<PAGE>
 
                       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, 1997, 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  
 incorporation or organization)                     Identification No.) 


                            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 the voting stock held by non-affiliates of the
registrant is $2,102,548 calculated using a closing price of $0.72 per share on
December 29, 1997. For purposes of this calculation, the registrant has included
only the number of shares held by its officers and directors directly as of
December 29, 1997 (and not counting shares beneficially held on that date) in
determining the shares held by non-affiliates. As of December 29, 1997, there
were issued and outstanding 3,238,813 shares of the Company's Common Stock
(excludes shares issuable upon payment of accrued but unpaid dividends on
Preferred Stock and 10,441 shares issuable upon conversion of 34,802 shares of
Series A 10% Cumulative Convertible Preferred Stock and 829,064 shares issuable
upon conversion of 1,683 shares of Series C 8% Cumulative Convertible Non-Voting
Preferred Stock).

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

                         1997 FORM 10-K ANNUAL REPORT

                               TABLE OF CONTENTS

                                    Part I
<TABLE> 
<CAPTION> 
                                                                                                             Page
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<S>                                                                                                          <C> 
Item  1.  Business..........................................................................................   4
Item  2.  Properties........................................................................................  23
Item  3.  Legal Proceedings.................................................................................  23
Item  4.  Submission of Matters to a Vote of Security Holders...............................................  24

                                                      Part II

Item  5.  Market for Registrant's Common Equity and Related Stockholder Matters.............................  24
Item  6.  Selected Financial Data...........................................................................  26
Item  7.  Management's Discussion and Analysis of Financial Condition and
               Results of Operations........................................................................  26
Item  8.  Financial Statements and Supplementary Data.......................................................  31
Item  9.  Changes in and Disagreements with Accountants on Accounting and
               Financial Disclosure.........................................................................  N/A

                                                     Part III

Item 10.  Directors and Executive Officers of the Registrant................................................  31
Item 11.  Executive Compensation............................................................................  34
Item 12.  Security Ownership of Certain Beneficial Owners and Management....................................  41
Item 13.  Certain Relationships and Related Transactions....................................................  43

                                                      Part IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................  44
</TABLE> 

                                      -2-
<PAGE>
 
             PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

ALL FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE DEEMED BY THE COMPANY TO BE
COVERED BY AND TO QUALIFY FOR THE SAFE HARBOR PROTECTION PROVIDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 (THE "1995 ACT"). SHAREHOLDERS AND
PROSPECTIVE SHAREHOLDERS SHOULD UNDERSTAND THAT SEVERAL FACTORS GOVERN WHETHER
ANY FORWARD-LOOKING STATEMENT CONTAINED HEREIN WILL BE OR CAN BE ACHIEVED. ANY
ONE OF THOSE FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
PROJECTED HEREIN. THESE FORWARD-LOOKING STATEMENTS INCLUDE PLANS AND OBJECTIVES
OF MANAGEMENT FOR FUTURE OPERATIONS, INCLUDING PLANS AND OBJECTIVES RELATING TO
THE PRODUCTS AND THE FUTURE ECONOMIC PERFORMANCE OF BIOMUNE AND ITS WHOLLY OWNED
SUBSIDIARY, OPTIM. THE FORWARD- LOOKING STATEMENTS AND ASSOCIATED RISKS SET
FORTH HEREIN RELATE TO (I) MARKET ACCEPTANCE OF OPTIMUNE(TM), MAXIMUNE(TM) AND
JUMP!(TM) (THE "BIOMUNE NUTRACEUTICAL PRODUCTS") AND THE DEVELOPMENT OF OTHER
NUTRACEUTICAL PRODUCTS BY OPTIM; (II) THE ADDITIONAL RESEARCH AND DEVELOPMENT,
GENERAL AND ADMINISTRATIVE AND OTHER DIRECT COSTS ASSOCIATED WITH OBTAINING
FINAL FDA APPROVAL ON BWPT-301(TM); (III) THE ADDITIONAL DOLLAR AMOUNT EXPECTED
TO BE EXPENDED ON THE BWPT-301(TM) AND BWPT-302(TM) CLINICAL TRIALS UNTIL FINAL
FDA APPROVAL HAS BEEN RECEIVED; (IV) THE ESTIMATED DATE OF RECEIPT OF FINAL FDA
APPROVAL ON BWPT-301(TM); (V) THE ESTIMATED COMMENCEMENT DATE OF PHASE III
CLINICAL TRIALS AND THE COMPLETION OF THOSE CLINICAL TRIALS ON BWPT-301(TM); AND
(VI) THE COMPANY HAVING SUFFICIENT CASH TO FUND ITS PROJECTED OPERATIONS AND
BUDGETED RESEARCH AND DEVELOPMENT FOR FISCAL YEAR 1998. THE FORWARD-LOOKING
STATEMENTS INCLUDED HEREIN ARE BASED ON CURRENT EXPECTATIONS THAT INVOLVE A
NUMBER OF RISKS AND UNCERTAINTIES. THE FORWARD-LOOKING STATEMENTS INCLUDED
HEREIN ARE BASED ON ASSUMPTIONS, AMONG OTHERS, (A) THAT THE EFFICACY OF
BWPT-301(TM) WILL BE ESTABLISHED DURING THE ONGOING PHASE II CLINICAL TRIALS AND
THE PHASE III CLINICAL TRIALS; (B) THAT THE COMPANY WILL BE ABLE TO SUCCESSFULLY
UNDERTAKE AND COMPLETE CLINICAL TRIALS ON BWPT-302(TM); (C) THAT THE COMPANY
WILL BE ABLE TO SUCCESSFULLY COMMERCIALIZE THE BIOMUNE NUTRACEUTICAL PRODUCTS,
AND SUCCESSFULLY DEVELOP AND COMMERCIALIZE OTHER NUTRACEUTICAL PRODUCTS; (D)
THAT THE COMPANY WILL BE ABLE TO SUCCESSFULLY DEVELOP AND COMMERCIALIZE THE
TECHNOLOGY; (E) THAT THE COMPANY WILL NEED TO CONDUCT ADDITIONAL PHASE II
CLINICAL TRIALS ON BWPT-301(TM) AND MAY NEED TO CONDUCT CLINICAL TRIALS THAT ARE
DIFFERENT FROM THOSE THAT HAVE BEEN CONDUCTED TO DATE OR THAT ARE CURRENTLY
CONTEMPLATED BY THE COMPANY; AND (F) THAT THE COMPANY WILL BE ABLE TO TIMELY AND
PROPERLY QUANTIFY AND ANALYZE THE DATA DERIVED FROM ITS CLINICAL TRIALS.
ASSUMPTIONS RELATING TO THE FOREGOING INVOLVE JUDGMENTS WITH RESPECT TO, AMONG
OTHER THINGS, FUTURE ECONOMIC, COMPETITIVE AND MARKET CONDITIONS, FUTURE
BUSINESS DECISIONS, AND THE RESULTS OF THE CLINICAL TRIALS AND THE TIME AND
MONEY REQUIRED TO SUCCESSFULLY COMPLETE THOSE TRIALS, ALL OF WHICH ARE DIFFICULT
OR IMPOSSIBLE TO PREDICT ACCURATELY AND MANY OF WHICH ARE BEYOND THE CONTROL OF
THE COMPANY. ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS UNDERLYING THE
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE REASONABLE, ANY OF THOSE
ASSUMPTIONS COULD PROVE INACCURATE AND, THEREFORE, THERE CAN BE NO ASSURANCE
THAT THE RESULTS CONTEMPLATED IN ANY OF THE FORWARD-LOOKING STATEMENTS CONTAINED
HEREIN WILL BE REALIZED. THIS IS PARTICULARLY TRUE GIVEN THE DYNAMIC NATURE OF
THE PROCESS IN WHICH THE COMPANY IS INVOLVED WITH RESPECT TO BWPT-301(TM) AND
BWPT- 302(TM). BUDGETING AND OTHER MANAGEMENT DECISIONS ARE SUBJECTIVE IN MANY
RESPECTS AND THUS SUSCEPTIBLE TO INTERPRETATIONS AND PERIODIC REVISION. BASED ON
ACTUAL EXPERIENCE AND BUSINESS DEVELOPMENTS, THE IMPACT OF WHICH MAY CAUSE THE
COMPANY TO ALTER ITS MARKETING, CAPITAL EXPENDITURE PLANS OR OTHER BUDGETS,
WHICH MAY IN TURN AFFECT THE COMPANY'S RESULTS OF OPERATIONS. IN LIGHT OF THE
SIGNIFICANT UNCERTAINTIES INHERENT IN THE FORWARD-LOOKING STATEMENTS INCLUDED
HEREIN, THE INCLUSION OF ANY SUCH STATEMENT SHOULD NOT BE REGARDED AS A
REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON THAT THE OBJECTIVES OR PLANS
OF THE COMPANY WILL BE ACHIEVED.

                                      -3-
<PAGE>
 
                                    PART I

ITEM 1.  BUSINESS

         GENERAL

         Biomune Systems, Inc. ("Biomune" or the "Company") is a development
stage biopharmaceutical and nutraceutical company that, along with its wholly
owned subsidiary, Optim Nutrition, Inc. ("Optim"), is engaged in the research,
development, production and marketing of biologic pharmaceutical products and
nutraceutical food supplements derived from the Biomune Whey Protein Technology
(the "Technology," also 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. The Company believes that
ProMune(TM) may be utilized to develop products to treat various
gastrointestinal and infectious diseases in humans and that products derived
from the Technology may help increase the body's immune response. The Company
also believes that certain products derived from the Technology may provide
nutritional supplementation for certain individuals who are nutritionally
deprived or immune stressed or compromised.

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

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

         The Company historically has invested significant sums in the research
and development of the Technology and its products. The research, development
and testing activities of the Company to date as described in this report have
been funded almost entirely and independently by the Company, without
third-party assistance. Moreover, during the fiscal year covered by this Report,
the Company's pharmaceutical product development efforts were scaled back
compared to prior years as a result of limited capital. Management nevertheless
believes that its past development efforts have positioned the Company to pursue
any future research and development in this area with the assistance of 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 its efforts with respect to research
and development associated with pharmaceutical product candidates based on the
Technology, both existing and potential, will continue to be severely curtailed
and may be postponed until such time as third party participation becomes
available.

                                      -4-
<PAGE>
 
         The Company also owns the rights to certain medical waste technologies
consisting of (i) a device for the sterilization and decontamination of medical
devices and wastes, (ii) a bioremediation process to detoxify and degrade
hazardous substances and (iii) a device and process for the safe treatment of
used medical stains. In May 1996, the Company granted a license to Biomed Patent
Development, L.L.C. ("Biomed"), to use the technology related to the medical
sterilization and decontamination device in return for certain royalties. Biomed
is owned or controlled by certain shareholders of the Company. See "-- License
of Medical Device Sterilization Technology".

         To date, the Company has generated no revenues from the sale of any
biological drugs or biological drug candidate, although Optim has generated a
minimal amount of revenues from the sale of Optimune(TM) and Maximune(TM). There
can be no assurance that the Company will ever generate revenues from sales of
biological drugs/pharmaceutical products, or if the Company were to generate
revenues from any such products or product candidates, that such revenues would
result in gross or net profits or positive operating margins, or that such
revenues would result in a positive cash flow.

         PROMUNE(TM) AND BWPT

         The Technology is a licensed, patented process of filtering specific
proteins from bovine whey, a by-product of cheese production, to produce the
Base Product, from which various drugs and product candidates are formulated.
The Technology was developed based on numerous pre-clinical studies that
indicate colostrum, a substance every mother mammal imparts to its newly-born
infant, provides a mechanism for the infant to receive passive immunity. In
analyzing colostrum, scientists have discovered that it contains thousands of
immune enhancing proteins known as immunoglobulins (or antibodies). The Company
believes that when antibodies from whey are concentrated, the beneficial effects
of those antibodies duplicate the effects of colostrum. Disease fighting
antibodies can be found not only in colostrum, but also in cows' milk, and can
be extracted from ordinary whey. Biomune's Technology utilizes a filtration
process that produces high concentrations of antibodies, as well as protein and
molecules that may be beneficial in the treatment of infectious diseases in
humans. The Company has the exclusive right and license (through a License
Agreement dated May 21, 1991, which was subsequently amended as of December 15,
1995, and September 13, 1996), with 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 each of their territories
and possessions.

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

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

         The Company is currently focusing on the prevention and/or treatment of
cryptosporidiosis and E. coli, strain 0157:H7, with its biologic pharmaceutical
drug candidates BWPT-301(TM) (formerly known as Immuno-C) and BWPT-302(TM),
respectively. In addition, the Company believes that pharmaceutical products
developed through the utilization of the Technology may be useful in the
prevention and/or treatment of other diseases, although the Company has not
prepared or filed an IND with the FDA with respect to any such potential
pharmaceutical drug candidates. Some

                                      -5-
<PAGE>
 
of the other diseases or microbial infections that the Company believes may be
preventable and/or treatable include certain infectious bacteria known to be
enteric (or intestinal) pathogens (including, for example, Helicobacter pylori
("H. pylori"), Clostridium difficile ("C. difficile"), Campylobacter jejuni ("C.
jejuni"), Yersinia enterocolitica ("Y. enterocolitica") and Staphylococcus
aureus ("Staph. aureus") and certain non-infectious immunologically-based
syndromes, diseases and other conditions (including, for example, certain
cancers, such as prostate cancer, arthritis, irritable bowel syndrome,
traveler's diarrhea and acne)).

         BIOLOGIC PHARMACEUTICAL ACTIVITIES

         As is described in the following section, between 1994 and early 1997,
the Company invested heavily in clinical and non-clinical development of
pharmaceutical applications of the Technology. During fiscal 1997, the Company
shifted much of its focus to completing the development and marketing of
nutraceutical products incorporating the Technology. In light of the status of
its current efforts in the nutraceutical arena, and assuming the availability of
necessary capital, of which there can be no assurance, the Company anticipates
that it will devote increased attention and resources to developing
pharmaceutical applications of the Technology during fiscal 1998 as funding from
private or governmental grants, joint ventures or other third parties may be
made available, while continuing to focus on nutraceutical applications.

                  Clinical Trials

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

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

         However, the FDA approved the Company's Emergency IND No. 6679 in June
1996 for the treatment of one pediatric patient with advanced AIDS and
cryptosporidiosis. The patient was treated according to the Company's pediatrics
protocol, which allows for 90 days of dosing with the Base Product at a maximum
dose of 3.0 g/kg/day. The patient is under the care of Dr. Margarita Silio, who
is affiliated with Dr. Russell Van Dyke, head of the pediatric AIDS section at
Tulane University and Louisiana State University. The patient, a 12 year old
girl with advanced AIDS, had cryptosporidiosis for several months before
beginning the study and was experiencing diarrhea in excess of 1,000 g/day at
the commencement of the study. The patient had a CD4 cell count of 1/uL on June
10, 1996 and weighed only 51.7 lbs. No pathogens other than cryptosporidium
parvum ("C. parvum") were identified in the patient's stools. After 65 days of
treatment at a dose of 2 g/kg/day, the study investigator reported that the
girl's weight had increased 18%, to 59.6 lbs, with marked clinical improvement.
By the end of the study, the girl's diarrhea had improved dramatically; stool
frequency had decreased and stool consistency was more formed. The study was
completed in September 1996. To date, the Company has not applied for subsequent
emergency INDs, and has no present plans to apply for subsequent emergency INDs.

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

         BWPT-302(TM). The Company filed an IND with the FDA on December 15,
1995 in connection with the development of its second pharmaceutical product
candidate, BWPT-302(TM). The Company has now concluded its adult Phase I
clinical trials on BWPT-302(TM) and, after the analysis of the data from those
trials, and assuming the availability of the necessary capital, of which there
can be no assurance, is planning to commence a Phase I/II clinical trial to
continue gathering data on BWPT-302(TM).

                                      -6-
<PAGE>
 
         The Company filed this second IND focusing on certain strains of
Escherichia coli because of the amount of existing animal data supporting the
efficacy of products developed utilizing the Technology for the treatment of
Escherichia coli. A product similar to BWPT-302(TM) was developed, utilizing the
same technology, for animal applications, which product received approval from
the United States Department of Agriculture with a specific claim for the
treatment of a certain strain of Escherichia coli. The Company has no rights
with respect to that animal product. There is presently no effective drug to
treat certain strains of Escherichia coli (and particularly E. coli, strain
0157:H7) in humans. The Company believes there may be as many as 20,000 cases of
E. coli, strain 0157:H7, in humans in the United States each year, resulting in
approximately 250 deaths. This bacterial strain, which is acquired from
undercooked hamburger meat or from other sources, can cause severe bloody
diarrhea, and in children, a hemolytic uremic syndrome associated with a high
risk of permanent kidney damage. In fiscal 1996, this IND was expanded to
include strains of Escherichia coli that are entero adherent Escherichia coli
(EAEC), which the Company believes may substantially increase the market
potential for a drug that proves to be effective.

         The Company has completed the administration of BWPT-302(TM) to healthy
individuals in Phase I dose tolerance trials. Through those dose tolerance
trials, the Company gained a general understanding of how well various doses of
BWPT-302(TM) are tolerated. There is presently no timetable for continuing
studies associated with this IND.

                  Other Pharmaceutical Applications

         Subject to the availability of adequate amounts of capital from joint
venture partners or grants from government or other third party sources, of
which there can be no assurance, the Company intends to continue its research
and pre-clinical development efforts in order to assess the feasibility of
filing additional INDs, followed by clinical trials, in respect of potential
drug candidates to be developed, utilizing the Technology, for the treatment of
certain infectious bacteria (including, for example, H. pylori, C. difficile, C.
jejuni, Y. enterocolitica and Staph. aureus) and certain non-infectious
immunologically-based syndromes, diseases and conditions (including, for
example, certain cancers, such as prostate cancer, arthritis, irritable bowel
syndrome and acne). 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 products incorporating the Company's Technology will be developed.

                  Pre-Clinical Studies

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

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

         From January 1996 to December 1996, Dr. Frederick Clayton at the
Regional Veterans Administration Hospital in Salt Lake City, Utah conducted
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.

                                      -7-
<PAGE>
 
         NUTRACEUTICAL ACTIVITIES

         Based upon the results of and the information obtained from clinical
trials and other studies involving the Base Product and BWPT-301(TM), which
trials and studies suggest potential health-related benefits from the use of
nutraceutical products derived from the Technology, the Company, during fiscal
1995, undertook an analysis of the nutraceutical market. Nutraceutical products
are food-based nutritional supplements marketed as a beneficial source of
nutrients to promote good health in humans. On October 31, 1995, the Company
incorporated Optim for the purpose of developing and marketing nutraceutical
products. To date, Optim has developed three nutraceutical products:
Optimune(TM), which is a nutritional dietary supplement marketed primarily to
people who are HIV positive or have AIDS or other immune- compromised
individuals, Maximune(TM), a nutritional dietary supplement similar in
composition to Optimune(TM) but manufactured in capsule form and marketed
primarily to healthy people who desire weight maintenance or management
assistance, and Jump!(TM) a fruit-flavored protein drink mix (Optimune(TM),
Maximune(TM) and Jump!(TM) are collectively referred to in this Report as the
"Biomune Nutraceutical Products"). The Company is presently in the process of
developing a marketing plan for Jump!(TM)

         To date, the marketing of the Biomune Nutraceutical Products has
generated only minimal amounts of revenue. The Company has learned that the
market for a weight gain, immune-enhancing nutrition supplement is very
competitive and relatively difficult to penetrate. 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.

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

         Optim has completed a nutritional study that was monitored by
Clinimetric Research Associates, a contract research organization
("Clinimetric"). This study was conducted at two sites: St. Francis Memorial
Hospital in San Francisco, California, and the East Bay AIDS Clinic in Berkeley,
California. Participant recruitment was completed in mid-May 1996 and patients
were monitored through the end of June 1996. This pilot study was designed to
examine the effects of two different doses of ProMune(TM) on wasting syndrome.
Secondary objectives included examining effects of ProMune(TM) on Karnofsky
Performance Score and quality of life as measured by HIV-Medical Outcome Study
(MOS). Patients were randomized to either 20g ProMune(TM) powder daily or 60g
ProMune(TM) powder daily (20g, 3 times a day). Product could be 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. 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.

         In October 1997, Dr. Donald P. Kotler at St. Lukes-Roosevelt Hospital
Center in New York completed a yearlong metabolic study. The results of this
study will be publicly available at a future date (probably June 1998) in
accordance with the protocols and guidelines governing such studies. Other study
sites that began less rigorous studies are located 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(TM). 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

                                      -8-
<PAGE>
 
and provide new data that may encourage the Company to introduce potential
customers for Optimune(TM) to Optim. There is presently no timetable for
completing studies at other sites.

         LICENSES AND PATENTS RELATING TO THE TECHNOLOGY

         Pursuant to a License Agreement dated May 21, 1991, and subsequently
amended as of December 15, 1995 (as amended, the "License"), PTI granted the
Company the exclusive right and license to utilize the Technology in connection
with the marketing and sale of pharmaceutical and nutraceutical products, solely
for human applications, in the United States and Canada and each of their
territories and possessions. Effective September 13, 1996, the Company and PTI
amended the License to expand the territories in which the Company is
exclusively licensed to market and sell products utilizing the Technology to
include the following countries and areas and their respective territories and
possessions: (i) the United States of America; (ii) Canada; (iii) Kenya; (iv)
the Ivory Coast; (v) Zimbabwe; (vi) Ghana; (vii) Zambia; and (viii) Nigeria. The
License includes the rights to human applications of the Technology contained
under four United States patents, each of which relates to methodologies to
produce large proteins (immunoglobulins) on a mass production basis. PTI has not
represented or warranted the quality or coverage of any of those patents, and
therefore the Company does not and cannot provide any assurance regarding PTI's
rights therein. The License expires in May 1999, unless the Company, prior to
such date, has generated annual gross revenues from the sale of products
developed utilizing the Technology of not less than $2,000,000, in which event
the License will be automatically extended until the expiration date of the
latest patent to expire covered by the License (including any extensions to such
patent registrations). Based on the patents currently licensed thereunder, the
License, if so extended, would expire on March 28, 2006.

         PTI may terminate the License upon the Company's failure to observe or
perform any of the covenants, terms, conditions or provisions contained therein
or in the event of a breach of any representation or warranty made by the
Company that is not cured within 30 days after receipt of written notice thereof
from PTI. Among other things, the License requires that the Company maintain
certain levels of product liability insurance coverage. Due to the lack of any
revenue from sales of pharmaceutical products and the limited amount of sales to
date of the Biomune Nutraceutical Products and the high costs associated with
product liability insurance, 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 which the Company's
management believes to be sufficient in light of its obligations to PTI under
the License, present sales levels and its independent product liability
exposure. The Company's management 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 as soon as
revenues justify such expenditure. 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 License also provides that promptly following the issuance of
authorization or approval by the FDA for sales of any pharmaceutical products
covered by the License, the Company and PTI will negotiate in good faith for the
grant of licensing rights for pharmaceutical products in other parts of the
world. In addition, upon achieving sales of $1,000,000 during any 12 month
period with respect to nutraceutical products covered by the License, the
Company and PTI will negotiate in good faith for the grant of licensing rights
in other parts of the world.

         The Company is required to pay PTI royalties in the amount of 5% of
gross receipts from the sale of all products covered by the License with respect
to the first $3,500,000 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. In addition, in the event the License is extended past May 1999, the
Company is required to pay PTI annual advances to be applied against royalties
in the amount of $100,000 for the first year of such extension, and increasing
by $10,000 each year thereafter. As of September 30, 1997, the Company had not
paid any royalties to PTI under the License.

                                      -9-
<PAGE>
 
         In December 1995, a patent application was filed on behalf of certain
individuals relating to a method for enhancing the immune system using the
Technology and the Base Product. That patent application relates to an increase
in CD4 cell count in immune-compromised individuals. The patent application and
the invention covered thereby have been assigned to the Company. The title of
this patent application is "A Method for Enhancing the Immune System using
Immunologically-Active Bovine Whey Protein Concentrate." The authors on that
patent are Frank A. Eldredge, Ph.D., 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. Under the terms of the License, the improvements to the Technology
that are the subject of this patent application will be owned by PTI.

         MANUFACTURING AND BASE PRODUCT SUPPLY ARRANGEMENT

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

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

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

         MARKET POTENTIAL FOR THE COMPANY'S PRODUCTS

                  Biomune Nutraceutical Products

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

                                     -10-
<PAGE>
 
         Optim may in the future also market Optimune(TM) or a similar
nutraceutical product as a nutritional dietary supplement for people
experiencing weight loss as a result of intensive antibiotic or chemotherapy
treatment, as well as to elderly persons experiencing weight loss problems.
Optim believes that the market for Optimune(TM) or a similar nutraceutical
product for these patient populations currently consists of approximately five
million individuals in the United States alone.

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

         Maximune(TM) and Jump!(TM) are nutritional supplements designed to be
marketed to healthy individuals to assist with weight maintenance or management
or to improve their immune system. The Company presently is in the process of
evaluating the potential markets for these products with a view to developing a
comprehensive marketing program.

                  BWPT-301(TM)

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

                  BWPT-302(TM)

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

                  Other Gastrointestinal Microorganisms and Syndromes

         While the Company is currently focusing its efforts and resources on
its two pharmaceutical drug candidates, BWPT-301(TM) and BWPT-302(TM), and the
Biomune Nutraceutical Products, in the future it may begin research and
development utilizing the Technology for other possible disease indications,
including, but not limited to, H. pylori, prostate cancer, C. jejuni, irritable
bowel syndrome, arthritis, traveler's diarrhea, acne and certain immunological
disorders and infections by microorganisms. There can be no assurance that the
Company will commence such research and development efforts or that sufficient
financing for such development efforts will be available when and in the amounts
required.

         MARKETING AND DISTRIBUTION ARRANGEMENTS

         For a discussion of the Company's License with PTI, see "Licenses and
Patents Relating to the Technology" above.

         Optim began marketing Optimune(TM) on a non-prescription or "doctor
recommended" basis. Optimune(TM) is being marketed and distributed directly by
Optim primarily to people who are HIV positive or have AIDS. The

                                     -11-
<PAGE>
 
Company began with a marketing pre-launch, which consisted of a direct mail
effort, a free sampling program, marketing efforts directed toward AIDS support
groups and other efforts. Commercial marketing efforts followed. The Company
commenced marketing Maximune(TM) during fiscal 1997 as a dietary supplement to
healthy individuals who desire weight maintenance or management assistance or
who desire generally to improve their health. The Company has not yet commenced
marketing Jump!(TM). There can be no assurance that the Company or Optim will
ever be able to market and distribute the Biomune Nutraceutical Products
profitably or that the Company or Optim will be successful in establishing any
distribution relationships. To date, only limited distribution has been achieved
and only minimal revenues have been received.

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

         COMPETITION

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

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

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

         The Company is also subject to increasing competition from existing
companies that market various powders and proteins for weight management and
general health to otherwise healthy individuals in which markets Maximune(TM)
and Jump!(TM) will compete.

                                     -12-
<PAGE>
 
         GOVERNMENT REGULATION

         All of the biopharmaceutical products and technologies owned by or
licensed to the Company are heavily regulated by the FDA, the EPA and/or other
regulatory authorities pursuant to applicable federal, state and/or local laws,
rules and regulations. While the Company's nutraceutical products will probably
not be subject to premarket approval by the FDA, they will be regulated on a
post-marketing basis by the FDA and be regulated by the FTC and other regulatory
authorities pursuant to applicable federal, state and/or local laws, rules and
regulations. The Company is in the process of seeking FDA approval for
BWPT-301(TM) and BWPT-302(TM). In addition, Optimune(TM) and other nutraceutical
product labeling and promotional materials may be reviewed by the FTC and the
FDA. The Dietary Supplement Act governs the labeling of and certain other
matters related to dietary supplements. While the FDA has adopted regulations
that could apply to such supplements, the FDA has decided to date not to enforce
certain of those regulations. The FDA has proposed new regulations applicable to
nutraceutical products that will supersede the existing regulations. The Dietary
Supplement Act dictates the labeling requirements for dietary supplements (such
as Optimune(TM)). The Company believes it is currently in compliance with the
Dietary Supplement Act and the proposed regulations recommended to be followed
by the FDA. The Company has incurred and will continue to incur substantial
costs in complying with applicable laws, rules and regulations to which it and
its operations and products and product candidates are subject. The Company
believes that it is currently in compliance in all material respects with all
applicable laws, rules and regulations governing its operations and products and
product candidates.

         LICENSE OF MEDICAL DEVICE STERILIZATION TECHNOLOGY

         The Company owns a 90% interest in certain technology relating to the
sterilization and decontamination of medical devices and waste (the
"Sterilization Technology"). Pursuant to a License Agreement dated as of May 6,
1996 (the "Sterilization License"), the Company granted a 15 year license to
Biomed, the owner of the remaining 10% interest in the Sterilization Technology,
for the exclusive use of the Sterilization Technology in connection with the
manufacture and distribution of medical devices based on the Sterilization
Technology and the provision of services relating thereto. 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. David G. Derrick and James J. Dalton, directors and/or
executive officers of the Company own approximately 15% and 29%, respectively,
of the issued and outstanding stock of Bioxide. Mr. Derrick is also a director
of Bioxide.

         Under the Sterilization License, the Company received royalties for the
first year of the Sterilization License of $45,000. The Company is entitled to
receive royalties for all subsequent years equal to the greater of (i) 0.9% of
gross sales or (ii) $90,000. The Company did not receive any payments under the
Sterilization License during the fiscal year ended September 30, 1997.

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

         DIVESTITURE OF VOLU-SOL

         The Board of Directors of the Company authorized the divestiture of
Volu-Sol, Inc., a wholly owned subsidiary ("Volu-Sol"), through the distribution
("Distribution") to Company shareholders of record as of March 5, 1997, of all
of the outstanding shares of Common Stock of Volu-Sol. Volu-Sol, while
affiliated with the Company, engaged in the commercial manufacture, distribution
and marketing of medial diagnostic stains to the medical and research laboratory
industry. Volu-Sol has never operated profitably, although it has received
revenues on an ongoing basis. Shareholders of the Company at the close of
business on March 5, 1997, the record date for the Distribution will receive one
(1) share of Volu-Sol Common Stock, par value $.0001 per share for each share of
Biomune Common Stock owned on March 5, 1997. No fractional shares will be
issued. All fractional shares will be rounded to the nearest whole share.

                                     -13-
<PAGE>
 
         Volu-Sol has filed with the SEC a Registration Statement on Form 10-SB
(the "Registration Statement") under the Exchange Act with respect to the
Distribution. The Registration Statement became effective by operation of law on
December 1, 1997. An Information Statement will be mailed to the shareholders
concerning the Distribution on or about January 15, 1998. The effective date of
the divestiture is October 1, 1997. Volu-Sol is required to comply with the
reporting requirements of the Exchange Act and now files annual, quarterly and
other reports with the SEC. Volu-Sol will also be subject to the proxy
solicitation requirements of the Exchange Act and, accordingly, will furnish
audited financial statements to its shareholders in connection with its annual
meetings of shareholders. If the stock of Volu-Sol is listed on any exchange,
Volu-Sol will be required to file with such exchange copies of such reports,
proxy statements and other information which can then be inspected at the
offices of the exchange.

         As a result of the divestiture of Volu-Sol, the Company no longer owns
an interest in the medical stain technology business operated by Volu-Sol.

         EMPLOYEES

         As of September 30, 1997, the Company employed 6 full-time employees
and 1 part-time employee, as follows: Biomune -- three full-time employees and
one part-time employee; Optim -- three full-time employees. The Company is
dependent upon the efforts and abilities of certain of its senior management
personnel, particularly David G. Derrick, the Company's Chief Executive Officer,
President and Chairman of the Board. The loss of the services of Mr. Derrick
could have a material adverse effect on the Company and its operations and
prospects.

         The Company contracts with certain third parties for a significant
portion of its research and development requirements, and intends to continue to
do so in the future. None of the Company's employees are subject to a collective
bargaining agreement. While certain of the Company's employees have experience
in the medical products and biotechnology fields, and all of the members of the
Company's Scientific Advisory Board are experienced physicians with varying
areas of expertise, such experience may not necessarily be indicative of the
Company's ability to achieve profitable operations.

         THE ROCKWOOD TRANSACTION

         Effective October 1, 1997, the Company entered into an agreement by
which it agreed to acquire all of the issued and outstanding shares of the
capital stock of Rockwood. Ira E. Ritter is the sole shareholder and control
person of Rockwood. In connection with the acquisition as contemplated by the
agreement, Mr. Ritter was to become the Company's President. He served in that
capacity from July 1997 until January 1998. The total purchase price for
Rockwood was to be $5,960,000. The key terms of the transaction as set forth in
the purchase agreement included the following:

         .        The purchase price of $5,960,000 included all of the issued
                  and outstanding shares of Rockwood. Upon consummation of the
                  transaction, Rockwood would have become a wholly owned
                  subsidiary of the Company.

         .        Prior option payments of $210,000 by the Company were to be
                  credited against the purchase price and would have reduced the
                  amount of cash otherwise payable at closing of the purchase.

         .        $460,000 of the purchase price was to be paid from Rockwood
                  operating profits for the period October 1997 through January
                  1998.

         .        The purchase price was to be reduced by the amount of sales of
                  Rockwood for the twelve months preceding the closing of the
                  purchase less than $4,000,000.

         .        As additional consideration, Mr. Ritter was to receive
                  Warrants to purchase stock which would have become exercisable
                  if the Company achieved sales volumes as follows: (i) 200,000
                  shares of Common Stock at $10.50 per share when the Company
                  realized revenues of $7,500,000 per year, (ii) 200,000 shares
                  exercisable at $25.00 per share when sales reached $10,000,000
                  per year, (iii) 200,000

                                     -14-
<PAGE>
 
                  shares at $35.00 per share when sales reached $15,000,000 per
                  year; and (iv) 200,000 shares at $45.00 per share when sales
                  reached $20,000,000 per year.

         .        Final payment was due January 5, 1998.

         .        Mr. Ritter was to have the right to nominate up to 3 members 
                  of an expanded nine-member Board of Directors.

         .        The balance of purchase price was to bear interest at an 
                  annual rate of 5% from October 1, 1997 through the date final 
                  payment was made.

         .        Mr. Ritter or his assign was to receive a royalty on certain 
                  products or distribution arrangements for a period of five
                  years following the closing.

         After the execution of the agreement, and subsequent to the Company's
fiscal year end, the Company withdrew from the transaction and terminated the
agreement. A primary factor in the Company's decision to terminate the agreement
was the significant dilution that would result to the Company's existing
shareholders in light of the decline in the market price of the Company's Common
Stock between the time the agreement was executed and the planned closing date.
By agreement, Mr. Ritter will retain all cash payments made to him or Rockwood
or their affiliates prior to the date of termination. Rockwood will continue to
distribute the Company's products under the terms of certain license agreements
entered into in connection with the proposed purchase. Mr. Ritter was replaced
as the Company's President by Mr. Derrick, who served as the Company's President
prior to the execution of the Rockwood agreement.

         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 herein.

         Development Stage; Technological Uncertainty. The Company is a
development stage company. The Company has not produced or marketed any
pharmaceutical products and therefore has received no revenues from sales of
pharmaceutical products. The Company has produced only limited revenues from the
Biomune Nutraceutical Products, which limited revenues have not been sufficient
to offset expenses incurred in connection with the Company's operations
resulting in ongoing losses. To date, the Company's resources have been
dedicated to the research and development of pharmaceutical and nutraceutical
candidates utilizing the Technology, pre-clinical studies and clinical trials on
those product candidates; studies on Optimune(TM), and development of product
formulations for the broader market. The Company has developed only two
pharmaceutical product candidates and three nutraceutical products to date. The
commercialization of the Company's pharmaceutical product candidates has
required and will continue to require significant additional investment,
research and development, pre-clinical and clinical testing, and regulatory
approvals, while commercialization of the Company's nutraceutical products will
require significant additional investment, research and development, and
nutritional studies. There can be no assurance that the Company will be able to
develop products at a reasonable cost or market successfully any of its product
candidates. Further, those product candidates may prove to have undesirable or
unintended side effects that may prevent and/or limit their commercial use. All
of the Company's pharmaceutical product candidates, including BWPT-301(TM) and
BWPT-302(TM), will require regulatory approval before they can be commercialized
and will be subject to regulatory oversight upon commencement of commercial use.
The Company anticipates that additional clinical studies required in connection
with FDA approval of its pharmaceutical product candidates will be completed
only pursuant to a joint venture partnership or substantial grants from
government or private sources. There can be no assurance that any products that
ultimately are developed by the Company will generate substantial revenues or
that the Company will ever be profitable.

         History of Operating Losses; Uncertainty of Future Profitability. The
Company has incurred significant operating losses since its inception. As of
September 30, 1997, the Company had an accumulated deficit of $35,480,749. The
Company expects to continue to incur significant operating losses at least
through fiscal year 1998, primarily due to the ongoing marketing efforts with
respect to the Biomune Nutraceutical Products and related marketing

                                     -15-
<PAGE>
 
expenditures, acquisition expenses and costs, expansion of its research and
development programs, including pre-clinical studies and clinical trials for its
existing pharmaceutical product candidates, nutritional studies for the Biomune
Nutraceutical Products, regulatory compliance requirements related to its
pharmaceutical product candidates, studies and trials for other products that it
or its subsidiaries may develop and the implementation of programs to market
those products that are ultimately approved for distribution, if any. The
Company's ability to achieve profitability depends upon its ability to
successfully market the Biomune Nutraceutical Products, to acquire, discover or
develop new products, to obtain any necessary 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 from the sale of its proposed or acquired products. 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 5, 1997 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.

         Need for Additional Funds; Issuance of Securities; Future Dilution. The
Company anticipates that it will continue to incur significant operating losses
over the next 12 months, and perhaps thereafter primarily due to ongoing
marketing efforts with respect to the Biomune Nutraceutical Products, expansion
of research and development programs, including pre-clinical studies and
clinical trials for existing pharmaceutical product candidates, nutritional
studies for nutraceutical products, regulatory compliance requirements relating
to pharmaceutical product candidates, studies and trials for other products that
it or its subsidiaries may develop, and the implementation of programs to market
those products that are ultimately approved for distribution, if any. The
Company presently anticipates that it will require additional funds to continue
its operations during the next 12 months. Absent such additional funding, the
Company may find it necessary to postpone or cancel some of its planned
marketing and/or research and development programs, which could adversely affect
the Company's ability to execute its business plan and generate future revenues
and new product introductions. Other factors such as extended pre-clinical and
clinical trials, difficulty in obtaining regulatory approvals, competition and
unforeseen market developments, unforeseen or unexpected difficulties in
securing Base Product used in the production of the Company's products from its
sole supplier in New Zealand, changes in existing research relationships, the
Company's ability to maintain and establish additional collaborative
arrangements and unexpected expenditures relating to the Company's operations
could result in the Company's need for additional funds sooner than anticipated.

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

         Dependence on Licensed Technology. The Company is dependent upon the
License granted to it by PTI for the use of the Technology. The Company's
existing nutraceutical and pharmaceutical product candidates and all additional
products currently under research and development, are derived from and based
upon the Technology. The License expires in May 1999, unless the Company, prior
to such date, has generated annual gross revenues from the sale of products
developed utilizing the Technology of not less than $2,000,000, in which event
the License will be

                                     -16-
<PAGE>
 
automatically extended until March 28, 2006. There can be no assurance that the
Company will meet the minimum revenue generation requirement to avoid
cancellation of the License in May 1999. PTI may terminate the License upon the
Company's failure to observe or perform any of the covenants, terms, conditions
or provisions contained therein or in the event of a breach of any
representation or warranty made by the Company that is not cured within 30 days
after receipt of written notice thereof from PTI. Among other things, the
License requires that the Company maintain certain levels of product liability
insurance coverage. Due to the lack of any revenue from sales of pharmaceutical
products and the limited amount of sales to date of the Biomune Nutraceutical
Products and the high costs associated with product liability insurance, 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 which the Company's management believes to be
sufficient in light of its obligations to PTI under the License, present sales
levels and its independent product liability exposure. The Company's management
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 as soon as revenues justify such
expenditure. 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. If the License is terminated for any
reason, the Company would lose all rights to the Technology, which would have a
material adverse effect on the Company's operations and could possibly result in
the termination of the Company's business.

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

         The pharmaceutical regulatory process includes extensive pre-clinical
safety, pharmacology and toxicological testing. Pre-clinical data is required
for the filing of an IND with the FDA to conduct clinical testing to establish
safety, efficacy, purity and potency of any investigational biological product.
With respect to each 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 during fiscal 1997
regarding its pharmaceutical products have been curtailed due to financial
restraints and the Company's increased emphasis on the Biomune Nutraceutical
Products. These delays may be encountered both domestically and abroad. 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, PLA and ELA regulatory
approval may entail limitations on the indicated uses for which any product may
be marketed. Following regulatory approval, if any, a product and its
manufacturer are subject to continuing regulatory oversight and review. Later
discovery of problems with a product or its manufacturer may result in
restrictions on such product or its manufacturer. These restrictions may include
withdrawal

                                     -17-
<PAGE>
 
of the marketing approval for the product. Violation of FDA requirements in
general can lead to recall or seizure of products, injunction against
production, distribution, sales and marketing, and criminal prosecution, among
other sanctions.

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

         In addition, the Company is subject to the Dietary Supplement Act with
respect to its nutraceutical products. The Dietary Supplement Act governs the
labeling of and certain other matters related to dietary supplements. While the
Company believes it is currently in compliance with the Dietary Supplement Act
and the presently proposed FDA regulations thereunder, there is no assurance
that final regulations will be adopted in the form proposed, that additional
legislation will not be adopted in the future to regulate nutraceutical
products, or that the Company will be able to comply with any such future laws
or regulations.

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

         With respect to the patents and other proprietary technology licensed
to the Company from PTI, PTI has not provided any representations or warranties
to the Company relating to non-infringement of third party proprietary rights
and has not indemnified the Company against any damages or expenses arising out
of any such claims of infringement.

                                     -18-
<PAGE>
 
To the extent that the Technology or any portion thereof is found to infringe
the proprietary rights of any other person or entity, the Company could be
liable for the payment of substantial damages without the likelihood of any
contribution by PTI. Such event could have a material adverse effect on the
Company's operations.

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

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

         Dependence on Third-Party Manufacturer; Limited Source of Supply. The
Company is dependent on a single third-party manufacturer to manufacture the
Base Product used in the production of its product candidates and anticipates
the use of third-party manufacturers for the manufacture of the Base Product in
connection with the production of all products it may develop, if any, for the
foreseeable future. Pursuant to the License with PTI, the Company has agreed to
purchase all of its requirements for the Base Product from one supplier, PTI,
which, in turn, places orders for such required Base Product with a distributor
in New Zealand, which distributor contracts with a single manufacturer to
manufacture all of such requirements at its New Zealand facilities. Although the
License permits the Company to utilize alternate sources of supply during any
period in which PTI is unable to satisfy all of the Company's requirements for
the Base Product, in the event PTI or the sole manufacturer of the Base Product
fail to supply any or all of the Company's requirements for the Base Product,
there can be no assurance that alternate sources of supply will be available to
the Company at 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 pharmaceutical
products are manufactured must conform to current FDA GMP. Although the New
Zealand manufacturing facilities have received a rating from the USDA with
respect to the manufacture of the Base Product for animal applications, those
facilities have not, as of the date of this Report, received FDA approval
necessary for pharmaceutical human applications. The Company has retained a
consulting firm to advise it regarding compliance by those manufacturing
facilities with current GMP standards because the Company's pharmaceutical
product candidates are being manufactured at those facilities. The Company's
consultant has reported that those manufacturing facilities are substantially in
compliance with current GMP standards. The Company cannot commence marketing
and/or distributing its pharmaceutical product candidates until the
manufacturing facilities have been properly licensed by the FDA, which license
cannot be obtained until the facilities meet current GMP standards. Those
standards must be met on an ongoing basis and the licensed facilities are
subject to inspection by the FDA at least once every two years. The failure of
the manufacturing facilities to meet such GMP standards in a timely manner could
result in delays in the marketing and sale of the Company's pharmaceutical
product candidates until modifications are made to comply with such standards.
In the event that the New Zealand manufacturer is unable or unwilling to make
such changes, the Company would be required to find an alternate source to
manufacture its pharmaceutical product candidates. If alternate manufacturing
sources are not available on a timely basis or on reasonable economic terms, the
Company's results of operations could be materially adversely affected.

         The Base Product will be manufactured at the New Zealand manufacturing
facility pursuant to the License with PTI. The New Zealand manufacturing
facility currently meets all requirements for the production of the Base Product

                                     -19-
<PAGE>
 
for the Biomune Nutraceutical Products. Although the FDA does not currently
regulate manufacturing facilities for nutraceutical products, there can be no
assurance that the FDA at some time in the future will not begin regulating
these manufacturing facilities. If the FDA were to begin regulating the
manufacturing facilities for nutraceuticals and if the New Zealand manufacturing
facilities did not meet those standards, the production of the Base Product for
the Biomune Nutraceutical Products (or any other nutraceutical product that may
be developed) will be delayed until the necessary modifications are made to
comply with those standards. If the New Zealand manufacturer were unable or
unwilling to make the necessary modifications, the Company would be required to
find an alternate source to manufacture the Base Product for the Biomune
Nutraceutical Products (or any other nutraceutical product that may be developed
that utilizes the Base Product).

         Competition. The Company competes with a number of entities that are
currently developing and producing pharmaceutical products derived from or that
include antibodies extracted from various by-products of cow's milk or
colostrum, including several companies that are developing and producing
products and product candidates to prevent and/or treat cryptosporidiosis. In
addition, the Company competes with a number of other companies that utilize
other technologies and that target the same infections, organisms or diseases in
humans. Many, if not all, 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 prior to any of the Company's products. The Ross Products
Division of Abbott Laboratories, which the Company believes currently dominates
the United States market in sales of nutritional supplements and meal
replacements, is now marketing two products commercially -- Ensure(R) and
Advera(R). Ensure(R) is being marketed to the elderly and others as a
nutritional supplement or meal replacement, while Advera(R) is being marketed to
people who are HIV positive or have AIDS as a nutritional supplement or meal
replacement and as a way to manage their weight loss. Both of those products can
be used as either a nutritional supplement or as a meal replacement, depending
upon the ability of the person to eat and digest solid foods. Advera(R) is
currently being advertised primarily for its weight management characteristics,
and thus is being targeted to the same market at which Optimune(TM) is being
targeted, although Optim intends only to market Optimune(TM) as a nutritional
supplement (and not as a meal replacement). Accordingly, Optimune(TM) may
compete with Advera(R).

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

         The Company is also subject to increasing competition from existing
companies that market various powders and proteins for weight management to
otherwise healthy individuals.

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

                                     -20-
<PAGE>
 
assurance that third-party coverage will enable the Company to maintain price
levels sufficient to realize an appropriate return on investment or to operate
profitably.

         Dependence on Qualified Personnel; Potential Conflict of Interest;
Part-Time Consultants. The Company's success is dependent upon its ability to
attract and retain qualified scientific and executive management personnel. To
commercialize its products and product candidates, the Company must maintain and
expand its personnel, particularly in the areas of clinical trial management and
product sales and marketing. The Company faces intense competition for such
personnel from other companies, academic institutions, government entities and
other research organizations. There can be no assurance that the Company will be
successful in hiring or retaining qualified personnel. Moreover, managing the
integration of such new personnel could pose significant risks to the Company's
development and progress and increase its operating expenses. The Company relies
on consultants and advisors, including the members of its Scientific Advisory
Board, to assist the Company in formulating its research and development
strategy. All of the Company's consultants and advisors 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. While the Company provides its management and key
employees with incentive compensation, including stock options and bonuses, that
the Company believes are competitive with incentive compensation provided by
other companies in the biopharmaceutical and nutraceutical industry, none of the
Company's management or key employees other than David G. Derrick, the Company's
Chief Executive Officer, President and Chairman are retained pursuant to written
employment agreements and, therefore, the Company has no assurances as to the
commitment of any of such employees for any period of time. All of the Company's
employees have entered into confidentiality agreements with the Company not to
disclose any of the Company's confidential information.

         Product Liability Exposure; Insurance. Product liability risk is
inherent in the testing, manufacture, marketing and sale of the Company's
products and product candidates, and particularly the Company's pharmaceutical
products, and there can be no assurance that the Company will be able to avoid
significant product liability exposure. Product liability insurance for the
pharmaceutical industry, when available, is extremely expensive. The Company
currently maintains a general liability insurance policy 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 PTI against any product liability claims incurred by PTI as a result
of any products developed and sold by the Company. PTI has not made, and is not
expected to make, any representations as to the safety or efficacy of the Base
Product or as to any products that may be made or used under rights granted
pursuant to the License. Any future product liability claim against the Company
and/or PTI (with respect to products developed using the Technology) could
result in the Company paying substantial damages, which may not be covered by
insurance and may have a material adverse effect on the business and financial
condition of the Company.

         Litigation. 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 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) and alleged
violations 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
nonpublic 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 has appealed the decision of the District
Court to the United States Court of Appeals for the 10th Circuit (Denver,
Colorado). While the Company believes that the allegations made in the Complaint
are wholly without merit, and it intends to vigorously oppose the appeal of the
favorable verdict, there can be no assurance that the Company's defense will be
successful. Furthermore, the cost of defending such lawsuit is substantial. See
"Legal Proceedings."

         Volatility of Stock Price.  The market price of the Company's Common 
Stock has been and in the future may be highly volatile. Factors such as
announcements by the Company or its competitors concerning technological

                                     -21-
<PAGE>
 
innovations, new products or procedures developed by the Company or its
competitors, proposed governmental regulations and developments in both the
United States and foreign countries, disputes relating to patents or proprietary
rights, publicity regarding actual or potential results relating to product
candidates under development by the Company or its competitors, delays in
obtaining requisite regulatory approvals, slow acceptance of the Company's
products in new or existing markets, and economic and other external factors, as
well as period-to-period fluctuations in financial results, may have a
significant effect on the market price of the Company's Common Stock.

         Limited Trading Volume and Related Matters; Continued NASDAQ Listing.
Historically, there has been limited trading volume in the Company's Common
Stock. In addition, 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, as of September 30, 1997 and under recently adopted
maintenance standards, which will become effective in February 1998, the Company
does not satisfy the minimum requirements for maintaining its listing with the
NASDAQ Small Cap Market. No assurance can be given regarding the Company's
continued NASDAQ SmallCap Market listing. If the Company's Common Stock were
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.
For example, subsequent to the end of the fiscal year ended September 30, 1997,
the Company effected a reverse stock split which reduced the number of shares of
Common Stock outstanding at the ratio of 1:10. Such change reduced the volume of
trading in the Company's Common Stock and also initially had an adverse effect
on the market price of the Common Stock.

         No Dividends on Common Stock. The Company has never paid cash dividends
on its Common Stock or on any of its outstanding series of Preferred Stock. It
is the Company's intention to retain its cash to finance the operation and
expansion of its business and, therefore, the Company does not expect to pay
cash dividends on any of its stock in the foreseeable future. The Company is
required to pay dividends on its Series A Preferred Stock and Series C Preferred
Stock, which dividends may either be paid in cash or in shares of the respective
Series of Preferred Stock. Any dividends paid in cash on either Series A or
Series C Preferred Stock will be required to be paid before any cash dividends
are paid on the Common Stock. The Company intends to pay dividends payable with
respect to Preferred Stock in additional shares of stock of the Series to which
such dividends relate.

         PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

         All forward-looking statements contained herein are deemed by the
Company to be covered by and to qualify for the safe harbor protection provided
by the Private Securities Litigation Reform Act of 1995 (the "1995 Act").
Shareholders and prospective shareholders should understand that several factors
govern whether any forward-looking statement contained herein will be or can be
achieved. Any one of those factors could cause actual results to differ
materially from those projected herein. These forward-looking statements include
plans and objectives of management for future operations, including plans and
objectives relating to the products and the future economic performance of
Biomune and its wholly owned subsidiary, Optim. The forward- looking statements
and associated risks set forth herein relate to (i) market acceptance of the
Biomune Nutraceutical Products and the development of other nutraceutical
products by Optim;(ii) the additional research and development, general and
administrative and other direct costs associated with obtaining final FDA
approval on BWPT-301(TM); (iii) the additional dollar amount expected to be
expended on the BWPT-301(TM) and BWPT-302(TM) clinical trials until final FDA
approval has been received; (iv) the estimated date of receipt of final FDA
approval on BWPT-301(TM); (v) the estimated commencement date of Phase III
clinical trials and the completion of those clinical trials on BWPT-301(TM); and
(vi) the Company having sufficient cash to fund its projected operations and
budgeted research and development for fiscal year 1998. The forward-looking
statements included herein are based on current expectations that involve a
number of risks and uncertainties. The forward-looking statements included
herein are based on assumptions, among others, (a) that the efficacy of
BWPT-301(TM) will be established during the ongoing Phase II clinical trials and
the Phase III clinical trials; (b) that the Company will be able to successfully
undertake and complete clinical trials on BWPT-302(TM); (c) that the Company
will be able to successfully commercialize the Biomune Nutraceutical Products,
and successfully develop and commercialize other nutraceutical products; (d)
that the Company will be able to successfully develop and commercialize the
Technology; (e) that the Company will need to conduct additional Phase II
clinical trials on BWPT-301(TM) and may need to conduct clinical trials that are
different from those that have been conducted to date or that are currently
contemplated by the Company; and (f) that the Company will be able to timely and
properly quantify and analyze the data derived

                                     -22-
<PAGE>
 
from its clinical trials. Assumptions relating to the foregoing involve
judgments with respect to, among other things, future economic, competitive and
market conditions, future business decisions, and the results of the clinical
trials and the time and money required to successfully complete those trials,
all of which are difficult or impossible to predict accurately and many of which
are beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of those assumptions could prove inaccurate and, therefore,
there can be no assurance that the results contemplated in any of the
forward-looking statements contained herein will be realized. This is
particularly true given the dynamic nature of the process in which the Company
is involved with respect to BWPT-301(TM) and BWPT-302(TM). Budgeting and other
management decisions are subjective in many respects and thus susceptible to
interpretations and periodic revision. Based on actual experience and business
developments, the impact of which may cause the Company to alter its marketing,
capital expenditure plans or other budgets, which may in turn affect the
Company's results of operations. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of any
such statement should not be regarded as a representation by the Company or any
other person that the objectives or plans of the Company will be achieved.

ITEM 2.  PROPERTIES

         The corporate headquarters for Biomune and Optim are located at 2401
South Foothill Drive, Salt Lake City, Utah. Biomune executed a three-year lease
agreement with Young Electric Sign Company, an unrelated third party, for the
lease of the corporate headquarters effective as of October 1, 1996 (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 approximately 700 remaining square feet of which are being
utilized by Optim) and approximately 800 square feet of research space at a
total monthly rent for both Biomune's and Optim's space of $7,500, which rent
increases to $7,875 per month for the second year of the Lease Agreement and to
$8,268.75 per month for the third and final year. The 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,
1997 Biomune was utilizing approximately 50% of the approximately 2,800 square
feet of office space and approximately 100% of the approximately 800 square feet
of research space at the corporate headquarters. As its needs change, the
Company may sublease part of this space to other parties.

         In addition to the corporate headquarters occupied by Biomune and
Optim, Optim leases approximately 3,800 square feet of warehouse space in West
Valley City, Utah. Optim is utilizing approximately 50% of the approximately 700
square feet of office space and approximately 25% of the approximately 3,800
square feet of warehouse space. The Company believes that those facilities will
accommodate Optim's operations and projected growth for the foreseeable future.

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 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) and alleged violations 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 has appealed the decision of the District Court to
the United States Court of Appeals for the Tenth Circuit (Denver, Colorado).
While the Company believes that the allegations made in the Complaint are wholly
without merit, and it intends to vigorously oppose the appeal of the favorable
verdict, there can be no assurance that the Company's defense will be
successful. 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.

                                     -23-
<PAGE>
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         There were no matters submitted to a vote of the security holders
during the fourth quarter of fiscal 1997.

                                    PART II

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

COMMON STOCK

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

<TABLE> 
                Quarter Ended                      High Bid/(1)/                Low Bid/(1)/
                -------------                      -------------                ------------
         <S>                                       <C>                          <C>
         September 30, 1997                           $  4.38                      $  3.75
         June 30, 1997                                $  5.00                      $  4.69
         March 31, 1997                               $ 13.13                      $ 11.88
         December 31, 1996                            $ 14.69                      $ 12.19


         September 30, 1996                           $ 20.00                      $ 19.70
         June 30, 1996                                $ 30.00                      $ 21.30
         March 31, 1996                               $ 27.40                      $ 19.40
         December 31, 1995                            $ 25.60                      $ 23.40
</TABLE>
---------------------

(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
         and reflect the effect of the 1-for-100 reverse stock split of the
         Company's Common Stock that was effective as of March 22, 1993 and the
         effect of the stock split of the Company's Common Stock that was
         effected as a 200% stock dividend effective as of June 14, 1994, and
         the 1-for-10 reverse stock split effective November 10, 1997. The high
         and low prices listed have been rounded up to the next highest two
         decimal places.

         The market price of the Company's Common Stock is subject to
significant fluctuations in response to variations in the Company's quarterly
operating results, general trends in the market for the Company's products and
product candidates, and other factors, many of which the Company has little or
no control over. In addition, broad market fluctuations, as well as general
economic, business and political conditions, may adversely affect the market for
the Company's Common Stock, regardless of the Company's actual or projected
performance. On December 29, 1997, the closing price of the Company's Common
Stock was $0.72 per share.

         The approximate number of holders of record of the Company's Common
Stock as of December 29, 1997 was 1,200. This number does not represent the
actual number of beneficial owners of shares of the Company's Common Stock
because shares are frequently held in "street name" by securities dealers and
others for the benefit of individual owners who have the right to vote their
shares. The Company has made no effort to speculate about the number of

                                     -24-
<PAGE>
 
persons who could be holding the Company's Common Stock in street name. The
Company has not paid or declared any cash dividends on its Common Stock or
Preferred Stock since its incorporation and does not anticipate paying any cash
dividends on its Common Stock or Preferred 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.

PREFERRED STOCK

         As of September 30, 1997, the Company had two Series of Preferred Stock
outstanding, as follows: Series A 10% Cumulative Convertible Preferred Stock
(the "Series A Preferred"); and Series C 8% Cumulative Convertible Non-Voting
Preferred Stock (the "Series C Preferred"). In addition, during a portion of
fiscal 1997 the Company also had outstanding shares of its Series B 10%
Cumulative Convertible Non-Voting Preferred Stock (the "Series B Preferred"),
all of which shares of Series B Preferred were converted into shares of Common
Stock during fiscal 1997. Summaries of the Series A Preferred and the Series C
Preferred follow:

         Series A Preferred. The Designation of Rights and Preferences related
to the Series A Preferred requires that dividends be paid at the rate of 10% per
annum prior to the payment of dividends on any class or series of shares of the
Company's equity securities that are junior to the Series A Preferred, unless
full cumulative dividends have been paid or contemporaneously are declared and
paid or set apart for payment on the Series A Preferred. Dividends on the Series
A Preferred may, however, at the option of the Company's Board of Directors, be
paid in either cash or additional shares of Series A Preferred. Shares of Series
A Preferred are convertible into shares of the Company's Common Stock at the
rate of three shares of Common Stock for every ten shares of Series A Preferred.
There are presently 34,802 shares of Series A Preferred issued and outstanding
which are convertible at the option of the several holders thereof into a total
of 10,441 shares of Common Stock. The Series A Preferred Stock is subject to
certain liquidation preferences and redemption rights.

         Series C Preferred. The Designation of Rights and Preferences related
to the Series C Preferred requires that dividends be paid at the rate of 8% per
annum, subject to the rights of the holders of shares of Series A Preferred,
prior to and in preference to any declaration or payment of any dividends on the
Company's Common Stock. Accordingly, the annual dividend per outstanding share
of Series C Preferred is $80.00. Dividends on the Series C Preferred may,
however, at the option of the Company's Board of Directors, be paid in either
cash or additional shares of Series C Preferred. Subject to certain conversion
limitations on the Series C Preferred as set forth in the Series C Preferred
Designation of Rights and Preferences, each share of Series C Preferred may be
converted into the number of shares of Common Stock determined by dividing
$1,000 plus any accrued and unpaid regular or special dividends on the Series C
Preferred by an amount equal to the market price of the Common Stock of the
Company less 42%. There are presently 1,683 shares of Series C Preferred issued
and outstanding, convertible as described above into a total of 829,064 shares
of Common Stock based on a conversion rate of $2.03 per share. The Series C
Preferred Stock is subject to certain liquidation preferences and redemption
rights.

         RECENT SALES OF UNREGISTERED EQUITY SECURITIES

         On August 1, 1997, the Company issued 10,000 shares of restricted
Common Stock and options to purchase 25,000 shares of restricted Common Stock to
three consultants for services provided to the Company. The shares of restricted
Common Stock issued were valued at $3.75 per share, and the exercise price of
the options is $3.75 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.

                                     -25-
<PAGE>
 
         On September 23, 1997, the Company issued 4,500 shares of restricted
Common Stock to the Durham, Evans, Jones & Pinegar Profit Sharing Plan Trust for
professional services rendered to the Company valued at approximately $20,000.
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 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.

ITEM 6.  SELECTED FINANCIAL DATA

         The selected financial information presented below has been derived
from the Company's consolidated audited financial statements. This selected
financial information should be read in conjunction with Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
below, and the Company's consolidated financial statements.
<TABLE> 
<CAPTION>
       Consolidated Statement of                         As of and for the fiscal years ended September 30,
       Operations Data From                              --------------------------------------------------
       Continuing Operations:                      1997           1996          1995          1994          1993
       ----------------------------------       ---------      ---------     ---------     ---------     ---------
       <S>                                      <C>            <C>            <C>          <C>           <C>
       Revenues                                 $   199,051         $2,001              $-           $-           $-
       Net Loss from Continuing Operations       (7,348,281)    (5,020,398)    (3,005,188)  (3,980,223)   (4,031,798)
       Net Loss per  Common Share
          from Continuing Operations                  (5.11)*        (2.72)         (1.83)       (3.25)        (3.94)

       Consolidated
       Balance Sheet Data:
       -------------------------

       Total Assets                               2,732,498      9,166,705      6,718,420    9,617,345     4,638,051
       Long-term Debt                                   ---            ---            ---          ---       950,740
       Shareholders' Equity                       1,343,985      8,646,525      6,329,175    9,404,636     1,384,701
       Cash Dividends per
         Common Share                                  ---            ---             ---          ---           ---
---------------------
</TABLE>
*  Based on weighted average outstanding common shares of 2,229,624.

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

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

         GENERAL

         The Company believes that in the future its results of operations could
be impacted by factors such as the availability of cash from financing
activities with which to fund its operations, the results of the Company's
research and development efforts and the clinical trials on BWPT-301(TM),
BWPT-302(TM) and any other future pharmaceutical drug candidates based on or
derived from the Technology, as well as market acceptance of the Company's
nutraceutical products (and particularly Optimune(TM), the Company's first
nutraceutical product) and pharmaceutical drug candidates, increased competitive
pressures, changes in raw material sources and costs, and adverse changes in
general economic conditions in any of the countries in which the Company
conducts or is able to conduct business under the License with PTI. The
Company's ability to develop and market nutraceutical products and
pharmaceutical drugs will have a significant and direct impact on the Company's
results of operations. The Company believes that the majority of its

                                     -26-
<PAGE>
 
anticipated future revenues will come from new nutraceutical products and
pharmaceutical drugs. The Company cannot determine the ultimate effect that new
nutraceutical products and pharmaceutical drugs will have on revenues, earnings
or the price of the Company's Common Stock.

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

         The Company's primary focus and efforts during the fiscal year ended
September 30, 1997, have been on commercializing the Biomune Nutraceutical
Products and, to a lesser extent, on seeking approval from the FDA on
BWPT-301(TM) for the treatment of cryptosporidiosis in people with AIDS and on
BWPT-302(TM) for the treatment of E. coli, strain 0157:H7, in humans. For the
fiscal year ended September 30, 1997, $199,051 of the Company's revenues were
generated by Optim from the sale of Optimune(TM) and Maximune(TM).

         The Company also anticipates that it will incur significant losses
during fiscal 1998 as a direct result of: (a) marketing costs associated with
the Company's on-going efforts to market the Biomune Nutraceutical Products; (b)
research costs associated with increased emphasis on completing Phase II and
commencing Phase III clinical studies with respect to BWPT-301(TM), and
completing Phase I and commencing Phase II clinical studies with respect to
BWPT- 302(TM); (c) maintaining general and administrative expenses at present
levels or increased levels to facilitate the Company's financing efforts, its
search for and, if possible, negotiations with potential joint venture partners
or other sources of private or governmental funding; (d) research and
development costs associated with identifying additional pharmaceutical or
nutraceutical products; and (e) costs associated with identifying and pursuing
acquisitions of new nutraceutical and/or pharmaceutical products.

         The Company is currently focusing its resources and efforts on (a) the
commercialization of the Biomune Nutraceutical Products; (b) BWPT-301(TM) for
the treatment of cryptosporidiosis in humans; (c) BWPT-302(TM) for the treatment
of E. coli, strain 0157:H7, in humans; (d) acquisition of new nutraceutical
and/or pharmaceutical products; and (e) the development of one or more
additional nutraceutical products based on the Technology.

         RESULTS OF OPERATIONS

         Fiscal Year 1997 Compared to Fiscal Year 1996

         During the fiscal year ended September 30, 1997, the Company generated
revenues from continuing operations totaling $199,051, all of which was derived
from Optim, the Company's nutraceutical product subsidiary from the sale of
Optimune(TM) and Maximune(TM). In fiscal year 1996, total revenue was $2,001,
all of which was generated by Optim. The increase in sales by Optim during
fiscal year 1997 is attributable to a full year of marketing and selling the
Company's nutraceutical products, Optimune(TM) and Maximune(TM) whereas fiscal
year 1996 sales of nutraceutical products were limited to the last fiscal
quarter. Effective October 1, 1997, the Company divested itself of its
wholly-owned subsidiary, Volu-Sol.

         Management, consulting and research expenses from continuing operations
increased from $3,359,985 in fiscal year 1996 to $3,563,682 in fiscal year 1997.
This increase was due to the Company relying on outside consultants for its
management, consulting and research expenditures. The Company anticipates that
it will incur increased management, consulting and research fees in the
foreseeable future, especially as (a) the Phase II clinical trials on
BWPT-301(TM) continue and Phase III clinical trials on BWPT-301(TM) commence
(assuming efficacy is established during the Phase II clinical trials), (b) the
Phase I clinical trials on BWPT-302(TM) are concluded and the Phase II clinical
trials on BWPT-302(TM) commence (assuming satisfactory results of the Phase I
trials are obtained upon the completion of the analysis of the data from those
trials), (c) the Company continues its efforts to successfully market the
Biomune Nutraceutical Products and (d) additional nutraceutical studies are
commenced and completed. The Company anticipates

                                     -27-
<PAGE>
 
that such increases in management, consulting and research expenses will be
partially, if not fully, offset by additional funding from joint venture
partners, government or private grants or other third-party funding, although
there can be no assurance that such third-party funding will be obtained at all
or in the required amounts. The Company believes these increased management,
consulting and research expenses will have the effect of increasing the
Company's accumulated deficit through the time the Company successfully produces
and commercializes a product based on the Technology or sells technology to a
third party.

         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: (1) the commercialization of the Biomune
Nutraceutical Products, and the addition of sales, marketing and support
personnel for Optim, and (2) the development and commercialization of
Maximune(TM) and Jump!(TM), the Company's other nutraceutical products. The
Company expects that general and administrative expenses will increase in fiscal
year 1998 as compared to fiscal year 1997, as the Phase II clinical trials on
BWPT-301(TM) progress and additional nutraceutical studies commence. This
increase in other general and administrative expenses will have the effect of
increasing the Company's net operating loss for fiscal year 1998 as compared to
the net operating loss for fiscal year 1997.

         Interest income decreased from $271,690 for fiscal year 1996 to
$256,331 for fiscal year 1997. 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 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 stock dividends on the outstanding shares of
Series A Preferred, Series B Preferred and Series C Preferred in fiscal year
1997, as compared to a net loss from continuing operations of $(5,111,597) in
fiscal year 1996. This increase in net loss is attributable to an increase in
accrued Preferred Stock dividends on Series A Preferred, Series B Preferred and
Series C Preferred, and $3,698,751 of impact from the beneficial conversion
features on Preferred Stock, and other general and administrative expenses.
These factors were partially offset by decreases in management, consulting and
research expenses. The net loss per common share from continuing operations
increased from $(2.72) for fiscal year 1996 to $(5.11) for fiscal year 1997. The
net loss per common share would have increased even more except for the fact
that the weighted average common shares outstanding increased as a result of
conversions of shares of Series A Preferred, Series B Preferred and Series C
Preferred into shares of Common Stock. Preferred Stock dividends increased from
$91,199 in 1996 to $337,766 in 1997 also due to the issuance of additional
shares of Preferred Stock. The Company expects to incur a net loss for fiscal
year 1998.

         Loss from discontinued operations of Volu-Sol decreased from $1,402,222
in fiscal year 1997 to $719,652 in fiscal year 1996. This decrease is
attributable to decreased selling, general and administrative expenses and to
the non-recurring loss on disposal of assets experienced during fiscal year 1996
as a result of relocating to Salt Lake City, Utah from Henderson, Nevada.

         The Company has incurred significant net operating losses, which
totaled $35,480,749 through September 30, 1997 (considering the impact of
Preferred Stock dividends and the impact from the beneficial conversion features
on Preferred Stock). Certain of the net operating loss carryforwards ("NOLs")
related thereto are limited by an ownership change (as that term is defined in
Section 382 of the Internal Revenue Code of 1986, as amended) that may have
occurred as of December 10, 1991. See Note 11 to the consolidated financial
statements for a detailed discussion of the Company's NOLs.

         Fiscal 1996 Compared to Fiscal 1995

         During the fiscal year ended September 30, 1996, the Company generated
revenues totaling $2,001, compared to no revenues in fiscal year 1995. Optim
began marketing product during the last quarter of fiscal year 1996.

         Management, consulting and research expenses increased from $2,341,304
in fiscal year 1995 to $3,359,985 in fiscal year 1996. This increase was due to
the Company using outside consultants for filing the IND on BWPT-302(TM)

                                     -28-
<PAGE>
 
and for the Company's fund raising activities. The Company anticipates that 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 $1,136,266
during fiscal year 1995 to $1,897,852 during fiscal year 1996. The increase in
other general and administrative expenses was primarily a result of increased
activity in connection with: (1) the development and commercialization of the
Biomune Nutraceutical Products and the addition of sales, marketing and support
personnel for Optim, (2) increased activity in preparing and filing the
Company's IND on BWPT-302(TM) for submission to the FDA for E. coli, strain
0157:H7, and to report to the FDA on the results of the Phase I clinical trials
on BWPT-301(TM) and the preliminary results of the initial Phase II clinical
trials on BWPT-302(TM) and (3) the addition of physical space for Optim.

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

         The Company incurred a net loss from continuing operations of
$(5,111,597) (after accounting for the payment of stock dividends on the
outstanding shares of Series A Preferred and Series B Preferred in fiscal year
1996), as compared to a net loss of $(3,122,659) in fiscal year 1995. 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
the Series A Preferred and the Series B Preferred because of the conversion of
shares of Series A Preferred and Series B Preferred into shares of Common Stock
during fiscal year 1996. The net loss per common share from continuing
operations increased from $(1.83) for fiscal year 1995 to $(2.72) for fiscal
year 1996. The net loss per common share would have increased even more except
for the fact that the weighted average number of shares of the Company's Common
Stock outstanding increased as a result of conversions of shares of Series A
Preferred, Series B Preferred and Series D Preferred into shares of Common
Stock. Preferred Stock dividends decreased from $117,471 in 1995 to $91,199 in
1996 also due to these conversions of shares of Preferred Stock into shares of
Common Stock.

         LIQUIDITY AND CAPITAL RESOURCES

         The Company has been unable to finance its operations from cash flows
from operating activities. Substantial funds and time will be required to
commercialize the Biomune Nutraceutical Products, to complete Phase II and Phase
III clinical trials on BWPT-301(TM) (assuming efficacy is established during the
Phase II clinical trials), to complete the necessary clinical trials on
BWPT-302(TM), to obtain regulatory approval for and commercialize products
utilizing the Technology and to develop and commercialize additional
nutraceutical products based on the Technology. Because revenue-generating
operating activities are not in place at significant levels and because the
Company will require significant capital to accomplish the objectives set forth
above, additional equity and/or debt funding will 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, 1997, the Company had cash and cash equivalents of
$1,585,099 and working capital of $925,166 (of which $846,137 relates to
continuing operations), as compared to cash and cash equivalents of $4,180,700
and working capital of $7,713,916 (of which $7,619,536 relates to continuing
operations) as of September 30, 1996.

         Series A Preferred. The Series A Preferred bears a 10% cumulative
dividend payable annually in cash or in additional shares of Series A Preferred,
at the election of the Company's Board of Directors. As of September 30, 1997,
the Company had recorded dividends payable on the Series A Preferred totaling
$21,842, which dividends the Company intends to pay in additional shares of
Series A Preferred.

         Series B Preferred. The Series B Preferred bears a 10% cumulative
dividend payable annually in cash or in additional shares of Series B Preferred,
at the election of the Company's Board of Directors. As of September 30, 1997,

                                     -29-
<PAGE>
 
the Company had recorded dividends payable on the Series B Preferred totaling
$6,740, which dividends the Company intends to pay in additional shares of
Series B Preferred.

         Series C Preferred. The Series C Preferred bears an 8% cumulative
dividend payable annually in cash or in additional shares of Series C Preferred,
at the election of the Company's Board of Directors. As of September 30, 1997,
the Company had recorded dividends payable on the Series C Preferred totaling
$309,184, which dividends the Company intends to pay in additional shares of
Series C Preferred.

         During fiscal year 1997, the Company's operating activities used
$4,064,096 of cash, which had previously been provided by the issuance of shares
of Series A Preferred, Series B Preferred, Series C Preferred and Series D
Preferred. During fiscal year 1996, the Company's operating activities used
$4,344,857 of cash, also principally provided by the raising of capital from the
issuance of shares of Series A Preferred, Series B Preferred, Series C Preferred
and Series D Preferred.

         The Company currently estimates that additional research and
development, general and administrative, and other direct costs associated with
reaching the stage of obtaining final FDA approval on BWPT-301(TM) in treating
cryptosporidiosis in people with AIDS will approximate $5 - $7 million. The
Company believes that its Technology is now sufficiently developed that any
future research and development efforts will be made only to the extent funding
is made available from joint venture partners, strategic alliances, private or
governmental grants or other third-party funding. Final FDA approval on
BWPT-301(TM) is currently estimated to be received possibly as early as 1999.
Phase II clinical trials on BWPT-301(TM) commenced in November 1994 and are
currently expected to be completed during 1998 (assuming approximate
institutional review board approvals can be timely obtained and patient
recruitment can be accomplished on a timely basis). Assuming efficacy of
BWPT-301(TM) is established during the Phase II clinical trials, the Company
currently anticipates commencing Phase III clinical trials on BWPT-301(TM)
sometime in 1998 and currently expects that it may be able to complete those
trials as early as 1999.

         The Company currently estimates that additional research and
development, general and administrative, and other direct costs associated with
reaching the stage of obtaining final FDA approval on BWPT-302(TM) in treating
E. coli, strain 0157:H7, will approximate $7 - $9 million, although the Company
presently is unable to fund such amounts independently and anticipates
proceeding with such research and development efforts only to the extent funding
is made available from joint venture partners, strategic alliances, private or
governmental grants or other third-party funding. Final FDA approval on
BWPT-302(TM) is currently estimated to be received possibly as early as 2000.
Phase I clinical trials on BWPT-302(TM) commenced on March 21, 1996.

         During fiscal year 1998, the Company anticipates incurring direct costs
of approximately $500,000 in marketing the Biomune Nutraceutical Products.

         The Company must continue to raise funds to finance the continued
commercialization of products utilizing the Technology, including BWPT-301(TM),
BWPT-302(TM), the Biomune Nutraceutical Products and any additional
pharmaceutical or nutraceutical products that the Company may develop and
attempt to commercialize or bring to market.

         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
5, 1997 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

                                     -30-
<PAGE>
 
the Company. In any event, such financing will result in immediate and possibly
substantial dilution to existing shareholders.

<TABLE> 
<CAPTION> 

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Index to Consolidated Financial Statements:
         <S>                                                                                                   <C> 
         Report of Independent Public Accountants..............................................................F-1

         Consolidated Balance Sheets as of September 30, 1997 and 1996.........................................F-2

         Consolidated Statements of Operations for the Years Ended September 30,
         1997, 1996 and 1995 and for the Period from Inception
         to September 30, 1997.................................................................................F-4

         Consolidated Statements of Shareholders' Equity for the Years Ended
         September 30, 1997, 1996 and 1995 and for the Period from Inception
         to September 30, 1997.................................................................................F-5

         Consolidated Statements of Cash Flows for the Years Ended September 30,
         1997, 1996 and 1995 and for the Period from
         Inception to September 30, 1997.......................................................................F-8

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

</TABLE> 

                                   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> 
David G. Derrick.................................... 44 ...........................Chief Executive Officer, President
                                                                                            and Chairman of the Board
Thomas Q. Garvey, III, M.D.......................... 54 .....................................................Director
Aaron Gold, D.D..................................... 69 .....................................................Director
Charles J. Quantz, Esq.............................. 69 .....................................................Director
Christopher D. Illick............................... 57 ..........................................Director, Secretary
Michael G. Acton, C.P.A............................. 34 ..........Chief Financial Officer and Chief Operating Officer

</TABLE> 

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

         David G. Derrick  Mr. Derrick served as the Company's President from 
May 1989 through December 1995 and again from March 1997 until July 1997, and
since January 8, 1998 to the present. He has been the Chief Executive Officer of
the Company since January 1996. Mr. Derrick also serves as a Director and as the
Chief Executive Officer of Optim Nutrition, Inc., a wholly owned subsidiary of
the Company ("Optim"). From April 1980 until September 1988, Mr. Derrick was the
managing partner of Derrick Enterprises Real Estate Development & Management
Services Company ("Derrick Enterprises"). Prior to organizing Derrick
Enterprises, Mr. Derrick was a partner in Kirton Land Company, an investment and
real estate development company, from September 1976 until April 1980. Mr.
Derrick currently serves as President of Derrick Properties Corporation, a
private investment company, and has served in that capacity since 1986. Since
July 1997, Mr. Derrick has also been a Director of Bioxide, the successor to
Biomed under the Sterilization License. From September 1979 until June 1983, Mr.
Derrick was a faculty member at the University of Utah College of Business,
Department of Finance. Mr. Derrick graduated from the University of Utah College
of

                                      -31-
<PAGE>
 
Business with a Bachelor of Science Degree in Economics in 1975, and a Masters
in Business Administration Degree with an emphasis in finance in 1976.

         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.

         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. In 1991, Mr. Quantz filed bankruptcy under Chapter 7 of the United
States Bankruptcy Code and was discharged in bankruptcy that same year.

         Christopher D. Illick  Mr. Illick has been a Director of the Company 
since February 1995 and a Director of Optim since May 1, 1996. He is also the
Company's Corporate Secretary. 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.

         EXECUTIVE OFFICERS

         In addition to Mr. Derrick, biographical information about whom is set
forth above, the following individual is an executive officer of the Company:

         Michael G. Acton, C.P.A. Mr. Acton has been Chief Financial Officer and
Controller of the Company since October 1994. He has been Chief Operating
Officer of the Company since July 1997. 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.

         No family relationships exist between or among any of the Company's
officers and directors.

         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.

                                      -32-
<PAGE>
 
         Compensation Committee

         The Compensation Committee makes recommendations to the Board of
Directors with respect to the compensation of management employees and
administers plans and programs relating to employee benefits, incentives and
compensation. The Compensation Committee also determines the persons to whom
options should be granted under the Company's Stock Option Plans and the number
of options to be granted to each person. The current members of the Compensation
Committee are David G. Derrick, Thomas Q. Garvey, III, and Christopher D.
Illick. Mr. Derrick 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 David G. Derrick, Charles J. Quantz and Christopher D.
Illick.

         Scientific Advisory Board

         The Company has assembled a Scientific Advisory Board comprised of
medical practitioners and distinguished academicians and scientists in the field
of medicine to assist the Company with the development of its pharmaceutical
drug candidates and nutraceutical products. The Company's management
periodically consults with members of the Scientific Advisory Board as and when
needed with respect to issues arising within a particular member's area of
expertise. Although the Company periodically receives guidance from certain of
the members of the Scientific Advisory Board, all of the members of the
Company's Scientific Advisory Board except David O. Lucas, Ph.D., Thomas Q.
Garvey III, M.D. and Allan H. Barker, M.D., are employed on a full-time basis by
others and, accordingly, are able to devote only a small portion of their time
to the Company. Thomas Q. Garvey III, M.D. provides approximately 5 hours per
month and Allan H. Barker, M.D. provides approximately 50 hours per month
advising the Company. None of the members of the Scientific Advisory Board are
members of the Company's Board of Directors except Thomas Q. Garvey III, M.D.,
biographical information with respect to whom is set forth above. Each member of
the Scientific Advisory Board has entered into a Confidentiality Agreement with
the Company and has agreed not to disclose any of the Company's confidential
information during the period such person serves on the Scientific Advisory
Board and for a period of five years thereafter. The members of the Scientific
Advisory Board with whom the Company consulted during fiscal year 1997 are as
follows:

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

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

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

                                      -33-
<PAGE>
 
         Joseph A. Smith, Jr., M.D. Dr. Smith has been Professor of Surgery and
Chairman of the Department of Urology at the Vanderbilt University Medical
Center in Nashville, Tennessee, since 1991. Prior to that time, Dr. Smith was a
Professor of Surgery and Chairman of the Division of Urology at the University
of Utah Medical Center. Dr. Smith was a research fellow at the Memorial Sloan-
Kettering Cancer Center in New York. Dr. Smith specializes in the treatment of
cancer and immune-compromised patients as a result of chemotherapy treatment. He
has written and published 105 articles, participated in writing 48 books and is
the sole author of nine books.

         Thomas Q. Garvey III, M.D. Please refer to biographical information set
forth above. 

         Except for Dr. Lucas, who was a party to a consulting agreement with
the Company, and 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. Lucas' consulting
agreement provided for the payment of $5,000 per month for his services and the
issuance of shares of the Company's Common Stock with an aggregate fair market
value of $4,000 for each three month period during the term of his consulting
agreement. The Company terminated Dr. Lucas's consulting agreement in December
1997. 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 established a Business Advisory Board, the purpose
of which is to advise the Company's management and the Board of Directors
regarding the Company's development and future growth. None of the members of
the Business Advisory Board are members of the Company's Board of Directors. The
Company's management periodically consults with members of the Business Advisory
Board, as and when necessary. The members of the Business Advisory Board with
whom the Company consulted during fiscal year 1997, including a brief
biographical summary of each member, are as follows:

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

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

         The following table sets forth the annual and long-term compensation
for services in all capacities to the Company of David G. Derrick, the Chief
Executive Officer, and James J. Dalton, former Sr. Vice President -- Investor
Relations, the only executive officer of the Company other than the Chief
Executive Officer whose total annual salary and bonuses exceeded $100,000 during
the fiscal year (collectively, the "Named Officers"), for the fiscal years ended
September 30, 1997, 1996 and 1995. No other current or former executive officer
of the Company received salary or

                                      -34-
<PAGE>
 
bonus compensation exceeding $100,000 in any of the referenced periods. No
options or long-term incentive plan awards were granted or made to the
referenced executive officers during the referenced periods, except as provided
below:

                          SUMMARY COMPENSATION TABLE
<TABLE> 
<CAPTION> 
                                                 Annual Compensation                  Long-Term Compensation
                                           ---------------------------------     ---------------------------------
                                                                                      Awards            Payouts
                                                                                 ---------------------------------
          (a)                   (b)          (c)       (d)          (e)           (f)         (g)         (h)             (i)
------------------------------------------------------------------------------------------------------------------------------------
                                                                                           Securities
                                                                    Other      Restricted  Underlying
                                                                   Annual        Stock      Options/      LTIP         All Other
Name and Principal position   Year (1)     Salary     Bonus     Compensation     Awards     SARs(#)     Payouts($    Compensation($)
---------------------------   --------     ------     -----     ------------     ------     -------     ----------   ---------------
<S>                           <C>          <C>        <C>       <C>              <C>        <C>         <C>          <C> 
David G. Derrick,               1997        $200,000      -0-         -0-            -0-     310,000 (2)      -0-          -0-
CEO/President                   1996        $203,000 (3)  -0-         -0-            -0-      60,000 (2)      -0-          -0-
Chairman of the Board (4)       1995        $150,000      -0-         -0-            -0-      58,000 (2)      -0-          -0-
                                      
James J. Dalton,                1997        $161,000    $87,600(6)    -0-            -0-      49,400 (2)      -0-          -0-
Sr. Vice President --           1996              --       --          --             --          --           --           --
Investor Relations (5)          1995              --       --          --             --          --           --           --

</TABLE> 

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

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

(2) Adjusted to reflect 1-for-10 reverse stock split effective November 10,
    1997.

(3) Represents salary pursuant to an employment and non-competition agreement
    dated June 15, 1996 (the "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.

(4) Pursuant to a management agreement (the "Management Agreement") between the
    Company and ADP Management Corporation ("ADP"), during fiscal year 1995, as
    well as through June 15, 1996, ADP provided the Company with the management
    and administrative services necessary to manage the daily business
    operations and affairs of the Company and, in addition, furnished the
    Company with a president or chief executive officer (i.e., David G.
    Derrick). The Management Agreement with ADP was terminated 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 the Employment and Non-Competition Agreement,
    which terminated on September 30, 1997. Mr. Derrick has agreed to continue
    to serve in these positions through September 30, 1999, although the terms
    and conditions of the new agreement have not been finalized. See "Certain
    Relationships and Related Transactions-- Transactions with Management and
    Others," subheading, "ADP Management Corporation and David G. Derrick,"
    below. 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 the present, he has served as the Company's Chief
    Executive Officer and Chairman of the Board of Directors.

(5) Mr. Dalton became an executive officer of the Company in October 1996 and
    resigned in September 1997. Prior to becoming an executive officer, he was a
    consultant to the Company. See "Certain Relationships and Related
    Transactions."

                                      -35-
<PAGE>
 
(6) Mr. Dalton received a cash bonus of $70,000 which was used to exercise
    previously granted stock options to purchase 18,919 shares of Common Stock.
    He also received 3,750 shares of Common Stock for which the Company recorded
    compensation expense of $17,600.

EMPLOYMENT AGREEMENT WITH DAVID G. DERRICK

    The Company employed the services of David G. Derrick pursuant to the
Management Agreement with ADP through and until June 15, 1996. The Management
Agreement was replaced by the Employment and Non-Competition Agreement. That
agreement terminated on September 30, 1997, although Mr. Derrick has agreed to
continue to serve in those capacities until September 30, 1999 under a modified
agreement which has not yet been finalized. Mr. Derrick receives a base salary
of $200,000 per year and the same benefits that other employees of the Company
receive. Mr. Derrick was also granted an option to purchase 60,000 shares of the
Company's Common Stock, 30,000 shares of which became vested and exercisable on
September 30, 1996 and the remaining 30,000 of which vested and became
exercisable on September 30, 1997, after giving effect to a 1-for-10 reverse
stock split effective November 10, 1997. During fiscal year 1997, Mr. Derrick
was granted options to purchase 310,000 shares of Common Stock at an exercise
price of $3.70 per share, after giving effect to the 1-for-10 reverse stock
split effective November 10, 1997.

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

STOCK OPTION AND STOCK APPRECIATION RIGHTS

    In December 1992, July 1993, February 1995 and March 26, 1996, the Company's
Board of Directors approved the 1992 Stock Incentive Plan, the 1993 Stock
Incentive Plan, the 1995 Stock Incentive Plan, and the 1996 Stock Incentive
Plan, respectively. Under the 1992 Stock Incentive Plan and the 1993 Stock
Incentive Plan, non-qualified stock options could be granted and stock bonuses
or issuances made to qualified recipients, while under the 1995 Stock Incentive
Plan and the 1996 Stock Incentive Plan, incentive stock options and non-
qualified stock options could be granted and stock bonuses or issuances made to
qualified recipients. As of September 30, 1997, 444,000 shares of the Company's
Common Stock were available for issuance under the 1992 Stock Incentive Plan,
334,502 shares of Common Stock were available for issuance under the 1993 Stock
Incentive Plan, no shares of Common Stock were available for issuance under the
1995 Stock Incentive Plan, and 1,459,896 shares of Common Stock were reserved
for issuance under the 1996 Stock Incentive Plan.

    The following table sets forth information concerning the grant of stock
options and stock appreciation rights (SARs) made under the Company's 1995
Incentive Stock Option Plan for the fiscal year ended September 30, 1997 to the
Named Officers:

                     OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE> 
<CAPTION> 

Potential Realizable Value at Assumed
Annual Rates of Stock Price
                                   Individual Grants                                            Appreciation for Option Term
------------------------------------------------------------------------          --------------------------------------------------

     (a)                  (b)            (c)           (d)             (f)            (c)                    (g)
                                     % of Total
                       Number of    Options/SARs
                      Securities     Granted to                    Market Price
                      Underlying      Employees     Exercise or     on Date of
                     Options/SARs     in Fiscal     Base Price        Grant       Expiration
     Name             Granted (#)        Year        ($/Share)      ($/Share)        Date         5% ($)    10% ($)    0% ($)
--------------       ------------   ------------    -----------    ------------   ----------      ------    -------    ------
<S>                  <C>            <C>             <C>            <C>            <C>            <C>        <C>        <C> 
David G. Derrick        310,000          80.6%          $3.70         $3.70        7/28/2002     $155,000   $310,000      $0

James J. Dalton          49,400          12.9%          $3.70         $3.70       10/23/2001     $ 24,700   $ 49,400      $0

</TABLE> 

                                      -36-
<PAGE>
 
         The following table sets forth information with respect to the exercise
of options to acquire shares of the Company's Common Stock by the Named Officers
during the fiscal year ended September 30, 1997, as well as the aggregate number
and value of unexercised options held by the Named Executive Officers on
September 30, 1997.

  AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION 
                                    VALUES

<TABLE> 
<CAPTION> 

                                                                Number of securities
                                                                     Underlying              Value of Unexercised
                                                                Unexercised options         In-the-Money Options at
                                                              At September 30, 1997(#)      September 30, 1997 ($)
                            Shares Acquired       Value             Exercisable/                  Exercisable/
Name                        On Exercise(#)      Realized($)        Unexercisable                 Unexercisable
-------------------------------------------------------------------------------------------------------------------
<S>                         <C>                 <C>           <C>                           <C> 
David G. Derrick             11,543 (1)           $8,080              412,246/                     $288,572/
                                                                          -0-                           -0-

James J. Dalton             282,939 (1)          $19,806               43,500/(1)/                  $30,450/
                                                                          -0-                           -0-

</TABLE> 

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

          (1)  All share amounts adjusted to reflect 1-for-10 reverse stock
split effective November 10, 1997.

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 Executive Compensation Report discusses the Company's executive
compensation policies and the basis for the compensation paid to the Company's
executive officers, including its Chief Executive Officer, David G. Derrick,
during the fiscal year ended September 30, 1997.

         Compensation Policy

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

         .        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;

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

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

                                      -37-
<PAGE>
 
         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 a substantial number of its officers and employees, including
selected members of management, and to reward such officers and employees for
achieving goals that have been established for the Company. The Company believes
its incentive compensation plan rewards management when the Company and its
shareholders have 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.

         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 have historically been reasonable in relation to the Company's size and
performance in comparison with the compensation paid by similarly sized
companies or companies within the Company's industry.

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

         Compensation of the Chief Executive Officer

         On June 15, 1996, the Company entered the Employment and
Non-Competition Agreement with Mr. Derrick, Chief Executive Officer of the
Company. This agreement had an initial term which expired on September 30, 1997.
Mr. Derrick and the Company have agreed that he will continue in that capacity
until September 30, 1999 under a modified agreement, however, the terms and
conditions of such modified agreement have not been finalized. Mr. Derrick
receives a monthly base salary of $16,667 (or $200,000 per year). The
Compensation Committee believes that Mr. Derrick's monthly compensation
adequately and fairly compensates Mr. Derrick in relation to his
responsibilities, capabilities, contributions and dedication to the Company and
secures for the Company the benefit of Mr. Derrick's leadership, management and
financial skills and capabilities. Moreover, the Compensation Committee believes
that Mr. Derrick's monthly base salary is reasonable in relation to Mr.
Derrick's responsibilities, capabilities, contributions and

                                      -38-
<PAGE>
 
dedication to the Company and is warranted to keep Mr. Derrick's annual salary
in line with the compensation earned by chief executive officers employed by
companies of comparable size or within the Company's industry.

         Mr. Derrick did not receive a bonus during fiscal years 1997 or 1996.
However, in fiscal year 1996, Mr. Derrick was granted stock options under the
1996 Stock Incentive Plan (the "Plan") for a total of 60,000 shares of Common
Stock at $3.70 per share and in fiscal year 1997 he was granted options to
purchase an additional 310,000 shares of Common Stock at $3.70 per share (all
share amounts and exercise prices are adjusted to reflect a 1 for 10 reverse
stock split effective November 10, 1997).

         Conclusion

         The Compensation Committee believes that the concepts discussed above
further the shareholders' interests because a significant part of executive
compensation is based upon the Company achieving its research and development
goals and other specific goals set by the Board of Directors. At the same time,
the Compensation Committee believes that the program encourages responsible
management of the Company in the short-term. The Compensation Committee
regularly considers plan design so that the total program is as effective as
possible in furthering shareholder interests.

The Compensation Committee bases its review on the experience of its own
members, on information requested from management personnel, and on discussions
with and information compiled by various independent consultants retained by the
Company.

                                    Compensation Committee:

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

                                      -39-
<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, 1997, 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, 1992 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, 1992
                          ASSUMES DIVIDEND REINVESTED
                       FISCAL YEAR ENDING SEPT. 30, 1997



                              Fiscal Year Ending
                              ------------------

<TABLE> 
<CAPTION> 
                               1992       1993        1994        1995         1996          1997
                               ----       ----        ----        ----         ----          ----
<S>                            <C>       <C>         <C>         <C>          <C>            <C> 
Biomune Systems, Inc.          100       100.00      284.43      187.13       117.96         22.45
Industry Index (8731)          100        98.41       72.92      114.96       109.27        131.16
Media General Composite        100       118.07      123.88      149.66       176.52        240.62
</TABLE> 




                                      -40-
<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 being reimbursed for their expenses incurred in
connection with attending meetings of the Board of Directors. No stock options
were issued during fiscal year 1997 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, 1997 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 December 29,
1997 by (i) beneficial owners of more than 5% of the outstanding shares of
Common Stock; (ii) each director and each executive officer; and (iii) 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 
                                                          Beneficially  Owned (2) 
Name and Address                                    ----------------------------------   
of Beneficial Owner (1)                             Number         Percentage of Class
------------------------------------            ------------------------------------------
<S>                                                <C>              <C> 
Directors:

David G. Derrick (3)                               447,821                 12.3%
                                                   
Aaron Gold, D.D. (4)                                20,461                   *
4373 Sheldon Drive                                                           
La Mesa, CA 92401                                                            
                                                                             
Charles J. Quantz. (5)                               8,715                   *
Post Office Box 8186                                                         
Emeryville, CA 94663                                                         
                                                                             
Thomas Q. Garvey, III, M.D.  (6)                    10,500                   *
10125 Gary Road                                                              
Potomac, MD 20854                                                            
                                                                             
Christopher D. Illick (7)                           25,200                   *
22 Mountain Avenue                                                           
Princeton, N.J. 08450                                                        
                                                                             
Executive Officers (8)                                                       
                                                                             
Michael G. Acton (9)                                44,954                   *

</TABLE> 

                                      -41-
<PAGE>
 
<TABLE> 
<S>                                                <C>                     <C> 
5% Beneficial Owners

Leviticus Trust  (10)                              210,755                  6.5%
282 Atlantic Avenue
Brooklyn, NY 11201

All executive officers and
directors as a group (10 persons) (11)             641,210                 17.0%
</TABLE> 
------------------------------

 *    Less than 1%

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

(2)   A person is deemed to be the beneficial owner of securities that can be
      acquired by such person within sixty (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 3,238,813 shares of Common
      Stock outstanding as of December 29, 1997 (as adjusted for shares deemed
      to be beneficially owned by such shareholder).

(3)   Mr. Derrick owns 35,363 shares of Common Stock directly and owns directly
      or indirectly options to purchase 412,458 shares of Common Stock.

(4)   Dr. Gold owns 6,961 shares of Common Stock directly and options to
      purchase 13,500 shares of Common Stock.

(5)   Mr. Quantz owns 1,215 shares of Common Stock directly and options to
      purchase 7,500 shares of Common Stock

(6)   Dr. Garvey owns 533 shares of Common Stock directly and options to
      purchase 9,967 shares of Common Stock.

(7)   Mr. Illick owns 14,700 shares of Common Stock directly and options to
      purchase 10,500 shares of Common Stock.

(8)   Omits David G. Derrick, Chief Executive Officer, whose information is
      provided above.

(9)   Mr. Acton owns 5,538 shares of Common Stock directly and options to
      purchase 43,054 shares of Common Stock.

(10)  The Leviticus Trust owns 210,755 shares of Common Stock directly. The
      Leviticus Trust is an irrevocable trust established for the benefit of its
      sole beneficiary, Genesis Investment Corporation, a Utah corporation
      ("GIC"). The executive officers and directors of GIC are Jacob "Jack"
      Solomon, president, Royden G. Derrick, vice president and secretary, and
      Edna Ennise Richardson, Sam Pekeles and Jerry Pekeles, directors. The
      beneficial owners of GIC are members of the Solomon family. Royden G.
      Derrick is the father of David G. Derrick, the Company's President and
      Chief Executive Officer. The trustee of the Leviticus Trust is Robert
      Pomerantz, an individual residing in New York. The Trustee has power to
      vote and dispose of the stock held by the trust consistent with the terms
      and conditions of the trust declaration establishing the trust.

(11)  Based on a total of 3,779,102 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.

                                      -42-
<PAGE>
 
         Approximately 3.3% 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 WITH MANAGEMENT AND
         OTHERS

         ADP Management Corporation and David G. Derrick. The Company entered
into an Employment and Non- Competition Agreement with David G. Derrick, the
Company's Chief Executive Officer and Chairman of the Board, effective as of
June 15, 1996, which expired September 30, 1997. Mr. Derrick and the Company
have agreed that he will continue in that position under a modified agreement,
the specific terms of which have not been finalized. The new agreement will not
include any services relating to investment banking or fund-raising activities
which will be handled by separate agreement. See discussion regarding MK
Financial, Inc., below. See Item 11, Executive Compensation, "Employment
Agreement With David G. Derrick," above.

         James J. Dalton. The Company entered into a consulting agreement (the
"Consulting Agreement") with James J. Dalton, the Vice Chairman of the Board,
effective as of February 1, 1996 and expiring on January 31, 1997. That
Consulting Agreement provides for Mr. Dalton's services as a director of the
Company and as Vice Chairman of the Board. Pursuant to that Consulting
Agreement, the Company agreed to pay Mr. Dalton a fee of $5,000 per month and to
issue Mr. Dalton 600 shares of Common Stock each month during the term of the
Consulting Agreement (for a total of 7,200 shares). Mr. Dalton was also granted
effective February 1, 1996 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 the
exercise price of $3.70 per share. See Item 11.
Executive Compensation.

         Christopher D. Illick. The Company entered into a Consulting Agreement
with Christopher D. Illick, one of the Company's directors and a member of its
Compensation and Audit Committees, effective as of March 1, 1996 and expiring on
February 28, 1997. That Consulting Agreement provides for Mr. Illick's services
as a director of the Company and as a member of the Company's Compensation and
Audit Committees. Pursuant to that Consulting Agreement, the Company agreed to
issue Mr. Illick 225 shares of Common Stock each month during the term of the
Consulting Agreement (for a total of 2,700 shares). The initial Consulting
Agreement was extended until February 1998, and the Company agreed to issued
12,000 shares of Common Stock for Mr. Illick's services.

CERTAIN BUSINESS RELATIONSHIPS

         MK Financial, Inc. Subsequent to year-end, the Company entered into an
investment banking arrangement with MK Financial, Inc., an entity owned by David
G. Derrick, the Company's Chief Executive Officer and Chairman of the Board.
Under this arrangement, the Company has advanced $150,000 to MK Financial for
fees and commissions related to investment banking services to be performed
during fiscal year 1998. These advances are noninterest bearing and are subject
to refund to the Company should the capital raising efforts not prove
successful.

INDEBTEDNESS OF RELATED PARTIES

         James J. Dalton. During fiscal year 1995 and fiscal year 1994, the
Company made loans aggregating $175,000 and $90,000, respectively, to James J.
Dalton, a director of the Company and Vice Chairman of the Board. These loans
were unsecured, bore interest at an annual rate of 12% and were due on demand.
During fiscal 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, if any, for three years after the expiration of his
Agreement with the Company (or any extension thereof). Mr. Dalton was a
consultant to the Company through fiscal year 1996 and, during fiscal year 1996,
became a director of the Company and the Vice Chairman of the Company's Board of
Directors. Effective October 15, 1996, Mr. Dalton became an employee of the
Company with the title of Senior Executive Vice President--Investor Relations.

                                      -43-
<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, 1997 and 1996

          Consolidated Statements of Operations for the Years Ended September
          30, 1997, 1996 and 1995 and for the Period from Inception to September
          30, 1997

          Consolidated Statements of Shareholders' Equity for the Years Ended
          September 30, 1997, 1996 and 1995 and for the Period from Inception to
          September 30, 1997

          Consolidated Statements of Cash Flows for the Years Ended September
          30, 1997, 1996 and 1995 and for the Period from Inception to September
          30, 1997.

          Notes to Consolidated Financial Statements

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

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

      Exhibit No.    Description of Exhibit
      -----------    ----------------------

      3.1+           Amended and Restated Articles of Incorporation

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

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

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

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

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

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

      4.1**          Form of Common Stock Certificate

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

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

                                      -44-
<PAGE>
 
      4.5#           Form of Series D 8% Cumulative Convertible Preferred Stock
                     Certificate
                           
      4.6+           Form of Series C 8% Cumulative Convertible Preferred Stock
                     Certificate

      10.37**        Genesis Investment Corporation Agreement
                     
      10.38*         Berkeley Securities Corporation Consulting Agreement
                     
      10.39***       Daliz Associates Agreement
                     
      10.40**        Sovran Financial Corporation Consulting Agreement
                     
      10.41**        Ladenburg, Thalmann & Co. Inc. Agreement
                     
      10.42**        William Baquet Business Consulting Agreement
                     
      10.43*         Office Lease Agreement
                     
      10.44*         Volu-Sol Stipulation and Order Regarding Lease extension
                     
      10.45*         Norman Rothstein Consulting Agreement
                     
      10.46*         Daliz Associates Consulting Agreement
                     
      10.47*         Salt Lake Clinic Research Foundation Statement of Agreement
                     (Protocol No. IMC-94-001)

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

      10.49*         Allan H. Barker Indemnification Agreement
                     
      10.50*         Thomas Q. Garvey, III Indemnification Agreement
                     
      10.51*         St. Luke's-Roosevelt Hospital Center Statement of Agreement
                     
      10.52*         Michael G. Acton Agreement
                     
      10.53*         Frank A. Eldredge Agreement
                     
      10.54*         James Dalton Agreement
                     
      10.55*         Genesis Investment Corporation Promissory Note
                     
      10.56*         James E. Cannon Promissory Note
                     
      10.57*         Ronald L. Wigington Promissory Note
                     
      10.58*         Ronald L. Wigington Amended Promissory Note
                     
      10.59*         Royden G. Derrick Promissory Note
                     
      10.60#         Amended License Agreement with PTI
                     
      10.61#         Commercial and Industrial Lease--Volu-Sol, Inc.

                                      -45-
<PAGE>
 
      10.62#         Agreement with Daliz Associates (February 1, 1995)
                     
      10.63#         Agreement with Sovran Financial Corporation (February 1,
                     1995)

      10.64#         Agreement with Norman Rothstein (May 8, 1995)
                     
      10.65#         Agreement with James Dalton (April 1, 1995)
                     
      10.66#         Agreement with Allen & Company, Inc. (June 21, 1995)
                     
      10.67#         Agreement with Allen Sarroff
                     
      10.68#         Agreement with Replicate Management Group (July 25, 1995)
                     
      10.69#         Compensation Contract with E. Wayne Nelson (August 1, 1995)
                     
      10.70#         Agreement with Robert Pomerantz (August 1, 1995)
                     
      10.71#         Agreement with David Pomerantz (February 1, 1995)
                     
      10.72#         Agreement with AAM Group, Inc. (August 11, 1995)
                     
      10.73#         Agreement with David Lucas (June 1995)
                     
      10.74#         Offshore Securities Subscription Agreement (Series D
                     Preferred)

      10.75#         Non-Negotiable Promissory Note (Series D Preferred)
                     
      10.76#         Agreement with Ladenberg, Thalmann & Co., Inc. (February 1,
                     1995)

      10.77#         1995 Stock Incentive Plan
                     
      10.78#         Invoice from Robert J. Pomerantz (January 19, 1995)
                     
      10.79#         Employment Agreement with Michael G. Acton (May 4, 1995)
                     
      10.80#         Incentive Stock Option Agreement with Michael G. Acton (May
                     4, 1995)

      10.81#         Consulting Agreement with David O. Lucas (August 30, 1994)
                     (including June 19, 1995 Amendment to Consulting Agreement)
                     
      10.82#         Amended 1995 Stock Incentive Plan
                     
      10.83#         Non-Qualified Stock Option Agreement with Christopher D.
                     Illick

      10.84#         Schedule Identifying Other Non-Qualified Stock Option
                     Agreements

      10.85#         Incentive Stock Option Agreement with Frank A. Eldredge
                     
      10.86#         Schedule Identifying Other Incentive Stock Option
                     Agreements

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

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

                                      -46-
<PAGE>
 
      10.89#         Employment Agreement with Etta Jane Bechtel
                     
      10.90#         Consulting Agreement with David Zuchero (Zuchero &
                     Associates)

      10.91#         Consulting Contract with E. Wayne Nelson
                     
      10.92#         Business Consulting Agreement with Robert J. Pomerantz
                     (August 15, 1995)

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

      10.94#         Agreement with Commonwealth Associates (May 18, 1995)
                     
      10.95+         Lease Agreement with Young Electric Sign Company
                     
      10.96+         Employment and Non-Competition Agreement with David G.
                     Derrick

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

      10.99+         401(k) Plan
      
      10.100+        First Amendment to Stock Purchase Warrant - A.L. Sarroff
                     (Warrant B-1000)

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

      10.102+        Commercial and Industrial Lease with RJF Companies, Ltd.
                     
      10.103+        Barretto Letter Agreement
                     
      10.104+        ADUN & Company Purchase Agreement
                     
      10.105+        Agreement with Clinimetrics Research Associates
                     
      10.106+        David G. Derrick Non-Qualified Stock Option Agreement
                     (60,000 shares)

      10.107+        Commercial and Industrial Lease - Volu Sol, Inc.
                     
      10.108+        License Agreement with Biomed Patent Development LLC
                     
      10.109+        Letter Agreement with Aurora Consultants, LLC
                     
      10.110+        Letter Agreement with Aurora Capital Corp.
                     
      10.111+        Termination and Mutual Release Agreement with Aurora
                     Capital Corporation and Aurora Consultants, L.L.C.
                     
      10.112+        First Amendment to Amended License Agreement with Protein
                     Technology, Inc.

      23             Consent of Arthur Andersen LLP
      
      27             Financial Data Schedule

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

                                      -47-
<PAGE>
 
#    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, 1997:

     In July 1997, the Company filed a Current Report on Form 8-k dated as of
     July 22, 1997, which included only Item 5 disclosure pertaining to the
     acquisition by the Company of an option to purchase the common stock of
     Rockwood Investments, Inc., a California corporation ("Rockwood") for
     $5,000,000 cash. The Current Report also described a consulting arrangement
     between the Company and Adela Group, Inc., a corporation solely owned by
     Ira E. Ritter, who also is the sole shareholder of Rockwood, and Mr.
     Ritter's appointment as the Company's President.

     On November 10, 1997, the Company filed a Current Report on Form 8-K dated
     as of October 27, 1997, which included Item 2 disclosure in connection with
     the Company's exercise of the option acquired in July 1997 to acquire the
     stock of Rockwood. The Report summarized the primary terms and conditions
     of the Rockwood acquisition and included as an exhibit the purchase
     agreement executed by the Company and Rockwood.

     On November 10, 1997, the Company filed a Current Report on Form 8-K dated
     as of November 7, 1997, which included Item 5 disclosure pertaining to a 
     10-for-1 reverse stock split declared by the Company's Board of Directors
     effective November 10, 1997.

     On November 24, 1997, the Company filed an amendment to the Current Report
     on Form 8-K filed on November 10, 1997 and pertaining to the Rockwood
     transaction. The amended Report contains Item 2 disclosure reflecting the
     changes in the terms and conditions of the Rockwood transaction resulting
     from the Company's intervening reverse stock split.

     No financial statements were filed with any of the above-described Current
     Reports on Form 8-K. The Company determined to abandon the Rockwood
     acquisition on January __, 1998, and that transaction accordingly was not
     consummated and the Company does not presently intend to consummate such
     transaction absent a substantial renegotiation of the primary terms and
     conditions.

                                      -48-
<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, 1997.

                                         BIOMUNE SYSTEMS, INC.
                                          (Registrant)
                                       
                                       
                                         By: /s/ David G. Derrick
                                            ----------------------------------
                                                 David G. Derrick
                                                 Its: Chief Executive Officer

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

<TABLE> 
<CAPTION> 

Signature                        Title                             Date
---------                        -----                             ----
<S>                              <C>                               <C> 
/s/ David G. Derrick             Chief Executive Officer and       January 8, 1997
-----------------------------    Chairman of the Board of      
David G. Derrick                 Directors (Principal Executive 
                                 Officer)                       
                             
 /s/ Aaron Gold                  Director                          January 8, 1997
-----------------------------
Aaron Gold                   
                             
 /s/ Charles J. Quantz           Director                          January 8, 1997
-----------------------------
Charles J. Quantz            
                             
/s/ Thomas Q. Garvey             Director                          January 8, 1997
-----------------------------
Thomas Q. Garvey, III        
                             
 /s/ Christopher D. Illick       Director                          January 8, 1997
-----------------------------
Christopher D. Illick        
                             
/s/ Michael G. Acton             Chief Financial Officer and       January 8, 1997
-----------------------------    Controller (Principal Financial
Michael G. Acton                 and Accounting Officer)        
                                                                
</TABLE>