=======================================================================
                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   -----------

                                   FORM 10-KSB


         (Mark One)
         [X] ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
                       EXCHANGE ACT OF 1934 (FEE REQUIRED)

                   For the fiscal year ended December 31, 1998

                                       or

       [ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
                     EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

                        For the transition period from to


                        Commission file number 333-34765



                            IXION BIOTECHNOLOGY, INC.
              (Exact Name of Small Business Issuer in Its Charter)



             DELAWARE                           59-3174033

(State or Other Jurisdiction of            (I.R.S. Employer Identification No.)
Incorporation or Organization)

13709 PROGRESS BLVD., BOX 13
    ALACHUA, FL                              32615
(Address of Principal Executive Offices)   (Zip Code)

                                  904-418-1428
                (Issuer's Telephone Number, Including Area Code)

          Securities registered under Section 12(b)of the Exchange Act:
                                      
                                      None

         Securities registered under Section 12(g) of the Exchange Act:

                                      None

     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 ___
         
     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B  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__ The issuer's  revenue for the most
recent fiscal year, ending December 31, 1998, was $3,722.00.

         The aggregate  market value of the voting and non-voting  common equity
held by  non-affiliates  computed by  reference to the price at which the common
equity was sold, or the average bid and asked price of such common equity, as of
March 23, 1999, was  approximately  $8,770,000 based on the most recent sales of
newly-issued  common equity.  There is no public market for the issuer's  common
stock.

     The  number of shares of the  Company's  common  stock,  par value $.01 per
share, outstanding as of March 23, 1999, was 2,514,014.

                      DOCUMENTS INCORPORATED BY REFERENCE:

     DOCUMENT                                    PART INTO WHICH INCORPORATED
     --------                                   ------------------------------
The Proxy Statement to be used in                      Part III
connection with the annual meeting of 
stockholders to be held June 11, 1999 
(the "Proxy Statement"), to be filed
with the Commission prior to April 30, 
1999, pursuant to Rule 14a-101, Schedule 
14A of the  Exchange Act.


<PAGE>



                                     PART I

Item 1.  Description of Business.


     Ixion  Biotechnology,  Inc., is a  development  stage,  discovery  research
biotechnology  company,  with several product candidates in development.  We are
the holder of world-wide  exclusive  licenses to patents and pending  patents in
two key areas: diabetes and oxalate-related disorders.

     We are developing diabetes products based on our islet progenitor/stem cell
technology,  including a proprietary  line of in vitro (in test tube) islet stem
cells for use in islet  transplantation  therapy.  This  development  program is
aimed at optimizing  the growth of  functioning  islets or islet  progenitors in
vitro islet  progenitor stem cells which Ixion has established in cell cultures.
The  transplantation  of islets or islet stem cells is the only known  potential
cure for Type I  diabetes.  We believe  that  successful  islet  transplantation
therapy will provide better management of diabetes than  conventional  treatment
with insulin and other metabolic regulators.  Conventional  treatment can result
in  hyper-  and  hypo-glycemic  episodes  which  are a major  cause of  diabetic
complications.  Ixion's  technology is intended to ameliorate  this condition by
implanting  functional  islets  into the body in  order  to  materially  improve
control of blood glucose levels.

     In addition to  developing  our cell  transplantation  therapy,  we have an
ongoing discovery program to identify and characterize  islet stem cells as well
as novel growth  factors  associated  with them.  The goal of this program is to
discover factors  important in islet cell  differentiation  and to identify stem
cell  markers  to  which  we hope to  produce  antibodies  useful  in stem  cell
isolation  and  research.  All of our  potential  diabetes  products  are in the
discovery research stage.

     Diabetes is a chronic,  complex metabolic disease. Immune mediated diabetes
(often referred to as Insulin Dependent Diabetes,  Juvenile Diabetes,  or Type I
Diabetes)  is  characterized  by an  inability  to  produce  insulin  due to the
destruction  of  the  insulin-producing   cells  of  the  pancreatic  islets  of
Langerhans.  Immune  mediated  diabetes  also leads to many  serious  conditions
ranging  from death from  diabetic  coma or insulin  shock,  to end stage  renal
disease,   blindness,   amputations,   nerve  damage,   and  cardiovascular  and
periodontal disease.  Over 16 million people in the United States have diabetes,
of whom five to ten percent (or about  800,000  patients)  have immune  mediated
diabetes,  the most  severe  form of the  disease,  and must  take  insulin.  An
additional  one and one-half  million Type II patients in the United States also
take  insulin.  Annual  expenditures  on all forms of  diabetes  are nearly $100
billion.

     We are also  developing  products  based on our oxalate  technology for the
diagnosis and treatment of oxalate-related  diseases.  Our oxalate technology is
based  on  genes  from  the  non-pathogenic   anaerobic   intestinal   bacteria,
Oxalobacter formigenes.  O. formigenes produces enzymes which degrade oxalate in
healthy people.  Inadequate  colonies of O. formigenes result in reduced ability
to  degrade  oxalate.  Excess  oxalate  plays a role in a variety  of  disorders
including

o        kidney stones,
o        hyperoxaluria,
o        cardiomyopathy,
o        cardiac conductance disorders,
o        cystic fibrosis,
o        Crohn's disease,
o        renal failure and toxic death, and
o        vulvodynia

     There are approximately one million kidney stone incidents  annually in the
United  States.  Annual  expenditures  on kidney  stone  incidents  exceed  $1.8
billion.  There are approximately  25,000 cystic fibrosis patients in the United
States;  these  patients are at materially  increased risk of kidney stones as a
result  of  excess  oxalate.  There  are  from  5,000  to  16,000  new  cases of
inflammatory bowel disease annually, resulting in 100,000 hospitalizations,  60%
from Crohn's disease which is associated with enteric hyperoxaluria. Vulvodynia,
a   chronic   multifactorial   disorder,   believed   to  be  in   some   degree
oxalate-related,  results in painful and  debilitating  symptoms  affecting  the
tissue  surrounding the vagina and urethra.  There are no population  studies of
the  incidence or  prevalence  of  vulvodynia,  but  estimates  range as high as
150,000  to  200,000  U.S.  women  with  this  condition.   Very  few  effective
treatments, if any, exist for these disorders.

     The most developed product candidate in Ixion's  development  pipeline is a
combination  diagnostic  and  therapy  for  the  management  of  oxalate-related
disorders.

     The diagnostic component of our oxalate-related  disease management product
is a DNA probe for the rapid and sensitive detection of human O. formigenes (the
XEntrIX TM Oxalobacter  formigenes Monitor). The current tests for O. formigenes
are  laborious,  time  consuming,  and  unreliable,  and are  limited by (1) the
difficulties of anaerobic culture methods,  (2) the inability to standardize and
accurately  quantitate  the presence of the bacteria,  and (3) the fact that the
tests cannot be automated.  In addition, the current tests are not sensitive and
are poorly suited to a clinical setting.  The XEntrIX TM Oxalobacter  formigenes
Monitor,  on the other  hand,  can  accurately  and  reliably  detect very small
numbers  of  O.  formigenes,  can  be  made  quantitative,  and  is  capable  of
automation.

     The therapeutic component of our oxalate-related disease management product
is an  orally  administered  product  consisting  of a  recombinant  form of two
enzymes normally found in O. formigenes and responsible for oxalate  degradation
(IxC1-62/47).  We believe that the  administration  of  IxC1-62/47  will greatly
diminish the recurrence of calcium  oxalate kidney stones and will have positive
therapeutic effects on other oxalate-related disorders.

     We intend to file an Investigational New Drug application with the Food and
Drug  Administration  for our  IxC1-62/47  enzyme  therapy  for  oxalate-related
diseases and an application under Section 510(k) of the Food, Drug, and Cosmetic
Act for the XEntrIX TM Oxalobacter formigenes Monitor. The date on which we will
be able to make these filings depends upon our cash  resources.  See "Business -
Government Regulation."

     Ixion is in the development  stage.  We have earned only limited  revenues,
the majority of which have been research and development  payments,  and we have
an accumulated  deficit of $2,893,598  from our inception  through  December 31,
1998. See "Risk Factors."

Industry Description and Outlook

     In 1998,  the U.S.  biotechnology  industry was  composed of  approximately
1,300  companies,  public  and  private.  The public  market  for  biotechnology
financing was very poor during 1998, particularly for smaller companies and many
companies  are running low on cash.  The  biotechnology  industry is part of the
broader  health  care  industry  in  the  United  States,   which  accounts  for
approximately  14%of the country's gross domestic  product,  or approximately $1
trillion.

     Diabetes.  Diabetes is the world's most common metabolic disease.  In 1995,
there were over 16 million diabetics in the United States. There were 21 million
diabetics  in  Europe  and as many as 100  million  worldwide.  Immune  mediated
diabetes patients compose from 5% to 10% of the total number of diabetics in the
U.S., or  approximately  800,000  patients.  An  additional  1.5 million Type II
diabetics  also take  insulin.  There are  approximately  500,000 to 600,000 new
patients  annually in the U.S.,  of which 35,000 to 50,000 are Type I diabetics.
Approximately 25 percent of the new Type II patients (or approximately  110,000)
will also take insulin.

     In  1995,  diabetes  accounted  for  over 10% of  total  U.S.  health  care
expenditures,  or  approximately  $100 billion.  In 1992, the American  Diabetes
Association estimated that another $47 billion was spent in indirect costs, such
as lost wages.  Other sources have  estimated  that indirect  costs may actually
exceed the direct costs.  Complications  of the disease  include  amputations of
toes and feet, blindness, ulcers, nerve damage and cardiovascular,  periodontal,
and kidney disease. Approximately 30% to 40% of people with Type I diabetes will
develop diabetic  nephropathy  leading to kidney dialysis and renal transplants.
Overall, diabetes is the seventh leading cause of death in the U.S.

     Current therapies,  including insulin shots or oral hypoglycemic medication
modulate blood glucose,  but cannot  consistently  maintain the diabetic's blood
glucose at normal  levels.  The  Diabetes  Control and  Complications  trial,  a
nine-year  NIH study,  demonstrated  that  maintaining  blood  glucose at normal
levels reduces by  approximately  60% the risk of development and progression of
diabetes  complications.  However,  there is no therapy that supplies insulin in
response to changes in blood glucose with the speed and precision of functioning
islets. We believe that  approximately  500,000 insulin dependent  diabetics are
candidates for islet  transplantation  and that  successful  transplantation  of
islets  capable of  providing  constant  glucose  control  will help control the
complications  of the  disease.  While islet  transplantation  is the only known
potential  cure for  Type I  diabetes,  transplant  therapy  is an  early  stage
procedure and results,  as is common for early stage  procedures,  for the adult
islet transplants performed to date have been disappointing.  Although there can
be no  assurance,  we believe that the success rate of  transplant  therapy will
improve over time.

     Kidney stones.  Kidney stones are a major health care problem in the United
States,  and a worse one in other  parts of the world.  Nearly one in every 1000
residents in the United States has been  hospitalized for stones,  and autopsies
have revealed that one in every 100 persons have  observable  stone formation in
their  kidneys.  Between seven and ten of every 1000 hospital  admissions in the
United States are for kidney  stones;  this is  approximately  248,000  hospital
admissions annually.  There are approximately one million kidney stone incidents
annually,   the  seventh   leading  cause  of  physician   visits.   Nationwide,
approximately 12% of the U.S. population will develop stones in their lifetimes,
but stones are  particularly  common in the region from  Virginia to New Mexico,
commonly  referred  to as the  "stone  belt."  In  other  parts  of  the  world,
particularly the Middle-East,  Asia, and India,  kidney stones are an even worse
problem since hot climates seem to favor stone formation.

     If a stone  cannot be passed,  it is  surgically  removed or  shattered  by
extracorporeal  shock-wave lithotripsy.  Both treatments are expensive, with the
average  lithotripsy  costing $4,617 and surgery  costing $8,308  (including the
hospital   stay).   Approximately   30%  of  patients  with  kidney  stones  are
hospitalized,   the  remainder  pass  the  stone  at  home,  which,   while  not
particularly  expensive,  is exceedingly painful.  Based on 1993 data, the total
annual cost of kidney stones in the United States was  conservatively  estimated
at $1.83 billion annually.

     Unfortunately, kidney stones usually recur; although for most patients, the
time between  episodes can be years.  The majority of kidney  stones are made of
oxalate,  which is an end product of  metabolism  in the body,  and an important
component  of  a  typical  diet.  The  intestinal  oxalate  degrading  bacteria,
Oxalobacter formigenes, plays an important role in oxalate homeostasis,  both by
regulating  intestinal absorption of dietary oxalate and also its secretion into
intestinal lumen from the blood. We believe that it may be clinically  important
to screen and treat patients with  oxalate-associated  diseases for the presence
or absence of the bacterium. Indeed, recent research indicates an increased risk
of kidney stones in patient populations with significantly  decreased intestinal
colonization by O. formigenes.  This appears to be particularly true of patients
with cystic fibrosis, who are at materially increased risk of kidney stones as a
result of excess oxalate.

     Inflammatory  Bowel Disease.  Inflammatory  bowel disease is a general term
which covers two primary chronic disorders that cause inflammation or ulceration
in the small and large intestine:  Crohn's disease and ulcerative  colitis.  The
cause of inflammatory bowel disease is unknown, with many theories, none proven.
Many persons  with  inflammatory  bowel  disease  also have  elevated  levels of
urinary oxalate,  suggesting that excess oxalate may be a complicating factor in
the disease, or may lead to increased risk of kidney stones. In 1987, the latest
data  available,  the number of new cases of  inflammatory  bowel disease in the
United States annually  ranged from two to six per 100,000 of population.  There
were about 100,000 hospitalizations annually, approximately 64% for Crohn's.

     Vulvodynia.  Vulvar  vestibulitis  syndrome  ("vulvodynia")  is a  complex,
multifactorial  disorder with painful and  debilitating  symptoms  affecting the
tissue surrounding the vagina and urethra,  including intense burning,  itching,
and  inflammation.  In chronic cases it is very  disruptive of a person's  life.
Recognition of this condition as a significant,  physiological syndrome appeared
in medical  journals only a decade ago.  There are no population  studies of the
incidence or  prevalence  of  vulvodynia  although the condition may affect from
150,000  to  200,000  American  women.  Because  the  cause  is  often  unknown,
treatments  have been aimed at  symptoms  and  include  xylocaine,  acupuncture,
hypnotherapy,  interferon  injections,  and, as a last resort in chronic  cases,
surgery.  Recent  research  suggests that vulvodynia is associated with oxalate,
with some investigators  reporting significant  improvement following control of
dietary oxalate.

     Other Oxalate Related Markets. Two additional products which could make use
of Ixion's oxalate  technology  include  improved kidney dialysis devices and an
improved urological catheter.  As of 1996, there were approximately 287,000 U.S.
hemodialysis  patients and  approximately  300,000 more in Europe and Japan. The
use of the Ixion oxalate  technology  could  significantly  reduce the time that
patients  spend in dialysis by  increasing  the  efficiency  of oxalate  removal
during the process.

     The world  market for  urological  drains  (catheters)  was $675 million in
1995.  Catheters often foster  infection and account for the leading side effect
of an invasive hospital procedure.  One major cause of catheter infection is the
build-up of oxalate crystals on the catheter. The Ixion oxalate technology would
allow an improved  catheter  which would inhibit or dissolve  encrusted  oxalate
crystals, thus reducing the potential for infection.


<PAGE>


Business Strategy

     We intend to market our initial  diagnostic  products,  while  working with
strategic  partners to take our planned  therapeutic  products  through clinical
trials into the market.

     Basic  Research.  Ixion has used and intends to continue to use cooperative
research and  development  agreements  with the  University of Florida for basic
discovery research. The University of Florida is the tenth largest university in
the  nation  and is the  largest  research  institution  in  the  Southeast.  It
typically ranks in the top 10 in the United States in gross  royalties  received
from patent licenses,  and the top 20 in the United States in the number of U.S.
patents obtained.

     Technology Evaluation and Development.  We plan to use our affiliation with
the  University  of  Florida  Biotechnology  Program  to seek  out  cutting-edge
university  based  biotechnology.  Our  scientific and business team will review
early stage academic  inventions,  identify  discoveries  which are commercially
promising,  obtain licenses from the University,  and develop the discoveries to
add value by confirming the initial  observations.  Discoveries that support our
core technologies will be retained for further  development;  the remainder will
be licensed-out.

     Our relationship  with the scientists at the University of Florida is based
upon personal  relationships  between our  management  and University of Florida
members of our Scientific  Advisory Board, on the one hand, and other members of
the University of Florida faculty on the other.  These  relationships are helped
by our nearby location and by the business consulting provided by our management
to University faculty at no cost, by arrangement with the Biotechnology Program.
We have no formal  agreement  providing  general  access to rights to University
research, nor to advance notice of disclosures by University researchers.

     The  University's  faculty has only recently  begun to engage in commercial
collaborations   in  significant   numbers,   thus  many  promising   commercial
discoveries  have not been  exploited.  For  example,  we  recently  licensed an
anti-microbial patent from two members of the University of Florida faculty. See
"Business-Licensed  Technology." In addition,  academic intellectual property is
often embryonic and,  therefore,  too risky,  expensive,  and time consuming for
large pharmaceutical and biotechnology  companies to acquire and develop. Ixion,
on the  other  hand,  is in a  position  to  perform  "applied  basic"  research
inexpensively, either in our labs or through cooperative research agreements, in
order to add value to the  technology  such that it is of  greater  interest  to
commercial  licensees.  By increasing the maturity stage of the  technology,  we
hope to capture an enhanced return upon  licensing-out for royalty and milestone
payments. See Figure 1, below.


<PAGE>



























                Figure 1 - Ixion Technology Opportunity Strategy

     Ixion  intends to  continue  to  develop  collaborative  arrangements  with
leading  researchers  at  the  University  of  Florida  and  at  other  research
institutions  in our core oxalate and diabetes areas to diversify and strengthen
our intellectual property estate and to establish our reputation and credibility
in the scientific and medical communities.

     Collaborative Product Development and Marketing with Established Companies.
Ixion  hopes  to  develop  products  in  collaboration   with  other  companies.
Collaborative  agreements may call for our partners to provide research funds as
well as clinical and other support during product  development,  although we may
develop  and test  ideas  independently  before  entering  into a  collaborative
agreement.  We  contemplate  that our partners will provide an  established  and
trained marketing and sales force, as well as manufacturing experience, clinical
trial expertise, support for patent prosecution, and other capabilities.

     Independent  Product  Development.  The quality of our scientific team also
permits independent product development.  Independently  developed products will
provide us with the flexibility  either to market the product  directly or enter
into  agreements  with  pharmaceutical  partners on terms more  favorable to us.
While independent product development is riskier than collaborative development,
we may be able to retain a higher  proportion  of any eventual  product  revenue
stream.

     Contract  Clinical Trial and  Manufacturing  Services.  Initially,  we have
elected to retain  contract  vendors to support  clinical  studies  and  product
development.  Moreover,  it will not initially  construct our own  manufacturing
facilities. By contracting with a qualified manufacturing company, Ixion will be
able to obtain  immediate  access to the necessary  regulatory skill base at low
entry  costs.  We thus expect to minimize the time to market,  maintain  control
over development candidates,  and reduce our financial risk when product risk is
the greatest.

Product Development

     Our first target  product for diabetes will be cell lines of cultured islet
or stem  cells for use in  transplantation  for  diabetes  treatment.  Our first
target product for  oxalate-related  diseases will be the XEntrIX TM Oxalobacter
formigenes Monitor and the IxC1-62/47  enzymatic  treatment for  oxalate-related
conditions.  We also plan  other  products  that will  detect  and  measure  the
presence of oxalate in urine or blood. Certain of these products may be suitable
for use in research applications and, subject to certain limitations,  would not
require FDA approval  prior to use in that context.  (See "Business - Government
Regulation," below.)

     Descriptions  of  Planned  Diabetes  Products.  Ixion  intends  to  develop
products  to  enhance  research  into  the  disease  of  diabetes,  as  well  as
therapeutic approaches where our proprietary technology offers unique solutions.

     Islet  transplantation to reverse diabetes or reduce insulin dependency has
been limited by, among other  things,  immunological  attack  resulting in rapid
rejection of transplanted  tissue. In addition to the immunologic  difficulties,
there are  significant  shortages of human islets  suitable  for  transplant  or
research, with only 4,000 or fewer pancreases available for transplant annually.
About  3,000  patients  die  each  year  while  waiting  for a  pancreas  graft.
Xenotransplants using porcine islets face additional  difficulties,  such as the
possibility of cross-species  viruses. To date, efforts to propagate  commercial
quantities  of human  islets in vitro (in the test  tube) from  either  fetal or
adult tissue has had minimal  success.  We believe that a source of reproducible
islet cells would  significantly  improve the speed and results of research into
transplanted islets for diabetes.

     Ixion's  islet  technology  permits  the  successful  growth  of  in  vitro
pancreatic-derived,  pluripotent  (e.g., able to differentiate)  islet-producing
cells from mice.  When mouse cells were  implanted into  clinically  prediabetic
mice, the implanted mice were  successfully  weaned from insulin until they were
sacrificed  for further  studies.  We have also been  successful in  propagating
human  islet  cells  from  children  and  adult  donors  as  well,  but have not
transplanted such islets at the date of this report.

     The following table summarizes the current status of our islet research and
development program for diabetes products.


<PAGE>

                 Product Development-Diabetes Islet Technology
--------------- -------------------------------------- --------------------
         
Product                 Planned Research Products              Status(1)
--------------- -------------------------------------- --------------------
Cultured Islets    Implantation in vivo of encapsulated        Research 
or Stem Cells      cells for study of protected 
                   implantations  to  reverse  diabetes
---------------------------------------------------------------------------
Genetically        Implantation in vivo without encapsulation  Concept
Engineered         for study of unprotected  implantations to            
Concept Islets or  reverse diabetes
Stem Cells         
---------------------------------------------------------------------------
Islet  Growth      Promotion  of cell  growth  and
Factors            differentiation   of   pancreatic 
                   explants                                    Research  
---------------------------------------------------------------------------
Nucleic  Acid      Genetic  and  phenotype  analysis           Concept  
Probes
---------------------------------------------------------------------------
Surface            Analysis  of health or  disease of          Research  
Antibodies                  biopsy specimens

                          Identification of cells

                    Enrichment of specific cell types
                                                           
                 Isolation and identification of cells by
                         stage of differentiation                              

                     Production of knock-out lines of
                             pancreatic cells
----------------------------------------------------------------------------
----------------------------------------------------------------------------   

Product                  Planned Clinical Products               Status(1)
--------------- --------------------------------------------- --------------
Cultured Islets    Encapsulated implantation in vivo to           Concept  
or Stem Cells      reverse diabetes                                           
----------------------------------------------------------------------------
Genetically        Transplantation without encapsulation          Concept
Engineered         (or other mechanical means of immunologic
Islets or Stem     protection) in vivo to reverse diabetes
Cells                                                 
---------------------------------------------------------------------------- 
Islet Growth            Correct disease deficiencies
Factors            
                    Promote greater efficiency in culturing
                          cells for transplantation
                   
                    Elucidation of diabetes disease process       Concept
                            
                            Monitor disease stages                          
----------------------------------------------------------------------------- 

         (1) "Concept"  includes  feasibility,  theoretical  market, and product
         design studies based on laboratory or other data.  "Research"  includes
         discovery  research,  development  of the  product's  physical form and
         specifications,  and  its  initial  production.  "Preclinical"  denotes
         efficacy, pharmacology, safety, or toxicology studies in animal models.

     Descriptions  of  Planned  Oxalate  Products.  Except  for our  XEntrIX  TM
Oxalobacter  formigenes  Monitor,  there is no  method  of  rapidly  and  easily
detecting  the  presence or absence of O.  formigenes  in the body.  The current
tests for O. formigenes are laborious, time consuming, and unreliable.

     The XEntrIX TM  Oxalobacter  formigenes  Monitor.  Our  oxalate  technology
consists  of  cloned,  sequenced,  and  expressed  genes  encoding  the  oxalate
degrading enzymes from the intestine dwelling bacteria,  Oxalobacter formigenes.
Dr.  Sidhu,  in  collaboration  with Dr.  Milton  Allison,  a member of  Ixion's
Scientific  Advisory Board and the discoverer of O. formigenes,  have used these
genes to  construct  a DNA-based  diagnostic  test (the  XEntrIX TM  Oxalobacter
formigenes   Monitor)   to   detect   the   presence   of   O.   formigenes   in
easily-collectable  stool  samples.  O.  formigenes is a gram negative  anaerobe
present  in humans and other  animals.  The role of this  species in  intestinal
management of oxalate is supported by findings showing  significantly  decreased
intestinal  colonization  in patient  populations  at  increased  risk of kidney
stones.  Research in this area has been inhibited by the difficulty of culturing
and detecting the anaerobe.

     The XEntrIX TM Oxalobacter formigenes Monitor is a significant  improvement
over current tests for O. formigenes and is an important  potential  addition to
routine diagnostic testing for several reasons.

o             Our XEntrIX TM  Oxalobacter  formigenes  Monitor is much easier to
              perform and  provides  accurate  results in a fraction of the time
              required  to culture  and test for O.  formigenes  using  existing
              methods.

o             Our DNA-based  method relies upon standard DNA techniques and does
              not  require  anaerobic  cultures of  organisms  since it provides
              direct detection of DNA extracted from fecal samples and amplified
              using polymerase chain reaction ("PCR").

o             Because  it is based  upon  PCR and  subsequent  hybridization  to
              species-specific  sequences, the XEntrIX TM Oxalobacter formigenes
              Monitor is simple to perform and provides  the  required  level of
              sensitivity, accuracy, selectivity, and throughput necessary for a
              commercial diagnostic test.

o             The XEntrIX TM Oxalobacter  formigenes Monitor is sensitive to the
              level  of 1,000  to  10,000  colony  forming  units/gram  of fecal
              material.  This is approximately 100-fold lower than the number of
              colony forming units in fecal material of normal, healthy adults.

We are focusing  ongoing  development of the XEntrIX TM  Oxalobacter  formigenes
Monitor on the following areas:

o             Extended  evaluation  and  enhancement of probe  specificity  with
              respect to other  intestinal  organisms  to assure the  absence of
              cross reactivity and misdiagnosis.  Organisms  currently evaluated
              include  the  following:  Bacteroides  ovatus,  Proteus  vulgaris,
              Enterobacter cloacae,,  Eschericia coli, Enterobacter,  aerogenes,
              Clostridium  perfringens,   Closteridium  sordellii,   Veillonella
              parvula,   Streptococcus   pneumoniae,    Staphylococcus   aureus,
              Pseudomonas   aerogenosa,    Streptococcus   bovis,   Enterococcus
              faecalis,  Staphlycoccus  epidermidis,   Moorella  thermoautotrop,
              Shigella  boydii,  Proteus  mirabilis,   Salmonella   typhimurium,
              Citrobacter   brakii,    Lactobacillus   acidophilus,    Moraxella
              osloensis, Moorella thermoacetica, Alcaligenes sp., and Klebsiella
              oxytoca.

o             Development  of probes  against  clinically  important  intestinal
              organisms  such as those  listed  above.  These,  coupled with the
              quantitative  version  of the  XEntrIX TM  Oxalobacter  formigenes
              Monitor,   will  provide  for  a  panel  of  clinically  important
              diagnostic tests for enteric bacteria
o             Development  of a  quantitative  kit  version  of  the  XEntrIX TM
              Oxalobacter  formigenes  Monitor.  


     In June of 1998,  we agreed in  principle  with the  University  of Florida
Diagnostic Referral Laboratories for them to offer a service to physicians using
our XEntrIX TM Oxalobacter  formigenes Monitor under the provisions of the FDA's
analyte specific reagent regulation.  The Diagnostic  Referral  Laboratories are
responsible  for  marketing  the new  service,  which costs $295 per sample.  No
reimbursement is yet available for patients  requesting this test. Sales to date
have been immaterial.

     We expect to file an  application  under Section  510(k) of the FDA Act for
clearance  to market the XEntrIX TM  Oxalobacter  formigenes  Monitor  directly.
There is no assurance that the Ixion Oxalobacter formigenes Monitor will qualify
for  510(k)  procedure,  in which case we will have to file an  application  for
premarket approval with the FDA. If we must follow the premarket approval route,
the approval process may be lengthy.

     IxC1-62/47 Enzyme Therapy for  Oxalate-Related  Disease. In addition to the
XEntrIX  TM  Oxalobacter  formigenes  Monitor  and  other  potential  diagnostic
products described above, Ixion is developing IxC1-62/47, an orally administered
therapeutic  product  consisting of the recombinant form of two enzymes normally
found  in  O.  formigenes:   oxalyl-CoA  decarboxylase  ("oxc")  and  formyl-CoA
transferase ("frc"). The enzymatic therapy is based upon the re-establishment of
oxalate   degrading   mechanisms   in  the  body.   IxC1-62/47  is  targeted  at
oxalate-related   disorders  including  kidney  stones,  enteric  hyperoxaluria,
oxalosis, cardiomyopathy, cardio conductance disorders, cystic fibrosis, Crohn's
disease,  and possibly  vulvodynia.  Very few satisfactory  treatments currently
exist for these disorders.

     Both the oxc and frc genes have been  successfully  cloned into E. coli and
expressed in active form as verified using activity assays  developed by Ixion's
scientists.  Physicochemical  analyses  such as SDS-PAGE,  IEF,  and  N-terminal
sequence  analysis have been completed.  Ixion has grown the recombinant E. coli
to 80 liter scale and has  initiated  the process of  purifying  the oxc and frc
enzymes for use in a variety of  preclinical  studies  including (1)  additional
physicochemical  characterization,  (2) formulation  and drug delivery,  and (3)
further animal studies. We are also purifying the native form of the oxc and frc
enzymes  from O.  formigenes,  to provide  comparative  data to the  recombinant
versions.  We have not determined whether the recombinant or native enzymes will
be used  therapeutically.  The current intention is to file an investigative new
drug  application  for the  IxC1-62/47  enzymatic  therapy  for  oxalate-related
disorders when resources permit.

     The  XEntrIX  TM  Oxalobacter  formigenes  Monitor  has been  performed  in
preclinical studies by Ixion lab personnel on over 300 human samples from varied
populations in the Ukraine,  Germany,  the United States, and India. The results
of those studies include the following:

         Cystic  Fibrosis.  Oxalate  kidney stones are a known  complication  of
         cystic fibrosis.  The incidence in cystic fibrosis  populations over 12
         years old approaches 3% to 4% as compared to 0.2% in normal populations
         Renal  autopsies  show  >90%  nephrocalcinosis.  In an Ixion  sponsored
         clinical  study  conducted  in  collaboration   with  collaborators  at
         Northwestern University, the University Children's' Hospital,  Cologne,
         Germany,  and University  Children's Hospital,  Halle,  Germany, 40 (18
         male and 22 female) cystic  fibrosis  patients (aged three to 35 years)
         were examined for colonization with Oxalobacter  formigenes.  33 of the
         40 patients were non-colonized, and of these, 18 were hyperoxaluric and
         eight had urinary  oxalate levels in the upper normal range.  The seven
         patients who were colonized with O. formigenes all showed normal levels
         of urinary oxalate.

         Recurrent  Stone  Formers.  In another  currently  ongoing  study on O.
         formigenes   colonization  in  adult  calcium  oxalate  stone  formers,
         preliminary  data have  revealed  that the majority of recurrent  stone
         formers  (five or more  stone  episodes)  are  non-colonized  with this
         bacteria. Studies in the literature suggesting a decrease in the colony
         forming units of O. formigenes in patients with oxalate calculi, rather
         than complete non-colonization,  has led to the development by Ixion of
         a Quantitative-PCR Oxalobacter formigenes Monitor. The Quantitative-PCR
         Oxalobacter   formigenes  Monitor  is  now  being  used  in  additional
         preclinical  work to detect and  quantitate  O.  formigenes  in oxalate
         stone  formers to determine if the number of Colony  Forming Units is a
         relevant risk factor.

         Vulvodynia.  A new preclinical  study is scheduled in cooperation  with
         the  Diagnostic  Reference  Laboratory  at the Shands  Hospital  at the
         University  of  Florida to examine  25 to 40  vulvodynia  patients  for
         colonization with Oxalobacter formigenes.

     Over 65 percent of kidney  stones are  calcium-oxalate  stones,  and excess
oxalate is implicated in other  diseases as set forth above.  Oxalate is present
in many common foods,  including tea,  broccoli,  and spinach.  O. formigenes is
involved in  degradation  of dietary  oxalate and its secretion from plasma into
the gut. We believe that a robust  colony of O.  formigenes  prevents  recurrent
calcium-oxalate  kidney stone formation in persons susceptible to excess oxalate
absorption and may ameliorate  other disease states.  We believe that we are the
only company  world-wide  which is examining the role of O.  formigenes in human
and animal disease states.

     Blood  Oxalate  Assay.  The  combination  of the oxc and  frc  enzymes  and
cofactors  also  serve as the basis  for a  planned  blood  oxalate  assay.  The
recurrence  rate of calcium  oxalate kidney stone  formation is very high,  with
hyperoxaluria  as the major  predisposing  factor to stone  formation.  Accurate
measurements of blood oxalate  levels,  together with the presence or absence of
O.   formigenes,   are  important   requirements  for  predicting  the  risk  of
calculogenesis in an individual and stratifying urological patients for clinical
intervention.  Development  is planned in the  future on an  additional  oxalate
product:  a blood oxalate  assay,  to be designed for clinical use by hospitals,
independent labs, and doctors.

     The following  table  summarizes the current status of our oxalate  product
research and development program.


<PAGE>

                 Product Development-Oxalate Technology

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

   Product                   Planned Research Products              Status (1)
----------------- ---------------------------------------------- ---------------
Oxalobacter           Detection of O. formigenes in stool          Preclinical 
formigenes            for vulvodynia and kidneystone research
Monitor                   
                                                                  
----------------- ---------------------------------------------- ---------------
Blood Oxalate         Measurement of oxalate levels in blood for   Concept
Assay                 research in kidney stone, hyperoxaluria, 
                      cystic fibrosis, Crohn's disease,                      
                      vulvodynia, and other oxalate-related 
                      diseases                                                
                                                
--------------------------------------------------------------------------------

                            Planned Clinical Products
------------------ --------------------------------------------- ---------------
Oxalobacter           Detection of O. formigenes in stool for      Preclinical
formigenes            oxalate-related and other oxalate-related               
Monitor               disorders                     
                                                           
------------------- -------------------------------------------- ---------------
IxC-162 Enzyme        Treatment of oxalate-related disorders:      Preclinical
Therapy                         Kidney Stones
                               Crohn's Disease
                               Cystic Fibrosis
                                Hyperoxaluria
                                  Vulvodynia
                         Other oxalate-related diseases       
                                                                  
------------------- -------------------------------------------- ---------------
Blood Oxalate Assay   Diagnostic oxalate detection kit for blood   Concept
                                                    
------------------- -------------------------------------------- ---------------
Dialysis Cartridge    Rapid removal of excess oxalate in blood     Concept    
                                                     
------------------- --------------------------------------------- --------------
Oxalate-Resistant     Catheter coated to avoid oxalate             Concept
Catheter              encrustation as a method to reduce                    
                      the incidence of infection                      
                                                          
--------------------------------------------------------------------------------


         (1) "Concept"  includes  feasibility,  theoretical  market, and product
         design studies based on laboratory or other data.  "Research"  includes
         discovery  research,  development  of the  product's  physical form and
         specifications,  and  its  initial  production.  "Preclinical"  denotes
         efficacy, pharmacology, safety, or toxicology studies in animal models.
         "Clinical" denotes testing for safety and efficacy.

Licensed Technology

     We have  exclusively  licensed  from the  University  of  Florida  Research
Foundation,  on a world-wide  basis,  commercial  rights in two areas:  in vitro
grown islet progenitor/stem cells for curing diabetes, and materials and methods
for detection of oxalate and Oxalobacter formigenes.

     Under the UF  Research  Foundation  licenses,  we have been  issued  two US
oxalate  patents and one US islet patent.  We have received notice of allowances
of claims in one US oxalate  patent and one US islet  patent.  Still pending are
five US oxalate patent  applications and one islet patent  application.  We have
also filed  internationally  on each of these  patent  families,  but no foreign
patent has issued.

     The  license  agreements  require the UF  Research  Foundation  to file and
prosecute the patents and require us to reimburse the costs. They must also take
all steps to defend such patent rights,  also at our expense. If the UF Research
Foundation  fails to take any such  action,  we have the  right to  defend  such
rights at our own expense.

     Except for royalty  rates and certain  other  immaterial  differences,  the
terms of our patent licenses with the UF Research  foundation are  substantially
identical. The UF Research Foundation licensed its rights under on an exclusive,
worldwide basis for the life of any patents granted  thereunder.  We have rights
under the UF Research  Foundation  licenses to all  possible  uses of the patent
applications,  any patents issued from such  applications,  any  divisionals and
continuations  of such  applications,  and to any  claims  of U.S.  and  foreign
continuation-in-part  applications,  and of the  resulting  patents,  which  are
directed to subject matter specifically described in such applications. In order
to  maintain  our  license,  we must use our best  efforts  to bring one or more
licensed  products or  processes  to market  through a thorough,  vigorous,  and
diligent  program for  exploitation of the patent rights.  In addition,  we must
provide annual business plans showing our plan for product development.

     Under the UF Research Foundation licenses, we paid a license issue fee, are
obligated to pay  royalties  on our net sales or net sales of our  sublicensees,
and must  reimburse the UF Research  Foundation  for patent costs.  There are no
minimum  annual  royalties.  We are also  obliged  to obtain  product  liability
insurance prior to the sale for commercial purposes of licensed products.  There
is no  assurance  that we will be able to obtain such  insurance  on  reasonable
terms. See "Risk Factors - Risk of Product Liability Insurance."

     A number of pharmaceutical companies, biotechnology companies, universities
and research  institutions,  and individuals  have filed patent  applications or
received  patents  to  technologies   that  are  similar  to  the  our  licensed
technologies. We is aware of patent applications previously filed by and patents
already  issued  to  others  that  could  conflict  with our  patents  or patent
applications,  either by claiming  the same  methods or compounds or by claiming
methods or compounds that could  dominate those licensed to us. In addition,  we
can not assure you that we are aware of all patents or patent  applications that
may  materially  affect our ability to make,  use, or sell any products.  United
States patent  applications are confidential  while pending in the United States
Patent and Trademark Office, and patent  applications filed in foreign countries
are often first published months or more after filing.  Any conflicts  resulting
from third party patent applications and patents could significantly  reduce the
coverage  of the  patents or patent  applications  licensed  to us and limit our
ability to obtain meaningful patent  protection.  If patents are issued to other
companies that contain  competitive or conflicting claims, we may be required to
obtain licenses to these patents or to develop or obtain alternative technology.
We can not  assure  you  that we will be able to  obtain  any  such  license  on
acceptable  terms or at all.  If such  licenses  are not  obtained,  we could be
delayed in or prevented from the development or commercialization of our product
candidates, which would have a material adverse effect on us.

     We are  aware  of  potentially  significant  risks  relating  to our  islet
technology  and to our oxalate  technology,  particularly  bacterial  oxalyl-CoA
decarboxylase,  an enzyme used in the XEntrIX TM Oxalobacter  formigenes Monitor
and our  IxC1-62/47  enzyme  therapy.  We may not be able to  commercialize  our
proposed diabetic products based on our method of proliferating  islets and stem
cells in vitro or our proposed oxalate-related disease management products, both
due to patent  rights held by third  parties.  As a result,  our  position  with
respect to the use of islets or stem  cells or  products  containing  oxalyl-CoA
decarboxylase  are uncertain and involve  legal and factual  questions  that are
unknown or unresolved.  Although we believe our patents and patent  applications
provide a  competitive  advantage  in our  efforts  to  discover,  develop,  and
commercialize   useful   products,   if  any  of  these  questions  is  resolved
unfavorably,  we may not have the right to  commercialize  products  relating to
certain  aspects  of  islet   technology  or  products   containing   oxalyl-CoA
decarboxylase in the absence of a license from one or more third parties,  which
may  not  be  available  on  acceptable  terms  or  at  all.  Our  inability  to
commercialize any of these products would have a material adverse effect on us.

     In 1981, the Ontario  Cancer  Institute  filed a patent  application in the
United  States and was issued a patent in 1984  covering a method for  producing
pancreatic   islet-like   structures  having  histology  and   insulin-producing
properties  corresponding  to those of fetal  pancreatic  islets and islets from
adult animals maintained in culture, based on discoveries by Michael Archer. The
patented method is similar, but not identical, to our islet technology. Archer's
patent was licensed to CytoTherapeutics, Inc. in 1991. CytoTherapeutics may have
filed patent  applications  in foreign  countries based upon Archer's patent and
may have  additional  patent  applications  on the same general  subject  matter
pending in the United States.

     We are also aware that in 1993,  Human Cell Cultures,  Inc.,  filed a first
U.S. patent  application  which was rapidly  abandoned in favor of a second U.S.
continuation-in-part application, and that these U.S. applications together were
the basis of an international  application which claimed a cell culturing method
and medium to form  pancreatic  "pseudotissues"  composed of  "pseudoislets"  to
treat blood sugar disorders in mammals,  based on discoveries by Hayden Coon and
others.  Subsequently,  on June 7, 1995, Human Cell Cultures filed in the U.S. a
continuation of its second (now abandoned) U.S. application, and has been issued
US patents.  Dr. Coon's  patents  claim methods which are also similar,  but not
identical,  to our  islet  technology.  There may have  been  additional  patent
applications  filed in the United States or foreign countries based upon the Dr.
Coon's work.

     In the United  States,  one must be the first to invent a subject matter in
order to be entitled to patent  protection  on that  invention.  With respect to
patent  applications  filed prior to January 1, 1996,  United  States patent law
provides that if a party invented a technology  outside the United States,  then
for purposes of determining  the first to invent the  technology,  that party is
deemed to have invented the  technology on the earlier of the date it introduced
the invention in the United States or the date it filed our patent  application.
In  foreign  countries,  the  first  party  to file a patent  application  on an
invention,  not the first to invent the  subject  matter,  is entitled to patent
protection  on that  invention,  assuming  that the  invention  meets  the other
requirements  for  patentability.  We can not  assure  you  that the  owners  of
Archer's  patent nor the owners of Coon's  patents will not  challenge our islet
patents or patent or that we will succeed in defending any such  challenges.  We
also can not assure you that the sale of islet  products by us would not be held
to infringe  United  States and  foreign  patent  rights of the owners  Archer's
patent and Coon's patent. Under the patent laws of most countries, a product can
be found to  infringe a third  party  patent  either if the third  party  patent
expressly  covers the product or method of treatment  using the  product,  or in
certain  circumstances,  if the third party patent, while not expressly covering
the product or method, covers subject matter that is substantially equivalent in
nature to the product or method.  If it were  determined  that products  derived
from our islet technology  infringe Archer's patent or Coon's patents,  we would
not have the  right to make,  use,  or sell our  islet  products  in one or more
countries  in the absence of a license from the owners of such  patents.  We can
not assure you that we could  obtain a license  from such  owners on  acceptable
terms or at all.

     In June, 1995, Human Genome Sciences,  Inc., filed a patent  application in
the United States,  and thereafter in foreign  countries,  relating to a claimed
human oxalyl-CoA  decarboxylase and the DNA(RNA)  encoding such polypeptide,  as
well as a procedure for producing such polypeptide and for producing an antibody
relating to such  polypeptide for use in the treatment of calcium oxalate kidney
stones and  hyperoxaluria.  A U.S.  Patent was issued on June 3, 1997. The Human
Genome patent purports to relate to a human version of oxalyl-CoA  decarboxylase
which is stated to be 50% to 60% homologous to the oxalyl-CoA decarboxylase from
the  anaerobic  bacteria,  Oxalobacter  formigenes.  If the use of our bacterial
oxalyl-CoA  decarboxylase  is found to infringe the patent owned by Human Genome
Sciences,  then we would not have the right to sell such products in one or more
countries  without  a  license  from  Human  Genome  Sciences.  There  can be no
assurance  that we would be able to obtain a license from Human Genome  Sciences
on acceptable terms or at all.

     Litigation,  which  could  result in  substantial  cost to us,  may also be
necessary  to enforce  any  patents to which we have rights or to determine  the
scope,  validity, and enforceability of other parties' proprietary rights, which
may affect our product candidates and technology.  United States patents carry a
presumption of validity and generally can be invalidated  only through clear and
convincing evidence.  Our licensors may also have to participate in interference
proceedings  declared  by the Patent  Office to  determine  the  priority  of an
invention,  which  could  result  in  substantial  cost to us.  There  can be no
assurance  that  our  licensed  patents  would  be  held  valid  by a  court  or
administrative  body  or  that  an  alleged  infringer  would  be  found  to  be
infringing.  Further,  with respect to the technology licensed by us from the UF
Research  Foundation,   they  are  primarily  responsible  for  any  litigation,
interference,  opposition,  or other  action  pertaining  to  patents  or patent
applications  related  to  the  licensed  technology,  and we  are  required  to
reimburse them for the costs. As a result,  we generally do not have the ability
to institute or determine the conduct of any such patent proceedings unless they
do not elect to institute or elects to abandon such proceedings.  In cases where
they elect to institute and  prosecute  patent  proceedings,  our rights will be
dependent in part upon the manner in which they conduct the proceedings.  The UF
Research  Foundation could elect not to vigorously pursue or defend or to settle
such  proceedings  on terms that are not favorable to us. An adverse  outcome in
any patent litigation or interference proceeding could subject us to significant
liabilities to third parties,  require disputed rights to be licensed from third
parties, or require us to cease using such technology, any of which could have a
material adverse effect on us.

     We can not assure you that any existing patent  application,  or any future
patent  application will issue or that any patents,  if issued,  will provide us
with adequate  patent  protection  with respect to the covered  products,  their
uses, technology, or processes. In addition, under our licenses, we are required
to meet specified diligence requirements to retain our rights. See "Risk Factors
- Uncertainty Regarding Patents and Proprietary Rights."

     In January  1997,  we entered  into a patent  license  agreement  obtaining
exclusive  rights to the issued  patent of Dr.  Randy S.  Fischer and Dr. Roy A.
Jensen,  faculty  members  at the  University  of  Florida,  for  identifying  a
difference  which exists  between the metabolic  pathway of a microbial or plant
target  organism and a non-target host specie and then preparing a control agent
which  perturbs  the  metabolic  pathway  of the  target  without  significantly
perturbing the metabolic  pathway of the host.  This patent may be useful in the
development of microbicides  for drug resistant  pathogens such as staphyloccus,
enterococcus, and neisseria. Under the Fischer/Jensen license agreement, we paid
a license issue fee of 1,000 shares of our Common stock and are obligated to pay
royalties of 2% on net sales by Ixion or our sublicensees.  There are no minimum
annual royalties or due diligence milestones.  The Fischer/Jensen license is for
the remainder of the legal life of the patent (or over 11 years).

     Because  the  inventions  covered by our  licenses  were made with  federal
assistance (which is typical of university-based discoveries),  they are subject
to the rights of the federal government under 35 USC Title 18, "Patent Rights in
Inventions  Made with  Federal  Assistance,"  including  "march in" rights under
which the government  has the right to require us to grant an exclusive  license
under any of such inventions to a third party if the government  determines that
(1) adequate steps have not been taken to  commercialize  such  inventions,  (2)
such action is  necessary  to meet public  health or safety  needs,  or (3) such
action  is  necessary  to  meet   requirement   for  public  use  under  federal
regulations. The government's rights include a non-exclusive, paid-up, worldwide
license  under  such  inventions  for any  governmental  purpose.  The law  also
requires  any  licensor of an  invention  that was  partially  funded by federal
grants  to  obtain a  covenant  from our  exclusive  licensee  to  substantially
manufacture  products  using the invention in the United  States,  although this
covenant is subject to a discretionary waiver by the government.

Patents and Trade Secrets

     Dr.  Peck,  as an employee of the  University  of Florida,  is bound by the
terms of the  University's  patent  policy,  which  requires  that any invention
conceived  of or  developed  in the area in which he is employed  belongs to the
University  (subject to the Government  Rights  described  above, and to Ixion's
rights  under the  consulting  agreement  it has with him).  See  "Management  -
Consulting  Agreement  With Dr. Peck" and  "Business -  Government  Regulation -
Florida Conflicts of Interest."

     It is our policy to require our directors,  material investors,  employees,
consultants,  outside scientific collaborators,  and sponsored researchers,  and
other advisors to execute confidentiality agreements upon investment or upon the
commencement of employment or consulting relationships with us. These agreements
provide  that  all  confidential  information  developed  or made  known  to the
individual  during the course of his or her  relationship  with us is to be kept
confidential  and not disclosed to third  parties.  Ixion also  requires  signed
confidentiality  or material  transfer  agreements  from any company  that is to
receive confidential data or proprietary compounds. In the case of employees and
consultants,  the  confidentiality  agreements  also generally  provide that all
inventions  conceived by the individual while rendering  services to us shall be
assigned to us as our exclusive property  (subject,  in the case of Dr. Peck, to
the prior  rights of the  University  of  Florida).  There can be no  assurance,
however,  that these agreements will provide  meaningful  protection or adequate
remedies for our trade secrets or other proprietary  information in the event of
an unauthorized disclosure or will be effective to assign inventions.

     Certain  of our  research  has  been  funded  in  part  by  Small  Business
Innovation Research grants and may be funded in the future by such grants and by
Small Business  Technology Transfer Research grants. In connection with any such
funding, the U.S. Government will have the rights described above.

     In order to produce or use the XEntrIX TM Oxalobacter formigenes Monitor in
its  current  formulation  or to  produce  the Blood  Oxalate  Assay  (and other
immunodiagnostic  products)  in  commercial  quantities  for resale,  it will be
necessary to license certain rights from Roche Diagnostics,  Inc., the holder of
patents on the nucleic acid amplification  process known as the polymerase chain
reaction  ("PCR")  process.  If Ixion finds it  necessary  to use PCR to produce
commercial  products,  it will enter into such a license with Roche, which makes
non-exclusive  licenses generally available.  Ixion does not anticipate that the
terms of such license will have a materially adverse effect on us.

Competition

     The  biotechnology  and  pharmaceutical  industries  are  characterized  by
rapidly evolving  technology and intense  competition.  Our competitors  include
major pharmaceutical, chemical, and specialized biotechnology companies, many of
which have larger R&D budgets,  as well as substantially  greater  experience in
developing products, in obtaining regulatory approvals, and in manufacturing and
marketing   diagnostic   and   pharmaceutical   products.   In  addition,   many
biotechnology  companies  have formed  collaborations  with  large,  established
companies to support research,  development,  and  commercialization of products
that may be competitive with ours. Academic institutions, governmental agencies,
and other public and private research organizations are also conducting research
activities and seeking patent protection and may commercialize products on their
own or through joint ventures.

     Our  products  under  development  are expected to address a broad range of
markets. Our competition will be determined in part by the potential indications
for which our products  are  developed  and  ultimately  approved by  regulatory
authorities.  See  "Business  Government  Regulation."  In  addition,  the first
pharmaceutical  product to reach the market in a therapeutic or preventive  area
is often at a significant  competitive  advantage  relative to later entrants to
the  market.  Accordingly,  the  relative  speed with which  Ixion or our future
corporate  partners can develop products,  complete the preclinical and clinical
trials and approval processes,  and supply commercial quantities of the products
to the market are expected to be important  competitive factors. Our competitive
position  will also  depend on our  ability  to  attract  and  retain  qualified
scientific and other personnel,  develop effective proprietary products, develop
and  implement   production  and  marketing  plans,   contract  for  and  manage
third-party service providers, obtain and maintain patent protection, and secure
adequate capital  resources.  We expect  our products,  if approved for sale, to
compete primarily on the basis of product efficacy, safety, patient convenience,
reliability,  value,  and scope of patent  rights.  See "Risk  Factors - Intense
Competition."

Government Regulation

     In  the  United  States,  the  FDA  regulates  distribution,   manufacture,
labeling,  and promotion of drugs, medical devices, and biologics.  In addition,
manufacturers  of these products are subject to other federal,  state, and local
environmental  and safety laws and  regulations.  Governments in other countries
may impose additional requirements.

     FDA Authorization to Market.  Drugs,  medical devices, or biologics may not
be  commercially   distributed  in  the  United  States  unless  they  have  FDA
authorization.  Obtaining  FDA  authorization  to  market  a  regulated  product
generally  involves the  submission of  preclinical,  product  characterization,
clinical, and manufacturing information.  The process can take a number of years
and the expenditure of significant resources, and there is no guarantee that the
FDA will ever authorize marketing of the product.

     Drugs and  Biologics.  Some of our planned  products,  such as the diabetes
treatment  products,  will be regulated as drugs and biologics.  The Food, Drug,
and  Cosmetic  Act and the Public  Health  Service  Act  provide  that drugs and
biologics may not be  commercially  distributed  within the United States unless
they have been approved by the FDA. The process required by the FDA before drugs
and  biologics  may be marketed in the United  States  generally  involves  five
steps:

     o    preclinical  laboratory and animal testing, 
     o    submission to the FDA of an investigational new drug application which
          must be effective prior to the initiation of human clinical studies,
     o    adequate and  well-controlled  clinical trials to establish safety and
          efficacy for its intended  use, 
     o    submission to the FDA of a new drug application or biologics  license
          application, and
     o    review and approval of the new drug  application or biologics  license
          application by the FDA.

     Preclinical  testing covers laboratory  evaluation of product chemistry and
formulation  as well as animal  studies  to  assess  the  safety,  pharmacology,
toxicology,  and  efficacy  of the  product.  The  results  of these  tests  are
submitted to the FDA as part of the investigational  new drug application.  If a
company is not notified by the FDA within 30 days of submission, the company may
initiate Phase I clinical  trials.  Clinical  trials are typically  conducted in
three sequential phases, although the phases may overlap.

     o    Phase I represents the initial  administration of the drug or biologic
          to a small group of humans,  healthy  volunteers,  to test for safety,
          dosage tolerance, absorption, distribution, metabolism, excretion, and
          clinical  pharmacology.  
     o    Phase II involves  studies in a small number of patients to assess the
          efficacy of the product,  to ascertain  dose tolerance and the optimal
          dose  range,  and to gather  additional  data  relating  to safety and
          potential adverse effects. 
     o    Once an  investigational  drug is found to have some  efficacy  and an
          acceptable  safety profile in the targeted patient  population,  Phase
          III studies  are  initiated  to  establish  safety and  efficacy in an
          expanded patient population and multiple clinical study sites.

The FDA reviews  both the  clinical  plans and the results of the trials and may
request that a company discontinue or expand the trials at any time if there are
significant safety issues.

     The  results  of the  preclinical  tests and  clinical  trials of drugs and
biologics are submitted to the FDA in the form of a new drug application (in the
case of a drug) or biologic license application (in the case of a biologic). The
FDA may request additional  information,  including additional animal studies or
clinical trials that may extend the review process and delay marketing approval.
The  manufacturer  must also pass a premarket  inspection of its compliance with
good  manufacturing  practices.  There  can be no  assurance  that  the FDA will
authorize  marketing of the product,  or that it will do so in a timely  manner.
Once granted,  a new drug application or product license  application may place
substantial  restrictions on how the product is marketed.  After FDA approval of
the new  drug  application  or  biologic  license  application  for the  initial
indications,  further  clinical trials may be necessary to gain approval for the
labeling of the product for additional indications.

     Medical  Devices.  Many  of  our  planned  products  (e.g.,  the  in  vitro
diagnostic products such as the XEntrIX TM Oxalobacter formigenes Monitor), will
be  regulated  as medical  devices.  The FDA  regulates  the  clinical  testing,
manufacture,  labeling,  distribution,  and promotion of medical devices. Unless
exempted by regulation,  medical devices may not be commercially  distributed in
the United States unless they have been approved or cleared by the FDA.

     In the United  States,  medical  devices are  classified  into one of three
classes (class I, II, or III), on the basis of the controls deemed  necessary by
the  FDA  to  reasonably  assure  their  safety  and  effectiveness.  Under  FDA
regulations,  class I devices  are  subject to general  controls  (for  example,
labeling,   premarket   notification,   and  adherence  to  good   manufacturing
practices),  and class II devices are subject to general and  specific  controls
(for example,  performance  standards,  patient  registries and FDA guidelines).
Generally,  class III devices are those which must receive a premarket  approval
by  the  FDA to  ensure  their  safety  and  effectiveness  (for  example,  life
sustaining,  life-supporting, and implantable devices, or new devices which have
not been found substantially equivalent to legally marketed devices).

     There are two review  procedures by which medical  devices can receive such
approval or clearance.  Some products may qualify for clearance  under a Section
510(k) procedure,  in which the manufacturer  provides a premarket  notification
that it intends to begin  marketing  the product,  and shows that the product is
substantially  equivalent to another legally marketed product (i.e., that it has
the same intended use and is as safe and effective as a legally  marketed device
and does not raise different  questions of safety and effectiveness  than does a
legally marketed  device).  In some cases, the submission must include data from
human clinical  studies.  Marketing may commence when the FDA issues a clearance
letter finding such substantial equivalence.

     If the medical  device does not  qualify for the 510(k)  procedure  (either
because  it is not  substantially  equivalent  to a legally  marketed  device or
because  it is a Class III  device  required  by the  statute  and  implementing
regulations to have an approved  application  for premarket  approval),  the FDA
must  approve a  premarket  approval  application  before  marketing  can begin.
Premarket approval applications must demonstrate,  among other matters, that the
medical  device is safe and  effective.  A  premarket  approval  application  is
typically a complex submission, usually including the results of preclinical and
clinical studies,  and preparing an application is a detailed and time-consuming
process.  Once a premarket  approval  application has been submitted,  the FDA's
review  may be  lengthy  and may  include  requests  for  additional  data.  The
manufacturer  must also pass a premarket  inspection of its compliance  with the
quality  systems  regulations.  There  can be no  assurances  that  the FDA will
authorize  marketing of the product under a 510(k) or a premarket  approval,  or
that it  will do so in a  timely  manner.  After  FDA  approval  of the  initial
indication,  further  clinical  trials may be necessary to gain  approval of the
product for additional indications.

     Clinical  investigations of most devices are subject to the investigational
device  exemption  requirements,   which  usually  involve  FDA  review  of  the
investigation  before it may  begin.  Clinical  investigations  of many in vitro
diagnostic   tests  are  exempt  from  the   investigational   device  exemption
requirements,  provided the testing meets certain exemption criteria,  including
labeling as an "investigational use only" product. In addition, in vitro devices
may be  distributed  for  "research  use only,"  provided  they are intended for
laboratory research and labeled for research use. The FDA's current policy is to
encourage  manufacturers of in vitro devices for  "investigational  use only" or
"research  use only" to establish a  certification  program under which these in
vitro devices are distributed to or utilized only by individuals,  laboratories,
or health care  facilities  that have provided the  manufacturer  with a written
certification of compliance  indicating that the  "investigational  use only" or
"research  use only"  product will be  restricted  in use and will,  among other
things, meet institutional review board and informed consent requirements.

     Once  granted,  a 510(k)  clearance or premarket  application  approval may
place substantial  restrictions on how a device is marketed. Even where a device
is exempted from 510(k) clearance or premarket application approval, the FDA may
impose  restrictions  on marketing.  For example,  FDA has exempted many analyte
specific reagents not sold as finished test kits from obtaining 510(k) clearance
or premarket application approval. These reagents, however, may be marketed only
to clinical laboratories certified under the Clinical Laboratories  Improvements
Act to conduct tests of high  complexity and are subject to a number of labeling
requirements.

     Ixion's  Products.  We have agreed, as discussed above, with the University
of  Florida  Diagnostic  Referral  Laboratories  for them to offer a service  to
urologists and other physicians  based on our XEntrIX TM Oxalobacter  formigenes
Monitor.  We believe this  agreement is permitted  under the  provisions  of the
FDA's analyte specific reagent  regulation;  however, we can not assure you that
our reliance on that regulation will be accepted by the FDA.

     The XEntrIX TM  Oxalobacter  formigenes  Monitor and Blood Oxalate  Assays,
when  manufactured by or for us, will be distributed  initially for research use
and will not require FDA review prior to distribution  for those uses. To market
these products for diagnostic use, we intend to request  authorization under the
510(k) procedure for the XEntrIX TM Oxalobacter  formigenes  Monitor and perhaps
the Blood Oxalate  Assay.  Premarket  approval  applications  may,  however,  be
required for each of these products.

     We believe that our  diabetes  treatment  products  and enzyme  therapy for
treatment  of  oxalate-related   disorders  will  require  either  a  new  drug
application or a biologic  license  application  before they may be commercially
distributed. There can be no assurance that the FDA will accept our views on the
regulatory status of our products,  or that the FDA will authorize  marketing or
clinical investigation of any product, or that it will do so in a timely manner.
Additional  studies or other  information may be requested during the FDA review
period that may delay marketing authorization. The law or government regulations
may change in ways that could prevent or delay marketing  authorization  for our
products.  Delays in receipt  of,  failure  to  receive,  or loss of  previously
received  approvals  could  have a  material  adverse  effect  on our  business,
financial condition, and results of operations.

     Other FDA  Obligations.  Each  manufacturing  facility  for drugs,  medical
devices,  or  biologics,  must be  registered  with  the FDA,  and the  products
manufactured  at that  facility  must be listed  with the FDA. A  manufacturer's
quality  control and  manufacturing  procedures must conform on an ongoing basis
with  good  manufacturing   practices.   Certain  adverse  effects  and  product
malfunctions  must be reported to the FDA. Product labeling and advertising must
comply with FDA requirements. In some cases, postmarket testing may be required,
or other  requirements  imposed.  Complying  with  these  requirements  requires
substantial  time,  money,  and  effort.  We  intend  to rely on our  strategic
partners for assistance with these matters.

     FDA Enforcement.  The FDA inspects manufacturers of drugs, medical devices,
and biologics on a regular basis. Failure to comply with applicable requirements
can,  among  other  consequences,   result  in  civil  penalties,   injunctions,
suspensions  and losses of regulatory  approvals,  product  recalls,  seizure of
products,  refusal  to  allow  us  to  enter  into  supply  contracts  with  the
government, and criminal prosecution.

     Non-U.S.  Marketing.  For marketing  outside the United States,  we is also
subject to foreign regulatory  requirements.  Requirements governing the conduct
of clinical trials,  product licensing,  pricing,  and reimbursement vary widely
from  country to  country.  The time  required  to obtain  approvals  by foreign
countries  may be longer or shorter  than that  required for FDA  approval,  and
regulatory  requirements  for foreign  countries may differ  significantly  from
those of the FDA. In some cases, products may not be exported until FDA approval
is obtained.  We intends to rely on our  strategic  partners  both in the United
States and abroad for assistance with these matters.

     Florida Conflicts of Interest.  Because Dr. Peck, our Chief Scientist,  Dr.
Schuster,  Dr. Khan, and Dr. Schatz,  members of our Scientific  Advisory Board,
are employees of the Florida State University System, they, and consequently we,
are subject to Florida statutes relating to conflicts of interest.  In order for
Ixion to conduct business with the University  (including  licensing  University
technology  or entering into research  support  agreements),  we must obtain and
maintain an exemption for Dr. Peck from the application of the Florida  conflict
of interest statutes, obtain approvals for outside activities for Drs. Schuster,
Khan, and Schatz.

     Exemptions  for Dr.  Peck are issued  pursuant to a  monitoring  plan which
requires us, among other things, to promptly disclose every material transaction
between us and any  employee of the  University.  Dr. Peck  obtained his initial
exemption  from the Florida  conflict  of interest  statutes on January 5, 1995,
relating to the academic  year ended June 30, 1995.  Exemptions  must be renewed
annually at the beginning of each academic year (or upon material alterations in
the terms of the relations between us and Dr. Peck). The approval of the request
for renewal for the academic  year ended June 30, 1997 was received on September
29, 1997.  The requests to renew Dr.  Peck's  exemption  for the academic  years
ended  June 30,  1998 and June 30,  1999 have been  filed and are  pending.  The
approval process can take 12 or more months.  While we have no reason to believe
that Dr. Peck's requests for renewal will not be approved, there is no assurance
that the exemption will be renewed,  or, if renewed,  that it will be renewed on
reasonable terms. Furthermore,  it is not clear what the effect of a non-renewal
will be should the University  decline to renew the exemptions on a timely basis
or at all.


Manufacturing and Marketing

     We  have  no  experience  in  manufacturing  or  marketing  products  on  a
commercial  scale.  Marketing  rights for  products may be licensed to corporate
partners.  Co-marketing  arrangements  may also be feasible  for some  products.
Ixion  intends  to seek  distribution  arrangements  for our  products  in other
countries  outside  of  the  United  States.   While  using  third  parties  for
distribution  or  marketing  permits  us to avoid  the costs of  establishing  a
distribution or marketing network in a particular area, this strategy also makes
us more  dependent  on the  efforts  of  third  parties,  involves  a  potential
reduction in profit margins,  and may complicate  negotiations and other matters
associated with technology licenses.

     Target  Markets.  We  believe  there  will be  demand  for the  XEntrIX  TM
Oxalobacter  formigenes  Monitor in the research  market and, upon acceptance by
urologists and nephrologists as a clinically useful test, by certain specialized
kidney,  nephrogenic,  and urologic reference labs. The target markets for a new
blood oxalate assay include approximately 5,000 hospital labs, the several major
independent  labs, and the same specialized  kidney,  nephrogenic,  and urologic
reference labs as for the XEntrIX TM Oxalobacter formigenes Monitor.

     For the use of the XEntrIX TM  Oxalobacter  formigenes  Monitor,  the blood
oxalate  assay,  and our  IxC1-62/47  enzyme therapy in the management of kidney
stones,  we  plan  to  target  the  country's   approximately   7,300  in-office
urologists.  For the use of the XEntrIX TM  Oxalobacter  formigenes  Monitor and
IxC1-62/47  enzyme  therapy for managing  kidney  stone risk in cystic  fibrosis
patients,  we plan to target the cystic fibrosis treatment centers in the United
States.  For  the use of the  XEntrIX  TM  Oxalobacter  formigenes  Monitor  and
IxC1-62/47  enzyme  therapy in the  diagnosis and  treatment of  vulvodynia,  we
intend to approach the market through the 35,000 gynecologists practicing in the
United States.

     Marketing Strategy. The strategy for marketing  islet-related products will
depend on  collaborations  with third parties with greater  marketing  resources
than we.

     The marketing  strategy for the XEntrIX TM Oxalobacter  formigenes  Monitor
depends upon educating  urologists and nephrologists of its clinical usefulness.
Over 65% of all kidney  stones are composed  predominantly  of calcium  oxalate.
Oxalate  plays a  crucial  role in the  formation  of renal  stones  and in this
respect  hyperoxaluria  constitutes  a special  problem in  management of kidney
stones.  The XEntrIX TM Oxalobacter  formigenes  Monitor would be used to screen
and manage known stone formers in order to assist the  urologist in  stratifying
and  treating  kidney  stone  patients.  The use of the  XEntrIX TM  Oxalobacter
formigenes  Monitor will allow the urologist to make a determination of which of
his or her  hyperoxaluric  patients  have an exogenous  hyperoxaluria  caused by
hyperabsorption   from  the  diet,   resulting  from   diminished  or  decimated
populations of O.  formigenes.  The clinical  relevance of the resulting data is
the urologist's  capability to identify a specific cause of urolithiasis  and to
treat it effectively. Ix XEntrIX TM ion Oxalobacter formigenes Monitor data will
be more meaningful than 24 hour urinary oxalate data alone in that it accurately
identifies and  quantifies the high-risk  population of kidney stone formers and
stratifies them with respect to cause.

     Kidney stones, while prevalent, are not generally recognized as predictable
or  avoidable  by  many  physicians  and  their  patients.   Consequently,   the
promotional task will be difficult.  To meet this challenge, we intend to invest
in both  physician  education  programs,  and,  assuming  funds  are  available,
consumer  awareness  campaigns.  We can reach the country's over 7,300 in-office
urologists through a direct mail campaign. In addition, working with specialized
companies  in the  urology  market,  we propose to inform  urologists  about our
planned  new  kidney  stone  disease  management  products.  In  addition,   the
Scientific  Advisory  Board  members  and other  recognized  scientists  will be
encouraged to write  articles for peer review  scientific  journals to stimulate
interest  and  establish  further  credibility  in the  scientific  and  medical
communities.

     A similar  approach will be used to approach the  gynecological  market for
our  vulvodynia  products and the cystic  fibrosis  market for the management of
kidney stone risk.

     In each case, we intend to participate in urology, nephrology,  gynecology,
and other industry trade meetings and to exploit on-line  medical  databases and
our own web site.  Finally,  as stated above, we intend to use third-party sales
forces to amplify our efforts. See "Business - Business Strategy."

     Contract Suppliers and Manufacturers.  It is our present intention to enter
into agreements  with contract  testing and  manufacturing  entities to test and
manufacture  commercial quantities of our planned products in order to avoid the
expenditure of significant funds to hire and train personnel and comply with the
extensive  regulations,  including "good  manufacturing  practice"  requirements
applicable to such a facility.

Employees

     We have five full time employees.  Our six part time employees  include Dr.
Peck, who is an exclusive  consultant,  Mr. Peck,  President and Chief Financial
Officer,  and Ms.  Ramsey,  Controller.  Ixion is not subject to any  collective
bargaining  agreements and believes that our relationship  with our employees is
good.

Scientific Advisory Board

     None of the members of the  Scientific  Advisory  Board are our  employees.
Scientific  advisors spend only a small portion of their time to our affairs and
have commitments to other  institutions  that may conflict or compete with their
obligations to us.  Scientific  advisors  collaborate  with us on research grant
applications,  review  and  evaluate  our  research  programs,  advise  us about
technical matters,  consult on product planning and feasibility studies,  assist
in establishing  research  priorities,  provide guidance on clinical  evaluation
programs,  alert us to potential  collaborators,  advise us on new developments,
and recommend personnel.

     The Scientific  Advisory Board meets  periodically as a group. In addition,
some members may meet in smaller  groups or  individually  with our  scientists.
Ixion has confidentiality agreements with each scientific advisor providing that
all  confidential  information  shall  be  our  exclusive  property.  Scientific
advisors are not paid in cash, but are reimbursed expenses, and, pursuant to the
1994 Board  Retainer  Plan,  receive 5,000  restricted  shares of Ixion's common
stock upon joining, and 1,000 restricted shares annually  thereafter.  They also
receive stock options for 2,500 shares annually after their initial year.

     The current members of the Scientific Advisory Board are the following:

     Milton J.  Allison,  Ph.D.  Dr.  Allison has long been a pioneer in oxalate
research,  having discovered and named Oxalobacter  formigenes.  He is presently
Professor of  Microbiology,  Immunology,  and  Preventive  Medicine,  Iowa State
University and  Microbiologist  Emeritus of the National  Animal Disease Center,
USDA, Ames, Iowa. He earned his Ph.D. from the University of Maryland.

     Marguerite  Hatch,  Ph.D.  Dr.  Hatch  is a  Professor  in the  College  of
Medicine,  Nephrology  Division,  and Director of the Kidney Stone Center at the
University of California,  Irvine College of Medicine since  1990.Previously she
was Director of the New York Kidney Stone Center,  SUNY Health  Science  Center.
She earned her B.Sc. with Honors from the University  College,  Dublin,  Ireland
and her Ph.D. in 1978 from Trinity College, Dublin, Ireland.

     Saeedur R. Khan, Ph.D. Dr. Khan is Associate  Professor of Pathology at the
University  of Florida  College of Medicine and a leader in the field of oxalate
research  and   molecular/microscopy.   His  current  and   previous   committee
memberships  include the NIH Ad hoc Reviewer on Urinary  Stone  Grants;  member,
Center for the Study of Lithiasis and Pathological Calcification;  and member of
the Shands Stone Center Committee.  He earned his undergraduate degree from Agra
University  in Agra,  India,  his masters of science  degree  from the  Peshawar
University, Peshawar, Pakistan, and his Ph.D. from the University of Florida.

     Desmond  Schatz,  M.D. Dr.  Schatz is the Medical  Director of the Diabetes
Center and Associate  Professor of Pediatric  Endocrinology at the University of
Florida  Medical  School.  He is a Diplomate of the American  Board of Pediatric
Endocrinology   and  a  member  of  the  American  Diabetes   Association,   the
International  Diabetes  Federation,  and the Immunology of Diabetes Society. He
received his  undergraduate  degree from St.  David's  College in  Johannesburg,
South Africa,  and his medical degree from the  University of the  Witwatersrand
Medical School in Johannesburg.

     Sheldon M. Schuster,  Ph.D. Dr. Schuster is Biotechnology  Program Director
for the University of Florida's biotechnology program and Associate Director for
Research for the  University  of Florida  Cancer  Center.  He is a member of the
American  Association for the Advancement of Science and the American Society of
Biological  Chemistry and Molecular Biology. He was a co-founder of BioNebraska,
Inc.,  and is a co-founder  and  chairman of the  scientific  advisory  board of
AquaGene,  Inc. He received  his B.S. in  biochemistry  from the  University  of
California,  Davis and his  Ph.D.  in  biochemistry  and  pharmacology  from the
University of Arizona.

     Hans  Wigzell,   M.D.,  D.Sc.  Dr.  Wigzell  is  presently  the  Rector  of
Stockholm's  famed  Karolinska  Institute.  He received  his medical  degree and
doctorate of science.  from Karolinska.  From 1982 onwards, he has been Chairman
of the  Department of Immunology  at  Karolinska.  Among his many honors was his
service as Chairman of the Nobel Committee of Karolinska from 1990 to 1992.


                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

         Statements  in this report  regarding  the dates on which we anticipate
commencing  clinical  trials  or  filing  for  regulatory  approval,  constitute
forward-looking  statements  under the federal  securities laws. Such statements
are subject to risks and  uncertainties  that could  cause the actual  timing of
such clinical trials or filings to differ materially from those we project. With
respect to such dates, we have made assumptions regarding, among other things,

     o    the successful and timely completion of preclinical tests,
     o    the approval of investigational  new drug applications for each of our
          drug candidates by the FDA,
     o    the  availability  of a  simplified  application  way to  seek  market
          clearance  from  the FDA  for our  molecular  diagnostic  test,  
     o    the  availability  of  adequate  clinical  supplies,  
     o    the absence of delays in patient enrollment, and 
     o    the  availability of the capital  resources  necessary to complete the
          preclinical tests and conduct the clinical trials.

     Our ability to commence clinical trials or file for regulatory  approval on
the dates  anticipated is subject to risks,  including the risks discussed under
"Risk  Factors." You should not rely on the dates on which we anticipate  filing
regulatory approval or commencing clinical trials.

     Statements  regarding our research and  development  plans also  constitute
forward-looking statements.  Actual research and development activities may vary
significantly from the current plans depending on numerous factors including

     o    changes in the costs of such activities from current estimates,  
     o    the  results  of the  programs,  
     o    the results of  clinical  studies  referred to above,  
     o    the  timing  of  regulatory  submissions,  technological  advances,  
     o    determinations  as  to  commercial  potential,  and 
     o    the status of competitive products.

     Our  projections  regarding  the likely  effect of Year 2000  issues on our
company is also a forward-looking statement.

     All of the above  estimates  are based on the current  expectations  of our
management  team,  which  may  change  in the  future  due to a large  number of
potential events, including unanticipated future developments.


<PAGE>



Item 2.  Description of Property.


     In October  1998, we leased  approximately  3,600  rentable  square feet of
equipped laboratory space and approximately 1,413 rentable square feet of office
space at 13709 Progress Blvd., Alachua,  Florida, across the street from our old
location in the business  incubator  owned by the  University  of Florida at the
Biotechnology  Development Institute.  Our lease has a three-year term, expiring
in September 2001, with two one-year renewal options.  We are developing a small
scale facility in our lab suite to produce preclinical quantities of our XEntrIX
TM Oxalobacter  formigenes  Monitor TM as well as IxC1-62/47.  Commercial  scale
production  will be  subcontracted  to contract  manufacturers.  See "Business -
Business  Strategy," Annual payments are approximately $72,000.

     For a fee of $1,000 for 1999, we have a graduate membership  agreement with
the  Biotechnology   Development   Institute  under  which  we  have  access  to
specialized   facilities   such  as  animal  rooms,   small-scale   fermentation
capabilities,  and glass  washing  and  autoclaving  facilities.  As a  graduate
member,  we may also use the  specialized  equipment  located in the centralized
instrument lab in the Biotechnology  Development Institute at no extra cost, and
we may use the services of the  University's  Core  Laboratories  including  the
Recombinant  Protein  Expression  Core,  the Flow  Cytometry  Core,  the Protein
Chemistry  Core,  and  the  Electron  Microscopy  Core  at  a  special  graduate
membership rate.

     We believe these facilities will be adequate for the foreseeable future.


Item 3.  Legal Proceedings.


     We are not a party  to any  legal  proceedings  and  are not  aware  of any
threatened  litigation or regulatory  action that could have a material  adverse
effect on our business, financial condition, or results of operations.


Item 4.  Submission of matters to a Vote of Security Holders.


     There were no matters submitted to a vote of the Company's security holders
during the fourth quarter of the Company's fiscal year.

                                     Part II

Item 5.  Market for Common Equity and Related Stockholder Matters.

         
     Set forth below is  information  as to securities  sold by Ixion within the
past three years which were not registered under the Securities Act of 1933 (the
"Act").  No  underwriters  were  involved in any of the sales,  so there were no
underwriting discounts or commissions.  All outstanding securities are deemed to
be  restricted  securities  for  the  purposes  of  the  Act.  All  certificates
representing  such issued and outstanding  restricted  securities of the Company
have  been  properly  legended  and  the  Company  has  issued  "stop  transfer"
instructions  to its  transfer  agent  with  respect to such  securities,  which
legends and stop  transfer  instructions  are  presently  in effect  unless such
securities  have  been  registered   under  the  Securities  Act  or  have  been
transferred   pursuant  to  an  appropriate   exemption  from  the  registration
provisions of the Securities Act.

     Restricted  shares of Common Stock have been issued to Members of the Board
of Directors,  Members of the Scientific Advisory Board, and key employees under
the Company's Board Retainer Plan as follows:

         On June 10, 1996,  34,000  shares of Common Stock (5,000 shares to each
         of two directors, 5,000 shares to each of two members of the Scientific
         Advisory  Board,  for services and 14,000 shares of Common Stock to its
         Vice President - Research and  Development  for services)  valued at an
         aggregate of $92,000 (a portion of which is unearned  compensation)  or
         $3.00 per share.

         On September  15, 1996,  10,000 shares of Common Stock (5,000 shares to
         each of two  members of the  Scientific  Advisory  Board) for  services
         valued at  $100,000 (a portion of which is  unearned  compensation)  or
         $10.00 per share.

         On October 10,  1996,  5,000  shares of Common Stock to a member of the
         Scientific  Advisory Board for services valued at $50,000 (a portion of
         which is unearned compensation) or $10.00 per share.

         On February  11,  1997,  10,000  shares to its  Director  of  Research,
         Oxalate  Division,  for services valued at $100,000 (a portion of which
         is unearned compensation) or $10.00 per share.

         On June 27, 1997, 7,000 shares of Common Stock (1,000 shares to each of
         two  directors,  and  1,000  shares  to  each of  five  members  of the
         Scientific  Advisory Board,  for services) valued at $70,000 (a portion
         of which is unearned compensation) or $10.00 per share.

         On July 1, 1997,  3,000 shares to its  Associate  Director of Research,
         Diabetes  Division,  for  services  (a  portion  of which  is  unearned
         compensation) valued at $30,000 or $10.00 per share.

         On July 1, 1998, 23,450 shares of Common Stock (1,000 shares to each of
         two directors,  5,000 shares to a newly-elected director,  1,000 shares
         to each of five members of the Scientific  Advisory Board, 5,000 shares
         to a newly-appointed member of the Scientific Advisory Board, and 6,450
         shares to  employees  for services, in aggregate, valued at $234,500 (a
         portion of which is unearned compensation) or $10.00 per share.

The Company issued the above  securities  without  registration in reliance upon
the exemption  provided by Section 4(2) of the Act as a transaction to a limited
number  of  sophisticated  investors  which did not  involve a public  offering,
general  solicitation,  or general  advertisement and the exemption  provided by
Rule 701 promulgated under the Act.

     Warrants have been issued to an institution in partial  payment of rent for
the  Company's   facilities  pursuant  to  the  License  Agreement  between  the
University of Florida Research Foundation, Inc., and the Company as follows:

         In August, October, and November,  1996, the Company issued warrants to
         purchase an  aggregate  of 8,022  shares of Common Stock at an exercise
         price of $2.00 per share expiring in 2000, valued at $1.35 per warrant.

The Company issued the above  securities  without  registration in reliance upon
the exemption  provided by Section 4(2) of the Act as  transactions to a limited
number  of  sophisticated  investors  which did not  involve a public  offering,
general solicitation, or general advertisement.

     On June 30, 1996, two directors and senior officers of the Company, who may
be deemed promoters, converted an aggregate of $16,158 of cash loans made to the
Company under the terms of a  subordinated  convertible  note  agreement  into a
total of 21,544  shares  of  Common  Stock,  at a price of $.75 per  share.  The
Company issued the above  securities  without  registration in reliance upon the
exemption  provided  by Section  4(2) of the Act as a  transaction  to a limited
number  of  sophisticated  investors  which did not  involve a public  offering,
general solicitation, or general advertisement.

     In October and November,  1996, the Company issued an aggregate of $787,270
of Convertible  Unsecured  Notes due 2001 to 35 accredited and one  unaccredited
investors.  The Notes  are  convertible  at any time  prior to  maturity  into a
maximum of 323,557  shares of Common  Stock at  conversion  prices  ranging from
$4.20 to  $2.10.  The  conversion  prices  are  based on the  length of time the
investor  holds the Notes  prior to  conversion.  The  Company  issued the above
securities  without  registration  in reliance  upon the  exemption  provided by
Section 4(2) of the Act as a transaction  to a limited  number of  sophisticated
investors  which did not involve a public  offering,  general  solicitation,  or
general advertisement and in reliance upon the exemption provided by Rule 505 of
Regulation D of the Act as a sale of securities  which,  together with all sales
within 12 months, aggregated less than $5,000,000 and were made to fewer than 35
investors.

     On February  11, 1997,  the Company  issued 1,000 shares of Common Stock to
two inventors in exchange for an exclusive  license of a patent entitled "Method
for the Selective  Control of Weeds,  Pests and Microbes,"  valued at $10,000 or
$10.00 per share. The Company issued the above securities  without  registration
in  reliance  upon  the  exemption  provided  by  Section  4(2)  of the Act as a
transaction to a limited number of sophisticated investors which did not involve
a public offering, general solicitation, or general advertisement.

     Warrants have been issued to Brandywine Consultants,  Inc., pursuant to the
Consulting Agreement between the Company and Brandywine Consultants, Inc., dated
December 12, 1996, for certain milestones as follows:

     On June 23, 1997, 3,000 warrants at an exercise price of $5.00 per share of
Common Stock, expiring June 2002.

     On October 24, 1997, 3,000 warrants at an exercise price of $5.00 per share
of Common Stock, expiring October 2002.

The Company issued the above  securities  without  registration in reliance upon
the exemption  provided by Section 4(2) of the Act as a transaction to a limited
number  of  sophisticated  investors  which did not  involve a public  offering,
general solicitation, or general advertisement.

     In  1997,  the  Company  registered  400,000   newly-issued  Units  of  its
securities  for  direct  sale on Form  SB-2 at a price of $10.00  per Unit.  The
registration  statement,  Commission  Registration No. 333-334765,  was declared
effective on December 10, 1997 and  Post-Effective  Amendment No. 1 was declared
effective on March 19, 1998.  On December  10,  1998,  the Company  extended the
offering,  and  thereafter  filed  Post-Effective  Amendment No. 2 to reduce the
number of Units being  registered to 150,000 Units  (including the Units already
sold), for an aggregate offering price of $1,500,000.  Each Unit consists of one
share of common stock,  $0.01 par value,  and .25  Charitable  Benefit  Warrant.
There is no minimum  number of Units to be sold in the  Offering,  and all funds
received will go immediately to the Company. The offering has not terminated and
is not  scheduled  to  terminate  until the  earliest of: the sale of all Units,
December  10,  1999,  or the date on which  the  Company  decides  to close  the
offering.  The  securities  are being sold directly by the Company  (except when
sales are to Florida residents, in which case sales must be made through Unified
Management Corporation, a Florida-registered broker dealer).

     As of March 23,  1999,  a total of 34,420  Units at an  aggregate  price of
$344,200  have been sold, of which 34,320 Units for an aggregate of $343,200 was
sold  through  December  31, 1998.  From the  effective  date of the offering to
December 31, 1998, $200 in expenses and $1,854 in commissions  have been paid to
Unified Management Company as broker and there have been no finders' fees. Other
offering related expenses through December 31, 1998,  amounted to $116,561,  all
of which have been offset against proceeds.  No payments were made to directors,
officers,  general partners of the Company, or to their associates in connection
with the offering.

     Net offering proceeds as of December 31, 1998 amounted to $227,639. The net
proceeds were used entirely to fund the operations of the Company during 1998 as
reflected in the financial statements included elsewhere in this report. The use
of proceeds  still to be  received  from the  offering  is not  expected to vary
materially from the use of proceeds described in the amended registration 
statement.

     There is no public trading market for the Company's securities.

     As of March 23, 1999, there were  approximately  100 shareholders of record
of the Company's common stock.

     The Company has never  declared  or paid any cash  dividends  on its common
stock and does not intend to pay any cash  dividends on its Common Stock for the
foreseeable future.


Item 6.  Management's Discussion and Analysis or Plan of Operations


     The following  discussion and analysis  should be read in conjunction  with
the Financial  Statements  and the related Notes thereto  included  elsewhere in
this report. This report contains forward-looking  statements that involve risks
and  uncertainties.  The Company's actual results may differ  significantly from
the results  discussed  in the  forward-looking  statements.  Factors that might
cause such a  difference  include,  but are not limited to,  those  discussed in
"Special Note Regarding Forward-Looking Statements."


     The following  discussion and analysis  should be read in conjunction  with
the financial  statements  and the related notes thereto  included  elsewhere in
this  prospectus.  This  prospectus  contains  forward-looking  statements  that
involve risks and  uncertainties.  Our actual  results may differ  significantly
from the results discussed in the forward-looking statements. Factors that might
cause such a  difference  include,  but are not limited to,  those  discussed in
"Risk Factors" and in "Special Note Regarding Forward-Looking Statements."

Overview

     Ixion  is a  development  stage,  biotechnology  company.  We  are  in  the
development  stage because we are devoting  substantially  all of our efforts to
establishing  our  business,  and our  planned  principal  operations  have  not
commenced.

     Since we were  founded  in March of 1993,  we have  principally  been doing
research and development,  securing patent protection,  and raising capital.  We
have not  received  any revenues  from the sale of  products.  In June 1998,  we
reached an agreement  in principle  with the  University  of Florida  Diagnostic
Referral  Laboratories  for them to  provide a service to  physicians  using our
molecular  diagnostic test, the XEntrIx TM Oxalobacter  formigenes  Monitor.  We
have received no revenue to date under this  agreement.  Provided the Diagnostic
Referral  Laboratories  markets the service and provided doctors accept the test
as useful, we may receive revenue from this test during 1999. (See "Risk Factors
- Our Proposed  Products May Not be Accepted in the Market.")  However we do not
expect any of our other product  candidates to be commercially  available for at
least  several  years.  From  inception  through  December 31, 1998, we incurred
cumulative losses of $2,893,598. These losses were due primarily to expenditures
on general and  administrative  activities,  research  and  development,  patent
preparation and prosecution, and interest charges.

     We expect to continue to incur  substantial  research and development costs
resulting from

     o    ongoing research and development programs, 
     o    manufacturing  of products for use in clinical  trials and preclinical
          and clinical testing of our products.

     We also expect that general and administrative costs, including

     o    amortization  of patents,  
     o    legal  and   regulatory   costs   necessary  to  support   preclinical
          development  and clinical  trials,  
     o    SEC  reporting  costs,  and 
     o    the creation of a marketing and sales organization, if warranted,

will increase in the future, assuming we can finance the increased requirements.
Accordingly, we expect to incur operating losses for the foreseeable future.

     We have  only a  limited  operating  history  upon  which  you can  base an
evaluation of our  prospects.  You should  consider  the  risks,  expenses,  and
difficulties  encountered  by  companies at an early stage of  development  when
evaluating our prospects. To address these risks, we must, among other things,

     o    successfully develop and commercialize our products,
     o    secure all necessary proprietary rights,
     o    respond to competitive developments, and
     o    continue to attract, retain and motivate qualified persons.

     There can be no assurance  that we will be successful  in addressing  these
risks.

     Our operating expenses will depend on several factors,  including the level
of  research  and  development  expenses  and our  success in  raising  capital.
Research and development expenses will depend on the progress and results of our
product development  efforts,  which we cannot predict. We may sometimes be able
to  control  the  timing of  development  expenses  in part by  accelerating  or
decelerating  preclinical testing and clinical trial activities.  As a result of
these factors,  we believe that  period-to-period  comparisons in the future are
not  necessarily  meaningful and you should not rely on them as an indication of
future performance. Due to all of the foregoing factors, it is possible that our
operating results will be below the expectations of market analysts, if any, and
investors.  In such event,  the prevailing  market price,  if any, of our common
stock would likely be materially adversely affected.


Results of Operations

Years Ended December 31, 1998 and 1997

     Our revenues under a research  agreement with Genetic  Institute  decreased
from  $135,922 in 1997 to $0 for 1998 because all contractual payments from 
Genetics Institute have been made.  Revenues  under our SBIR grant  declined
from  $71,650  in 1997 to $0 in 1998 because the grant was fully expended.  
Revenues  under  the  Genetics  Institute agreement  and the SBIR  ceased at
the end of 1997.  We do not  expect  material revenues during 1999.

     Interest  income  decreased 95% from $10,147 in 1997 to $465 in 1998.  This
decrease was  attributable  to the  expenditure of the proceeds from the sale of
our unsecured  convertible notes in the last quarter of 1996, which proceeds had
been  invested  during  1997.  Interest  income  relating to the  investment  of
proceeds of the unsecured convertible notes ceased in the first quarter of 1998.

     Operating,   general  and  administrative  expenses  increased  10.0%  from
$336,572 in 1997 to $370,397 1998. These increased  expenses  reflect  increased
legal expenses,  increased  advertising and promotion,  and increased  salaries,
compared to 1997. We expect our general and  administrative  expense to modestly
decrease  during  1999 as a result  of a  continued  reduction  in the  scale of
operations,  offset,  to some  degree,  by  increased  rent,  depreciation,  and
amortization of capitalized patent costs as new patents are issued.

     Research and development expenditures consist primarily of

     o payroll-related expenses of research and development personnel,
     o laboratory supplies,
     o animal supplies,
     o laboratory rent,
     o depreciation on laboratory equipment,
     o development activities,
     o payments for sponsored research, and
     o payments to scientific and regulatory consultants.

     Research and development  expenses decreased 23.5% from $554,751 in 1997 to
$424,606 in 1998, primarily as a result of a reduction in the scale of research
and development and concomitant reduction in lab  supplies,  together with  the
termination  of our  consulting  contract  with our  regulatory  advisor,  and a
reduction in the stock compensation expense relating to our scientific advisors,
offset, to some degree by an increase in lab rent.  Future research and 
development expenses are dependent on our success in raising capital.

     Interest  expense  increased 9.7% from $112,083 in 1997 to $122,958 in 1998
due primarily to interest on bridge loans from officers,  and the compounding of
interest on deferred fees and salaries,  including deferred interest, payable to
related  parties.  Interest  expense will continue to increase during 1999, as a
result of the  continued  compounding  of interest on deferred fees and salaries
accounts and additional bridge loans from officers.

Liquidity and Capital Resources

     In December,  1997,  we commenced  the public  offering of 400,000 Units of
newly issued securities,  for an aggregate of $4,000,000.  Each Unit consists of
one share of common stock and .1/4 of a Charitable  Benefit Warrant.  Each whole
Charitable Benefit Warrant entitles you to purchase one share of common stock at
a price of $20.00 per share.  Ixion is directly  (except in Florida  where sales
must be made through a broker) making the offering in ten states, primarily over
the  Internet.  There is no minimum  number of Units to be sold in the offering,
and all funds  received have gone and will go immediately to us. On December 10,
1998, we extended the offering through the earliest of:

     o    the sale of all Units,
     o    December 10, 1999, or
     o    the date we decide to close the offering.

In  addition,  we have reduced the size of the  offering  from 400,000  Units to
150,000  Units,  including  the 34,320 Units we sold during  1998.  At March 23,
1999, we have sold a total of 34,420 Units in the offering.  We must file a new 
post-effective amendment to the registration statement to include our audited 
financials for the periods ended December 31, 1998 before sales of units may be 
resumed.

     During  1998,  our  development  activities  were funded  primarily  by the
proceeds  from the  offering  and  bridge  loans  from the  Chairman  and  Chief
Executive  Officer and the  President.  The bridge loans total $385,000 at March
23, 1999.  Interest on the bridge loans from officers is currently at 8% but can
be reset annually,  at the election of either party, to the prime rate in effect
on January 1 of any given year,  plus 3%. We have no agreement with the officers
to advance further funds, however, the officers have continued to fund operating
requirements  voluntarily to meet working  capital needs.  We can not assure you
that the officers will continue to voluntarily fund bridge loans during 1999. We
do not have any bank financing arrangements. Our long-term indebtedness consists
primarily of deferred fees and salaries  payable to related  individuals and our
unsecured convertible notes.

     At December 31, 1998,  we had $18,633 in cash and cash  equivalents.  Until
required  for  operations,  our policy is to invest any excess cash  reserves in
bank deposits,  money market funds,  certificates of deposit,  commercial paper,
corporate notes, U.S. government instruments and other investment-grade  quality
instruments.

     On January 1, 1996, we purchased laboratory equipment pursuant to a chattel
mortgage  agreement in the amount of $32,309.  The  agreement  calls for monthly
payments of $897,  commencing  August 1, 1996.  At December 31, 1998,  $6,282 in
principal remains outstanding under this agreement..

     In connection  with the Genetics  Institute  sponsored  research  agreement
referred to above,  some  patent-related  expenses  were  reimbursed by Genetics
Institute.  We may be contractually obligated to repay these reimbursed expenses
in installments over a 36 month period upon a notice to or by Genetics Institute
to the effect that their option  contained in the sponsored  research  agreement
has expired. We have not given such notice, and, accordingly,  reimbursement has
not commenced.  We have accrued  $42,317 as a long term liability  pending final
notice under the agreement.

     Through  December  31,  1998,  we have paid  offering-related  expenses  of
$116,561 which have been applied against the proceeds of the public offering. We
expect further offering-related expenses to be modest.

     On October 8, 1998,  upon the expiration of our lease at the  Biotechnology
Development  Institute,  we moved to  comparable  rental  facilities  across the
street from our former  location.  The new lease will be for increased space and
rent and for a three-year  term, with two one-year  renewal  options.  We expect
that annual payments under the new lease (including  repayment of funds provided
by  lessor  for  tenant  improvements  and  an  emergency   generator)  will  be
approximately  $84,000 per year. We will continue to have access,  as a graduate
affiliate, to the Biotechnology  Development Institute's specialized facilities,
centralized  equipment,  and core  laboratories.  Relocation will not materially
affect our research and development operations;  however, we incurred relocation
expenses  and have been  obliged  to  purchase  or lease  laboratory  and office
furnishings  and  equipment.  We  expect to  purchase  or lease  additional  lab
equipment in the amount of approximately $80,000 in the future.

     We have incurred  negative cash flows from operations  since our inception.
We have spent and expect to continue to spend, substantial funds to complete our
planned product development efforts, commence clinical trials, and diversify our
technology.  Our future capital requirements and the adequacy of available funds
will depend on numerous factors, including

     o    the success of the continuing public offering of our securities,
     o    the  successful  commercialization  of the  XEntrIx  (TM)  Oxalobacter
          formigenes  Monitor (our new diagnostic test) and IxC1-62/47 (our lead
          therapeutic compound),
     o    progress in our product development efforts,
     o    the magnitude and scope of development efforts,
     o    progress with preclinical studies and clinical trials,
     o    the cost of contract manufacturing and research organizations,
     o    cost of filing, prosecuting, defending and enforcing patent claims and
          other intellectual property rights,
     o    competing technological and market developments, and
     o    the  development  of  strategic  alliances  for  the  development  and
          marketing of our products.

     We  require  all of the  proceeds  of this  offering  to meet  our  planned
operating  requirements through December 31, 1999. Shortfalls in the proceeds of
the public  offering to date have forced a curtailment in our planned  operating
requirements  to adjust to reduced  resources.  In the event our plans change or
our assumptions change or prove to be inaccurate or the proceeds of the offering
continue to be  insufficient  to fund  operations  at the planned  level (due to
further unanticipated expenses,  delays, problems or otherwise), we will require
additional  financing.  We will be  required to obtain  additional  funds in any
event through  equity or debt  financing,  strategic  alliances  with  corporate
partners and others,  mergers or the sale of  substantially  all our assets,  or
through other sources in order to bring our products through regulatory approval
to  commercialization.  The terms and prices of any equity or debt financings or
corporate  combination may be significantly more favorable to new investors than
those of the Units sold in the offering,  resulting in  significant  dilution to
current  investors.  We do not have any material committed sources of additional
financing.  We can not assure you that  additional  funding,  consolidation,  or
alliance,  if necessary,  will be available on acceptable  terms,  if at all. If
adequate  funds  are  not  available,  we  may be  required  to  further  delay,
scale-back,  or eliminate certain aspects of our operations or attempt to obtain
funds  through  arrangements  with  collaborative  partners  or others  that may
require  us to  relinquish  rights  to  certain  of  our  technologies,  product
candidates, products, or potential markets. If adequate funds are not available,
our business,  financial condition, and results of operations will be materially
and adversely affected.


Product Research and Development Plan

     Our  plan  of  operation  for  1999  consists  primarily  of  research  and
development and related activities, resources permitting, including:

     o    further  research into the biology of islet and islet stem cell growth
          and  differentiation,  aimed at developing  cell lines of  functioning
          islets for transplantation into diabetic patients;
     o    further  research into  identifying  and  characterizing  novel growth
          factors  associated with islets to discover factors important in islet
          cell  differentiation  and  possible  regulation  of  diabetes  and to
          identify  stem cell  markers  to which we hope to  produce  monoclonal
          antibodies useful in stem cell isolation
     o    research into differential  gene expression  studies on differentiated
          islet cells;
     o    further research into encapsulation  materials for  transplantation of
          islets;
     o    further  preclinical  development  of a  quantitative  version  of our
          molecular  diagnostic  test, the XEntrIx (TM)  Oxalobacter  formigenes
          Monitor,
     o    further preclinical  development of our oxalate therapeutic  compound,
          IxC1-62/47;   
     o    continuing the prosecution and filing of patent applications; and
     o    hiring additional employees.

     Our  actual  research  and  development  and  related  activities  may vary
significantly  from  current  plans  depending  on numerous  factors,  including
changes in the costs of such activities from current  estimates,  the results of
our research and  development  programs,  the results of clinical  studies,  the
timing of regulatory submissions,  technological advances,  determinations as to
commercial potential,  the status of competitive products,  and, most important,
our success in raising  capital.  The focus and direction of our operations will
also be dependent upon the  establishment  of  collaborative  arrangements  with
other companies, and other factors.

     We  can  not  assure  you  that  we  will  be  able  to  commercialize  our
technologies  or that  profitability  will ever be achieved.  We expect that our
operating  results will fluctuate  significantly  from quarter to quarter in the
future and will  depend on a number of  factors,  most of which are  outside our
control.

Year 2000 Compliance

     Many computer  systems and computer  chips embedded in equipment are unable
to tell the difference  between the year 1900 and the year 2000. This is know as
the Year 2000 issue. Many businesses are at risk for possible miscalculations or
systems  failures as a result of their computers,  software,  or equipment's not
being Year 2000 compliant.

     Our assessment of Year 2000 compliance issues is not complete.

     Software and  Computers.  Our computers all run Windows  operating  systems
which are or will be Year 2000 compliant  according to our tests and information
received  from  Microsoft.  We have been  assured by the vendors that our office
applications programs are Year 2000 compliant. We have been also been assured by
the vendor that our finance and accounting software,  our only  mission-critical
software, is Year 2000 compliant.

     Equipment.  Most of our  laboratory  equipment  does not use a computer  or
embedded  chip.  Our policy is that all equipment  that we purchase must be Year
2000 compliant. Our assessment of our laboratory equipment is not complete.

     With  respect  to  equipment  made  available  to us  as a  result  of  our
affiliation with the Biotechnology  Development  Institute,  we have requested a
statement of compliance.

     Suppliers.  We are  contacting  key  suppliers  regarding  their  Year 2000
compliance in order to determine if there might be any effect on our operations.
In general, our suppliers (primarily scientific reagent and disposable equipment
vendors),  have  developed or are in the process of developing  plans to address
Year 2000 issues.  We will  continue to monitor and evaluate the progress of our
suppliers.

     In general our review of the potential consequences of Year 2000 compliance
issues on us leads us to believe that those  issues will prove to be  immaterial
to our business,  operations,  and financial condition.  Accordingly,  we do not
have  contingency  plans and have no plans to develop  any  unless  our  further
assessment indicates one is necessary.  No material expenses have been incurred
to date and none are anticipated.


Item 7.  Financial Statements.

     The  financial  statements  of the Company are set forth  beginning on page
F-1, immediately following the signature page of this report.

Item  8.  Changes  in and  Disagreements  With  Accountants  on  Accounting  and
Financial Disclosure.

     None.

                                    Part III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.

Item 10.  Executive Compensation.

Item 11.  Security Ownership of Certain Beneficial Owners and Management.

Item 12.  Certain Relationships and Related Transactions.

     The information  required under Part III, Items 9, 10, 11, and 12, has been
omitted from this report since the Company  intends to file with the  Securities
and Exchange  Commission (the  "Commission"),  not later than 120 days after the
close of its fiscal year,  a definitive  proxy  statement  prepared  pursuant to
Regulation 14A, which information is hereby incorporated by reference.

Item 13.  Exhibits and Reports on Form 8-K.

     Exhibits  marked by  asterisk(s)  are  included  with  this  Report on Form
10-KSB;  other exhibits have been  incorporated  by reference to other documents
filed by the Company with the SEC.

Exhibit   
Number    Description

3.1      Certificate of Incorporation of Registrant (1)
3.2      Certificate   of  Amendment  to   Certificate   of   Incorporation   of
         Registrant(1)
3.3      Certificate of Amendment to Certificate of  Incorporation of Registrant
         (1)
3.4      Bylaws of Registrant, as amended and restated (5)
4.1      Form of Registrant's Common Stock Certificate (2)
4.2      Form of Registrant's Charitable Benefit Warrant Certificate (5)
4.3      Charitable Benefit Warrant Agreement, dated (5)
4.4      Warrant Agreement with Jeffrey W. Seel, dated November 7, 1995 (1)
4.5      Warrant  Agreement with the University of Florida Research  Foundation,
         Inc., dated November 7, 1995 (1)
4.6      Warrant  Agreement with the University of Florida Research  Foundation,
         Inc., dated August 1, 1996 (1) 
4.7      Warrant  Agreement with the University of Florida Research  Foundation,
         Inc., dated October 1, 1996 (1)
4.8      Warrant  Agreement with the University of Florida Research  Foundation,
         Inc., dated November 7, 1996 (1)
4.9      Warrant  Agreement with Brandywine  Consultants,  Inc.,  dated June 23,
         1997 (2)
4.10     Warrant Agreement with Brandywine Consultants,  Inc., dated October 24,
         1997 (2)
10.1     Chattel  Mortgage  Agreement with Carl  Therapeutic,  Inc., dated as of
         January 1, 1996 (1)
10.2     Consulting Agreement with Brandywine Consultants,  Inc., dated December
         12, 1996 (1)
10.3     Consulting Agreement with Ammon B. Peck, dated February 21, 1997 (1)
10.4     Consulting Agreement with David C. Peck, dated July 1, 1996 (1)
10.5     Convertible Promissory Note with Weaver H. Gaines, dated March 31, 1993
         (1)
10.6     Convertible  Promissory Note with David C. Peck, dated October 15, 1993
         (1)
10.7     Demand  Promissory Note, Bridge Loan with Weaver H. Gaines, dated April
         15, 1996 (1)
10.8     Demand Promissory Note, Bridge Loan with David C. Peck, dated April 15,
         1996 (1)
10.9     Deferred  Compensation  Plan  Agreement  with Weaver H.  Gaines,  dated
         January 1, 1994 (1)
10.10    Deferred Compensation Plan Agreement  with Ammon B. Peck, dated June 1,
         1994(1)
10.11    Deferred  Compensation  Plan  Agreement with David C. Peck, dated April
         1, 1994(1)
10.12    Agreement to Purchase Shares, dated as of October 10, 1994 (1)
10.13    Note Purchase Agreement,  dated as of September 13, 1996 (1) 
10.14    Incubator  License  Agreement with  the University  of Florida Research
         Foundation,  Inc., dated June 26, 1995 (1) 
10.15    Amendment  No. 1, dated  July 31, 1996 to Incubator  License  Agreement
         with the University of Florida Research Foundation, Inc. (1)
10.16    Amendment  No. 2, dated October 1, 1996 to Incubator  License Agreement
         with the University of Florida Research Foundation, Inc. (1)
10.17    Amendment  No. 3, dated November 7, 1996 to Incubator License Agreement
         with the University of Florida Research Foundation, Inc. (1)
10.18    Amendment No. 4, dated January 21, 1997 to Incubator  License Agreement
         with the University of Florida Research Foundation, Inc. (1)
10.19    Patent  License  Agreement with Randy S. Fischer and Roy A. Jensen  for
         U.S.  Patent No.  5,187,071,  "Method  for  the  Selective  Control  of
         Weeds, Pests, and Microbes," dated February 11, 1997 (1)
10.20    Patent License  Agreement with Research  Component with  the University
         of  Florida  Research   Foundation,   Inc.   relating   to  Oxalobacter
         formigenes, dated January 11, 1995 (4) (a)
10.21    Amendment No. 1 to Patent License  Agreement  with  Research  Component
         with the University of Florida  Research  Foundation,  Inc. relating to
         Oxalobacter formigenes, dated December 20, 1995 (4)
10.22    Amendment No. 2  to Patent License  Agreement  with Research  Component
         with the  University of Florida Research  Foundation,  Inc. relating to
         Oxalobacter formigenes, dated October 9, 1996 (4) (a)
10.23    Patent License  Agreement with  Research  Component with the University
         of  Florida  Research  Foundation,  Inc.  relating to  Pancreatic  Stem
         Cells, dated February 17, 1995 (4) (a)
10.24    Amendment No. 1  to Patent License  Agreement  with Research  Component
         with the  University of Florida Research  Foundation,  Inc. relating to
         Pancreatic Stem Cells, dated October 9, 1996 (4) (a)
10.25    Patent  License Agreement with Milton J. Allison,  dated June 23, 1997.
         (4) (a)
10.26    Sponsored Research Agreement with  Genetics Institute, Inc., dated June
         5, 1996 (4) (a)
10.27    Employment Agreement with Weaver H. Gaines, dated August 31, 1994 (1)
10.28    Employment Agreement with David C. Peck, dated August 31, 1994 (1)
10.29    1994 Stock Option Plan, as amended (1)
*10.30   1994 Board Retainer Plan, as amended
10.31    Consulting Agreement with Ammon Peck, dated October 6, 1994 (1)
10.32    Amendment No. 5 to Incubator License Agreement dated July 19, 1997 (1)
10.33    Office Lease agreement with Echelon International  Corporation dated as
         of September 18, 1998 (6)
10.34    Amendment No. 3 to Patent License  Agreement  with  Research  Component
         with the University of  Florida Research  Foundation,  Inc. relating to
         Oxalobacter formigenes, dated December 17, 1998 (6) (a)
10.35    BDI Graduate  Membership  Agreement with the Biotechnology  Development
         Institute dated November 5, 1998. (6)
10.36    Consulting  Agreement with  Amersham  Pharmacia  Biotech,  Inc.,  dated
         January 3, 1999 (6)
*10.37   Interinstitutional  Agreement with  The University of  Florida Research
         Foundation, dated February 4, 1999 (a)
*10.38   Finders' Agreement with East Coast Angels, LLC, dated March 15, 1999.
*11.1    Statement  regarding  computation  of  earnings per share  (included as
         Note 1 in financial statements)
*27      Financial Data Schedule (6)


     (a)  Confidential  information  has been  omitted  from these  document and
          filed  separately  with  the  Commission  pursuant  to a  request  for
          Confidential Treatment.

*        Filed herewith.


(1)  Incorporated by reference to Form SB-2, File No.  333-334765,  dated August
     29, 1997.
(2)  Incorporated by reference to Amendment 1 to Form SB-2, File No. 333-334765,
     dated November 7, 1997.
(3)  Incorporated by reference to Amendment 2 to Form SB-2, File No. 333-334765,
     dated December 2, 1997.
(4)  Incorporated by reference to Amendment 3 to Form SB-2, File No. 333-334765,
     dated December 9, 1997.
(5)  Incorporated  by reference to Post Effective  Amendment No. 1 to Form SB-2,
     File No. 333-34765, dated January 23, 1998.
(6)  Incorporated  by reference to Post Effective  Amendment No. 2 to Form SB-2,
     File No. 333-33475, dated February 17, 1999.

Item 13(b)  Reports on Form 8-K.

         No reports on Form 8-K were filed during the quarter ended December 31,
1998.


<PAGE>



                                   Signatures

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

                            Ixion Biotechnology, Inc.


                            By:  /S/ Weaver H. Gaines  
                                 Weaver H. Gaines, Chairman  and Chief Executive
                                 Officer

     In accordance  with the  requirements  of the Exchange Act, this report has
been  signed  by the  following  persons  on behalf  of the  Company  and in the
capacities indicated on March 30, 1999.

SIGNATURE                               TITLE

/S/ Weaver H. Gaines                    Chairman of the  Board, Chief  Executive
Weaver H. Gaines                        Officer, and Director


/S/ David C. Peck                       President, Chief  Financial  Officer and
David C. Peck                           Director     


/S/ Kimberly A. Ramsey                  Controller
Kimberly A. Ramsey



/S/David M. Margulies                   Director 
David M. Margulies



/S/ Vincent P. Mihalik                  Director
Vincent P. Mihalik




/S/ Karl-E. Arfors                      Director
Karl-E. Arfors
<PAGE>
                              Ixion Biotechnology, Inc.
                            (A Development Stage Company)


                                 FINANCIAL STATEMENTS


                      Years Ended December 31, 1998 and 1997 and
                  for the Period March 25, 1993 (Date of Inception)
                              through December 31, 1998









<PAGE>


                            Ixion Biotechnology, Inc.
                                    Contents




                                                                 Page
                                                               --------

Report of Independent Accountants                                  1
Financial Statements:
    Balance Sheet                                                  2
    Statements of Operations                                       3
    Statements of Capital Deficiency                               4
    Statements of Cash Flows                                       6
    Notes to Financial Statements                                  8











<PAGE>











Report of Independent Accountants




The Board of Directors
Ixion Biotechnology, Inc.


In our opinion,  the  accompanying  balance sheet and the related  statements of
operations,  of capital  deficiency  and of cash flows  present  fairly,  in all
material  respects,  the  financial  position  of Ixion  Biotechnology,  Inc. (A
Development  Stage  Company)  at  December  31,  1998  and  the  results  of its
operations and its cash flows for the years ended December 31, 1998 and 1997 and
for the period March 25, 1993 (date of inception)  through December 31, 1998, in
conformity  with  generally  accepted  accounting  principles.  These  financial
statements   are  the   responsibility   of  the   Company's   management;   our
responsibility  is to express an opinion on these financial  statements based on
our audits.  We conducted  our audits of these  statements  in  accordance  with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable  assurance about whether the financial statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and  disclosures  in the financial  statements,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audits  provide a reasonable  basis for the opinion  expressed
above.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 1 to the
financial statements,  the Company requires additional financing to continue its
development stage activities which raises substantial doubt about its ability to
continue as a going concern.  Management's  plans in regard to these matters are
also  described  in  Note  1.  The  financial  statements  do  not  include  any
adjustments that might result from the outcome of this uncertainty.







March 12, 1999





<PAGE>


Ixion Biotechnology, Inc.
(A Development Stage Company)
Balance Sheet
December 31, 1998

                                    Assets

Current Assets:
 Cash and cash equivalents                                           $   18,633
 Accounts receivable                                                      1,916
 Prepaid expenses                                                         1,076
 Other current assets                                                       500
                                                                     -----------
     Total current assets                                                22,125

Property and Equipment, net                                              61,087

Patents and Patents Pending, net                                        289,913

Other                                                                     7,015
                                                                     -----------
                                                                     $  380,140
                                                                     ===========

                       Liabilities and Capital Deficiency

Current Liabilities:
 Accounts payable                                                    $   30,478
 Current portion of notes payable                                       340,099
 Accrued expenses                                                        64,216
                                                                     -----------
     Total current liabilities                                          434,793
                                                                     -----------
Long-Term Liabilities:
 Notes payable                                                          650,256
 Liability under research agreement                                      42,317
 Deferred rent                                                           22,095
 Deferred fees and salaries, including accrued interest, payable to     719,278
                                                                     -----------
     Total long-term liabilities                                      1,433,946
                                                                     -----------
     Total liabilities                                                1,868,739
                                                                     -----------
Commitments (Notes 1 and 11)

Capital Deficiency:
 Common stock, $.01 par value; authorized 4,000,000, issued and
  outstanding 2,513,914 shares                                           25,139
 Additional paid-in capital                                           1,664,458
 Deficit accumulated during the development stage                    (2,893,598)
 Less unearned compensation                                            (284,598)
                                                                     -----------
     Total capital deficiency                                        (1,488,599)
                                                                     -----------
Total Liabilities and Capital Deficiency                             $  380,140
                                                                     ===========

See accompanying notes to financial statements.



<PAGE>


Ixion Biotechnology, Inc.
(A Development Stage Company)
Statements of Operations

                                                              For the Period
                                                                 March 25,
                                                                1993 (Date
                                          Year Ended           of Inception)
                                         December 31,             through
                                       1998        1997      December 31, 1998
                                  ==============================================


Revenues:

 Income under research agreement $        -     $   135,922     $    275,001
 Income from SBIR grant                   -          71,650           91,650
 Interest income                        465          10,147           23,432
 Other income                         3,257           3,733           17,805
                                  ----------------------------------------------
     Total revenues                   3,722         221,452          407,888
                                  ----------------------------------------------

Expenses:
 Operating, general and 
   administrative                   370,397         336,572        1,468,507
 Research and development           424,606         554,751        1,510,737
 Interest                           122,958         112,083          322,242
                                  ----------------------------------------------
     Total expenses                 917,961       1,003,406        3,301,486
                                  ----------------------------------------------
Net Loss                         $ (914,239)    $  (781,954)      (2,893,598)
                                  ==============================================


Net Loss per Share (Basic)       $    (0.37)    $     (0.32)
                                  ==============================================

Weighted Average Common Shares    2,489,677       2,458,440
                                  ==============================================


See accompanying notes to financial statements.







<PAGE>


Ixion Biotechnology, Inc.
(A Development Stage Company)
Statements of Capital Deficiency
For the Period March 25, 1993 (Date of Inception) through December 31, 1998



<TABLE>



                                                                                Deficit
                                                                               Accumulated
                                                                Additional     During the                      Unearned
                                             Common Stock        Paid-In       Development         Note         Compen-
                                           Shares    Amount      Capital          Stage         Receivable     sation         Total
                                        ============================================================================================
<S>                                     <C>        <C>         <C>            <C>              <C>             <C>         <C>
 Initial sale of common stock, $.01
  per share                               100,000  $ 1,000     $     -        $     -          $    -          $   -        $ 1,000
 Sale of common stock, $.01 per share      50,000      500           -              -               -              -            500
 Net loss for the period March 25, 1993
  (date of inception) through December
   31, 1993                                    -        -            -           (54,268)           -              -        (54,268)
                                         -------------------------------------------------------------------------------------------

Balance, December 31, 1993                150,000    1,500           -           (54,268)           -              -        (54,768)

 Conversion of subordinated notes 
  payable, $0.02 per share                900,000    9,000        9,000             -               -              -         18,000
 Issuance of stock under Board Retainer
  Plan, $0.02 per share                     5,000       50           50             -               -              -            100
 Sale of stock, $0.02 per share             5,000       50           50             -               -              -            100
 Issuance of stock in exchange for 
  certain intellectual property, $0.02
  per share                               650,000    6,500        6,500             -               -              -         13,000
 Conversion of deferred consulting 
  fees, $0.10 per share                    10,000      100          900             -               -              -          1,000
 Sale of stock, $0.10 per share           140,000    1,400       12,600             -               -              -         14,000
 Net loss                                      -        -            -           (215,286)                                 (215,286)
                                         -------------------------------------------------------------------------------------------

Balance, December 31, 1994              1,860,000   18,600       29,100          (269,554)          -              -       (221,854)

 Sale of stock, $0.75 per share           500,000    5,000      370,000             -               -              -        375,000
 Issuance of stock under Board Retainer
  Plan, $0.75 per share                    10,000      100        7,400             -               -              -          7,500
 Issuance of 9,608 common stock 
  warrants                                     -        -         9,608             -               -              -          9,608
 Sale of stock, $3.00 per share             3,000       30        8,970             -               -              -          9,000
 Note received from shareholder for common
  stock and warrants                           -        -            -              -              (6,000)         -         (6,000)
 Net loss                                      -        -            -           (374,212)          -              -       (374,212)
                                         -------------------------------------------------------------------------------------------

Balance, December 31, 1995              2,373,000   23,730      425,078          (643,766)         (6,000)         -       (200,958)

 Issuance of stock under Board 
  Retainer Plan, $3.00 per share           20,000      200       59,800             -               -          (26,166)      33,834
 Issuance of stock, $3.00 per share        14,000      140       41,860             -               -          (36,540)       5,460
 Issuance of stock under Board Retainer
  Plan, $10.00 per share                   15,000      150      149,850             -               -          (50,000)     100,000
 Issuance of 8,022 common stock
  warrants                                     -        -        10,857             -               -              -         10,857
 Conversion of subordinated notes 
  payable to related parties, $0.75
  per share                                21,544      215       15,943             -               -              -         16,158 
 Issuance of variable notes with 
  beneficial conversion feature                -        -       285,835                                                     285,835
 Net loss                                      -        -            -           (553,639)          -              -       (553,639)
                                          ------------------------------------------------------------------------------------------

Balance, December 31, 1996              2,443,544   24,435      989,223        (1,197,405)         (6,000)    (112,706)    (302,453)

</TABLE>



<PAGE>


Ixion Biotechnology, Inc.
(A Development Stage Company)
Statements of Capital Deficiency - Continued
For the Period March 25, 1993 (Date of Inception) through December 31, 1998

<TABLE>

                                                         

                                                                                Deficit
                                                                               Accumulated
                                                                Additional     During the                      Unearned
                                             Common Stock        Paid-In       Development         Note         Compen-
                                           Shares    Amount      Capital          Stage         Receivable     sation         Total
                                          =========================================================================================
<S>                                     <C>          <C>        <C>            <C>                <C>          <C>         <C>
Balance, December 31, 1996              2,443,544    24,435     989,223        (1,197,405)         (6,000)     (112,706)   (302,453)

 Issuance of stock, $10.00 per share       14,000       140     139,860            -                  -        (111,382)     28,618
 Issuance of stock under Board Retainer
  Plan, $10.00 per share                    7,000        70      69,930            -                  -         (43,000)     27,000
 Payment received from shareholder for 
  note received for common stock 
  and warrants                                 -         -           -             -                6,000            -       6,000
 Amortization  of unearned compensation
  over service period                          -         -           -             -                  -         64,400       64,400 
 Stock warrants issued for seervices           -         -       30,000            -                  -              -       30,000 
 Sale of stock, $10.00 per share            1,000        10       9,990            -                  -              -       10,000
 Net loss                                      -         -           -           (781,954)            -              -     (781,954)
                                           -----------------------------------------------------------------------------------------

Balance, December 31, 1997              2,465,544    24,655   1,239,003        (1,979,359)            -        (202,688)   (918,389)

 Issuance of stock, $10.00 per share        6,450        65      64,435            -                  -         (58,050)      6,450 
 Issuance of stock under Board Retainer
  Plan, $10.00 per share                   17,000       170     169,830            -                  -        (113,000)     57,000
 Forfeiture of issued stock, $10.00
  per share                                (8,400)      (84)    (25,116)           -                  -          25,200          -
 Amortization of unearned compensation
  over service period                          -         -           -             -                  -          63,940      63,940
 Sale of stock, $10.00 per share           33,320       333     332,867            -                  -              -      333,200
 Offering costs                                -         -     (116,561)           -                  -              -     (116,561)
 Net loss                                      -         -           -           (914,239)            -              -     (914,239)
                                           -----------------------------------------------------------------------------------------

Balance, December 31, 1998              2,513,914  $ 25,139 $ 1,664,458      $ (2,893,598)       $    -      $ (284,598)$(1,488,599)


</TABLE>



See accompanying notes to financial statements.






<PAGE>


Ixion Biotechnology, Inc.
(A Development Stage Company)
Statements of Cash Flows
                                                                For the Period
                                                                   March 25,
                                                                  1993 (Date
                                                                 of Inception)
                                               Year Ended           through
                                              December 31,        December 31,
                                            1998       1997          1998
                                       ======================================== 
Cash Flows from Operating Activities:
 Net loss                             $ (914,239)   $ (781,954)  $ (2,893,598)
 Adjustments to reconcile net loss
  to net cash used in operating 
  activities:
   Depreciation                           13,455        11,471         37,855
   Amortization                            3,156         3,019          7,000
   Stock warrants issued under 
    license agreement                         -             -          20,465
   Amortization of debt discount          57,168        57,168        133,392
   Stock warrants/options issued
    for consulting services                   -         30,000         30,000
   Stock compensation                    127,390       110,018        384,203
   Decrease (increase) in prepaid 
    expenses and other current assets        326         6,376         (1,401)
   Decrease (increase) in accounts 
    receivable                              (146)        6,389         (1,916) 
   Increase (decrease) in deferred 
    revenue                                   -       (100,000)            -
   Increase in liability under research 
    agreement                                 -         42,317         42,317
   Increase in accounts payable and
    accrued expenses                         172        28,881         95,365
   Increase in deferred fees and 
    salaries                             242,862        91,378        692,726
   Increase in deferred rent              15,609         6,486         22,095
   Increase in interest payable               -             -          33,198
                                       -----------------------------------------
     Net cash used in operating 
      activities                        (454,247)     (488,451)    (1,398,299)
                                       -----------------------------------------
Cash Flows from Investing Activities:
 Purchase of property and equipment      (12,397)       (5,757)       (44,294)
 Organization costs                           -              -           (436) 
 Payments for patents and patents 
  pending                                (74,345)      (90,289)      (284,115)
                                       -----------------------------------------
     Net cash used in investing
      activities                         (86,742)      (96,046)      (328,845)
                                       -----------------------------------------

Cash Flows from Financing Activities:
 Loans from officers                     250,000        75,000        355,307
 Proceeds from issuance of 
  convertible not                             -             -         787,270
 Proceeds from sale of common stock      333,200        10,000        755,900
 Proceeds from collection of 
  note receivable                             -          6,000             -
 Payment of loan costs and other 
  assets                                  (1,114)           -         (12,194)
 Payment of offering costs               (53,932)      (62,629)      (116,561)
 Principal reductions in note payable    (12,975)      (10,970)       (23,945)
                                        ----------------------------------------
     Net cash provided by financing
     activities                          515,179        17,401      1,745,777
                                        ----------------------------------------
Net Increase (Decrease) in Cash 
 and Cash Equivalents                    (25,810)     (567,096)        18,633

Cash and Cash Equivalents at 
 Beginning of Period                      44,443       611,539             -

Cash and Cash Equivalents at End 
 of Period                              $ 18,633      $ 44,443       $ 18,633

See accompanying notes to financial statements.



<PAGE>


Ixion Biotechnology, Inc.
(A Development Stage Company)
Statements of Cash Flows - Continued



                                                                For the Period
                                                                   March 25,
                                                                  1993 (Date
                                                                 of Inception)
                                               Year Ended           through
                                              December 31,        December 31,
                                            1998       1997          1998
                                       ========================================

                                                  
                                          
Supplemental Disclosure of Cash
 Flow Information:

 Cash paid during the year for:
  Interest                            $   27,590    $  21,887      $  55,746
                                      ------------------------------------------

Supplemental Disclosure of Noncash 
 Investing and Financing Activities:

  Common stock issued for subordinated 
   notes payable                      $       -     $      -       $  34,158
                                      ------------------------------------------
 
  Common stock, stock warrants and 
   stock options issued for services
   or technology                      $       -     $   30,000     $  49,457
                                      ------------------------------------------

  Common stock issued for note 
   receivable                         $       -     $       -      $  (6,000)
                                      ------------------------------------------
  
  Common stock issued for purchase 
   of patent                          $       -     $   10,000     $  10,000
                                      ------------------------------------------

  Equipment purchased under an 
   installment note arrangement 
   or lease agreement                 $  26,450     $        -     $  53,442
                                      ------------------------------------------

  Common stock issued under Board
   Retainer Plans                     $ 170,000     $   70,000     $ 457,500
                                      ------------------------------------------

  Other common stock issued as 
   compensation                       $  65,000     $  130,000     $ 237,000
                                      ------------------------------------------

  Offering costs included in 
   accounts payable                   $      -      $   16,345     $  16,345
                                      ------------------------------------------


See accompanying notes to financial statements.






<PAGE>


Ixion Biotechnology, Inc.
(A Development Stage Company)

Notes to Financial Statements

Years Ended  December  31, 1998 and 1997 and the Period  March 25, 1993 (Date of
Inception) through December 31, 1998


1.      Significant Accounting Policies:

        Organization - Ixion  Biotechnology,  Inc., a Delaware  corporation (the
        "Company"),  was  incorporated  on  March  25,  1993 and has been in the
        development  stage  since its  formation.  The Company is in business to
        develop pharmaceutical products and medical devices to detect, diagnose,
        treat or prevent diabetes and oxalate-induced  diseases. The Company has
        not generated significant revenues to date and has experienced operating
        losses  since its  inception.  The Company  expects to incur  additional
        operating  losses for the next several years as the Company  expands its
        research and development and regulatory  activities and prepares for the
        manufacturing and marketing of its products.

        Basis of Presentation - The Company is in the development stage since it
        is  devoting  substantially  all  of its  efforts  to  establishing  its
        business  and its  planned  principal  operations  have  not  commenced.
        Successful  completion of the  Company's  development  program,  and its
        transition  to  profitable  operations,   is  dependent  upon  obtaining
        approval  to market its  products  from the United  States Food and Drug
        Administration and achieving revenues from the commercial development of
        its products.  Obtaining regulatory  authorization involves, among other
        things,   lengthy  and  detailed   laboratory   and  clinical   testing,
        manufacturing  validation,  and other complex  procedures.  The approval
        process is costly, time-consuming, and subject to unexpected delays.

        The Company's financial  statements for the year ended December 31, 1998
        have been  prepared on a going concern  basis,  which  contemplates  the
        realization of assets and the settlement of liabilities  and commitments
        in the normal  course of  business.  The Company  incurred a net loss of
        $914,239  for the year ended  December  31, 1998 and, as of December 31,
        1998,  had a total  capital  deficiency of  $2,893,598.  The Company had
        deficit  cash from  operations  of  $454,247  and $488,451 for 1998 and
        1997, respectively.

        In December,  1997, the Company commenced the public offering of 400,000
        units of newly issued  securities for an aggregate of  $4,000,000.  Each
        unit  consists of one share of Common Stock,  $.01 par value,  and a .25
        Charitable  Benefit  Warrant.  Each  whole  Charitable  Benefit  Warrant
        entitles the holder to purchase one share of the Common Stock at a price
        of $20.00 per share.  There is no minimum  number of units to be sold in
        the offering.  In December,  1998, the Company extended the offering and
        reduced the size from 400,000  units to 150,000  units.  The Company had
        received  proceeds of $343,200 as of December 31, 1998. During 1998, the
        Company was funded  primarily  by the  proceeds  from the  offering  and
        bridge  loans  from  the   Chairman/Chief   Executive  Officer  and  the
        President.  If the proceeds from the offering prove to be  insufficient,
        then the Company  would be required to obtain  additional  funds through
        equity or debt financing,  strategic  alliances with corporate partners,
        or through  other  sources.  If adequate  funds are not  available,  the
        Company will have to curtail or defer research and development programs.



<PAGE>


Ixion Biotechnology, Inc.
(A Development Stage Company)

Notes to Financial Statements - Continued

Years Ended  December  31, 1998 and 1997 and the Period  March 25, 1993 (Date of
Inception) through December 31, 1998


                                                                   

1.      Significant Accounting Policies - Continued:

        Basis of  Presentation  - Continued - There can be no assurance that the
        Company will be successful in obtaining  the required  financing.  Under
        current  circumstances,  the  Company's  ability to  continue as a going
        concern depends upon obtaining additional financing.

        Cash and Cash  Equivalents  - The Company  considers  all highly  liquid
        instruments  with a maturity of three months or less at time of purchase
        to be cash equivalents.

        Income  Taxes  -  Deferred  income  taxes  are  recognized  for  the tax
        consequences  in future  years of  differences  between the tax bases of
        assets and  liabilities and their  financial  reporting  amounts at each
        year end based on enacted tax laws and statutory tax rates applicable to
        the periods in which the  differences  are  expected  to affect  taxable
        income.  Valuation  allowances are established  when necessary to reduce
        deferred tax assets to the amount  expected to be  realized.  Income tax
        expense is the tax  payable  for the  period  and the change  during the
        period in deferred tax assets and liabilities.

        Property  and  Equipment - Property  and  equipment  are stated at cost.
        Gains  and  losses  on  disposition  are  recognized  in the year of the
        disposal.  Expenditures  for  maintenance  and repairs  are  expensed as
        incurred.

        Depreciation  is  computed  using  the  straight-line  method  over  the
        estimated lives of the assets (5 years).

        Patents and Patents  Pending - Patents  pending  consist of direct costs
        incurred in connection with the applications  for patents.  Amortization
        of these costs over the estimated  life will begin upon issuance or they
        will be expensed  immediately  if rejected.  At December  31, 1998,  the
        Company had been issued three U.S. patents and purchased another through
        the  issuance  of 1,000  shares  of  common  stock.  Patents  are  being
        amortized  over 13-17  years.  The Company  periodically  evaluates  the
        recoverability  of intangibles and measures any impairment by comparison
        to estimated undiscounted cash flows from future operations. The factors
        considered by management in performing  this  assessment  include trends
        and  prospects  as  well  as  the  effects  of   obsolescence,   demand,
        competition and other economic factors.

        Research and Development - Research and development costs are charged to
        expense as incurred.





<PAGE>


1.      Significant Accounting Policies - Continued:

        Other Assets - Other assets  consists of loan costs  associated with the
        issuance  of  convertible  notes.  Loan costs are being  amortized  on a
        straight-line  basis, which  approximates the interest method,  over the
        term of the notes.

        Deferred Rent - Deferred  rent  represents a portion of the rent payable
        under the Company's  former  facilities  license with the  Biotechnology
        Development Institute ("BDI") and accrued interest thereon. The deferred
        amount  bears  non-cash  interest  at 12% on  the  outstanding  balance,
        compounded  annually.  The Company will repay the liability through a 1%
        royalty on net sales of any products developed during its tenancy at the
        BDI, such royalty not to exceed the outstanding balance.

        Net Loss Per  Share - Basic  net loss per  share is  computed  using the
        weighted  average  number of common shares  outstanding  for the period.
        Diluted net loss per share is not presented, as the effects of including
        common  equivalent  shares from stock options,  warrants and convertible
        notes payable in the computation is antidilutive.

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



2.      Property and Equipment:

        Property  and  equipment  consists of the  following  as of December 31,
        1998:

             Computers and lab equipment                  $     77,196
             Computer software                                     515      
             Library                                             1,423
             Leasehold improvements                             17,652
                                                          -------------
                                                                96,786
             Less accumulated depreciation                     (35,699)
                                                          -------------
                                                          $     61,087
                                                          =============
     
        



<PAGE>


3.      Notes Payable:

        On March 15,  1996,  the Company  entered  into a written  agreement  to
        purchase  certain  laboratory  equipment  for a sales  price of $32,309,
        payable  in  36  monthly   installments  of  $897,  including  interest,
        beginning  August 1, 1996. As of December 31, 1998,  $6,282 in principal
        remains outstanding under this agreement.

        In  September,  1996,  the Company  completed  the private  placement of
        $787,270 in Convertible  Unsecured Notes due 2001. The private placement
        provided  investors with the option of either 10% Convertible  Unsecured
        Notes ("10% Notes") or Variable  Conversion Rate  Convertible  Unsecured
        Notes  ("Variable  Notes").  The 10% Notes accrue interest at the stated
        rate  until  maturity,   or  conversion,   and  pay  interest  quarterly
        commencing  on November 30,  1996.  The 10% Notes are  convertible  into
        shares of the Company's common stock, at any time prior to maturity,  at
        a  conversion   price  of  $4.20  per  share.  The  Variable  Notes  are
        non-interest  bearing and are  convertible  into shares of the Company's
        common  stock,  at any time prior to  maturity,  at variable  conversion
        prices ranging from $4.20 to $2.10. The variable  conversion  prices are
        based on the  length  of time the  investor  holds  the  notes  prior to
        conversion,  declining  at the  rate  of  $.10  per  quarter  commencing
        November,  1996  from the  initial  conversion  price of $4.20  which is
        greater  than  the  market  value  of the  common  stock  at the date of
        issuance.  The  fair  value  of the  beneficial  conversion  feature  of
        $285,835 at September, 1996 has been recorded as debt discount, reducing
        notes  payable  and  increasing  additional  paid-in  capital.  The debt
        discount is being amortized using the effective interest method over the
        term of the Variable Notes and to the date of the deepest  discount.  As
        of December 31, 1998,  there were  $215,600 of 10% Notes and $571,670 of
        the  Variable  Notes  outstanding  ($419,227  net  of  unamortized  debt
        discount of $152,443 at December 31, 1998).  Accrued interest on the 10%
        Notes totalled $1,796 as of December 31, 1998.

        The Company entered into short-term loan agreements with officers of the
        Company for working capital purposes.  Amounts outstanding were $325,000
        and  $75,000 at  December  31,  1998 and 1997,  respectively.  The loans
        accrue interest at 8% and are due on demand (Note 8).

        In October,  1998, upon the expiration of its lease at the Biotechnology
        Development Institute, the Company entered into a new lease agreement at
        a new facility (see Note 11). As part of this new agreement, the Company
        acquired  $26,450 of leasehold  improvements  and lab equipment from the
        lessor. Amounts due for these capital additions are to be repaid over 36
        months,  the term of the lease,  with  interest at 10%.  The balance due
        under this agreement was $24,246 at December 31, 1998.





<PAGE>


3.      Notes Payable - Continued:

        Future principal  maturities of notes payable for each of the five years
        subsequent to December 31, 1998 are as follows:

              Year Ending
                 1999                                       $    340,099
                 2000                                              8,817
                 2001                                            793,882
                                                            -------------
                                                               1,142,798
                   Less:  Unamortized debt discount             (152,443)
                                                            -------------
                   Total                                    $    990,355
                                                            ============= 


4.      Income Taxes:

        The  components  of the  Company's  net  deferred  tax asset and the tax
        effects  of  the  primary  temporary  differences  giving  rise  to  the
        Company's deferred tax asset are as follows as of December 31, 1998:

               Deferred compensation                        $    284,000
               Net operating loss carryforward                   851,000
                                                            -------------
               Deferred tax asset                              1,135,000
               Valuation allowance                            (1,135,000)
                                                            -------------
               Net deferred tax asset                       $         -
                                                            ============= 

        Any tax benefits for the years ended  December 31, 1998 and 1997 and the
        period  March 25, 1993 (date of  inception)  through  December  31, 1998
        computed  based on  statutory  federal  and state  rates are  completely
        offset by valuation  allowances  established  since  realization  of the
        deferred tax benefits are not considered more likely than not.







<PAGE>


5.      Common Stock Warrants:

        During 1997,  the Company  issued  warrants to purchase  6,000 shares of
        common  stock to a  consulting  firm as part of a  consulting  agreement
        (Note 8).  The  warrants  are  accounted  for under  the  provisions  of
        Statement of Financial  Accounting  Standards  No. 123,  Accounting  for
        Stock Based  Compensation.  The value  assigned  was $5.00 per  warrant,
        based on the difference between the exercise price of $5.00 and a $10.00
        market  value at date of grant,  for a total of  $30,000  to  consulting
        expense.   The  value   assigned   approximates   that  derived  from  a
        Black-Scholes valuation model assuming an average discount rate of 5.5%,
        a volatility factor of 30% and an expected term of one year.

        There were no common stock warrants issued during 1998.

        Common stock warrants outstanding at December 31, 1998 are as follows:


              Number           Exercise Price            Expiration Date
          ------------------------------------------------------------------
              17,630             $2.00                 August 31, 2000
               6,000             $5.00          February, 2002 - October, 2002


        As  discussed  in Note 1, as part of the public  offering  commenced  in
        December, 1997, the Company has sold units which consist of one share of
        common stock, $.01 par value, and a .25 Charitable Benefit Warrant. Each
        whole  Charitable  Benefit  Warrant  entitles the holder to purchase one
        share of  common  stock  at a price of $20 per  share.  Four  units  are
        required  to acquire  one whole  Charitable  Benefit  Warrant.  Approved
        qualified  charitable  organizations  may  exercise  Charitable  Benefit
        Warrants at any time until the expiration date (December 9, 2007, unless
        extended);    holders   other   than   approved   qualified   charitable
        organizations  may not  exercise  except  between  December  9, 2006 and
        December 9, 2007. The Charitable Benefit Warrants, will be detached from
        the common stock  immediately on purchase.  At December 31, 1998,  there
        were 8,580 Charitable Benefit Warrants outstanding.





<PAGE>


6.      Stock Option Plan:

        In August,  1994,  the Board of Directors  adopted the 1994 Stock Option
        Plan,  under which  250,000  shares of common  stock were  reserved  for
        issuance upon  exercise of options  granted to  non-employee  directors,
        officers,  employees,  members  of the  Scientific  Advisory  Board  and
        consultants of the Company.  Generally,  options vest at the rate of 20%
        per year and are  exercisable  within  ten  years  after  date of grant.
        Activity under the Company's stock option plan is set forth below:

                                                              Exercise
                                             Shares           Price
                                           -------------------------------------
     Outstanding at January 1, 1994             -               -
      Granted                                2,000            $0.02
      Exercised                                 -               -
                                           -------------------------------------
     Outstanding at December 31, 1994        2,000            $0.02
      Granted                                3,500            $0.75
      Exercised                                 -               -
                                           -------------------------------------
     Outstanding at December 31, 1995        5,500        $0.02 - $0.75
      Granted                               13,000            $3.00
      Exercised                                 -               -
                                           -------------------------------------
     Outstanding at December 31, 1996       18,500        $0.02 - $3.00
      Granted                               25,400        $6.00 - $10.00
      Exercised                                 -
                                           -------------------------------------
     Outstanding at December 31, 1997       43,900
      Granted                               62,500           $10.00
      Exercised                                 -
      Forfeited                             (5,500)       $3.00 - $10.00
                                           -------------------------------------
     Outstanding at December 31, 1998      100,900
                                           =====================================





<PAGE>


6.      Stock Option Plan - Continued:

        The status of options outstanding at December 31, 1998 is as follows:


                                     Weighted          Weighted
   Exercise                    Average            Average             Number
    Price        Shares     Remaining Life      Exercise Price      Exercisable
 -------------------------------------------------------------------------------
   $ 0.02        2,000       5.5  years          $   0.02              1,800
   $ 0.08        3,500       6.5  years          $   0.08              2,450
   $ 3.00        8,000       7.5  years          $   3.00              4,000
   $ 6.00        3,000       8.33 years          $   6.00              1,000
   $ 7.50        2,000       8.4  years          $   7.50                640
   $10.00       19,900       8.5  years          $   7.50             14,700
   $10.00       62,500       9.5  years           $ 10.00              6,250
               --------                                              ---------
               100,900                                                30,840
               ========                                              =========


        The Company  applies APB Opinion No. 25 and related  Interpretations  in
        accounting for stock issued to employees  under this plan.  Compensation
        expense resulting from stock options is measured at the grant date based
        upon the  difference  between the exercise price and the market value of
        the common stock.  All stock options issued to employees were granted at
        an exercise price equal to the market value at the date of grant.

        Given the limited time period that the Company's stock has been publicly
        registered,  as well as the lack of  history  to  estimate  patterns  of
        exercise and option term,  fair value  disclosures  required  under FASB
        Statement  No.  123 are  provided  as a range  from  low to high for the
        expected  term  and  volatility.  Fair  value  is  estimated  using  the
        Black-Scholes option pricing model and the following assumptions:

                                          1998                   1997
                                          ---------------------------
                                     Low      High          Low      High
                                    --------------------------------------
     Discount Rate                   5.46%    5.52%         6.09%    6.38%

     Volatility                        30%      60%           30%      60%

     Option Life (Years)                5        9             5        9






<PAGE>


6.      Stock Option Plan - Continued:

        The  weighted  average  fair  value of  options  granted  to other  than
        non-employee  consultants  during  fiscal  year 1998 and 1997 was in the
        range of $3.67 to $7.16 and $3.82 to $7.31 per option, respectively. Had
        compensation cost for the Company's  stock-based  compensation plan been
        determined  based on the fair value at the grant dates for these  awards
        consistent  with the method of FASB  Statement  No. 123,  the  Company's
        reported net loss and loss per share for fiscal year 1998 and 1997 would
        have been as follows:

                                             Low            High
                                        -----------------------------
              1998 Net Loss              $  968,169     $  1,030,751
              1998 Loss Per Share             (0.39)            0.41) 

              1997 Net Loss                 792,985          802,995
              1997 Loss Per Share             (0.32)           (0.33)  


        The Company applies Statement of Financial  Accounting Standards No. 123
        for stock  options  issued to  non-employee  consultants.  In 1997,  the
        Company  granted 5,000  options at exercise  prices of $6.00 - $7.50 per
        share and will record  consulting  expense as the  options  vest for the
        difference  between the  exercise  price and the market  values at grant
        date of $10.00.


7.      Board Retainer Plan:

        The Company  does not pay cash  compensation  to outside  members of the
        Board of Directors or to members of the  Company's  Scientific  Advisory
        Board. Accordingly,  in August, 1994, the Board of Directors adopted the
        1994 Board Retainer Plan, under which 75,000 shares of common stock were
        reserved  for  non-employee  directors  and  members  of the  Scientific
        Advisory Board.

        New  outside  members  of the  Board or the  Scientific  Advisory  Board
        receive  5,000 shares upon  joining,  and all will receive  1,000 shares
        annually  during the pendency of the Board Retainer Plan.  Shares either
        vest upon  delivery or time of service.  For the shares  which vest over
        time of service,  unearned compensation  equivalent to the fair value at
        the date of grant is charged  against  capital  deficiency and amortized
        over the service period to compensation expense.  Shares which vest upon
        delivery are recorded as compensation expense upon issuance. At December
        31,  1998,  a total of 74,000  shares had been granted to members of the
        Scientific  Advisory  Board  under  this  Plan.   Compensation   expense
        recognized in connection  with such awards for the years ending December
        31, 1998 and 1997 was $92,000 and $83,000, respectively.  Total unearned
        compensation  related to Board  Retainer  Plan  awards was  $141,166  at
        December 31, 1998 and will be recognized as expense over future  periods
        of service.



<PAGE>


8.      Related-Party Transactions:

        Commencing  with  the  founding  of the  Company,  two  executives,  the
        Chairman/Chief  Executive  Officer and the President,  made loans to the
        Company  pursuant  to the terms of a  convertible  promissory  note (the
        "Subordinated  Note  Agreement").  Under the  terms of the  Subordinated
        Notes,  principal  amounts were convertible into common stock at a price
        per share not  greater  than the lowest  price per share  (adjusted  for
        stock splits, stock dividends, or other dilution) at which shares of the
        Company's  common  stock have been  issued  during the  12-month  period
        immediately prior to the notice of election to convert.

        On  September  30,  1994,   these  officers  each  converted  $9,000  of
        Subordinated  Notes into an aggregate of 900,000 shares of the Company's
        common  stock,  at a price of $0.02 per  share.  On June 30,  1996,  the
        remaining obligation on these notes was converted by the officers into a
        total of 21,544  shares of the  Company's  common  stock,  at a price of
        $0.75 per share.

        In April, 1996, the Chairman/Chief  Executive Officer and President each
        entered  into a revolving  agreement to extend the Company up to $25,000
        in the  form of  bridge  loans.  Under  these  agreements,  the  Company
        borrowed a total of  approximately  $32,000,  all of which was repaid in
        June,  1996.  In  addition,  in June,  1996,  these  officers  agreed to
        increase their loan commitments to operations.  Interest on bridge loans
        is at 8%, but can be reset annually, at the election of either party, to
        prime  rate in  effect  on  January  1 of any  given  year,  plus 3%. At
        December  31,  1998,  there are total loans of $325,000  outstanding  to
        these  officers  of  the  Company  (Note  3).  These  officers  have  no
        commitment to lend additional funds in the future.

        In  addition,  the  Company has agreed to defer the payment of the 1993,
        1994  and  part  of the  1995,  1996,  1997  and  1998  salaries  of the
        Chairman/Chief   Executive   Officer  and  the  President   pursuant  to
        agreements  between the Company and such executives.  Similar agreements
        are in  effect  with the  Company's  Senior  Vice  President  and  Chief
        Scientist.  Payments are to be made only upon  termination of employment
        (which may be by death,  disability,  or otherwise) and may be in a lump
        sum or as an annuity.  Amounts bear interest,  compounded annually, at a
        rate established by the Board of Directors, and is reset annually at the
        rate on 30-year  treasury bonds in effect on January 1 of any given year
        plus 1%. The rate during 1998 was 6.54%.  These obligations are unfunded
        recorded liabilities of the Company.

        On October 10, 1994,  Dr. A.B.  Peck,  who is an  executive  officer and
        consultant,  assigned to the Company all his interest in certain oxalate
        technology  (subject to prior rights of the  University  of Florida) and
        agreed to an exclusive consulting agreement with the Company in exchange
        for an aggregate  of 650,000  shares of common stock at a price of $0.02
        per share.  The Company has a consulting  agreement with Dr. Peck for 48
        days of service per year for $50,000 per year which  expires on December
        31, 1999.



<PAGE>


8.      Related-Party Transactions - Continued:

        On November 10, 1994,  members of the immediate families of the founders
        of the  Company,  including a  partnership  in which the  Chairman/Chief
        Executive Officer has an undivided 25% interest,  purchased an aggregate
        of 140,000 shares of the Company's common stock pursuant to an Agreement
        to  Purchase  Shares  dated as of such  date,  for a price of $0.10  per
        share, or $14,000 in the aggregate.

        In December,  1996, the Company entered into a consulting agreement with
        a company whose  president is an officer of the Company.  The company is
        to be paid $5,000  monthly and could  receive  warrants for up to 20,000
        shares of Common  Stock  upon the  achievement  of  certain  milestones.
        Through  December 31, 1998,  the  consultants  had been paid $70,000 and
        were issued  warrants for 6,000 shares of Common Stock in 1997 (Note 5).
        This agreement was terminated in March, 1998.

        In 1997,  the Company  engaged the  services of a printer in  connection
        with the offering. The printer is partially owned by the Company's Chief
        Executive Officer.  Through December 31, 1998, the printer has been paid
        a total of $11,533.



9.      Sponsored Research Agreement:

        On June 5, 1996,  the Company  entered into an agreement  with  Genetics
        Institute,   Inc.   ("GI")   relating  to  Islet  Producing  Stem  Cells
        Technology.  Under the agreement,  GI sponsored  certain research by the
        Company and provided  funding of $275,000 over a 12-month  period,  plus
        patent expenses of approximately  $35,000. The agreement with GI was not
        extended  after the initial  12-month  period.  The  revenue  under this
        contract was recognized on a pro rata basis  consistent  with the period
        over  which the  research  was  conducted  as well as upon  delivery  of
        certain research reports.  Under the agreement,  the Company is required
        to  reimburse  GI for certain  patent  costs if GI does not exercise its
        option for an exclusive  license for the technology.  As of December 31,
        1998, GI has not exercised their right for an exclusive  license to this
        technology and costs of $42,317 are recorded as a liability.





<PAGE>


10.     Risks and Uncertainties:

        Approximately  61% of 1997 revenues  consisted of revenues  related to a
        single sponsored research agreement which expired in 1997. There were no
        such revenues in 1998.

        The Company's  product  candidates are in an early stage of development.
        The Company has not  completed  the  development  of any  products  and,
        accordingly,  has not  received  any  regulatory  approvals or commenced
        marketing  activities.  No revenues have been generated from the sale of
        its products.

        The Company's development and commercialization  rights for its proposed
        products are derived from its license  agreements with the University of
        Florida and others.  A  deterioration  in the  relationship  between the
        Company  and the  University  of Florida  could have a material  adverse
        effect on the Company.

        The Company is aware of  potentially  significant  risks  regarding  the
        patent rights licensed by the Company relating to Islet  Progenitor/Stem
        Cells and to its  oxalate  technology.  The  Company  may not be able to
        commercialize  its proposed  diabetic products due to patent rights held
        by third parties other than the Company's licensors.


11.     Commitments:

        Lease  - In  October,  1998,  the  Company  entered  into  a  lease  for
        approximately  5,000 square feet of laboratory  and office space.  Rents
        consist of a base rent plus an amount designated for the Company's share
        of operating  costs in excess of a certain  base level.  The lease has a
        three-year term expiring in September,  2001, with two one-year  renewal
        options.  Total rent expense under this lease was approximately  $16,900
        during 1998. Future minimum rental payments under this lease,  including
        an  estimate of excess  operating  costs,  at  December  31, 1998 are as
        follows:

                     Year Ending
                       1999                      $     70,395
                       2000                            72,497
                       2001                            55,588

        Other - The Company  issued 1,000 shares of  restricted  common stock in
        exchange for a patent in February,  1997. In addition to the issuance of
        stock, the Company will be required to pay royalties of 2% of net sales,
        if any, generated from the patented technology.

        The Company has licensed the exclusive rights to technology in two areas
        from the  University  of Florida  Research  Foundation.  The  Company is
        obligated  to  pay  royalties  on net  sales  of the  Company  or  their
        sublicensees  on products in these areas.  As there have been no product
        sales to date,  there have been no  amounts  owed  under  these  license
        agreements.



<PAGE>


12.     Subsequent Events:

        From  January 1, 1999 through  March 12, 1999,  the Company has received
        proceeds of $1,000 by selling 100 units of Common  Stock and  Charitable
        Benefit Warrants in their initial public offering.

        From  January 1, 1999  through  March 12,  1999,  the  Company  received
        additional bridge loans from officers of the Company for $60,000.