3.5  million  balance was received by the
Company in cash  during  fiscal year 1997.  The Series C  Preferred  bears an 8%
cumulative  dividend payable annually either in cash or in additional  shares of
Series C Preferred,  at the election of the  Company's  Board of  Directors.  In
connection with the sale of the Series C Preferred,  the Company paid a finder's
fee of $500,000,  or 10% of the gross offering  amount from the  subscription of
the Series C Preferred,  and certain costs and expenses related to the offering,
including,  but not limited to,  legal fees,  accounting  fees and escrow  fees.
Subject to certain conversion limitations on the Series C Preferred as set forth
in the Series C Preferred  Designation of Rights and Preferences,  each share of
Series  C  Preferred  was  convertible   into  common  stock.  See  "Market  for
Registrant's  Common  Equity  and  Related  Stockholder   Matters,"   subheading
"Preferred  Stock -- Series C  Preferred."  The Series C Preferred  offering was
made in  reliance  on  Regulation  D and  Regulation  S  promulgated  under  the
Securities Act.

         With respect to all of the foregoing offers and sales of restricted and
unregistered  securities by the Company, the Company relied on the provisions of
Sections  3(b)  and  4(2)  of the  Securities  Act  and  rules  and  regulations
promulgated  thereunder,  including,  but not  limited  to Rules  505 and 506 of
Regulation D, in that such  transactions  did not involve any public offering of
securities and were exempt from registration under the Securities Act. The offer
and sale of the securities in each instance was not made by any means of general
solicitation,  the  securities  were  acquired by the  investors  without a view
toward  distribution,  and all  purchasers  represented to the Company that they
were sophisticated and experienced in such transactions and investments and able
to bear the  economic  risk of their  investment.  A legend  was  placed  on the
certificates  and instruments  representing  these  securities  stating that the
securities  evidenced by such  certificates or instruments,  as the case may be,
have  not been  registered  under  the  Securities  Act and  setting  forth  the
restrictions  on their  transfer and sale.  Each  investor also signed a written
agreement that the securities would not be sold without  registration  under the
Securities Act or pursuant to an applicable exemption from such registration.

ITEM 6.  SELECTED FINANCIAL DATA

         The selected  financial  information  presented  below has been derived
from the Company's  consolidated  audited  financial  statements for each of the
fiscal years ended September 30, 1994,  1995, 1996, 1997 and 1998. This selected
financial  information  should be read in conjunction with Item 7, "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations,"
below, and the Company's  consolidated  financial  statements  forming a part of
this Report. With respect to the information for the 1994 through 1997, the data
are derived from consolidated  financial  statements  audited by Arthur Andersen
LLP.  Information  for the year ended  September  30, 1998 is from  consolidated
financial statements audited by Tanner + Company.


                                      -15-

<PAGE>
<TABLE>
<CAPTION>


       Consolidated Statement of                      As of and for the fiscal years ended September 30,
       Operations Data From                           --------------------------------------------------
       Continuing Operations:                     1994          1995         1996         1997          1998
       ----------------------------------  --------------------------------------------------------------------

<S>                                        <C>            <C>           <C>          <C>          <C>         
       Revenues                            $          --  $         --  $     2,001  $   199,051  $  2,806,853
       Net loss from continuing operations $  (3,980,223) $ (3,005,188) $(5,020,398) $(7,348,281) $ (1,622,647)
       Net Loss per common share
          from continuing operations       $      (32.50) $     (18.25) $    (27.20) $    (51.08) $      (4.52)*


       Consolidated Balance Sheet Data:

       Total assets                        $   9,617,345  $  6,718,420  $  9,166,705 $ 2,732,498  $  5,650,475
       Long-term debt                      $          --  $         --  $         -- $        --  $         --
       Shareholders' equity                $   9,404,636  $  6,329,175  $  8,646,525 $ 1,343,985  $  3,745,726
       Cash dividends per
         common share                      $          --  $         --  $         -- $        --  $         --

</TABLE>


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

       The  following   discussion  and  analysis  of  the  Company'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 8, "Financial Statements and Supplementary Data."

Overview

       The Company is engaged in the  research,  development,  distribution  and
sale of  biologic  pharmaceutical  products,  nutraceutical  food  products  and
supplements, medical foods and health and beauty aids. Certain of these products
have been  developed  by the Company and  incorporate  a patented  whey  protein
technology,  which is designed to provide or increase protective immunities from
an  immune response to disease and to provide nutritional  supplementation.  The
Company's medical food bar is a patented formulation developed by researchers at
Beth Israel Deaconess  Medical Center,  Harvard Medical School,  and marketed by
the Company under an exclusive license.  The energy and sports nutrition bars of
the Company are also marketed  under an exclusive  license from the developer of
the products.  Through a majority owned subsidiary, the Company also distributes
health and beauty aids and related  products  to national  wholesale  and retail
customers.

         The Company  believes its future results of operations will be affected
by factors such as:

         o        the availability of cash from financing activities to fund its
                  operations;

         o        the  results  of  research  and  development  efforts  and the
                  clinical  trials  on  BWPT-301,   BWPT-302  and  other  future
                  pharmaceutical  drug  candidates  based on or derived from the
                  Technology;

         o        market acceptance of Optimune,  the nutrition and medical food
                  bars,   and   pharmaceutical   drug   candidates,    increased
                  competitive pressures;

         o         changes in raw material sources and costs; and

         o        adverse changes in general  economic  conditions in any market
                  in which the Company conducts or markets its products.


                                      -16-

<PAGE>

         The Company believes that the majority of its future revenues will come
from its nutrition and medical food products and new nutraceutical  products and
pharmaceutical  drugs. The Company cannot determine the ultimate effect that new
products will have on revenues,  earnings or the price of the  Company's  common
stock.

         The Company's  primary  focus and efforts  during the fiscal year ended
September 30, 1998, were the  commercialization  of its nutraceutical  products,
assessing and obtaining additional  nutraceutical and medical products to add to
product  line,  and, to a lesser  extent,  continuing  its efforts to obtain FDA
approval of BWPT-301 for the treatment of  cryptosporidiosis in people with AIDS
and BWPT-302 for the  treatment of E. coli,  strain  0157:H7.  During the fiscal
year ended September 30, 1998, $116,860 of the Company's revenues were generated
from the sale of Optimune  and  Maximune.  The Company  also had  revenues  from
settlement of a royalty fee arrangement and discontinued  operations of $400,000
and  $28,027,  respectively.  The sale of health and  beauty  aids  through  the
Company's majority owned Rockwood  subsidiary provided revenues of $2,261,966 in
1998.  The sale of nutrition and medical food bars  commenced in September  1998
and produced no material revenues during fiscal year 1998.

         Continuing  in fiscal year 1999,  the Company will focus its  resources
and efforts on:

         o        commercialization of its nutraceutical products;

         o        continued  marketing  and selling of the NiteBite and Mountain
                  Lift bars;

         o        acquisition of new nutraceutical and or medical food products;

         o        development of one or more additional  nutraceutical  products
                  based on the Technology; and

         o        approval of BWPT-301 and BWPT-302.

Results of Operations

Fiscal Year 1998 Compared to Fiscal Year 1997

         During the fiscal year ended September 30, 1998, the Company  generated
revenues from continuing  operations  totaling  $2,806,853.  These revenues were
generated primarily by Optim, the Company's nutraceutical product subsidiary and
Rockwood,  the  Company's  beauty aid  subsidiary.  In fiscal  year 1997,  total
revenue was $199,051, all of which was generated by Optim. The increase in sales
during  fiscal  year 1998 is  attributable  primarily  to sales by the  Rockwood
subsidiary.

         Management, consulting and research expenses from continuing operations
decreased from $3,563,682 in fiscal year 1997 to $1,052,674 in fiscal year 1998.
This decrease was due primarily to a reduction in expenditures  for research and
development.  The Company anticipates that it will continue to focus on reducing
expenditures  for  management,  consulting and research fees in the  foreseeable
future by reducing its expenses in the following areas:

         o         Phase II clinical trials on BWPT-301;

         o         Phase III clinical trials on BWPT-301;

         o         Phase I clinical trials on BWPT-302;

         o         Phase II clinical trials on BWPT-302;

         o         additional nutraceutical studies.

         Other general and  administrative  expenses  decreased from  $4,074,580
during fiscal year 1997 to $1,924,429  during fiscal year 1998.  The decrease in
other  general and  administrative  expenses was primarily a result of decreased
activity in connection with the commercialization of the Company's nutraceutical
products, the reduction of sales,

                                      -17-

<PAGE>
marketing  and  support   personnel   for  Optim,   and  the   development   and
commercialization  of other  nutraceutical  products.  The Company  expects that
general  and  administrative  expenses  will  increase  in  fiscal  year 1999 as
compared  to fiscal  year 1998,  as  additional  sales,  marketing  and  support
personnel are added. This increase in other general and administrative  expenses
is expected to be offset by increased sales of the Company's products.

         Interest  income  decreased  from  $256,331  for fiscal  year 1997,  to
$144,042 for fiscal year 1998.  This decrease was primarily  attributable to the
use of cash for  management,  consulting and research,  as well as other general
and administrative expenses. The Company incurred interest expense of $44,722 in
fiscal year 1998, compared to no interest expense in fiscal year 1997.

         The Company had a net loss from  continuing  operations  of  $2,968,108
(after  accounting for stock  dividends on the  outstanding  shares of preferred
stock) in fiscal year 1998, as compared to a net loss from continuing operations
of $11,388,798 in fiscal year 1997. This decrease in net loss is attributable to
a decrease in accrued  preferred  stock  dividends,  the  beneficial  conversion
features  on  preferred  stock,  an increase in the  Company's  revenues,  and a
reduction  in other  general and  administrative  expenses as  described  above.
Additional  factors  were  decreases  in  management,  consulting  and  research
expenses.  The net loss per common share from  continuing  operations  decreased
from $51.08 for fiscal year 1997 to $4.52 for fiscal year 1998.  The decrease in
net loss per  common  share is due  primarily  to the  decrease  in  management,
consulting  and research  and  development  expenses,  as well as a reduction in
general and  administrative  expenses.  The reasons for the  decreases  in these
expenses are described above.

         The  Company has  incurred  significant  net  operating  losses,  which
totaled  $37,848,773 from inception through  September 30, 1998.  Certain of the
net operating loss carryforwards  ("NOLs") related to the accumulated  operating
loss may be limited by an  ownership  change (as that term is defined in Section
382 of the Internal  Revenue Code of 1986, as amended) that may have occurred as
of December 10, 1991. See Note 11 to the consolidated financial statements for a
detailed discussion of the Company's NOLs.

Fiscal Year 1997 Compared to 1996

         During the fiscal year ended September 30, 1997, the Company  generated
revenues totaling $199,051, compared to $2,001 revenues in fiscal year 1996. The
increase in sales by Optim during fiscal 1997 is  attributable to a full year of
marketing and selling the Company's first nutraceutical products.

         Management,  consulting and research expenses increased from $3,359,985
in fiscal year 1996 to $3,563,682 in fiscal year 1997.  This increase was due to
the Company using outside consultants for filing the IND on BWPT-302 and for the
Company's fund raising activities. Such increases in management,  consulting and
research  expenses were funded by existing cash from previous sales of preferred
stock.

         Other general and  administrative  expenses  increased from  $1,897,852
during fiscal year 1996 to $4,074,580  during fiscal year 1997.  The increase in
other  general and  administrative  expenses was primarily a result of increased
activity  in  connection   with  the  development   and   commercialization   of
nutraceutical  products  and  the  addition  of  sales,  marketing  and  support
personnel for Optim, as well as activity in connection with preparing and filing
the Company's IND on BWPT-302 for E. coli, strain 0157:H7,  and to report to the
FDA on the results of the Phase I clinical  trials on  BWPT-301,  as well as the
preliminary results of the initial Phase II clinical trials on BWPT-302, and the
addition of physical space for Optim.

         Interest  income  decreased  from  $271,690  for  fiscal  year  1996 to
$256,331for  fiscal year 1997.  This decrease was primarily  attributable to the
use of cash for  management,  consulting  and  research,  as well as general and
administrative  expenses.  The Company  incurred  no interest  expense in either
fiscal year 1997 or fiscal year 1996.

         The  Company  incurred  a  net  loss  from  continuing   operations  of
$11,388,798  (after  accounting  for  the  payment  of  stock  dividends  on the
outstanding shares of preferred stock) in fiscal year 1997, as compared to a net
loss of  $5,111,597  in  fiscal  year  1996.  This  increase  in net  loss  from
continuing operations was attributable to an increase in management,  consulting
and research expenses and other general and administrative  expenses,  offset in
part by a decrease in stock  dividends  paid on preferred  stock  because of the
conversion of shares of preferred stock into shares of

                                      -18-

<PAGE>
common  stock  during  fiscal  year  1997.  The net loss per  common  share from
continuing operations increased  from $27.20 for fiscal  year 1996 to $51.08 for
fiscal year 1997.  The net loss per common share would have increased even more,
but for the fact that the  weighted  average  number of shares of the  Company's
Common stock outstanding increased as a result of conversions of preferred stock
into common stock.  Preferred stock dividends  increased from $91,199 in 1996 to
$337,766 in 1997, due to the sale of additional  shares of preferred  stock into
shares of common stock in 1997.

Liquidity and Capital Resources

         The Company has been unable to finance its  operations  from cash flows
from  operating  activities.  Substantial  funds  and  additional  time  will be
required to continue  commercializing the Company's  nutraceutical  products, to
complete Phase II and Phase III clinical trials on BWPT-301  (assuming  efficacy
is established  during the Phase II clinical trials),  to complete the necessary
clinical trials on BWPT-302, to obtain regulatory approval for and commercialize
products  utilizing the Technology and to develop and  commercialize  additional
nutraceutical  products based on the Technology.  Because  operating  activities
have not  produced  significant  revenues to date and  because the Company  will
require  significant  capital to  accomplish  the  objectives  set forth  above,
additional  equity  and/or debt funding will be required,  although such funding
may not be available or may not be  available  on  favorable  terms.  Management
believes that the Company-funded  research and development  efforts to date have
positioned  the Company to pursue future  research and  development  efforts and
clinical trials with joint venture,  strategic  alliance,  government or private
grants or other third-party funding.

         As of September 30, 1998, the Company had cash and cash  equivalents of
$27,701 and working capital of $981,757 compared to cash and cash equivalents of
$1,585,099 and working capital of $925,166 as of September 30, 1997.

         During  fiscal  year 1998,  the  Company's  operating  activities  used
$1,740,736 of cash, which had previously been provided by the issuance of shares
of its  preferred  stock and the  exercise of options for the purchase of common
stock. In 1997, the Company's operating activities used $4,401,787 of cash, also
principally  provided by the sale of the Company's equity securities  (primarily
preferred stock).

         During fiscal year 1999, the Company anticipates incurring direct costs
of approximately $1,000,000 in marketing and selling its nutraceutical products.
The Company  expects it will continue to seek funds to supplement  sales revenue
for  operations  and to finance  the  continued  commercialization  of  products
utilizing the Technology and the marketing of its other products.

         The  Company has not  established  a credit  facility  with any lending
institution. The Company has in the past, from time to time, borrowed money from
certain  shareholders,  but has no formal  financing  arrangement,  agreement or
understanding  with any of its  shareholders  or any other  related or unrelated
party to do so in the future.

         The consolidated financial statements of the Company have been prepared
on the  assumption  that the  Company  will  continue  as a going  concern.  The
Company's independent public accountants have issued their report dated December
10, 1998,  that  includes an  explanatory  paragraph  stating that the Company's
recurring losses and accumulated deficit,  among other things, raise substantial
doubt about the Company's ability to continue as a going concern.  The Company's
product line is limited and it has been  necessary to rely upon  financing  from
the sale of its equity securities to sustain  operations.  Additional  financing
will be  required if the  Company is to  continue  as a going  concern.  If such
additional funding cannot be obtained, the Company may be required to scale back
or discontinue its operations. Even if such additional financing is available to
the Company, there can be no assurance that it will be on terms favorable to the
Company.  In any event,  such  financing  will result in immediate  and possibly
substantial dilution to existing shareholders.


                                      -19-
<PAGE>
Year 2000 Issues

         Since  its  inception,  the  Company  has  attempted  to  make  use  of
increasingly sophisticated computer hardware and software to manage its business
and  operations.  The Company also relies on  third-parties  to  facilitate  its
business including, for example:

         o        contract manufacturers who produce its products;

         o        telecommunications providers on whom the Company must rely for
                  its communications;

         o        public  utilities  which  provide  electrical  power and other
                  utilities needed in the Company's operations;

         o        major  credit card  companies  that  process  payments for the
                  Company's products;

         o        major shipping  companies  through which the Company ships its
                  products;

         o        financial  institutions  that provide  commercial  banking and
                  other financial services to the Company; and

         o        the Nasdaq Stock Market,  on which the Company's  common stock
                  is traded.

         Many existing  computer programs use only two digits to identify a year
in the date field and were designed,  developed and modified without considering
the  impact  of the  upcoming  change in the  century.  If not  corrected,  such
computer  applications  could fail or create  erroneous  results by or after the
Year 2000 by erroneously  identifying  the year "00" as 1900,  rather than 2000.
Correcting a Year 2000 problem on a large  mainframe or network  application can
be difficult and expensive.  If a company does not successfully address its Year
2000 issues,  it may face material adverse  consequences.  The Company is in the
process of  insuring  that all of its  internal  computer  systems are Year 2000
compliant.  The Company will assess the readiness of the Company for meeting the
Year 2000 problem.  It is expected that the assessment and remediation,  if any,
of Year 2000  issues  affecting  the  Company's  internal  systems or  products,
including any issues involving  embedded  technology,  will be completed by June
30, 1999 and that the cost to the Company will not be significant.

         With respect to  third-party  providers  whose services are critical to
the  Company,  the Company  intends to monitor the efforts of such  providers as
they become Year 2000 compliant.  The Company is presently not aware of any Year
2000  issues  that have been  encountered  by any such third  party  which could
materially affect the Company's operations. Notwithstanding the foregoing, there
can  be  no  assurance  that  the  Company  will  not   experience   operational
difficulties  as a result of Year 2000  issues,  either  arising out of internal
operations or caused by third-party  service  providers,  which  individually or
collectively  could have a material  adverse  effect on the Company's  business,
financial condition or results of operations.

Recent Accounting Pronouncements

         In September  1997, the Financial  Accounting  Standards Board ("FASB")
issued SFAS No.  130,  "Reporting  Comprehensive  Income"  (SFAS 130).  SFAS 130
requires entities  presenting a complete set of financial  statements to include
details  of   comprehensive   income  that  arise  in  the   reporting   period.
Comprehensive income consists of net earnings or loss for the current period and
other  comprehensive  income,  which  consists of revenue,  expenses,  gains and
losses that bypass the  statement  of earnings  and are  reported  directly in a
separate component of equity. Other comprehensive income includes,  for example,
foreign  currency items,  minimum pension  liability  adjustments and unrealized
gains and losses on certain investment securities.

         SFAS 130 requires that components of  comprehensive  income be reported
in a financial  statement  that is displayed  with the same  prominence as other
financial  statements.  SFAS is  effective  for  fiscal  years  beginning  after
December 15, 1997 and requires  restatement of prior period financial statements
presented for comparative purposes.

                                      -20-
<PAGE>
Adoption of SFAS 130 is not required for  reporting on interim  periods prior to
the close of a fiscal year  beginning  after December 15, 1997. The Company will
adopt SFAS 130 commencing with the year ending September, 1999.

         During  January  1998,  the  American  Institute  of  Certified  Public
Accountants  ("AICPA") issued Statement of Position 98-5 "Reporting on the Costs
of Start-up  Activities"  ("SOP 98-5). SOP 98-5 becomes effective for all fiscal
years  beginning after December 15, 1998. The Company will adopt SOP 98-5 in its
fiscal year beginning October 1, 1999. Because the current  amortization periods
of the product  development  costs and start-up costs  averaging 12 months,  the
Company  does not expect the  adoption of SOP 98-5 to have a material  impact on
the Company's financial statements.

         During  January  1998,  the AICPA  issued  Statement  of Position  98-1
"Accounting  for the  Costs of  Computer  Software  Developed  or  Obtained  for
Internal  Use" ("SOP  98-1").  SOP 98-1 becomes  effective  for all fiscal years
beginning  after  December 15, 1998. The Company does not expect the adoption of
SOP  98-1  to  have  a  material  adverse  effect  on  the  Company's  financial
statements.

Certain Business Considerations and Risk Factors

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

         History of Operating Losses;  Uncertainty of Future Profitability.  The
Company  has  incurred  significant  operating  losses  since  formation.  As of
September 30, 1998, the Company had an accumulated deficit of $37,726,503.
The factors contributing to these significant operating losses included:

                  o        ongoing marketing expenditures;

                  o        acquisition expenses and costs;

                  o        expansion of its research and development programs;

                  o        costs  associated  with   pre-clinical   studies  and
                           clinical  trials  for  its   pharmaceutical   product
                           candidates;

                  o        nutritional studies;

                  o        regulatory  compliance  requirements  related  to its
                           pharmaceutical product candidates;

                  o        trials for other products that it or its subsidiaries
                           may develop; and

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

         The Company's ability to achieve profitability depends upon its ability
to  successfully  market its  products,  to  acquire,  discover  or develop  new
products, to obtain regulatory approvals of its proposed pharmaceutical products
and  to  enter  into   agreements   for  product   development,   manufacturing,
distribution, and commercialization.  There can be no assurance that the Company
will ever achieve significant revenues or profitable operations.

         Going Concern.  The  consolidated  financial  statements of the Company
have been prepared on the  assumption  that the Company will continue as a going
concern.  The Company's  independent public accountants have issued their report
dated December 10, 1998 that includes an explanatory  paragraph stating that the
Company's recurring losses and accumulated  deficit,  among other things,  raise
substantial  doubt about the Company's  ability to continue as a going  concern.
The  Company's  product  line is limited and it has been  necessary to rely upon
financing  from  the  sale  of its  equity  securities  to  sustain  operations.
Additional  financing  will be required if the Company is to continue as a going
concern.  If such  additional  funding  cannot be  obtained,  the Company may be
required to scale back or discontinue its

                                      -21-
<PAGE>
operations. Even if such additional financing is available to the Company, there
can be no assurance that it will be on terms favorable to the Company.

         Sale of Equity  Securities;  Future Dilution.  The Company  anticipates
that it will sell  additional  equity  securities to fund its  operations and to
acquire  inventory.  Absent  such  additional  funding,  the Company may find it
necessary to postpone or cancel some of its planned  marketing  and research and
development  programs.  This could  adversely  affect the  Company's  ability to
execute its business plan,  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  additional
shares of common stock or securities  convertible to common stock, such sales or
conversion  will  result in further  and  possibly  substantial  dilution of the
equity  ownership  of the  Company's  existing  holders  of common  stock.  Such
dilution may make it more  difficult  for  investors to sell their shares or may
result in a lower  price of the  Company's  securities.  The Company may also be
forced to obtain  funds  through  arrangements  with  collaborative  partners or
others may require the  Company to  relinquish  rights to certain of its product
candidates or technologies or products.

         Dependence  on  Licensed  Technology.  The  Company is  dependent  upon
licenses  granted by third  parties for its  product  line and  Technology.  The
several  license  agreements  require that the Company  achieve minimum sales in
order to retain the license  rights.  There can be no assurance that the Company
will meet the minimum sales  requirements to avoid  cancellation of the licenses
or a change in its rights.  The  Company's  failure to observe or perform any of
the  covenants,  terms,  conditions  or  provisions  contained  in  the  license
agreements or in the event of a breach of any representation or warranty made by
the Company, may result in a termination or restriction of the Company's rights.
Termination  of any of the  licenses or any  restriction  or  limitation  of its
rights would adversely affect the Company's operations and could possibly result
in the termination of the Company's business.

         Government  Regulation.  The Company's products and business activities
are subject to government  regulations,  including,  without  limitation,  those
administered  by the  FDA and the FTC and  state  and  local  agencies.  Similar
regulatory frameworks exist in other countries, where the Company is licensed to
distribute  products.  To date,  the Company has  completed  extensive  clinical
trials on  BWPT-301pursuant  to the submission to the FDA of an IND. The Company
has also  commenced  clinical  trials  on  BWPT-302  pursuant  to a second  IND,
although communications with the FDA concerning this second IND remain at a very
early stage.  Prior to marketing  pharmaceutical  products,  such  products must
undergo extensive clinical trials and an extensive  regulatory approval process.
Any denials or delays in obtaining the requisite  approvals  would likely have a
material adverse effect on the Company.  The  pharmaceutical  regulatory process
includes extensive pre-clinical safety,  pharmacology and toxicological testing.
Pre-clinical  data is required  for the filing of an IND with the FDA to conduct
clinical  testing to  establish  safety,  efficacy,  purity  and  potency of any
investigational   biological   product.   With   respect   to  each   biological
pharmaceutical product candidate, the developer must initially conduct a limited
Phase I (safety)  study,  then more  extensive  Phase II studies,  followed by a
Phase III study. This testing can take many years and require the expenditure of
substantial  capital and other  resources.  There can be no assurance  that this
testing  will be  completed  on a timely  basis or at all.  Delays or denials of
marketing approval are encountered regularly,  and the Company's activities with
respect to clinical  studies  since  fiscal 1997  regarding  its  pharmaceutical
products  have been  curtailed  due to financial  restraints  and the  Company's
increased emphasis on nutraceutical products. Prior to commencing marketing of a
pharmaceutical  product,  a  company  must file a  Product  License  Application
("PLA") and an  Establishment  License  Application  ("ELA") with the FDA and be
issued the appropriate product license and establishment  license. A PLA relates
to the product itself,  while an ELA relates to the manufacturing  facilities to
be used to manufacture  the product.  Both a PLA and an ELA are required  before
product  marketing  can  begin.  There  can  be no  assurance  that  even  after
successful clinical testing, regulatory approval of a PLA or an ELA will ever be
obtained.  If  obtained,  regulatory  approval  may  entail  limitations  on the
indicated  uses for which any  product  may be  marketed.  Following  regulatory
approval,  a product and its manufacturer  are subject to continuing  regulatory
oversight  and  review.  Later  discovery  of  problems  with a  product  or its
manufacturer  may result in  restrictions  on the  product or its  manufacturer.
These  restrictions  may include  withdrawal of the  marketing  approval for the
product.  Violation of FDA requirements in general can lead to recall or seizure
of products, injunction against production,  distribution,  sales and marketing,
and  criminal  prosecution,  among other  sanctions.  The cost to the Company of
conducting  human  clinical  trials can vary  dramatically  based on a number of
factors,  including,  but not  limited  to,  the  order and  timing of  clinical
indications  pursued,  the  size  of  the  patient  population,  the  number  of
participating institutions and the number and type of end points subject to data
collection. Because of the intense

                                      -22-
<PAGE>
competition  in the market in which the Company  operates,  the Company may have
difficulty obtaining sufficient  populations or clinician support to conduct its
clinical trials as planned and may have to expend  substantial  additional funds
to obtain access to such resources,  or delay or modify its plans significantly.
There can be no  assurance  that the Company will have  sufficient  resources to
complete the required  clinical testing  regulatory review and approval process.
Moreover,  there can be no  assurance  that  clinical  testing of the  Company's
product  candidates will provide  sufficient  evidence of safety and efficacy in
humans,  that regulatory  approvals will be granted for any product candidate or
that it will be economically feasible to commercialize any product candidate for
which regulatory approval is ultimately granted.

         Uncertainty    Regarding   Patents   and   Proprietary    Rights.   The
pharmaceutical  industry places considerable  importance on obtaining patent and
trade  secret  protection  for new  technologies,  products and  processes.  The
success  of the  Company  will  depend in large  part on its  ability  or on the
ability of its current licensors,  to defend patents,  and on their ability,  to
maintain trade secrets and operate without  infringing the proprietary rights of
others.  Patent  protection is highly  uncertain and involves  complex legal and
factual  questions.  The  Company  relies on four  patents  issued to PTI on the
Technology,  a patent  applied for by the Company  relating to an enhancement of
the Technology,  and on a patent relating to the NiteBite  medical food bar. The
patent  application  and issuance  process can be expected to take several years
and could entail  considerable  expense to the Company, as it may be responsible
for such costs  under the terms of any  technology  agreements.  There can be no
assurance  that patents will issue as a result of any  applications  or that the
existing  patents  and any patents  resulting  from such  applications,  will be
sufficiently  broad to afford  protection  against  competitors  with similar or
competing  technology.  In addition,  there can be no assurance that the patents
will not be challenged,  invalidated or circumvented, or that the rights granted
thereunder will provide  competitive  advantages to the Company.  The commercial
success of the  Company  will also  depend  upon  avoiding  infringement  of any
patents issued to competitors.  A United States patent application is maintained
under  conditions of  confidentiality  while the application is pending,  so the
Company  cannot  determine  the  inventions  being  claimed  in  pending  patent
applications  filed by third  parties,  if any.  Litigation  may be necessary to
defend or enforce the  Company's  patent and license  rights or to determine the
scope and validity of others'  proprietary  rights.  Defense and  enforcement of
patent claims can be expensive and time  consuming,  even in those  instances in
which the outcome is favorable, and could result in the diversion of substantial
resources and management time and attention from the Company's other activities.
An adverse  outcome could subject the Company to significant  liability to third
parties,  require the Company to obtain licenses from third parties, require the
Company to alter its  products or  processes,  or cease  altogether  any related
research and  development  activities or product sales,  any of which may have a
material  adverse  effect on the Company's  business,  results of operations and
financial  condition.   With  respect  to  the  patents  and  other  proprietary
technology  licensed to the Company from third  parties,  the licensors have not
provided  any   representations   or  warranties  to  the  Company  relating  to
non-infringement  of third party proprietary rights and have not indemnified the
Company  against  any  damages or  expenses  arising  out of any such  claims of
infringement. To the extent that the licensed rights or the Company's activities
or any portion thereof is found to infringe the proprietary  rights of any other
person or entity,  the Company  could be liable for the  payment of  substantial
damages without the likelihood of any  contribution by the licensor.  Such event
could have a material  adverse effect on the Company's  operations.  The Company
also relies on trade secrets,  know-how and continuing technological advancement
to maintain its competitive position. No assurance can be given that others will
not gain  access  to its  trade  secrets,  or that the  Company  will be able to
effectively  protect  its rights to its trade  secrets.  Furthermore,  assurance
cannot  be given  that  others  will  not  independently  develop  substantially
equivalent  proprietary  information  and techniques or otherwise gain access to
the Company's trade secrets.

         Technological   Changes.  New  process  developments  are  expected  to
continue at a rapid pace in the biologic pharmaceuticals,  nutrition and medical
food  industries.  The  Company's  future  success will depend on its ability to
develop and  commercialize  its existing  product  candidates  and to develop or
acquire  new  products.  There  can  be  no  assurance  that  the  Company  will
successfully  complete the development of any of its existing product candidates
or that any of its future products will be commercially viable or achieve market
acceptance. In addition, there can be no assurance that research and development
and discoveries by others will not render some or all of the Company's  programs
or products uncompetitive or obsolete.

         Dependence on  Third-Party  Manufacturers.  The Company is dependent on
third-party  manufacturers  to manufacture  the Base Product and its nutritional
and medical food bars.  Pursuant to the license with PTI, the Company has agreed
to purchase  all of its  requirements  for the Base  Product  from PTI. A single
manufacturer in New Zeland

                                      -23-

<PAGE>
produce all of such  product at its New  Zealand  facilities.  Although  the PTI
license  permits the Company to utilize  alternate  sources of supply during any
period in which PTI is unable to satisfy all of the Company's  requirements  for
the Base Product, if PTI or the sole manufacturer of Base Product fail to supply
any or all of  the  Company's  requirements  for  the  Base  Product,  or if the
Company's  suppliers  of  nutrition  and  medical  food bars fail to fulfill the
Company's  requirements,  there can be no assurance  that  alternate  sources of
supply will be available to the Company at  reasonable  cost or at all,  and, if
available at a reasonable cost,  whether the Company will be able to secure such
alternate  sources in a timely manner.  If such alternate  sources of supply are
not available on a timely basis or on reasonable  economic terms,  the Company's
results  of   operations   could  be  severely  and  adversely   affected.   The
manufacturing  facilities in which the Company's  products are manufactured must
conform to current FDA GMP. Those  standards must be met on an ongoing basis and
the licensed facilities are subject to inspection by the FDA at least once every
two years. If a contract manufacturer is unable or unwilling to obtain or retain
its FDA rating,  the Company  would be required to find an  alternate  source of
supply. If alternate  manufacturing  sources are not available on a timely basis
or on reasonable  economic terms,  the Company's  results of operations could be
materially adversely affected.

         Competition.  The Company  competes with  companies  that are currently
developing  or selling  products  similar to or in direct  competition  with the
Company. Many of these competitors have substantially greater capital resources,
research  and  development   capabilities,   and   manufacturing  and  marketing
resources,   capabilities  and  experience  than  the  Company.   The  Company's
competitors  may succeed in developing  products that are more effective or less
costly than any products  that may be  developed  by the  Company,  or that gain
regulatory approval or market acceptance prior to any of the Company's products.
Other  companies have  competitive  products that are in more advanced stages of
clinical testing than are the Company's pharmaceutical product candidates. There
can be no assurance that the Company will be able to compete successfully in any
market.

         Dependence  on Qualified  Personnel;  Potential  Conflicts of Interest;
Part-Time  Consultants.  The Company's  success is dependent upon its ability to
obtain and retain the services of qualified scientific, sales and marketing, and
executive management  personnel.  The Company faces intense competition for such
personnel from other companies,  academic institutions,  government entities and
other research organizations. There can be no assurance that the Company will be
successful in hiring or retaining qualified  personnel.  Moreover,  managing the
integration  of new  personnel  could pose  significant  risks to the  Company's
development  and progress and increase its  operating  expenses.  The  Company's
consultants  and advisors devote only a portion of their time to the business of
the Company and may from time to time serve as officers, directors,  consultants
or  advisors  to  other  pharmaceutical,   health  and  fitness,   nutrition  or
biotechnology  companies.  There can be no assurance  that such other  companies
will not in the future have  interests  that conflict with those of the Company.
The Company also  contracts with a related party to provide  marketing  services
and personnel.

         Product  Liability  Exposure;  Insurance.  Product  liability  risk  is
inherent  in the  testing,  manufacture,  marketing  and  sale of the  Company's
products and product candidates,  and there can be no assurance that the Company
will be able to avoid significant product liability exposure.  Product liability
insurance for the pharmaceutical and nutraceutical  industries,  when available,
is extremely  expensive.  The Company  currently  maintains a general  liability
insurance  policy  and a product  liability  insurance  policy.  There can be no
assurance that the Company will be able to maintain such insurance in sufficient
amounts to protect the Company against such liabilities at a reasonable cost. In
addition,  the Company is required to indemnify its licensors and  manufacturers
against  any  product  liability  claims  incurred  by then as a  result  of any
products  developed and sold by the Company.  Any future product liability claim
against the Company could result in liability for substantial damages, which may
not be covered in whole or in part by  insurance,  and which may have a material
adverse effect on the business and financial condition of the Company.

         Litigation.  The Company and certain  affiliates and current and former
officers  and  directors  are parties to certain  legal  proceedings.  While the
Company  believes that the  allegations  made by the plaintiffs in these actions
are wholly  without  merit,  and it intends to  vigorously  oppose such actions.
There can be no assurance  that the Company's  defense will be  successful.  The
cost  of  defending   against  these   lawsuits  is   substantial.   See  "Legal
Proceedings."

         Possible de-Listing by Nasdaq.  There can be no assurance that a market
will continue to be made or that any securities  analysts will provide  coverage
on the Company's common stock.  Furthermore,  under  maintenance  standards that
went into effect in  February  1998,  the  Company  does not satisfy the minimum
requirements for maintaining its

                                      -24-

<PAGE>
listing with the Nasdaq Small Cap Market.  Following a hearing  before a Listing
Qualifications  Panel in December,  1998, Nasdaq granted the Company a temporary
exception  to  the  listing   maintenance   standards,   pending  the  Company's
satisfaction  of certain  undertakings,  including  the  filing of this  Report,
achieving net earnings for the quarter  ending  December 31, 1998, and a minimum
stock  price of $1.00 per share for at least ten  trading  days.  To fulfill the
latter requirement,  the Company effected a 1-for-10 reverse split of its common
stock on December 31, 1998.  No assurance  can be given  regarding the Company's
continued  Nasdaq  SmallCap  Market  listing.  If the Company's  common stock is
delisted from the Nasdaq SmallCap Market, shareholders would likely find it more
difficult  to sell shares of common  stock.  The Company may be required to take
actions acceptable to Nasdaq in order to continue to be included for listing.

         Year 2000  Compliance.  Many currently  installed  computer systems and
software  products are coded to accept only  two-digit  entries in the date code
field.  Beginning  in the year 2000,  these date code fields will need to accept
four digit entries to distinguish 21st century dates from 20th century dates. As
a result,  in less than one year,  computer  systems and  software  used by many
companies  may need to be upgraded  to comply with such Year 2000  requirements.
Significant  uncertainty exists concerning the potential effects associated with
such compliance or the failure to comply. The Company is currently assessing its
own readiness  and the expense of  correcting  any problems in its own operating
systems,  as well as monitoring the readiness of vendors,  contractors and other
third parties with which it does business.  Any Year 2000 compliance problem for
either the Company or third parties with whom it trades or does  business  could
result  in a  material  adverse  effect  on the  Company's  business,  operating
results, and financial condition.

         Limited  Availability  of Conclusive  Clinical  Studies.  The Company's
products  include  nutritional  supplements  and food  bars  that are made  from
vitamins, minerals, herbs and other substances for which there is a long history
of  human  consumption.  Some  of  the  Company's  products  contain  innovative
ingredients or combinations of ingredients. Although the Company believes all of
its  products  to be safe when  taken as  directed,  there is  little  long-term
experience  with  human  consumption  of  certain  of these  innovative  product
ingredients or  combinations  of ingredients in  concentrated  form. The Company
relies  primarily on the research of consultants  and others for the formulation
and production of its products. Some of these consultants and suppliers may have
performed or sponsored only limited clinical studies relating to these products.
Furthermore,  because  these  products  are  or  will  be  highly  dependent  on
consumers'  perception  of the  efficacy,  safety and quality of the  supplement
products,  as well as  similar  products  distributed  by other  companies,  the
Company could be adversely  affected in the event such products  should prove or
be asserted to be ineffective or harmful to consumers or in the event of adverse
publicity  associated  with  illness or other  adverse  effects  resulting  from
consumers' use or misuse of the Company's products or similar products.

         Volatility  of Stock Price.  The trading  price of the Common Stock has
been and is likely to continue to be subject to wide fluctuations in response to
the quarter-to-quarter  variations in the Company's operating results,  material
announcements by the Company or its competitors, governmental regulatory action,
conditions in the nutritional  supplement industry,  or other events or factors,
many of which are beyond the Company's control.  The Company'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  which  have  particularly
affected the market prices of many nutritional  supplement companies and network
marketing  companies  and which  often  have  been  unrelated  to the  operating
performance of such companies.  Moreover, the Company's Common Stock may be even
more prone to  volatility  than the  securities  of other  businesses in similar
industries in light of the relatively small number of shares of Common Stock not
held by affiliates.  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. The Company 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 future. See "Dividend Policy."


                                      -25-
<PAGE>
Special Statement Concerning Forward-looking Statements

         This Report, in particular the "Business" and "Management's  Discussion
and Analysis of Financial Condition and Results of Operations" sections, contain
forward-looking statements concerning the expectations and anticipated operating
results of the Company. All of these forward-looking statements contained herein
are  intended  to  qualify  for  the  safe  harbor  protection  provided  by the
Securities Act and the Securities  Exchange Act of 1934, as amended.  The reader
should  understand  that numerous  factors  govern  whether any  forward-looking
statement  made  by the  Company  will  be or can be  achieved.  Any one of such
factors could cause actual results to differ  materially from those projected bu
the  forward-looking  statements  made in  this  Report.  These  forward-looking
statements  include plans and  objectives of management  for future  operations,
including plans and objectives  relating to the products and the future economic
performance of the Company. The forward-looking  statements and associated risks
relate to:

         o        market acceptance of the products;

         o        development of new nutraceutical products;

         o        the extent of additional research and development, general and
                  administrative   and  other  direct  costs   associated   with
                  obtaining final FDA approval on BWPT-301;

        o         the  anticipated  cost and related expense of the BWPT-301 and
                  BWPT-302  clinical  trials  until final FDA  approval has been
                  received;

        o         unexpected  delays in receipt of final FDA  approval  on BWPT-
                  301;

        o         the estimated  commencement  date of Phase III clinical trials
                  and the completion of those clinical trials on BWPT-301;

         o        and the lack of sufficient  cash to fund current and projected
                  operations and budgeted  research and  development  for fiscal
                  year 1999.

         The forward-looking  statements are based on current  expectations that
maybe  affected  by a number of risks  and  uncertainties.  The  forward-looking
statements are based on certain assumptions, among others:

        o         the  efficacy  of  BWPT-301  will be  established  during  the
                  ongoing  Phase II clinical  trials and the Phase III  clinical
                  trials;

        o         the  Company  will  be  able  to  successfully  undertake  and
                  complete clinical trials on BWPT-302(TM);

         o        the Company will be able to successfully market the health and
                  beauty  aids  and  it's  the   nutraceutical   products,   and
                  successfully  develop and  commercialize  other  nutraceutical
                  products;

        o         the  Company  will  be  able  to   successfully   develop  and
                  commercialize the Technology;

         o        the Company  will  successfully  conduct  additional  Phase II
                  clinical  trials on BWPT-301and  may need to conduct  clinical
                  trials that are different  from those that have been conducted
                  to date or that are currently contemplated by the Company; and

         o        the Company will be able to timely and  properly  quantify and
                  analyze the data derived from its clinical trials.

         Assumptions  involve  judgments  with respect to,  among other  things,
future economic,  competitive and market conditions,  future business decisions,
and the  results  of the  clinical  trials  and the time and money  required  to
successfully  complete those trials, all of which are difficult or impossible to
predict  accurately  and many of which are  beyond the  control of the  Company.
Although the Company believes that the assumptions underlying the

                                      -26-
<PAGE>
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 the
Company to alter its marketing capital expenditure plans or other budgets.  This
will affect the Company'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 the Company or any other  person
that the objectives or plans of the Company will be achieved.

OUTLOOK

         The management  team of the Company has assembled a talented  marketing
team to establish the Company's  position as a distributor of nutrition products
in the functional foods and medical foods industry. This team, together with the
Board of Directors  and  management,  have  developed a business  strategy  that
identifies  the  Company's  strengths and  objectives,  outlines a vision of the
future  market  opportunities  in the industry and  articulates  a corporate and
technology strategy that includes strategic alliances, collaborative development
agreements, strategic acquisitions and new product development.

         The Company believes its primary operating strengths include:

         -        High quality, scientifically sound products
         -        Strong marketing team with industry experience
         -        Growing product lines and positive name recognition within the
                  industry
         -        Inclusive, supportive corporate culture

         Management  believes that these strengths can be used by the Company to
provide  added  access to  capital  markets,  facilitate  accomplishment  of the
objectives of the Company and position the Company as an  attractive  investment
and development partner.

         The Company will  continue to pursue  research and  development  of new
product  offerings and enhancements to existing product lines and acquisition of
complementary technologies, products or entities that will enhance or expand its
current  product  lines.  Acquisition  targets will (i) have products or product
lines that are complementary to the Company's;  (ii) offer existing products and
marketing   strengths  that  provide  immediate  revenues  to  the  Company  and
complement  its own products and marketing  expertise,  (iii) open new marketing
channels  for  the  Company's   products,   and  (iv)  possess  vertical  market
applications  expertise that can be leveraged by the Company in further  product
development and marketing opportunities.

         As the Company  proceeds to  implement  its  strategy  and to reach its
objectives,  it anticipates  realizing  several  benefits for itself and for its
shareholders.  In fiscal year 1999,  the  Company  expects  continued  growth in
sales,  primarily  due to the  introduction  of the sports and energy  nutrition
bars,  NiteBite bars, and related  products.  In addition,  the Company  expects
further   development   of   complementary   technologies,   added  product  and
applications  development  expertise,  access to market  channels,  leverage  of
strategic  alliances,  increased  access  to  capital  markets,  and  additional
opportunities for strategic alliances in other industry segments.

         The strategy  described above is not without risk, and shareholders and
others interested in the Company and its common stock should carefully  consider
the risks contained elsewhere in this Report.


                                      -27-
<PAGE>
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
         Index to Consolidated Financial Statements:

<S>                                                                                                        <C>
         Reports of Independent Public Accountants..........................................................F-1 and F-2

         Consolidated Balance Sheets as of September 30, 1998 and 1997.............................................F- 3

         Consolidated Statements of Operations for the Years Ended
         September 30, 1998, 1997 and 1996 ........................................................................F- 4

         Consolidated Statements of Shareholders' Equity for the Years Ended
         September 30, 1998, 1997 and 1996 ........................................................................F- 5

         Consolidated Statements of Cash Flows for the Years Ended
         September 30, 1998, 1997 and 1996 .......................................................................F- 11

         Notes to Consolidated Financial Statements...............................................................F- 14

</TABLE>

<PAGE>


                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                                    INDEPENDENT AUDITORS' REPORT





To the Board of Directors and Stockholders
of Biomune Systems, Inc.


We have audited the  consolidated  balance  sheet of Biomune  Systems,  Inc. and
subsidiaries as of September 30, 1998, and the related  consolidated  statements
of  operations,  shareholders'  equity and cash  flows for the year then  ended.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audit.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the financial  position of Biomune Systems,
Inc.  and  subsidiaries  as of  September  30,  1998,  and the  results of their
operations  and their cash flows for the year then  ended,  in  conformity  with
generally accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 2 to the
consolidated financial statements,  the Company has had substantial  reoccurring
losses from  operations,  has relied upon  financing from the sale of its equity
securities  to satisfy its  obligations  and the  license to certain  technology
expires in May 1999. These conditions raise  substantial doubt about the ability
of the Company to continue as a going concern.  Management's  plans in regard to
that matter are also described in note 2. The consolidated  financial statements
do not  include  any  adjustments  that might  result  from the  outcome of this
uncertainty.




TANNER + CO.

Salt Lake City, Utah
December 10, 1998 except for Note 23,
which is dated January 8, 1999

                                                                             F-1
<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To Biomune Systems, Inc.:

We have audited the accompanying  consolidated balance sheet of Biomune Systems,
Inc. (a Nevada  corporation)  and subsidiaries as of September 30, 1997, and the
related  consolidated  statements of operations,  shareholders'  equity and cash
flows  for the  years  ended  September  30,  1997  and  1996.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Biomune
Systems,  Inc. and  subsidiaries  as of September  30, 1997,  and the results of
their operations and their cash flows for the years ended September 30, 1997 and
1996, in conformity with generally accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial  statements,  the Company has incurred  significant  recurring  losses
since its  inception.  As of September 30, 1997,  the Company had an accumulated
deficit  of  $35,480,749  and  minimal  working  capital of  $925,166,  of which
$846,137 was related to continuing  operations.  Revenues and sales backlog were
also minimal.  These factors along with the development and marketing  status of
the Company's nutraceutical products and the development status of the Company's
pharmaceutical  products raise  substantial doubt about the Company's ability to
continue as a going  concern.  Management's  plans with resepct to these matters
are also  described  in Note 2. The  accompanying  financial  statements  do not
include any adjustments that might result from the outcome of this uncertainty.




ARTHUR ANDERSEN LLP

Salt Lake City, Utah
December 5, 1997

                                                                             F-2
<PAGE>

<TABLE>
<CAPTION>
                                                                    BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                                                                Consolidated Balance Sheet
                                                                                             September 30,
----------------------------------------------------------------------------------------------------------
              Assets                                                              1998              1997
                                                                       -----------------------------------
Current assets:
<S>                                                                    <C>                <C>             
     Cash and cash equivalents                                         $          27,701  $      1,585,099
     Receivables, net                                                          2,147,249           306,783
     Inventories                                                                 661,243           342,768
     Prepaid expenses                                                             19,032                 -
     Net current assets of discontinued operations                                     -            79,029
                                                                       -----------------------------------

                  Total current assets                                         2,855,225         2,313,679

Property and equipment, net                                                      150,544            96,041
Long-term receivables                                                          1,391,260                 -
Intangibles, net                                                                 814,009            27,988
Investments                                                                      425,000                 -
Other                                                                             14,437            11,346
Long-term assets of discontinued operations                                            -           283,444
                                                                       -----------------------------------

                                                                       $       5,650,475  $      2,732,498
                                                                       -----------------------------------

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

              Liabilities and Shareholders' Equity 

Current liabilities:

     Payables and accrued expenses                                     $         798,968  $      1,388,513
     Notes payable                                                             1,074,500                 -
                                                                       -----------------------------------

                  Total current liabilities                                    1,873,468         1,388,513
                                                                       -----------------------------------

Minority interest                                                                 31,281                 -
                                                                       -----------------------------------

Commitments and contingencies                                                          -                 -

Shareholders' equity:
     Preferred stock, $.0001 par value; 50,000,000 shares authorized,  
     1,360,430 shares and 36,485 shares issued
       and outstanding, respectively                                           2,573,015         2,478,421
     Common stock, $.0001 par value; 500,000,000 shares
       authorized, 1,286,662 and 323,881 shares
       outstanding, respectively                                                     128                32
     Additional paid-in capital                                               39,042,910        33,633,900
     Stock subscriptions receivable                                              (55,192)         (101,392)
     Warrants                                                                    338,500           883,273
     Deferred compensation and consulting                                       (304,862)          (69,500)
     Accumulated deficit                                                     (37,848,773)      (35,480,749)
                                                                       -----------------------------------

                  Total shareholders' equity                                   3,745,726         1,343,985
                                                                       -----------------------------------

                                                                       $       5,650,475  $      2,732,498
                                                                       -----------------------------------
----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
                                                                                                       F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                    BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                                                     Consolidated Statement  of Operations
                                                                                 Years Ended September 30,
----------------------------------------------------------------------------------------------------------
                                                            1998             1997              1996
                                                     -----------------------------------------------------

<S>                                                  <C>                 <C>              <C>             
Revenues                                             $        2,806,853  $       199,051  $          2,001
                                                     -----------------------------------------------------

Operating expenses:
     Cost of revenues                                         1,415,428          165,401                 -
     Management, consulting and research                      1,052,674        3,563,682         3,359,985
     Other general and administrative                         2,046,699        4,074,580         1,897,852
                                                     -----------------------------------------------------
              Total operating expenses                        4,514,801        7,803,663         5,257,837
                                                     -----------------------------------------------------

Loss from operations                                         (1,707,948)      (7,604,612)       (5,255,836)
                                                     -----------------------------------------------------

Other income (expense):
     Interest income                                            144,042          256,331           271,690
     Interest expense                                           (44,722)               -                 -
     Other expense, net                                         (14,019)               -           (36,252)
                                                     -----------------------------------------------------
              Total other income, net                            85,301          256,331           235,438
                                                     -----------------------------------------------------

Net loss from continuing operations                          (1,622,647)      (7,348,281)       (5,020,398)

Loss from discontinued operations of
  Volu-Sol, Inc.                                                      -         (719,652)       (1,402,222)
                                                     -----------------------------------------------------

Net loss before income taxes and minority
  interest                                                   (1,622,647)      (8,067,933)       (6,422,620)
Provision for income taxes                                            -                -                 -
                                                     -----------------------------------------------------
              Loss before minority interest                  (1,622,647)      (8,067,933)       (6,422,620)

Minority interest in net loss of subsidiary                      14,200                -                 -
                                                     -----------------------------------------------------

              Net loss                               $       (1,608,447) $    (8,067,933) $     (6,422,620)
                                                     -----------------------------------------------------

Preferred stock dividends and beneficial
  conversion premium                                         (1,359,661)      (4,040,517)          (91,199)
                                                     -----------------------------------------------------

              Net loss applicable to common
                shares                               $       (2,968,108) $   (12,108,450) $     (6,513,819)
                                                     -----------------------------------------------------

Net loss per common share:
     Continuing operations                           $            (4.52) $        (51.08) $        (27.20)
     Discontinued operations of Volu-Sol, Inc.                        -            (3.22)           (7.45)
                                                     -----------------------------------------------------

                  Net loss per common share          $            (4.52) $        (54.30) $        (34.65)

                                                     -----------------------------------------------------
----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
                                                                                                       F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                                BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                                                        Consolidated Statement of Shareholders' Equity
                                                                        Years Ended September 30, 1998, 1997, and 1996
----------------------------------------------------------------------------------------------------------------------
                                       Series A              Series B              Series C               Series D
                                   Preferred Stock       Preferred Stock       Preferred Stock         Preferred Stock
                              -------------------------------------------------------------------------------------------
                                  Shares     Amount     Shares     Amount     Shares       Amount     Shares      Amount
                              -------------------------------------------------------------------------------------------

<S>                              <C>       <C>          <C>      <C>          <C>      <C>             <C>     <C>       
Balance at October 1, 1995        213,833  $ 994,049     10,058  $ 148,837          -  $         -          -  $          -

Effect of 1 for 10 stock split 
(at December 31, 1998)                  -          -          -          -          -            -          -             -

Issuance of preferred stock:
         Series C                       -          -          -          -      5,000    4,171,500          -             -
         Series D                       -          -          -          -          -            -      5,200     4,010,227

Issuance of common stock for:
         Cash                           -          -          -          -          -            -          -             -
         Services                       -          -          -          -          -            -          -             -
         Conversion of preferred 
           stock                  (98,738)  (444,321)         -          -          -            -     (3,200)   (2,467,936)

Issuance of warrants and options
for services                            -          -          -          -          -            -          -             -

Amortization of deferred
consulting expense                      -          -          -          -          -            -          -             -

Cancellation of Series D
preferred stock subscription            -          -          -          -          -            -     (2,000)   (1,542,291)

Preferred stock dividends          20,494    102,471      1,000     15,000          -            -          -             -

Net loss                                -          -          -          -          -            -          -             -
                              ----------------------------------------------------------------------------------------------

Balance at September 30, 1996     135,589    652,199     11,058    163,837      5,000    4,171,500          -             -

Issuance of common stock for:
         Cash                           -          -          -          -          -            -          -             -
         Services                       -          -          -          -          -            -          -             -
         Note receivable                -          -          -          -          -            -          -             -
         Conversion of preferred 
           stock                 (116,027)  (559,815)   (12,058)  (178,837)    (1,817)  (2,493,746)         -             -

Accretion of preferred stock:
         Preferred stock                -          -          -          -          -    2,632,084          -             -
         Volu-Sol Series A 
         preferred stock                -          -          -          -          -            -          -             -
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
                                     Series E              Series F              Series J
                                 Preferred Stock       Preferred Stock       Preferred Stock
                              ------------------------------------------------------------------
                                Shares     Amount     Shares     Amount     Shares     Amount
                              ------------------------------------------------------------------

<S>                                   <C>  <C>              <C>  <C>              <C>  <C>
Balance at October 1, 1995              -  $       -          -  $       -          -  $       -

Effect of 1 for 10 stock split (at
December 31, 1998)                      -          -          -          -          -          -

Issuance of preferred stock:
         Series C                       -          -          -          -          -          -
         Series D                       -          -          -          -          -          -

Issuance of common stock for:
         Cash                           -          -          -          -          -          -
         Services                       -          -          -          -          -          -
         Conversion of preferred 
           stock                        -          -          -          -          -          -

Issuance of warrants and options
for services                            -          -          -          -          -          -

Amortization of deferred
consulting expense                      -          -          -          -          -          -

Cancellation of Series D
preferred stock subscription            -          -          -          -          -          -

Preferred stock dividends               -          -          -          -          -          -

Net loss                                -          -          -          -          -          -
                                    ------------------------------------------------------------

Balance at September 30, 1996           -          -          -          -          -          -

Issuance of common stock for:
         Cash                           -          -          -          -          -          -
         Services                       -          -          -          -          -          -
         Note receivable                -          -          -          -          -          -
         Conversion of preferred 
           stock                        -          -          -          -          -          -

Accretion of preferred stock:
         Preferred stock                -          -          -          -          -          -
         Volu-Sol Series A preferred
           stock                        -          -          -          -          -          -


------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
                                                                                             F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                                 BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                                                         Consolidated Statement of Shareholders' Equity
                                                                                                              Continued
-----------------------------------------------------------------------------------------------------------------------
                                     Series A             Series B              Series C              Series D
                                Preferred  Stock       Preferred Stock       Preferred Stock        Preferred Stock
                              -----------------------------------------------------------------------------------------
                                Shares     Amount     Shares     Amount     Shares     Amount     Shares      Amount
                              -----------------------------------------------------------------------------------------

<S>                                <C>       <C>          <C>       <C>        <C>    <C>               <C>         <C>
Redemption of Series C  preferred
stock                                   -          -          -          -     (1,500)(2,000,000)         -           -

Collections on common stock
subscriptions receivable                -          -          -          -          -          -          -           -

Issuance of warrants and options
for services                            -          -          -          -          -          -          -           -

Amortization of deferred
consulting expense                      -          -          -          -          -          -          -           -

Preferred stock dividends          15,240     76,199      1,000     15,000          -          -          -           -

Net loss                                -          -          -          -          -          -          -           -
                              -----------------------------------------------------------------------------------------

Balance at September 30, 1997      34,802    168,583          -          -      1,683  2,309,838          -           -

Issuance of common stock for:
         Cash                           -          -          -          -          -          -          -           -
         Services                       -          -          -          -          -          -          -           -
         Acquisition of subsidiary      -          -          -          -          -          -          -           -
         Debt                           -          -          -          -          -          -          -           -
         Accrued liabilities            -          -          -          -          -          -          -           -
         Note receivable                -          -          -          -          -          -          -           -
         Conversion of preferred 
           stock                   (1,996)    (9,721)         -          -     (2,055)(2,820,144)         -           -

Conversion of preferred stock to
preferred stock                         -          -          -          -       (100)  (137,245)         -           -

Accretion                               -          -          -          -          -          -          -           -

Issuance of stock options for
services                                -          -          -          -          -          -          -           -

Deferred compensation                   -          -          -          -          -          -          -           -
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>

                                     Series E              Series F              Series J
                                 Preferred Stock       Preferred Stock       Preferred Stock
                              ------------------------------------------------------------------
                                Shares     Amount     Shares     Amount     Shares     Amount
                              ------------------------------------------------------------------

<S>                                  <C>    <C>       <C>          <C>            <C>    <C>
Redemption of Series C  
preferred stock                         -          -          -          -          -          -

Collections on common stock
subscriptions receivable                -          -          -          -          -          -


Issuance of warrants and options
for services                            -          -          -          -          -          -

Amortization of deferred
consulting expense                      -          -          -          -          -          -

Preferred stock dividends               -          -          -          -          -          -

Net loss                                -          -          -          -          -          -
                              ------------------------------------------------------------------

Balance at September 30, 1997           -          -          -          -          -          -

Issuance of common stock for:
         Cash                         274    234,050  1,000,000    489,450         85     85,000
         Services                     330    330,000    100,000     60,000          -          -
         Acquisition of 
           subsidiary                 150    150,000          -          -        300    300,000
         Debt                           -          -          -          -        100    100,000
         Accrued liabilities            -          -          -          -          -          -
         Note receivable                -          -          -          -        650    650,000
         Conversion of preferred 
           stock                     (470)  (796,457)         -          -          -          -

Conversion of preferred stock to
preferred stock                         -          -    166,667    100,000          -          -

Accretion                               -    600,084          -          -          -          -

Issuance of stock options for
services                                -          -          -          -          -          -

Deferred compensation                   -          -          -          -          -          -

------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
                                                                                             F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                                 BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                                                         Consolidated Statement of Shareholders' Equity
                                                                                                              Continued
-----------------------------------------------------------------------------------------------------------------------
                                     Series A             Series B              Series C              Series D
                                Preferred  Stock       Preferred Stock       Preferred Stock        Preferred Stock
                              -----------------------------------------------------------------------------------------
                                Shares     Amount     Shares     Amount     Shares     Amount     Shares      Amount
                              -----------------------------------------------------------------------------------------

<S>                                <C>     <C>              <C>  <C>              <C>  <C>              <C>  <C>
Amortization of deferred
compensation                            -          -          -          -          -          -          -           -

Collection of subscription
receivables                             -          -          -          -          -          -          -           -

Expiration of Series D 
preferred stock warrants                -          -          -          -          -          -          -           -

Reclassification to an asset 
due to collection occurring 
prior to issuance of the 
audit report                            -          -          -          -          -          -          -           -

Capital contribution                    -          -          -          -          -          -          -           -

Preferred stock dividends           6,968     34,817        449      6,740        472    647,551          -           -

Net loss                                -          -          -          -          -          -          -           -
                              -----------------------------------------------------------------------------------------

Balance at September 30, 1998      39,774  $ 193,679        449  $   6,740          -  $       -          -  $        -
                              -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
                                     Series E              Series F                 Series J
                                 Preferred Stock       Preferred Stock           Preferred Stock
                              --------------------------------------------------------------------
                                Shares      Amount     Shares     Amount        Shares      Amount
                              --------------------------------------------------------------------

<S>                                   <C>  <C>        <C>        <C>            <C>    <C>
Amortization of deferred
compensation                            -          -          -          -          -            -

Collection of subscription
receivables                             -          -          -          -          -            -

Expiration of Series D preferred
stock warrants                          -          -          -          -          -            -

Reclassification to an asset due to
collection occurring prior to
issuance of the audit report            -          -          -          -          -            -

Capital contribution                    -          -          -          -          -            -

Preferred stock dividends              39     39,220     52,082     31,249          -            -

Net loss                                -          -          -          -          -            -
                              --------------------------------------------------------------------

Balance at September 30, 1998         323  $ 556,897  1,318,749  $ 680,699      1,135  $ 1,135,000
                              --------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
                                                                                               F-7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                                  BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                                                          Consolidated Statement of Shareholders' Equity
                                                                                                               Continued
------------------------------------------------------------------------------------------------------------------------
                                                                                          Additional          Stock
                                                                 Common Stock              Paid-in        subscriptions
                                                          -----------------------------
                                                           Shares           Amount          Capital         Receivable
                                                         ---------------------------------------------------------------

<S>                                                       <C>           <C>             <C>           <C>           
Balance at October 1, 1995                                 1,743,919    $        174    $ 22,709,486  $            -

Effect of 1 for 10 reverse stock split
(at December 31, 1998)                                    (1,569,527)           (157)            157               -

Issuance of preferred stock:
         Series C                                                  -               -               -               -
         Series D                                                  -               -               -      (2,000,000)

Issuance of common stock for:
         Cash                                                    400               -          32,500               -
         Services                                              2,172               -         522,857               -
         Conversion of preferred stock                        21,806               3       2,912,254               -

Issuance of warrants and options for services                      -               -         674,900               -

Amortization of deferred consulting expense                        -               -               -               -

Cancellation of Series D preferred stock subscription              -               -        (457,709)      2,000,000

Preferred stock dividends                                          -               -               -               -

Net loss                                                           -               -               -               -
                                                          ----------------------------------------------------------

Balance at September 30, 1996                                198,770              20      26,394,445               -

Issuance of common stock for:
         Cash                                                  5,083               -         291,476               -
         Services                                             25,683               3       2,183,023               -
         Note receivable                                       1,000               -         116,000        (116,000)
         Conversion of preferred stock                        93,345               9       3,232,389               -
--------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
                                                                           Deferred
                                                                         Compensation
                                                                             and        Accumulated
                                                          Warrants        Consulting      Deficit
                                                       ---------------------------------------------

<S>                                                     <C>            <C>             <C>          
Balance at October 1, 1995                              $     10,000   $   (674,891)   $(16,858,480)

Effect of 1 for 10 reverse stock split
(at December 31, 1998)                                             -              -               -

Issuance of preferred stock:
         Series C                                            328,500              -               -
         Series D                                            544,773              -               -

Issuance of common stock for:
         Cash                                                      -              -               -
         Services                                                  -       (238,783)              -
         Conversion of preferred stock                             -              -               -

Issuance of warrants and options for services                      -       (329,000)              -

Amortization of deferred consulting expense                        -        996,224               -

Cancellation of Series D preferred stock subscription              -              -               -

Preferred stock dividends                                          -              -         (91,199)

Net loss                                                           -              -      (6,422,620)
                                                         ------------------------------------------

Balance at September 30, 1996                                883,273       (246,450)    (23,372,299)

Issuance of common stock for:
         Cash                                                      -              -               -
         Services                                                  -     (1,334,330)              -
         Note receivable                                           -              -               -
         Conversion of preferred stock                             -              -               -

---------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
                                                                                                F-8
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                                  BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                                                          Consolidated Statement of Shareholders' Equity
                                                                                                               Continued
------------------------------------------------------------------------------------------------------------------------
                                                                                          Additional          Stock
                                                                 Common Stock              Paid-in        subscriptions
                                                          -----------------------------
                                                           Shares           Amount          Capital         Receivable
                                                         ---------------------------------------------------------------

<S>                                                        <C>          <C>       <C>            <C>           
Accretion of preferred stock:
         Preferred stock                                         -            -    1,066,667            -
         Volu-Sol Series A preferred stock                       -            -            -            -

Redemption of Series C  preferred stock                          -            -            -            -

Collections on common stock  subscriptions receivable            -            -            -       14,608

Issuance of warrants and options  for services                   -            -      349,900            -

Amortization of deferred  consulting expense                     -            -            -            -

Preferred stock dividends                                        -            -            -            -

Net loss                                                         -            -            -            -
                                                           ----------------------------------------------

Balance at September 30, 1997                              323,881           32   33,633,900     (101,392)

Issuance of common stock for:
         Cash                                               41,261            4      206,299            -
         Services                                          150,001           15    1,070,377            -
         Acquisition of subsidiary                          30,000            3      119,997            -
         Debt                                                    -            -            -            -
         Accrued liabilities                                10,065            1       59,133            -
         Note receivable                                         -            -            -     (650,000)
         Conversion of preferred stock                     731,454           73    3,626,249            -
---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
                                                                           Deferred
                                                                         Compensation
                                                                             and        Accumulated
                                                          Warrants        Consulting      Deficit
                                                       ---------------------------------------------

<S>                                                     <C>            <C>             <C>          

Accretion of preferred stock:
         Preferred stock                                          -             -     (3,698,751)
         Volu-Sol Series A preferred stock                        -             -         (4,000)

Redemption of Series C  preferred stock                           -             -              -

Collections on common stock  subscriptions receivable             -             -              -

Issuance of warrants and options  for services                    -      (153,500)             -

Amortization of deferred  consulting expense                      -     1,664,780              -

Preferred stock dividends                                         -             -       (337,766)

Net loss                                                          -             -     (8,067,933)
                                                        ----------------------------------------

Balance at September 30, 1997                               883,273       (69,500)   (35,480,749)

Issuance of common stock for:
         Cash                                                     -             -              -
         Services                                                 -             -              -
         Acquisition of subsidiary                                -             -              -
         Debt                                                     -             -              -
         Accrued liabilities                                      -             -              -
         Note receivable                                          -             -              -
         Conversion of preferred stock                            -             -              -

------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
                                                                                             F-9
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                                  BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                                                          Consolidated Statement of Shareholders' Equity
                                                                                                               Continued
------------------------------------------------------------------------------------------------------------------------
                                                                                          Additional          Stock
                                                                 Common Stock              Paid-in        subscriptions
                                                          -----------------------------
                                                           Shares           Amount          Capital         Receivable
                                                         ---------------------------------------------------------------

<S>                                                    <C>         <C>            <C>             <C>           

Conversion of preferred stock to  preferred stock              -              -         37,245               -

Accretion                                                      -              -       (600,084)              -

Issuance of stock options for  services                        -              -        295,750               -

Deferred compensation                                          -              -              -               -

Amortization of deferred compensation                          -              -              -               -

Collection of subscription receivable                          -              -              -          46,200

Expiration of Series D preferred stock warrants                -              -        544,773               -

Reclassification of stock subscription satisfied
subsequent to year end                                         -              -              -         650,000

Capital contribution                                           -              -         49,271               -

Preferred stock dividends                                      -              -              -               -

Net loss                                                       -              -              -               -
                                                                                                 
                                                       -------------------------------------------------------
Balance at September 30, 1998                          1,286,662   $        128   $ 39,042,910    $    (55,192)
                                                       =======================================================
--------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
                                                                           Deferred
                                                                         Compensation
                                                                             and        Accumulated
                                                          Warrants        Consulting      Deficit
                                                       ---------------------------------------------

<S>                                                 <C>             <C>             <C>          


Conversion of preferred stock to  preferred stock              -               -               -

Accretion                                                      -               -               -

Issuance of stock options for  services                        -        (295,750)              -

Deferred compensation                                          -        (447,584)              -

Amortization of deferred compensation                          -         507,972               -

Collection of subscription receivable                          -               -               -

Expiration of Series D preferred stock warrants         (544,773)              -               -

Reclassification of stock subscription satisfied
subsequent to year end                                         -               -               -

Capital contribution                                           -               -               -

Preferred stock dividends                                      -               -        (759,577)

Net loss                                                       -               -      (1,608,447)
                                                    --------------------------------------------

Balance at September 30, 1998                       $    338,500    $   (304,862)   $(37,848,773)
                                                    --------------------------------------------
------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
                                                                                            F-10
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                               BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                                                 Consolidated Statement of Cash Flows
                                                                            Years Ended September 30,
-----------------------------------------------------------------------------------------------------
                                                            1998              1997            1996
                                                         --------------------------------------------
Cash flows from operating activities:
<S>                                                        <C>            <C>            <C>         
   Net loss                                                $(1,608,447)   $(8,067,933)   $(6,422,620)
   Adjustments to reconcile net loss to net cash
     used in operating activities:
     Depreciation and amortization                              66,573        232,838        197,121
     Provision for losses on receivables                       114,698              -              -
     Recognition of revenues in exchange for investments      (400,000)             -              -
     Loss on disposal of fixed assets                                -              -         69,043
     Write-down of investment in technology                          -        337,873        244,839
     Issuance of common stock and warrants for services      1,460,392      1,045,096        629,975
     Amortization of deferred consulting expense               507,972      1,664,780        996,224
     Reduction in related party note receivable                      -         40,000        125,660
     Change in  assets  and  liabilities,
     net of effect  of  nonmonetary  asset
       acquisitions:
         Receivables                                          (463,306)       (29,685)        23,618
         Inventories                                           149,488         61,086       (456,418)
         Prepaid expenses                                      (19,032)             -              -
         Net assets for discontinued operations                362,473       (337,691)             -
         Other assets                                          117,412        (15,825)       (14,805)
         Payables and accrued expenses                      (2,014,759)       751,674        178,506
         Unearned revenue                                            -        (84,000)        84,000
         Minority interest                                     (14,200)             -              -
                                                         --------------------------------------------
              Net cash used in
              operating activities                          (1,740,736)    (4,401,787)    (4,344,857)
                                                         --------------------------------------------
Cash flows from investing activities:
   Purchase of property, equipment, and intangibles           (327,151)       (41,096)      (478,030)
   Purchase of investments                                     (25,000)             -              -
   Net (advances to) repayments from related parties        (1,152,430)      (291,525)       222,143
                                                         --------------------------------------------
              Net cash used in
              investing activities                          (1,504,581)      (332,621)      (255,887)
                                                         --------------------------------------------
Cash flows from financing activities:
   Proceeds from notes payable                               1,074,500              -              -
   Proceeds from issuance of common stock                      206,303        306,084         32,500
   Proceeds from issuance of preferred stock and related
      warrants                                                 808,500      3,500,000      4,500,000
   Increase in deferred compensation                          (447,584)             -              -
   Payments received on stock subscription receivable           46,200              -              -
   Offering costs for Series C and D preferred stock                 -              -       (945,000)
   Redemption of Series C preferred stock                            -     (2,000,000)             -
   Issuance of preferred stock by Volu-Sol, Inc.                     -        320,555              -
                                                         --------------------------------------------
              Net cash provided by
              financing activities                           1,687,919      2,126,639      3,587,500
                                                         --------------------------------------------
Net decrease in cash and cash equivalents                   (1,557,398)    (2,607,769)    (1,013,244)

Cash and cash equivalents at beginning of year               1,585,099      4,192,868      5,206,112
                                                         --------------------------------------------
Cash and cash equivalents at end of year                   $    27,701    $ 1,585,099    $ 4,192,868
                                                         --------------------------------------------
-----------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
                                                                                                 F-11

</TABLE>
<PAGE>
                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                            Consolidated Statement of Cash Flows
                                                                       Continued
--------------------------------------------------------------------------------

Supplemental disclosure of noncash investing and financing activities:

During the fiscal year 1998, the Company purchased 52% of the outstanding common
stock of Rockwood.  The Company entered into certain agreements to make loans to
Rockwood and pay cash if certain  benchmarks are met, in exchange for the common
stock and recorded net assets from the acquisition as follows:


Receivables                                 $   582,928
Related party receivables                       526,260
Inventories                                     439,463
Property and equipment, net                       9,946
Other assets                                    120,503
Payables and accrued expenses                (1,584,348)
Minority interest                               (45,481)
Equity                                          (49,271)
                                            -----------

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

During the year ended September 30, 1998:

o    The  Company  issued   preferred  stock  in   payment  of  preferred  stock
     dividends of $759,577.

o    The Company issued preferred stock in exchange for debt,  receivables,  and
     acquisition of intangibles of $1,200,000.

o    The Company  issued  common stock in exchange for debt and  acquisition  of
     intangibles of $179,134.

o    The Company  increased  common  stock and  additional  paid-in-capital  and
     decreased  preferred stock by $3,626,322 due to the conversion of preferred
     stock to common stock.

o    The   Company   increased   preferred   stock  and   decreased   additional
     paid-in-capital   by  $600,084  due  to  the  preferred  stock   beneficial
     conversion feature.

o    The Company increased additional  paid-in-capital and decreased warrants by
     $544,773 due to certain preferred stock warrants expiring.

o    The Company increased  additional  paid-in-capital  and increased  deferred
     compensation  by $295,750 due to the  issuance of stock  options for future
     services.

o    The Company increased  additional  paid-in-capital  and decreased preferred
     stock by $37,245 as a result of the conversion of Series C preferred  stock
     to Series F preferred stock.

--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
                                                                            F-12

<PAGE>
                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                            Consolidated Statement of Cash Flows
                                                                       Continued

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



Supplemental   disclosure  of  noncash  investing  and  financing  activities  -
Continued:

During fiscal year 1997, 116,027 shares of Series A convertible  preferred stock
with a recorded  value of $559,815 were  converted  into 34,808 shares of common
stock.  In  addition,  12,058  and 1,817  shares  of Series B and C  convertible
preferred  stock with a recorded value of $178,837 and $2,493,746 were converted
into 362 and 89,503  shares of common  stock,  respectively.  During fiscal year
1997, the Company  declared  preferred stock dividends of $337,766.  The Company
intends to issue  4,368  shares of Series A  convertible  preferred  stock,  449
shares  of  Series B  convertible  preferred  stock  and 309  shares of Series C
convertible preferred stock as payment of these dividends.

During fiscal year 1996,  98,738 shares of Series A convertible  preferred stock
with a recorded  value of $444,321  were  converted  into 2,962 shares of common
stock. In addition,  3,200 shares of Series D convertible preferred stock with a
recorded value of $2,467,936  were converted into 18,844 shares of common stock.
During  fiscal year 1996,  the Company  declared  preferred  stock  dividends of
$91,199.  During  fiscal year 1996,  the Company  exercised its option to cancel
subscriptions for 2,000 shares of Series D convertible preferred stock.


--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
                                                                            F-13

<PAGE>


                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                      Notes to Consolidated Financial Statements

                                              September 30, 1998, 1997, and 1996
--------------------------------------------------------------------------------

1.   Nature of Operations

Biomune Systems, Inc. (Biomune) was incorporated in Nevada on December 31, 1981.
Biomune is a  biopharmaceutical  and nutraceutical  company that, along with its
wholly owned subsidiary (the Company), Optim Nutrition, Inc. (Optim), is engaged
primarily  in  researching,   developing,   producing  and  marketing   biologic
pharmaceutical   products  and  nutraceutical  food  supplements   derived  from
Biomune's  patented  technology  (ProMune).  Nutraceutical  food supplements are
derived from a whey protein food base and are marketed as a beneficial source of
nutrients to promote good health.


Effective April 1, 1998, Biomune acquired a 52% interest in Rockwood  Companies,
LLC, a California limited liability company (Rockwood),  which is engaged in the
research,   development,   distribution  and  sale  of  biologic  pharmaceutical
products,  nutraceutical  and medical food products and supplements,  and health
and beauty aids. The consolidated financial statements include those of Rockwood
from April 1, 1998 through September 30, 1998.


Another  wholly owned  subsidiary,  Volu-Sol,  Inc.  (Volu-Sol),  was engaged in
researching,  developing,  manufacturing,  marketing  and  distributing  medical
diagnostic stains and related  equipment.  Effective October 1, 1997, all of the
outstanding  shares of  Volu-Sol's  common  stock  were  distributed  as a stock
dividend to the shareholders of Biomune and, as a result,  Volu-Sol ceased to be
subsidiary  of  Biomune.  Volu-Sol's  net assets and results of  operations  are
presented as discontinued  operations as of September 30, 1997 and for the years
ended September 30, 1997 and 1996.



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

                                                                            F-14

<PAGE>


                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                      Notes to Consolidated Financial Statements

                                                                       Continued
--------------------------------------------------------------------------------


2.   Significant Accounting Policies

Going  Concern 
The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As of September 30, 1998, the
Company  had an  accumulated  deficit  of  $37,848,773  and  incurred  a loss of
$1,608,447 for the year then ended. Although Company sales and revenues have had
a substantial increase in 1998, the consolidated  operations of the Company have
not had sustained  profitability  and the Company has relied upon financing from
the sale of its equity securities to satisfy its obligations.  The Company has a
technology  license  which  expires in May 1999 and  although  the Company is in
negotiations  to renew the license there is no guarantee  that the Company  will
be able to renew the license.  In addition,  the Company is obligated to provide
financing to Rockwood and/or  affiliates of the minority member.  The Company is
required to provide an  additional  $1,000,000  in financing  prior to March 15,
1999. 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  include  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.


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


Principles of Consolidation
The consolidated  financial  statements include the accounts of the Company, and
its subsidiaries.  All significant  intercompany  balances and transactions have
been eliminated.


Cash and Cash Equivalents
For  purposes  of the  statement  of cash  flows,  cash  includes  all  cash and
investments with original maturities to the Company of three months or less.

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

                                                                            F-15

<PAGE>


                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                      Notes to Consolidated Financial Statements

                                                                       Continued
--------------------------------------------------------------------------------



2.   Significant Accounting Policies
     Continued

Inventories
Inventories are recorded at the lower of cost or market,  cost being  determined
on a first-in, first-out (FIFO) method.


Intangible Assets
Intangible  assets  consists  primarily of licenses  acquired to market and sell
certain  products  and  goodwill   acquired  in  the  acquisition  of  Rockwood.
Intangibles are being amortized over a period of 5 to 10 years.


Investments
The Company has an  investment  in a Company  related by common  ownership.  The
Company values its investment at cost which approximates market.


Property and Equipment
Property  and  equipment  are  stated  at cost  less  accumulated  depreciation.
Depreciation and amortization is 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 and Common Equivalent Share
The  computation  of basic  earnings  per  common  share is  computed  using the
weighted average number of common shares outstanding during the year.


The  computation  of diluted  earnings per common share is based on the weighted
average  number  of  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 antidilutive.


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.


Revenue Recognition
Revenue is recognized upon shipment of product.


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

                                                                            F-16

<PAGE>


                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                      Notes to Consolidated Financial Statements

                                                                       Continued
--------------------------------------------------------------------------------



2.   Significant Accounting Policies
     Continued

Management, Consulting and Research Expenses
Management, consulting and research expenses include amounts paid to third-party
and  related-party  consultants  for marketing,  investment  banking,  and other
business  advisory  services  (see Notes 11 and 12), as well as costs related to
the Company's  nutraceutical and pharmaceutical product research and development
activities.  Research  and  development  costs  totaled  approximately  $17,000,
$560,000,  and $822,000 for the years ended September 30, 1998,  1997, and 1996,
respectively.


Advertising
The Company  expenses the cost of advertising when the advertising  occurs.  For
the years ended September 30, 1998, 1997, and 1996, advertising expenses totaled
approximately $85,000, $210,000, and $120,000, respectively, and are included in
other  general and  administrative  expenses in the  accompanying  statement  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.


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,  at times,  may
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  1997  and  1996  financial   statements  have  been
reclassified to conform with the current year presentation.


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

                                                                            F-17

<PAGE>


                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                      Notes to Consolidated Financial Statements

                                                                       Continued
--------------------------------------------------------------------------------



3.   Detail of Certain Balance Sheet Accounts

                                                         September 30,
                                            ------------------------------------
                                                      1998              1997
                                            ------------------------------------
Receivables:
     Trade receivables                      $        1,065,556  $        80,758
     Related party receivables (see
       Note 5)                                       1,985,215          290,589
     Interest and other                                 61,436           15,936
     Subscription receivable                           650,000                -
     Less allowance for doubtful
       accounts                                       (223,698)         (80,500)
                                            ------------------------------------

                                                     3,538,509          306,783

Less long-term portion                              (1,391,260)               -
                                            ------------------------------------

Current portion                             $        2,147,249  $       306,783
                                            ------------------------------------




                                                       September 30,
                                            ------------------------------------
                                                   1998              1997
                                            ------------------------------------
Inventories:
     Finished goods                         $          220,234$          111,431
     Raw materials                                     541,009           231,337
     Reserve allowance                                (100,000)                -
                                            ------------------------------------

                                            $          661,243$          342,768
                                            ------------------------------------




                                                       September 30,
                                            ------------------------------------
                                                   1998              1997
                                            ------------------------------------
Payables and accrued expenses:
     Trade payables                         $          707,221  $        324,915
     Preferred stock dividends payable                       -           337,766
     Accrued legal expenses                                  -           225,000
     Accrued research expenses                               -           210,000
     Accrued payroll and payroll taxes                       -            85,494
     Other accrued expenses                             91,747           205,338
                                            ------------------------------------

                                            $          798,968  $      1,388,513
                                            ------------------------------------



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

                                                                            F-18

<PAGE>


                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                      Notes to Consolidated Financial Statements

                                                                       Continued
--------------------------------------------------------------------------------



3.   Detail of Certain Balance Sheet Accounts
     Continued

Preferred Stock:


                                                       September 30,
                                            ------------------------------------
                                                   1998              1997
                                            ------------------------------------

Series A, 10% cumulative, convertible;
39,774 shares and 34,802 shares
outstanding, respectively                   $          193,679  $        168,583

Series B, 10% cumulative, convertible
non-voting; 449 shares and -0- shares
outstanding, respectively                                6,740                 -



Series C, 8% cumulative, convertible
non-voting; -0- shares and 1,683
shares outstanding, respectively                             -         2,309,838

Series E, 8% cumulative, convertible
non-voting; 323 shares and -0- shares
outstanding, respectively                              556,897                 -



Series F, 8% cumulative, convertible,
non-voting; 1,318,749 shares and -0-
shares outstanding, respectively                       680,699                 -

Series G, 8% noncumulative, non-
voting, no shares issued and
outstanding                                                  -                 -

Series J, 10% cumulative, convertible
non-voting; 1,135 shares and -0-
shares outstanding, respectively                     1,135,000                 -
                                            ------------------------------------

                                            $        2,573,015  $      2,478,421
                                            ------------------------------------


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

                                                                            F-19

<PAGE>


                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                      Notes to Consolidated Financial Statements

                                                                       Continued
--------------------------------------------------------------------------------



4.   Property, Plant and Equipment

Property and equipment consists of the following:


                                                   September 30,
                                        -----------------------------------
                                               1998             1997
                                        -----------------------------------

Furniture, fixtures, and equipment      $          275,303  $       164,641
Leasehold improvements                                   -            1,256
                                        -----------------------------------

                                                   275,303          165,897

Less accumulated depreciation
  and amortization                                (124,759)         (69,856)
                                        -----------------------------------

                                        $          150,544  $        96,041
                                        -----------------------------------



5.   Related Party Receivables

Related party receivables are comprised of the following:


                                                   September 30,
                                        -----------------------------------
                                               1998             1997
                                        -----------------------------------

Note receivable from the minority
interest member. The note bears
interest at 8%, requires quarterly
interest payments with principal
due January 2006, secured by the
remaining ownership of the
subsidiary, accounts receivable
from entity related to the minority
member, and the guarantee of entity
related to a former officer. On
January 8, 1999, the note
receivable was satisfied                $          891,260  $             -

Note receivable from a related
entity of the minority interest
member, requiring quarterly
interest payments at 7%, principal
due in August 2000, secured by the
remaining ownership of the
subsidiaries                                       500,000                -


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

                                                                            F-20

<PAGE>


                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                      Notes to Consolidated Financial Statements

                                                                       Continued
--------------------------------------------------------------------------------



5.   Related Party Receivables
     Continued

Note receivable from the former
subsidiary of the Company due on
demand unsecured with interest at
10%                                                276,149                -

Notes receivable from entities,
which are shareholders or are
controlled by an advisory board
chairman, which are due on
demand                                             254,091          290,589

Note receivable from individual who
is a relative to former officer of
the company at an interest rate of
1% over prime, unsecured and due
on demand                                           50,000                -

Employee advances                                   13,715                -
                                        -----------------------------------

                                        $        1,985,215  $       290,589
                                        -----------------------------------



6.   Intangibles
Intangible assets consist of the following:

                                                   September 30,
                                        -----------------------------------
                                               1998             1997
                                        -----------------------------------

Licenses                                $          595,000  $             -
Goodwill                                           222,700                -
ProMune Technology                                  70,000           70,000
                                        -----------------------------------

                                                   887,700           70,000

Accumulated amortization                           (73,691)         (42,012)
                                        -----------------------------------

                                        $          814,009  $        27,988
                                        -----------------------------------



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

                                                                            F-21

<PAGE>


                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                      Notes to Consolidated Financial Statements

                                                                       Continued
--------------------------------------------------------------------------------



6.   Intangibles
     Continued

During 1997, the Company  determined that facts and circumstances  warranted the
write-down of the remaining net book value of approximately  $337,800 related to
certain  technology (see Note 12). This determination was based on the Company's
estimated future cash flows from this intangible asset taking into consideration
that required  royalties  under a license  arrangement  were not received from a
third party.


7.   Notes Payable

The Company,  at September 30, 1998, has a note payable to a trust in the amount
of $559,000 where in the trustee is the brother of the Company's president.  The
note bears interest at 12% with monthly interest payments,  maturity of the note
is February  1999 and is secured by the assets of the Company and a guarantee of
approximately  60,000 shares of the Company's stock owned by a former officer of
the Company.


The Company has $800,000 aggregate lines of credit from a bank. At September 30,
1998, the  outstanding  balance is $515,500.  The lines have an interest rate of
10.25%, are due January 2000 and are secured by all assets of the subsidiary.


8.   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
                                               September 30,
                               ----------------------------------------------
                                     1998           1997           1996
                               ----------------------------------------------

Federal income tax benefit
   at statutory rate           $        550,000  $   2,743,000  $   2,184,000
Change in valuation
  allowance                            (550,000)    (2,743,000)    (2,184,000)
                               ----------------------------------------------

                               $              -  $           -  $           -
                               ----------------------------------------------





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

                                                                            F-22

<PAGE>


                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                      Notes to Consolidated Financial Statements

                                                                       Continued
--------------------------------------------------------------------------------



8.   Income Taxes
     Continued

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


                                                   September 30,
                                        -----------------------------------
                                               1998             1997
                                        -----------------------------------

Net operating loss carryforwards        $       10,300,000  $     9,750,000
Valuation allowance                            (10,300,000)      (9,750,000)
                                        -----------------------------------

                                        $                -  $             -
                                        -----------------------------------

As of  September  30, 1998,  the Company had net  operating  loss  carryforwards
(NOLs) for federal income tax reporting  purposes of approximately  $29,900,000.
There can be no  assurance  that all of these NOLs will be  available  to offset
future taxable income, if any. An NOL generated in a particular year will expire
for federal tax  purposes if not  utilized  within 15 years.  Additionally,  the
Internal  Revenue Code contains other provisions which could reduce or limit the
availability and utilization of these NOLs. For example, limitations are imposed
on the utilization of NOLs if certain ownership changes have taken place or will
take place. In accordance  with SFAS No. 109, a valuation  allowance is provided
when it is more likely  than not that some  portion of the  deferred  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.


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

                                                                            F-23

<PAGE>


                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                      Notes to Consolidated Financial Statements

                                                                       Continued
--------------------------------------------------------------------------------



8.   Income Taxes
     Continued

The Company has determined  that as of December 10, 1991  ownership  changes (as
that term is defined  in  Section  382 of the  Internal  Revenue  Code) may have
occurred.  The  impact  of  this  ownership  change  is  to  limit  the  use  of
approximately $1,661,000 of the Company's total NOLs. The Company estimates that
the use of these NOLs would be limited to approximately  $502,000 per year (on a
cumulative basis). The NOLs that may have been limited by the possible ownership
change expire in the years and in the amounts indicated below:


      Year Generated                 Amount              Year of Expiration
--------------------------------------------------------------------------------

1984                       $                  333,000           1999
1985                                           10,000           2000
1986                                          148,000           2001
1987                                          149,000           2002
1988                                          137,000           2003
1989                                          234,000           2004
1990                                          252,000           2005
1991                                          226,000           2006
1992                                          172,000           2007
                           --------------------------

Total                      $                1,661,000
                           --------------------------



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


      Year Generated                 Amount              Year of Expiration
--------------------------------------------------------------------------------

1992                       $                  625,000           2007
1993                                        6,386,000           2008
1994                                        3,417,000           2009
1995                                        3,217,000           2010
1996                                        5,762,000           2011
1997                                        7,203,000           2012
1998                                        1,608,000           2013
                           --------------------------

Total                      $               28,218,000
                           --------------------------




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

                                                                            F-24

<PAGE>


                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                      Notes to Consolidated Financial Statements

                                                                       Continued
--------------------------------------------------------------------------------



9.   Distribution of Volu-Sol Shares

Pursuant to the terms of a Distribution and Separation Agreement between Biomune
and Volu-Sol,  entered into in September  1997, the common stock of Volu-Sol was
distributed pro rata to Biomune  shareholders of record as of March 5, 1997 (the
Distribution).  The  Distribution  was  effective  October 1, 1997 on which date
Volu-Sol  ceased to be a subsidiary of Biomune.  The  accompanying  consolidated
financial statements present the financial position and results of operations of
Volu-Sol as discontinued operations. For the fiscal years 1997 and 1996 revenues
from Volu-Sol's  operations totaled $493,754 and $434,691,  respectively.  As of
September 30, 1997,  total  liabilities of Volu-Sol of $151,207 have been netted
against total current  assets of Volu-Sol and presented as net current assets of
discontinued operations in the accompanying consolidated balance sheets.


In accordance  with the terms of the  Distributions  and  Separation  Agreement,
certain persons who remained Biomune  employees or non-employee  directors after
the Distribution,  hold Add-on Volu-Sol Options. The obligations with respect to
the Add-on Volu-Sol options held by these individuals are obligations  solely of
Biomune.


10.  Reverse Common Stock Split

On November 10, 1997 and December 31,  1998,  the  Company's  Board of Directors
approved a 1-for-10  reverse common stock split.  All common share amounts,  per
share  information  and numbers of common shares into which  preferred  stock is
convertible  have been  retroactively  adjusted to reflect this  reverse  common
stock split in the accompanying consolidated financial statements.


11.  Commitments

Financing
The Company  has an  agreement  to provide up to $1.5  million of  financing  to
Rockwood and/or affiliates of the minority member over a one year period.  Under
terms of the agreement,  the minority member has the right to redeem part of the
Company's member interest if the Company fails to keep its covenants  concerning
the financing loans to Rockwood or affiliates.  Among other things, the minority
member could reduce the  Company's  interest to  approximately  20% of the total
issued and  outstanding  member  interests.  As of the date of this report,  the
Company has not advanced all of the funds required by the  agreement.  Under the
agreement,  the Company is required to advance an additional $1,000,000 prior to
March 15, 1999.


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

                                                                            F-25

<PAGE>


                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                      Notes to Consolidated Financial Statements

                                                                       Continued
--------------------------------------------------------------------------------



11.  Commitments
     Continued

Optim
In September 1998, the Company  acquired the exclusive  worldwide  marketing and
distribution rights to the Mountain Lift sports and energy nutrition bars. Under
the  agreement,  which  has an  initial  term of 10  years  and  continues  on a
year-to-year  basis  thereafter,  the Company  pays a royalty of 7% of net sales
generated by the licensed products. As of September 30, 1998, the Company had no
sales royalty payable under terms of the agreement.


NiteBite
Also, in September  1998,  the Company  entered into an agreement  acquiring the
exclusive worldwide distribution rights to a time-release glucose bar. Under the
agreement,  the Company pays a 12% royalty on net sales of the patented product,
which is marketed under the trade name NiteBite.  The bars are  manufactured for
the Company under contract by third parties.

As of September  30, 1998,  the Company had no royalties  payable under terms of
the agreement.


Technology
The Company has the  exclusive  right and license to utilize a patented  process
technology  (Technology) for pharmaceutical and nutraceutical  products,  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 United  States  patents.  This license
expires in May 1999 and the Company is presently  negotiating to extend the term
of the license. The term of the license is extended  automatically through March
2006, if the Company  generates  annual gross revenues from the sale of products
utilizing the  Technology  of not less than  $2,000,000.  However,  this minimum
sales target has not been  achieved  and,  unless  minimum sales are achieved in
that  amount or an  extension  of the license is agreed to, the Company may lose
its  exclusive  rights or its  ability to  continue  using the  Technology.  The
Company has not  capitalized any amounts related to this technology at September
30, 1998.


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

                                                                            F-26

<PAGE>


                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                      Notes to Consolidated Financial Statements

                                                                       Continued
--------------------------------------------------------------------------------



11.  Commitments
     Continued

Technology - Continued
The license may also terminate 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.  Among other things,  the License requires
that  the  Company  maintain  certain  levels  of  product  liability  insurance
coverage.  The Company presently does not maintain product  liability  insurance
coverage in the amounts required by the license. The Company does, however, have
product liability  insurance in amounts that it believes are sufficient in light
of its obligations  under the license,  present sales levels and its independent
product liability exposure.  Based on its current relationship with the grantor,
the  Company  does not  believe  that its  technical  failure to comply with the
insurance  coverage  covenant of the license will result in  termination  of the
license.


The Company is required to pay  royalties in the amount of 5% of gross  receipts
from the sale of all  products  covered by the license with respect to the first
$3,500,000  of sales  during each annual  period and 7% of gross  receipts  with
respect to all sales in excess of $3,500,000  during such annual periods.  Under
the current agreement,  if the license is extended past May 1999, the Company is
required to pay annual advances to be applied against royalties in the amount of
$100,000 for the first year of such  extension,  and  increasing by $10,000 each
year  thereafter.  As of  September  30,  1998,  the  Company  had not  paid any
royalties under the License.


Consulting
The  Company has a yearly  consulting  agreement  with a former  director of the
Company. During 1998, he received 120,000 shares of common stock for services.


During 1997, the Company entered into several consulting  agreements for various
services through September 30, 1997. Under terms of the agreements,  the Company
issued an  aggregate  of 7,880  shares of common  stock.  The common  stock have
"piggy back"  registration rights.  The Company recorded  $906,280 of consulting
expense for the year ended September 30, 1997.


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

                                                                            F-27

<PAGE>


                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                      Notes to Consolidated Financial Statements

                                                                       Continued
--------------------------------------------------------------------------------



11.  Commitments
     Continued

Leases
The  Company  is  contingently   liable  for  the  facilities  of  its  Rockwood
subsidiary,  should the minority  members related entities not make the payment.
The Company is also  contingently  liable for the Volu-Sol lease should Volu-Sol
not make the payment. See Note 19.


12.  Medical Waste Technologies

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


Pursuant to a license agreement dated May 6, 1996 (the "Sterilization License"),
the  Company granted a 15-year  license  to  Biomed  Patent  Development  L.L.C.
("Biomed") for the exclusive use of a portion of the Medical Waste Technologies,
known as the "Sterilization  Technology," in connection with the manufacture and
distribution  of medical devices based on the  Sterilization  Technology and the
provision of services  related thereto.  In September 1997,  Biomed assigned its
rights under the  Sterilization  License to Bioxide  Corporation  ("Bioxide") in
exchange for Bioxide stock and the assumption of certain liabilities.  Under the
Sterilization  License, the Company received royalties for the first year of the
Sterilization  License  of  $45,000,  which  were  accounted  for using the cost
recovery method. The Company is entitled to receive royalties for all subsequent
years equal to the greater of (a) 0.9 percent of gross sales of (b) $90,000. The
next royalty  payment of $90,000  became due subsequent to year end, but was not
made to the Company. As a result, the Company has determined that its investment
in the  Medical  Waste  Technologies  has been  impaired,  and has  recorded  an
impairment loss equal to the remaining unamortized cost (see Note 6).


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

                                                                            F-28

<PAGE>


                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                      Notes to Consolidated Financial Statements

                                                                       Continued
--------------------------------------------------------------------------------



12.  Medical Waste Technologies
     Continued

Biomed has entered into a license with a third party in settlement of an alleged
infringement claim by such third party relating to the Sterilization Technology.
Biomed has indemnified the Company against any damages resulting from the claims
of  such  third  party.   


13.  Common Stock Transactions

During fiscal years 1998,  1997, and 1996, the Company issued 150,001 and 25,683
and 2,172  shares of common  stock,  respectively,  in exchange for services and
bonuses.  These  issuances have been recorded at prices which represent the fair
market  value of the  services  received or the fair  market  value of the stock
issued, whichever was more readily determinable.


The Company sold 41,261, 5,083, and 400  shares  of  restricted common stock for
$206,303,   $291,500,  and  $32,500  in  fiscal  years  1998,  1997,  and  1996,
respectively. The shares were issued in connection with the exercise of existing
options and warrants.


At  September  30,  1997,  certificates  for 48,491   shares of the total common
shares reflected in the accompanying  consolidated financial statements as being
issued and  outstanding  were not physically  issued.  However,  the Company was
obligated to, and is in the process of, issuing such stock certificates.


14.  Preferred Stock

Effective  September 30, 1998, the Company satisfied the accrued preferred stock
dividends  through the issuance of additional shares of preferred stock from the
following  series:  Series A 6,968  shares,  Series B 449  shares,  Series C 472
shares, Series E 39 shares and Series F 52,082 shares.


In  addition,  the Company  converted  1,996 shares of Series A, 2,055 shares of
Series B and 470 shares of Series E into 731,454 shares of the Company's  common
stock.


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

                                                                            F-29

<PAGE>


                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                      Notes to Consolidated Financial Statements

                                                                       Continued
--------------------------------------------------------------------------------



14.  Preferred Stock
     Continued

During the year ended September 30, 1997 the Company converted 116,027 shares of
Series A,  12,058  shares of Series B and 1,817  shares of Series C into  93,345
shares of the Company's common stock. The Company issued 15,240 shares of Series
A, and 1,000 shares of Series B preferred stock to satisfy $337,766 of preferred
stock  dividends.  The Company also redeemed  1,500 shares of Series C preferred
stock for $2,000,000.


During the year ended September 30, 1996 the Company  converted 98,738 shares of
Series A, and  3,200  shares of  Series D into  21,806  shares of the  Company's
common stock.  The Company  issued 20,494 shares of Series A and 1,000 shares of
Series B to satisfy $91,199 of preferred stock dividends.


15.  Stock Options and Warrants

The Company has established the 1992, 1993, 1995, and 1996 Stock Incentive Plans
(collectively,  "the Plans"),  which allows for the granting of incentive  stock
options,  nonqualified  stock options,  and the award of common stock to certain
individuals,  including employees, officers, directors,  consultants, and others
as  designated  by the board of directors.  The Company has  designated  900,000
shares of common stock for issuance under the 1992 plan,  1,500,000 shares under
the 1993 plan, and 2,250,000 shares under the 1995 plan, and 2,500,000 under the
1996 plan. 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.  Options  are
exercisable  within  periods  determined  by the Board of Directors  but may not
exceed ten years from the date of grant. At September 30, 1997, 44,400,  33,450,
0, and 145,990 shares were available for issuance  under the 1992,  1993,  1995,
and 1996 plans,  respectively.  The 1992,  1993,  1995, and 1996 plans expire in
December 1997, September 1998, February 2005, and March 2006, respectively.


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

                                                                            F-30

<PAGE>


                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                      Notes to Consolidated Financial Statements

                                                                       Continued
--------------------------------------------------------------------------------





15.  Stock Options and Warrants
     Continued

A summary of the stock option and warrant  activity for fiscal years 1998, 1997,
and 1996 is as follows:


                                                                    Weighted
                                                    Number           Average
                                                      of            Exercise
                                                    Shares            Price
                                             ----------------------------------

Outstanding at October 1, 1995                      64,472  $           238.90
     Exercised                                        (400)              81.20
     Canceled                                       (4,600)             283.30
     Granted                                        33,741              234.90
                                             ----------------------------------
Outstanding at September 30, 1996                   93,213              229.20
     Exercised                                      (6,576)              64.70
     Canceled                                      (11,867)             206.20
     Revalued                                      (58,294)             157.40
     Granted                                       107,744               62.70
                                             ----------------------------------
Outstanding at September 30, 1997                  124,220              129.40
     Exercised                                     (41,260)              37.00
     Canceled                                      (31,587)             206.18
     Granted                                       369,000                3.62
                                             ----------------------------------
Outstanding at September 30, 1998                  420,373  $           212.64
                                             ----------------------------------

Exercisable at September 30, 1998                  118,881
                                             ----------------------------------




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

                                                                            F-31

<PAGE>


                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                      Notes to Consolidated Financial Statements

                                                                       Continued
--------------------------------------------------------------------------------




15.  Stock Options and Warrants
     Continued

When  accounting  for the  issuance  of stock  options  and  warrants  financial
accounting  standards  allows 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. The Company has opted for the
latter approach. Had the Company'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:


                                                 Years Ended
                                                September 30,
                              -------------------------------------------------
                                    1998             1997            1996
                              -------------------------------------------------

Net loss applicable to
  common shares - as
  reported                    $      (2,968,108)  $ (12,108,450)   $ (6,513,819)
Net loss applicable to
  common shares -
  pro forma                   $      (2,986,846)  $ (13,307,910)   $ (7,445,759)
Loss per common
  share - as reported         $           (4.52)  $      (54.30)   $     (34.65)
Loss per common share -
  pro forma                   $           (4.55)  $      (59.70)   $     (39.60)
                              -------------------------------------------------



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:


                                                   September 30,
                                   ---------------------------------------------
                                        1998           1997           1996
                                   ---------------------------------------------

Expected dividend yield            $           -  $            -  $            -
Expected stock price volatility             108%             80%             80%
Risk-free interest rate                       5%            5.5%            5.5%
Expected life of options                 2 years         2 years         3 years
                                   ---------------------------------------------

The weighted  average fair value of options granted during 1998,  1997, and 1996
are $.29, $45.00, and $70.70, respectively.


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

                                                                            F-32

<PAGE>


                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                      Notes to Consolidated Financial Statements

                                                                       Continued
--------------------------------------------------------------------------------




15.  Stock Options and Warrants
     Continued

The  following  table  summarizes  information  about stock options and warrants
outstanding at September 31, 1998:



                             Outstanding                     Exercisable
                  --------------------------------------------------------------
                                 Weighted
                                 Average
                     Number     Remaining    Weighted      Number      Weighted
    Range of       Outstanding Contractual   Average    Exercisable    Average
Exercise Prices        at          Life      Exercise         at       Exercise
                    09/30/98      (Years)      Price      09/30/98       Price
--------------------------------------------------------------------------------

$  2.00 to 17.50       369,000    2.3      $   3.62        67,508    $    2.51
  37.00 to 68.80        25,182    2.2         38.75        25,182        37.75
 167.00 to 400.00       26,191    1.0        255.56        26,191       255.56
--------------------------------------------------------------------------------

$  2.00 to 400.00      420,373    2.2      $  21.42       118,881    $   65.94
--------------------------------------------------------------------------------




16.  Earnings Per Share

The  Financial   Accounting   Standards  Board  issued  Statement  of  Financial
Accounting  Standards No. 128 (SFAS 128)  "Earnings  Per Share," which  requires
companies to present  basic  earnings  per share (EPS) and diluted  earnings per
share, instead of the primary and fully diluted EPS as previously required.  The
new standard  also  requires  additional  informational  disclosures,  and makes
certain  modifications to the previously  applicable EPS calculations defined in
Accounting  Principles  Board No. 15. The new standard is required to be adopted
by all public  companies for reporting  periods  ending after December 15, 1997,
and requires restatements of EPS for all prior periods reported. During the year
ended  September 30, 1998, the Company  adopted this standard.  Adoption of this
standard had no impact on the financial condition or operations of the Company.


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

                                                                            F-33

<PAGE>


                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                      Notes to Consolidated Financial Statements

                                                                       Continued
--------------------------------------------------------------------------------




16.  Earnings Per Share
     Continued

Earnings per share information is as follows:


                                                  Years Ended
                                                 September 30,
                               -------------------------------------------------
                                     1998            1997            1996
                               -------------------------------------------------

Net loss available to
  common stockholders          $     (2,968,108)  $ (12,108,450)  $  (6,513,819)
                               -------------------------------------------------

Average equivalent
 shares (basic and diluted)             656,000         223,000         188,000
                               -------------------------------------------------

Net loss per share
  (basic and diluted)          $         (4.52)   $      (54.30)  $      (34.65)
                               -------------------------------------------------



17.  Fair Value of Financial Instruments

None of the Company's financial  instruments are held for trading purposes.  The
Company estimates that the fair value of all financial  instruments at September
30, 1998, 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 judgement 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.



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

                                                                            F-34

<PAGE>


                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                      Notes to Consolidated Financial Statements

                                                                       Continued
--------------------------------------------------------------------------------




18.  Related Party Transactions

The Company has the following related party activities:

     The Company has various notes and  receivables due from related parties see
     Note 5. Interest income recorded under the notes was approximately $102,000
     and  $31,000   during  the  years  ended   September  30,  1998  and  1997,
     respectively.

     The  Company at  September  30,  1998 has a note  payable to a trust  who's
     trustee  is the  brother  of the  president  of the  Company.  See  Note 7.
     Interest expense was $16,770 for the year ended September 30, 1998.

     The Company in 1998 has a  management  agreement  with an entity owned by a
     shareholder and former officer of the Company.  The agreement provides that
     the entity will provide management and marketing services to the Company in
     exchange for a fee equal to 45% of the gross  revenues of the nutrition and
     medical food products.  The Company had no payments due under terms of this
     agreement, which expires September 30, 1999.

     The  Company  during  1998 sold to another  company  under  common  control
     certain rights including  royalties  rights to a waste disposal  technology
     for a gain of $400,000.


     The Company paid $37,000 rent to the minority  interest member for the year
     ended September 30, 1998.


     The  Company  in  1996  had  a  consulting   agreement   with  an  indirect
     shareholder,  whereby  the  shareholder  received  $10,000  per  month  and
     reimbursement of any out-of-pocket expenses. Effective October 1, 1996, the
     consulting  agreement was terminated.  The services provided to the Company
     included primarily  financial and general business  consulting services and
     introductions   to  the   scientific,   medical,   financial  and  business
     communities.  The Company  recorded  consulting  expense of $120,000 in the
     fiscal year ended September 30, 1996.


     The Board of Directors  approved the  reimbursement  to the  shareholder of
     certain legal costs which Genesis  incurred in connection with a litigation
     matter  discussed in Note 21. For the year ended  September 30, 1997,  this
     amount totaled $96,000.



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

                                                                            F-35

<PAGE>


                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                      Notes to Consolidated Financial Statements

                                                                       Continued
--------------------------------------------------------------------------------




19.  Operating Leases

The  Company  leases its  facilities  related  to  continuing  operations  under
noncancellable  operating leases,  which expire through July 2001. Lease expense
for the  years  ended  September  30,  1998,  1997,  and 1996 was  approximately
$114,000, $117,000, and $47,000, respectively.  Future minimum lease commitments
are as follows:


Fiscal year                                                    Amount
                                                          -----------------
     1999                                                 $         119,000
     2000                                                            20,000
     2001                                                            13,000
                                                          -----------------

                                                          $         152,000
                                                          -----------------

These  minimum  lease  commitments  do not include any amounts  associated  with
Volu-Sol's  leased facility.  To the extent that Volu-Sol  defaults on any lease
payments,  Biomune is obligated to make such payments as the lessee. These lease
commitments total $4,617 per month through November 2000.


20.  Acquisition

During the year ended  September 30, 1998, the Company  acquired a 52%  majority
interest in Rockwood, which was accounted for as a purchase and, accordingly, is
included in the consolidated  financial  statements since April 1, 1998 (date of
acquisition).  The  purchase  price  consisted  of costs  incurred in  acquiring
Rockwood  and the  commitment  by the  Company to advance up to $1.5  million of
operating resources to Rockwood or related entities of the minority shareholder.
The Company is also required to issue up to 500,000 shares of preferred stock if
certain operating  benchmarks are met. No operating  benchmarks have been met at
September  30, 1998.  The excess of the purchase  price over assets  acquired of
$222,700 has been included in goodwill and is being  amortized  over a period of
five years.



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

                                                                            F-36

<PAGE>


                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                      Notes to Consolidated Financial Statements

                                                                       Continued
--------------------------------------------------------------------------------




20.  Acquisition
     Continued

The following  unaudited pro forma consolidated  results of operations have been
prepared as if the 1998  acquisition  had  occurred at the  beginning  of fiscal
1996:


                                   Pro Forma Results of Operations
                           ------------------------------------------------
                                 1998            1997            1996
                           ------------------------------------------------

Total revenue              $      7,494,488  $    4,790,304  $    3,653,102

Total expenses                   10,132,819      12,638,553      10,116,398
                           ------------------------------------------------

Net loss                   $     (2,638,331) $   (7,848,249) $   (6,463,296)
                           ------------------------------------------------

Net loss per share         $          (4.02) $       (35.19) $       (34.38)
                           ------------------------------------------------

The pro forma  consolidated  results do not purport to be  indicative of results
that would have  occurred  had the  acquisitions  been in effect for the periods
presented,  nor do they  purport to be  indicative  of the results  that will be
obtained in the future.


21.  Litigation

The Company and certain of its officers and directors are currently  involved in
litigation  with a  shareholder.  On October 12, 1995,  a Proposed  Class Action
Complaint for violation of federal  securities  laws was filed in U.S.  District
Court. The complaint  alleges various  violations of the Securities and Exchange
Act of 1934.  On April 2, 1997,  the trial 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.  On September 2,
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. No date had been set for a rehearing by the trial court.


The Company  believes  that the  allegations  made in the  Complaint  are wholly
without  merit and  intends to  vigorously  oppose the claims of the  plaintiff.
However,  there  can  be  no  assurance  that  the  Company's  defense  will  be
successful.  Until  September  1998,  the  Company  has paid the legal  fees and
related  expenses  associated  with the  defense of this action on behalf of the
Company and the other named defendants.  The financial statements do not include
any accrued amounts should the Company not prevail in the litigation.


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

                                                                            F-37

<PAGE>


                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                      Notes to Consolidated Financial Statements

                                                                       Continued
--------------------------------------------------------------------------------



21.  Litigation
     Continued

On September 29, 1998, a lawsuit was filed in the Third Judicial  District Court
for Salt Lake County, naming the Company,  Bioxide Corporation,  and individuals
and related entities as defendants.  The plaintiff's  claims allegedly arose out
of his role in the  development  of certain waste disposal  technologies.  Those
technologies  were  included  in the  property  sold by the  Company  in 1998 to
Bioxide Corporation. The defendants, including the Company, filed answers to the
complaint,  denying all of the plaintiff's  principal allegations and claims and
asserting  counterclaims against the plaintiff,  including,  among other things,
unjust  enrichment and a claim that the plaintiff  misrepresented  his authority
and  ability  to  patent  the  technology  at the  core of the  litigation.  The
litigation  is  presently  in the  discovery  phase.  The Company  believes  the
plaintiff's claims to be without merit and will vigorously defend itself in this
action. No amounts have been accrued in the financial statements.


By agreement with the Company,  Harrogate Marketing LLC has agreed to assume and
pay all costs,  including  legal fees, of the Company in connection with both of
these matters.


22.  Recent Accounting Pronoucements

The  Financial  Accounting  Standards  Board has issued  Statement  of Financial
Accounting Standards No. 130,  "Reporting  Comprehensive  Income," Statement No.
131,  "Disclosures about Segments on an Enterprise and Related  Information" and
Statement   No.  132,   "Employers'   Disclosures   about   Pensions  and  Other
Postretirement Benefits." Statements No. 130 and No. 131 are effective for years
beginning  after  December 15, 1997.  Statement  No. 132 is effective  for years
beginning after December 15, 1998. It is not expected that the adoption of these
statements will have a material impact on the Company's financial statements.


During  January 1998,  the American  Institute of Certified  Public  Accountants
("AICPA") issued Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities"  ("SOP  98-5).  SOP 98-5  becomes  effective  for all  fiscal  years
beginning after December 15, 1998. The Company will adopt SOP 98-5 in its fiscal
year beginning  October 1, 1999. The Company does not expect the adoption of SOP
98-5 to have a material impact on the Company's financial statements.



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

                                                                            F-38

<PAGE>


                                          BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
                                      Notes to Consolidated Financial Statements

                                                                       Continued
--------------------------------------------------------------------------------


23.  Subsequent Events

The Company, during 1998, sold common stock for a note receivable. Subsequent to
the  year  end,  the  Company  received  $650,000.  As  part  of  the  Company's
acquisition of Rockwood,  the minority  shareholder  agreed to contribute  other
assets totaling approximately  $891,000. This contribution was originally in the
form of a note. On January 8, 1999, the note was satisfied.


Subsequent  to September  30, 1998,  the holders of a majority of the issued and
outstanding  shares of  Series F  Preferred  consented  to an  amendment  of the
designation  of rights and  preferences  of the Series F Preferred  whereby each
share of  Series F  Preferred  will be  convertible  to .3 of a share of  common
stock.  However,  not more than 250,000  shares of common stock may be issued in
the  aggregate  in  conversion  of all  shares  of  Series  F  Preferred  unless
stockholder  approval is received for the issuance of more than 250,000  shares.
Unconverted  shares of Series F  Preferred  may be  redeemed by the Company at a
price of $.80 per share.

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

                                                                            F-39


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

         On June 15, 1998,  the Company  appointed  Tanner + Co.  ("Tanner")  to
replace Arthur Andersen LLP ("Andersen") as independent auditors of the Company.
Andersen's services as the Company's auditor terminated on the same date.

         The  report  of  Andersen  on  the  Company's   consolidated  financial
statements for the years ended  September 30, 1997 and 1996 contained no adverse
opinion or  disclaimer  of  opinion  and was not  qualified  or  modified  as to
uncertainty, audit scope or accounting principle, except that such report on the
consolidated financial statements included an explanatory paragraph with respect
to the Company being in the development stage and its having suffered  recurring
losses  which raise  substantial  doubt about its ability to continue as a going
concern.

         The decision to engage Tanner as the Company's independent auditors was
approved by the Company's board of directors.

         Except as discussed  below, in connection with the audits for the years
ended  September 30, 1997 and 1996,  and through the interim period through June
15, 1998, there were no  disagreements  or "reportable  events" with Andersen as
described  in Items  304(a)(1)(iv)  and (v) of  Regulation  S-K on any matter of
accounting principles or practices,  financial statement disclosure, or auditing
scope or procedure,  which  disagreements if not resolved to the satisfaction of
Andersen  would have  caused it to make  reference  thereto in its report on the
consolidated financial statements for 1997 and 1996.

         During the course of Andersen's  review of the  consolidated  financial
statements of the Company for the quarter ended March 31, 1998,  certain matters
came to Andersen's  attention  that were reported to the Audit  Committee of the
Company in a letter dated May 14, 1998.  Andersen  informed the Audit  Committee
that with respect to certain  related-party  notes receivable and trade accounts
receivable significant collections had not been received to date.  Additionally,
Andersen  informed  the Audit  Committee  that with  respect  to  certain of the
Company's  nutraceutical  inventories  there had been  minimal  sales  activity.
Andersen informed the Audit Committee that management's assessment was that both
the  receivables  and  the  inventory  balances  were  fully  realizable  and no
additional  reserves were necessary.  Andersen encouraged the Audit Committee to
monitor these issues with management.

         Substantive  audit tests and further  investigation  into these  issues
would have been a necessary part of Andersen's  audit  procedures for the fiscal
year-end  September  30,  1998  financial   statements  had  the  client/auditor
relationship  not  terminated.  Andersen has been  authorized  by the Company to
respond to any and all inquiries by the

                                      -28-

<PAGE>



successor auditors,  without  limitation.  The Company has cooperated fully with
the new auditors to address  these  matters and these  matters had no bearing on
the decision to change auditors.

         Andersen  provided to the Company a letter  addressed to the Securities
and Exchange  Commission stating that it had reviewed the disclosure provided in
the  Current  Report  filed by the Company on June 19, 1998 to report the change
and that it had no  disagreement  with the relevant  portions of the  disclosure
contained  in such  Current  Report,  which is  repeated  here,  pursuant to the
requirements of Item 304(a)(3) of Regulation  S-K. A copy of such letter,  dated
as of June 19, 1998, was filed as Exhibit 16 to the Current Report on Form 8-K.

         During the years ended  September  30,  1997 and 1996,  and through the
interim period through June 15, 1998, there were no other reportable  events (as
referenced in Item 304(a)(1)(iv) and (v) of Regulation S-K).


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS

         As of January 8, 1998,  the  directors  and  executive  officers of the
Company were as follows:

<TABLE>
<CAPTION>
    Name                                            Age                              Position

<S>                                                <C>                <C>                                             
Christopher D. Illick...............................58..............................Director, Chairman of the Board
Michael G. Acton....................................35.................Director, Chief Executive Officer, President
Thomas Q. Garvey, III, M.D..........................55.....................................................Director
Aaron Gold, D.D.....................................70.....................................................Director
Charles J. Quantz, Esq..............................70.....................................................Director
</TABLE>

     Christopher  D. Illick Mr.  Illick has been a Director of the Company since
February 1995 and a Director of Optim since May 1, 1996. He has been Chairman of
the Board of  Directors  since July 1998.  Mr.  Illick is Sr. Vice  President of
Brean Murry & Co.,  Inc., an  investment  banking  firm.  Since March 1995,  Mr.
Illick  has  been a  limited  partner  in the  investment  banking  firm of Oaks
Fitzwilliams  & Co., L.P. in New York City, New York. He has also been a general
partner of Illick Brothers, a real estate and management concern since 1965, and
was the founder and President of the U.S.  subsidiary of Robert Fleming Holding,
Ltd. of London,  England,  from 1973 to 1983. Mr. Illick is also a member of the
board of directors of National Transaction Network, Inc.

         Michael G. Acton,  C.P.A. Mr. Acton has been Chief Executive Officer of
the  Company  since  June  1998.  Prior to that  time,  Mr.  Acton was the Chief
Financial  Officer  since July 1997 and  Controller of the Company since October
1994.  He was the President of Volu-Sol from March 15, 1996 until March 1997 and
has been Chief Executive Officer and Chairman of Volu-Sol since March 1997. From
June 1989 through October 1994, Mr. Acton was employed by Arthur Andersen LLP in
Salt Lake  City,  Utah,  where he  performed  various  tax,  audit and  business
advisory services. Mr. Acton received a Bachelor of Science Degree in Accounting
in 1988 and a Master of Professional  Accountancy  Degree in 1989, both from the
University of Utah. He is a Certified Public Accountant in the State of Utah.

         Thomas Q.  Garvey,  III,  M.D.  Dr.  Garvey has been a Director  of the
Company since April 1994 and a member of the Company's scientific advisory board
and a scientific and  regulatory  consultant to the Company since November 1992.
Dr. Garvey has also served as a Director of Optim since May 1, 1996.  Dr. Garvey
is a  gastroenterologist  in private medical and scientific  consulting practice
with Garvey  Associates,  Inc. in Potomac,  Maryland,  since 1981. Prior to that
time, Dr. Garvey was the supervisory  medical officer of the  Cardio-Renal  Drug
Products  Center of Drug  Evaluation  at the FDA for  approximately  five years.
Prior to that time, he was in private  practice with the  Massachusetts  General
Hospital in Boston, Massachusetts, and with the National Cancer Institute at the
National  Institutes  of  Health.  As a  consultant  to  various  pharmaceutical
companies,  Dr.  Garvey has  developed,  written and  consulted on many new drug
applications and has assisted the Company in preparing its  investigational  new
drug  applications  and the  development of protocols for clinical trials of the
Company's proposed drug products.


                                      -29-
<PAGE>
     Aaron Gold,  D.D.  Dr. Gold has been a Director of the Company  since April
1984 and a Director of Optim since May 1, 1996.  Dr. Gold has been a businessman
and religious leader in San Diego,  California since 1974. Between July 1974 and
September  1992, Dr. Gold was a Rabbi with the Tiferth  Israel  Synagogue in San
Diego,  California.  From July 1994 to the  present he has been a Rabbi with the
Nertamid Synagogue in Rancho Bernardo, California. He holds a Doctor of Divinity
Degree  from the Jewish  Theological  Seminary  of America  and a  Doctorate  in
Philosophy from Columbia University.

     Charles J. Quantz Mr. Quantz has been a Director of the Company since April
1984 and a Director  of Optim  since May 1, 1996.  Mr.  Quantz was a  practicing
attorney in California for twenty-six years prior to his retirement in 1981.

         No family  relationships  exist  between or among any of the  Company's
officers  and  directors.  In  addition  to the  above  executive  officers  and
directors, the Company's Optim subsidiary is managed by Randy Olshen, President.

         Randy Olshen. Mr. Olshen has been President of Optim since August 1998.
Prior to joining the Company,  Mr. Olshen was director of sales and marketing at
Nellson  Nutraceutical,  where  he  directed  all  marketing  and  research  and
development  activities  for  the  private  label  business  of  pharmaceutical,
clinical  nutrition and medical food  companies,  worked on new product  concept
development,  coordinated state-by-state medical reimbursement programs, lobbied
for  medical  food bars to be  included on state  formularies,  managed  branded
disease specific products,  and built customer business and marketing  relations
with wholesalers,  institutions, retailers, physicians, dieticians and patients.
Before joining  Nellson,  Mr. Olshen was employed as business  manager for sales
and marketing at McGaw, Inc.

     Ira E. Ritter.  Mr. Ritter served  briefly as President of the Company from
July 9, 1997 until  January 1998.  Prior to joining the Company,  Mr. Ritter was
the Vice  Chairman of Quality  King  Distributors,  a wholesale  distributor  of
health and beauty care, grocery and pharmaceutical products. Since January 1997,
Mr. Ritter has been the President of Rockwood and its predecessor companies. Mr.
Ritter  provides his services to Rockwood on a part-time  basis and continues to
be active in other business,  community and personal pursuits.  For the past ten
years, Mr. Ritter has been the Chief Executive Officer of Andela Group,  Inc., a
California venture capital company.  From 1983 to 1985, Mr. Ritter was active in
the publishing  business,  founder or co-founder of several successful magazines
and the executive  publisher of  best-selling  books. He has also been active in
civic and political circles.  Mr. Ritter attended California State University at
Northridge  and founded his first  successful  magazine,  Environmental  Quality
Magazine at the age of 21.

Board of Directors Committees

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

Compensation Committee

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

Audit Committee

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


                                      -30-
<PAGE>
Scientific Advisory Board

         The  Company  has a  Scientific  Advisory  Board  comprised  of medical
practitioners  and  distinguished  academicians  and  scientists in the field of
medicine to assist the Company with the development of its  pharmaceutical  drug
candidates and nutraceutical  products.  The Company's  management  periodically
consults with members of the  Scientific  Advisory  Board with respect to issues
arising  within a particular  member's area of  expertise.  Although the Company
periodically  receives  guidance  from certain of the members of the  Scientific
Advisory Board,  all of the members of the Company's  Scientific  Advisory Board
are otherwise employed on a full-time basis and, accordingly, are able to devote
only a small portion of their time to the Company. Each member of the Scientific
Advisory Board has entered into a Confidentiality Agreement with the Company and
has agreed not to disclose any of the Company's confidential  information during
the period such person serves on the Scientific  Advisory Board and for a period
of five years  thereafter.  The  members  of the  Scientific  Advisory  Board at
September 30, 1998 are as follows:

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

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

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

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

     Thomas Q. Garvey III,  M.D.  Dr.  Garvey is also a director of the Company.
Please refer to his biographical information above.

         Except for Dr. Garvey,  who has a separate  agreement with the Company,
members of the Scientific Advisory Board are paid either $250 per hour or $1,000
per day for their services,  depending on the individual. Dr. Garvey's agreement
with the Company provides for the payment of $400 per hour,  $1,500 per half-day
and $3,000 per full day for his services.

Business Advisory Board

     The Company also has a Business  Advisory Board, the purpose of which is to
advise  the  Company's  management  and the  Board of  Directors  regarding  the
Company's  development  and future  growth.  None of the members of the Business
Advisory Board are members of the Company's Board of Directors. The Company's

                                      -31-
<PAGE>
management  periodically  consults with members of the Business  Advisory  Board
concerning  business  issues.  The  members of the  Business  Advisory  Board at
September 30, 1998, are as follows:

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

     Wilford W. Kirton,  Jr., Esq. Mr. Kirton is a prominent  lawyer who founded
the Salt Lake City,  Utah-based  law firm of Kirton & McConkie.  Mr.  Kirton has
served on numerous boards,  including Lawyers Title Company,  Murdock Travel and
the American Bar Association. He is David G. Derrick's father-in-law.

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

ITEM 11.  EXECUTIVE COMPENSATION

         The following table sets forth the annual and long-term compensation in
fiscal years 1998,  1997 and 1996 for services in all  capacities to the Company
of any person  serving as Chief  Executive  Officer  during fiscal year 1998. No
other  current or former  executive  officer of the Company  received  salary or
bonus compensation exceeding $100,000 in 1998. No options or long-term incentive
plan awards were granted or made to the referenced executive officers, except as
noted in the table below:

<TABLE>
<CAPTION>
                                              SUMMARY COMPENSATION TABLE

                                           Annual Compensation           Long-Term Compensation
                                    ------------------------------- ------------------------------  
                                                                          Awards          Payouts

         (a)                  (b)       (c)      (d)       (e)         (f)       (g)        (h)          (i)
------------------------------------------------------------------------------------------------------------------
                                                                              Securities
                                                           Other    RestrictedUnderlying
                                                          Annual       Stock   Options/     LTIP       All Other
Name and Principal position Year (1)   Salary    Bonus Compensation   Awards    SARs(#)  Payouts($) Compensation($)
--------------------------- --------   ------    ----- ------------   ------    -------  ---------- ---------------

<S>                           <C>   <C>           <C>       <C>       <C>       <C>           <C>          <C>
David G. Derrick,(3)          1998  $ 69,230      -0-       -0-         -0-     349,252(4)     -0-          -0-
CEO/President                 1997  $200,000      -0-       -0-         -0-      31,000        -0-          -0-
Chairman of the Board         1996  $203,000 (5)  -0-       -0-         -0-       6,000        -0-          -0-

Michael G. Acton,             1998  $100,000 (6)   --       -0-         -0-           0        -0-          -0-
CFO                           1997    80,000       --        --          --       2,500         --           --
President/CEO                 1996    60,000       --        --       2,350       2,350         --           --

-----------------------
</TABLE>

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

(2)      Adjusted to reflect 1-for-10 reverse stock split effective November 10,
         1997 and the 1-for-10 reverse split effective December 31, 1998.

                                      -32-

<PAGE>



(3)      Pursuant to a management agreement (the "Management Agreement") between
         the Company and ADP Management  Corporation  ("ADP"),  through June 15,
         1996, ADP provided the Company with the  management and  administrative
         services necessary to manage the daily business  operations and affairs
         of the Company and, in addition, furnished the Company with a president
         or chief executive officer (Mr. Derrick). The Management Agreement with
         ADP was terminated on June 15, 1996.  While that  Management  Agreement
         was in force,  the Company's  Board of Directors  determined the dollar
         amount of compensation  that was paid to Mr. Derrick (through ADP). Mr.
         Derrick and his wife own ADP. The Management  Agreement was replaced by
         an  Employment  and  Non-Competition  Agreement,  which  terminated  on
         September 30, 1997. Mr. Derrick resigned as CEO, President and director
         of the Company in July,  1998.  Mr. Acton  replaced Mr. Derrick at that
         time.  Amounts for Mr. Acton for periods prior to July,  1998 were paid
         to Mr. Acton in his position as Chief Financial Officer of the Company.
         See "Certain Relationships and Related Transactions. Mr. Derrick served
         as the Company's President during fiscal year 1995 and to January 1996,
         from April 1997 to July 1997,  and resumed in that  position  effective
         January  1998.  During all of fiscal  years  1995,  1996 and 1997,  and
         continuing  to June 1998, he served as the  Company's  Chief  Executive
         Officer and Chairman of the Board of Directors.

(4)      Includes (a)  repricing  of options for the purchase of 41,252  shares,
         and (b) 308,000 shares covered by options held by Harrogate,  a limited
         liability  company owned 100% by Mr.  Derrick.  Mr.  Derrick  disclaims
         beneficial  ownership of the Harrogate  options,  given the  limitation
         placed  thereon by the Company that their exercise will be permitted if
         and only to the extent that the ownership of shares  acquired upon such
         exercise, when aggregated with all other shares of the Company's common
         stock  beneficially  owned by Mr. Derrick,  will not exceed 4.9% of the
         issued and outstanding common stock of the Company.

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

(6)      Mr.  Acton was the  chief  accounting  officer  and,  later,  the chief
         financial officer of the Company until June 1998. For a brief period of
         time, from September 1997 until January 1998, Ira E. Ritter,  President
         of Rockwood,  also served as  President of the Company.  He received no
         compensation in such capacity and he resigned in January 1998.

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

STOCK PLANS

         In  December  1992,  July  1993,  February  1995 and March,  1996,  the
Company's  Board of Directors  approved the 1992 Stock  Incentive Plan, the 1993
Stock  Incentive  Plan,  the 1995  Stock  Incentive  Plan,  and the  1996  Stock
Incentive Plan, respectively.  The 1992 Stock Incentive Plan terminated December
31, 1997 and no additional  options may be granted under it. As of September 30,
1998,  2370 shares of the  Company's  common  stock were  subject to options and
issuable  upon  exercise  of  options  granted  previously  under the 1992 Stock
Incentive  Plan. The 1993 Stock Incentive Plan has also  terminated.  A total of
12,438 shares of common stock were issuable upon exercise of options  previously
granted and  outstanding  under the 1993 Stock  Incentive  Plan at September 30,
1998. No shares of common stock were available for  additional  grants under the
1995 Stock  Incentive Plan, and 19,230 shares of common stock were issuable upon
exercise of  outstanding  options  under the Plan at September  30, 1998.  As of
September  30, 1998, a total of 20,271  shares were  issuable  upon  exercise of
options  granted under the 1996 Stock Incentive  Plan.  There are  approximately
403,000 shares available for future grants under this plan.


                                      -33-
<PAGE>
Option Grants in Fiscal Year 1998

         The  following  table sets forth  information  concerning  the grant of
stock  options and stock  appreciation  rights  (SARs) made under the  Company's
plans  during the fiscal year ended  September  30, 1998 to the Chief  Executive
Officer and President:

<TABLE>
<CAPTION>
                                         OPTION/SAR GRANTS IN LAST FISCAL YEAR

                                                                          Potential Realizable Value at Assumed
                                                                                   Annual Rates of Stock Price
                                      Individual Grants                           Appreciation for Option Term
-------------------------------------------------------------------------  ----------------------------------------
            (a)           (b)         (c)            (d)          (e)         (f)           (g)
                                   % of Total
                       Number of  Options/SARs
                       Securities  Granted to
                       Underlying   Employees    Exercise or
                      Options/SARs  in Fiscal    Base Price    Expiration
         Name          Granted (#)     Year        ($/Share)      Date        5% ($)        10% ($)
-------------------------------------------------------------------------------------------------------------


<S>                     <C>         <C>          <C>            <C>          <C>           <C>    
David G. Derrick (1)    308,000     308,000      $2.00          9/30/2003    $30,800       $61,600

Michael G. Acton              0           0        N/A               N/A         N/A           N/A
</TABLE>

         (i)      All  options  granted  Harrogate  under a  marketing  services
                  agreement.  Harrogate is wholly owned by Mr. Derrick,  however
                  Mr. Derrick disclaims beneficial ownership of such shares. See
                  Summary Compensation Table above.

Aggregated Option Exercises and Fiscal Year-end Option Value

         The following table sets forth information with respect to the exercise
of stock options by the Company's Chief Executive  Officer and President  during
the fiscal year ended  September 30, 1998,  as well as the aggregate  number and
value of unexercised options held by such officer on September 30, 1998.

<TABLE>
<CAPTION>
                  AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

                                                              Number of securities
                                                                   Underlying               Value of Unexercised
                                                                Unexercised options        In-the-Money Options at
                                                              At September 30, 1998(#)     September 30, 1998 ($)
                        Shares Acquired         Value             Exercisable/                 Exercisable/
Name                      On Exercise(#)     Realized($)          Unexercisable               Unexercisable
--------------------------------------------------------------------------------------------------------------------

<S>                          <C>             <C>                     <C>                      <C>           
David G. Derrick             41,252 (1)      $371,268(2)             349,252/-0-               N/A/(3)/-0-

Michael G. Acton                  0 (1)               -                4,306/-0-                N/A(3)/-0-
</TABLE>


         (1)      All share amounts  adjusted to reflect  1-for-10 reverse stock
                  split  effective  November 10, 1997, and the 1-for-10  reverse
                  split  effective  December  31, 1998.  The exercise  price was
                  $5.00 per share and the market  price on the date of  exercise
                  was  $14.00  per  share  (also  adjusted  for the  intervening
                  reverse stock split).

         (2)      Shares acquired upon exercise of this option have been pledged
                  as collateral  security for the Company's  obligation  under a
                  loan  agreement.   See  "Certain   Relationships  and  Related
                  Transactions."

         (3) At September 30, 1998, none of the options were in the money.

                                      -34-

<PAGE>



Report on Repricing of Options

         In December 1997, the Board of Directors adjusted the exercise price of
options previously granted under the Stock Option Plans to certain  individuals,
including certain of the Named Executive Officers. The Compensation Committee of
the Board  recommended  the changes to bring the exercise  prices  closer to the
market price for the Company's  Common Stock at the time of the  repricing  such
that the options  continued to provide  incentive for the persons who held them.
The new exercise  price was based on the market price at the close of trading on
the date the repricing was adopted.  The following table summarizes  information
concerning  the  adjustments  made to the exercise  price of options held by all
executive officers of the Company during the past 10 fiscal years.



<TABLE>
<CAPTION>
                                                 Ten-Year Option Repricings


            (a)                    (b)             (c)                (d)               (e)             (f)             (g)
                                                Number of           Market
                                                Securities           Price           Exercise                        Length of
                                                Underlying            Of               Price                         Original
                                                 Options/          Stock at           At Time                       Option Term
                                                   SARs             Time of             Of              New        Remaining at
                                               Repriced or         Repricing         Repricing       Exercise         Date of
                                                 Amended         Or Amend-ment       Or Amend-         Price       Repricing or
     Name and Position            Date              (#)               ($)            ment ($)           ($)          Amendment

---------------------------- --------------- ----------------  -----------------  ---------------  ------------- -----------------
<S>                                 <C>                <C>                 <C>              <C>            <C>           <C>    
Michael G. Acton                    10/23/96            1,600                116              250            116           4 years
CFO, President, CEO                 10/23/96              750                116              200            116           4 years
                                     7/28/97            1,600                 37              116             37           3 years
                                     7/28/97              750                 37              116             37           3 years


David G. Derrick (1)                10/23/96            4,000               $116             $200           $116           4 years
Former President and CEO            10/23/96            1,400                116              200            116           4 years
                                    10/23/96            6,000                116              200            116           4 years
                                     7/28/97            4,000                 37              116             37           3 years
                                     7/28/97            1,400                 37              116             37           3 years
                                     7/28/97            6,000                 37              116             37           3 years
                                     7/28/97            1,000                 37              116             37           4 years
                                    12/15/97            4,000                  5               37              5           2 years
                                    12/15/97            1,400                  5               37              5           2 years
                                    12/15/97            6,000                  5               37              5           2 years
                                    12/15/97            1,000                  5               37              5           3 years

James J. Dalton                     10/23/96            1,200                116              200            116           4 years
Former Vice President               10/23/96            1,000                116              231            116           4 years
                                     7/28/97            1,200                 37              116             37           3 years
                                     7/28/97            1,000                 37              116             37           3 years
                                     7/28/97            1,440                 37              116             37           4 years
                                     7/28/97              750                 37              116             37           4 years
Milton G. Adair                     10/23/96              750                116              234            116         4.5 years
Former CEO
</TABLE>

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

(1)      Includes  options held by ADP Management  under a contract by which ADP
         made Mr.  Derrick's  services  available  as  President  and CEO of the
         Company.


                                      -35-
<PAGE>
Executive Compensation Report of the Compensation Committee

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

         This section discusses the Company's  executive  compensation  policies
and the basis for the  compensation  paid to the Company's  executive  officers,
including its former Chief Executive Officer,  David G. Derrick, and its current
Chief  Executive  Officer,  Michael  G.  Acton,  during  the  fiscal  year ended
September 30, 1998.

Compensation Policy

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

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

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

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

         The components of compensation paid to executive officers consist of:

         o        base salary;

         o        incentive  compensation  in the form of annual bonus  payments
                  and stock  options  awarded by the Company under the Company's
                  Stock Incentive Plans; and

         o        certain other  benefits  provided to the  Company's  executive
                  officers.

         The Company's  Compensation  Committee is responsible for reviewing and
approving cash  compensation  paid by the Company to its executive  officers and
members of the Company's senior  management  team,  including annual bonuses and
stock options awarded under the Company's Stock Incentive  Plans,  selecting the
individuals  who will be  awarded  bonuses  and  stock  options  under the Stock
Incentive  Plans,  and determining  the timing,  pricing and amount of all stock
options  granted  thereunder,  each  within  the  terms of the  Company's  Stock
Incentive Plans.

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


                                      -36-
<PAGE>
Components of Compensation

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

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

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

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

Conclusion

         The Compensation  Committee  believes that the concepts discussed above
further  the  shareholders'  interests.  At  the  same  time,  the  Compensation
Committee  believes that the program  encourages  responsible  management of the
Company. The Compensation  Committee regularly considers plan design so that the
total program is as effective as possible in furthering  shareholder  interests.
The  Compensation  Committee  bases  its  review  on the  experience  of its own
members, on information requested from management personnel,  and on discussions
with and information compiled by various independent consultants retained by the
Company.

                                    Compensation Committee:

                                    Christopher D. Illick
                                    Michael G. Acton
                                    Thomas Q. Garvey III, M.D.











                                      -37-

<PAGE>



                             STOCK PERFORMANCE GRAPH

         The following graph compares the yearly  cumulative  total returns from
the  Company's  common stock during the five fiscal year period ended  September
30, 1998,  with the  cumulative  total return on the Media General Index and the
Standard  Industrial  Classification  (SIC) Code Index for that same period. The
comparison  assumes $100 was invested on October 1, 1993 in the Company's common
stock and in the common  stock of the  companies in the  referenced  Indexes and
further assumes reinvestments of dividends.

                    COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
                         AMONG BIOMUNE SYSTEMS, INC.,
                    MEDIA GENERAL INDEX AND SIC CODE INDEX

                           [LINE GRAPH APPEARS HERE]

                    ASSUMES $100 INVESTED ON OCT. 01, 1993
                          ASSUMES DIVIDEND REINVESTED
                       FISCAL YEAR ENDING SEPT. 30, 1998



                        Fiscal Year Ending September 30,
                        --------------------------------

<TABLE>
<CAPTION>
                               1993       1994        1995        1996         1997          1998
                               ----       ----        ----        ----         ----          ----
<S>                            <C>       <C>         <C>         <C>          <C>            <C>
Biomune Systems, Inc.          100       284.43      187.43      117.96        22.46          2.46
Commercial Physical Research   100        74.10      116.82      111.03       133.28        107.45
Media General Composite        100       104.92      125.75      149.50       203.79        209.69

</TABLE>









                                      -38-

<PAGE>



Compensation of Directors

         Members of the Board of Directors  who are not  directly or  indirectly
employed  by the  Company  are paid $500 for each  Board  meeting  attended,  in
addition to having their expenses in connection  with attending  meetings of the
Board of Directors.  No stock options were issued during fiscal year 1998 to any
such Directors for their service on the board.

Section 16(a) Beneficial Ownership Reporting Compliance

         Section  16(a) of the 1934 Act requires  the  Company's  directors  and
executive  officers,  and persons who own more than 10% of a registered class of
the  Company's  equity  securities,  to file  with the SEC  initial  reports  of
ownership and reports of changes in ownership of the Company's  common stock and
other equity securities.  Officers,  directors and greater than 10% shareholders
are  requested  by SEC  Regulations  to furnish the  Company  with copies of all
Section  16(a)  reports  they file.  Based solely upon a review of the copies of
such reports furnished to the Company and written  representations that no other
reports were  required,  the Company  believes that there was compliance for the
fiscal year ended September 30, 1998 with all Section 16(a) filing  requirements
applicable to the Company's officers,  directors and greater than 10% beneficial
owners.

ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         To the Company's knowledge,  the following table sets forth information
regarding ownership of the Company's outstanding common stock on January 4, 1999
by beneficial owners of more than 5% of the outstanding  shares of common stock;
each  director and each  executive  officer;  and all  directors  and  executive
officers  as a group.  Except  as  otherwise  indicated  below  and  subject  to
applicable  community  property  laws,  each  owner  has  sole  voting  and sole
investment powers with respect to the stock listed.

<TABLE>
<CAPTION>
                                                                      Shares of Common stock
Name and Address                                                      Beneficially  Owned (2)
of Beneficial Owner (1)                                            Number         Percentage of Class
------------------------------------------------------     ------------------------------------------

Directors/Officers

<S>                                                               <C>                      <C>
Michael G. Acton (3) (Executive Officer/Director)                  9,057                    *

Aaron Gold, D.D. (4) (Director)                                    2,046                    *
4373 Sheldon Drive
La Mesa, CA 92401

Charles J. Quantz. (5) (Director)                                    872                    *
Post Office Box 8186
Emeryville, CA 94663

Thomas Q. Garvey, III, M.D.  (6) (Director)                        1,050                    *
10125 Gary Road
Potomac, MD 20854

Christopher D. Illick (7) (Director)                              17,520                  1.3%
22 Mountain Avenue
Princeton, N.J. 08450

All executive officers and
directors as a group (persons) (8)                                30,545                  2.3%
------------------------------
</TABLE>

*         Less than 1% [Footnotes continued on next page.]

                                      -39-

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

(2)      A person is deemed to be the beneficial owner of securities that can be
         acquired  by  such  person  within  60 days  from  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
         1,316,662 shares of common stock  outstanding as of January 4, 1999 (as
         adjusted  for  shares   deemed  to  be   beneficially   owned  by  such
         shareholder).

(3)      Mr.  Acton owns 4,752  shares of common  stock  directly and options to
         purchase 4,306 shares of common stock.

(4)      Dr.  Gold owns 696  shares of common  stock  directly  and  options  to
         purchase 1,350 shares of common stock.

(5)      Mr.  Quantz  owns 122 shares of common  stock  directly  and options to
         purchase 750 shares of common stock

(6)      Dr.  Garvey  owns 53 shares of common  stock  directly  and  options to
         purchase 997 shares of common stock.

(7)      Mr. Illick owns 16,470  shares of common stock  directly and options to
         purchase 1,050 shares of common stock.

(8)      Based on a total of  1,325,115  shares of common  stock,  assuming  the
         exercise of all options held by such person and  exercisable  within 60
         days of the date of this statement.

         Approximately  2.3%  of  the  issued  and  outstanding  shares  of  the
Company's common stock are beneficially owned by current directors and executive
officers of the Company.  There are no  arrangements  known to the Company,  the
operation of which may, at a subsequent date, result in a change of ownership or
control of the Company.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

David Derrick

          ADP.  The Company  entered  into an  Employment  and Non-  Competition
Agreement  with David G. Derrick,  the  Company's  Chief  Executive  Officer and
Chairman of the Board,  effective as of June 15, 1996,  which expired  September
30, 1997. Mr. Derrick  continued that position under a modified  agreement until
July, 1998.

         MK  Financial,  Inc. In fiscal year 1998,  the Company  entered into an
investment banking arrangement with MK Financial, Inc., an entity owned by David
G. Derrick.  Under this  arrangement,  the Company paid $150,000 to MK Financial
for fees and commissions related to investment banking services performed during
fiscal year 1998.

         Harrogate  Marketing  LLC. The Company has an agreement  with Harrogate
under which Harrogate provides  marketing and management  services and is paid a
fee equal to 45% of the gross  revenues  from the sale of nutrition  and medical
food  products.  Harrogate is owned by David  Derrick.  The Company also granted
Harrogate  an option to purchase  308,000  shares of common  stock at a price of
$2.00 per share.  Harrogate  agreed to assume the expense  (including legal fees
and costs) of pending litigation and all marketing costs.

         Rockwood Transaction.  Mr. Derrick was required to personally guarantee
certain obligations of the Company in connection with the Rockwood purchase. The
Company agreed to indemnity Mr. Derrick in connection  with such  guarantee.  In
addition,  certain  obligations  of Cypress  Springs LLC, the minority  owner of
Rockwood,  relating to the  assumption  of the negative net worth of Rockwood at
September 30, 1998,  are guaranteed by Greenmints  Investment  Corp., a Delaware
corporation.  The  assets of  Greenmints  securing  this  obligation  of Cypress
comprise  trust deed notes  secured by real property  beneficially  owned by Mr.
Derrick  and members of his  immediate  family.  In January  1999,  Mr.  Derrick
satisfied this note to Rockwood through a contribution of assets.

                                      -40-
<PAGE>
          Calvin Black Trust Loan. The Company borrowed $600,000 from the Calvin
Black  Trust.  The  trustee of the Trust is Phil B.  Acton,  the  brother of the
Company's  President  and CEO,  Michael  G.  Acton.  The loan to the  Company is
secured by assets,  including accounts receivable and inventory.  The obligation
is guaranteed  personally by Mr. Derrick,  whose guarantee is further secured by
the pledge of 60,000 shares of common stock of the Company beneficially owned by
Mr. Derrick. The note is due February 28, 1999.

James J. Dalton

         Consulting  Agreement.  The Company  has a  consulting  agreement  (the
"Consulting  Agreement") with James J. Dalton, a former director of the Company.
Pursuant to the Consulting Agreement, the Company pay Mr. Dalton a fee of $5,000
and 600 shares of common  stock each  month (for a total of 7,200  shares).  Mr.
Dalton was also granted a five year warrant exercisable for 10,000 shares of the
Company's  common  stock.  During  fiscal year 1997,  the Company  issued to Mr.
Dalton options to purchase 49,400 shares of the Company's  common stock at $3.70
per share.

         Loans.  During fiscal year 1995 and fiscal year 1994,  the Company made
loans aggregating $175,000 and $90,000, respectively, to Mr. Dalton. These loans
were  unsecured,  bore interest at an annual rate of 12% and were due on demand.
During fiscal year 1996,  1995 and 1994,  Mr. Dalton made principal and interest
payments totaling $60,000, $16,605 and $90,000, respectively, on those loans. On
January 29, 1996,  the Company  agreed to eliminate the remaining  principal and
interest  balances on these loans,  which  totaled  approximately  $126,000,  in
exchange for Mr. Dalton relinquishing his right to receive 50% of the future net
profits of Volu-Sol (a former  subsidiary  of the  Company),  if any,  for three
years after the  expiration of his agreement  with the Company (or any extension
thereof).

Christopher D. Illick

          The Company has a Consulting Agreement with Christopher D. Illick, one
of  the  Company's  directors  and  a  member  of  its  Compensation  and  Audit
Committees.  That Consulting  Agreement  provides for Mr. Illick's services as a
director of the Company and as a member of the Company's  Compensation and Audit
Committees. Pursuant to that Consulting Agreement, the Company issues Mr. Illick
225 shares of common stock each month.





                                      -41-

<PAGE>
                                     PART IV

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

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

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

                  Consolidated Balance Sheets as of September 30, 1998 and 1997

                  Consolidated  Statements  of  Operations  for the Years  Ended
                  September 30, 1998, 1997 and 1996

                  Consolidated  Statements of Shareholders' Equity for the Years
                  Ended September 30, 1998, 1997 and 1996

                  Consolidated  Statements  of Cash  Flows for the  Years  Ended
                  September 30, 1998, 1997 and 1996

                  Notes to Consolidated Financial Statements

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

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

         Exhibit No.       Description of Exhibit

         3.1+              Amended and Restated Articles of Incorporation

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

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

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

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

         3.6+              Certificate of Amendment to the Designation of Rights
                           and  Preferences  Related to Series A 10%  Cumulative
                           Convertible Preferred Stock

         3.7+              Certificate and Statement of  Determination of Rights
                           and Preferences of Series C 8% Cumulative Convertible
                           Non-Voting Preferred Stock

         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


                                      -42-

<PAGE>

         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

         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

         10.95+            Lease Agreement with Young Electric Sign Company

                                      -43-

<PAGE>
         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

         23.1              Consent of Tanner + Co.

         23.2              Consent of Arthur Andersen LLP

         27                Financial Data Schedule

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

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

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

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

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

+        Incorporated by reference to the Company's Annual Report on From 10-K 
         for the fiscal year ended September 30, 1996

(B)      Reports  filed on Form 8-K during the last  quarter of the fiscal  year
         ended September 30, 1998:

         On August 18, 1998,  the Company filed a Current  Report on Form 8-K to
         report  changes to the terms of the  Rockwood  purchase and to file the
         audited  financial  statements and proforma  financial data relative to
         the transaction.


                                      -44-

<PAGE>
                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto duly  authorized,  on this 8th day of
January, 1998.

                                                 BIOMUNE SYSTEMS, INC.
                                                  (Registrant)


                                              By:   /s/ Michael G. Acton
                                                    -------------------------
                                                    Michael G. Acton
                                                    Its: Chief Executive Officer

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

<TABLE>
<S>                                            <C>                              <C> 
Signature                                      Title                             Date

/s/ Michael G. Acton                           Chief Executive Officer and       January 8, 1999
------------------------------------------     Director (Principal Executive
Michael G. Acton                               and Accounting Officer)


 /s/ Aaron Gold                                Director                          January 8, 1999
------------------------------------------
Aaron Gold



 /s/ Charles J. Quantz                         Director                          January 8, 1999
------------------------------------------
Charles J. Quantz



 /s/ Christopher D. Illick                     Director, Chairman                January 8, 1999
------------------------------------------
Christopher D. Illick


</TABLE>





                                      -45-