SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   FORM 10-KSB

|X|              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                            For the fiscal year ended
                                February 28, 1999

                                       OR

|_|            TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                             Commission file number
                                    33-15607

                               DermaRx Corporation
             (Exact name of registrant as specified in its charter)

                Delaware                               13-3301899
    (State or other jurisdiction of                  (IRS Employer
     incorporation or organization)                Identification No.)

     400 Colorado Blvd., Suite 420
            Denver, Colorado                             80222
(Address of principal executive offices)               (Zip Code)

Registrant's telephone number, including area code: (303) 333-4600

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

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

      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 |_|

      Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |X|

<PAGE>

      State issuer's revenues for its most recent fiscal year: $121,262

      As of May 30, 1999, the aggregate market value of the 9,999,019 issued and
outstanding Shares of Common Stock of the registrant (based upon the average of
the bid and asked price of these shares as reported by the NASDAQ Bulletin
Board) held by non-affiliates was approximately $899,911.

      The number of shares outstanding of the registrant's common stock, par
value $.05, as of February 28, 1997 was 9,999,019 shares.


                                       2
<PAGE>

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS.

      (a) Business Development

      DermaRx Corporation (the "Company"), a Delaware corporation formerly known
as Innotek, Inc., was organized in June 1985 to develop, design, manufacture and
market products utilizing proprietary speech-generated tactile feedback devices
(the "Devices") containing methodology for which a patent was allowed in
December 1986 and FDA clearance was granted in October 1987 (referred to
collectively herein as the "VFD Technology"). The Company completed an initial
public offering of its securities in October 1987. In January 1992, the Company
effected a 1 for 6.3 reverse stock split of the Common Stock. Additionally, the
Company amended the par value of the Common Stock to $.05 par value per share.
All share amounts listed have been adjusted to reflect this reverse stock split
unless otherwise noted. The Company's shares of Common Stock are publicly traded
in the over-the-counter market and are reported on the NASD electronic bulletin
board.

      On September 1, 1992, the Company's wholly-owned subsidiary, InnoVisions,
Inc., a Delaware corporation ("InnoVisions Delaware"), acquired all of the
outstanding shares of stock of InnoVisions, Inc. ("InnoVisions Ohio," a private,
closely-held Ohio corporation) in exchange for 110,000 shares of Innotek, Inc.
common stock (the "Common Stock") and a $10,000 note. InnoVisions manufactured
and marketed two "over-the-counter" skin care products, BottomBetter(TM) and
DermaMend(TM), which are based on InnoVisions' patent. (See InnoVisions-Patent.)
InnoVisions, Inc. is no longer a going concern. All of its shares are held by
the Company.

      In 1993, Company began to concentrate its efforts on marketing its two
skin protective products. DermaMend(TM) and BottomBetter(TM) were found, through
clinical trials and user satisfaction, to be highly effective products.
Unfortunately, lawsuits filed in early 1992 with the product's developer
demanded all of the Company's resources, forcing the delay of marketing efforts.
The lawsuit's settlement in the spring of 1994 provided the Company with the
undisputed ownership of the patent for the two skin protectant products.

      To take advantage of the potential of both DermaMend(TM) and the rapidly
growing wound care industry and to create a commercially viable product line, an
extended line of wound care products was developed during 1995 - 1996. New
products, a skin tear therapy (GeriMend Skin Tear Therapy(TM)), an antibacterial
wound cleanser (DermaMend(TM) Cleanser), a polyurethane foam dressing
(DermaMend(TM) Foam), an amorphous hydrogel (DermaMend(TM) Gel), and a composite
dressing (DermaMend(TM) Island Dressing), and a hydrogel impregnated gauze
dressing (DermaMend(TM) Hydrogel Gauze Dressing) have been developed. All
products are considered proprietary. A patent has been awarded for DermaMend
Barrier(TM), GeriMend Skin Tear Therapy(TM), DermaMend(TM) Cleanser, and
DermaMend(TM) Foam - Cavity Dressing. The names DermaMend(TM) and GeriMend(TM)
have been trademarked. A patent is pending for DermaMend(TM) Foam (square) and
DermaMend(TM) Gel . There is no assurance that a patent will be allowed.


                                       3
<PAGE>

      On March 3, 1995, the Company issued a Confidential Private Offering
Memorandum offering units comprised of 100,000 shares of Common Stock per unit,
at $50,000 per unit to seven "accredited investors" (as defined within the
Securities Act of 1933 and the Regulations promulgated thereunder) and to a
limited number of non-accredited investors. In July 1995 the Board of Directors
approved an increase in the offering from $350,000 to $500,000. Additional
private placement offerings were commenced in September, 1995 (2,000,000 shares
at the price of $.50 per common share), in December 1996 (1,000,000 shares at
the price of $.50 per common share), in May 1997 (1,000,000 shared at the price
of $.25 per common share and unsecured promissory notes for $250,000), and in
November 1997 (3,000,000 shares at the price of $.10 per common share).

      The Company received FDA 510(k) marketing approval for DermaMend(TM) Foam
in August 1995, for DermaMend(TM) Gel in October, 1996, for DermaMend(TM) Foam
Island Dressing in May, 1997, and for DermaMend(TM) Hydrogel Gauze Dressing in
July, 1997.

      In May, 1997 the Company negotiated the settlement of an outstanding debt
of $226,094 debt for $10,000.

      In May, 1997 the Company created Integrated Wound Management (IWM), a
wholly owned subsidiary to provide consulting and education services to the
wound care industry. The business was dissolved in October 1998.

      In November, 1997 development was completed on the Company's new topical
hemorrhoid cream. A clinical evaluation of the product was completed in 1998,
and indicated superior efficiency.

      The Company has not been involved in any bankruptcy, receivership or
similar proceedings from the time of its organization.

      The Company did not have any material reclassification, merger,
consolidation, or purchase or sale of a significant amount of assets not in the
ordinary course of business during the fiscal year.

      (b) Business of Issuer:

      The Company has been involved in the research and development of wound
care business with products that treat wounds for both the consumer and the
health care provider markets. All products are proprietary preparations designed
primarily for the topical treatment and management of wounds, disorders and
irritations including venous, pressure and diabetic ulcers, diaper rash, urinary
and fecal incontinence, skin chaffing, abrasions, minor burns, skin tears and
hemorrhoids. The Company also owns the patent to a proprietary speech-generated
tactile feedback device which it no longer actively markets. The Company's
primary objectives are 1) to market its hemorrhoidal cream and its diaper rash
cream over the internet, 2) to become a leading provider of wound clinic
development and wound care education service, 3) to market, in conjunction with
a marketing partner, a full line of "value-added" clinically proven,
over-the-


                                       4
<PAGE>

counter treatments for the management of chronic wounds, and 4) to become a
leading provider of educational and management service to the hospital, nursing
home, home health and physical therapists that provide wound treatments.

      (1) Principal products or services:

            The Company's comprehensive wound care product line is designed to
address the rapidly growing market of people suffering from hemorrhoids and
chronic wounds, and of the hospitals, nursing homes, home health care agencies
and wound clinics that provide wound care treatments. Chronic wounds frequently
affect the elderly as well as people with diabetes, venous insufficiency and
those who are immobilized. Hemorrhoids affect a large proportion of persons over
the age of 18. Possible causes of hemorrhoids are constipation, sitting for long
periods of time, spicy diet, pregnancy, and heavy lifting. There is no known
cure and, with sufferers experiencing periodic hemorrhoid episodes, product
brand loyalty is developed.

      Products include:

      a. BottomBetter(TM): BottomBetter(TM) is a topical cream that meets FDA
guidelines for over-the-counter ("OTC") diaper rash remedies and produces proven
positive results in healing diaper rash. It is packaged in convenient
single-dose, disposable containers (18 per package).

      b. Unnamed Hemorrhoid Cream is a topical ointment which meets all the FDA
standards for ingredients and labeling as an OTC Anorectal Drug. It is indicated
for the temporary relief of itching, burning and swelling associated with
hemorrhoids. It will be packaged in one ounce tubes and clinically evaluated by
physicians.

      c. DermaMend Barrier(TM): DermaMend Barrier(TM) is a topical cream which
meets all FDA standards for ingredients and labeling as an OTC skin protectant.
Indicated for irritation and inflammation of intact skin caused by fecal or
urinary incontinence. DermaMend Barrier(TM) is packaged in unique individual
packets for convenience, and to prevent cross contamination.

      d. GeriMend Skin Care Therapy(TM): GeriMend Skin Care Therapy(TM) is a
topical cream designed primarily for use on early stage ulcers and skin tears.
GeriMend Skin Tear Therapy(TM) is currently in compliance with all FDA standards
for ingredients and labeling as an OTC skin protectant. It is packaged in unique
individual packets for convenience and to inhibit cross contamination.

      e. DermaMend(TM) Cleanser: DermaMend(TM) Cleanser is a non-ionic,
surfactant, anti-microbial cleanser designed to assist with debridement of dead
tissue and other debris on the wound surface without damaging healing skin. The
product also contains ingredients which are beneficial to healing and which help
decrease skin contaminants which may contribute to infection or odor.
DermaMend(TM) Cleanser is currently in compliance with all FDA standards for
ingredients and labeling as an OTC antimicrobial wound cleanser.


                                       5
<PAGE>

      f. DermaMend(TM) Foam: DermaMend(TM) Foam is a second generation
hydrophilic polyurethane foam dressing which contains an odor repressing
ingredient. The 4"x4" square is sterilized and indicated for partial and full
thickness wounds including pressure, venous and diabetic ulcers. The Company
received FDA 510 (k) approval to market the product in August 1995.

      g. DermaMend(TM) Foam - Cavity Dressing: The Cavity Dressing is a thick,
round, second generation hydrophilic polyurethane wafer which is indicated for
full thickness wounds. The Company received FDA approval to market the product
in August 1995.

      h. DermaMend(TM) Gel: DermaMend(TM) Gel is an amorphous hydrogel designed
to create an optimal moist wound environment for acute and chronic wounds. The
Company received FDA approval to market the product in October, 1996. Coined the
"Gold Standard of Hydrogels", it is bacteriostatic to control odor and bacteria
growth and will not damage newly granulating tissue. Because of its unique
viscosity and low water loss, it maintains a moist environment for a prolonged
period resulting in the need for fewer dressing changes.

      i. DermaMend(TM) Island Dressing: DermaMend(TM) Island Dressing is a
composite dressing consisting of a polyurethane foam pad with an adhesive
border. FDA 510(k) approval for marketing was received in May, 1997.

      j. DermaMend(TM) Hydrogel Gauze Dressing: DermaMend(TM) Hydrogel Gauze
Dressing is an amorphous hydrogel which is delivered in a saturated gauze pad.
FDA 510(k) approval for marketing was received in July, 1997.

      j. Vocal Feedback Devices: The Company also owns the rights to a vocal
feedback device designed as a mechanical aid for speech therapy. During its
fiscal year ended February 28, 1994, the Company elected to discontinue active
marketing of the vocal feedback device and to concentrate primarily on marketing
and manufacturing of its skin care products.

      (2) Distribution status:

      The Company plans to distribute all products over the internet subject to
raising capital to fund the acquisition of inventory and to establish a web
site. Additionally, marketing partners are being sought for international sales.

      (3) Status of any publicly announced new product or service:

            BottomBetter(TM) - patented; available for shipment; limited
            distribution available.

            DermaMend Barrier(TM) - patented; available for shipment.

            GeriMend Skin Care Therapy(TM) - patented; available for shipment.

            DermaMend(TM) Cleanser - patented; available for shipment.


                                        6
<PAGE>

            DermaMend(TM) Foam - patent issued on cavity wound filler; patent
            pending on other sizes and shapes of foam; available for shipment -
            5 cm round and 11 cm x 11 cm square. FDA 510(k) marketing approval
            received in August, 1995.

            DermaMend(TM) Gel - patent pending; FDA 510(k) marketing approval
            received in October, 1996.

            DermaMend(TM) Island Dressing - FDA 510(k) marketing approval was
            received in May, 1997.

            DermaMend(TM) Hydrogel Gauze Dressing - FDA 510(k) marketing
            approval received in July, 1997.

            Hemorrhoidal Cream - patented; clinical evaluation completed.

      (4) Competitive business conditions and the small business issuer's
competitive position in the industry and methods of competition:

      The Company will compete directly with several major, multi-national
corporations, each of which has resources substantially greater than those of
the Company. The Company currently has a negligible portion of the markets.

      The wound care industry is new, highly fragmented and rapidly growing as
the population of elderly and infirm continues to demonstrate record growth. The
last two years have shown marked changes in the industry as the number of supply
companies has increased substantially, managed care is becoming a driving force
in the market place and reimbursement is being decreased.

      DermaRx provides cost-effective and efficacious products, unique delivery
systems, a synergistically designed product line. While the Company's small size
offers distinct advantages in terms of product development and cost management,
it has limitations for distribution.

      The top selling over-the-counter diaper rash ointments fall into three
basic categories: zinc oxide-based products such as Desitin Diaper Rash Ointment
(Pfizer, Inc.), Diaparene Medicated Cream (L & F Personal Products, Inc.),
petroleum-based products such as Vaseline Petroleum Jelly (Chesebrough-Ponds,
Inc.), and vitamin-based ointments such as A&D Ointment (Schering Corp.). These
products are primarily packaged in multi-dose tubes or jars. A relative
"newcomer" to the diaper rash market is a product called Dyprotex Diaper Rash
Pads (Blistex, Inc.).

      The diaper rash market is a mature market as the baby population has not
been growing, nor is it expected to in the future. Increased demand for diaper
rash products is the result of the use of new antibiotics and the introduction
of certain foods, both of which may cause diarrhea


                                       7
<PAGE>

and result in diaper rash. As a mature industry, the market is dominated by
three products which are manufactured by very large, well established
pharmaceutical companies.

      (5) Sources and availability of raw materials and the names of principal
suppliers:

      The Company does not maintain manufacturing facilities and it contracts
for the production and packaging of all its products. BottomBetter(TM),
DermaMend(TM) Barrier, GeriMend(TM) Skin Care Therapy, and DermaMend(TM)
Cleanser and the hemorrhoid cream are currently blended by unaffiliated contract
manufacturers. DermaMend(TM) Foam is manufactured by a separate, unaffiliated
polyurethane foam manufacturer. The foam is shipped to Denver where it is
packaged, sterilized, tested and stored for shipment. All the products are
inventoried in Denver.

      The Company's products utilize readily available components. There are
numerous laboratories and production facilities with the capability of producing
the Company's products to the standards required by the FDA. Given availability
of other suppliers, the Company does not believe that the loss of one or more of
its suppliers would have a major impact on its business, however, down time
could result from a change in contract manufacturers.

      (6) Dependence on one or a few major customers:

      Not applicable.

      (7) Patents, trademarks, licenses, franchises, concessions, royalty
agreements or labor contracts, including duration:

      The Company currently holds the following patents:

            Vocal Feedback Device, issued December 10, 1986 and European patent
            was granted in August, 1992

            Eradication And Treatment of Diaper Dermatitis And Other Related
            Skin Disorders (BottomBetter(TM) and DermaMend(TM)), issued May,
            1992

            Skin Tear Medicament and Method of Use (GeriMend Skin Tear
            Therapy(TM)), issued July, 1996

            Wound Cleanser and Method of Use (DermaMend(TM) Cleanser), issued
            July, 1996

            Wound Filler and Method of Manufacture (DermaMend(TM) Foam Cavity),
            issued November, 1996

            Hemorrhoid Cream - allowed June 1999

      The Company has applied for patents on DermaMend(TM) Gel, DermaMend(TM)
Foam (square). There is no assurance that these applications will be allowed.


                                       8
<PAGE>

            BottomBetter(TM), DermaMend(TM) and GeriMend are registered trade
names of the Company.

      All formulations used by the Company are considered proprietary.

      (8) Need for any government approval of principal products or services. If
government approval is necessary and the small business issuer has not yet
received that approval, discuss the status of the approval within the government
approval process:

      Discussed above.

      (9) Effect of existing or probable government regulations on the business:

      The manufacture, distribution and advertising claims of the Company's
products are subject to regulation by numerous federal and state governmental
agencies. In the United States, the Food and Drug Administration (FDA) is
responsible for enforcement of the Federal Food, Drug and Cosmetic Act (the "FDC
Act") which regulates drugs and devices manufactured and distributed in
interstate commerce. The Company's products are either drugs or medical devices
regulated under the FDA Act. The Federal Trade Commission (FTC) administers the
Federal Trade Commission Act (the "FTC Act") which regulates the advertising of
products including drugs and devices.

      In addition to the foregoing requirements, there are other requirements of
state, local and foreign law which may apply to the manufacture and marketing of
the Company's products. The FDA also has the authority, among other things, to
conduct detailed inspection of manufacturing facilities, establish "good
manufacturing practices" which must be followed in the manufacturing of medical
products, require periodic reporting of product defects, and prohibit the
exportation of products that do not comply with the law and promulgate
performance standards.

      All products designed for use on or in the human body and which have
characteristics that do not require prescription dispensing (drugs not safe for
use except under professional supervision) are considered to be over-the-counter
(OTC) drugs. The Company's wound care products are classified as OTC drugs.

      Two of the Company's wound care products will be marketed as OTC skin
protectant products. Skin protectant products are the subject of an ongoing FDA
rulemaking procedure which will result in the issuance of a final regulation
specifying those active ingredients which are permitted in, and designating
labeling requirements for, such products. Preliminary Monographs and Tentative
Monographs were issued by the FDA in 1978 and 1981, respectively. It is
currently impossible to predict when the FDA will promulgate a final regulation,
what the final regulation will provide or how a final regulation (monograph)
will affect the Company's products. The Company believes that its products have
been formulated and labeled in accordance with the proposals outlined in the
Preliminary and Tentative Monographs. It is the Company's intention to
manufacture and label two of its products pursuant to the FDA's Final Monograph
relative to "skin protectants" which could eventually require a formulation
and/or


                                       9
<PAGE>

labeling change. Four products, DermaMend(TM) Foam, DermaMend(TM) Island
Dressing, DermaMend Gel and DermaMend(TM) Hydrogel Gauze Dressing will not be
marketed in compliance with published monographs but rather have received FDA
510(k) marketing approval.

      (10) Estimate of the amount spent during each of the last two fiscal years
on research and development activities, and if applicable the extent to which
the cost of such activities are borne directly by customer:

                                 1997           $15,000
                                 1998           $30,000

      The extent to which the cost of such activities are borne directly by
customers: Not Applicable.

      (11) Costs and effects of compliance with environmental laws (federal,
state and local):

      Not applicable.

      (12) Number of total employees and number of full time employee:

      The Company currently has no full-time employees.

ITEM 2. DESCRIPTION OF PROPERTY.

      The Company owns no real estate and is not obligated on any real estate
lease.

ITEM 3. LEGAL PROCEEDINGS.

In April 1999, the Company filed a lawsuit against Gerit D. Mulder, former
officer and director and Lee Booras, former Business Manager seeking damages
based on breach of duty among other things.

      The Company is not a party to any other pending legal proceeding, nor is
its property the subject of any pending legal proceeding. Further, the Company
is not aware of any proceeding that a governmental authority is contemplating.
Additionally, the Company is not aware of any material proceeding to which any
director, officer or affiliate of the Company, any owner of record or
beneficially of more than 5% of any class of voting securities of the Company,
or security holder is a party adverse to the Company or has a material interest
adverse to the Company.

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

      None


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<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

      (a) Market information:

      The Common Stock is traded publicly in the over-the-counter market on the
NASD electronic bulletin board and listed in what is referred to as the "pink
sheets."

      The following table sets forth the range of high and low bid quotations of
the Common Stock (as reported by the over-the-counter market on the NASD
electronic bulletin board) and representative market-makers making a market in
the Company's securities for each fiscal quarter within its two most recent
fiscal years. These quotations reflect inter-dealer prices, without retail
markups, mark-downs or commissions, and may not necessarily represent actual
transactions. There is a limited public trading market with respect to the
Company's securities.

================================================================================
Fiscal Quarter Ending:                                                Bid
----------------------                                                ---
--------------------------------------------------------------------------------
Fiscal 1998                                                     High         Low
-----------                                                     ----         ---
--------------------------------------------------------------------------------
May 1998                                                        .32          .04
--------------------------------------------------------------------------------
August 1998                                                     .34          .02
--------------------------------------------------------------------------------
November 1998                                                   .35          .02
--------------------------------------------------------------------------------
February 1999                                                   .03          .01
================================================================================

      There were 233 holders of record of the Common Stock, including those
shares held in "street name" as of February 28,1999. As of May 30, 1999, the
closing "bid" and "asked" prices were $0.7 and $0.11 per share respectively.

      The Company did not declare or pay dividends during Fiscal 1998. The
Company intends to invest earnings, if any, in its business, and to fund
operations and development.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

      Results of Operations - Fiscal 1998 Compared to Fiscal 1997

      Due to the unexpected and untimely departure of Gerit Mulder, former
President and Director of the Company's wholly owned subsidiary, the Company was
forced to suspend its wound care consulting business. Since the consulting
business was the primary source of revenues, revenue goals were not met during
fiscal 1998. The Company believes that Mr. Mulder has breached his fiduciary
duties and has utilized programs and customers developed by


                                       11
<PAGE>

and for the Company without the Company's authorization. Accordingly, a lawsuit
has been initiated against Mr. Mulder.

      During Fiscal 1998, Maryanne Carroll resigned as President and Director of
the Company, and Pedro Valdez and Gerit Mulder resigned as Directors.

      The Company's primary goals for fiscal 1999 are: 1) to obtain capital to
establish an internet business to sell the Company's products; 2) to sell
international marketing rights to its products; and 3) to find a merger partner.

      Subsequent Events

      On April 5, 1999, the Company filed a lawsuit against Gerit Mulder, former
officer and director and against Lee Booras, former business manager for breach
of fiduciary duty and improper use of corporate assets.

      On June 2, 1999, the Company received notice that a patent had been
allowed on the hemorrhoid cream.

      Liquidity and Capital Resources

List any of the following that are applicable:

      a)    Any known trends, events or uncertainties that have or are
            reasonably likely to have a material impact on the Company's
            short-term or long-term liquidity:

      The ability to secure additional working capital and the ability to obtain
successful distribution for its products are reasonably likely to have a
material impact on the Company's short-term and long-term liquidity.

      b)    Internal and external sources of liquidity:

      The Company does not expect a positive cash flow until additional working
capital is obtained.

      c)    Any material commitments for capital expenditures and the expected
            sources of funds for such expenditures:

      None.

      d)    Any known trends, events or uncertainties that have or are
            reasonably likely to have a material impact on the Company's net
            sales or revenues or income from continuing operations:


                                       12
<PAGE>

      Successful distribution and product acceptance by health care providers
are events or uncertainties that are reasonably likely to have a material impact
on the Company's net sales or revenues or income from continuing operations.

      e)    Any significant elements of income or loss that do not arise from
            the Company's continuing operations:

      None.

      f)    The causes for any material changes from period to period in one or
            more line items of the Company's financial statements:

      Not applicable.

      g)    Any seasonal aspect that had a material effect on the financial
            condition or results of operation:

      None.

ITEM 7. FINANCIAL STATEMENTS.

      The financial statements of the Company are attached hereto as pages F-2
through F-14.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

      None.

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.

      The executive officers, directors, and significant employees of the
Company and their ages, are as follows:

--------------------------------------------------------------------------------
Name                 Age    Position                             Director Since
----                 ---    --------                             --------------
--------------------------------------------------------------------------------
Thomas Dean          53     Director                             1995
--------------------------------------------------------------------------------
Peter Martin         45     Director                             1996
--------------------------------------------------------------------------------

      The directors of the Company are elected to serve until the next annual
meeting of shareholders and until their respective successors are elected and
qualify.

Thomas Dean. Mr. Dean was elected to the Board of Directors in 1995 to fill a
vacancy. Mr. Dean is President and founder of Innovative Research Associates,
Inc., a financial consulting


                                       13
<PAGE>

firm formed in 1992, and has 26 years experience as a retail/institutional
broker with investment banking firms, including Kidder Peabody (1967-76); L.F.
Rothschild (1976-82); Advest Co. (1982-86); Ladenberg, Thalmann & Co. (1986-90)
and Cowen & Co. (1990).

Peter Martin. On April 4, 1996 Peter Martin was appointed to serve as a director
of the Company until the next annual meeting of shareholders of the Company, at
which time he was elected to the board. Mr. Martin is an independent investment
banker and has been since 1990. Prior to 1990, Mr. Martin worked as a Vice
President for National Westminster Bank USA. Mr. Martin received a J.D. from
Fordham Law School in 1980, an M.B.A. in finance from Columbia Business School
in 1973 and a B.A. in English from Fordham College in 1971.

Disclose if any legal proceedings during the past five years occurred that are
material to evaluating the ability of any directors or significant employees.
E.g.,

      a)    Any bankruptcy petition filed by or against any business of which
            such person was a general partner or executive officer either at the
            time of the bankruptcy or w/in two years prior to that time; None.

      b)    Any conviction in a criminal proceeding or being subject to a
            pending criminal proceeding (excluding traffic violations and other
            minor offenses); None.

      c)    Being subject to any order, judgment, or decree, not subsequently
            reversed, suspended or vacated, of any court permanently or
            temporarily enjoining, barring, suspending or otherwise limiting his
            involvement in any type of business, securities or banking
            activities; None.

      d)    Being found by a court of competent jurisdiction (in a civil
            action), the Commission or the Commodity Futures Trading Commission
            to have violated a federal or state securities or commodities law,
            and the judgment has not been reversed, suspended or vacated. None.

ITEM 10. EXECUTIVE COMPENSATION.

      The following chart sets forth all compensation awarded to, earned by or
paid to the Company's chief executive officer and all other officers of the
Company during the last three fiscal years.

                             SUMMARY COMPENSATION TABLE

Name                       Annual Compensation      Long Term Compensation
----                       -------------------      ----------------------

                           Fiscal     Salary   Restricted Stock Awards (Options)
                           Year          $                  (#)
                           ----          -                  ---

(Former Treasurer,         1996        8,500             (125,000)
Secretary)                 1997          -0-              (25,000)
                           1998          -0-


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<PAGE>

Maryanne Carroll           1996      100,000              (50,000(1))
Former President           1997      100,000             (376,118(2))
                           1998      100,000             (250,000)
                                     (deferred)

Gerit Mulder               1996      156,000               97,500(3)
V.P. Business Development
President of Integrated    1997      156,000
Wound Management           1998       96,200

          Incentive Stock Option Plan and Executive Stock Option Plan:

      The Board of Directors of the Company adopted an Incentive Stock Option
Plan (the "ISOP") and an Executive Stock Option Plan (the "ESOP") (collectively
referred to herein as the "Plans") which provide that the administrators of the
Plans may grant to employees in the case of the ISOP and employees, directors,
and consultants in the case of ESOP, as determined by the administrators, an
option to purchase shares of Common Stock at the fair market value of said
shares on the date the option is granted. A maximum of 111,111 shares of Common
Stock have been reserved for issuance under the ISOP and 47,619 shares of Common
Stock have been reserved for issuance under the ESOP. The options granted will
be exercisable for a period of up to five years from the date they are granted.
Under the Plans, options may be granted only during the ten year period from the
date of adoption of the Plans. The following tables summarize the activity in
options under the stock option plan:

                                                     Shares          Price Range
                                                     ------          -----------
ISOP PLAN
---------
Outstanding at February 28, 1993                     31,000             $ 2.50
Canceled                                             31,000             $ 2.50
Outstanding at February 28, 1994                          0                 --
Outstanding at February 28, 1995                          0                 --

                                                     Shares          Price Range
                                                     ------          -----------
ESOP PLAN
---------
Outstanding at February 28, 1993                     34,920      $2.36 - $2.76
Canceled                                             34,920      $2.36 - $2.76
Outstanding at February 28, 1994                          0                 --
Outstanding at February 28, 1995                          0                 --

--------
(1) Options earned as consultant; April through September 1994 - 50,000. Options
earned as President; October through February - 104,167.
(2) Options earned as President are 351,118. Options earned as a director are
25,000.
(3) Includes 67,500 shares earned as a consultant prior to joining the Company
as Vice President and 30,000 shares awarded pursuant to his employment
agreement.


                                       15
<PAGE>

                     Options/SAR Grants in Last Fiscal Year
                                Individual Grants

                 Number of       % of Total
                 Securities      Options/SARs
                 Underlying      Granted to     Exercise or
                 Options/SARs    Employees in   Base Price      Exp.
Name             Granted         Fiscal 1995    ($/sh)          Date
----             -------         -----------    ------          ----

             Aggregated Option/SAR Exercises in Last Fiscal Year
                        and FY-end Options/SAR Values

                                                            Number of
                     Shares Acquired    Value               Unexercised Options
Name                 on Exercise (#)    Realized ($)        (All Exercisable)
----                 ---------------    ------------        -----------------

              Long-Term Incentive Plans-Awards in Last Fiscal Year

      None.

                           Reissuance of Stock Options

      Richard Melnick canceled options to purchase 100,000 shares of common
stock of the Company and the Company subsequently granted an option to purchase
100,000 shares of common stock of the Company to Tom Dean.

                           Compensation of Directors.

      Directors of the Company receive annual compensation of options to
purchase 25,000 shares of stock at $.65 per share.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The following table sets forth certain information as of February 28,
1997, with respect to (i) each person known to the Company who beneficially owns
more than five percent of the outstanding shares of Common Stock, (ii) each
director of the Company, and (iii) all officers and directors of the Company as
a group, showing in each case, the name (and address, if required),


                                       16
<PAGE>

amount and nature of shares beneficially owned, and the percentage of the class
owned by each such beneficial owner.

Name and Address of Beneficial Owner   Beneficial Ownership  Percentage of Class
------------------------------------   --------------------  -------------------

Ms. Maryanne Carroll                         920,298(1)              9.1%
284 Jackson Street
Denver, CO  80206

Mr. Pedro Valdez                             160,000(2)              1.6%
252 Griggs Avenue
Teaneck, NJ  07666

Mr. Tom Dean                                 200,000(3)              2.0%
c/o Innovative Research
Assoc., Inc.
520 Madison Avenue
New York, NY  10022

David Russell                              1,300,000                13.0%
45 Park Place South, Suite 103
Morristown, NJ  07960

Gerit Mulder                                 147,500(4)              1.5%
4720 E. Princeton Ave
Englewood, CO  80110

Peter Martin                                 262,500(5)              2.6%
48 Ogden Place
Dobbs Ferry, NY 10522

All Officers and Directors                 1,300,298                16.9%
as a Group (five persons)                    (1)(2)
                                             (3)(4)
                                              (5)

      (1) Includes options to purchase 401,118 shares of Common Stock
exercisable at $.50 per share and 50,000 shares at $.625 per share granted to
Ms. Carroll.

      (2) Includes an option to purchase 50,000 shares of Common Stock
exercisable at $.625 per share.

      (3) Includes an option to purchase 100,000 shares of Common Stock
exercisable at $.50 per share issued to Innovative Research Associates, Inc., a
company controlled by Mr. Tom Dean and 50,000 shares at $.625 per share.


                                       17
<PAGE>

      (4) Includes an option to purchase 50,000 shares of Common Stock
exercisable at $.50 per share.

      (5) Includes warrants and options to purchase 122,500 shares of Common
Stock exercisable at $.625 per share.

      The Company is not aware of any arrangements the operation of which may at
a subsequent date result in a change of control of the Company.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

1.    As a term of Dr. Mulder's employment contract, he is to receive one option
      per year to purchase 50,000 shares of common stock at $.50 per share any
      time before December 31, 1999, for each year of the agreement, i.e.,
      November 1, 1995 to November 1, 1997, (100,000 total shares). Options
      shall be considered earned on the last day of each contract year.

2.    Maryanne Carroll received shares for her participation in the debt
      conversion in which she converted $54,590.00 of the Company's debt in
      exchange for 109,180 shares at $.50 per share.

                                     PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

(a) 1. Financial Statements

            Independent Auditor's Report.

            Consolidated Balance Sheet as of February 28, 1997.

            Consolidated Statements of Operations for the years ended February
            28, 1997 and February 28, 1996.

            Consolidated Statements of Common Stockholders' Equity (Net Capital
            Deficiency) for the years ended February 28, 1997 and February 28,
            1996 (as restated).

            Consolidated Statements of Cash Flows for the years ended February
            28, 1997 and February 28, 1996.

            Notes to Consolidated Financial Statements.

      (a) 2. Financial Statement Schedules


                                       18
<PAGE>

            Schedule IV - Indebtedness of and to Related Parties

            Schedule IX - Short Term Borrowings

      (a) 3. Other Exhibits

            3(a). Certificate of Incorporation of the Company, as amended
                  (incorporated by reference to Exhibit 3.1 to the Company's
                  Registration Statement No. 33-15607 on Form S-18 under the Act
                  (the "S-18 Registration Statement")).

            3(b)  By-Laws of the Company (incorporated by reference to Exhibit
                  3.2 to the S-18 Registration Statement).

            3(c)  Vocal Feedback and Associates Apparatus Information Disclosure
                  Statement filed in the U.S. Patent and Trademark Office on
                  October 11, 1983, Notice or Recordation of Assignment of
                  Document, Amendment dated January 21, 1985, Notice of Appeals
                  dated June 1985; Amendment dated July 22, 1985 and
                  Continuation-in-Part Application filed on November 14, 1985;
                  Notice of Allowance and Issue Fee Due dated December 10, 1986
                  (incorporated by reference to Exhibit 10.12 to the S-18
                  Registration Statement).

            10(b) Sublease Agreement.

            10(e) Securities Registration Agreement used in the Company's March
                  1993 private placement (incorporated by reference to Exhibit
                  10(o) to the 1993 10-KSB).

            10(f) Settlement Agreement dated March 29, 1994 among M. Sue
                  Benford, the Company, other others (incorporated by reference
                  to exhibit 10(g) to the 1994 10-KSB).

            14    Notice of Grant of European Patent (incorporated by reference
                  to Exhibit 14 to the Company's Form 10-K for its fiscal year
                  ended February 28, 1991).

(b) Reports on Form 8-K

      No reports on Form 8-K were filed by the Company during its fiscal year
ended February 28, 1998.


                                       19
<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.

                                            DermaRx Corporation


                                            By:/s/ Peter Martin
                                               ------------------------
                                               Peter Martin, Director

                                            Date: June 15, 1999
                                                 ----------------------

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


                                            By:/s/ Peter Martin
                                               ------------------------
                                               Peter Martin, Director


                                       20
<PAGE>

                  SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH
                 REPORTS FILED PURSUANT TO SECTION 15(d) OF THE
                      EXCHANGE ACT BY NON-REPORTING ISSUERS

      No annual report to security holders covering the registrant's last fiscal
year has been sent to security holders. No proxy statement, form of proxy or
other proxy soliciting material has been sent to more than ten of the
registrant's security holders with respect to any annual or other meeting of
security holders material has been sent to security holders. No such report or
proxy material is to be furnished to security holders subsequent to the filing
of the annual report on this Form.


                                       21
<PAGE>

                                     DERMARx
                                  BALANCE SHEET
                                FEBRUARY 28, 1999

<TABLE>
<CAPTION>
                                     ASSETS
Current assets:
<S>                                                                           <C>
     Cash and cash equivalent                                                 $        22
     Accounts receivable - trade                                                    5,459
     Inventory - Finished goods                                                    39,899
     Other Receivables                                                             31,520
                                                                              -----------
          Total current assets                                                     76,900
                                                                              -----------

Property and equipment:
         Equipment, net of accumulated depreciation of $17,357                      2,948
                                                                              -----------

Other assets:
     Patents, net of accumulated amortization of $57,598                           93,093
                                                                              -----------

         Total Assets                                                         $   172,941
                                                                              ===========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Notes payable - net of discounts                                          $   175,950
    Notes payable - related party, net of discounts                                50,000
    Accrued interest - notes payable                                               17,601
    Accrued interest - notes payable, related party                                14,301
    Accounts payable and accrued expenses                                         171,797
                                                                              -----------
          Total current liabilities                                               429,649
                                                                              -----------

Common stockholders' equity:
     Common stock, $.05 par value: 12,000,000 shares authorized;
       9,999,019 shares issued and outstanding                                $   499,951
     Additional paid-in capital                                                 4,125,027
     Accumulated (deficit)                                                     (4,881,686)
                                                                              -----------

         Total Stock holders' Equity                                          ($  256,708)
                                                                              ===========

         Total Liabilities and Stockholder's Equity                           $   172,941
                                                                              ===========
</TABLE>

See accompanying Auditor's Report and notes to Financial Statement.


                                      F-2
<PAGE>

                                     DERMARx
                            STATEMENTS OF OPERATIONS

                                                       Years Ended February 28
                                                       1999               1998
                                                       ----               ----
Revenues:
     Sales, net discounts                          $   121,262      $   123,467
     Cost of Goods sold                                 18,252           43,484
                                                   -----------      -----------
     Gross profit                                      103,010           79,983

     General and Administrative                        279,428          427,269
                                                                    -----------
          Special Item (Note 12)                        98,465
          Research and Development                      30,000           15,000
                                                   -----------      -----------
                                                       407,893
                                                   -----------
(Loss) from operations                                (304,883)        (362,286)

Other income (expense)
     Interest income                                        48              430
     Interest expense                                  (25,605)         (30,309)
                                                   -----------      -----------

Net (loss) before extraordinary item               $  (330,440)     $  (392,163)
                                                   -----------      -----------

Extraordinary item:
      Gain on Extinguishment of debt                        --          226,904
                                                   -----------

Net (loss)                                         ($  330,440)     ($  165,259)
                                                   ===========      ===========

Income (loss) per common share:
     (Loss) before extraordinary gain              ($     0.03)     ($     0.05)
     Extraordinary Gain                                     --             0.03
                                                   -----------      -----------
Net (loss) per common share                        $      (.03)     $      (.02)
                                                   -----------      -----------

Weighted average shares outstanding                $ 9,578,349      $ 7,586,138
                                                   ===========      ===========

See accompanying Auditor's Report and notes to Financial Statement.


                                      F-3
<PAGE>

                                     DERMARx
                    STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED FEBRUARY 28, 1999 AND 1998

<TABLE>
<CAPTION>
                                         Common Stock
                                         ------------
                                              Additional
                                     Par        Paid-in    Accumulated
                       Shares       Value       Capital      Deficit         Total
                       ------       -----       -------      -------         -----
<S>                    <C>          <C>        <C>          <C>             <C>
Balance -
February 28, 1997      7,127,363    356,368    3,989,495    (4,385,987)     (40,124)
Shares issued in
private placements     1,025,000     51,250       68,450            --      119,700
Shares issued  in
connection with debt
obligations              523,800     26,190           --            --       26,190

Net (loss)                    --         --           --      (165,259)    (165,259)
                       ---------   --------   ----------   -----------    ---------

Balance -
February 28, 1998      8,676,163    433,808    4,057,945    (4,551,246)     (59,493)
Shares issued in
private placements       618,000     30,900       30,900            --       61,800
Shares issued in
Conversion of Notes
Payable                  186,666      9,333        9,333            --       18,666
Shares issued  for
services and accrued
expenses                 518,190     25,910       26,849            --       52,759

Net (loss)                    --         --           --      (330,440)    (330,440)
                       ---------   --------   ----------   -----------    ---------
Balance -
February 28, 1999      9,999,019   $499,951   $4,125,027   ($4,881,686)   ($256,708)
                       =========   ========   ==========   ===========    =========
</TABLE>

See accompanying Auditor's Report and notes to Financial Statement.


                                      F-4
<PAGE>

                        DERMARx STATEMENTS OF CASH FLOWS
                     YEARS ENDED FEBRUARY 28, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                                  1999         1998
                                                                               ---------    ---------
<S>                                                                            <C>          <C>
Cash flows from operating activities:
     Net (loss)                                                                $(330,440)   $(165,259)
     Adjustments to reconcile net (loss) to net cash (used) by
          operating activities:
          Gain of extinguishment of debt                                              --     (226,904)
          Expenses paid by issuance of stock                                      55,224           --
          Discount on notes amortized                                             13,095       13,939
          Depreciation and amortization                                           13,594       14,509
     Changes in assets and liabilities:
           (Increase) Decrease in accounts receivable                             11,341      (10,064)
           (Increase) Decrease in inventory                                       89,217       (3,404)
           (Increase) Decrease in prepaid expenses                                 1,487       12,807
           (Increase) Decrease in other assets                                   (28,000)       3,286
           Increase (Decrease) in accounts payable, accrued interest
           and accrued expenses                                                   42,582      119,496
                                                                               ---------    ---------

     Net cash (used) by operating activities                                    (131,900)    (245,205)
                                                                               ---------    ---------

Cash flows from financing activities:
     Proceeds from issuance of common stock                                       62,000      119,700
     Proceeds from debt obligations                                               10,000      157,950
     Repayment of debt obligations                                               (11,000)     (12,500)
                                                                               ---------    ---------
Net cash provided by financing activities                                         61,000      265,150
                                                                               ---------    ---------

Net increase (decrease) in cash and cash equivalents                             (70,900)      19,945

Cash and cash equivalents, beginning of year                                      70,922       50,977
                                                                               ---------    ---------

Cash and cash equivalents, end of year                                         $      22    $  70,922
                                                                               =========    =========

Supplemental disclosures of cash flow information:
     Cash paid during the year for:
          Interest                                                             $     324           --
                                                                               =========    =========
</TABLE>

See accompanying Auditor's Report and notes to Financial Statement.


                                      F-5
<PAGE>

                                     DERMARx
                          NOTES TO FINANCIAL STATEMENTS
                           FEBRUARY 28, 1999 AND 1998

Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Description of Business:

      The Company was organized on June 4, 1985 under the name Vocaltech, Inc.
      On December 11, 1992 the Company changed its name to Innotek, Inc. and on
      January 24, 1995 again changed its name to DermaRx, Inc. The Company is
      engaged in the development and sale of proprietary, non-prescription wound
      and skin care products to retailers, hospitals, nursing homes and home
      health care.

      Revenue Recognition:

      The Company recognizes sales and the related costs of sales upon shipment
      of goods.

      Depreciation and Amortization:

      Property and equipment are reflected at cost.

      Property and equipment are being depreciated over estimated useful lives
      of five years, principally using the straight-line method for both book
      and tax reporting purposes. Patents are being amortized using the
      straight-line method over a period of ten to seventeen years.

      (Loss) Per Share:

      (Loss) per share is computed on the basis of the weighted-average number
      of common shares outstanding during the periods. The weighted-average
      number of shares of common stock does not include common equivalent shares
      for the assumed exercise of the common stock options and warrants, as the
      effect would be antidilutive.

      Cash and Cash Equivalents:

      For purposes of the statement of cash flows, the Company considers all
      highly liquid investments purchased with an original maturity of three
      months or less to be cash equivalents.


                                      F-6
<PAGE>

                                     DERMARx
                          NOTES TO FINANCIAL STATEMENTS
                           FEBRUARY 28, 1999 AND 1998

      Use of Estimates:

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

      Inventory:

      Inventory is valued at the lower of cost or market, with cost determined
      by the first in, first out (FIFO) method.

      New Accounting Standards:

      In 1998, we adopted Statement of Financial Accounting Standards ("FAS")
      No. 130, "Reporting Comprehensive Income: FAS No. 130 requires that the
      components and total amounts of comprehensive income be displayed in the
      financial statements beginning in 1998. Comprehensive income includes net
      income and all changes in equity during a period that arise from nonowner
      sources, such as foreign currency items and unrealized gains and losses on
      certain investments in equity securities. We do not have any components of
      comprehensive income other than net income.

Note 2 - OPERATING RESULTS AND MANAGEMENT'S PLANS

      The Company has had recurring operating losses, has been in default of
      certain debt agreements and has had deficiencies in working capital in the
      past which raise doubt about the Company's ability to continue as a going
      concern.

      The Company has raised $1,432,650 over the past four fiscal years net of
      costs in private placements and converted debt and liabilities to common
      stock. The Company is in the process of developing new wound care products
      and services.

      The Company is also in the process of raising capital through a private
      placement.

Note 3 - LONG TERM DEBT

      During the year ended February 28, 1995, the Company raised $315,500 in a
      private placement by issuance of three year notes which bear interest at a
      rate of 6% per annum. In connection with the issuance of the notes, the
      Company issued 631,000 shares of its common stock to the noteholders.
      During the year ended February 28, 1996, holders of $230,500 of the notes
      plus interest accrued thereon converted to common stock of the Company. Of
      this amount $140,500 was converted by officers and directors of the
      Company. During the year ended February 28, 1999, holders of $10,000 of
      the notes,


                                      F-7
<PAGE>

                                     DERMARx
                          NOTES TO FINANCIAL STATEMENTS
                           FEBRUARY 28, 1999 AND 1998

      plus accrued interest thereon, converted into 126,666 shares of common
      stock of the Company.

      During the year ended February 28, 1998, the Company raised $27,000
      through the issuance of demand notes, which bear interest at the rate of
      8% per annum.

      During the year ended February 28, 1999, $11,000 of these notes were paid
      and $6,000 of notes were converted into 60,000 shares of common stock of
      the Company.

      During the year ended February 28, 1998, the Company raised $130,950 in a
      private placement by issuance of one year notes which bear interest at a
      rate of 5% per annum. In connection with the issuance of the notes, the
      Company issued 523,800 shares of its common stock to the note holders.

      Aggregate maturities of notes payable are as follows:

                                              Fiscal Year                Amount
                                              -----------                ------
                                              1999                    $225,950
                                              Less: Current Portion   (225,950)
                                                                      --------
                                                                           $-0-
                                                                      ========

Note 4 - INCOME TAXES

      The Company has changed its method of accounting for income taxes to
      comply with the provisions of SFAS No. 109, Accounting for Income Taxes.
      This accounting change had no significant impact on the Company's
      financial statements.

      As of February 28, 1999, the Company has net operating loss carryforwards
      of approximately $4,550,000 for both financial statement and income tax
      purposes which expire in the years 2001 through 2014, and unused research
      and development credits of $21,000 which expire in 2001. The Company has
      provided a full valuation reserve against the benefit of the net operating
      loss and unused R&D Credits due to uncertainty regarding its ability to
      use them.

Note 5 - REDEEMABLE CONVERTIBLE PREFERRED STOCK

      The Company has authorized 800 shares of $.10 par value Series A 14%
      convertible preferred stock. The holders of the Series A preferred stock
      are entitled to 15 votes per share on all matters submitted to a vote of
      the common shareholders and are entitled in liquidation to share price
      plus all accrued and unpaid dividends. No preferred stock shares were
      outstanding as of February 28, 1999.


                                      F-8
<PAGE>

                                     DERMARx
                          NOTES TO FINANCIAL STATEMENTS
                           FEBRUARY 28, 1999 AND 1998

Note 6 - COMMON STOCK

      During the year ended February 28, 1998, the Company issued 1,025,000
      shares of common stock of the Company in connection with a private
      placement with net proceeds of $132,500.

      During the year ended February 28, 1998, the Company issued 523,800 shares
      of common stock of the Company in connection with the receipt of $130,950
      of financing.

      During the year ended February 28, 1999, the Company issued 618,000 shares
      of common stock for net proceeds of $62,000.

      During the year ended February 28, 1999, the Company issued 518,190 shares
      of common stock for service and conversion of accrued expenses.

Note 7 - STOCK WARRANTS

      In July 1990, the Company issued warrants to purchase 19,048 shares of
      common stock of the Company at $3.15 per share that expired August 1,
      1994. These warrants were issued along with convertible debentures. During
      the fiscal year ended February 28, 1992 the debentures were in default. As
      consideration to waive the default, the Company extended the date of
      expiration for five years to August 1, 1999.

Note 8 - COMMITMENTS

      None.

Note 9 - MAJOR CUSTOMERS

      For the years ended February 28, 1999 and 1998 there were three and three
      customers, respectively, who accounted for more than ten percent of the
      Company's sales of its non-prescription products. The Company is not
      dependent, however, and believes the loss of one of its customers would
      not have a material effect on the Company's sales.

Note 10 - MANUFACTURING

      For 1999 and 1998 the Company is dependent on three suppliers of its
      non-prescription products. The Company has identified additional suppliers
      to serve as back-up suppliers.


                                      F-9
<PAGE>

                                     DERMARx
                          NOTES TO FINANCIAL STATEMENTS
                           FEBRUARY 28, 1999 AND 1998

Note 11 - EXTRAORDINARY ITEM

      In May 1997, the Company negotiated a discount on a liability (royalty and
      security agreement) from $226,094 to $10,000. Payment of $10,000 was made
      in May 1997.

      During the year ended February 20, 1999 the Company wrote down its
      inventory reflecting its decline in value by $98,465.

                                      F-10
<PAGE>

                                 Paul C Roberts
                          Certified Public Accountant
                                800 Bedford Road
                            Pleasantville, NY 10570

                          INDEPENDENT AUDITOR'S REPORT

To the Board of Directors and Shareholders
DermaRX, Inc.

      I have audited the accompanying balance sheet of DermaRX, Inc. at February
28, 1999 and the related statements of operations, changes in common
stockholders' equity and cash flows for each of the two years in the period
ended February 28, 1999. These financial statements are the responsibility of
the Company's management. My responsibility is to express an opinion on these
financial statements based on my audits.

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

      In my opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DermaRX, Inc. at February
28, 1999 and the results of its operations and its cash flows for each of the
two years in the period ended February 28, 1999 in conformity with generally
accepted accounting principles.

      The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's past default on certain loan agreements,
recurring losses, and past deficiencies in working capital raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2 to the financial
statements. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.


                                                    /s/ Paul C. Roberts

                                                    PAUL C. ROBERTS
                                                    Certified Public Accountant

Pleasantville, New York
June 14, 1999