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, 1998

                                       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.)

           284 Jackson Street
            Denver, Colorado                             80206
(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: $123,0000.

      As of April 15, 1998, the aggregate market value of the 7,718,769 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 $1,543,753.00.

      The number of shares outstanding of the registrant's common stock, par
value $.05, as of February 28, 1998 was 7,718,769 shares.


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                                     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, the 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), 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 the patents will be allowed.


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<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 shares 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.

      In November, 1997 development was completed on the Company's new
hemorrhoidal cream, HemorRx(TM). A clinical evaluation of the product began at
three separate sites in March, 1998. The name HemorRx(TM) has been trademarked
and a patent is pending.

      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, in conjunction with its wholly owned subsidiary, Integrated
Wound Management (IWM), is a full service comprehensive wound care business with
products that treat wounds for both the consumer and the health care provider
markets. Additionally, through its subsidiary, clinical consulting services for
all segments of the wound care industry are offered. 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 services, wound clinic
development and educational training for nurses and physicians, and the
customized protocols for wound care clinics, are based on the highly successful
courses and materials previously developed for and offered through the Wound
Healing Institute (WHI) in Denver, Colorado. The Company also owns the patent to
a proprietary 


                                       4
<PAGE>

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 services, 3) to market, in
conjunction with a marketing partner, a full line of "value-added," clinically
proven, over-the-counter treatments for the management of chronic wounds, and 4)
to become a leading provider of educational and management services to the
hospitals, nursing homes, home health and physical therapists that provide wound
treatments.

            (1)   Principal products or services:

            The Company's comprehensive wound program of both products and
services 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 treating diaper rash. It is packaged in convenient
single-dose, disposable containers (18 per package).

      b. HemorRx(TM): HemorRx(TM) is a topical cream 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. HemorRx(TM) is packaged in one ounce tubes and is being clinically
evaluated at three sites in Denver, Colorado.

      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.
It is 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 may be beneficial to healing and which
help decrease skin contaminants which may contribute to 


                                       5
<PAGE>

infection or odor. DermaMend(TM) Cleanser is currently in compliance with all
FDA standards for ingredients and labeling as an OTC antimicrobial wound
cleanser. It is packaged in 12 ounce plastic bottles with trigger spray
dispensers.

      f. DermaMend(TM) Foam: DermaMend(TM) Foam is a second generation
hydrophilic polyurethane foam dressing which contains an odor repressing
ingredient. The 4" x 4" 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 510 (k) 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 510 (k) 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.

      k. 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.

      Services include:

      a. Wound Clinic Development: Complete program for setting up a wound
treatment facility, including protocols, policies and procedures, and training
of personnel.

      b. Wound Treatment Quality Audits: Complete program for annual audit of
wound treatment facilities records to determine treatment and cost
effectiveness.

      c. Treatment Outcomes: Data collection and treatment measurements for
wound care management.

            (2)   Distribution methods of the products or services:


                                       6
<PAGE>

      Wound Care Products. In order to achieve rapid market penetration, the
Company is actively seeking a marketing partner for private label of the DermaRx
wound care dressings. The Company does not employ a dedicated sales force for
the wound care products and is dependent upon independent distributors and
marketing partners. There is no assurance that a marketing partner will be found
or that the distributors will be successful in marketing the Company's products.
HemorRx(TM) and BottomBetter(TM) will be marketed via the internet.

            (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;
                  marketing partner being sought.

                  GeriMend Skin Care Therapy(TM) - patented; name trademarked;
                  available for shipment; marketing partner being sought.

                  DermaMend(TM) Cleanser - patented; available for shipment;
                  marketing partner being sought.

                  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. Private label
                  agreement with GeriCare Providers.

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

                  DermaMend(TM) Island Dressing - FDA 510(k) marketing approval
                  received in May, 1997; marketing partner being sought.

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

                  HemorRx(TM) Hemorrhoidal Cream - patent pending; clinical
                  evaluation to be completed in May 1998; anticipated that
                  product will be available in August 1998.

      Clinics and Educational Services. Programs developed and currently being
marketed by IWM. Wound clinic development and educational services will be
marketed via the IWM's dedicated sales force.


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<PAGE>

            (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 has become a driving force
in the market place and reimbursement is being decreased.

      DermaRx provides cost-effective and efficacious products, unique delivery
systems, and 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 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.

      The hemorrhoid treatment products market is a multi-billion dollar market.
Approximately 80% of all Americans between the ages of 20-50 periodically
experience hemorrhoid discomfort at some point in time. Over the age of 50, the
rate increases. There is no known cure for hemorrhoids and sufferers have
periodic episodes which provides the opportunity to build product brand loyalty.
The market is currently dominated by Preparation H, primarily because of very
strong name recognition.

            (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, DermaMend(TM) Cleanser
and HemorRx(TM) are currently blended by unaffiliated contract manufacturers.
DermaMend(TM) Foam is manufactured by a separate, 


                                       8
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unaffiliated polyurethane foam manufacturer. The foam is shipped to Denver where
it is packaged, sterilized, tested and stored for shipment. All 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

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

            BottomBetter(TM), DermaMend(TM), GeriMend(TM) and HemorRx(TM) 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
<PAGE>

            (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 labeling change. Four products, DermaMend(TM) Foam, DermaMend(TM) Island
Dressing, DermaMend Gel and DermMend(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:

                                 1996           $38,000
                                 1997           $15,000

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


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            (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 three 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.

      The Company is not a party to any 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.

                                     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.


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===================================================
Fiscal Quarter Ending:            Bid
---------------------------------------------------
Fiscal 1997                High           Low
---------------------------------------------------
May 1997                   .25           .50
---------------------------------------------------
August 1997                .25           .50
---------------------------------------------------
November 1997              .43           .21
---------------------------------------------------
February 1998              .04           .12
---------------------------------------------------

---------------------------------------------------
Fiscal 1996
---------------------------------------------------
May 1996                   .75           .56
---------------------------------------------------
August 1996                .69           .56
---------------------------------------------------
November 1996              .56           .50
---------------------------------------------------
February 1997              .53           .25
===================================================


      There were 231 holders of record of the Common Stock, including those
shares held in "street name" as of February 28,1998. As of April 15, 1998, the
closing "bid" and "asked" prices were $.17 and $.23 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

      Revenues increased from $36,000 to $123,000 primarily as the result of: 1)
the first order of the private labeled DermaMend(TM) Foam and 2) the first
consulting service contracts. Expenses decreased from $644,000 to $442,000
primarily because of a decrease in research and development activities and a
shift from direct marketing of the wound care product line to private label
marketing.

      Management plans for fiscal 1998 include launching HemorRx(TM), the new
hemorrhoid cream; completing a private financing for Integrated Wound Management
which will allow for additional staffing and more aggressive marketing efforts;
and continuing to seek private labeling partners for the wound care line.

      Due to the very positive test results on HemorRx(TM), its launch has
become the Company's primary focus. Forty five hemorrhoid patients are being
evaluated at three separate clinics in Denver, Colorado to further verify the
product's effectiveness. Darcy Communications, Inc. has been retained to develop
a public relations campaign and a market launch in the state of Colorado.
Outside of Colorado, the product will be sold over the internet and in an
informmercial.


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<PAGE>

      Contact Consult, Inc. of Vancouver, B.C. has been retained to raise
working capital for developing and marketing the wound care consulting services
of the Company's wholly owned subsidiary, Integrated Wound Management.

      Subsequent Events

      Twenty five thousand dollars of accrued payables was converted to equity.

      An additional sixty thousand dollars was raised as part of a Private
Offering dated 11/97.

      Clinical evaluations commenced in April 1998 on the Company's recently
developed topical hemorrhoidal cream. Forty-five patients are being evaluated at
three separate sites in Denver, Colorado.

      The public relations firm, Darcy Communications, was retained to assist
with the market launch of the hemorrhoid product and to develop a public
relations campaign for the Company.

      Integrated Wound Management entered into a contract with Sharp Grossmont
Hospital, San Diego, California to install a wound care clinic.

      Contract Consultants, a Canadian investment advisory firm, was retained to
secure working capital for Integrated Wound Management.

      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 private
label contracts are received, additional consulting business is developed and/or
HemorRx(TM) sales become substantial.

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

None.


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<PAGE>

      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:

      Successful distribution and product acceptance by consumers and 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:

      The private placement offering completed during fiscal 1998 provided
significant capital to the Company which did not arise from the Company's
continuing operations.

      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
--------------------------------------------------------------------------------
Maryanne Carroll     50     Chief Executive Officer, President
                            and Director                         1994
--------------------------------------------------------------------------------
Thomas Dean          50     Director                             1995
--------------------------------------------------------------------------------


                                       14
<PAGE>

--------------------------------------------------------------------------------
Peter Martin         44     Director                             1996
--------------------------------------------------------------------------------
Gerit Mulder         44     Vice President Medical Affairs and
                            Business Development and Director    1996
--------------------------------------------------------------------------------
Pedro H. Valdes      52     Director                             1994
--------------------------------------------------------------------------------

      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.

Maryanne Carroll. Ms. Carroll was elected to the Board of Directors in May 1994,
and worked as a Consultant from May-October 1994 when she was appointed Chief
Executive Officer. From its inception in 1987 through its sale in 1994, Ms.
Carroll was President and a director of Prism Imaging Incorporated, a
privately-held company located in Colorado which manufactures medical equipment.
Ms. Carroll earned a B.S. and M.B.A. with an area of emphasis in Finance from
the University of Colorado.

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 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.

Dr. Gerit Mulder. On November 1, 1995, Dr. Mulder entered into a two year
employment contract and in November, 1996 was elected to the Board of Directors.
Dr. Mulder was the founder of the Wound Care Healing Institute in 1982 and was
President and Director until its sale in 1994. He is internationally recognized
as one of the leaders in wound care research and education. He has had
appointments at numerous universities and hospitals and serves on the editorial
board of the journal WOUNDS. Additionally, he has evaluated over 150 wound care
products, many in clinical trials, has approximately 200 presentations and
publications, and directs the industry's largest educational program on wound
healing for clinicians and researchers.

Pedro H. Valdes. Mr. Valdes was elected to be a Director in July 1994 to fill a
vacancy on the Board of Directors. Mr. Valdes has been President of Protecom
Inc., a pharmaceutical distribution company which distributes products in Latin
America, since 1984.

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.,


                                       15
<PAGE>

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

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

Richard Melnick          1995          12,000                 -
                                        8,500
(Former Treasurer,       1996                             (125,000)
Secretary)               1997             -0-              (25,000)
                                                           -------

Maryanne Carroll         1995          94,166              (50,000(1))
Current President        1996         100,000             (376,118(2))
                                      100,000
                         1997        (deferred)

Gerit Mulder             1995          83,000              147,500(3)
V.P. Business
Development              

----------
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.


                                       16
<PAGE>

                         1996         156,000
                         1997         156,000

            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                 -

                     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


                                       17
<PAGE>

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

              Long-Term Incentive Plans-Awards in Last Fiscal Year

      None.

                           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,
1998, 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), amount and
nature of shares beneficially owned, and the percentage of the class owned by
each such beneficial owner.

<TABLE>
<CAPTION>
Name and Address of Beneficial Owner             Beneficial Ownership     Percentage of Class
------------------------------------             --------------------     -------------------

<S>                                                 <C>                       <C>  
Mr. Richard Melnick                                   761,422(1)                 9.4% 
764 Cottage Lane                                                                      
Boulder, CO  80304                                                                    
                                                                                      
Ms. Maryanne Carroll                                  670,298(2)                 9.1% 
284 Jackson Street                                                                    
Denver, CO  80206                                                                     
                                                                                      
Mr. Pedro Valdez                                      160,000(3)                 2.1% 
252 Griggs Avenue                                                                     
Teaneck, NJ  07666                                                                    
                                                                                      
Mr. Tom Dean                                                                          
c/o Innovative Research                                                               
Assoc., Inc.                                          200,000(4)                 2.6% 
520 Madison Avenue                                                                    
New York, NY  10022                                                                   
                                                                                      
David Russell                                       1,300,000                   16.9%
45 Park Place South, Suite 103                                                        
</TABLE>


                                       18
<PAGE>

<TABLE>
<S>                                                   <C>                       <C>  
Morristown, NJ  07960                                                                 

Gerit Mulder                                          147,500(5)                 1.8% 
4720 E. Princeton Ave.                                                                
Englewood, CO  80110                                                                  
                                                                                      
Peter Martin                                          122,500(6)                 1.6% 
48 Ogden Place                                         
Dobbs Ferry, NY 10522                                  
                                                       
All Officers and Directors                            1,300,298                 16.9%    
as a Group (five persons)                              (2) (3)                           
                                                       (4) (5)                           
                                                         (6)                    
</TABLE>

      (1) Includes 49,530 shares owned by Vocal Research Partners ("VRP"), a
division of Redwood Capital Group, Inc. ("Redwood") and Redwood. Mr. Richard
Melnick is President, director and owns approximately 90% of Redwood. For
purposes of Rule 13d-3 promulgated under the Exchange Act, Redwood and Mr.
Melnick are deemed to beneficially own the shares of Common Stock owned by VRP.
As of February 28, 1996 this figure includes options to purchase 64,682 shares
of Common Stock exercisable at $.50 per share and 25,000 shares at $1.625 per
share. Also includes 91,349 shares owned by, and options to purchase 7,936
shares of Common Stock exercisable at $1.57 per share granted to Mr. Melnick's
wife of which Mr. Melnick disclaims beneficial interest.

      (2) 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.

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

      (4) 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.

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

      (6) 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.


                                       19
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

1.    Norman Dean received a $65,000 commission for the placement of 1,300,000
      shares of stock in the September 15, 1995 private placement.

2.    Dr. Mulder was entitled to receive 67,500 shares of stock as partial
      payment for consulting services provided between October 1994 and October
      1995. This stock was issued.

3.    Dr. Mulder also received 30,000 shares as a signing bonus for entering
      into an employment contract with the Company on October 27, 1995.

4.    As a term of Dr. Mulder's employment contract, he will 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.

5.    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.

6.    Rick Melnick also received shares as a result of his participation in the
      debt conversion in which he converted $99,123.30 of the Company's debt in
      exchange for 198,247 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, 1998.

            Consolidated Statements of Operations for the years ended February
            28, 1998 and February 28, 1997.

            Consolidated Statements of Common Stockholders' Equity (Net Capital
            Deficiency) for the years ended February 28, 1998 and February 28,
            1997 (as restated).

            Consolidated Statements of Cash Flows for the years ended February
            28, 1998 and February 28, 1997.

            Notes to Consolidated Financial Statements.

      (a) 2. Financial Statement Schedules

            Schedule IV - Indebtedness of and to Related Parties


                                       20
<PAGE>

            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(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 quarter
ended February 28, 1998.


                                       21
<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/ Maryanne Carroll,
                                             -------------------------------
                                             Maryanne Carroll,
                                             Chief Executive Officer


                                          Date: May 28, 1998
                                                ----------------------------

      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/ Maryanne Carroll
                                             -------------------------------
                                             Maryanne Carroll,
                                             Chief Executive Officer


                                       22
<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.


                                       23
<PAGE>

                         [LETTERHEAD OF PAUL C. ROBERTS]

                          INDEPENDENT AUDITOR'S REPORT

To the Board of Directors and Shareholders
DermaRX, Inc. and Subsidiary

      I have audited the accompanying consolidated balance sheet of DermaRX,
Inc. and subsidiary at February 28, 1998 and the related consolidated statements
of operations, changes in common stockholders' equity and cash flows for each of
the two years in the period ended February 28, 1998. These consolidated
financial statements are the responsibility of the Company's management. My
responsibility is to an 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 consolidated financial statements referred to above
present fairly, In all material respects, the financial position of DermaRX,
Inc. and subsidiary at February 28, 1998 and the results of their operations and
their cash flows for each of the two years in the period ended February 28, 1998
in conformity with generally accepted accounting principles.

      The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company'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 consolidated financial statements. The consolidated 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

Pleasantviile, New York
May 24, 1998


                                      F-1
<PAGE>

                             DERMARx and SUBSIDIARY
                                  BALANCE SHEET
                                FEBRUARY 28, 1998

                                     ASSETS
<TABLE>
<CAPTION>
<S>                                                                   <C>
Current assets:
     Cash and cash equivalent                                             $70,922
     Accounts receivable - trade                                           16,800
     Inventory - Finished goods                                           129,116
     Prepaid expense                                                        5,007
                                                                      -----------
          Total current assets                                            221,845
                                                                      -----------
Property and equipment:
     Computer equipment, net of accumulated depreciation of $12,625         7,679
                                                                      -----------

Other assets:
     Patents, net of accumulated amortization of $48,735                  101,956
                                                                      -----------
                                                                         $331,480
                                                                      ===========
                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Notes payable - Demand                                                $27,000
    Notes payable - Other, net of discounts                               152,855
    Notes payable - related party                                          50,000
    Accrued interest - notes payable                                       11,084
    Accrued interest - notes payable, related party                        11,301
    Accounts payable and accrued expenses                                 138,733
                                                                      -----------
          Total current liabilities                                       390,973
                                                                      -----------
Common stockholders' equity (deficiency):
     Common stock, $.05 par value: 12,000,000 shares authorized;
       8,676,163 shares issued and outstanding                           $433,808
     Additional paid-in capital                                         4,057,945
     Accumulated (deficit)                                             (4,551,246)
                                                                      -----------
                                                                          (59,493)
                                                                      -----------
                                                                         $331,480
                                                                      ===========
</TABLE>

See accompanying Auditor's Report and notes to Financial Statement


                                      F-2
<PAGE>

                             DERMARx and SUBSIDIARY
                            STATEMENTS OF OPERATIONS

                                                Years Ended February 28
                                                  1998           1997
                                                  ----           ----
Revenues:                                        
     Sales, net discounts                     $   123,467    $    36,016
     Cost of Goods sold                            43,484          9,416
                                              -----------    -----------
     Gross profit                                  79,983         26,600
                                            
     General and Administrative                   442,269        643,980
                                              -----------    -----------
                                            
(Loss) from operations                           (362,286)      (617,380)
                                            
Other income (expense)                      
     Interest income                                  430         16,649
     Interest expense                             (30,309)       (26,664)
                                              -----------    -----------
                                            
Net (loss) before extraordinary item             (392,163)      (627,395)
                                              ===========    ===========
Extraordinary item:                         
     Gain on Extinguishment of debt               226,904             --
                                              -----------    -----------
                                            
Net (loss)                                    $  (165,259)   $  (627,395)
                                              -----------    -----------
                                            
Income (loss) per common share:             
     (Loss) before extraordinary gain         $      (.05)   $      (.09)
     Extraordinary Gain                               .03             --
                                              -----------    -----------
Net (loss) per share                          $      (.02)   $      (.09)
                                              -----------    -----------
                                            
Weighted average shares outstanding             7,586,138      7,056,529
                                              ===========    ===========

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


                                      F-3
<PAGE>

                             DERMARx and SUBSIDIARY
             CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED FEBRUARY 28, 1998 AND 1997

                                  Common Stock

<TABLE>
<CAPTION>
                                                   Additional
                                          Par        Paid-in     Accumulated
                         Shares          Value       Capital       Deficit           Total
                         ------          -----       -------       -------           -----
<S>                      <C>         <C>           <C>           <C>            <C>        
Balance -
February 28, 1996        7,052,363   $   352,618   $ 3,955,745   $(3,758,592)   $   549,771
Shares issued in
private placements          75,000         3,750        33,750            --         37,500
Net (loss)                      --            --            --      (627,395)      (627,395)
                       -----------   -----------   -----------   -----------    -----------
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)
                       -----------   -----------   -----------   -----------    -----------
</TABLE>

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


                                      F-4
<PAGE>

                 DERMARx and SUBSIDIARY STATEMENTS OF CASH FLOWS
                     YEARS ENDED FEBRUARY 28, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                                   1998          1997
                                                                                   ----          ----
<S>                                                                            <C>          <C>       
Cash flows from operating activities:
     Net (loss)                                                                $(165,259)   $(627,395)
     Adjustments to reconcile net (loss) to net cash (used) by
          operating activities:
          Gain on extinguishment of debt                                        (226,904)           -
          Expenses paid by issuance of stock                                           -            -
          Discount on notes amortized                                             13,939        2,833
          Depreciation and amortization                                           14,509       14,500
     Changes in assets and liabilities:
           (Increase) Decrease in accounts receivable                            (10,064)      (1,042)
           (Increase) Decrease in inventory                                       (3,404)     (63,035)
           (Increase) decrease in prepaid expenses                                12,807       (5,161)
           Decrease in other assets                                                3,286            -
           Increase (Decrease) in accounts payable, accrued interest and
         accrued expenses                                                        119,496       (6,524)
                                                                               ---------    ---------
     Net cash (used) by operating activities                                    (245,205)    (685,824)
                                                                               ---------    ---------
     Cash flows from investing activities:
         Purchase of property and equipment                                            -       (7,210)
                                                                               ---------    ---------

     Net cash (used) by investing activities                                           -       (7,210)
                                                                               ---------    ---------
Cash flows from financing activities:
     Proceeds from issuance of common stock                                      119,700       37,500
     Proceeds from debt obligations                                              157,950            -
     Repayment of debt obligations                                               (12,500)      (5,881)
                                                                               ---------    ---------
Net cash provided by financing activities                                        265,150       31,619
                                                                               ---------    ---------

Net increase (decrease) in cash and cash equivalents                              19,945     (661,415)

Cash and cash equivalents, beginning of year                                      50,977      712,392
                                                                               ---------    ---------

Cash and cash equivalents, end of year                                         $  70,922    $  50,977
                                                                               =========    =========

Supplemental disclosures of cash flow information: Cash paid during the year
     for:
          Interest                                                             $       -    $   2,046
                                                                               =========    =========
</TABLE>

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


                                      F-5
<PAGE>

                             DERMARx AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           FEBRUARY 28, 1998 AND 1997

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.

      Consolidation:
      The consolidated financial statements and accompanying data include
      DermaRx, Inc. and its wholly-owned subsidiary. All material transactions
      between companies are eliminated. The subsidiary is on a calendar year
      basis in order to enable a more efficient and timely audit at year end.
      During the year ended February 28, 1997, Innovisions, Inc. transferred all
      assets to DermaRx in exchange for forgiveness of debt and Innovisions,
      Inc. was then dissolved.

      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>

      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.

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 $1,370,850 over the past three fiscal years net of
      costs in private placements and converted debt and liabilities to common
      stock. The Company is devoting all its resources to inventory purchases
      and to marketing its over the counter wound care products and services.
      The Company is also in the process of developing new wound care products
      and services.

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 25, 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, 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, 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:


                                       F-7
<PAGE>

Fiscal Year                                 Amount
1998                                      $242,950

Less:  Discounts                           (13,090)

Less:  Current Portion                    (229,860)
                                          --------
                                              $ -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, 1998, the Company has net operating loss carryforwards
      of approximately $4,280,000 for income tax purposes which expire in the
      years 2001 through 2013, 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, 1998.

Note 6 - COMMON STOCK

      During the year ended February 28, 1997, the Company issued 75,000 shares
      of common stock of the Company in connection with the receipt of $37,500
      of financing.

      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.

Note 7 - STOCK OPTIONS

      (a) Stock Options:

      The following table summarizes the activity in other options:


                                       F-8
<PAGE>

                                               Shares          Price Range
                                               ------          -----------

Outstanding at February 28, 1994              522,480         $.50 - $1.58
                                              -------         ------------
     Granted                                  145,000                 $.50
     Expired                                   56,603                $1.58
     Canceled                                  69,841                 $.50
                                               ------                 ----
Outstanding at February 28, 1995              541,036         $.50 - $1.58
                                              -------         ------------
     Granted
     Expired                                   67,461         $.76 - $1.58

Outstanding at February 28, 1996            1,099,693         $.50 - $1.58
Exercisable at February 28, 1996            1,099,693         $.50 - $1.58
                                            ---------         ------------
     Expired                                   55,955        $1.26 - $1.58

      See Note 11 for other options which may be issued under employment
      agreements.

      (b)   The Company has an incentive stock option plan (ISOP) for employees
            and an executive stock option plan (ESOP) for employees, directors,
            and consultants, under which options to purchase common stock may be
            granted at fair market value on the grant date or otherwise as
            specified under the executive stock option plan. A maximum of
            111,111 shares and 47,619 shares have been reserved for issuance
            under the ISOP and the ESOP, respectively. No options were
            outstanding at February 28, 1997 and 1996 under either plan.

            In October 11995, the FASB issued Statement of Financial Accounting
            Standards No. 123 "Accounting and Disclosure of Stock-Based
            Compensation" (statement 123). Statement 123 is effective for fiscal
            years beginning after December 15, 1995, and allows for the option
            of continuing to follow Accounting Principles Board Opinion No. 25
            (APB 25), "Accounting for stock issued to employees" and the related
            interpretations or selecting the fair value method of expense
            recognition as described in Statement 123. The Company has elected
            to follow APB 25 in accounting for its employee stock options. Under
            APB 25,because the exercise price of the Company's stock options are
            equal to or less than the market price of the underlying stock on
            the date of grant, no compensation expense is recognized.

            Pro forma net income had Statement 123 been applied would not
            change. There is no market for the Company's stock at this time and
            therefore the Company believes the fair value of all outstanding
            options to be zero.

Note 8 - 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.


                                       F-9
<PAGE>

Note 9 - MAJOR CUSTOMERS

      For the years ended February 28, 1998 and 1997 there were three and one
      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 1998 and 1997 the Company is dependent on three suppliers of its
      non-prescription products. The Company has identified additional suppliers
      to serve as back-up suppliers.

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.

Note 12 - SUBSEQUENT EVENTS

      Twenty five thousand dollars of accrued payables was converted to equity.

      Sixteen thousand dollars of demand notes were converted to equity.

      An additional sixty thousand dollars was raised as part of a Private
      offering dated 11/97.


                                      F-10
<PAGE>

                             DERMARx and SUBSIDIARY
                  SCHEDULE IV - INDEBTEDNESS OF AND TO RELATED
                              PARTIES - NOT CURRENT

<TABLE>
<CAPTION>
                                  Balance at
                                 Beginning of        Indebtedness to         Balance at End
        Description                 Period        Additions    Deductions       of Period
        -----------                 ------        ---------    ----------       ---------
<S>                                <C>           <C>               <C>          <C>  
Year Ended February 28, 1996       

Maryanne Carroll (1)               $48,597        $ 5,893          $54,490           $0           
Richard Melnick (1)                $88,716        $10,407          $99,123           $0           
Pedro Valdez                       $48,580        $ 4,667          $0           $53,247
</TABLE>

      (1) Deduction was a conversion of the debt to Common Stock of the Company.


                                      F-11