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

                                   FORM 10-QSB

(Mark One)
[X]    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
       Exchange Act of 1934

       For the quarterly period ended September 30, 2001

[ ]    Transition Report Pursuant to 13 or 15(d) of the Securities Exchange Act
       of 1934

       For the transition period from __________ to __________

                         Commission file number 0-27839

                            EMPYREAN BIOSCIENCE, INC.
        (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)

            Delaware                                 86-0973095
 (STATE OR OTHER JURISDICTION            (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)


 23800 Commerce Park Road, Suite A, Cleveland, Ohio     44122
    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)          (ZIP CODE)

                    Issuer's telephone number (216) 360-7900

   (Former Name, Former Address and Former Fiscal Year, If Changed Since Last
                                    Report)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]

As of November 7, 2001, the registrant had 54,650,036 shares of common stock
outstanding.

Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]

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

<PAGE>


                          PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
                            EMPYREAN BIOSCIENCE, INC.

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                  September 30,  December 31,
                                                                                      2001           2000
                                                                                    --------       --------
                                                                                   (unaudited)     (audited)
                                                 ASSETS

<S>                                                                                 <C>            <C>
CURRENT ASSETS:
    Cash and cash equivalents                                                       $     52       $     34
    Accounts receivable                                                                  120             76
    Prepaid expenses and other                                                            54            175
    Inventory                                                                            266            235
                                                                                    --------       --------

       Total current assets                                                              492            520

    Long-term deferred financing costs                                                   176              -
    Equipment and improvements                                                            20             29
                                                                                    --------       --------

       Total assets                                                                 $    688       $    549
                                                                                    ========       ========

                       LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
    Accounts payable                                                                $    809       $  1,273
    Accrued compensation                                                                 489            328
    Accrued sales promotion and advertising                                               50            177
    Other accrued liabilities                                                             89             75
    Deferred revenue                                                                       -            100
    Short-term debt                                                                    1,250            424
                                                                                    --------       --------

       Total current liabilities                                                       2,686          2,377

LONG-TERM LIABILITIES:
    Convertible notes and debentures, net of original issue discount of $60              972              -

STOCKHOLDERS' EQUITY (DEFICIT):
    Par value of common stock, authorized 90,000,000 shares, $.0001 par value;
       issued and outstanding (2001: 52,811,096; 2000: 43,282,986)                         5              4
    Paid-in capital in excess of par value                                            33,978         29,782
    Notes receivable from officers and directors                                      (2,344)             -
    Accumulated deficit                                                              (34,609)       (31,614)
                                                                                    --------       --------

        Total stockholders' equity (deficit)                                          (2,970)        (1,828)
                                                                                    --------       --------

       Total liabilities and stockholders' equity (deficit)                         $    688       $    549
                                                                                    ========       ========
</TABLE>

                 See accompanying notes to financial statements



                                       2
<PAGE>


                            EMPYREAN BIOSCIENCE, INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)



<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED             NINE MONTHS ENDED
                                                     ------------------             -----------------
                                                 SEPTEMBER 30,  SEPTEMBER 30,  SEPTEMBER 30,  SEPTEMBER 30,
                                                     2001           2000           2001           2000
                                                   --------       --------       --------       --------

<S>                                                <C>            <C>            <C>            <C>
Net revenues                                       $    146       $     49       $    695       $    496
Cost of sales                                            75             27            316            267
                                                   --------       --------       --------       --------

   Gross profit                                          71             22            380            229

Selling, general and administrative                     659            964          2,737          2,099
Royalties                                                42           (345)           136             64
Litigation settlement                                     -          5,360           (371)         5,434
                                                   --------       --------       --------       --------

   Operating expenses                                   701          5,979          2,502          7,597

   Loss from operations                                (630)        (5,957)        (2,122)        (7,368)

Interest expense                                       (280)           (15)          (900)           (66)
Interest income                                          15              8             40             31
Other, net                                               (2)            10            (13)           (14)
                                                   --------       --------       --------       --------

Other income (expense)                                 (267)             3           (873)           (49)
                                                   --------       --------       --------       --------

Net loss                                           $   (897)      $ (5,954)      $ (2,995)      $ (7,417)
                                                   ========       ========       ========       ========

Basic and diluted loss per share                   $  (0.02)      $  (0.15)      $  (0.06)      $  (0.20)
                                                   ========       ========       ========       ========

Weighted average number of shares outstanding        51,194         39,207         49,146         36,305
                                                   ========       ========       ========       ========
</TABLE>






                 See accompanying notes to financial statements


                                       3
<PAGE>


                           EMPYREAN BIOSCIENCE, INC.

       CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                 (IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                 Common Stock
                                    ---------------------------------------
                                                                   Paid-In       Notes
                                                                  Capital in    Receivable
                                                                  Excess of    from Officers/   Accumulated
                                         Shares      Par Value    Par Value     Directors         Deficit           Total
                                         ------      ---------    ---------     ---------         -------           -----

<S>                                      <C>          <C>          <C>          <C>               <C>             <C>
Balances, January 1, 2001                43,283       $   4        $29,782      $      -          $(31,614)       $ (1,828)

Common stock issued for
cash                                        169           -             61             -                -               61

Stock options and warrants
exercised with notes                      4,845           1          2,385       (2,344)                -               42

Common stock issued for debt and
services                                  1,780           -            590             -                -              590

Common stock issued upon
conversion of convertible notes           2,199           -            280             -                -              280
and debentures

Fair value of option and warrant
grants                                        -           -            264             -                -              264

Common stock issued for trade               335           -             75             -                -               75
payables

Common stock issued for
litigation settlement                       200           -             50             -                -               50

Intrinsic value of conversion
options in convertible notes and              -           -            491             -                -              491
debentures issued

Net loss                                      -           -              -             -            (2,995)         (2,995)
                                         ------       -----        -------      --------          ---------       --------

Balances, September 30, 2001             52,811       $   5        $33,978      $(2,344)          $(34,609)       $(2,970)
                                         ======       =====        =======      ========          =========       ========
</TABLE>









                 See accompanying notes to financial statements


                                       4
<PAGE>
                           EMPYREAN BIOSCIENCE, INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                                           Nine months ended
                                                                                  ----------------------------------
                                                                                    September 30,     September 30,
                                                                                       2001               2000
                                                                                   --------------    ---------------
<S>                                                                                  <C>                <C>
Cash flows from operating activities:
    Net cash used by operating activities                                            $   (2,003)        $    (1,998)

Cash flows from investing activities:
    Proceeds from sales of fixed assets                                                       -                   5
    Purchase of capital assets                                                                -                 (17)
                                                                                     ----------         ------------

          Net cash used by investing activities                                               -                 (12)

Cash flows from financing activities:
    Issuance of common stock                                                                 61               1,857
    Proceeds of short-term debt                                                             826                 250
    Payments of short-term debt                                                               -                (150)
    Net proceeds of convertible notes and debentures                                      1,134                   -
                                                                                     ----------         -----------

          Net cash provided by financing activities                                       2,021               1,957
                                                                                     ----------         -----------

          Net increase (decrease) in cash and cash equivalents                               18                 (53)

Cash and cash equivalents at beginning of period                                             34                 286
                                                                                     ----------         -----------

Cash and cash equivalents at end of period                                           $       52         $       233
                                                                                     ==========         ===========
</TABLE>



                 See accompanying notes to financial statements


                                       5
<PAGE>

                           EMPYREAN BIOSCIENCE, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                     (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)


NOTE 1 - BASIS OF PRESENTATION

     Empyrean Bioscience, Inc. (the "Company"), previously known as Empyrean
     Diagnostics Ltd., was originally incorporated in Canada in 1986 under the
     name "Mr. Build Industries Inc." The Company became a Wyoming corporation
     during 1997. The Company distributed and marketed products designed to
     prevent infectious diseases through its wholly-owned subsidiary, Empyrean
     Diagnostics, Inc., until December 31, 2000, when Empyrean Diagnostics, Inc.
     was merged into the Company. The Company now distributes and markets the
     products directly.

     On March 20, 2001, the Company's stockholders approved a proposal to
     reincorporate into the State of Delaware by way of a merger of the existing
     Wyoming corporation into a newly formed, wholly-owned Delaware subsidiary
     corporation. The merger and reincorporation were completed on March 21,
     2001. Neither the merger of Empyrean Diagnostics, Inc. into the Company nor
     the reincorporation into the State of Delaware affected the Company's
     operations or management.

     The financial information included herein for the quarters ended September
     30, 2001 and 2000, and the financial information as of September 30, 2001,
     is unaudited. However, such information reflects all adjustments,
     consisting of normal recurring adjustments, which are, in the opinion of
     management, necessary for the fair presentation of the financial position,
     results of operations and cash flows for the interim periods. The interim
     financial statements and the notes thereto should be read in conjunction
     with the annual audited financial statements as of December 31, 2000. The
     results of operations for the interim periods presented are not necessarily
     indicative of the results to be expected for the full year.

NOTE 2 - GOING CONCERN

     The Company incurred net losses in 1999 and 2000 and expects to incur net
     losses through at least 2001. The Company expects operations to generate
     negative cash flow through at least 2001 and does not have existing capital
     resources or credit lines available that are sufficient to fund its
     operations and capital requirements as presently planned over the next
     twelve months. The Company is actively pursuing additional funds through
     the issuance of debt and/or equity instruments. However, such funds may not
     be available on favorable terms or at all. These factors raise doubts about
     the Company's ability to continue as a going concern and the audit report
     contained in the Company's Annual Report on Form 10-KSB for the year ended
     December 31, 2000, filed with the U.S. Securities and Exchange Commission
     on March 30, 2001, contains an explanatory paragraph with respect to this
     matter.

NOTE 3 - SHORT-TERM DEBT

     In November 2000, the Company obtained a one-year, $1,000 revolving line of
     credit from a bank, secured by the guarantees of several officers and
     directors and their spouses, which guarantees are in turn secured by the
     assets of the Company. As consideration for their guarantees, the Company
     granted these officers and directors, collectively, 450 shares of the
     Company's common stock with a fair value of $169, which is being amortized
     over the term of the loan agreement. Borrowings under the line of credit
     bear interest at a rate equal to the bank's prime rate plus 0.5%. As of
     September 30, 2001, borrowings of $1,000 were outstanding under this line
     of credit and the applicable interest rate was 6.50%.


                                       6
<PAGE>

     In March 2001, the Company obtained an additional 120-day, $250 line of
     credit from a bank, secured by the guarantees of a Company director and a
     company wholly-owned by the director. As consideration for the guarantees,
     the Company granted the director's wholly-owned company 113 shares of the
     Company's common stock with a fair value of $39, which was amortized over
     the term of the loan agreement. In July 2001, this bank line of credit was
     extended for an additional 60-day term. As consideration for an extension
     of the guarantees, the Company granted the director's wholly-owned company
     56 shares of the Company's common stock with a fair value of $13, which was
     amortized over the term of the loan agreement. In September 2001, this bank
     line of credit was extended for an additional 90-day term, as were the
     guarantees. Borrowings under the line of credit bear interest at a rate
     equal to the bank's prime rate plus 1%. As of September 30, 2001,
     borrowings of $250 were outstanding under this line of credit and the
     applicable interest rate was 7.00%.

     In June 2001, the Company obtained 60-day bridge lines of credit totaling
     $300 from two officers and directors and a company wholly-owned by a third
     director. As consideration for the execution of the bridge loan facilities,
     the Company granted these officers and directors and the director's
     wholly-owned company an aggregate of 135 shares of the Company's common
     stock with a fair value of $30, which was amortized over the term of the
     loan facilities. The interest rate applicable to the bridge lines of credit
     was equal to the prime rate of a certain bank plus 3.5%. As of September
     30, 2001, these bridge lines of credit had expired and no borrowings were
     outstanding.

NOTE 4 - CONVERTIBLE DEBT

     In April 2001, the Company issued convertible debentures in an aggregate
     principal amount of $40 to three unrelated investors. The debentures mature
     in April 2006 and bear interest at a 4% annual rate. At the Company's
     option, interest on the debentures is payable in cash or common stock at
     maturity and the debentures are redeemable at any time for 125% of the
     outstanding principal amount plus unpaid interest. At the option of the
     holders, the debentures are convertible into common stock at a conversion
     price equal to the lower of $0.434 or 80% of the average five lowest
     closing bid prices of the common stock for the twenty trading days
     immediately preceding the conversion date. In addition, the placement agent
     for the transaction received a warrant to purchase 8 shares of common stock
     at an exercise price of $0.468 with a fair value of $3. Issuance expenses
     of $8 and the fair value of the warrant are being amortized over the term
     of the debentures. The intrinsic value of the embedded conversion option,
     valued at $18, is being amortized over the three-month period prior to the
     date that the debentures are first exercisable. Notwithstanding the waiting
     period prior to the date that the debentures are first convertible, at
     September 30, 2001, the debentures would have been convertible into 478
     shares of common stock.

     In June 2001, the Company issued a two-year, 8% $1,000 convertible note and
     a warrant to purchase 333 shares of common stock at an exercise price of
     $0.27 to an unrelated investor. Interest on the note is payable quarterly
     in cash or common stock, at the option of the Company. At the option of the
     investor, the note is convertible into common stock at a conversion price
     equal to the lower of $0.1773 or 80% of the average of the three lowest
     closing prices of the common stock for the sixty trading days immediately
     preceding the conversion date. Two officers and directors of the Company
     and a company wholly-owned by a third director pledged their beneficially
     owned holdings of the Company's common stock as security for the Company's
     registration obligations under a subscription agreement with the investor
     (which registration obligations were subsequently fulfilled). As
     consideration for the pledge of their shares, the Company granted the
     officers and directors and the director's wholly-owned company an aggregate
     of 450 shares of the Company's common stock with a fair value of $99. The
     share grants and other issuance expenses totaling $218 and the fair value
     of the warrant of $71 are being amortized over the term of the note. The
     intrinsic value of the embedded conversion option, valued at $425, was
     expensed in the quarter


                                       7
<PAGE>

     in which the note was issued. In the quarter ended September 30, 2001,
     2,199 shares of common stock were issued upon the conversion of $258 of the
     principal and the payment of $22 of accrued interest on the note. At
     September 30, 2001, a principal amount of $742 was outstanding under the
     note, which was convertible into 8,976 shares of common stock.

     In August 2001, the Company issued a two-year, 8% $250 convertible note and
     a warrant to purchase 83 shares of common stock at an exercise price of
     $0.236 to the same unrelated investor. Interest on the note is payable
     quarterly in cash or common stock, at the option of the Company. At the
     option of the investor, the note is convertible into common stock at a
     conversion price equal to the lower of $0.1573 or 80% of the average of the
     three lowest closing prices of the common stock for the sixty trading days
     immediately preceding the conversion date. Issuance expenses totaling $31
     and the fair value of the warrant of $13 are being amortized over the term
     of the note. The intrinsic value of the embedded conversion option, valued
     at $49, was expensed in the quarter ended September 30, 2001. At September
     30, 2001, the note was convertible into 3,023 shares of common stock.

     The shares issuable upon the conversion of the notes and debentures were
     not included in the computation of diluted loss per share for the periods
     presented because to do so would have been antidilutive.

NOTE 5 - LEGAL PROCEEDINGS

     The Company was the plaintiff in an action filed in the United States
     District Court, Southern District of Florida Case No. 00-8300. In this
     action in federal court, the Company brought suit against International
     Bioscience Corporation ("IBC") and two principals of IBC for fraud in the
     inducement, tortious interference with a business relationship and breach
     of contract in connection with the Company's original license from IBC of
     certain technology. On August 9, 2000, the Company entered into a
     settlement agreement with IBC. The case against IBC was settled by the
     filing of a Stipulation of Dismissal with the United States District Court
     on August 17, 2000.

     In this federal court action, a company called Optima Holding Co. Ltd.
     intervened, claiming that it had an exclusive prior right to use the same
     technology by virtue of a joint venture agreement entered into between IBC
     and Optima. Optima asserted claims against the Company for injunctive
     relief, conversion and tortious interference with a business relationship.
     On August 18, 2000, Optima, together with Mercury Technology Corp.
     (Delaware) and Mercury Technology Corp. (Bahamas) (collectively "Mercury")
     amended its original intervention complaint to add two counts of patent
     infringement against both the Company and IBC, alleging willful
     infringement of U.S. Patent Nos. 3,594,468 and 4,321,277. Empyrean and IBC
     each filed motions in the federal action seeking the dismissal of Mercury's
     patent infringement claims. Mercury dropped its claim of infringement of
     U.S. Patent No. 3,594,468. On April 4, 2001, the court issued a Final Order
     of Dismissal granting the motions of the Company and IBC to seek dismissal
     of the patent infringement claims and declining to exercise jurisdiction
     over the remaining state claims.

     The Company is also a defendant in an action that was filed by Optima
     Holding Co., Ltd. and Mercury Technology Corp. on July 28, 1998 in the
     Circuit Court of the Eleventh Judicial District, Dade County, Florida. This
     state court action alleges that the Company tortiously interfered with
     Optima and Mercury's contractual relationship with IBC. Optima and Mercury
     claim that they had prior rights to the IBC formulation and products and
     that the Company induced IBC to breach that agreement. Optima and Mercury
     have requested an unspecified amount of damages against the Company. In two
     separate actions that have now been consolidated with the first action in
     the same court, IBC has requested a declaratory judgment that IBC properly
     terminated its development and distribution contract with Optima and
     Mercury, and IBC sued various individuals of Optima and/or Mercury for
     fraudulent inducement and civil theft. Optima and Mercury also seek
     injunctive relief to prevent IBC and its managers and directors from



                                       8
<PAGE>

     allowing IBC to have further dealings with the Company. The state court
     action was informally abated while the parties pursued their remedies in
     the federal action. Since the federal court action has been dismissed, it
     is likely that the state court action will resume. If the Company is not
     successful in the state court action, it could lose the right to market,
     sell or manufacture its hand sanitizer and first-aid antiseptic lotion and
     towelette products and other products currently under development. Should
     any court judgment be entered precluding the Company's rights to the
     products, IBC has agreed as part of the overall litigation settlement to
     secure its obligations to the Company by granting it the highest priority
     perfected security interest IBC is permitted to assign in IBC's rights in
     commercializing the products in the United States.

     The Company was also a defendant in an action that was filed by Integrated
     Commercialization Solutions, Inc. ("ICS") on November 14, 2000 in the
     United States District Court, Central District of California, Southern
     Division. The action alleged that the Company breached a contract and
     sought damages of at least $445 plus interest and attorneys fees. During
     June 2001, the Company entered into a settlement agreement and mutual
     release with ICS and the Company agreed to pay ICS $24 in twelve equal
     monthly installments of $2 each plus 200 shares of Empyrean common stock
     valued at $50. A dismissal entry was filed with the court on June 22, 2001.
     The Company recognized a gain of $371 upon the settlement of the lawsuit in
     the quarter ended June 30, 2001.

NOTE 6 - STOCKHOLDERS' EQUITY

     The Company's authorized preferred stock consists of 10,000 shares, $.0001
     par value. No preferred stock has been issued.

     The Company has granted options to purchase common stock to employees,
     officers, directors, lenders, and persons providing services to the
     Company. The Company has also granted warrants to lenders and investors.
     For options granted to non-employees, the Company recognizes consulting or
     interest expense equal to the fair value of the options. At September 30,
     2001, 7,159 options and warrants were exercisable at a weighted average
     price of $0.65 per share.

     A summary of the status of stock options and warrants as of September 30,
     2001, and changes during the nine months ended on that date is presented
     below.

<TABLE>
<CAPTION>
                                                         Options                               Warrants
                                             ---------------------------------    -----------------------------------
                                                                  WEIGHTED                               WEIGHTED
                                                                  AVERAGE                                 AVERAGE
                                                                  EXERCISE                               EXERCISE
                                                  NUMBER           PRICE                NUMBER             PRICE
                                                  ------           -----                ------             -----

<S>                                                 <C>            <C>                    <C>              <C>
Outstanding at January 1, 2001                       9,574          $  .63                 3,488            $  .68
     Granted                                         3,038             .40                   425               .27
     Exercised                                      (3,922)            .47                  (924)              .54
     Expired                                          (710)            .64                (1,295)              .94
                                                   -------          ------               -------            ------
Outstanding at September 30, 2001                    7,980          $  .62                 1,694            $  .45
                                                   =======          ======               =======            ======
</TABLE>


     Stock options and warrants were not included in the computation of diluted
     loss per share for the periods presented because to do so would have been
     antidilutive.



                                       9
<PAGE>



NOTE 7 - DISTRIBUTION AGREEMENT

     In April 1999, the Company executed a distribution agreement with Durstrand
     International Limited ("Durstrand") granting Durstrand the exclusive right
     to distribute the Company's licensed products in certain Southeast Asian
     markets. Durstrand paid a non-refundable fee of $600 for these rights of
     which $100 was deferred pending shipment of product to Durstrand. The
     Company recognized $500 of the fee paid as revenue in the quarter ended
     June 30, 1999, as the Company had performed all of its obligations under
     the agreement.

     The agreement with Durstrand required Durstrand to purchase a minimum
     amount of product in each year of the contract to maintain its exclusive
     rights. The $100 of deferred revenue was to be applied to minimum annual
     purchases of $400 required in the contract year ended April 28, 2000. There
     have been no purchases to date. As a result of Durstrand not satisfying the
     minimum purchase requirement, the Company served notice in October 2000 of
     its intent to revoke Durstrand's exclusivity in the defined territory if
     Durstrand did not purchase at least $200 of product within 60 days. Since
     no effort was made by Durstrand to cure, in January 2001 the Company served
     notice that Durstrand's rights were no longer exclusive. In April 2001,
     Durstrand was given 60-day notice of termination for cause and as a result,
     the distribution agreement with Durstrand was terminated. The $100 of
     deferred revenue was recognized upon the termination of the agreement in
     the quarter ended June 30, 2001.

NOTE 8 - REVENUES

     Net revenues are comprised of the following:

<TABLE>
<CAPTION>
                                                     Three months ended                       Nine months ended
                                            -------------------------------------    ---------------------------------
                                            Sept. 30, 2001     Sept. 30, 2000        Sept. 30, 2001     Sept. 30, 2000
                                            --------------     --------------        --------------     --------------
<S>                                                   <C>                 <C>                 <C>                 <C>
    Product sales                                     146                 49                  595                 496
    Distribution rights                                 -                  -                  100                   -
                                                    -----              -----                  ---               -----
    Net revenues                                      146                 49                  695                 496
</TABLE>

NOTE 9 - LICENSES AND ROYALTIES

     In April 2001, the license agreement between the Company and Sunbeam
     Corporation was terminated effective December 31, 2000. The license
     agreement allowed the Company to use the SunbeamTM trademark in connection
     with the sale and distribution of its hand sanitizer and first-aid
     antiseptic, sanitizing wet wipe, disinfectant surface spray and sanitizing
     baby wipe products throughout the United States and Canada. The Company had
     made no product sales using the SunbeamTM trademark since the acquisition
     of the licensing rights in October 1999. Concurrent with the termination of
     the license agreement with Sunbeam Corporation, the license agreement
     between the Company and The Coleman Company, Inc., which is wholly-owned by
     Sunbeam Corporation, was amended to increase the annual minimum royalties
     related to the use by the Company of the Coleman(R) trademark in the sale
     and distribution of its products to $110 and $220 in 2001 and 2002,
     respectively. No other terms of the agreement were amended. The minimum
     royalties under the amended license agreement with The Coleman Company,
     Inc. are equal to the combined minimum royalties under the original
     agreements with Sunbeam Corporation and The Coleman Company, Inc.



                                       10
<PAGE>



NOTE 10 - CASH FLOW STATEMENT

     During the first nine months of 2001, the Company entered into the
following non-cash transactions:

-        The Company issued 1,780 shares of common stock, valued at $590, to
         various consultants, employees and other parties as compensation for
         services, loan and performance guarantees, and lines of credit provided
         to the Company.
-        The Company issued 2,199 shares of common stock to an investor upon the
         conversion of $258 of the principal of, and the payment of $22 of
         accrued interest on, a convertible note.
-        The Company granted options to purchase 482 shares of common stock,
         valued at $176, to various consultants and other parties in
         compensation for services provided to the Company and warrants to
         purchase 425 shares of common stock, valued at $88, to a lender and a
         placement agent in conjunction with the issuance of three convertible
         debt instruments.
-        The Company issued 335 shares of common stock, valued at $75, to three
         vendors for the conversion of trade accounts payable to common stock.
-        The Company issued 200 shares of common stock, valued at $50, to a
         former vendor as part of the settlement of litigation.
-        The Company recognized $42 of expense related to the exercise of
         options to purchase common stock by two directors with loans from the
         Company at an interest rate less than a market rate.
-        The Company recognized $491 of interest expense related to the
         intrinsic value of conversion options embedded in three convertible
         debt instruments issued.

NOTE 11 - RELATED PARTY TRANSACTIONS

     During 2001, the Company made loans totaling $2,344 to six officers and
     directors for the exercise of options and warrants to purchase 4,845 shares
     of common stock. The loans bear interest at rates of 5.48% or 5.78%, are
     secured by the common stock acquired, and have maturities ranging from
     December 2001 through February 2006.

NOTE 12 - SUBSEQUENT EVENT

     In October 2001, the Company issued a two-year, 5% $250 convertible note
     and a warrant to purchase 83 shares of common stock at an exercise price of
     $0.123 to an unrelated investor. Interest on the note is payable quarterly
     in cash or common stock, at the option of the Company. At the option of the
     investor, the note is convertible into common stock at a conversion price
     equal to the lower of $0.08 or 80% of the average of the three lowest
     closing prices of the common stock for the sixty trading days immediately
     preceding the conversion date. The Company is required to remit all funds
     received from its customer accounts receivable to the investor to repay the
     note. The Company will account for the convertible debt in accordance with
     the FASB's Emerging Issues Task Force (EITF) Issue No. 98-5, "Accounting
     for Convertible Securities with Beneficial Conversion Features or
     Contingently Adjustable Conversion Ratios", and Issue No. 00-27,
     "Application of Issue No. 98-5 to Certain Convertible Instruments". These
     standards establish the accounting treatment for convertible debt
     instruments with nondetachable conversion options that have beneficial
     conversion features.




                                       11
<PAGE>


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

SPECIAL NOTE CONCERNING FORWARD LOOKING STATEMENTS

         This Form 10-QSB, including the notes to the condensed consolidated
financial statements and this "Management's Discussion and Analysis of Financial
Condition and Results of Operations," contains forward looking statements. We
may make additional written and oral forward looking statements from time to
time in filings with the U.S Securities and Exchange Commission, in our press
releases, or otherwise. The words "believe," "expect," "anticipate," "intends,"
"forecast," "project," "plan," and similar expressions identify forward looking
statements. These statements may include, but are not limited to, the
anticipated outcome of contingent events, including litigation, regulatory
proceedings or rulemaking, projections of revenues, income, loss, or capital
expenditures, plans for future operations, growth and acquisitions, financing
needs or plans and the availability of financing, and plans relating to products
or product development as well as assumptions relating to the above subjects.

         Forward looking statements reflect our current views concerning future
events and financial performance and speak only as of the date the statements
are made. These forward looking statements are subject to risks and
uncertainties, some of which cannot be predicted or quantified, that could cause
actual results to differ materially from those set forth in, contemplated by, or
underlying the forward looking statements. Statements in this Form 10-QSB,
including the notes to the consolidated financial statements and this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," describe factors, among others, that could contribute to or cause
such differences. Such factors include, among other factors, changes in external
competitive market factors or in our internal budgeting process which might
impact trends in our results of operations, unanticipated working capital or
other cash requirements, changes in our business strategy or an inability to
execute our strategy due to unanticipated changes in the industries in which we
operate, the acceptability and success of existing and potential products in the
marketplace, the ability to obtain sufficient capital to fund operations and the
outcome of potential litigation.

         The following discussion and analysis provides information regarding
our financial condition and results of operations for the periods shown. This
discussion should be read in conjunction with our Unaudited Condensed
Consolidated Financial Statements and related Notes thereto included elsewhere
in this document.

INTRODUCTION

         In 1998, we acquired certain rights to use a microbicide formulation
from International Bioscience Corporation ("IBC"). We market, sell and
distribute innovative personal care products based on this and other third party
or purchased formulations that are intended to prevent the spread of infectious
disease. To date, we have introduced three product lines under our complete germ
protection program. The first, a Hand Sanitizer and First-Aid Antiseptic lotion,
is marketed under both the Preventx(R) and Coleman(R) with Advanced Preventx(R)
brands. During the fourth quarter of 2000, we began selling our new line of
antibacterial towelettes under both the Preventx(R) and Coleman(R) with Advanced
Preventx(R) brands. In December 2000, we announced the introduction of the
Coleman(R) Antibacterial Surface Disinfectant Cleaner, which can remove most of
the organisms present on surfaces that can cause infectious disease. The
Antibacterial Surface Disinfectant Cleaner is not based on the IBC formulation,
but is a formulation sub-registered from a third party that is registered with
the EPA. The introduction of this product allows us to offer our customers a
more complete line of infectious disease prevention products. In accordance with
the settlement of our suit with IBC, new product development is vested in a
joint venture formed with IBC. Our marketing personnel and IBC's scientific
personnel share new product development responsibilities. We perform the market
research to determine, among other things, the product claims that we would like
to make while IBC develops the formulation to



                                       12
<PAGE>

meet these claims, performs the required testing and insures compliance with the
appropriate government regulations. Additional preventative products that we
anticipate marketing utilizing formulations similar to the one used in our hand
sanitizer and first-aid antiseptic include a disinfectant surface spray, baby
wipes, and the GEDA Plus(R) microbicidal contraceptive gel. Our disinfectant
surface spray that is based on the IBC formulation must obtain regulatory
approval from the FDA to enable us to market the product for use on food
surfaces, which we estimate will take at least 12 months. When the IBC
formulation has been approved by the FDA and is available for sale, we intend to
introduce it as an improved product offering to the antibacterial surface
disinfectant cleaner that we announced in December 2000. IBC plans to apply for
an Investigative New Drug (IND) number from the FDA for the baby wipes
subsequent to the receipt of an IND number for the GEDA Plus(R) microbicidal
contraceptive gel. An IND number will enable IBC to commence testing that will
be recognized by the FDA. We estimate that the testing and approval process for
the baby wipes will take at least six months from the receipt of the IND number.
The application process to obtain an IND number for the GEDA Plus(R)
microbicidal contraceptive gel is underway. The gel must undergo clinical trials
and obtain regulatory approval prior to marketing. The gel will be tested to
determine its effectiveness in preventing HIV as well as other sexually
transmitted diseases, all of which have different rates of transmission as well
as gestation periods for infection within the human body. As a result, we
anticipate the clinical trials for certain sexually transmitted diseases will
require a minimum of six months while other sexually transmitted diseases such
as HIV will require at least 18 months from the receipt of the IND number.

         The limited revenues and substantial start-up costs associated with
introducing our new line of preventative products have significantly affected
our current financial condition and operations. We have sustained substantial
losses from operations in recent years and have an accumulated deficit.

         We incurred net losses in 1999 and 2000 and expect to incur net losses
at least through 2001. We expect operations to generate negative cash flow at
least through 2001. We do not have existing capital resources or credit lines
available that are sufficient to fund our operations and capital requirements as
presently planned over the next twelve months. These factors raise doubts about
our ability to continue as a going concern and our audit report in our annual
report on Form 10-KSB for the year ended December 31, 2000, filed with the SEC
on March 30, 2001, contained an explanatory paragraph with respect to this
matter.

         We expect to generate substantially all of our revenues in the future
from increased sales of our current line of Preventx(R) preventative products as
well as additional preventative products that we can market utilizing IBC
formulations similar to the one used in our hand sanitizer and first-aid
antiseptic and other third-party formulations.

         In addition to cost of goods sold, which we expect to vary somewhat
proportionately with sales over time, significant cost and expense items include
salaries and benefits, professional fees, royalties, office and administration,
advertising, and legal and accounting, all of which, in total, significantly
exceeded our total revenues for 2000 and in the first nine months of 2001.
Accordingly, we do not believe comparing costs as a percentage of revenues from
year to year is meaningful.

RESULTS OF OPERATIONS

COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000

         Our total revenues in the three months ended September 30, 2001 were
$146,000 compared with $49,000 in the three months ended September 30, 2000. The
nearly 200% increase in product sales was primarily due to shipments to new
customers in the quarter including the first-aid department of Rite Aid
Corporation and reorder shipments to customers acquired earlier this year. In
the three months ended September 30, 2000, shipments to Wal-Mart Stores, Inc
comprised approximately 43% of total revenues. Due


                                       13
<PAGE>

to a significant decline in its overall hand sanitizer sales in 2000, Wal-Mart
Stores significantly reduced the space dedicated to this product category in its
health and beauty aids departments in the first quarter of 2001. Wal-Mart was
not an active customer in the third quarter of 2001, and is not expected to be a
significant customer during the remainder of the year. The reduction in sales to
Wal-Mart have been more than offset by gains in distribution in our targeted
channels and we believe that in the remainder of 2001 we will continue to
develop relationships with other large regional and national retail drug,
grocery, hardware, sporting goods and discount chains that will offset the
reduction in sales to Wal-Mart Stores.

         Our gross margin from product sales increased to 49% in the quarter
ended September 30, 2001 from 45% in the quarter ended September 30, 2000. The
margin improvement is primarily due to the sale of inventory in the quarter
ended September 30, 2001 that had been previously reserved as surplus. Without
this sale, gross margin in the quarter ended September 30, 2001 would have
declined from the year ago quarter because the margin in the year ago period
reflected only sales of our hand sanitizer and first-aid antiseptic product
while the margin in the third quarter of 2001 also included our recently
introduced towelette and antibacterial surface disinfectant cleaner product
lines. Product costs as a percentage of sales revenue are higher for towelettes
than for our hand sanitizer and first-aid antiseptic lotion product. We believe
that as volume increases, towelette product costs will decline and our gross
margin from towelettes will improve.

         Selling, general, and administrative expenses decreased to $659,000 in
the three months ended September 30, 2001 from $964,000 in the three months
ended September 30, 2000 primarily due to the following:

-        Sales promotion and advertising expenses declined to $158,000 in the
         quarter ended September 30, 2001 from $341,000 in the quarter ended
         September 30, 2000. The prior year quarter included significant
         expenditures for web-site development and redesigned point-of-purchase
         product displays that were not repeated in the current quarter. In
         addition, public relations expenses were reduced as a result of a
         change in our public relations agency and a gain related to the
         settlement of outstanding invoices with a former public relations
         agency.

-        Costs for professional and consulting services decreased to $74,000 in
         the quarter ended September 30, 2001 from $347,000 in the quarter ended
         September 30, 2000 due to a reduction in legal fees, lower expense
         related to stock options granted to consultants, and reduced reliance
         on paid consultants.

-        Salaries and benefits increased to $342,000 in the quarter ended
         September 30, 2001 from $194,000 in the quarter ended September 30,
         2000 as a result of an accrual for employee bonuses of $123,000 in the
         quarter ended September 30, 2001 compared to $0 in quarter ended
         September 30, 2000.

         Royalty expense was $42,000 in the quarter ended September 30, 2001
compared to $(345,000) in the quarter ended September 30, 2000. An accrual for
minimum royalties to IBC of $358,000 that was established in the first and
second quarters of 2000 was reversed in the third quarter as a result of the
settlement of our lawsuit with IBC and the elimination of minimum royalties
retroactive to January 1, 2000. Additionally, higher sales of our products and
increased minimum royalty obligations to The Coleman Company, Inc. increased
royalty expense in the quarter ended September 30, 2001.


                                       14
<PAGE>
         Litigation settlement expense decreased to $0 in the quarter ended
September 30, 2001 from $5,360,000 in the quarter ended September 30, 2000. In
the quarter ended September 30, 2000, litigation settlement expense of
$5,360,000 was recognized for expenses related to our lawsuit with IBC that was
settled in August 2000.

         Interest expense increased to $280,000 in the three months ended
September 30, 2001 from $15,000 in the three months ended September 30, 2000.
Interest expense in the quarter ended September 30, 2001 included $55,000
non-cash expense from the intrinsic value of conversion options embedded in
convertible debt issued in 2001, $186,000 amortization of financing costs
including the fair value of common stock granted to loan guarantors and loan
facility providers, deferred financing costs, and original issue discount, and
$39,000 interest on our bank lines of credit and convertible debt.

         We incurred a net loss in the three months ended September 30, 2001 of
$897,000 compared to a net loss of $5,954,000 in the three months ended
September 30, 2000. The losses in the second quarters of 2001 and 2000 were due
primarily to limited revenues that were substantially exceeded by our costs of
operations, and in the third quarter of 2000, the expense related to the lawsuit
and settlement with IBC. Our net loss per share was $0.02 for the three months
ended September 30, 2001 and $0.15 for the three months ended September 30,
2000. The loss per share declined as a result of the factors affecting net loss
as discussed above, and because of an increase in the weighted average number of
shares outstanding to 51,194,000 in the three months ended September 30, 2001
from 39,207,000 in the three months ended September 30, 2000.

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000

         Our total revenues in the nine months ended September 30, 2001 were
$695,000 compared with $496,000 in the nine months ended September 30, 2000.
Total revenues in the nine months ended September 30, 2001 included distribution
rights revenue of $100,000, which was recognized upon the termination of our
distribution agreement with Durstrand International Ltd., compared to $0 of
distribution rights revenue in the nine months ended September 30, 2000. Product
sales increased 20% to $595,000 in the first nine months of 2001 compared to
$496,000 in the same period of 2000. Product sales in the nine months ended
September 30, 2001 consisted of shipments to several new customers including
Walgreen Co., Kmart Corp., Target Corp., Rite Aid Corp., the Eckerd drugstore
chain, Fred Meyer Stores, Duane Reade, Inc., Dick's Sporting Goods, and Price
Chopper. Total revenues in the nine months ended September 30, 2000 were
primarily comprised of initial and reorder shipments to the health and beauty
aids and sporting goods departments of Wal-Mart Stores, Inc. Due to a
significant decline in its overall hand sanitizer sales in 2000, Wal-Mart Stores
significantly reduced the space dedicated to this product category in its health
and beauty aids departments in the first quarter of 2001. Wal-Mart is not
expected to be a significant customer during 2001. We believe that the reduction
in sales to Wal-Mart Stores will continue to be more than offset by gains in
distribution in our targeted channels and that in the remainder of 2001 we will
continue to develop relationships with other large regional and national retail
drug, grocery, hardware, sporting goods and discount chains that will lessen the
significance of the reduction in sales to Wal-Mart Stores.

         Our gross margin from product sales increased to 47% in the nine months
ended September 30, 2001 compared to 46% in the nine months ended September 30,
2000. The margin in the earlier period reflected only sales of our hand
sanitizer and first-aid antiseptic lotion product line while the margin in the
nine months ended September 30, 2001 also included our recently introduced
towelette and antibacterial surface disinfectant cleaner product lines. Product
costs as a percentage of sales revenue are higher for towelettes than for our
hand sanitizer and first-aid antiseptic lotion product. We believe that as
volume increases, towelette product costs will decline and our gross margin will
improve. Margins have improved on our hand sanitizer


                                       15
<PAGE>

and first-aid antiseptic lotion product line as a result of lower product costs
and higher average selling prices, offsetting the impact of lower towelette
margins. In addition, margin in the period ended September 30, 2001 included a
sale of inventory previously reserved as surplus.

         Selling, general, and administrative expenses increased to $2,737,000
in the nine months ended September 30, 2001 from $2,099,000 in the nine months
ended September 30, 2000 primarily due to the following:

-        Salaries and benefits increased to $1,100,000 in the nine months ended
         September 30, 2001 from $535,000 in the nine months ended September 30,
         2000 as a result of an accrual for employee bonuses of $369,000 in the
         nine months ended September 30, 2001 compared to $0 in nine months
         ended September 30, 2000, salary increases for employees effective
         January 2001, and an increase in the number of employees. The
         relocation of our business to Ohio in January 2000 resulted in a
         temporary reduction in our work force in the nine months ended
         September 30, 2000.

-        Expenses related to consulting and professional services increased to
         $621,000 in the nine months ended September 30, 2001 compared to
         $560,000 in the nine months ended September 30, 2000 due to non-cash
         charges related to the engagement of investor relations and financial
         consultants. The newly engaged consultants were compensated with common
         stock and options to purchase common stock. Partially offsetting the
         costs related to the newly engaged consultants, fees for legal services
         declined to $182,000 in the nine-month period ended September 30, 2001
         from $353,000 in the prior year period.

         Royalty expenses increased to $136,000 in the nine months ended
September 30, 2001 from $64,000 in the nine months ended September 30, 2000 due
to royalties related to higher product sales, an increase in the royalty rate
paid to IBC from 2% to 5% of net sales effective August 2000, and an increase in
the minimum royalty obligations to The Coleman Company, Inc.

         A gain of $371,000 from the settlement of litigation with Integrated
Commercialization Solutions at a cost lower than the amount accrued was
recognized in the nine months ended September 30, 2001 compared to litigation
settlement expense of $5,434,000 that was recognized in the nine months ended
September 30, 2000 related to the litigation and settlement with IBC in August
2000.

         Interest expense increased to $900,000 in the nine months ended
September 30, 2001 from $66,000 in the nine months ended September 30, 2000.
Interest expense in the nine months ended September 30, 2001 included $492,000
non-cash expense from the intrinsic value of conversion options embedded in
convertible debt issued in the period, $318,000 amortization of financing costs
including the fair value of common stock granted to loan guarantors and loan
facility providers, deferred financing costs, and original issue discount, and
$91,000 interest on our bank lines of credit and convertible debt. Interest
expense in the nine months ended September 30, 2000 included the fair value of
options granted to promissory note holders and interest on promissory notes.

         We incurred a net loss in the nine months ended September 30, 2001 of
$2,995,000 compared to a net loss of $7,417,000 in the nine months ended
September 30, 2000. The losses in the nine month periods of 2001 and 2000 were
due primarily to limited revenues that were substantially exceeded by our costs
of operations, non-cash interest expense resulting from the intrinsic value of
conversion options embedded in convertible debt issued in the 2001 period, and
expenses related to the litigation and settlement with IBC in the 2000 period.
Our net loss per share was $0.06 for the nine months ended September 30, 2001
and the $0.20 for the nine months ended September 30, 2000. The loss per share
declined as a result of the factors affecting


                                       16
<PAGE>

net loss as discussed above and an increase in the weighted average number of
shares outstanding to 49,146,000 in the nine months ended September 30, 2001
from 36,305,000 in the nine months ended September 30, 2000.


LIQUIDITY AND FINANCIAL POSITION

         To date, we have been unable to generate significant cash flows from
our business operations. As a result, we have funded our operations through
investor financing, including sales of common stock, the exercise of warrants
and options, and the issuance of convertible notes and debentures. We have also
issued stock to satisfy obligations and we have used debt to fund our
operations. Until such time as we are able to generate significant cash flow
from operations through increased sales of our products, we will be required to
continue our reliance on investor financing and debt to fund our operations. At
September 30, 2001, cash and cash equivalents totaled $52,000. Current
liabilities at September 30, 2001, consisting primarily of accounts payable,
accrued liabilities, and short-term debt, exceeded current assets by $2,194,000.

         During the nine months ended September 30, 2001, net cash used in
operating activities was $2,003,000, primarily due to a net loss of $2,995,000
less net non-cash charges of $916,000 related to the issuance of common stock
and options to purchase common stock, the intrinsic value of conversion options
embedded in convertible debt issued, the exercise of options to purchase common
stock by two directors with the use of loans from the Company with an interest
rate lower than a market rate, and the amortization of debt issuance expenses,
partially offset by a non-cash gain related to the settlement of our lawsuit
with ICS.

         In the nine months ended September 30, 2001, net cash flow from
financing activities was $2,021,000, resulting from the sale of common stock in
the amount of $61,000, borrowings under bank lines of credit totaling $826,000,
and the issuance of convertible notes and debentures for net proceeds of
$1,134,000.

         Our future royalty requirements will affect liquidity. We are required
to pay royalties to various licensors, including IBC, of up to 17% of net sales.
The settlement with IBC has had a favorable effect on near-term liquidity as a
result of the elimination of minimum royalty payments. The previous license
agreement would have required a minimum royalty payment of $735,000 to be paid
no later than January 30, 2001 and $915,000 to be paid no later than January 30,
2002. Our licensing agreement with The Coleman Company, Inc. contains minimum
royalty obligations of $110,000 and $220,000 in 2001 and 2002, respectively.

         As of September 30, 2001, we had no capital expenditure obligations.

         In November 2000, we secured a one-year, $1,000,000 revolving line of
credit from a bank with an interest rate equal to the bank's prime rate plus
1/2%. The line of credit is secured by the guarantees of several officers and
directors and their spouses, which guarantees in turn are secured by the assets
of the Company. As consideration for their guarantees, we granted these officers
and directors, collectively, 450,000 shares of the Company's common stock valued
at $169,000. In March 2001, an additional 120-day credit facility of $250,000
was obtained from a bank with an interest rate equal to the bank's prime rate
plus 1%. This facility is secured by the guarantees of a director and a company
wholly-owned by the director, and was extended for an additional 60-day term in
July 2001 and an additional 90-day term in September 2001. As consideration for
the original and first renewal guarantees, we granted 168,750 shares of the
Company's common stock, valued at $53,000, to the director's wholly-owned
company. As of November 7, 2001, borrowings of $1,234,000 were outstanding under
the two lines of credit. We do not have sufficient liquidity to meet our
operating cash requirements and repay the two lines of credit on their current
maturity dates. We plan to request that the bank renew the two lines of credit
until 2002 when we plan to repay the borrowings through operating cash flows or


                                       17
<PAGE>

additional debt or equity financing. However, there can be no assurance that the
bank will agree to such extension, that operating cash flows to repay the debt
will be available or that such debt or equity financing will be available on
favorable terms or at all.

         In June 2001, we executed 60-day bridge loan facility agreements
totaling $300,000 with two officers and directors and a company wholly-owned by
a third director with an interest rate equal to the prime rate of The Huntington
National Bank plus 3.5%. As consideration for the execution of the bridge loan
facilities, we granted these officers and directors and the director's
wholly-owned company, collectively, 135,000 shares of the Company's common stock
valued at $30,000. As of September 30, 2001, these bridge loan facilities had
expired and no borrowings were outstanding.

         In April 2001, we issued convertible debentures in an aggregate
principal amount of $40,000 to three unrelated investors. The debentures mature
in April 2006 and bear interest at a 4% annual rate. At the Company's option,
interest on the debentures is payable in cash or common stock at maturity and
the debentures are redeemable at any time for 125% of the outstanding principal
amount plus unpaid interest. At the option of the holders, the debentures are
convertible into common stock at a conversion price equal to the lower of $0.434
or 80% of the average five lowest closing bid prices of the common stock for the
twenty trading days immediately preceding the conversion date. In addition, the
placement agent for the transaction received a warrant to purchase 8,000 shares
of common stock at an exercise price of $0.468 with a fair value of $3,000.
Notwithstanding the waiting period prior to the date that the debentures are
first convertible, at November 8, 2001, the debentures would have been
convertible into 420,168 shares of common stock.

         In June 2001, we issued a two-year, 8% $1,000,000 convertible note and
a warrant to purchase 333,333 shares of common stock at an exercise price of
$0.27 to an unrelated investor. Interest on the note is payable quarterly in
cash or common stock, at the option of the Company. At the option of the
investor, the note is convertible into common stock at a conversion price equal
to the lower of $0.1773 or 80% of the average of the three lowest closing prices
of the common stock for the sixty trading days immediately preceding the
conversion date. Two officers and directors and a company wholly-owned by a
third director pledged their beneficially owned holdings of the Company's common
stock as security for the Company's registration obligations under a
subscription agreement with the investor. As consideration for the pledge of
their shares, we granted the officers and directors and the director's
wholly-owned company an aggregate of 450,000 shares of the Company's common
stock with a fair value of $99,000. As of November 7, 2001, 3,896,230 shares of
common stock were issued upon the conversion of $393,000 of the principal and
the payment of $22,000 of accrued interest on the note. At November 7, 2001, a
principal amount of $607,000 was outstanding under the note, which was
convertible into 7,584,376 shares of common stock.

         In August 2001, we issued a two-year, 8% $250,000 convertible note and
a warrant to purchase 83,333 shares of common stock at an exercise price of
$0.236 to the same unrelated investor. Interest on the note is payable quarterly
in cash or common stock, at the option of the Company. At the option of the
investor, the note is convertible into common stock at a conversion price equal
to the lower of $0.1573 or 80% of the average of the three lowest closing prices
of the common stock for the sixty trading days immediately preceding the
conversion date. At November 7, 2001, a principal amount of $250,000 was
outstanding under the note, which was convertible into 3,125,000 shares of
common stock.

         In October 2001, we issued a two-year, 5% $250,000 convertible note and
a warrant to purchase 83,333 shares of common stock at an exercise price of
$0.123 to an unrelated investor. Interest on the note is payable quarterly in
cash or common stock, at the option of the Company. At the option of the
investor, the note is convertible into common stock at a conversion price equal
to the lower of $0.08 or 80% of the average of the three lowest closing prices
of the common stock for the sixty trading days immediately preceding the
conversion date. We are required to remit all funds received from our customer
accounts receivable to the


                                       18
<PAGE>

investor to repay the note. At November 7, 2001, a principal amount of $188,000
was outstanding under the note, which was convertible into 2,355,691 shares of
common stock.

         We anticipate a substantial increase in cash outlays associated with
increased marketing and sales of our Preventx(R) preventative product line.
Although the IBC settlement requires us to use reasonable efforts to expend up
to $10,000,000 over five years to market licensed products in the territory, we
believe that 100% of our expenditures will qualify to satisfy this commitment
since we are purely a sales and marketing company whose products are derived
from the IBC formulation. We do not believe that incremental outlays beyond the
level projected in our business and marketing plans will be needed solely to
satisfy the IBC settlement commitment.

         We will incur additional expenditures associated with the market
development of additional preventative products that we can market utilizing
similar formulations to the one used in our hand sanitizer and first-aid
antiseptic or for products licensed from third parties. These cash outlays could
include, but are not limited to, market testing, package design, advertising,
point of sale displays, inventory purchases and a sales and marketing campaign.
Our investment in working capital is also expected to increase as we broaden our
product line and obtain new customers. Additionally, if the joint venture
company formed as part of the settlement with IBC incurs net cash outlays, we
may be obligated to make capital contributions to, or arrange financing for, the
joint venture.

         We do not have existing capital resources or credit lines available
that are sufficient to fund our operations and capital requirements as presently
planned over the next twelve months. We are actively pursuing additional funds
through the issuance of debt and/or equity instruments. We may also seek a
working capital line of credit to be secured by our accounts receivable and
inventory. However, such funds may not be available on favorable terms or at
all. To maintain our current expense level of approximately $3,000,000 to
$4,000,000 per year and meet the costs associated with our increased marketing,
sales and market development efforts, it is likely that we will need to raise a
minimum of $3,000,000 to $5,000,000 of additional capital during the next twelve
months, dependent upon the amount of funds generated from operations. Also,
should the FDA issue final regulations that are consistent with its current
proposed regulations with respect to our hand sanitizer and first-aid
antiseptic, we may experience an adverse effect on liquidity. Although we
believe we would have twelve months to address any changes which may be
necessary regarding the labeling of our hand sanitizer and first-aid antiseptic,
the effort required to undertake the changes may cause our financial condition
and results of operations to deteriorate and our business may ultimately fail.





                                       19
<PAGE>


                            PART II OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         We were the plaintiff in an action filed in the United States District
Court, Southern District of Florida Case No. 00-8300. In this action in federal
court, we brought suit against IBC and two principals of IBC for fraud in the
inducement, tortious interference with a business relationship and breach of
contract in connection with our original license from IBC of certain technology.
On August 9, 2000, we entered into a settlement agreement with IBC. The case
against IBC was settled by the filing of a Stipulation of Dismissal with the
United States District Court on August 17, 2000.

         In this federal court action, a company called Optima Holding Co. Ltd.
intervened, claiming that it had an exclusive prior right to use the same
technology by virtue of a joint venture agreement entered into between IBC and
Optima. Optima asserted claims against us for injunctive relief, conversion and
tortious interference with a business relationship. On August 18, 2000, Optima,
together with Mercury Technology Corp. (Delaware) and Mercury Technology Corp.
(Bahamas) (collectively "Mercury") amended its original intervention complaint
to add two counts of patent infringement against both Empyrean and IBC, alleging
willful infringement of U.S. Patent Nos. 3,594,468 and 4,321,277. Empyrean and
IBC each filed motions in the federal action seeking the dismissal of Mercury's
patent infringement claims. Mercury dropped its claim of infringement of U.S.
Patent No. 3,594,468. On April 4, 2001, the court issued a Final Order of
Dismissal granting the motions of Empyrean and IBC to seek dismissal of the
patent infringement claims and declining to exercise jurisdiction over the
remaining state claims.

         We are also a defendant in an action that was filed by Optima Holding
Co., Ltd. and Mercury Technology Corp. on July 28, 1998 in the Circuit Court of
the Eleventh Judicial District, Dade County, Florida. This state court action
alleges that we tortiously interfered with Optima and Mercury's contractual
relationship with IBC. Optima and Mercury claim that they had prior rights to
the IBC formulation and products and that we induced IBC to breach that
agreement. Optima and Mercury have requested an unspecified amount of damages
against us. In two separate actions that have now been consolidated with the
first action in the same court, IBC has requested a declaratory judgment that
IBC properly terminated its development and distribution contract with Optima
and Mercury, and IBC sued various individuals of Optima and/or Mercury for
fraudulent inducement and civil theft. Optima and Mercury also seek injunctive
relief to prevent IBC and its managers and directors from allowing IBC to have
further dealings with us. The state court action was informally abated while the
parties pursued their remedies in the federal action. Since the federal court
action has been dismissed, it is likely that the state court action will resume.
If we are not successful in the state court action, we could lose the right to
market, sell or manufacture our hand sanitizer and first-aid antiseptic lotion
and towelette products and other products currently under development. Should
any court judgment be entered precluding our rights to the products, IBC has
agreed as part of the overall litigation settlement to secure its obligations to
us by granting us the highest priority perfected security interest IBC is
permitted to assign in IBC's rights in commercializing the products in the
United States.

         We were also a defendant in an action that was filed by ICS on November
14, 2000 in the United States District Court, Central District of California,
Southern Division. The action alleged that we breached a contract and sought
damages of at least $445,000 plus interest and attorneys fees. During June 2001,
we entered into a settlement agreement and mutual release with ICS and we agreed
to pay ICS $24,000 in twelve equal monthly installments of $2,000 each plus
200,000 shares of Empyrean common stock valued at $50,000. A dismissal entry was
filed with the court on June 22, 2001. We recognized a $371,000 gain upon the
settlement of the lawsuit in the quarter ended June 30, 2001.





                                       20
<PAGE>


ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

PRIVATE PLACEMENT OF COMMON STOCK FOR CASH

         In August 2001, we sold 44,444 shares of common stock to one purchaser
at a price of $0.225 per share. The offer and sale of the above securities were
deemed to be exempt from registration under the Securities Act of 1933 (the
"Securities Act") in reliance on Section 4 (2) of Regulation D promulgated
thereunder. No advertising or general solicitation was employed in offering the
securities. The purchaser was an accredited investor, represented that he was
capable of analyzing the merits and risks of the investment, acknowledged in
writing that he was acquiring the securities for investment and not with a view
toward distribution or resale and that he understood the speculative nature of
his investment. Proceeds from the above sale of common stock were used for
working capital and for general corporate purposes.

ISSUANCES OF STOCK FOR SERVICES OR IN SATISFACTION OF OBLIGATIONS

         In August 2001, we issued 19,295 shares of common stock valued at
$4,631 to two outside directors as compensation for their service as members of
our Board of Directors.

         In August 2001, we issued 56,250 shares of common stock valued at
$13,500 to Uptic Investments Corp., a company wholly-owned by Lawrence D. Bain,
Chairman of our Board of Directors, as consideration for the guarantee of a
$250,000 renewal line of credit extended to the Company by a bank.

         In August 2001, we issued 335,000 shares of common stock to three
vendors in payment of outstanding trade accounts payable in the amount of
$75,375.

         Each such issuance of common stock was exempt from registration under
Section 5 of the Securities Act of 1933 by way of the exemption provided by
Section 4(2) of such Act. Each such issuance did not involve a public offering
and was effected without general advertising or general solicitation and without
use of any broker, dealer or agent.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

INDEX TO EXHIBITS

4.1      Convertible Note issued to Laurus Master Fund dated August 23, 2001.

4.2      Warrant issued to Laurus Master Fund dated August 23, 2001.

10.30    Promissory Note dated September 11, 2001 in favor of The Huntington
         National Bank.

10.31    Amendment to Employment Agreement with Richard C. Adamany dated August
         1, 2001.

10.32    Amendment to Employment Agreement with Bennett S. Rubin dated August
         1, 2001.

REPORTS ON FORM 8-K

The Company made no filings on Form 8-K during the third quarter of 2001.



                                       21
<PAGE>

                                   SIGNATURES

         In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed by the undersigned on its behalf and in her
capacity as Chief Financial Officer of the Company, thereunto duly authorized.

                                    EMPYREAN BIOSCIENCE, INC.
                                          (Registrant)





November 9, 2001                    /s/ Brenda K. Brown
----------------------              --------------------------------------------
(Date)                              (Signature)
                                    Brenda K. Brown
                                    Vice President and Chief Financial Officer

















                                       22