<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                          AMENDMENT NO.2 TO FORM 10-KSB

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


                For the fiscal year ended Commission File Number
                            December 31, 1996 0-28392

                            HARVARD SCIENTIFIC CORP.
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                              <C>       
        Nevada                                        88-0226455
(State or other jurisdiction                       (I.R.S. Employer
    of incorporation)                            Identification Number)
</TABLE>


              100 N. Arlington Ave., Suite 23P, Reno, Nevada 89501
               (Address of principal executive offices) (Zip Code)

       Registrant's Telephone number, including area code: (702) 796 1173



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

                    Common Stock, Par Value $0.001 Per Share
                                (Title of Class)

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.

(1)   Yes    X No     (2)   Yes    X No
   ---      ---          ---      ---

Check if there is no disclosure of delinquent filers in response to Item 405 of
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 10-KSB
or any amendment to this Form 10-KSB. _X_

State Registrant's revenues for its most recent fiscal year:  $181,000.


State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock as of a specified date within the past 60
days:

Given the closing price for the Registrant's shares of $4.875 on April 9, 1997,
such market value equals approximately $17,074,098.

Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.   Yes   X No
                                             ---     ---  

As of December 31, 1996, there were 9,888,629 shares of common stock
outstanding.

Documents incorporated by reference: No annual report to security holders, proxy
or information statement or prospectus filed pursuant to Rule 424(b) or (c) of
the Securities Act of 1933 are incorporated by reference herein.
<PAGE>   2
PART I

--------------------------------------------------------------------------------
ITEM 1.  DESCRIPTION OF BUSINESS
--------------------------------------------------------------------------------

         The Registrant incorporates herein by this reference Part I, Item 1 of
the Form 10-KSB the Registrant filed with the Securities and Exchange Commission
on April 14, 1997.


--------------------------------------------------------------------------------
ITEM 2.  DESCRIPTION OF PROPERTY
--------------------------------------------------------------------------------

         The Registrant incorporates herein by this reference Part I, Item 2 of
the Form 10-KSB the Registrant filed with the Securities and Exchange Commission
on April 14, 1997.


--------------------------------------------------------------------------------
ITEM 3.  LEGAL PROCEEDINGS
--------------------------------------------------------------------------------

         The Registrant incorporates herein by this reference Part I, Item 3 of
the Form 10-KSB the Registrant filed with the Securities and Exchange Commission
on April 14, 1997.


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

         The Registrant incorporates herein by this reference Part I, Item 4 of
the Form 10-KSB the Registrant filed with the Securities and Exchange Commission
on April 14, 1997.


                                       1
<PAGE>   3
PART II

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

         The Registrant incorporates herein by this reference Part II, Item 5 of
the Form 10-KSB the Registrant filed with the Securities and Exchange Commission
on April 14, 1997.


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

         The discussion contained in this Item 6 is "forward looking", as that
term is identified in, or contemplated by, Section 27A of the Securities Act and
Section 21E of the Exchange Act. Accordingly, actual results may materially
differ from projections. Additional information concerning factors that could
cause actual results to differ materially is readily available in this item.

OVERVIEW:

         Harvard Scientific Corp., is a bio-pharmaceutical development company.
The Registrant's corporate objective is to utilize medically researched and
developed drug substances, determine the ability of these substances to be
encapsulated in liposomes and determine the potential market for such products.
The company will ensure development, regulatory testing and Federal Drug
Administration (FDA) processing to the point of distribution. The Registrant is
currently working on only one product--a therapeutic treatment for male erectile
dysfunction. The Registrant presented the results of its Phase I clinical study
to the FDA in April 1997 as part of its pre-Phase II clinical trial meeting.
During 1994, 1995 and 1996, the Registrant's activities consisted primarily of
raising capital, identifying a core management team, developing a patent
application, concluding manufacturing scale up and initial clinical trials and
formulating both a commercialization and clinical development strategy.

         The Registrant continues to look at other products it can add to its
portfolio that it believes has market potential.

         Over the next 12 months, the Registrant's primary focus will be on
continuing clinical trials and product validation to conform to the regulatory
process of the FDA. The Registrant believes that an 18 to 24 month time-line to
obtain regulatory approval is the current assumption, but there can be no
assurance that the product will receive FDA approval in that time span, if ever.
Additionally, the Registrant will be identifying and seeking collaborative
arrangements with pharmaceutical distribution concerns and/or licensing
agreements with companies to eventually distribute the erectile dysfunction
product.

         In the next twelve months, the Registrant has no plans to purchase or
sell any significant capital assets in the form of either plant or equipment,
with the exception of office equipment and furnishings to effect its
administrative activities.


RESULT OF OPERATIONS:

FOR THE PERIOD FROM JANUARY 13, 1987 (INCEPTION) THROUGH DECEMBER 31, 1993:

         The Registrant was in the development stages and had limited operating
revenues since its inception on January 13, 1987. During this period, the
Registrant's activities consisted primarily of reviewing business opportunities
and acquisitions, as well as maintaining the business entity. During 1987 and
1988, the Registrant realized limited revenues from wholesaling activities
unrelated to its current planned operations. The Registrant had 


                                       2
<PAGE>   4
no operational activity for fiscal years 1989 through 1993 and all expenses
incurred during that period were related solely to maintaining the entity and
reviewing possible business opportunities. Therefore, the Registrant has had a
limited history of operation. From January 13, 1987 through December 31, 1993,
the Registrant had an accumulated deficit of $60,722.


FOR THE YEAR ENDED DECEMBER 31, 1994:

         In July of 1994, the Registrant entered into a joint venture research
and development agreement with Disease Detection International, Inc., a Delaware
corporation, and its current parent, Trinity Biotech, Ltd., an Irish
corporation, for the improvement and enhancement of a rapid whole blood HIV test
device. The intellectual property rights and technology for such enhancement and
improvement had been acquired from three individuals, two of whom were directors
of the Registrant and the third of whom was the son of one of the directors of
the Registrant. The joint venture agreement with Disease Detection International
and Trinity Biotech called for complimentary marketing rights and a 50/50 split
of the profits on any products produced as a result of this agreement.
Subsequently, in August of 1994, the two companies signed a marketing agreement
further defining the manufacturing, pricing and patent rights to the new
product. After several months of pre-marketing of this rapid detection device,
the Registrant determined that approval by the marketing authority in the United
States was not likely due to adverse psychological reactions by private testing
patients. Trinity Biotech, Ltd. terminated the agreements in February of 1995.
The Registrant contributed $34,470 directly to the research and development cost
of this product. At this time, the Registrant has not taken any action in this
matter and has abandoned the project with Trinity Biotech, Ltd.

         The Registrant incurred a net loss for the year ended December 31, 1994
in the amount of $489,664. General and administrative expenses consisted
primarily of salaries of corporate officers, directors fees, office staffing
accounting, legal and marketing-related expenses, rent and occupancy costs.
Research and development cost consisted primarily of reimbursements to our
parent company for expenditures to consultants, patent attorneys, lab costs and
product sampling materials necessary to formulate the treatment for erectile
dysfunction. Included in the Registrant's research and development expenses for
1994 was the expenditure of $34,470 with regard to the HIV testing research and
development program.


FOR THE YEAR ENDED DECEMBER 31, 1995:

         In 1995, the Registrant experienced an increase in both general and
administrative expenses, as well as research and development expenses. The net
loss for the year ended December 31, 1995 amounted to $676,455. The total
operating expenditures for the two years ended December 31, 1995 represented
approximately 97% of the total operating expenses from inception, primarily due
to the fact that the Registrant was not operational prior to that time and all
expenses incurred from inception to the end of 1993 were primarily to maintain
the Registrant's status.

         On December 29,1995, the Registrant raised $831,300, net of issuance
cost , which monies were used to fund the Registrant's existing operations and
retire a portion of loans and notes payable incurred earlier in the year.


FOR THE YEAR ENDED DECEMBER 31, 1996:

         The Registrant experienced an increase in administrative and general
expenses primarily as a result of increased consulting, legal and professional
fees. These fees were paid mostly to auditors, attorneys and marketing
consultants. In addition, the Registrant experienced an increase in payroll
costs, as it had four employees until December 6,1996, when a management change
took place. As a result of this management change, Neal Armstrong, Rex Morden,
Stephen M. Goldberg and David F. Miller were removed and Don Steffens and Ian
Hicks were appointed as officers and directors of the Registrant.

         During 1996, the Registrant's activities centered around continued fund
raising efforts and development of the product. The Registrant submitted an IND
to the FDA and concluded a Phase I clinical trial. The Registrant started the
year with a cash balance of $799,466. The Registrant raised funds though the
sale of $500,000 aggregate 


                                       3
<PAGE>   5
principal amount of 7% Convertible Debentures ("7% Debentures") in June 1996.
The Registrant received revenues of $181,000 resulting from the supply of its
product to its Korean distributor for the conduct of clinical trials and
incurred research and development and other costs of the goods sold in the
amount of $326,423. The Registrant also incurred $494,813 in costs for legal
settlements, based on the fair market value of 568,750 shares issued to Thomas
Waite & Associates ("Waite") in settlement of litigation between the Registrant
and Waite. The net loss for the year ended December 31, 1996 amounted to
$1,938,944.


LIQUIDITY AND CAPITAL RESOURCES:

         On January 7, 1994, the Registrant acquired intellectual property
rights from Bio-Sphere Technology, Inc. for the treatment of male erectile
dysfunction. The Registrant issued 2,856,000 shares (714,000 shares as currently
restated) to acquire this technology. Subsequently, the Registrant offered a
private placement memorandum to qualified investors to fund the further
development and commercialization of this product. The capital raised totaled
$354,150 net of issuance cost during this period.

         In July of 1994, the Registrant purchased the property rights to the
HIV testing technology that would permit the improvement of the existing product
of the Disease Detection International and Trinity Biotech, Ltd. companies. The
Registrant issued 1,340,000 shares (335,000 shares as currently restated) to
three individuals for those property rights. Two of those individuals were
directors and the third was the son of one of the directors of the Registrant.

         In 1995, the Registrant raised capital primarily through loans from the
Registrant's directors and others. These moneys were primarily used to attempt
to raise investment capital and maintain the corporate entity.

         In November of 1995, the Registrant exchanged 6,138,500 shares of its
common stock with its parent company, Bio-Sphere Technology, Inc. (BTI) for
patent assignment necessary to strengthen its position on the treatment of male
erectile dysfunction. In addition, BTI assigned licensing and distribution
contracts associated with the Registrant's impotency treatment. BTI agreed to
make scientific and technical personnel available, as well as to provide
management and marketing personnel for the Registrant's use and to assist in
raising working capital. As a result of this reorganization, the Registrant
raised $831,300, net of issuance cost, on December 29, 1995.

         In June 1996, the Registrant sold 7% Convertible Debentures ("7%
Debentures") outside the United States under the provisions of Regulation "S"
promulgated under the Securities Act, as follows:

<TABLE>
<CAPTION>
                                  PURCHASER                                      AMOUNT
                                  ---------                                      ------
<S>                                                                             <C>     
                       Ailouros Ltd.                                            $150,000
                       DJ Limited                                               $100,000
                       Wood Gundy London Limited                                $250,000
</TABLE>

         The 7% Debentures bear an interest rate of seven percent (7%) per annum
and matured on December 7, 1996. The Debentures are issuable in denominations of
$25,000 and integral multiples thereof and, at the holder's request, are
exchangeable for an equal aggregate principal amount of debentures of different
authorized denominations.

         The holder may convert the 7% Debentures into Common Stock commencing
forty-one (41) days after the Closing Date, which was June 10, 1996. The
conversion price per share will be 50% of the Market Price on the date of
conversion. "Market Price," as used herein, means the closing bid price of the
Common Stock on the trading day immediately preceding the Conversion Date, as
reported by the National Association of Securities Dealers, or the closing bid
price on the over-the-counter market on such date or, in the event the Common
Stock is listed on a stock exchange or traded on NASDAQ, the Market Price means
the closing price on the exchange on such date, as reported in the Wall Street
Journal.

         The Registrant has the right to force conversion commencing sixty (60)
days after the Closing Date. No portion of the interest accrued from the date of
issuance to the date of conversion is payable in shares of Common 


                                       4
<PAGE>   6
Stock. In addition, each holder of the 7% Debentures has waived the interest
accrued from the date of issuance to the date of conversion.

         The Registrant has the right of first refusal with regard to any
proposed sale of the 7% Debentures prior to conversion.

         On August 22, 1996, DJ Limited converted the entirety of its 7%
Debenture holdings into 123,076 shares of the Registrant's common stock. On
August 22, 1996, Wood Gundy Limited ("Wood Gundy") converted $125,000 of its 7%
Debenture holdings into 153,845 shares of common stock. The remainder of Wood
Gundy's holdings of 7% Debentures are still outstanding. On August 15, 1996,
Ailouros Ltd. ("Ailouros") converted $25,000 of its 7% Debenture holdings into
33,333 shares of common stock. The remaining $125,000 of 7% Debentures held by
Ailouros were converted into 450,000 shares of common stock on June 12, 1997.

On March 21, 1997, pursuant to a private placement, the Company (a) sold to one
investor ("Investor") $5,000,000 principal amount of 6% Convertible Debentures
(the "Debentures") and (b) received a commitment from Investor, subject to
various conditions, to purchase additional Debentures in the aggregate principal
amount of up to $10,000,000 in two tranches of $5,000,000 each. The Debentures
bear an interest rate of six percent (6%) per annum and mature on March 30, 1998
as to the $4,300,000 principal amount of Debentures currently outstanding and as
of the end of the first anniversary month of the issuance of the two additional
$5,000,000 tranches of Debentures that the Selling Shareholder has agreed to
purchase. The Debentures are issuable in denominations of $100,000 and integral
multiples thereof and, at the holder's request, are exchangeable for an equal
aggregate principal amount of debentures of different authorized denominations.
Upon maturity of the Debentures, payment for principal and accrued interest will
be made either in currency or in shares of the Company's Common Stock, at the
option of the holder.

         The holder may convert the Debentures into Common Stock commencing the
earlier of (i) ninety days after the closing of sale of the Debentures with
respect to one-half of the principal amount of the Debentures, (ii) one hundred
twenty days after the closing of sale of the Debentures with respect to the
balance of the principal amount of the Debentures, or (iii) on the effective
date of the Registrant's Registration Statement on Form SB-2. On July 14, 1997,
the Investor exercised its conversion rights as to $700,000 principal amount of
Debentures plus $13,232 accrued interest, receiving 864,523 shares of Common
Stock therefor. In addition, the Investor has agreed in principle, contingent
upon the Company's filing of said Registration Statement, to amend the
Debentures to give the Company the right to require conversion by giving notice
thereof to the holder at least ten days prior to the Maturity Date. The
conversion price per share will be either (a) $6.525, the Market Price as
defined in the Debentures as of March 21, 1997, or (b) 80% of the Market Price
on the date of conversion, whichever is lower. "Market Price," as used herein,
means the average closing bid price of the Common Stock on the five (5) trading
days immediately preceding March 21, 1997 or Conversion Date as may be
applicable, as reported by the National Association of Securities Dealers, or
the closing bid price on the over-the-counter market on such date or, in the
event the Common Stock is listed on a stock exchange or traded on NASDAQ, the
Market Price means the closing price on the exchange on such date, as reported
in the Wall Street Journal. The Company has the option to pay the interest
accrued from the date of issuance to the date of conversion either in cash or in
shares of Common Stock.

         The Company may redeem any Debentures for which a Notice of Conversion
has not been submitted if the conversion price equals or is less than $1.60 per
share by delivering a Notice of Redemption to the holder. However, the holder
may still opt to convert any such Debentures into shares of Common Stock by
submitting a Notice of Conversion to the Company within three business days of
the holder's receipt of the Company's Notice of Redemption.

         The redemption price will be 125% of the principal amount of the
Debentures, plus accrued unpaid interest. The Company must pay the redemption
price to the holder within ten days from the date of the Notice of Redemption.
If the Company fails to make the redemption payment within these ten days, the
Company forfeits its right to redeem those Debentures.

         The holder may also require the Company to declare whether it intends
to effect a redemption within the following ten days by faxing a notice to the
Company. The Company must respond to this notice within 24 hours.


                                       5
<PAGE>   7
If it fails to do so, the Company may not redeem that holder's Debentures during
the ten day period commencing 24 hours after the date of the notice from the
holder.

         If the Company merges or consolidates with another corporation or sells
or transfers all or substantially all of its assets to another person and, as a
condition of such merger, consolidation or sale, the holders of the Company's
Common Stock are entitled to receive stock or securities in another corporation
or to receive property in exchange for the Company's Common Stock, then the
Debenture may be converted into the kind and amount of stock, securities or
property receivable by the holders of the Company's Common Stock pursuant to the
transaction. If, within 15 days of the holder's receipt of a notice from the
Company advising of a proposed merger, consolidation or sale, the holder has not
submitted a Notice of Conversion, then the Company may prepay all outstanding
principal and accrued interest and thereby terminate the holder's conversion
rights.

         According to the Consensus Report of the American Medical Association,
erectile dysfunction in one form or another afflicts nearly 50,000,000 men
world-wide. This number is expected to increase as the male population increases
its life expectancy and the current "baby boom" generation ages. Erectile
dysfunction becomes more prevalent as men get older.

         If the Registrant's product receives the appropriate regulatory
approvals, which is not certain, the Registrant expects to be able to capitalize
on this trend. Estimates of funding needed to pursue the regulatory process run
as high as $15,000,000. In the short term, this is likely to retard liquidity as
the Registrant's capital needs will increase.

         The Registrant expects to obtain capital funds either from the issuance
of common stock or debt. It is expected that external sources will be available
to provide these funds, but there can be no guarantees of such funding. As of
the date of this filing, the Registrant has no plans to obtain capital funds
other than through the sale of an additional $10,000,000 principal amount of
Debentures to the Investor, as described above.


RISK FACTORS:

         The Registrant's future success is dependent upon its ability to raise
additional funds to complete the commercialization process for its erectile
dysfunction treatment product. In his Report on Financial Statements, the
Registrant's independent auditor has included explanatory language addressing
the Registrant's ability to continue as a going concern. See Note 11 to
Financial Statements. In the past, the Registrant has relied upon the private
purchase of its securities by sophisticated investors to raise such funds, and
the Registrant intends to continue this practice in the future. The Registrant
may also obtain these funds through public financing or from other sources such
as collaboration agreements. There can be no guarantee that the investors who
have been interested in purchasing the Registrant's securities in the past will
be interested in doing so in the future, or that alternative investors will be
found or that public financing or collaborative arrangements will be available
or will be available on terms satisfactory to the Registrant.

         It should be noted that although the Investor has purchased only
$5,000,000 of Debentures as of the filing of this Amended Form 10-KSB, the
Investor has committed to purchasing an additional $10,000,000 of Debentures, in
two tranches of $5,000,000 each, subject to certain conditions. In addition, the
Investor may opt to exercise its conversion rights in one lump sum. If the
Investor converts all or any one tranch of the Debentures and then immediately
sells those shares on the market in one lump sum, or in several large amounts,
the number of shares issued and outstanding will increase significantly in a
very short period of time. This may severely depress the market for the
Registrant's shares. A depressed market for the Registrant's shares could, in
turn, have an adverse impact on the Registrant's ability to raise funds through
public or private sales of its shares.

         Management does not know if the Investor will elect to convert the
Debentures in such a manner as to obtain the maximum amount of Conversion Shares
in one lump sum, or whether it would then immediately attempt to sell all of the
converted shares at one time.

         Failure to obtain adequate financing could cause a delay or termination
of the Registrant's product development and marketing efforts.


                                       6
<PAGE>   8
         The Registrant has identified at least two sources as contract
manufacturers for its product. The product under development by the Registrant
has never been manufactured on a commercial scale and there can be no assurance
that such a product can be manufactured at a cost or in quantities necessary to
make it commercially viable.

         The Registrant has engaged a clinical research organization to develop
and strategize on completing the FDA regulatory process. The Registrant's
long-term success is predicated on the strength of its patent position. The
Registrant is the exclusive assignee of a U.S. patent application for the
therapeutic remedy of male erectile dysfunction. The Registrant relies on trade
secrets and unpatented proprietary technology in producing its product.

         The competition for the product of the Registrant is primarily Upjohn
and Vivus and secondarily other treatments for male erectile dysfunction,
including penile implants and vacuum systems.

         Another uncertainty is the dependence on key personnel familiar with
the manufacturing process. The loss of any of the Registrant's key scientific
personnel could have an adverse effect on the Registrant's continued product
development and business operations.


                                       7
<PAGE>   9
--------------------------------------------------------------------------------
ITEM 7.  FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


                                      II-1
<PAGE>   10
                              HARVARD SCIENTIFIC CORP.
                            (A DEVELOPMENT STAGE COMPANY)

                           REPORT ON FINANCIAL STATEMENTS
                             DECEMBER 31, 1996 AND 1995

<PAGE>   11
                              HARVARD SCIENTIFIC CORP.
                            (A DEVELOPMENT STAGE COMPANY)



                                  TABLE OF CONTENTS

                                                                        PAGE NO.

INDEPENDENT AUDITOR'S REPORT

        On Financial Statements                                                2

        On Supplemental Schedules                                             18

FINANCIAL STATEMENTS

     Balance Sheets                                                       3-4

     Statements of Operations                                               5

     Statements of Stockholders' Equity                                   6-7   

     Statements of Cash Flows                                             8-9 

     Notes to the Financial Statements                                  10-17

     Schedule V - Property, Plant, and Equipment                           19

     Schedule VI - Accumulated Depreciation and 
                   Amortization of Property, Plant, and Equipment          20
                                         
                                   
<PAGE>   12
DALE MCGHIE                                          
CERTIFIED PUBLIC ACCOUNTANT                          Town & Country Plaza
                      
                                              1539 Vassar St. Reno, Nevada 89502
                                                      Tel: 702-323-7744        
                                                      Fax: 702-323-8288


                           

                            INDEPENDENT AUDITOR'S REPORT




To the Board of Directors
 and Shareholders of
Harvard Scientific Corp.

I have audited the balance sheet of Harvard Scientific Corp. (A Development
Stage Company) as of December 31, 1996, and 1995, and the related statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on the financial statements based on my audits.

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

In my opinion, the financial statements referred to above, revised as described
in Note 14, present fairly, in all material respects, the financial position of
Harvard Scientific Corp. as of December 31, 1996, and 1995, and the results of
its operations and its cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles. 

The accompanying financial statements have been presented assuming that the
company will continue as a going concern. As discussed in Note 11 to the
financial statements, the Company has suffered recurring losses from operations
that raises substantial doubt about its ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.

W. Dale McGhie, CPA
Reno, Nevada
June 2, 1997
<PAGE>   13
                               HARVARD SCIENTIFIC CORP.
                            (A DEVELOPMENT STAGE COMPANY)


                                   BALANCE SHEETS
                             DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
                                                                 1996           1995
                                                              ----------     ----------
<S>                                                          <C>             <C>  
CURRENT ASSETS:                                                                           
   Cash                                                       $        -     $  799,466
   Prepaid expenses (Note 7)                                       1,565        425,094
                                                              ----------     ----------
        TOTAL CURRENT ASSETS                                       1,565      1,224,560
                                                              ----------     ----------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
   at cost, less accumulated depreciation of
   $3,491 at December 31, 1996 and $6,637 at
   December 31, 1995 (Note 3)                                      5,925         10,861
                                                              ----------     ----------
INTANGIBLE ASSETS:
   Intellectual property, net of accumulated amortization
         of $1,048 at December 31, 1996 and $1,771 at
         December 31, 1995 (Notes 4 and 7)                         7,948          8,563
   Organizational cost, net of accumulated amortization
         of $105,760 at December 31, 1996, and $70,754 at
         December 31, 1995 (Note 7)                               69,789        104,796
                                                              ----------     ----------
                                                                  77,737        113,359
                                                              ----------     ----------

OTHER ASSETS:
   Deposits                                                          300            300
                                                              ----------     ----------
    TOTAL ASSETS                                              $   85,527     $1,349,080
                                                              ==========     ==========
</TABLE>
 

      The accompanying Notes are an integral part of these financial statements


                                         -3-

                                                              
<PAGE>   14
                              HARVARD SCIENTIFIC CORP.
                            (A DEVELOPMENT STAGE COMPANY)


                                   BALANCE SHEETS
                             DECEMBER 31, 1996 AND 1995


<TABLE>
<CAPTION>
                                                            1996           1995
                                                         ----------     -----------
<S>                                                     <C>            <C>
CURRENT LIABILITIES
  Accounts payable (Note 7)                             $    36,625     $   105,791
  Accrued expenses (Note 5)                                  20,329          84,380
  Bank Overdraft                                                134               -
  Due to related parties (Note 7)                           190,860         406,881
  Note payable to related parties (Notes 6 and 7)            37,275          67,675
  Note payable - Convertible (Note 6)                       250,000               -
                                                        -----------     -----------
        TOTAL CURRENT LIABILITIES                           535,223         664,727
                                                        -----------     -----------
CONTINGENCIES: (Note 10)


STOCKHOLDERS' EQUITY:
  Common Stock, $.001 par value, 100,000,000
        authorized; 9,883,129 and 8,749,125 shares issued
        and outstanding at December 31, 1996 and
        December 31, 1995 respectively (Note 1)               9,883           8,749
  Additional paid-in capital                              3,206,207       1,902,445
  Deficit accumulated during the development stage       (3,665,786)     (1,226,841)
                                                        -----------     -----------

        TOTAL STOCKHOLDERS' EQUITY                         (449,696)        684,353
                                                        -----------     -----------

     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY         $    85,527     $ 1,349,080
                                                        ===========     ===========

</TABLE>

      The accompanying Notes are an integral part of these financial statements
                                         -4-
<PAGE>   15
                              HARVARD SCIENTIFIC CORP.
                            (A DEVELOPMENT STAGE COMPANY)



                              STATEMENTS OF OPERATIONS
                FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
              AND THE PERIOD FROM JANUARY 13, 1987 (DATE OF INCEPTION)
                                TO DECEMBER 31, 1996

<TABLE>
<CAPTION>
                                                                                               Inception
                                                                                                   to          
                                                                                                12/31/96
                                                      1996          1995           1994       (Unaudited)
                                                   -----------   -----------    -----------   -----------   
<S>                                                <C>           <C>            <C>           <C>
NET SALES                                            $ 181,000        $    -         $    -   $   187,387
COST OF SALES                                          216,870             -              -       221,557
                                                   -----------   -----------    -----------   -----------
     GROSS PROFIT                                      (35,870)            -              -       (34,170)
                                                   -----------   -----------    -----------   -----------
OPERATING EXPENSES:
  General and administrative                         1,244,272       434,320        324,699     2,040,870 
  Research and development (Notes 7 and 9)             109,553       194,965        124,366       428,884
  Depreciation and amortization (Notes 3 and 7)         41,472        39,550         38,872       120,634
                                                   -----------   -----------    -----------   -----------

     TOTAL OPERATING EXPENSES                        1,395,297       668,835        487,937     2,590,388
                                                   -----------   -----------    -----------   -----------

     (LOSS) FROM OPERATIONS                         (1,431,167)     (668,835)      (487,937)   (2,624,558)
                                                   -----------   -----------    -----------   ----------- 

OTHER INCOME (EXPENSES)
  Settlements (Note 10)                               (494,813)            -              -      (494,813)
  Interest income                                            -             -              -           397 
  Interest expense                                    (512,964)       (7,620)        (1,727)     (522,312)
  Loss on disposition of marketable securities               -             -              -       (24,500) 
                                                   -----------   -----------    -----------   -----------
                                                    (1,007,777)       (7,620)        (1,727)   (1,041,228)
                                                   -----------   -----------    -----------   -----------
NET (LOSS)                                         $(2,438,944)  $  (676,455)   $  (489,664)  $(3,665,786)
                                                   ===========   ===========    ===========   ===========
(LOSS) PER COMMON SHARE                            $     (0.27)  $     (0.29)   $     (0.34) 
                                                   ===========   ===========    ===========  
WEIGHTED AVERAGE SHARES OUTSTANDING                  9,022,404     2,333,839      1,421,563     
                                                   ===========   ===========    ===========  
</TABLE>

      The accompanying notes are an integral part of these financial statements

                                         -5-
<PAGE>   16
                              HARVARD SCIENTIFIC CORP.
                            (A DEVELOPMENT STAGE COMPANY)

                         STATEMENTS OF STOCKHOLDER'S EQUITY
                   FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
              AND THE PERIOD FROM JANUARY 13, 1987 (DATE OF INCEPTION)
                                TO DECEMBER 31, 1996

<TABLE>
<CAPTION>        
                                                                          Deficit
                                          Restated          Additional      From
                                        Common Stock          Paid-in    Inception             
                                    Shares       Amount       Capital     To  Date         TOTAL
                                  ----------   ----------   ----------   ----------    ----------
<S>                               <C>          <C>          <C>          <C>           <C>     
Issuance of shares for cash on
   January 13, 1987 (inception)     103,000    $      103   $   2,097                  $   2,200 

Issuance of shares for cash,
   net of offering costs             51,000            51      19,223                     19,274

Issuance of shares for services      90,000            90           -                         90 

Issuance of shares for services      20,000            20           -                         20

Issuance of shares for services      36,000            36           -                         36

Issuance of shares to acquire
   Grant City Corporation            50,000            50      39,827                     39,877

Issuance of shares to effect
   a four-for-one-split           1,050,000         1,050      (1,050)                         -

Issuance of shares for
   intellectual property rights   4,196,000         4,196           -                      4,196

Issuance of shares for 
   corporation property rights      394,000           394      24,231                     24,625

Issuance of shares for fees  
   and services                   1,045,000         1,045      96,893                     97,938
                                  ----------   ----------  ----------                 ----------  
BALANCE CARRIED FORWARD           7,035,000         7,035     181,221                    188,256 
                                  ----------   ----------  ----------                 ----------             
                                                  
</TABLE>

      The accompanying Notes are an integral part of these financial statements

                                         -6-

<PAGE>   17
                              HARVARD SCIENTIFIC CORP.
                            (A DEVELOPMENT STAGE COMPANY)

                         STATEMENTS OF STOCKHOLDER'S EQUITY
                   FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
              AND THE PERIOD FROM JANUARY 13, 1987 (DATE OF INCEPTION)
                                TO DECEMBER 31, 1996

   
<TABLE>
<CAPTION>        
                                                                          Deficit
                                          Restated          Additional      From
                                        Common Stock          Paid-in    Inception             
                                    Shares       Amount       Capital     To Date        TOTAL
                                  ----------   ----------   ----------   ----------    ----------
<S>                               <C>          <C>          <C>          <C>           <C>     
BALANCE BROUGHT FORWARD            7,035,000        7,035      181,221                    188,256

Issuance of shares for cash,
   net of offering costs             393,500          393      353,757                    354,150

Adjustment of shares to effect
   a four-for-one-reverse split   (5,571,375)      (5,571)       5,571                          -

Cumulative loss from inception
   to December 31, 1994                    -            -            -     (550,386)     (550,386) 
                                  ----------   ----------   ----------   ----------    ---------- 
Balance December 31, 1994          1,857,125        1,857      540,549     (550,386)       (7,980)

Issuance of common stock
   for directors' fees and 
   services                          553,500          553      530,796            -       531,349

Issuance of common stock 
   at par value for
   intellectual property rights    6,138,500        6,139            -            -         6,139

Issuance of common stock 
   for cash, net of offering
   costs                             200,000          200      831,100            -       831,300 

Net loss for the year ended
   December 31, 1995                       -            -            -     (676,455)     (676,455)
                                  ----------   ----------   ----------   ----------    ----------
Balance December 31, 1995          8,749,125        8,749    1,902,445   (1,266,841)      684,353

Issuance of common stock
   for conversion of debentures      310,254          310      249,690            -       250,000

Issuance of common stock
   for services                      255,000          255       59,828            -        60,083

Issuance of common stock
   for legal settlement              568,750          569      494,244            -       494,813  

Discount on convertible
   debentures                                                  500,000                    500,000 

Net loss for the year ended
   December 31, 1996                       -            -            -   (2,438,944)   (2,438,945)
                                  ----------   ----------   ----------   ----------    ----------

Balance December 31, 1996          9,883,129   $    9,883   $3,206,207  $(3,665,785)   $ (449,696)
                                  ==========   ==========   ==========   ==========    ==========        
</TABLE>
    

      The accompanying Notes are an integral part of these financial statements



                                         -7-

<PAGE>   18
                              HARVARD SCIENTIFIC CORP.
                            (A DEVELOPMENT STAGE COMPANY)

                              STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
              AND THE PERIOD FROM JANUARY 13, 1987 (DATE OF INCEPTION)
                                TO DECEMBER 31, 1996

<TABLE>
<CAPTION>
                                                                                                     INCEPTION       
                                                                                                         TO     
                                                                                                      12/31/96
                                                     1996             1995            1994           (UNAUDITED)
                                                  -----------     -----------      ----------        -----------
<S>                                               <C>              <C>             <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES                                                                              
  Cash received from customers                    $   181,000      $      --        $      --         $   181,000
  Cash paid to employees                             (237,911)        (8,804)         (93,255)           (339,970)
  Cash paid to suppliers (Note 13)                 (1,151,723)       (30,154)        (158,108)         (1,371,897)
  Cash paid for interest                               (3,167)            --               --              (3,167)
  Cash paid for settlement                            (50,000)            --               --             (50,000)
                                                  -----------      ---------        ---------         -----------
    NET CASH USED IN OPERATING ACTIVITIES          (1,261,801)       (39,958)        (251,363)         (1,584,034)
                                                  -----------      ---------        ---------         -----------     

CASH FLOWS FROM INVESTING ACTIVITIES:
  Cash from sale (purchase) of equipment               (7,399)            --          (17,498)            (24,897)
  Capitalized organization costs                           --             --         (150,000)           (150,924)
  Purchase of marketable securities                        --             --               --             (24,500)      
                                                  -----------      ---------        ---------         -----------
    NET CASH USED IN INVESTING ACTIVITIES              (7,399)            --         (167,498)           (200,321)
                                                  -----------      ---------        ---------         -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from sale of capital stock,                               831,300          354,149           1,246,946
  Proceeds from debt converted to capital stock       250,000             --               --             250,000
  Proceeds from debt, net of costs                    251,100         80,719           83,625             415,444
  Principal payments on debt                          (31,500)       (74,319)         (22,350)           (128,169) 
                                                  -----------      ---------        ---------         -----------
    NET CASH PROVIDED BY FINANCING
      ACTIVITIES                                      469,600        837,700          415,424           1,784,221
                                                  -----------      ---------        ---------         -----------
   
NET INCREASE (DECREASE) IN CASH                      (799,600)       798,742           (3,437)               (134)

CASH AT BEGINNING OF YEAR                             799,466            724            4,161                  --
                                                  -----------      ---------        ---------         -----------
CASH AT END OF YEAR                               $      (134)     $ 799,466        $     724         $      (134)
                                                  ===========      =========        =========         ===========
</TABLE>

      The accompanying Notes are an integral part of these financial statements

                                         -8-


   

<PAGE>   19
                              HARVARD SCIENTIFIC CORP.
                            (A DEVELOPMENT STAGE COMPANY)
                                          
                        STATEMENTS OF CASH FLOWS (CONTINUED)
                FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
               AND THE PERIOD FROM JANUARY 13, 1997 (DATE OF INCEPTION)
                                TO DECEMBER 31, 1996

   

<TABLE>
<CAPTION>
                                                                                                INCEPTION
                                                                                                    TO
                                                                                                 12/31/96
                                                1996            1995            1994            (UNAUDITED)
                                                ----            ----            ----            -----------
<S>                                             <C>             <C>             <C>             <C>
RECONCILIATION OF NET LOSS TO NET CASH
  USED IN OPERATING ACTIVITIES

NET LOSS                                        $(2,438,944)     $(676,455)      $(489,664)       $(3,665,766)
                                                -----------     ----------      ----------       ------------
ADJUSTMENTS TO RECONCILE NET LOSS TO
  NET CASH PROVIDED BY (USED IN)
  OPERATING ACTIVITIES                          

  Book value of assets sold                           6,483             --               --              6,483
  Loss on disposition of marketable securities           --             --               --             24,500
  Depreciation and amortization                      41,472         39,550           38,872            120,634
  Issuance of stock for director's fees
    and services (Note 13)                          485,129         71,974           97,938            689,375
  Issuance of stock in legal settlement             494,813                                            494,813
  Discount on convertible bonds                     500,000                                            500,000
  (Increase) decrease in assets:
    Prepaid expenses                                 (1,565)        38,281           (4,000)            (1,565)
    Deposits                                                            --             (300)              (300)
  Increase (decrease) in liabilities:
    Accounts payable                                (69,116)       100,962            1,268             36,624
    Accrued expenses                                (64,051)        82,779            1,600             20,328
    Due to related parties                         (216,021)       303,951          102,923            190,860
                                                -----------     ----------       ----------       ------------
      TOTAL ADJUSTMENTS                           1,177,144        637,497          238,301          2,081,752
                                                -----------     ----------       ----------       ------------
NET CASH (USED) IN OPERATING ACTIVITIES         $(1,261,800)      $(38,958)       $(251,363)       $(1,584,034)
                                                ===========     ==========       ==========       ============
</TABLE>
    

     The accompanying Notes are an integral part of these financial statements

                                         -9-
<PAGE>   20
                              HARVARD SCIENTIFIC CORP.
                            (A DEVELOPMENT STAGE COMPANY)

                            NOTES TO FINANCIAL STATEMENTS
                             DECEMBER 31, 1996 AND 1995

NOTE 1 -- NATURE OF BUSINESS AND ORGANIZATION

NATURE OF BUSINESS:

Harvard Scientific Corp. (the "Company") is a development stage company. The
Company's primary business operations consist of development,
commercialization, marketing, and distribution of products relating to
prostaglandin/microsphere delivery and the way in which the product is applied
in treating male sexual dysfunction. The Company has preliminary data
available, indicating the possible benefits of such a therapy.

On February 13, 1996, the Company received an assignment of an application for
a patent entitled "PGE-1 Containing Lyophilized Liposomes For Use In The
Treatment of Erectile Dysfunction" and identified as United States Application
No. 08/573,408 ("PGE-1"). The assignment was made by the holder of the
application, Bio-Sphere Technology, Inc. ("BTI"), the Company's majority
shareholder. The Company plans to focus its operations on PGE-1 in order to
bring the product to the marketplace.

ORGANIZATION:

The Company was incorporated under the laws of the State of Nevada on January
13, 1987, under the name of Witch Doctors Bones, Inc. On August 12, 1987, the
Company qualified a public offering under Rule 504 of Regulation D of the
Securities Act of 1933, as amended, with the Secretary of State of Nevada. On
June 17, 1988, the Company changed its name to CareyWard, Inc.

On October 18, 1993, the Company acquired Grant City Corporation by merger,
changed its name to Grant City Corporation, and issued 50,000 shares of stock
carrying two classes of warrants. Class A warrants entitled the holder to
purchase stock at $8.00 per share and the Class B warrants entitled the holder
to purchase stock for $10.00 per share. The warrants could only be exercised if
a registration statement was filed with the United States Securities and
Exchange Commission ("SEC") pursuant to the Securities Act of 1933 as amended.
The warrants were redeemable by written notice of twenty (20) days at a
redemption price of $.001 per warrant. During 1996, before the warrants could be
exercised, the Company gave the required notice and redeemed both classes of
warrants.

On January 18, 1994, the Company changed its name to The Male Edge, Inc. On May
10, 1994, the Company changed its name to Harvard Scientific Corp.

The Company has 100,000,000 shares of $.001 par value common stock authorized,
with 9,883,129 shares issued and outstanding as of December 31, 1996. The
Company had 8,749,124 shares issued and outstanding on December 31, 1995. BTI
owned approximately 63% and 78% of the Company's shares at December 31, 1996
and December 31, 1995, respectively.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATIONAL COSTS:

Organization costs are being amortized over a five-year period using the
straight-line method. See also discussion contained in Note 7.

                                          6
<PAGE>   21
                              HARVARD SCIENTIFIC CORP.
                            (A DEVELOPMENT STAGE COMPANY)
                                          
                            NOTES TO FINANCIAL STATEMENTS
                             December 31, 1996 and 1995



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


EQUIPMENT:

Equipment is stated at cost. Depreciation is incorporated on a straight-line
basis over a period of 5 to 7 years. Expenditures for maintenance and repairs
are charged to expenses as incurred. Upon retirement or disposal of assets, the
cost and accumulated depreciation are eliminated from the account and any
resulting gain or loss is included in expense. See Note 3.


USE OF ESTIMATES:

In order to prepare financial statements in conformity with generally accepted
accounting principals, management must make estimates and assumptions that
affect certain reported accounts and disclosures. Actual results could differ
from these estimates.


INTELLECTUAL PROPERTIES:

The costs of intellectual properties are amortized using the straight-line
method over a period of fifteen years. See Note 4.


EARNINGS PER SHARE:

The earnings per share calculation is based on the weighted average number of
shares outstanding during the period: 9,022,404 shares in 1996 and 2,333,839
shares in 1995.


INCOME TAX:

Because of losses sustained since inception, no provision has been made for
income tax.


NOTE 3 - EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and building improvements at December 31, 1996 and 1995, consist of
the following:

<TABLE>
<CAPTION>
                                                         1996            1995
                                                         ----            ----
<S>                                                     <C>             <C>
Equipment                                               $9,416          $11,682
Leasehold Improvements                                      --            5,816
                                                        ------          -------
                                                         9,416           17,498
Less accumulated depreciation                            3,491            6,637
                                                        ------          -------
                                                        $5,925          $10,861
                                                        ------          -------
</TABLE>

The Company relocated to Reno, Nevada, during December 1996. By relocating, the
Company reduced its need for certain equipment and leasehold improvements. The
Company does not own manufacturing equipment for its product. The product has
been and will continue to be manufactured by third-party manufacturers
according to the Company's specifications.

NOTE 4 - INTELLECTUAL PROPERTIES

                                          7
<PAGE>   22
                              HARVARD SCIENTIFIC CORP.
                            (A DEVELOPMENT STAGE COMPANY)

                            NOTES TO FINANCIAL STATEMENTS
                             DECEMBER 31, 1996 AND 1995

On January 7, 1994, the Company exchanged 2,856,000 shares with BTI for the
intellectual rights to patent, develop, manufacture, and market PGE-1. The
Company recorded the transfer of intellectual properties at the par value of
stock transferred, which amounted to $2,856. BTI's largest shareholder, the
originator of PGE-1 holds a 2% royalty interest in the Company's gross
proceeds. 

On November 16, 1995, the Company exchanged 6,138,500 shares of common stock
with BTI for assistance in raising working capital, patent application,
management assistance and distribution agreements associated with the PGE-1
product. The Company recorded the transfer at the par value of stock
transferred, which amounted to $6,139.

During 1996, the Company expensed the unamortized cost of acquiring technology
relating to the development of an HIV home test kit. The Company, which
originally acquired the rights in exchange for 335,000 shares of common stock,
ceased product development in connection with a settlement accrued in 1995
(Note 10).

NOTE 5 -- ACCRUED EXPENSES

Accrued expenses at December 31, 1996 and 1995, consist of the following:

<TABLE>
<CAPTION>
                                         1996            1995
                                       --------        --------  
<S>                                    <C>             <C>
Settlement costs (Note 10)             $    --         $50,000
Payroll                                  9,680          32,000
Payroll taxes                            1,000           1,680   
Interest on notes                        9,649              --
Transfer fees                               --             700
                                       -------         -------

                                       $20,329         $84,380
                                       =======         =======  
</TABLE>

See also Notes 9 and 10.

NOTE 6 -- NOTES PAYABLE         

The Company had the following notes payable at December 3, 1996 and 1995:

<TABLE>
<CAPTION>
                                         1996            1995  
                                       --------        --------
<S>                                    <C>             <C>
8% note, payable to former director
     on demand, unsecured (Note 7)     $ 37,275         $62,675
8% note, payable to a related party
     on demand, unsecured                    --           5,000
7% convertible debentures, convertible
at 50% of the market price of the
stock on the day before the conversion
date                                    250,000              --
                                       --------         -------
                                       $287,275         $67,675
                                       ========         =======
</TABLE>

                                          8
<PAGE>   23
                              HARVARD SCIENTIFIC CORP.
                            (A DEVELOPMENT STAGE COMPANY)

                            NOTES TO FINANCIAL STATEMENTS
                             DECEMBER 31, 1996 AND 1995

NOTE 6 -- NOTES PAYABLE (CONTINUED)

In June 1996, the Company issued $500,000 worth of 7% convertible debentures to
three non-US residents. The debentures were to be converted into shares of
common stock in December 1996, at 50% of the current market value of the stock.
By December 31, 1996, $250,000 of the debentures had been converted to equity. A
total discount of $500,000 was reflected in interest expense and paid in capital
in the current year. See also Notes 9, 10, and 12.

NOTE 7 -- RELATED PARTY TRANSACTIONS

During 1994, the Company paid $150,000, to related parties for work performed
in completing a merger (described in Note 1). Of this amount, $100,000 was paid
to BTI. The remaining $50,000 was paid to individuals affiliated with BTI.
These amounts have been capitalized and are included in organizational costs. 

Additional organizational costs of $24,625 were capitalized in 1994. The
Company transferred 246,000 shares to its former owners and directors in return
for corporation property rights and 148,000 shares to individuals for
assistance in acquiring the rights. These shares were valued at $.0625 per
share as determined by a 1994 appraisal.

During 1994 and 1995, the Company entered into three significant transactions
with related parties for the acquisition of intellectual rights and the
provision of technological, management, fundraising, ad marketing assistance.
Note 4 describes the valuation of these transactions.

The Company has a payable to BTI of $183,535 and $130,000 as of December 31,
1996 and 1995, respectively. The payable is related to costs incurred by BTI on
the Company's behalf for consultation and rent, as well as research and
development of the PGE-1 product.

The Company has a note payable to a former director as of December 31, 1996 and
1995 (Note 6). The amount of accrued interest associated with the note at
year-end in 1996 and 1995 was $6,419 and $8,097, respectively.

The Company often pays for services, fees, and salaries by issuing stock. Most
of this stock is issued with a two-year selling restriction. After the Company
files its registration statement in 1997, the two-year restriction may be
lifted. The shares are valued at a discount of free-trading stock, if market
valuation is available. Several material transactions of this type occurred
during 1995 and 1996 during which time the Company issued 1,188,754 shares
recorded at $841,432.

See also the discussions regarding agreements, intellectual properties, and
subsequent events in Notes 4, 9 and 12.

NOTE 8 -- INCOME TAXES

                                          9



<PAGE>   24
                              HARVARD SCIENTIFIC CORP.
                            (A DEVELOPMENT STAGE COMPANY)

                            NOTES TO FINANCIAL STATEMENTS
                             DECEMBER 31, 1996 AND 1995

The Company has federal net operating loss carryforwards for financial
statement purposes of approximately $3,200,000 at December 31, 1996, which will
be used to offset future earnings of the Company. The loss carryforwards will
expire during the years ending 2002 through 2012 if not used.

NOTE 9 -- AGREEMENTS

In conjunction with the agreement of November 16, 1995, between BTI and the
Company (Note 4), BTI transferred four agreements to the Company related to the
manufacture, marketing, and distribution of the PGE-1 product overseas. The
Company terminated two of these agreements during 1996 for nonperformance. A
third agreement for distribution in Korea was terminated in 1996 by mutual
agreement. The Company is prepared to terminate a fourth agreement with its
European licensor, Pharma Maehle unless Pharma Maehle can resolve the Company's
concerns (Note 10).

In December 1996, the Company entered into an agreement with Martin E. Janis &
Company, Inc. The agency will create and carry out a financial public relations
program in exchange for costs and an option on 50,000 shares of free-trading
stock, exercisable at $1.25 a share.

NOTE 10 -- CONTINGENCIES

The Company has been named as a party in certain pending or threatened legal,
governmental, administrative, or judicial proceedings that arose in the
ordinary course of business. These pending or threatened proceedings may affect
the Company in a material way.

These financial statements reflect the way in which the Company resolved two
lawsuits:

        a.  The Company reached a mutual release regarding a Distribution
            Agreement, which provided for the manufacture, marketing, and
            distribution of HIV test kits. The mutual release called for a
            $50,000 payment which accrued during 1995 and was paid in full
            during the first quarter of 1996.

        b.  The Company amicably settled an action with Thomas E. Waite &
            Associates regarding the contract under which Waite was to provide
            an array of business services. The Company issued 568,750 shares of
            stock in settlement, which was accrued in these financial
            statements at $494,813.

The ultimate effect of other proceedings cannot be estimated at this time. The
Company has noted some possible irregularities pertaining to the June 1996
issuance of its convertible debentures and has taken steps to rectify the
matter. The Company hopes to resolve two pending claims related to the
debenture issuance, which aim to force a stock conversion. These claims were
filed December 31, 1996, and are discussed in Note 12 as subsequent events.

NOTE -- CONTINGENCIES (CONTINUED)

One additional act may impact the Company in the future although no
determination can be made at this time. The Company is prepared to terminate
its licensing agreement with Pharma Maehle, the holder of the

                                       10
<PAGE>   25
                              HARVARD SCIENTIFIC CORP.
                            (A DEVELOPMENT STAGE COMPANY)

                            NOTES TO FINANCIAL STATEMENTS
                             DECEMBER 31, 1996 AND 1995

Company's distribution rights in a portion of its overseas market. The Company
is negotiating to resolve the contract issues to benefit business operations,
but the ultimate resolution and its impact upon the Company cannot be
estimated. 

The Company experienced a management change in December 1996 as it moved its
headquarters to Reno, Nevada. The Company expects no negative impact from the
change.

NOTE 11 -- UNCERTAINTY -- GOING CONCERN

The financial statements of the company have been prepared assuming that the
Company will continue as a going concern. The Company's continued existence is
dependent upon its ability to resolve its liquidity problems, principally by
obtaining additional equity capital and through the sale of the PGE-1 product.
If additional capital is not secured, then there is substantial doubt about the
Company's ability to continue as a going concern. See also Note 12 regarding
the Company's plans to issue 6% Convertible Debentures in 1997.
 
The Company intends to obtain additional capital through public and private
financing or from other sources, such as collaboration agreements. Although the
Company sold $5,000,000 principal amount of 6% convertible debentures (Note 12)
and has an undertaking, subject to various conditions, to sell an additional
$10,000,000 principal amount of 6% convertible debentures, there can be no
assurance that this additional funding will occur, or be sufficient. If
additional funding does not occur or is insufficient, there is no assurance
that other required funds will be available on terms satisfactory to the
Company. Failure to obtain adequate financing could cause a delay or
termination of the Company's product development and marketing efforts. See
also Note 12.

NOTE 12 -- SUBSEQUENT EVENTS

During 1997, the Company authorized a transfer of 1,250,000 shares of common
stock to related  parties in exchange for services previously rendered.

During 1997, the Company became a defendant in a U.S. District Court action
initiated by Ailouros Ltd., a 7% debenture holder. Ailouros claims it is
entitled to convert its debentures into 263,225 shares of common stock and/or
damages in the amount of $2,000,000. The Company had previously initiated a
lawsuit in the Nevada courts respecting the same claim and both matters were
removed to Federal court. The Company is asking that any shares issued to
Ailouros be issued pursuant to the requirements of the SEC's Regulation S. It
is too early to estimate the monetary outcome of this litigation.

In February 1997, the Company filed an action for damages due to negligence and
breach of contract by D. Weckstein and Co. Inc. and Donald Weckstein. The
contract at issue was an agreement to obtain financing in exchange for Company
stock. The Weckstein defendants subsequently filed a lawsuit in New York against
the Company respecting the same contract and asked for damages against a third
party for tortious interference with the contract. The Weckstein plaintiffs seek
damages on their contract claim in the amount of $250,000 and $400,000, and
damages in excess of $10,000 on an abuse of process claim. On 

                                       11
<PAGE>   26
                            HARVARD SCIENTIFIC CORP.
                         (A DEVELOPMENT STAGE COMPANY)

                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1996 AND 1995

April 23, 1997, the parties settled these lawsuits with the issuance of 35,000
shares of the Company's common stock to D. Weckstein & Co., Inc.

In March 1997, pursuant to a private placement, the Company sold to one
investor $5,000,000 principal amount of 6% Convertible Debentures (the
"Debentures") due March 30, 1998. The company also received a commitment from
the same investor, subject to various conditions, to purchase additional
Debentures in the aggregate principal amount of up to $10,000,000 in two
tranches of $5,000,000 each, also to be due March 30, 1998. The Debentures will
be convertible into shares of common stock at the lesser of the market price
on March 21, 1997, or 80% of the market price on the conversion date.

Issuance costs of $625,000 related to the first $5,000,000 principal amount of
6% Convertible Debentures sold in March 1997 were deferred, and will be
amortized on a straight-line basis though March 30, 1998. In addition, and in
anticipation of a possible conversion to common stock at 80% of the market
price on the conversion date, the Company is accounting for the 20% discount to
market of $1,250,000 as additional interest expense to be accrued on a
straight-line basis through March 30, 1998.

Relative to the Company's undertaking to issued $15,000,000 in 6% Convertible
Debentures, on April 21, 1997, the Company filed with the Securities and
Exchange Commission a registration statement on Form SB-2 (together with all
amendments thereto), under the Securities Act with respect to the securities
offered thereby. The registration relates to an aggregate of 12,064,344 shares
of Common Stock, $.001 par value per share, which is approximately 300% of the
4,021,448 shares issuable if the proposed $15,000,000 principal amount of
Debentures had been outstanding on April 14, 1997, and all the Debentures had
been converted on that date.

As discussed in Note 3, the Company moved its headquarters to Reno, Nevada, in
early 1997. The Company still shares research and development facilities with
BTI in Irvine, California.

NOTE 13 -- SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company paid cash to suppliers of goods and services and in 1996, 1995, and
1994 as follows:

<TABLE>
<CAPTION>
                                        1996            1995            1994
<S>                                <C>               <C>            <C>
Professional Fees                   $  589,370        $   --         $ 41,467
Office & Occupancy                      37,787         28,885          33,478
Travel & Entertainment                 114,588          1,269          32,316
R&D/Costs of Goods Sold                405,359             --          48,740
Miscellaneous                            5,619             --           2,107
                                    ----------        -------        --------
                                    $1,151,723        $30,154        $158,108
                                    ==========        =======        ========
</TABLE>

NOTE 13 -- SUPPLEMENTAL CASH FLOW DISCLOSURES (CONTINUED)
The Company issues stock for other than cash in the following amounts:

                                       12
<PAGE>   27
                            HARVARD SCIENTIFIC CORP.
                         (A DEVELOPMENT STAGE COMPANY)

                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
                                        1996            1995            1994
<S>                                <C>               <C>            <C>
Issuance of stock for director's
  fees, salaries, consultants,
  and rent                          $ 60,083           $531,349      $ 97,938
Issuance of stock for
  intellectual properties                 --              6,139         4,196
Issuance of stock for
  organizational costs                    --                 --        24,625
Issuance of stock for legal
  settlement                        $494,813           $     --      $     --
                                    --------           --------      --------
                                    $554,896           $537,448      $126,759
                                    ========           ========      ========
</TABLE>

The Company expensed $425,045 in the current year for stock issued in 1995 for
prepaid services included in the $531,349 reflected in the statement of
stockholders' equity.

A discount of $500,000 on convertible debentures was reflected in the current
year as interest expensed and paid in capital.

NOTE 14 -- REVISED FINANCIAL STATEMENTS

The financial statements and the auditors' report for the Company for the
periods ending December 31, 1996 and 1995 have been recalled, the following
items were adjusted.

Issuance of Convertible Debentures did not include the discount portion which
should be reflected as interest expense of $500,000 on the $500,000 debentures.

The net effect of the above change is as follows:

*  Net loss increased by $500,000
*  No effect on net assets or liabilities.

                                       13
<PAGE>   28
                              [DALE MCGHIE LETTERHEAD]



                            INDEPENDENT AUDITOR'S REPORT

To the Board of Directors
 and Shareholders of
Harvard Scientific Corp.

I have audited the balance sheet of Harvard Scientific Corp. (A Development
Stage Company) as of December 31, 1996, and the related statements of
operations, stockholders' equity, and cash flows for the year then ended, and
have issued my opinion thereon dated June 2, 1997. Such financial statements
and opinion are included in your 1987 Annual Report to Stockholders and are
incorporated herein by reference. My examination also comprehended Supplemental
Schedules V and VI of Harvard Scientific Corp. (A Development Stage Company).
In my opinion, Schedules V and VI, when considered in relation to the basic
financial statements, present fairly in all material respects the information
shown therein.


W. Dale McGhie, CPA
Reno, Nevada
June 2, 1997



<PAGE>   29
                              HARVARD SCIENTIFIC CORP.
                            (A DEVELOPMENT STAGE COMPANY)

         SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION
                          OF PROPERTY, PLANT AND EQUIPMENT
                   For the Years Ended December 31, 1996 and 1995

<TABLE>
<CAPTION>
      Column A                    Column B             Column C           Column D                    Column E
--------------------------    -------------------  -----------------  ------------------  --------------------------------
                                                       Additions                            Other Changes
                                 Balance at         Charged to Costs                       Reclassifications   Balance at
    Classification             Beginning of Year      and Expenses       Retirements         add (deduct)      End of Year
--------------------------    -------------------  -----------------  ------------------  ------------------  ------------
<S>                               <C>                 <C>                 <C>                  <C>              <C>
December 31, 1996:
 Furniture and equipment           $4,408               $3,235             $ (4,152)             $--             $3,491
 Intellectual property*             1,771                2,067               (2,791)              --              1,047
 Leasehold and leasehold
  improvements                      2,228                1,163               (3,391)              --                 --
                                  -------               ------             --------              ---             ------
     TOTAL                         $8,407               $6,465             $(10,334)             $--             $4,538
                                  =======               ======             ========              ===             ======


December 31, 1995:
 Furniture and equipment           $2,072               $2,336             $     --              $--             $4,408
 Intellectual property*               728                1,043                   --               --              1,771
 Leasehold and leasehold
  improvements                      1,065                1,163                   --               --              2,228
                                  -------               ------             --------              ---             ------
     TOTAL                         $3,865               $4,542             $     --              $--             $8,407
                                  =======               ======             ========              ===             ======
</TABLE>


             
                                        -20-

<PAGE>   30
                              HARVARD SCIENTIFIC CORP.
                            (A DEVELOPMENT STAGE COMPANY)

                    SCHEDULE V -- PROPERTY, PLANT, AND EQUIPMENT
                   For the Years Ended December 31, 1996 and 1995

<TABLE>
<CAPTION>
        Column A                 Column B            Column C            Column D                    Column E
                                                                                         OTHER CHANGES 
                                BALANCE AT           ADDITIONS                         RECLASSIFICATIONS   BALANCE AT
     CLASSIFICATION          BEGINNING OF YEAR        AT COST           RETIREMENTS       ADD(DEDUCT)      END OF YEAR
-------------------------    -----------------   -----------------   ---------------   -----------------   -----------
<S>                      <C>                 <C>                 <C>               <C>                 <C>         

December 31, 1996:                                                                                              
  Furniture and equipment    $          11,682   $           7,399   $        (9,665)  $               -   $     9,416
  Intellectual property*                10,335                   -            (1,340)                  -         8,995
  Leasehold and leasehold                                                                                    
    improvements                         5,816                   -            (5,816)                  -             -
                             -----------------    ----------------   ---------------   -----------------   -----------
       Total                 $          27,833    $          7,399   $       (16,821)                  -   $    18,411
                             =================    ================   ===============   =================   ===========

December 31, 1995:
  Furniture and equipment    $          11,682    $              -   $             -   $               -   $    11,682
  Intellectual property*                 4,196               6,139   $             -   $               -   $    10,335
  Leasehold and leasehold             
   improvements                         5,816                   -                  -                   -         5,816
                             -----------------     ---------------   ---------------   -----------------   -----------
       Total                 $          21,694     $         6,139   $             -   $               -   $    27,833 
                             =================     ===============   ===============   =================   ===========
</TABLE>

*Supplemental disclosure

                                        -19-
<PAGE>   31

                         CONSENT OF INDEPENDENT AUDITOR

         I hereby consent to the use of my report on financial statements for
the years ended December 31, 1996, 1995, and 1994 dated June 2, 1997, in the
Form 10-KSB of Harvard Scientific Corp. in which this consent is included.

         I also consent to the addition of Supplemental Schedules V and VI of
Harvard Scientific Corp. for the years ended December 31, 1996 and 1995 in such
Registration Statement and Prospectus.




                                                       /s/  W. Dale McGhie 
                                                       ------------------------
                                                         W. Dale McGhie, CPA


Dated:  August 8,  1997
        Reno, Nevada

                                     II-18
<PAGE>   32
--------------------------------------------------------------------------------
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
--------------------------------------------------------------------------------

         The Registrant incorporates herein by this reference Part II, Item 8 of
the Amended Form 10-KSB the Registrant filed with the Securities and Exchange
Commission on July 29, 1997.


                                     II-19
<PAGE>   33

PART III

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

         The Registrant incorporates herein by this reference Part III, Item 9
of the Form 10-KSB the Registrant filed with the Securities and Exchange
Commission on April 14, 1997.


--------------------------------------------------------------------------------
ITEM 10. EXECUTIVE COMPENSATION
--------------------------------------------------------------------------------


         The Registrant incorporates herein by this reference Part III, Item 10
of the Form 10-KSB the Registrant filed with the Securities and Exchange
Commission on April 14, 1997.


--------------------------------------------------------------------------------
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------------------------

         The Registrant incorporates herein by this reference Part III, Item 11
of the Form 10-KSB the Registrant filed with the Securities and Exchange
Commission on April 14, 1997.


--------------------------------------------------------------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------------------------------

         The Registrant incorporates herein by this reference Part III, Item 12
of the Form 10-KSB the Registrant filed with the Securities and Exchange
Commission on April 14, 1997.


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

         The Registrant incorporates herein by this reference Part III, Item 13
of the Amended Form 10-KSB the Registrant filed with the Securities and Exchange
Commission on July 29, 1997.


                                     III-1
<PAGE>   34
--------------------------------------------------------------------------------
                                   SIGNATURES
--------------------------------------------------------------------------------


         In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

Dated: August 11, 1997.

                                                     HARVARD SCIENTIFIC CORP.



                                                     By  /s/ Don Steffens
                                                         ----------------------
                                                          Don Steffens
                                                          Secretary


                                     III-2