<PAGE>
                      SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C.  20549

                            REPORT ON 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 April 30, 1997

         / /               Transition Report pursuant to Section 13 or 15(d) of
                           The Securities Exchange Act of 1934

         For the transition period from _________________ to __________________.

Commission File No. 0-27028

                        EMBRYO DEVELOPMENT CORPORATION
            (Exact name of registrant as specified in its charter)

       Delaware                                     13-3832099
(State of or other jurisdiction            (IRS Employer Identification No.)
of incorporation or organization)

750 Lexington Avenue
New York, New York                                     10022
 (Address of Principal                               (Zip Code)
  Executive Officers)

Registrant's telephone number, including area code:   (212) 355-8484

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

Securities registered pursuant to Section 12(g) of the Act:

                   Common Stock, par value $.0001 per share
                               (Title of Class)

         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 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
                                             ---    --- 
         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of the Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10K-SB
or any amendment to this Form 10-KSB. [X]

         Issuer's revenues for its most recent fiscal year were $287,000.

         The aggregate market value of the voting stock held by non-affiliates

of the Registrant, computed by reference to the closing price of such stock as
of July 8, 1997, was approximately $1,514,062.50.

         Number of shares outstanding of the issuers common stock, as of July 8,
1997, was 4,845,000.

                 DOCUMENTS INCORPORATED BY REFERENCE:  None.


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                                    PART I

Item 1.  BUSINESS.

         Embryo Development Corporation, is a development stage Delaware
corporation (the "Company" or "Embryo"), which was organized in March 1995 to
develop, acquire, manufacture and market various bio-medical devices. The
Company currently markets products in four (4) distinct market segments;
hydrogel materials, emergency medical equipment, apnea monitoring devices and
peritoneal dialysis warming devices. In addition, the Company has licensed
several patents for products one (1) of which is being developed to be sold in
the medical field. The Company has not derived any significant revenues since
its inception.

         On February 6, 1997 the Company, through its majority owned subsidiary
Hydrogel Design Systems, Inc. ("HDS"), acquired certain of the assets of two (2)
related companies, Novatech, Inc. and Alternative Design Systems R & D Group.
HDS acquired all rights and assets, including proprietary formulas and
methodology, necessary to manufacture, market, sell and distribute hydrogel
materials and apnea monitoring devices and associated products. Hydrogel is a
product used in wound care as well as a component of a variety of medical
devices including, cardiac defibrillator pads and various types of electrodes.
HDS has also entered into a contract for the purchase of manufacturing equipment
which has been financed through a long-term note and security agreement between
HDS and Becton Dickinson Transdermal Systems, a division of Becton Dickinson and
Company, a customer of HDS and a manufacturer and distributor of medical devices
and diagnostic systems.

         In addition, the Company is also a party to seven (7) license
agreements (the "License Agreements") and two (2) royalty sharing agreements
(the "Royalty Sharing Agreements") with Dr. Lloyd Marks which provide for the
exclusive license of seven medical devices and the sharing of royalties of two
(2) medical devices, all of which have been developed by Dr. Marks ("Marks
Medical Devices"). Five (5) of the Marks Medical Devices have been patented in
the United States, and one (1) is subject to a pending patent application. Both
of the Royalty Sharing Agreements are in connection with Marks Medical Devices
for which Dr. Marks has received patents in the United States. The Marks Medical
Devices include a safety needle, adjustable blood pressure cuff, a multi
function fluid communication control system and stereoscopic fluoroscopy
apparatus. Dr. Marks has also entered into a consulting agreement with the

Company to assist in the commercial exploitation of the licensed devices. In
addition, Dr. Marks has given the Company a right of first refusal on any
devices he should develop in the future.

         The Company owns five (5) medical devices and has the exclusive
licensing rights to one

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(1) medical device in the areas of emergency medical equipment and peritoneal
dialysis warming devices ("C.F. Medical Devices"). Two (2) of the devices, the
Hot-Sack II(TM) and Hot-Sack II+(TM), are used in connection with the warming of
peritoneal dialysis solution. Four (4) of the devices, Hot-Sack(R),
Res-Q-Air(R), Therm-O-Drug(TM) and an electronic stethoscope, are devices used
for emergency rescue operations and by other emergency medical technicians.
Three of the devices (Hot-Sack(R), Res-Q-Air(R) and Therm-O-Drug(TM) ) have
received all necessary regulatory approval under the FDA's "510(k) review"
process and the Company believes that the additional two (2) products (Hot-Sack
II(TM) and Hot-Sack II+(TM)) are covered by the FDA's approval of Hot-Sack(R) or
would independently qualify for 510(k) approval.

HDS PRODUCTS

         The major focus of HDS is the manufacture of hydrogel materials, on an
original equipment manufacturer ("OEM") basis, for the manufacture of medical
devices, drug delivery products, wound care and cosmetics products. Hydrogel is
manufactured by introducing a polymer (solid) into water, creating a feed mix.
The feed mix is used to coat a web material (or scrim) and two outer linings are
applied creating sheets of hydrogel. These sheets are then introduced to a high
energy field, which is accomplished by using an electron beam accelerator. The
introduction of a high energy field causes the release of hydrogen atoms which
in turn causes carbon molecule covalent bonding. This is commonly referred to as
crosslinking. This creates longer chains of the polymer in the gel which
increases its molecular integrity, giving the gel unique characteristics which
make it useful in a variety of products. By varying the percent of solids in the
feed mix, the amount of crosslinking (which is determined by the amount of
energy introduced), the type of polymer, scrim and lining used, a wide variety
of gels with distinctly different characteristics may be produced.

         The Company believes that HDS's proprietary mixing and beam operation
technology allow it to make superior quality products at competitive prices. HDS
currently provides product to several Fortune 500 companies, as well as other,
smaller companies. These customers are using the HDS hydrogel for wound
dressings, transdermal drug delivery systems and electrodes.

         HDS currently mixes the gel and outsources the beam processing.
However, HDS has purchased an electron beam and has leased space in Langhorne,
PA, where it is building an electron beam irradiation facility. The facility is
scheduled to be on-line in the fourth quarter of calendar year 1997. Management
anticipates that in addition to housing the electron beam and hydrogel mixing
room, the facility will house the warehousing and distribution operations of the

emergency medical, apnea monitoring and peritoneal dialysis products.

         HDS also sells a variety of wire and cable products to resellers which
are used for infant monitors. The products are generally used for infants with
health problems that result in a need for monitors which are attached to
electrodes. HDS primarily purchases parts and assembles a variety of kits for
use with the monitors.


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MARKS MEDICAL DEVICES.

         The Company has seven (7) licensing agreements with Dr. Lloyd Marks
which provide for the exclusive license to commercially exploit medical devices
that have been developed by Dr. Marks. Five (5) of the devices are the subject
of existing United States patents and one (1) device has a patent application
pending.

         Each of the Licensing Agreements provide that the Company receives the
exclusive right to develop, commercialize and sell each of the seven (7) medical
devices. In addition, the Company has two (2) Royalty Sharing Agreements with
Dr. Marks for patented medical devices. To date, the Company has focused its
resources on the development of the safety needle and has not pursued the
development of the other Marks Medical Devices. See "Certain Transactions."

         Safety Needle The Company has aggressively pursued the development and
exploitation of Dr. Marks' patented safety needle design. The safety needle is a
needle which prevents accidental skin punctures, thereby preventing the spread
of infections or diseases to medical personnel. Although there are several
safety needles developed and on the market, almost all require a specific act by
the user to place it in its safe state. The Company believes that the few
designs which automatically cap the needle are mechanically complex and too
expensive to achieve commercial success. As a result, safety needles are neither
generally acceptable nor in common use.

         The Company's safety needle requires no affirmative act on the part of
the user to deploy the protective mechanism. In addition, it is mechanically
simple and therefore inexpensive to manufacturer. The needle tip is never
exposed from its protective mechanism except when it is in the patient or an
Intramuscular ("IM") injection is about to be administered.

         In May 1996, the Company entered into contract with two (2) different
firms to commence final design and manufacture of the Safety Needle.
Subsequently, the Company has terminated one of the contracts. The Company has
developed soft tooling which is being used to assess the manufacturing process
and validation of the hard tool design. Sample product has been manufactured
using the soft tooling. These samples are currently being shown to focus groups
and healthcare professionals in an effort to better evaluate the marketing
strategy of the product. A hard tool will be ordered from which a product will
be made which will be used for the data gathering required for FDA submission.


CF MEDICAL DEVICES

Emergency Medical Devices

         The Company owns three (3) medical devices, Hot-Sack(TM),
Therm-o-Drug(TM) and an


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electronic stethoscope, and has the exclusive licensing rights to one (1)
medical device, Res-Q-Air(TM), all of which are used in medical rescue
operations by ambulances and other emergency medical technicians. The following
is a detailed explanation of these medical devices.

         The Hot-Sack(R) - The Hot-Sack(R) warms two (2), one (1) liter
intravenous ("IV") bags in one hour. The Hot-Sack(TM) reduces the temperature
loss of the IV solution given to patients in extreme weather conditions and is
particularly useful in the treatment of patients suffering from hypothermia.
This device has received United States, Patent No. DES352606. The trademark
Hot-Sack(R) is a registered trademark as evidenced by United States Trademark
Certificate No. 1742230. The Hot-Sack(R) has received approval from the FDA, and
has been marketed since 1993 subject to the general control provisions of the
Federal Food, Drug and Cosmetic Act.

         Res-Q-Air(R) - The Res-Q-Air(R) inhaled delivery system is an effective
method of core rewarming in cases of hypothermia giving the patient the ability
to inhale warm saturated air. This product makes warm saturated air available
for any emergency rescue operation. The Res-Q-Air(R) was designed and developed
at the University of Victoria, British Columbia. The Company has licensed the
exclusive right to manufacture, market and sell the Res-Q-Air(R) in the United
States, Canada and Worldwide, pursuant to a license agreement which expires on
May 8, 2000. In consideration for such license, the Company has agreed to pay
Rescue Products, Inc. a royalty of ten (10%) percent of the factory selling
price of all Res-Q-Air(R)'s sold. This device has received United States, Patent
No. 5,148,801. The Res-Q-Air(R) received approval from the FDA in 1993 and has
been marketed since 1993 subject to the general control provisions of the
Federal Food, Drug and Cosmetic Act.

         Therm-O-Drug(TM) - Therm-O-Drug(TM) is a heated drug box which enables
medications to be stored at between 65o and 85o even when the temperature
outside the box is as low as 10o . The Therm-O- Drug(TM) is powered by either a
115 VAC or through a 12 volt vehicle power with an optional cigarette lighter
cable. Therm-O-Drug(TM) received required approval from the FDA under Section
510(k) in 1993 and has been marketed since 1993. Therefore the Company may
market the device subject to the general control provisions of the Federal Food,
Drug and Cosmetic Act.


         Electronic Stethoscope - an electronic stethoscope which allows a
medical technician to hear a patient's heart and lungs clearly in a high noise
environment (up to 100db levels), without removing any of the patient's
clothing. The stethoscope also makes it possible to hear fetal sounds clearly
and to monitor blood pressure through clothing layers. Direct amplification
through the stethoscope combined with fixed and adjustable filters block out
excessive ambient noise and extraneous sounds which cause massive interference
with conventional stethoscopes. This allows monitoring of a patient's condition
and blood pressure during medivac or ambulance transportation. The electronic
stethoscope was developed by Dr. Andrew Weinberg, M.D. in cooperation with C.F.
The Company has acquired all rights to the stethoscope and an agreement with Dr.
Weinberg which has a term of twenty (25) years and under which the Company will
pay Dr. Weinberg a royalty of three (3%) percent of the retail price of each
stethoscope sold by the


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Company.

Peritoneal Dialysis Devices

         The Company owns two (2) devices that are used in the warming of
peritoneal dialysis solution.

         The Hot-Sack II(TM) - The Hot-Sack II(TM) is a portable and safe method
for warming peritoneal dialysis solutions. The Hot-Sack II(TM) warms one (1)
2000 milliliter bag of peritoneal dialysis solution in approximately one and
one-half (1 1/2) hours providing even heating with no hot spots and no
overheating. The device has an automatic temperature gauge to maintain the
solution at 98o Fahrenheit with no operator adjustments. It enables peritoneal
dialysis patients to have a convenient way to warm the dialysis solution. The
Company believes that this device is protected by the Company's Patent for The
Hot-Sack(R) and may be marketed based upon the FDA approval of The Hot-Sack(R)
subject to the control provisions of the Federal, Food, Drug and Cosmetic Act.

         Hot-Sack II+(TM) - The Hot-Sack II+(TM) is a modified version of the
Hot-Sack II(TM) device for the heating of peritoneal dialysis solution. The
Hot-Sack II+(TM) was developed in cooperation with a worldwide distributor of
health products. The Company believes that this device is protected by the
Company's Patent on the Hot-Sack(R) and may be marketed based upon the FDA's
approval of Hot-Sack(R), subject to the general control provisions of the
Federal Food, Drug and Cosmetic Act.

Sales and Marketing

         HDS hydrogel and other electron beam accelerator processed products are
being marketed both through internal contacts with a few world-wide health
distributors and through an outside sales force. HDS has entered into a contract
with a sales consultant experienced in electron beam accelerator processed
products and an outside agency. HDS has commenced solicitation of prospective

customers for hydrogel and electron beam accelerator processed products in
preparation for the completion of the plant facility in late 1997.

         The HDS apnea monitor related products have an established market of
approximately 50 resellers. HDS, through its internal sales force, is seeking to
expand its customer base through increased marketing efforts and by bidding on
large volume supply contracts. Since this is a specialized field, the customer
base is limited.

         The Company markets its C.F. Medical Devices through independent
distributors worldwide. The Company does not have written agreements with these
distributors and pays these distributors between 15-30% of the sales price of
each device. The Company also markets its


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products through print and media advertising directed at consumers, health care
professionals and long-term care facilities and product literature directed at
distributors of medical products, and by exhibiting its products at appropriate
medical conventions and meetings.

         On July 25, 1995, the Company entered into a distributorship agreement
with Medical Marketplace, Inc., ("MMI") which provided that MMI would act as a
distributor of certain Marks Medical Devices in the State of California. In
consideration for such distribution, the Company agreed to sell to MMI the Marks
Medical Devices at fifty (50%) percent of their retail sales price. The
Distributorship Agreement has a term of five (5) years and may be terminated
upon the mutual consent of the parties upon thirty (30) days written notice.

         Management will determine the appropriate marketing strategy for the
products which are currently in the development stage as these products come to
market.

Manufacturing

         HDS is currently in the process of constructing an electron beam
accelerator in Langhorne, PA. This facility will serve as a manufacturing
facility for its hydrogel products as well as a contract irradiation facility.
In addition, the Company anticipates consolidating its other manufacturing and
warehousing operations into this facility. The facility is scheduled to be
completed in the fourth quarter of calendar 1997.

         The Company's medical devices must be manufactured in compliance with
applicable regulatory requirements and at acceptable cost. Many of the Company's
competitors rely on third party manufacturers to produce and assemble some or
all of the components of their products. The Company's success depends to a
material degree upon its ability to contract with third parties to manufacture
the Company's proposed products according to the Company's designs and
specifications, in accordance with applicable regulations, and at a unit cost to

the Company that will permit the Company to market its products at an acceptably
competitive purchase price to its customers.

         Management believes, although there can be no assurance, that the
Company will be able to maintain sources of manufacturing supply for its non-HDS
products that will satisfy the foregoing requirements.

Competition

         Competition in the medical device industry is intense. There are many
companies and academic institutions that are capable of developing products of
similar design, and that have developed and are capable of developing products
based on other technologies, that are or may be competitive with the Company's
medical devices. Many of those companies and academic institutions are
well-established, have substantially greater financial and other resources than
the Company, and have established reputations for success in the development,
sale and service of


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products. These companies and academic institutions may succeed in developing
competing products that are more effective than those of the Company or that
receive FDA approval more quickly than the Company's products. The Company's
ability to compete will be dependent upon its ability to get products approved
by regulatory authorities and introduced to the market, including the
arrangement of a distribution network, and to provide products with advanced
performance features, none of which can be assured. In addition, the Company
must compete with other existing and new technologies in the allocation of
hospitals' capital spending budgets.

Government Regulation

         The majority of the Company's products are subject to regulation by,
among other governmental entities, the United States Food and Drug
Administration ("FDA") and, to a lesser extent, correspondent state agencies. If
a device is subject to FDA regulation, compliance with its requirements usually
constitutes compliance with state regulation. In order to ensure that medical
products distributed for human use in the United States are safe and effective,
the FDA regulates the introduction, manufacture, advertising, labeling,
packaging, marketing and distribution of and record-keeping for such products.

         In manufacturing some of its products, the Company must comply with FDA
regulations and is subject to various other FDA record-keeping requirements and
to inspections by the FDA. The Company believes that the manufacturing and
quality control procedures it will follow, will meet the requirements of these
regulations. The FDA would have the authority, in addition to less drastic
remedies, to order the Company to cease production of its products and to
request that the Company recall products already sold by the Company. The FDA
may conduct periodic inspections of the Company's facilities in order to confirm

regulatory compliance by the Company, but has not yet done so. If the FDA
believes that its regulations and other guidelines have not been followed, it
may seek to implement extensive enforcement powers, which were recently
strengthened by the enactment of the Safe Medical Devices Act of 1990. The FDA's
powers include the ability to ban products from the market, prohibit the
operation of manufacturing facilities and effect recalls of products from
customer locations and impose monetary civil penalties. The Company believes
that it is in substantial compliance with applicable FDA regulations.

          Three (3) of the medical devices that the Company acquired from C.F.
and four (4) of the products acquired from Alternative Design Systems R & D
Group have been approved by FDA under a review process known as "510(k) review"
and the Company believes that an additional two (2) products (Hot-Sack II(TM)
and Hot-Sack II+(TM)) are covered by the FDA's approval of Hot Sack(TM) or would
qualify independently for 510(k) approval. In the 510(k) review process, a
manufacturer is mandated to demonstrate that a proposed product is
"substantially equivalent" to another product that was in commercial
distribution in the United States before May 26, 1976, in which event the review
process can take anywhere from three months to more than one year before FDA
grants clearance of the 510(k) pre-market notification. In cases where there is
no existing FDA-approved product "substantially equivalent" to the new proposed
product, the


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product is considered a "new" product. The new product requires a Pre-Market
Application ("PMA") which is a lengthier and more burdensome process and a
process which will require FDA approval prior to the product entering commercial
distribution. Although the Company believes that the Marks Medical Devices will
also qualify for approval under the 510(k) review process, the Company has not
submitted any applications to the FDA for the approval of any of these devices
and consequently has not received the approval of the FDA to market any of Marks
Medical Devices.

         After clearance is given, the FDA has the power to withdraw the
clearance or require the Company to change the device or its manufacturing
process or labeling, to supply additional proof of its safety and effectiveness
or to recall, repair, replace or refund the cost of the medical device if it is
shown to be hazardous or defective. The process of obtaining clearance to market
products is costly and time consuming and can delay the marketing and sale of
the Company's products.

Health Care Industry. Legislation and regulations at both the federal and state
levels may be enacted which may change the methods by which health care
providers, including hospitals, physicians and home care dealers, are reimbursed
for costs of providing services to Medicare and Medicaid program beneficiaries.
Changes may also be made by third-party payors in coverage policies for various

items.

Patents, Proprietary Rights and Trademarks

         The Company's policy is to file patent applications to protect
technology, inventions and improvements that are important to the development of
its business. The Company also relies on trade secret protection for its
confidential and proprietary information.

         The Company has the exclusive license to six (6) medical devices of
which five (5) have been issued United States patents and the exclusive license
to one (1) medical device that has a U.S. patent application pending. There can
be no assurance that pending patent applications will be approved or that any
patents will provide competitive advantages for the Company's products or will
not be challenged or circumvented by competitors. The Company also relies on
trade secrets and proprietary know-how which it seeks to protect, in part,
through confidentiality agreements with employees, consultants and other
parties. There can be no assurance that these agreements will not be breached,
that the Company would have adequate remedies for any breach, or that the
Company's trade secrets will not otherwise become known to or independently
developed by competitors. The Company also holds a registered trademark on
Hot-Sack(R) and on SmartMed(TM) which is used on current products and may be
used on future products.

         As part of the HDS asset acquisition, the Company also holds a
registered trademark on Buzz-Off(R) which may be used on future hydrogel related
products.

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Product Liability Insurance

         Companies in the health care market are subject to lawsuits alleging
negligence, product liability and other legal theories, many of which involve
large claims and significant defense costs. The Company could be subject to
claims alleging personal injuries resulting from the use of its products. The
Company has obtained product liability insurance since it has commenced sales of
its products. However, there can be no assurance that such policies will be
sufficient to cover potential claims or the costs of any resulting litigation or
that a policy can be maintained in force at an acceptable cost to the Company. A
successful claim against the Company in excess of the Company's insurance
coverage could have a material adverse effect upon the Company's business and
results of operations. In addition, claims against the Company, regardless of
their merit or eventual outcome, also may have a material adverse effect upon
the Company's reputation. The Company currently has product liability coverage
of $1,000,000 and a $5,000,000 umbrella policy.

Employees

         As of July 31, 1997, the Company and its majority-owned subsidiary

employed ten (10) full time persons, including two (2) in sales marketing and
product development, four (4) in general administration and finance, and four
(4) in production and setup of the new facility. The Company has never had a
work stoppage and its employees are not represented by a labor organization. The
Company considers its employee relations to be good.

Item 2.  PROPERTIES.

         The Company's corporate headquarters are in New York City. The
Company's lease is on a month to month basis at a rent of $5,000 per month. See
"Certain Transactions." The Company believes that these facilities are adequate
to meet its current needs and that suitable additional or alternative space will
be available as needed in the future on commercially reasonable terms.

         In February 1997, the Company leased a 16,500 square foot facility in
Langhorne, PA. This facility will serve as the Company's
manufacturing/distribution center. The lease is for a term of seven years with
an annual rent of $116,000 which increase to $119,000 per annum over the term of
the lease. The facility is subleased to HDS for the full rental amount.

         HDS also leases additional space in Carlstadt, New Jersey and in
Teterboro, New Jersey on a month to month basis which is currently being used
for production and distribution of products. On August 1, 1997 HDS closed its
Teterboro facility and the operations have been transferred to the Langhorne
facility.


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Item 3.  LEGAL PROCEEDINGS.

         The Company has been named in four (4) actions, three (3) of which are
seeking class certification of their claims against the Company and various
other defendants.

         Morehead, et al. v. Advanced Voice Technologies, et al., (New York
Supreme Court, New York County); Control Touch Systems, Inc. v. Advanced Voice
Technologies, Inc., et al, (New York Supreme Court, New York County); Mott v.
Sterling Foster & Co., Inc., et al., (United States District Court, District of
South Carolina); Petit, et al. v. Sterling Foster & Co., Inc., et al., (United
States District Court, Eastern District of New York) These complaints against
numerous defendants including the Company allege violations of the Securities
Act of 1933 arising out of the November 1995 initial public offering of 1
million shares of Company common stock. According to the complaints, the
underwriter of the offering, Sterling Foster & Co., Inc. ("Sterling Foster"),
manipulated secondary market trading in shares of the Company's common stock
following the offering. The complaints further allege that the prospectus and
registration statement for the offering failed to disclose material facts, in
violation of federal and state securities laws. The complaints seek unspecified
damages. The Company and its officers and directors deny the allegation of the

complaints and are vigorously defending these actions.

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

         No matters were submitted to the Company's shareholders for vote during
the last quarter of its fiscal year.



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                                   PART II

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

         The Company's securities commenced trading in the over-the-counter
market on the effectiveness of the Company's Initial Public Offering on November
18, 1995 in the form of Common Stock. The Common Stock is regularly quoted and
traded on the NASDAQ system.

         The following table indicates the high and low bid prices for the
Company's Common Stock for the period up to June 30, 1997 based upon information
supplied by the NASDAQ system. Prices represent quotations between dealers
without adjustments for retail markups, markdowns or commissions, and may not
represent actual transactions.

Common Stock

                                                         Quoted Bid Price
                                                      High             Low

                  1995 Calendar Year                

                  Fourth Quarter                     12 7/8           9 3/4
                   November 18, 1995 -
                   December 31, 1995

                  1996 Calendar Year

                  First Quarter                      12 5/8           5 1/4
                  Second Quarter                      6 7/8           4 3/4
                  Third Quarter                       5 3/4           2 1/2
                  Fourth Quarter                      2 5/8             1/2

                  1997 Calendar Year

                  First Quarter                       2 1/2             1/2
                  Second Quarter                       11/16            1/4


         On July 8, 1997, the closing price of the Common Stock as reported on
the NASDAQ System was $.3125. On July 8, 1997, there were 136 holders of record
of common stock.


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Item 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
         FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Liquidity and Capital Resources

    The Company had net working capital of $1,159,999 at April 30, 1997 which is
primarily due to the remainder of the proceeds from the public offering which
was completed in November 1995. Additionally, the Company has invested
approximately $750,000 of these proceeds in long-term investments. The Company
remains in its development stage as it has not yet derived significant revenues
from the sale of its products.

         In January 1997, the Company entered into a subscription agreement to
acquire 50.04% of the Common Stock and 15,000,000 shares of Preferred Stock for
a combined voting interest of 92.9% of Hydrogel Design Systems, Inc. ("HDS").
HDS was formed to effect the asset acquisition described below. As consideration
for its interest, which consists of 1,251,000 shares of HDS Common Stock and
15,000,000 shares of HDS Series A Preferred Stock, the Company agreed to
contribute $150,000 in cash, 150,000 shares of its Common Stock, and the
commitment to make available to HDS a $500,000 8% revolving line of credit. In
February 1997, HDS acquired certain assets from two entities for an aggregate
purchase price of $150,000 in cash and 150,000 shares of Embryo Common Stock.
Assets acquired include property rights and technical data, machinery and
equipment, and inventory. The Embryo shares vest on the second anniversary date
of the closing only if HDS has earned $500,000 in cumulative gross revenues
derived from the sale of certain products during the two (2) year period. If, on
the vesting date, the fair market value of the shares is less than $900,000, the
parties may demand that HDS purchase all of the shares at an aggregate purchase
price of $900,000 in either cash and/or marketable securities.

         The Company's statement of cash flows for the year ended April 30, 1997
reflects cash used in operating activities of approximately $1,126,000. This use
of cash is primarily attributable to general and administrative expenses,
product development and advertising and marketing expenses. Net cash provided by
investing activities approximated $847,000 representing the sale of investments
of approximately $1,196,000 which was used primarily to fund current operations.
In addition, $201,000 of these funds were used for the asset acquisition
described above and $148,000 was used to purchase property and equipment for
HDS. Net cash provided by financing activities of $150,000 represents the cash
contribution of a minority shareholder of HDS which was also utilized for

capital expenditures and the asset acquisition. HDS has also entered into a
contract for the purchase of manufacturing equipment for approximately $600,000,
which was provided by financing activities through the issuance of debt in the
same amount. The funds were transferred directly from the lender to the seller
of the equipment. The debt is evidenced by a promissory long-term note and
security agreement between HDS and Becton Dickinson and the note is to be repaid
between three (3) and six (6) years from the anniversary date, depending upon
the amount of revenue generated by HDS as a


                                      13


<PAGE>




result of Becton Dickinson contracts.

         The Company expects to incur substantial expenditures over the next 6
to 12 months for product development, to implement its sales and marketing plans
and to establish a manufacturing facility for HDS. The Company's management
believes that the Company's short and long-term investments will be sufficient
to fund its liquidity needs for at least the next 12 months.

Results of Operations

         Since its inception, the Company's primary activities have consisted of
obtaining the exclusive license to seven (7) medical devices developed by Dr.
Lloyd Marks, developing a marketing strategy for the C.F. Medical Devices and
the start-up of HDS.

         The Company has not derived significant revenues since its inception in
March 1995. The total revenue earned from inception of $435,260 is primarily a
result of the sale of the C.F. Medical Devices. HDS sales of hydrogel and apnea
monitor products represents approximately $115,000 of the revenue earned since
February 6,1997. As a result of the Company's start-up expenses and acquisition
of licenses and royalty rights for the products in the development stage, the
Company had an accumulated deficit of $3,530,474 as of April 30, 1997. The
Company expects to continue to incur operating losses until such time it can
generate significant revenues from the sale of its products.

Plan of Operation

         On February 6, 1997, the Company, through its majority owned
subsidiary, HDS, entered into asset purchase agreements pursuant to which it
acquired certain assets from two entities. The two companies were engaged in the
business of manufacturing, marketing, selling and distributing hydrogel, a
aqueous polymer-based radiation ionized medical/consumer product, as well as
after-market components for apnea monitoring. Assets acquired include property
rights and technical data, machinery and equipment, and inventory. During the
next six (6) months HDS will seek to increase revenues from the sale of hydrogel
after-market apnea monitoring components primarily through increased marketing

efforts. The Company has also leased a facility in Langhorne, PA where it will
establish a manufacturing facility for the in-house production of hydrogel and
electronic beam processing of medical, cosmetic and pharmaceutical products. The
Company anticipates completion of the facility in the fourth calendar quarter of
1997.

         In May of 1996 the Company entered into contracts with two different
firms to commence final design and manufacture of the Safety Needle, one of the
medical devices developed by Dr. Lloyd Marks. Toward that end, the Company has
implemented the manufacture of prototypes for this medical device and has held
focus groups with various medical professionals to refine and enhance the
device. The Company anticipates the development of a marketing strategy and
seeking FDA approval for this device in the next six (6) - nine (9) months.

         During the next six (6) months,  the Company will also continue to
conduct market


                                      14


<PAGE>




research studies on the other six (6) medical devices it has licensed from Dr.
Marks in order to determine which of the devices are most commercially
marketable. The review will also include an analysis of the most efficient way
to market each of the devices. The Company will determine if it is more
efficient to license the products to third parties for development or to develop
and market the products itself. Within 12 months the Company intends to
implement the development and marketing of the most commercially viable and
potentially profitable medical devices. The Company also intends to undertake
clinical and beta tests to evaluate the products as they are being developed.
The Company may enter into discussions with unaffiliated third parties that may
be able to utilize, develop or market the devices in either a cooperative joint
venture or as a licensee. The relationship may also assist the Company in the
preparation of applications to the Food and Drug Administration in order to
receive approval to market the devices in the United States.

         The Company is also seeking to increase revenues from the sale of the
C.F. Medical Devices primarily through increased demonstrations to the
appropriate interest groups.

         The Company believes it has sufficient capital to fund the Company's
operations for the next 12 months.

Item 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                  See financial statements following Item 13 of this Annual
Report on Form 10-KSB.

Item 8.  CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS

         ON ACCOUNTING AND FINANCIAL DISCLOSURE.

                  None.


                                      15


<PAGE>




                                   PART III

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

Directors and Executive Officers

                  The names and ages of the directors, executive officers and
significant employees, and promoters of the Company are set forth below. All of
the directors are elected annually.

      Name                 Age      Position Held

Matthew L. Harriton        33       Chief Executive Officer, Chief Financial
                                    Officer and Director

Donn M. Gordon             52       Chief Executive Officer and Director*

Michael Lulkin             44       Chairman of the Board of Directors
                                    and Secretary

Steven F. Wasserman        39       Director**

Dr. Daniel Durchslag       52       Director

Dr. Lloyd Marks            45       Consultant

David Meridor              54       Consultant

*Employment of Donn M. Gordon was terminated on March 31, 1997.
**Steven F. Wasserman resigned as a Director of the Company on July 22, 1997.

Background of Executive Officers and Directors

         Matthew L. Harriton has served as the Chief Financial Officer of the
Company since January 1996. In April 1997, Mr. Harriton became the Chief
Executive Officer and a Director of the Company. Prior to joining Embryo
Development Corporation, Mr. Harriton's professional experience included
positions at CIBC Wood Gundy Securities Corporation, Coopers & Lybrand, and The
First Boston Corporation.   Mr. Harriton also serves as a director of Decor
Group, Inc., a public company which trades on the OTC Bulletin Board and is

involved in the home decorating industry.  Mr. Harriton also serves as a
director of Superior Supplements, Inc., a public company which trades on the OTC
Bulletin Board and which manufactures and sells dietary supplements and
specialty nutritional supplements in bulk tablet, capsule and powder form. Mr.
Harriton



                                      16


<PAGE>




also serves as a director of Perry's Majestic Beer, Inc., a public company which
trades on the OTC Bulletin Board and produces micro brewed beers.  He is a
graduate of Lehigh University and received his M.B.A. from Duke University's
Fuqua School of Business.

         Donn M. Gordon was the President and Chief Executive Officer of Westcon
Orthopedics, Inc. From 1989 to 1995.  Westcon develops, manufactures and markets
specialty products to the Orthopedic and Podiatric markets.  Prior to joining
Westcon, Mr. Gordon was Vice President and Chief Operating Officer of Cormed,
Inc., a developer/marketer of ambulatory infusion pumps and vascular access
devices.  Mr. Gordon received his B.S. in Chemistry from Mommouth College and
his MBA in Marketing/Management from Southern Illinois University.

         Michael Lulkin has served as a Chairman of the Board of Directors of
the Company since March 1995. Since May 1995, Mr. Lulkin has served as the
general counsel for PDK Labs, Inc., a manufacture of over-the-counter
pharmaceuticals which trades on The Nasdaq SmallCap Market. Prior to joining PDK
Labs, Mr. Lulkin was engaged in the private practice of law as a sole
practitioner for over 13 years. Mr. Lulkin also serves as a director of Decor
Group, Inc. Decor is a public company which trades on the OTC Bulletin Board and
is in the home decorating industry. He graduated from State University of New
York at Buffalo and received his J.D. from Emory University School of Law.

         Steven F. Wasserman served on the Company's Board of Directors from
March, 1995 through July 22, 1997.  Mr. Wasserman has been engaged in the
practice of law at the firm of Bernstein & Wasserman since 1984.  See "Legal
Matters."  Mr. Wasserman is a graduate of Union College and received his J.D.
from the Benjamin N. Cardozo School of Law.

         Dr. Daniel Durchslag, DDS,, has been practicing General, Cosmetic and
Sports Dentistry in Beverly Hills, CA, since 1980. From 1973 until 1979, he was
an Associate Professor and Director of Clinics at the University of Southern
California School of Dentistry. He is a graduate of the University of Wisconsin
and Loyola University/Chicago College of Dental Surgery. He is presently Team
Dentist for the Los Angeles Raiders.

         Dr. Lloyd Marks has been a consultant to the Company since March 31,
1995.  Since 1994 he has been the chief of the division of pediatric cardiology

for the Children's Hospital of New Jersey and the New Jersey Medical School.  He
is also an adjunct Professor of Biomedical Engineering at the New Jersey
Institute of Technology and Drexel University.  From 1986 - 1994 Dr. Marks
served as a professor of pediatrics at Temple University of Medicine and from
1983 - 1986 he served as an assistant professor at the State University of New
York at Stony Brook.  From 1986 - 1994 he also served as staff cardiologist and
director of the cardiovascular laboratory at St. Christopher's Hospital for
Children.  Dr. Marks received his M.D. from the University of Michigan Medical
School and his B.S. in Electrical Engineering from Massachusetts Institute of
Technology.

         David Meridor has been a consultant to the Company since August 1995. 
From 1977-1992, Mr. Meridor was President, Chief Executive Officer and a
Director of Laser Industries Limited and since 1992


                                      17


<PAGE>




has continued to serve as a Director. Laser Industries Limited is a public
Company which trades on the American Stock Exchange and which specializes in
surgical lasers.  Mr. Meridor is currently a director of Laser Industries
Limited since 1995.  Mr. Meridor has been Chairman of the Board of Directors of
Rosebud Medical Ltd., a healthcare company, whose shares are traded on the
Tel-Aviv Stock Exchange.

         Each director of the Company is entitled to receive reasonable expenses
incurred in attending meetings of the Board of Directors of the Company. The
Directors receive no other compensation for serving on the Board of Directors.
The members of the Board of Directors intend to meet at least quarterly during
the Company's fiscal year, and at such other times duly called.


                                      18


<PAGE>

Item 10.  EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>

                                                    SUMMARY COMPENSATION TABLE

                                                                                        Long Term Compensation
                                                                                     -----------------------------
                                                Annual Compensation               Awards             Payouts
                                          ---------------------------------      --------        -----------------
         (a)                  (b)      (c)         (d)            (e)              (f)           (g)          (h)     (i)

                                                                                    Restricted                            All
                                                                 Other              Stock                      LTIP       Other
                                                                 Annual             Awards        Options/   Payouts  Compensation
Name and Principal Position   Year    Salary($)      Bonus($)  Compensation($)     ($)            SARs(#)    ($)          ($)
----------------------------  ----    ---------      -------   ----------------    -----------   --------  ---------  ------------
<S>                           <C>     <C>            <C>       <C>                 <C>           <C>        <C>       <C>
Donn Gordon, CEO(2)           1997    $91,000        $13,650     $6,000(1)              ---      100,000       0         0
                              1996     77,250         11,400      7,575(1)              ---      100,000       0         0
                              1995      6,333              0        500(1)              ---            0       0         0

Matthew L. Harriton, CEO      1997    $90,000        $     0     $    0                 ---      100,000       0         0
--------------------
</TABLE>
(1)      Represents auto allowance in accordance with March 1995 employment 
         agreement
(2)      Employment of Donn M. Gordon was terminated on March 31, 1997.

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

    (a)                              (b)                               (c)                            (d)                    (e)
                                                              % of Total Options
                           Number of Securities               Options/SARs Granted                 Exercise or
                           Underlying Option/                 to Employees in                      Base Price            Expiration
Name                       SARs Granted (#)                   Fiscal Year                          (# Share)               Date
----                       --------------------               --------------------                 ----------            ----------
<S>                        <C>                                <C>                                  <C>                   <C>  
Donn Gordon                100,000                            50%                                  $.5625                  3/31/01

Matthew Harriton           100,000                            50%                                   .65                    1/01/01
</TABLE>
  
<TABLE>
<CAPTION>
                                               AGGREGATED OPTION/SARs EXERCISES IN
                                                   LAST FISCAL YEAR AND FY-END
                                                        OPTIONS/SAR VALUES

    (a)                              (b)                         (c)                     (d)                          (e)
                                                                                     Number of                    Value of
                                                                                     Securities Underlying        Unexercised
                                                                                     Unexercised Options/         In-the-Money
                                                                                     SARs at FY-End (#)           Options/SARs at
                           Shares Acquired                    Value                  Exercisable/                 FY-End Exercisable
Name                       on Exercise (#)                    Realized ($)           Unexercisable                Unexercisable
----                       ------------------                 ------------           ---------------------        -----------------
<S>                        <C>                                <C>                    <C>                          <C>

Donn Gordon                        0                          $ -0-                  200,000/-0-                      $-0-/$-0-
Matthew Harriton                   0                            -0-                  100,000/-0-                        -0-/-0-

</TABLE>



                                      19


<PAGE>

Employment Agreements

Employment Agreements and Consulting Agreements

         On March 31, 1995, the Company entered into a two (2) year employment
agreement with Donn Gordon to serve as the Company's Chief Executive Officer.
The agreement provided for Mr. Gordon to receive a salary of $76,000 per annum
the first year and $91,000 per annum the second year, and for Mr. Gordon to
devote all of his time to the performance of duties to the Company. The
agreement also provided for the payment of a bonus to Mr. Gordon, at the sole
discretion of the Board of Directors, which will be at least 15% of his base
salary and the issuance of options to purchase the aggregate amount of 200,000
shares of Common Stock, 100,000 of which were issued upon the completion of the
Company's initial public offering exercisable at the initial public offering
price of $5.00 and 100,000 of which were issued on March 31, 1997 and are
exercisable at $.5625. Mr. Gordon's contract expired on March 31, 1997 and was
not renewed by the Company.

         The Company has entered into a four (4) year consulting agreement with
Dr. Lloyd Marks which provides for compensation of $75,000 per year. The
agreement also provides for the issuance to Dr. Marks of warrants to purchase
600,000 shares of the Company's Common Stock at $3.00 per share from January 1,
1996 through December 31, 1999. The agreement requires Dr. Marks to provide 12
hours of consulting services to the Company per month.

         On August 29, 1995, the Company entered into a three (3) year
consulting agreement with David Meridor. The consulting agreement provides for
Mr. Meridor to render advice to the Company specifically concerning strategic
planning involving development of strategic sales and marketing plans in the
United States and internationally. The agreement which initially provided for a
monthly consulting fee of $5,000, was amended in March 1996 at which time the
Company issued 60,000 shares of Common Stock in lieu of the consulting fee. The
value of the Common Stock granted ($240,000) is being charged to operations
ratably over the remaining life of the consulting agreement. The agreement may
be terminated by either party upon thirty (30) days written notice.

         On January 1, 1997 the Company entered into a two (2) year employment
agreement with Matthew L. Harriton which provides for a base salary of $90,000
for the first year and $100,000 for the second year, with provisions for a
discretionary bonus. The agreement also provides for the issuance to Mr.
Harriton of options to purchase 100,000 shares of the Company's Common Stock at
$.65 per share.

         On February 6, 1997 the Hydrogel Design Corporation entered into five
(5) year employment agreements with both John Essmyer, as Chief Operating
Officer and Vice President of Research, and Michael Periera, as Chief Financial
Officer (the "Executives"). The agreements provide that each of the Executives
shall receive a base salary of $100,000 per annum, with provisions for a
discretionary bonus. The agreements also provided for bonuses of 250,000 shares

of common stock which were issued to each of the Executives upon execution of
their respective agreements.


                                      20


<PAGE>


Stock Option Plans and Agreements

                  Incentive Option and Stock Appreciation Rights Plan -- As of
March, 1995, the Directors of the Company adopted and the stockholders of the
Company approved the adoption of the Company's 1995 Incentive Stock Option and
Stock Appreciation Rights Plan ("Incentive Option Plan"). The purpose of the
Incentive Option Plan is to enable the Company to encourage key employees and
Directors to contribute to the success of the Company by granting such employees
and Directors incentive stock options ("ISOs") as well as non-qualified options
and stock appreciation rights ("SARs").

         The Incentive Option Plan will be administered by the Board of
Directors or a committee appointed by the Board of Directors (the "Committee")
which will determine, in its discretion, among other things, the recipients of
grants, whether a grant will consist of ISOs, non-qualified options or SARs or a
combination thereof, and the number of shares to be subject to such options and
SARs.

         The Incentive Option Plan provides for the granting of ISOs to purchase
Common Stock at an exercise price to be determined by the Board of Directors or
the Committee not less than the fair market value of the Common Stock on the
date the option is granted. Non-qualified options and freestanding SARs may be
granted with any exercise price. SARs granted in tandem with an option have the
same exercise price as the related option.

         The total number of shares with respect to which options and SARs may
be granted under the Incentive Option Plan is 2,000,000. ISOs may not be granted
to an individual to the extent that in the calendar year in which such ISOs
first become exercisable the shares subject to such ISOs have a fair market
value on the date of grant in excess of $100,000. No option or SAR may be
granted under the Incentive Option Plan after March 15, 2005 and no option or
SAR may be outstanding for more than ten years after its grant. Additionally, no
option or SAR can be granted for more than five (5) years to a shareholder
owning 10% or more of the Company's outstanding Common Stock.

         Upon the exercise of an option, the holder must make payment of the
full exercise price. Such payment may be made in cash or in shares of Common
Stock (based on the fair market value of the Common Stock on the date prior to
exercise), or in a combination of both. The Company may lend to the holder of an
option funds sufficient to pay the exercise price, subject to certain
limitations. SARs may be settled, in the Board of Directors' discretion, in
cash, Common Stock, or in a combination of cash and Common Stock. The exercise
of SARs cancels the corresponding number of shares subject to the related
option, if any, and the exercise of an option cancels any associated SARs.

Subject to certain exceptions, options and SARs may be exercised any time up to
three months after termination of the holder's employment.

         The Incentive Option Plan may be terminated or amended at any time by
the Board of


                                      21


<PAGE>




Directors, except that, without stockholder approval, the Incentive Option Plan
may not be amended to increase the number of shares subject to the Incentive
Option Plan, change the class of persons eligible to receive options or SARs
under the Incentive Option Plan or materially increase the benefits of
participants.

         To date no options or SARs have been granted under the Incentive Option
Plan. No determinations have been made regarding the persons to whom options or
SARs will be granted in the future, the number of shares which will be subject
to such options or SARs or the exercise prices to be fixed with respect to any
option or SAR.

         Non-Qualified Option Plan -- As of March 1995, the Directors and
stockholders of the Company adopted the 1995 Non-Qualified Stock Option Plan
(the "Non-Qualified Option Plan"). The purpose of the Non-Qualified Option Plan
is to enable the Company to encourage key employees, Directors, consultants,
distributors, professionals and independent contractors to contribute to the
success of the Company by granting such employees, Directors, consultants,
distributors, professionals and independent contractors non-qualified options.
The Non-Qualified Option Plan will be administered by the Board of Directors or
the Committee in the same manner as the Incentive Option Plan.

         The Non-Qualified Option Plan provides for the granting of
non-qualified options at such exercise price as may be determined by the Board
of Directors, in its discretion. The total number of shares with respect to
which options may be granted under the Non-Qualified Option Plan is 2,000,000.

         Upon the exercise of an option, the holder must make payment of the
full exercise price. Such payment may be made in cash or in shares of Common
Stock (based on the fair market value of the Common Stock on the date prior to
exercise), or in a combination of both. The Company may lend to the holder of an
option funds sufficient to pay the exercise price, subject to certain
limitations. Subject to certain exceptions, options may be exercised any time up
to three months after termination of the holder's employment or relationship
with the Company.

         The Non-Qualified Option Plan may be terminated or amended at any time
by the Board of Directors, except that, without stockholder approval, the
Non-Qualified Option Plan may not be amended to increase the number of shares

subject to the Non-Qualified Option Plan, change the class of persons eligible
to receive options under the Non-Qualified Option Plan or materially increase
the benefits of participants.


                                      22


<PAGE>




Item 11. SECURITY OWNERSHIP OF CERTAIN
         BENEFICIAL OWNERS AND MANAGEMENT.

         The following table sets forth certain information, as of July 22, 1997
with respect to the beneficial ownership of the outstanding Common Stock by (i)
any holder of more than five (5%) percent; (ii) each of the Company's officers
and directors; and (iii) the directors and officers of the Company as a group:

<TABLE>
<CAPTION>
                                                              Percentage                                     Percentage (%)
                                    Shares of                 (%) of                                          of Total
Name and Address                    Common                    Common                    Shares of             Combined
of Beneficial Owner                Stock Owned                Stock                   Preferred Stock           Vote
-------------------               -------------              ------------             ---------------       --------------
<S>                                <C>                       <C>                      <C>                   <C>  
M.D. Funding, Inc.(1)                 --                        --                     6,000,000                 55.3
5 Old Woods Drive
Harrison, NY 10528

Donna Field(1)(2)                     --                        --                     6,000,000                 55.3
5 Old Woods Drive
Harrison, NY 10528

Michael Lulkin(4)                     --                        --                           ---
305 Broadway
New York, NY  10007

Lloyd Marks(3)                        600,000                  11.0                           ---                 5.2
27 Great Springs Road
Bryn Mawr, PA  19010

Daniel Durchslag                          --                     --                            ---
9400 Brighton Way
Suite 402
Beverly Hills, CA 90210

Matthew L. Harriton(5)                100,000                   2.0                             ---                .9
750 Lexington Avenue
New York, NY  10022


All directors and officers            100,000                   2.0                              ---               .9
as a group (3 persons)

</TABLE>

(1)      M.D. Funding, Inc. is a corporation which is wholly owned by Donna 
         Field, the beneficial owner of such shares.  M.D. Funding, Inc. is 
         not affiliated with any of the

         officers or directors of the Company.

(2)      Includes 6,000,000 shares of Preferred Stock owned by M.D. Funding, 
         Inc., a corporation wholly owned by Ms. Field.


                                      23


<PAGE>




(3)      Includes a warrant to purchase 600,000 shares of Common Stock at an
         exercise price of $3.00 per share commencing January 1, 1996 through
         December 31, 1999.

(4)      Does not include Class B Warrants to purchase 15,000 shares of Common
         Stock.

(5)      Includes an option to purchase 100,000 shares of Common Stock at $.65
         per share.



                                      24


<PAGE>




Item 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         On March 31, 1995 the Company entered into seven (7) License Agreements
with Lloyd A. Marks for the exclusive license of seven (7) separate medical
devices. The License Agreements provided for the following aggregate payments:

                  (i)      $230,000 paid to Dr. Marks, at the closing of the
Company's initial public offering;.

                  (ii)     issued to Dr. Marks of 400,000 shares of the
Company's Common Stock;


and

                  (iii)     payment to Dr. Marks of 6% to 8% of the amount of
the net sales of the medical device.

         Each of the agreements also provides for minimum payment obligations
commencing 2 1/2 years after the date of the agreement. The minimum payment
obligations are for each license as follows:

                         Agreement                         Minimum Payment
                           Year                              Obligation
                         ---------                         ---------------    

                          9/30/97                              $ 25,000
                          3/31/98                              $ 25,000
                          9/30/98                              $ 50,000
                          3/31/99                              $ 50,000
                          9/30/99                              $100,000
                          3/31/00                              $100,000
                         3/31/01+                              $200,000

If the minimum payment obligations are not met, Dr. Marks has the option to
revoke the applicable license.

         On March 31, 1995, the Company entered into two (2) royalty sharing
agreements with Dr. Marks covering two (2) medical devices he had previously
licensed to unaffiliated third parties. The royalty sharing agreements provided
for the Company to pay Dr. Marks the aggregate amount of $20,000 paid at the
closing of the Company's initial public offering and


                                      25


<PAGE>




the issuance of 50,000 shares of the Company's Common Stock. The agreements
provide for the Company to receive from Dr. Marks 50% of all royalties he should
receive on each of these medical devices.

         On March 31, 1995, the Company entered into a consulting agreement with
Dr. Marks for Dr. Marks to provide consulting services to the Company for a
period of four (4) years. Dr. Marks has agreed to provide the Company at least
12 hours per month of consulting services in connection with the exploitation of
the License Agreement. The agreement provides for annual payments to Dr. Marks
of $75,000 per year and the issuance of a warrant to purchase 600,000 shares of
the Company's Common Stock at a purchase price of $3.00 per share.

         The Company has entered into a month to month lease with Michael
Lulkin, Chairman of the Board of Directors, for the Company's headquarters at

$5,000.00 per month.

         On September 14, 1995, the Company acquired five (5) medical devices
and the exclusive licensing rights to one (1) medical device from C.F.
Electronics, Inc. (the "C.F. Medical Devices"). Two (2) of the acquired medical
devices, the Hot-Sack II(TM) and Hot-Sack II+(TM) are used in connection with
the warming of peritoneal dialysis solution. Four (4) of the medical devices,
Hot-Sack(R), Res-Q-Air(R), Therm-O-Drug(TM) and an electronic stethoscope, are
devices used for emergency rescue operations and by other emergency medical
technicians. All of the medical devices acquired from C.F. have received all
necessary regulatory approvals and are in commercial distribution.

         In November, 1995, the Company completed a public offering of 1,000,000
shares of Common Stock at $5.00 per share for an aggregate of $5,000,000. An
additional 150,000 shares were sold for gross proceeds of $750,000 to the
underwriter to cover over-allotments. In addition, the underwriter received an
option, for a nominal fee, to acquire 100,000 shares of Common Stock at an
exercise price of $6.75 per share. The option expires in November 2001.

         Effective with the closing of the offering, the Company entered into a
five year consulting agreement with the underwriter. The unamortized balance of
the consulting fee of $91,667 was fully charged to operations in 1997 as a
result of the termination of the underwriter's operations.

         In February 1996, the Company entered into two separate multi-year
consulting agreements. As consideration for these services, the Company issued
225,000 shares of Common Stock to each of the parties. The value of the Common
Stock granted ($1,800,000) is being charged to operations ratably over the lives
of the consulting agreements.

         In January 1997, the Company entered into a subscription agreement to
acquire 50.04% of the Common Stock and 15,000,000 shares of Preferred Stock for
a combined voting interest of 92.9% of Hydrogel Design Systems, Inc. (HDS). HDS
was formed in October 1996 to



                                      26


<PAGE>




effect the asset acquisition described below. As consideration for its interest,
the Company paid $150,000 cash, 150,000 shares of its Common Stock and made
available to HDS a $500,000 line of credit.

         On February 6, 1997 the Company, through HDS, acquired substantially
all of the assets of two (2) related companies, Novatech, Inc. and Alternative
Design Systems R & D Group. In consideration for the payment of $150,000, and
the issuance of 150,000 shares of the Company's Common Stock (subject to certain
adjustments), the Company acquired certain rights and assets, including

proprietary formulas and methodology, necessary to manufacture, market, sell and
distribute Hydrogel and associated products. Hydrogel is a product used in the
manufacture of a variety of medical devices including, cardiac defibrillator
pads and various types of electrodes. HDS has also entered into a contract for
the purchase of manufacturing equipment for $600,000 which has been financed
through a long-term note and security agreement between HDS and Becton
Dickinson, a customer of HDS and a manufacturer and distributor of medical
devices and diagnostic systems.

         In February 1997, HDS entered into a month to month lease for a
property owned by two of its executives at $3,000 per month.

         M.D. Funding, Inc. may be deemed a parent of the Company as a result of
its control of the Company voting stock.  M.D. Funding, Inc. is a corporation
which is wholly owned by Donna Field, the beneficial owner of such shares.  M.D.
Funding, Inc. is not affiliated with any of the officers or directors of the
Company.  See "Principal Stockholders."

General

         The Company believes that material affiliated transactions and loans
between the Company and its directors, officers, principal shareholders or any
affiliates thereof have been and will be in the future on terms no less
favorable than could be obtained from unaffiliated third parties.


                                      27


<PAGE>




                                   PART IV

Item 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)(1)  Financial Statements.

        The following financial statements are included in Part II, Item 7:

Index to Financial Statements and Schedules

Report of Independent Certified Public Accountants                    F-1

Balance sheet as of April 30, 1997                                    F-2

Statements of operations for the years ended                          F-3
  April 30, 1997 and 1996

Statements of stockholders' equity for the years                      F-4
  ended April 30, 1997 and 1996


Statements of cash flows for the years ended                          F-5
  April 30, 1997 and 1996

Notes to financial statements                                         F-6 - F-14


                                      28


<PAGE>




(a)(3)  Exhibits.

1.01*                   Form of Underwriting Agreement.

1.02*                   Form of Selected Dealers Agreement.

3.01*                   Certificate of Incorporation of the Company.

3.02*                   By-Laws of the Company.

4.01*                   Form of Warrant Agreement by and among the Company and 
                        American Stock Transfer & Trust Company.

4.02 *                  Form of Underwriter's Share Purchase Option.  

10.01*                  March 1995 Bridge Loan Agreements.

10.02*                  Consulting Agreement by and between Dr. Lloyd Marks 
                        and the Company dated as of March 31, 1995.

10.03*                  Licensing Agreement by and between Dr. Lloyd Marks and
                        the Company re: SmartMonitor dated of March 31,1995.

10.04*                  Licensing Agreement by and between Dr. Lloyd Marks and
                        the Company re: Multi-Function Fluid Communication 
                        Control System dated as of March 31, 1995.

10.05*                  Licensing Agreement by and between Dr. Lloyd Marks and
                        the Company re: Adjustable Blood Pressure Cuff and 
                        Method of Measuring Blood Pressure dated of March 31,
                        1995.

10.06*                  Licensing Agreement by and between Dr. Lloyd Marks and 
                        the Company re: Stereoscopic Fluoroscopy Apparatus 
                        dated of March 31,1995.

10.07*                  Licensing Agreement by and between Dr. Lloyd Marks and 
                        the Company re: Adjustable Blood Pressure Cuff and 
                        Method of Using Same dated as of March 31,1995.


10.08*                  Licensing Agreement by and between Dr. Lloyd Marks and
                        the Company re: Multiple Cuff Blood Pressure System 
                        dated of March 31,1995.



                                      29


<PAGE>



10.09*                  Licensing Agreement by and between Dr. Lloyd Marks and
                        the Company re: Safety Needle dated of March 31,1995.

10.10*                  Royalty Sharing Agreement by Dr. Lloyd Marks and the 
                        Company re: Computer Assisted Admittance 
                        Plethysmography dated as of March 31, 1995.

10.11*                  Royalty Sharing Agreement by Dr. Lloyd Marks and the 
                        Company re: Method of and Apparatus of Detecting 
                        Cardiac Rhythm Disturbance dated as of March 31, 1995.

10.12*                  Employment Agreement by and between Donn Gordon and 
                        the Company dated as of March 31, 1995.

10.13*                  Asset Purchase Agreement by and between C.F. 
                        Electronics, Inc. and the Company dated September 14, 
                        1995.

10.14*                  Supply Agreement by and between C.F. Electronics, Inc.
                        and the Company dated September 14, 1995.

10.15*                  Supplier - Produced Finished Goods Purchase Agreement
                        (the Company has filed a request seeking confidential
                        treatment of this agreement).

10.16*                  Consulting Agreement by and between the Company and 
                        David Meridor dated August 29 1995.

10.17*                  Sublicensing Agreement by and between the Company and 
                        Advanced Technologies International, Ltd. dated July 
                        1995.

10.18*                  Distributorship Agreement by and between the Company 
                        and Medical Marketplace, Inc. dated July 25, 1995.

10.19**                 Consulting Agreement by and between the Company and 
                        Stanley Krasnoff dated February 12, 1996.

10.20**                 Consulting Agreement by and between the Company and 
                        Randolph K. Pace dated February 12, 1996.


10.21+                  Asset Purchase Agreement by and between Hydrogel 
                        Design Systems, Inc. and Alternative Design Systems R 
                        & D Group dated February 6, 1997.

10.22+                  Asset Purchase Agreement by and between Hydrogel Design
                        Systems, Inc. and Novatech, Inc. dated February 6, 1997.

10.23+                  Employment Agreement by John Essmyer and Hydrogel Design

                                      30


<PAGE>

                        Systems, Inc. dated February 6, 1997.

10.24+                  Employment Agreement by Michael Periera and Hydrogel 
                        Design Systems, Inc. dated February 6, 1997.

10.25***                Employment Agreement by Matthew Harriton and the 
                        Company dated January 1, 1997.

10.26***                Equipment Financing Agreement by Becton Dickinson and 
                        Hydrogel Design Systems, Inc. dated January 24, 1997.

10.27+                  Real Property Lease by and between the Company and 
                        Circon Corporation dated January 1997.

+        Filed herewith.

*        Incorporated by reference to the Company's Registration Statement on 
         Form SB-2 No. 33-92366.

**       Incorporated by reference to the Company's Form S-8 dated March 8, 
         1996.

***      Incorporated by reference to the Company's Form 10QSB dated January 
         31, 1997.

(B)      Reports on Form 8-K.

                  None.

                                      31


<PAGE>


                                  SIGNATURE

         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.


Dated:  New York, New York
        August 11, 1997

                                            EMBRYO DEVELOPMENT CORPORATION

                                            By: /s/ Matthew L. Harriton
                                                __________________________
                                                Matthew L. Harriton
                                                Chief Executive Officer, Chief
                                                Financial Officer, Principal 
                                                Accounting Officer and Director

         Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or Amendments thereto has been signed below by the
following persons in the capacities and on the dates indicated.

Signature                           Title                         Date
---------                           -----                         ----   
                              

/s/ Michael Lulkin        Chairman of the Board and        August 11, 1997
-----------------         Secretary
Michael Lulkin            

/s/ Matthew L. Harriton   Chief Executive Officer,         August 11, 1997
-------------------       Chief Financial Officer,
Matthew L. Harriton       Principal Accounting Officer
                          and Director

                         
/s/ Daniel Durchslag      Director                         August 11, 1997
-------------------       
Daniel Durchslag



<PAGE>


                         EMBRYO DEVELOPMENT CORPORATION
                                 AND SUBSIDIARY
                          (A Development Stage Company)

                               REPORT ON AUDITS OF
                        CONSOLIDATED FINANCIAL STATEMENTS

                       YEARS ENDED APRIL 30, 1997 AND 1996

                                                                      Page
                                                                      ----

Independent auditors' report                                          F-1

Balance sheet                                                         F-2


Statements of operations                                              F-3

Statement of stockholders' equity                                     F-4

Statements of cash flows                                              F-5

Notes to financial statements                                      F-6 - F-14


<PAGE>


                          INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Embryo Development Corporation and Subsidiary
New York, New York

We have audited the accompanying consolidated balance sheet of Embryo
Development Corporation and Subsidiary (a development stage company) as of April
30, 1997 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the two years in the period ended April 30,
1997 and cumulative from inception, March 3, 1995 to April 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Embryo Development Corporation
and Subsidiary as of April 30, 1997 and the results of its operations and its
cash flows for each of the two years in the period ended April 30, 1997 and
cumulative from inception, March 3, 1995 to April 30, 1997, in conformity with
generally accepted accounting principles.

                                                /s/ HOLTZ RUBENSTEIN & CO., LLP
                                                -------------------------------
                                                    HOLTZ RUBENSTEIN & CO., LLP

Melville, New York
June 12, 1997


                                       F-1


<PAGE>


                  EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
                          (A Development Stage Company)

                           CONSOLIDATED BALANCE SHEET

                                 APRIL 30, 1997

         ASSETS

CURRENT ASSETS:
   Cash and cash equivalents                                        $   280,199
   Short-term investments                                               559,000
   Investments in available-for-sale securities (Note 4)                299,414
   Accounts receivable                                                  117,598
   Interest receivable                                                   18,045
   Inventories                                                           48,496
   Prepaid expenses and other current assets                            181,784
                                                                    -----------
       Total current assets                                           1,504,536

INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES (Note 4)                   749,966

PROPERTY, PLANT AND EQUIPMENT, net (Notes 5 and 7)                      993,047

LICENSED TECHNOLOGY, net of accumulated
   amortization of $447,025 (Note 6)                                  1,162,975

OTHER ASSETS                                                             51,676
                                                                    -----------
                                                                    $ 4,462,200
                                                                    ===========
   LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable and accrued expenses                            $   319,537
   Customer deposits                                                     25,000
                                                                    -----------
       Total current liabilities                                        344,537

NOTE PAYABLE (Note 7)                                                   600,000
                                                                    -----------

INTEREST OF MINORITY HOLDERS IN SUBSIDIARY (Note 3)                      50,777
                                                                    -----------

COMMITMENTS AND CONTINGENCIES (Notes 9 and 10)


STOCKHOLDERS' EQUITY (Note 8):
   Common stock, $.0001 par value; authorized 30,000,000
     shares; 4,845,000 issued and outstanding                               485
   Preferred stock, $.0001 par value; authorized 15,000,000
     shares; 6,000,000 issued and outstanding                               600
   Additional paid-in capital                                         8,443,775
   Unearned compensation                                             (1,447,500)
   Deficit accumulated during the development stage                  (3,530,474)
                                                                    -----------
       Total equity                                                   3,466,886
                                                                    -----------
                                                                    $ 4,462,200
                                                                    ===========

                 See notes to consolidated financial statements

                                       F-2


<PAGE>


                  EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
                          (A Development Stage Company)

                      CONSOLIDATED STATEMENTS OF OPERATIONS

 <TABLE>
<CAPTION>                                                                                Cumulative
                                                               Years Ended             From Inception
                                                                April 30,             March 3, 1995 to
                                                         1997             1996          April 30, 1997
                                                    ---------------   ------------   -----------------
<S>                                                <C>                <C>             <C>
REVENUES (Notes 6 and 12)                           $   287,487       $   147,773       $   435,260
                                                    -----------       -----------       -----------

COSTS AND EXPENSES:

   Cost of sales                                        237,839            92,050           329,889
   General and administrative (Note 9)                1,814,174           417,426         2,251,600
   Research and development (Note 6)                    185,678            92,766           718,444
   Amortization (Note 6)                                230,000           203,215           447,025
   Interest (income) expense (Note 8)                  (133,729)          482,077           357,848
                                                    -----------       -----------       -----------
                                                      2,333,962         1,287,534         4,104,806
                                                    -----------       -----------       -----------

LOSS BEFORE MINORITY INTEREST                        (2,046,475)             --          (3,669,546)

MINORITY INTEREST IN NET
   LOSS OF SUBSIDIARY                                   139,072              --             139,072
                                                    -----------       -----------       -----------


NET LOSS                                           $ (1,907,403)      $(1,139,761)      $(3,530,474)
                                                   ============       ===========       ===========

NET LOSS PER SHARE (Note 8)                         $      (.40)      $      (.31)      $      (.87)
                                                    ===========       ===========       ===========

WEIGHTED AVERAGE NUMBER OF
   SHARES OF COMMON STOCK
   OUTSTANDING (Note 8)                               4,728,274         3,636,685         4,078,430
                                                    ===========       ===========       ===========
</TABLE>

                 See notes to consolidated financial statements

                                       F-3


<PAGE>



                  EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
                         (A Development Stage Company)

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                    (Note 8)

<TABLE>
<CAPTION>                        
                                 
                                                Amount       Common Stock      Preferred Stock       Additional                    
                                                  Per                  Par                Par        Paid-in         Unearned       
                                                 Share      Shares     Value   Shares     Value      Capital      Compensation   
                                               --------   ---------   -------  -------    ------      ---------   -------------- 
<S>                                            <C>        <C>         <C>      <C>        <C>         <C>         <C>
Issuance of stock for cash at inception:
   Common                                       $ .05       2,400,000    $240          -     $ -      $   108,936     $        -    
   Preferred                                      .002             -       -   6,000,000     600          10,224               -    
Issuance of stock for licensed technology        3.00         325,000      33          -       -          974,967              -    
Issuance of stock for research
   and development                               3.00         125,000      12          -       -          374,988              -    
Issuance of stock in connection
   with subscription agreement                   3.00         180,000      18          -       -          539,982              -    
Net loss                                                           -       -           -       -               -               -    
 
                                                           ----------    ----   ---------    ----     -----------    -----------   

Balance, April 30, 1995                                     3,030,000     303   6,000,000     600       2,009,097              -    

Issuance of stock in connection with
   initial public offering                      $5.00       1,150,000     115          -       -        4,337,093              -    
Issuance of stock in connection with
   consulting agreements                         4.00         510,000      51          -       -        2,039,949     (2,040,000)  

Compensation earned in connection with
   consulting agreements                                           -       -           -       -               -          97,500   
Net loss                                                           -       -           -       -               -              -    
                                                           ----------    ----   ---------    ----     -----------    -----------   

Balance, April 30, 1996                                     4,690,000     469   6,000,000     600       8,386,139     (1,942,500)  

Issuance of stock for services                   3.50           5,000       1          -       -           17,499             -    
Issuance of stock in connection with
   investment in subsidiary                       .50         150,000      15          -       -           74,985             -    
Compensation earned in connection with
   consulting agreements                                           -       -           -       -               -        495,000   
Issuance of stock by subsidiary
   to minority holders                                             -       -           -       -          (37,350)           -    
Amortization of unearned compensation
   of minority holders-subsidiary                                  -       -           -       -            2,502            -    
Net loss                                                           -       -           -       -               -             -    
                                                           ----------    ----   ---------    ----     -----------   -----------   

Balance, April 30, 1997                                     4,845,000    $485   6,000,000    $600     $ 8,443,775   $(1,447,500)  
                                                           ==========    ====   =========    ====     ===========   ===========   

<CAPTION>
                                                                    Deficit                     
                                                                  Accumulated              
                                                                   During the               
                                                                  Development               
                                                                    Stage            Total  
                                                                  --------          ------- 
<S>                                                           <C>              <C>
Issuance of stock for cash at inception:                                                    
                                                                                            
   Common                                                     $         -      $    109,176 
   Preferred                                                            -            10,824 
Issuance of stock for licensed technology                               -           975,000 
Issuance of stock for research                                                              
   and development                                                      -           375,000 
Issuance of stock in connection                                                             
   with subscription agreement                                          -           540,000 
Net loss                                                          (483,310)        (483,310)
                                                              ------------     ------------ 
                                                                                            
Balance, April 30, 1995                                           (483,310)       1,526,690 
                                                                                            
Issuance of stock in connection with                                                        
                                                                                            
   initial public offering                                              -         4,337,208 
Issuance of stock in connection with                                                        
   consulting agreements                                                -                -  
Compensation earned in connection with                                                      
   consulting agreements                                                -            97,500 
Net loss                                                        (1,139,761)      (1,139,761)
                                                              ------------     ------------ 
                                                                                            

Balance, April 30, 1996                                         (1,623,071)       4,821,637 
                                                                                            
Issuance of stock for services                                          -            17,500 
Issuance of stock in connection with                                                        
   investment in subsidiary                                             -            75,000 
Compensation earned in connection with                                                      
   consulting agreements                                                -           495,000 
Issuance of stock by subsidiary                                                             
   to minority holders                                                  -           (37,350)
Amortization of unearned compensation                                                       
   of minority holders-subsidiary                                       -             2,502 
Net loss                                                        (1,907,403)      (1,907,403)
                                                              ------------     ------------ 
                                                                                            
Balance, April 30, 1997                                       $ (3,530,474)    $  3,466,886 
                                                              ============     ============ 
</TABLE>                  






                 See notes to consolidated financial statements

                                       F-4


<PAGE>


                  EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
                          (A Development Stage Company)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                            Years Ended               Cumulative  
                                                                             April 30,            From Inception
                                                               ---------------------------------  March 3, 1995 to
                                                                     1997              1996           April 30, 1997
                                                                --------------     --------------  ------------------
<S>                                                            <C>                <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

   Net loss                                                    $   (1,907,403)    $   (1,139,761)   $     (3,530,474)
                                                               --------------     --------------  ------------------
   Adjustments to reconcile net loss to net
     cash used in operating activities:
       Depreciation and amortization                                  241,203            734,650             999,163
       Minority interest in loss of subsidiary                       (139,072)                -             (139,072)
       Non-cash consideration - consulting                            517,500             97,500             615,000

       Non-cash consideration - research
         and development                                                   -                  -              440,000
       Changes in operating assets and liabilities:
         (Increase) decrease in assets:
           Accounts receivable                                        (91,838)           (25,760)           (117,598)
           Interest receivable                                         14,580            (32,625)            (18,045)
           Inventories                                                    775            (22,276)            (21,501)
           Prepaid expenses and other current assets                  (71,340)           (85,444)           (156,784)
           Other assets                                                 3,771            (71,666)            (67,895)
         Increase in liabilities:

           Accounts payable and accrued expenses                      280,879             18,658             319,537
           Customer deposits                                           25,000                 -               25,000
                                                               --------------     --------------     ---------------
       Total adjustments                                              781,458            613,037           1,877,805
                                                               --------------     --------------     ---------------
       Net cash used in operating activities                       (1,125,945)          (526,724)         (1,652,669)
                                                               --------------     --------------     ---------------

CASH FLOWS FROM INVESTING ACTIVITIES:

   Increase in short-term investments                                (559,000)                -             (559,000)
   Net sale (purchase) of investments in
     available-for-sale securities                                  1,754,924         (2,804,304)         (1,049,380)
   Net cash paid for asset acquisition                               (200,588)                -             (200,588)
   Purchase of licensed technology                                         -            (450,000)           (450,000)
   Purchase of plant and equipment                                   (148,059)           (17,313)           (165,372)
                                                               --------------     --------------     ---------------
       Net cash provided by (used in)
         investing activities                                         847,277         (3,271,617)         (2,424,340)
                                                               --------------     --------------     ---------------

CASH FLOWS FROM FINANCING ACTIVITIES:

   Proceeds from issuance of debt                                          -             175,000             300,000
   Proceeds from issuance of stock                                         -                  -              120,000
   Proceeds from issuance of subsidiary
     stock to minority shareholder                                    150,000                 -              150,000
   Repayment of debt                                                       -            (550,000)           (550,000)
   Proceeds of stock offering, net of deferred costs                       -           4,337,208           4,337,208
                                                               --------------     --------------     ---------------
       Net cash provided by financing activities                      150,000          3,962,208           4,357,208
                                                               --------------     --------------     ---------------

NET (DECREASE) INCREASE IN CASH
   AND CASH EQUIVALENTS                                              (128,668)           163,867             280,199

CASH AND CASH EQUIVALENTS
   at beginning of period                                             408,867            245,000                  -
                                                               --------------     --------------     --------------

CASH AND CASH EQUIVALENTS
   at end of period                                            $      280,199      $      408,867      $      280,199

                                                               ==============      ==============      ==============
</TABLE>

                 See notes to consolidated financial statements

                                       F-5


<PAGE>


                  EMBRYO DEVELOPMENT CORPORATION AND SUBSIDIARY
                          (A Development Stage Company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       YEARS ENDED APRIL 30, 1997 AND 1996

1.     Organization and Nature of Operations:

       Embryo Development Corporation (the "Company") is a Delaware Corporation
which was formed to develop, acquire, manufacture and market various bio-medical
devices.

       In January 1997, the Company acquired a majority interest in Hydrogel
Design Systems, Inc. ("HDS") (see Note 3). HDS is engaged in the manufacture,
marketing, selling and distribution of hydrogel, an aqueous polymer-based
radiation ionized medical/consumer product, and after-market components for
apnea monitoring.

       The Company and HDS are in the development stage, as defined in Statement
of Financial Accounting Standard No. 7, "Accounting and Reporting for
Development Stage Enterprises". To date, the Company has generated minimal sales
and devoted its efforts primarily to various organizational activities,
including negotiating of license agreements, developing its business strategy,
hiring management personnel, raising capital through an initial public offering
which was completed in November 1995 (see Note 8), and undertaking preliminary
activities for the commencement of operations. In February 1997, HDS acquired
certain assets and the ongoing business of a group of companies engaged in the
manufacture and distribution of hydrogel and after-market apnea monitoring
components. HDS is devoting substantial efforts to the establishment of a
manufacturing facility for its accelerator beam equipment used in the production
of hydrogel, anticipated to be completed during the year ended April 30, 1998,
and in contacting prospective customers of hydrogel and related accelerator beam
products. In September 1995, the Company purchased certain assets and the
on-going business of a medical products division of an existing business (see
Note 10). The Company has not generated any significant revenue to date and is
presently evaluating the commercial value of the products obtained under its
business acquisitions license agreements. Although the Company is constructing
its manufacturing facility and has obtained exclusive licenses for the
manufacture and marketing rights to certain medical devices, there can be no
assurance that the Company will be successful in marketing any such products.

2.     Summary of Significant Accounting Policies:


       a. Principles of consolidation

          The accompanying consolidated financial statements include the
accounts of the Company and its majority-owned subsidiary, HDS. Upon
consolidation, all significant intercompany accounts and transactions are
eliminated.

       b.  Depreciation and amortization

           Depreciation is computed principally by the straight-line method over
the estimated useful lives of the related assets. Amortization of licensed
technology is computed using the straight-line method over the estimated useful
life of the related technology (7 years).

           The Company provides for depreciation over the following estimated
useful lives:

           Manufacturing equipment                            10 years
           Office equipment and fixtures                     3-7 years

                                       F-6


<PAGE>


2.     Summary of Significant Accounting Policies:  (Cont'd)

       c.  Inventories

           Inventories, consisting principally of finished goods, are stated at
the lower of cost (first-in, first-out method) or market.

       d.  Investments

           Short-term investments consist of bank certificates of deposits.

           Investments in debt and equity securities are designated as trading,
held-to-maturity, or available for sale. Management considers the Company's
marketable securities, consisting principally of government and
government-backed securities, to be available-for-sale. Available-for-sale
securities are reported at amounts which approximate fair value.

       e.  Concentration of credit risk

           Financial instruments which potentially expose the Company to
concentration of credit risk, include cash deposits in excess of federally
insured limits, U.S. treasury notes and other government backed securities.

       f.  Income taxes

           Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities,

and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.

       g.  Statement of cash flows

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

       h.  Research and development costs

           Research and development costs are expensed as incurred.

       i. Estimates

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

       j.  Advertising

          The Company charges to expense, advertising costs as incurred.
Advertising costs approximated $71,000 and $1,000 for the years ended April 30,
1997 and 1996, respectively.

       k.  Stock-based compensation

          The Company applies APB Opinion No. 25 and related interpretations in
accounting for stock-based compensation to employees. Stock compensation to
non-employees is accounted for at fair value in accordance with Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation".

                                       F-7


<PAGE>


2.     Summary of Significant Accounting Policies:  (Cont'd)

       l.  New standards

           In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share" ("Statement 128"), which simplifies the
standards for computing earnings per share previously used and makes them
comparable to international standards. The Statement is effective for financial
statements issued for periods ending after December 15, 1997, and earlier
application is not permitted. The Company does not believe that the adoption of
this Statement will have a material effect to its financial statements.


3.     Investment in HDS:

       In January 1997, the Company entered into a subscription agreement to
acquire 1,251,000 shares of HDS common stock and 15,000,000 shares of HDS Series
A preferred stock. HDS was formed to effect the asset acquisition described in
Note 10b. As consideration for its interest, the Company contributed $150,000 in
cash, 150,000 shares of its common stock, and the commitment to make available
to HDS a $500,000, 8% revolving line of credit.

       At April 30, 1997, the Company's ownership of HDS represented 50.04% of
the common stock and 92.9% of total voting shares.

4.     Investments in Available-for-Sale Securities:

       Investments in available-for-sale securities consist of the following at
April 30, 1997:

       Current:
         Guaranteed by the U.S. Government:
           Federal National Mortgage Notes                       $   299,414
                                                                 ===========
       Non-current:
         Guaranteed by the U.S. Government:
           Federal Farm Credit Notes                             $   249,966
           U.S. Treasury Notes                                       500,000
                                                                 -----------

                                                                 $   749,966
                                                                 ===========
5.     Property, Plant and Equipment:

       Property, plant and equipment, at cost, consist of the following at April
30, 1997:

       Manufacturing equipment                                   $   226,275
       Office equipment and fixtures                                  63,721
       Leasehold improvements                                         50,334
       Projects in progress                                          664,642
                                                               -------------
                                                                   1,004,972

       Less accumulated depreciation and amortization                 11,925
                                                               -------------
                                                                $    993,047
                                                                ============

       During the year ended April 30, 1997, $12,500 of interest was capitalized
in connection with the construction of certain projects in progress.

                                       F-8


<PAGE>



6.     License Agreements:

       In March 1995, the Company entered into seven license agreements for the
rights to manufacture and market seven medical devices for an aggregate purchase
price of $1,430,000. The consideration consisted of the issuance of $230,000 in
notes and 400,000 shares of the Company's common stock. In addition, the seller
is entitled to royalties, ranging from 6% - 8% of net revenues, as defined, of
the licensed products sold. The agreements are in effect over the lives of the
respective patents.

       Each of the seven agreements also provide for minimum payment obligations
commencing 2 1/2 years after the date of the agreements. The agreements provide
that the licensor may terminate the licenses if the minimum royalty payments are
not made. The minimum payment obligations for each license are as follows:

                                             Minimum Payment
            Agreement Year                      Obligation
       ------------------------             -----------------
       September 30, 1997                         $ 25,000
       March 31, 1998                             $ 25,000
       September 30, 1998                         $ 50,000
       March 31, 1999                             $ 50,000
       September 30, 1999                         $100,000
       March 31, 2000                             $100,000
       March 31, 2001                             $200,000

       The Company also entered into royalty sharing agreements under which it
is entitled to 50% of the royalties received by the licensor under license
agreements for two medical devices. Consideration under these agreements
consisted of the issuance of $20,000 in notes and 50,000 shares of the Company's
common stock. The royalty sharing agreements are in effect over the lives of the
underlying agreements. In addition, the Company has the right to license the
patents for the products in the event the underlying licenses are terminated.

       The common stock issued under these agreements were valued at $3 per
share.

       The medical devices underlying five of these license and royalty sharing
agreements were deemed to be in the development stage, and accordingly, the
consideration paid ($440,000) was charged to operations (research and
development) in the period ended April 30, 1995. The consideration for the
remaining four agreements ($1,160,000) was recorded as licensed technology.

7.     Note Payable:

       On January 24, 1997, HDS entered into a financing agreement with a
customer for the purchase of $600,000 of manufacturing equipment from a third
party. The agreement consists of a promissory note in the amount of $600,000
which bears interest at 8% per annum and is due between three (3) and six (6)
years from the anniversary date, depending upon the amount of products the
customer has ordered from HDS. The funds were transferred directly from the
lender to the seller of the equipment. The note is collateralized by the related
equipment.


8.     Stockholders' Equity:

       a.  Capitalization

           The Company's authorized capitalization consists of 30,000,000 shares
of common stock and 15,000,000 shares of preferred stock. All stock has a $.0001
par value. Each share of common and preferred has one vote in all matters. In
the event of any liquidation, holders of the issued and outstanding shares of
preferred stock will be entitled to receive, prior to any distribution to the
holders of common stock, the sum of $.10 per share.

                                       F-9


<PAGE>


8.     Stockholders' Equity:  (Cont'd)

       b.  Initial capitalization

           In March 1995, the Company issued 2,400,000 shares of common stock
and 6,000,000 shares of preferred stock ("Founders' Stock") for an aggregate
amount of $120,000.

       c.  Subscription agreements

           In March 1995, the Company entered into subscription agreements in
connection with a bridge loan in the aggregate amount of $300,000, (the "Bridge
Loans"). In connection with the Bridge Loan, the Company issued the aggregate
amount of 180,000 Bridge Units, each Bridge Unit consisting of one share of
Common Stock and one Class B Warrant. Each Class B Warrant entitles the holder
to acquire one share of common stock at an exercise price of $10 per share. The
promissory notes issued in connection with the Bridge Loan were repaid with
interest at 8% on November 22, 1995, with the proceeds from the public offering.
The 180,000 shares of the Company's common stock represented a financing cost of
$540,000 ($3 per share) which was amortized in full upon the successful
completion of the public offering.

       d.  Public offering

           In November 1995, the Company completed a public offering of
1,000,000 shares of common stock at $5.00 per share for an aggregate of
$5,000,000. An additional 150,000 shares were sold for gross proceeds of
$750,000 to the underwriter to cover over-allotments. In addition, the
underwriter received an option, for a nominal fee, to acquire 100,000 shares of
common stock at an exercise price of $6.75 per share. The option expires in
November 2001.

           Effective with the closing of the offering, the Company entered into
a consulting agreement with the underwriter. The underwriter ceased operations
in 1997, and the unamortized balance of the consulting fee ($91,667) was charged
to operations in the year ended April 30, 1997.


       e.  Issuance of securities

          In July 1996, the Company issued 5,000 shares of common stock to its
medical advisory board for services. The value of the common stock granted
($17,500) was charged to operations.

           In May 1996, the Company issued a five-year warrant, exercisable at
any time, for the purchase of 100,000 shares of common stock of the Company at
$6 per share. The warrant was issued in connection with the termination of a
sublicensing agreement.

       f.  Consulting agreements

           In February 1996, the Company entered into two separate multi-year
consulting agreements. As consideration for these services, the Company issued
225,000 shares of common stock to each of the parties. The value of the common
stock granted ($1,800,000) is being charged to operations ratably over the lives
of the consulting agreements.

           In August 1995, the Company entered into a three-year consulting
agreement for services related to the development of strategic sales and
marketing plans in the United States and internationally. The agreement, which
initially provided for a monthly consulting fee of $5,000, was amended in March
1996, at which time the Company issued 60,000 shares of common stock in lieu of
the monthly consulting fee. The value of the common stock granted ($240,000) is
being charged to operations ratably over the remaining life of the consulting
agreement.

                                      F-10


<PAGE>


8.     Stockholders' Equity:  (Cont'd)

       g.  Stock option plan

           The Company has adopted a Non-qualified Option Plan (the "Plan")
covering 2,000,000 shares of common stock of the Company. Options under the Plan
are granted at terms set by the Board of Directors at the time of issuance.

           The Company has also adopted an Incentive Option and Stock
Appreciation Rights Plan (the "Incentive Option Plan") covering 2,000,000 shares
of the Company's common stock. Incentive stock options under the Incentive
Option Plan are granted at an exercise price (not less than the fair market
value) at the date of grant. Non-qualified options and freestanding stock
appreciation rights may also be granted with any exercise price.

           To date, no options or stock appreciation rights have been granted
under either plan.

       h.  Loss per share


           Loss per share was computed by dividing net loss by the weighted
number of shares outstanding. Common stock equivalents have been excluded as
their effect would be anti-dilutive.

           As noted in Note 8d, the Company has completed an initial public
offering ("IPO"). Pursuant to SEC rules, common stock issued for consideration
below the IPO price during the 12 months before the filing of the registration
statement has been included in the weighted average number of shares, using the
treasury stock method, as if such shares had been outstanding for all periods
presented.

       i.  Reserved shares

           Common shares reserved at April 30, 1997 are as follows:

           Incentive stock option plan                         2,000,000
           Non-qualified stock option plan                     2,000,000
           Class B Warrants                                      180,000
           Consultant warrants                                   600,000
           Underwriter's options                                 100,000
           Key employee options                                  300,000
           Other                                                 100,000
                                                            ------------
                                                               5,280,000
                                                            ============

9.     Commitments and Contingencies:

       a.  Class action lawsuits

           Class Action complaints have been filed naming as defendants the
Company and certain Board members. The Class Actions assert that the underwriter
of the Company's initial public offering and other defendants engaged in various
violations of the federal securities laws. The Company and Board members deny
that they engaged in any improper conduct or any violations of any federal
securities laws and intend to vigorously defend the action. Although the
ultimate disposition of legal proceedings cannot be predicted with certainty,
management does not believe that they should result in a materially adverse
effect on the Company's financial position.

                                      F-11


<PAGE>


9.     Commitments and Contingencies:  (Cont'd)

       b.  Employment agreement

           (i) On January 1, 1997, the Company entered into a two-year
employment agreement with an officer. The agreement calls for annual
compensation of $90,000 the first year and $100,000 in the second year with a

minimum bonus of 10% per annum of the prior year's salary. The officer was also
granted options to purchase 100,000 shares of the Company's common stock at an
exercise price of $.65 per share, the market price at the time the agreement was
executed.

           (ii) HDS has entered into five-year employment agreements with three
executives which provide for minimum annual salaries aggregating $242,000. In
addition, HDS granted to two executives 500,000 shares of its common stock
(valued at $100,000), which will be earned by the executives over the terms of
their employment.

                In 1995, the Company granted an officer an option to purchase
100,000 shares of the Company's common stock at an exercise price of $5 per
share and 100,000 shares, exercisable commencing March 1997, at an exercise
price equal to the fair market value at March 31, 1997 ($.5625). These options
are exercisable over a four-year period.

       c.  Consulting agreement

           In 1995, the Company has entered into a four-year consulting
agreement with the licensor of the medical devices discussed in Notes 4 and 6.
The agreement provides for an annual consulting fee of $75,000. In addition, the
consultant was issued warrants to purchase 600,000 shares of the Company's
common stock at an exercise price of $3 per share.

       d.  Lease

           On February 14, 1997, the Company entered into a seven-year operating
lease for premises to be used for offices and manufacturing. The lease provides
for annual minimum lease payments ranging from $116,000 to $119,000. The lease
contains a five-year renewal option and provides that the Company shall pay for
insurance, taxes and maintenance. In addition, the lease contains an escalation
clause based upon increases in the consumer price index for years four through
seven.

           The Company and HDS lease two operating facilities from its
executives on a month-to-month basis. Rent expense under these leases
approximate $68,500 and $25,000 during the years ended April 30, 1997 and 1996.

           Aggregate rent expense approximated $113,700 and $28,900 for the
years ended April 30, 1997 and 1996, respectively.

       e.  Purchase commitments

           HDS had outstanding purchase commitments for property, plant and
equipment of approximately $326,000 at April 30, 1997.

                                      F-12


<PAGE>


10.    Business Combinations:


       a.  In  September  1995,  the Company  entered into an agreement to 
purchase certain assets and the ongoing business of the Medical Division of C.F.
Electronics, Inc. ("CF"). Under the agreement, the Company acquired CF's medical
products for consideration of $450,000, of which $45,000 was paid upon closing
and the balance ($405,000) was paid on December 12, 1995 from the proceeds from
the public offering. The Company also purchased CF's finished goods inventory
and demonstration equipment.

           In addition, the Company entered into a five year "Supply Agreement"
with CF, which provides for CF to supply the Company with certain products at a
price equal to CF's cost (as defined) plus 10%. The Agreement provides for
minimum payments to CF during its first two years.

       b. On February 6, 1997, HDS acquired certain assets from a group of
entities for an aggregate purchase price of $150,000 in cash and 150,000 shares
of Embryo Common Stock (valued at $75,000). Assets acquired include property
rights and technical data, machinery and equipment, and inventory. The Embryo
shares vest on the second anniversary date of the agreement only if HDS has
earned $500,000 in cumulative gross revenue derived from the sale of certain
products during the two (2) year period. If, on the vesting date, the fair
market value of the shares is less than $900,000, the parties may demand that
HDS purchase all of the shares at an aggregate purchase price of $900,000 in
either cash and/or marketable securities. Expenses of approximately $51,000 were
incurred in connection with this acquisition. This acquisition has been
accounted for as a purchase.

       As a result of this transaction, the following was recorded at February
6, 1997:
 
       Inventories                                           $ 27,000
       Property and equipment                                 240,000
       Other assets                                             9,000
                                                           ----------
                                                           $  276,000
                                                           ==========

       Pro forma consolidated information assuming the transaction had taken 
place as of May 1, 1995, is as follows:

<TABLE>
<CAPTION>
                                                                     April 30,
                                                                     ---------
                                                               1997            1996
                                                          --------------    -----------
       <S>                                                <C>               <C>
       Revenues                                           $      792,714    $  1,298,195
                                                          ==============    ============
       Net loss                                           $    1,934,726    $  1,125,651
                                                          ==============    ============
       Net loss per share                                 $         (.40)   $       (.30)
                                                          ==============    ============  
       Weighted average number of shares outstanding           4,844,164       3,786,685

                                                               =========       =========

</TABLE>

11.    Income Taxes:

       Net deferred income tax asset is comprised of the following:
<TABLE>
<CAPTION>

                                                                April 30,
                                                                ---------
                                                          1997              1996
                                                     --------------    -------------
       <S>                                           <C>               <C> 
       Net operating loss carryforwards              $    1,752,000     $    388,000
       Unearned compensation                               (579,000)          39,000
       Other                                                 64,000           15,000
       Valuation allowance                               (1,237,000)        (442,000)
                                                     --------------     ------------
                                                     $           -      $         -
                                                     ==============     ===========
</TABLE>
                                      F-13


<PAGE>


12.    Major Customers:

       Sales to two customers approximated 18% and 14% of total revenues in
1997. Sales to one customer approximated 16% of total revenues in 1996.

13.    Fair Value of Financial Instruments:

       The methods and assumptions used to estimate the fair value of the
following classes of financial instruments were:

       Current Assets, Short-Term Investments, Investments in Available-for-Sale
       Securities and Current Liabilities: The carrying amount of cash and
       temporary cash investments, current receivables and payables and certain
       other financial instruments approximate their fair value.

       Note Payable: The fair value of the note payable estimated using a
       discounted cash flow analysis, based on the Company's assumed incremental
       borrowing rates for similar types of borrowing arrangements. The carrying
       amount at April 30, 1997 approximates fair value.

       The carrying amount and fair value of the Company's financial instruments
at April 30, 1997 are as follows:
<TABLE>
<CAPTION>
                                                                  Carrying         Fair

                                                                    Value         Value
                                                                 ----------    -----------
       <S>                                                       <C>           <C>
       Cash and cash equivalents                                 $  280,200    $  280,200
       Short-term investments                                       559,000       559,000
       Investments in available-for sale securities               1,049,400     1,049,400
       Accounts receivable and interest receivable                  135,600       135,600
       Accounts payable and accrued expenses                        319,500       319,500
       Note payable                                                 600,000       600,000

</TABLE>

14.    Supplementary Information - Statements of Cash Flows:

       Cash paid during the years for:
<TABLE>
<CAPTION>
                                                                                           Years Ended
                                                                                            April 30,
                                                                                --------------------------------- 
                                                                                   1997                  1996
                                                                                   ----                  ----
       <S>                                                                       <C>                   <C>
       Interest, net of capitalized interest                                     $     822             $  25,698
                                                                                 =========             =========
       Income taxes                                                              $  13,984             $     292
                                                                                 =========             ========= 
</TABLE>

          HDS financed the acquisition of $600,000 of manufacturing equipment
with a note payable. Additionally, $12,500 of interest expense was capitalized
during the year ended April 30, 1997.


                                      F-14