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, 1997

                                       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: $36,000.00

      As of May 15, 1997, the aggregate market value of the 7,127,363 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 $2,747,537.

      The number of shares outstanding of the registrant's common stock, par
value $.05, as of February 28, 1997 was 7,127,363 shares.


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<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 payable to Ms. M. Sue
Benford. 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 decided 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;
however, a thorough business analysis revealed a potential distribution problem.

      Marketing a single product in the wound care industry is extremely
expensive if not impossible. In order 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, the Company decided to develop an extended
line of wound care products. Accordingly, 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 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


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<PAGE>

is pending for DermaMend(TM) Foam and DermaMend(TM) Gel . There is no assurance
that a patent will be allowed.

      In October 1994, the Company elected Maryanne Carroll as President. Dr.
Gerit Mulder, a leading wound care expert, became Vice President of Medical and
Business Development on November 1, 1995. Since October 1994, the majority of
the resources of the Company have been devoted to research and development of
new wound care products, fund-raising, and establishing a distribution network
for its new expanded line of products.

      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. The net proceeds have been used for
operating overhead, debt reduction, initial marketing activities, and the
preparation of a FDA 510(k) notification. In July 1995, the Board of Directors
approved an increase in the offering from $350,000 to $500,000. This private
placement raised gross proceeds of $359,250.

      In April 1995, the Company registered to do business in Colorado, and in
January 1996 established new corporate headquarters in Denver, Colorado.

      On September 15, 1995, the Company commenced another private placement
offering of 2,000,000 shares of the Company's stock at the price of $.50 per
common share. The Company raised gross proceeds of $1,000,000 in this offering
as of February 28, 1996.

      In August of 1995, the Company extended an offer to certain holders of the
Company's debt to convert such debt to common shares of the Company's stock.
Holders of such debt converted $296,112 of debt and accrued interest into
604,898 shares of the Company's common stock subsequent to August 31, 1995,
thereby reducing the Company's outstanding debt significantly.

      In August 1995, the Company received approval from the FDA to market
DermaMend(TM) Foam.

      On November 1, 1995 the Company entered into an employment contract with
Dr. Gerit D. Mulder.

      In October 1996, the Company received approval from the FDA to market
DermaMend(TM) Gel.

      In November 1996, the Company entered into a six (6) month agreement with
Aevitec to market its products in 39 states.

      In December 1996, the company commenced another private placement offering
of 1,000,000 shares of stock at the price of $.50 per share.


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<PAGE>

      In February 1997, the Company submitted a 501(k) to the FDA requesting
approval to market the Company's island dressing.

      In February 1997, the Company entered into an agreement with Sales and
Management Associates to provide assistance in establishing distribution
nationally and internationally.

      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 a dual focus in the wound care industry which includes a
seven product line of topical non-prescription products, and a consulting
service which provides wound treatment training, wound care practice guidelines
and implementation, and treatment outcome measurement. All products are
proprietary preparations designed primarily for the topical treatment and
management of skin wounds, disorders and irritations including venous, pressure
and diabetic ulcers, diaper rash, urinary and fecal incontinence, skin chaffing,
abrasions, minor burns and skin tears. The services, educational training for
nurses and physicians, and the customized protocols for wound care clinics, are
based on the highly successful courses and materials developed and offered
through the Wound Healing Institute (WHI) in Denver, Colorado. The Company also
owns the patent to a proprietary speech-generated tactile feedback device which
it no longer actively markets. The Company's primary objective is to design,
develop and 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 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 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.

      The products include:

      a. BottomBetter(TM): BottomBetter(TM) is a white 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 unique
single-dose, disposable containers (18 per package) to prevent contamination.


                                        5
<PAGE>

      b. 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.

      c. 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.

      d. 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. It requires no
further FDA approval for marketing.

      e. DermaMend(TM) Foam: DermaMend(TM) Foam is a second generation
hydrophilic polyurethane foam dressing which contains an odor repressing
ingredient. The high density foam wafer is indicated as a wound filler for full
thickness wounds. An FDA 510(k) notification was filed in March 1995. The
Company received FDA approval to market the product in August 1995.

      f. 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.

      g. 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.

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

      i. 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:


                                        6
<PAGE>

      a. Staff Training: Wound treatment course for nurse and physician
caregivers

      b. Practice Guideline Development and Implementation: Complete program for
setting up and managing a wound treatment facility, including protocols,
policies and procedures.

      c. Treatment Outcomes: Data collection and measurement for wound
treatment.

            (2) Distribution methods of the products or services:

      International. International distribution will not be actively pursued
until domestic distribution is in place; however, the Company has entered into a
distribution agreement with The Boot Company Australia and is involved in
licensing agreement discussions with international distributors. Product is
available to ship to Australia pending final TGA approval (which has been on
hold pending FDA GMP audit of the foam manufacturing facility).

      Domestic. In order to achieve rapid market penetration, the Company is
actively seeking a marketing partner for both BottomBetter(TM) and the wound
care dressings. In November, 1996, the Company entered into a sales agreement
with Aevitec, an independent medical sales organization for distribution in 39
states. In February, 1997, the Company entered into a consulting agreement with
Sales and Management Associates to provide sales and marketing assistance
including locating and training additional distributors. The Company does not
employ a dedicated sales force 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.

            The Company is currently negotiating with additional companies which
are interested in distributing the Company's products. There is no assurance,
however, that such negotiations will be concluded successfully.

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

                  BottomBetter(TM) - patented; Licenser is currently being
                  sought; available for shipment; limited distribution
                  available.

                  DermaMend Barrier(TM) - patented; launched at the Symposium
                  for Advanced Wound Repair in Atlanta, Georgia, April 1996;
                  currently available for shipment.

                  GeriMend Skin Care Therapy(TM) - patented; name trademarked;
                  launched at the Symposium for Advanced Wound Repair in
                  Atlanta, Georgia, April 1996; currently available for
                  shipment.

                  DermaMend(TM) Cleanser - patented; launched at the Symposium
                  for Advanced Wound Repair in Atlanta, Georgia, April 1996;
                  available for shipment July 1997.


                                        7
<PAGE>

                  DermaMend(TM) Foam - patent issued on cavity wound filler;
                  patent pending on other sizes and shapes of foam; launched at
                  the Symposium for Advanced Wound Repair in Atlanta, Georgia,
                  April 1996; currently available for shipment - 5 cm round and
                  11 cm x 11 cm square.

                  DermaMend(TM) Gel - patent pending; launched at the Symposium
                  for Advanced Wound Repair in New Orleans, April, 1997;
                  available for shipment in May, 1997.

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

                  Wound Care Consulting - programs are available to assist with
                  the development and management of wound care facilities.
                  Programs are currently being marketed.

            (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 market is characterized by rapid growth and competition.
The Company's competitors market several varieties of wound care products which
compete with those of the Company. Competing products fall into the categories
of skin protectants, wound cleaners, gauze dressings, antimicrobials and
antiseptics, transparent films, hydrocolloids, gels/hydrogels, calcium alginates
and foam wafers.

      The wound care industry is new, highly fragmented and one of the most
rapidly growing areas of health care 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 and the experience and
reputation of Dr. Mulder, a recognized leader in the field. While the small size
offers distinct advantages in terms of product development and marketing, 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


                                        8
<PAGE>

"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.

            (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 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:

      On May 5, 1992, a patent titled ERADICATION AND TREATMENT OF DIAPER
DERMATITIS AND OTHER RELATED SKIN DISORDERS was allowed by the U.S. Patent and
Trademark Office.

      The Company entered into a royalty and security agreement with a law firm,
to which the Company owes $233,000. The agreement calls for payment of the
outstanding balance by payment of a royalty equal to 7% of gross sales of
BottomBetter(TM) and DermaMend Barrier(TM) until the entire balance plus
interest accruing at 9% is paid.

      BottomBetter(TM), DermaMend(TM) and GeriMend(TM) are registered trade
names of the Company. Patent applications have recently been approved for
allowance for GeriMend Skin Tear Therapy(TM), DermaMend(TM) Foam and
DermaMend(TM) Cleanser. An application has been filed with the U.S. Patent
office DermaMend(TM) Gel and DermaMend(TM) Foam. There is no assurance that
these applications will be allowed.


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<PAGE>

      On December 10, 1986, the U.S. Patent and Trademark Office issued a Notice
of Allowance and Issue Fee Due with respect to the grant of a patent covering
two claims arising out of the Vocal Feedback Device technology. For the duration
of these patents, the Company is the only entity permitted to utilize the
technology to treat speech disorders.

      On September 18, 1990, the European Patent Office allowed the grant of a
European Patent on the Devices, which patent was granted to the Company in July
1991 and became effective in August 1992.

      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


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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. Three products, DermaMend(TM)
Foam, DermaMend(TM) Island Dressing and DermaMend Gel, 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:

                               1994          $50,000
                               1995          $150,000
                               1996          $38,000

      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 four full-time employees and one part-time
employee. Maryanne Carroll is the Company's President and Chief Executive
Officer. Dr. Gerit Mulder is the Vice President of Medical Affairs and Business
Department.

ITEM 2. DESCRIPTION OF PROPERTY.

      On January 1, 1996, the Company entered into a sublease for 3,125 square
feet of office space in the Norwest Bank Building located at 400 South Colorado
Boulevard, Denver, Colorado. The sublease is for a period of 16 months (expiring
on April 30, 1997). The Company continues to lease the space on a month-to-month
basis.

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 


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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.

      During 1996, the security holders elected a new Board of Directors,
approved the appointment of Paul Roberts as auditor for the Corporation, and
increased the authorized number of common shares from 8,000,000 to 12,000,000.

                                     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 1996                            High                 Low
-----------                            ----                 ---
------------------------------------------------------------------------
May 1996                                3/4                9/16
------------------------------------------------------------------------
August 1996                           11/16                9/16
------------------------------------------------------------------------
November 1996                          9/16                 1/2
------------------------------------------------------------------------
February 1997                         17/32                 1/4
------------------------------------------------------------------------

------------------------------------------------------------------------
Fiscal 1995
-----------
------------------------------------------------------------------------
May 1995                                5/8                 3/8
------------------------------------------------------------------------
August 1995                             3/4                7/16
------------------------------------------------------------------------
November 1995                           7/8                 1/2
------------------------------------------------------------------------
February 1996                        1 1/16                 5/8
========================================================================

      There were 221 holders of record of the Common Stock, including those
shares held in "street name" as of February 28,1997. As of May 15, 1997, the
closing "bid" and "asked" prices were $0.25 and $0.53 per share respectively.


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<PAGE>

      The Company did not declare or pay dividends during Fiscal 1996. 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 1995 Compared to Fiscal 1994

      During fiscal 1996, the Company's primary focus was on completing its
product line, beginning the manufacturing process, building inventory and on
establishing a distribution network. FDA marketing approval was received for
DermaMend(TM) Gel in November 1996 and for DermaMend(TM) Island Dressing in May
1997. A patent was filed on DermaMend(TM) Foam and on DermaMend(TM) Gel. The
Company entered into a six month sales agreement with Aevitec in November 1996
and signed a consulting agreement to establish sales and distribution with Sales
and Management Associates in February 1997. DermaMend(TM) Foam, DermaMend(TM)
Cavity Filler, DermaMend Barrier(TM) and GeriMend Skin Tear Therapy(TM) were
completed and inventoried during the year.

      During fiscal 1996, revenues were substantially equal to those of 1995.
Sales of the diaper rash product declined minimally as no marketing efforts were
devoted to the product. Significant revenues are not expected from the wound
care products until the entire line is available for shipment and a complete
national distribution network is established.

      Fiscal 1996 was the first full year of actual business operations for
DermaRx. Accordingly, operating expenses increased substantially. The increase
of approximately $200,000 is attributable to marketing expenses including trade
shows, trade journal advertisements, and marketing materials; to a clinical
evaluation completed at Henry Ford Hospital, to numerous other safety,
effectiveness, antimicrobial and sterility testing; to ongoing patent filings;
and to additional overhead resulting from increased personnel and new operating
headquarters.

      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:


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<PAGE>

      There are and will be negligible internal sources of liquidity until the
full wound care product line is available for shipment.

      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:

      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:

      The private placement offerings done during fiscal 1996 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.


                                       14
<PAGE>

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

--------------------------------------------------------------------------------
Name              Age  Position                                  Director Since
----              ---  --------                                  --------------
--------------------------------------------------------------------------------
Maryanne Carroll  49   Chief Executive Officer, Chief Financial  1994
                       Officer and Director
--------------------------------------------------------------------------------
Thomas Dean       49   Director                                  1995
--------------------------------------------------------------------------------
Peter Martin      44   Director                                  1996
--------------------------------------------------------------------------------
Gerit Mulder      43   Vice President Medical Affairs and        1996
                       Business Development and Director
--------------------------------------------------------------------------------
Judy Papen        45   Director                                  1997
--------------------------------------------------------------------------------
Pedro H. Valdes   51   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


                                       15
<PAGE>

directs the industry's largest educational program on wound healing for
clinicians and researchers.

Judy Papen, RN, BSN, CETN. In November 1996, Judy Papen was elected to serve on
the Board of Directors. Ms. Papen has been listed in Who's Who in American
Colleges and Universities, has over 15 years clinical and research related wound
care experience and is a well recognized speaker and author in the wound care
industry.

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. From 1985 to date Mr. Valdes has also taught Spanish in
Teaneck High School.

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             $                    (#)
                       ----             -                    ---

Richard Melnick        1994           36,000                 --


                                       16
<PAGE>

(Former Treasurer,     1995           12,000             (125,000)
 Secretary)            1996            8,500              (25,000)

Anthony Adler          1994           55,500               50,000
(Former President)

Maryanne Carroll       1994           37,500              (50,000(1))
Current President      1995           94,166             (376,118(2))
                       1996          100,000

Gerit Mulder           1994           16,000              147,500(3)
V.P. Business          1995           83,000
 Development           1996          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
---------

----------
(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.


                                       17
<PAGE>

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 Base 
               Options/SARs     to Employees       Price                Exp.
Name           Granted          in 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 


                                       18
<PAGE>

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.

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

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                                  200,000(4)             2.6%
c/o Innovative Research Assoc., Inc.
520 Madison Avenue
New York, NY  10022

David Russell                               1,300,000               16.9%
45 Park Place South, Suite 103
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)

      (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 


                                       19
<PAGE>

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.

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.


                                       20
<PAGE>

(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

            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).


                                       21
<PAGE>

            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, 1996.


                                       22
<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: 5/8/97

      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


                                       23
<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.


                                       24
<PAGE>

                                 PAUL C. ROBERTS
                           Certified Public Accountant
                              600 Bedford Road, BHA
                            Pleasantville, N.Y. 10570

                                      -----

                                 (914) 741-1508


                          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, 1997 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, 1997. These consolidated
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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DermaRX,
Inc., and subsidiary at February 28, 1997 and the results of their operations
and their cash flows for each of the two years in the period ended February 28,
1997 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 plan 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

Pleasantville, New York
May 8, 1997


                                      F-1
<PAGE>

                             DERMARx and SUBSIDIARY
                                  BALANCE SHEET
                                FEBRUARY 28, 1997

                                     ASSETS
Current assets:
  Cash and cash equivalent                                          $    50,977
  Accounts receivable - trade                                             6,736
  Inventory - Finished goods                                            125,712
  Prepaid expense                                                        17,814
                                                                    -----------
    Total current assets                                                201,239
                                                                    -----------

Property and equipment:
  Equipment, net of accumulated depreciation of $6,979                   13,326
                                                                    -----------

Other assets:
  Security deposits                                                       3,286
  Patents, net of accumulated amortization of $39,872                   110,819
                                                                    -----------
                                                                        114,105
                                                                    -----------
                                                                    $   328,670
                                                                    ===========
                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Notes payable - net of discounts                                  $    34,311
  Notes payable - related party, net of discounts                        49,845
  Accrued interest - notes payable                                        5,308
  Accrued interest - notes payable, related party                         8,301
  Accounts payable and accrued expenses                                  39,219
                                                                    -----------
    Total current liabilities                                           136,984
                                                                    -----------

Other Liabilities accrued expense (see note 9)                          231,810
                                                                    -----------

Common stockholders' equity:
  Common stock, $.05 par value: 12,000,000 shares authorized;
    7,127,363 shares issued and outstanding                         $   356,368
  Additional paid-in capital                                          3,989,495
  Accumulated (deficit)                                              (4,385,987)
                                                                    -----------
                                                                        (40,124)
                                                                    -----------
                                                                    $   328,670
                                                                    ===========

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


                                      F-2
<PAGE>

                             DERMARx and SUBSIDIARY
                            STATEMENTS OF OPERATIONS

                                                     Years Ended February 28
                                                      1997              1996
                                                      ----              ----
Revenues:
  Sales, net discounts                            $    36,016       $    49,738
  Cost of Goods sold                                    9,416            13,406
                                                  -----------       -----------
  Gross profit                                         26,600            36,332

  General and Administrative                          643,980           451,696
                                                  -----------       -----------

(Loss) from operations                               (617,380)         (415,364)

Other income (expense)
  Interest income                                      16,649            11,134
  Interest expense                                    (26,664)          (59,123)
                                                  -----------       -----------

Net (loss)                                        $  (627,395)      $  (463,353)
                                                  ===========       =========== 

Net (loss) per common share                       $      (.09)      $      (.09)

Weighed average shares outstanding                  7,056,529         4,956,185
                                                  ===========       ===========

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, 1997 AND 1996

                                  Common Stock

<TABLE>
<CAPTION>
                                                  Additional
                                         Par        Paid-in    Accumulated
                            Shares      Value       Capital      Deficit         Total
                            ------      -----       -------      -------         -----
<S>                       <C>        <C>          <C>          <C>           <C>         
Balance -
February 28, 1995         3,598,965  $   179,948  $ 2,603,991  $(3,295,239)  $  (511,300)
Shares issued in
private placements        2,718,500      135,925    1,064,925           --     1,200,850
Shares issued  upon
conversion of notes &
accrued expenses            637,398       31,870      286,829           --       318,699
Shares issued per
consulting and
employment agreements        97,500        4,875           --           --         4,875

Net (loss)                       --           --           --     (463,353)     (463,353)
                        -----------  -----------  -----------  -----------   -----------

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)
                        ===========  ===========  ===========  ===========   ===========
</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, 1997 AND 1996

                                                          1997          1996
                                                          ----          ----
Cash flows from operating activities:
  Net (loss)                                          $  (627,395)  $  (463,353)
  Adjustments to reconcile net (loss) to net
    cash (used) by operating activities:
    Accounts payable, accrued expenses and
      accrued interest converted to common stock               --        58,074
    Expenses paid by issuance of stock                         --            --
    Discount on notes amortized                             2,833        20,106
    Depreciation and amortization                          14,500         9,832
  Changes in assets and liabilities:
    Decrease (Increase) in accounts receivable             (1,042)        5,766
    Decrease (Increase) in inventory                      (63,235)       16,251
    (Increase) decrease in prepaid expenses                (5,161)      (11,605)
    Decrease in other assets                                   --        (3,286)
    Increase (Decrease) in accounts payable, accrued
      interest and accrued expenses                        (6,324)      (81,057)
                                                      -----------   -----------

  Net cash (used) by operating activities                (685,824)     (449,272)
                                                      -----------   -----------

  Cash flows from investing activities:
      Purchase of property and equipment                   (7,210)      (12,297)
                                                      -----------   -----------

  Net cash (used) by investing activities                  (7,210)      (12,297)
                                                      -----------   -----------

Cash flows from financing activities:
  Proceeds from issuance of common stock                   37,500     1,200,850
  Repayment of debt obligations                            (5,881)      (32,619)
                                                      -----------   -----------
Net cash provided by financing activities                  31,619     1,168,231
                                                      -----------   -----------

Net increase (decrease) in cash and cash equivalents     (661,415)      706,662

Cash and cash equivalents, beginning of year              712,392         5,730
                                                      -----------   -----------

Cash and cash equivalents, end of year                $    50,977   $   712,392
                                                      ===========   ===========

Supplemental disclosures of cash flow information:
  Cash paid during the year for:
    Interest                                          $     2,046   $     7,416
                                                      ===========   ===========

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


                                      F-5
<PAGE>

                             DERMARx AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           FEBRUARY 28, 1997 AND 1996

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.
<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 $1,238,350 over the past two 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.

      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.

      Aggregate maturities of notes payable are as follows:

                                       Fiscal Year                    Amount
                                       -----------                    ------
                                       1998                          $85,000
                                                                     -------
                                                                     $85,000
                                       Less: Discounts                  (844)
                                                                     -------
                                                                      84,156
                                       Less: Current Portion          84,156
                                                                     -------
                                                                     $   -0-
                                                                     =======
<PAGE>

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, 1997, the Company has net operating loss carryforwards
      of approximately $4,227,000 for both financial statement and income tax
      purposes which expire in the years 2001 through 2012, 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, 1997.

Note 6 - COMMON STOCK

      During the year ended February 28, 1996, the Company issued 2,718,500
      shares of its common stock in private offerings for net proceeds of
      $1,200,850.

      During the year ended February 28, 1996, the Company converted $265,500 of
      notes payable into 531,000 shares of common stock of the Company.

      During the year ended February 28, 1996, the Company converted $53,199 of
      liabilities into 106,398 shares of common stock of the Company.

      During the year ended 1996, the Company issued 97,500 shares of the common
      stock of the Company in exchange for services.

      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.

Note 7 - STOCK OPTIONS

      (a)   In October 1995, 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 
<PAGE>

            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.

      (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.

      (c)   Other Stock Options:

      The following table summarizes the activity in other options:

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

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
                                                 ---------        -------------
  Granted                                          150,000        $ .50 - $ .75
  Expired                                           55,955        $1.26 - $1.58

Outstanding at February 28, 1997                 1,193,738         $.50 - $1.58
Exercisable at February 28, 1997                 1,193,738         $.50 - $1.58
                                                 ---------        -------------

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

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 
<PAGE>

      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.

      In July 1996, the Company issued to a director of the Company warrants to
      purchase an aggregate 97,500 shares of common stock of the Company at
      $.625 per share that expire on November 1, 1998.

Note 9 - COMMITMENTS

  (a) Operating leases:

      The Company was obligated under a lease for office space which expired
      April 30, 1997 at the monthly rental of $3,286 per month. The Company is
      renting the space on a month-to-month basis. Rent expense for the years
      ended February 28, 1997 and 1996 was $40,500 and $9,958 respectively.

  (b) Employment agreement:

      The Company has entered into an employment agreement with an officer of
      the Company. The agreement provides for annual compensation of $90,000 and
      $100,000 for the first and second year of the agreement respectively, the
      agreement expires on October 1, 1996. The agreement also provides for
      stock options to purchase up to 5% of the Company's fully diluted capital
      stock after completion of its private placement at the rate of $.50 per
      share any time before October 1, 1998. Additionally, another option in the
      second year of the agreement was provided to purchase up to 5% of the
      Company's fully diluted capital stock at the greater of $.50 per share or
      the per share financing amount of any additional financing completed
      before October 1, 1996. These options may be exercised any time before
      October 1, 1999.

      The Company has entered into an employment agreement beginning on November
      1, 1995 and expiring October 31, 1997. The agreement calls for annual
      compensation of $106,000 plus a performance bonus equal to 1 1/2% of
      annual net increases in revenues of certain of the Company's skin care
      products with a minimum of $2500 per month. The agreement also calls for
      the issuance of 30,000 shares of the Company's common stock to the
      employee as a signing bonus at the time the contract is signed. The
      contract was signed on October 27, 1995, and the shares were delivered. 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.

  (c) Security Agreement:

      The Company has entered into a royalty and security agreement (See Note
      12) with a law firm to which the Company owes $205,487.32. The agreement
      provides for simple 
<PAGE>

      interest of 9% on the outstanding balance owed. The agreement calls for
      payment of the outstanding balance by payment of a royalty equal to 7% of
      gross sales of certain products the Company until the outstanding balance
      plus accrued interest thereon is paid. The Company has granted a security
      interest in its patent entitled "Eradication and Treatment of Diaper
      Dermatitis and Related Skin Disorders" to the law firm in conjunction with
      this agreement.

  (d) Other Commitments and Agreements:

      In November 1996, the Company entered into a Sales Agreement with Aevitec.
      This agreement is for a term of six (6) months and if six (6) months sales
      quotas are reached will automatically renew for terms of one year unless
      terminated by either party with ninety (90) days written notice in advance
      of termination date. The agreement calls for sales commissions of 30% of
      net sales.

      In February 1997, the Company has also entered into a representation
      agreement for a period of five (5) years unless terminated by either party
      six (6) months in advance. This agreement calls for a commission equal to
      10% of net sales for a period of twelve months from date of first order
      placed by the account and then 5% for the remainder of the term of the
      agreement. The company also will issue a three (3) year stock option to
      purchase 20,000 shares of its common stock at $.50 per share for every
      $1,000,000 in net sales during the first two years of the agreement. At
      the end of first two year the Company will negotiate with good faith with
      the representative additional options at a price based on the current
      trading price of the Company's stock.

      The Company has also entered into a selling agreement with an individual
      which calls for a 10% commission of the offering price of any share sold
      by the agent in a private placement being conducted by the Company.

Note 10 - MAJOR CUSTOMERS

      For the years ended February 28, 1997 and 1996 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 11 - MANUFACTURING

      For 1997 and 1996 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 12 - SUBSEQUENT EVENTS

      The Company issued options to purchase 125,000 shares to five (5)
      directors of the Company at $.625 per share.
<PAGE>

      On May 7, 1997, the Company negotiated a discount on the above referenced
      liability (Note 9) from $203,309.44 to $10,000.00 if paid by May 19, 1997.
      A check was remitted on May 16, 1997 in the amount of $10,000.00. The net
      effect of this transaction will be a $10,000 reduction in current assets
      and a $231,800 (including accrued interest) reduction in long term
      liabilities.

      On May 8, 1997, the Company was notified by the FDA that DermaMend(TM)
      Island Dressing had been approved for marketing.