SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                   FORM 10-KSB


/X/  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934 for the fiscal year ended December 31, 1998

     OR

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


                                     0-25828
                              --------------------
                              (Commission File No.)

                            ELECTROPHARMACOLOGY, INC.
        -----------------------------------------------------------------
        (Exact name of Small Business Issuer as specified in its charter)

         Delaware                                            954315412
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(State or other jurisdiction                              (I.R.S. Employer
    of incorporation)                                    Identification No.)

                1109 N.W. 13th Street,Gainesville, Florida 32601
          -------------------------------------------------------------
           (Address of principal executive offices including zip code)

       Registrant's telephone number, including area code: (352) 367-9088

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

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

                          COMMON STOCK, $.01 PAR VALUE

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes / / No /X/

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. / /

The issuer's revenues for the fiscal year ended December 31, 1998 are $620,484.

The aggregate market value of the registrant's common stock held by non-

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affiliates as of May 17, 1999, was approximately $2,941,413. As of May 17, 1999,
there were 16,143,325 shares of the registrant's common stock outstanding.

                      Documents Incorporated by Reference:
                                      None

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Item 1.  Description of Business.

General
-------


           We are a biotechnology company engaged in developing drug delivery
and drug design technologies for use in products for complex diseases that are
not effectively treated by available drugs or treatment methods. Complex
diseases like cancer, tissue degenerative diseases (such as ulcers, Alzheimer's
disease or osteoporosis) or inflammation go through multiple stages and involve
a complex interplay of multiple genes and proteins. We believe that the future
of the biopharmaceutical product market will be based on delivering the right
amount of drug at the right time to diseased tissues (drug delivery) and using a
drug that is designed to attack the right gene or protein target for the
appropriate stage of a complex disease (drug design). Our strategy is to use our
two proprietary technologies:

           (i) drug delivery technologies to deliver pharmaceutical drugs and
biotechnology products more effectively to diseased tissues; and

           (ii) drug design technologies to create new drugs aimed at the genes
and proteins that cause or control complex diseases.

         Drug Delivery - Improving the delivery of a drug to diseased tissues
can reduce side effects and/or allow patients to take lower doses of toxic
drugs. Examples include delivering topical drugs for skin disorders (psoriasis,
acne, herpes sores, wrinkles), chemotherapeutic drugs to cancerous organs, or
anti-inflammatory drugs to arthritic joints. We use the principle of applying
mild electric currents ("iontophoresis") to improve the delivery of topical
drugs through the skin and pulsed radiofrequency electromagnetic signals
("PREMS") broadcast to increase blood flow in superficial soft tissues and thus
improve the delivery of drugs carried in the bloodstream. Both technologies can
be:
         > non-invasively applied from outside the body without the need for any
           additional surgery or injection;
         > used without the need to change the formulation or the route of
           administration (topical, injection or oral) of many approved drugs;
           and
         > applied to a wide range of drugs regardless of their molecular size
           or ionic character (positive or negative charge).

         Drug Design - Our scientists have special expertise in designing and
chemically synthesizing new drugs that are small molecules (like antibiotics or
chemotherapeutic drugs) as compared to large molecule drugs (like the protein
drugs made by the biotechnology industry). Our drug design strategy uses new
information from biomedical research that is revealing the roles of specific
genes and proteins in complex diseases. Each of our small molecule drugs is
designed to selectively target a specific gene or a protein in order to either
treat or detect a disease (or the stage of a complex disease). Our drug design
program and expertise are currently focused on:
         > synthesizing novel molecules made from the building blocks of genes
         and proteins to build a growing library of proprietary small molecule
         drugs for cancer and inflammation; and
         > marketing our synthesis capability, as a separate business, to
         generate a growing revenue stream from the rapidly growing markets of
         custom DNA and peptide synthesis for genetic and biochemical research.



         We believe that our strength is in rapidly converting new technical
ideas

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being generated from our academic collaborations into product prototypes or new
methods of treatment or diagnosis. Once we prove the clinical use and define the
patients for whom our products or methods will have real benefit, we intend to
form partnerships with larger companies for the future development, large scale
manufacturing and worldwide marketing and sales of the final products. Our drug
delivery technologies can be used to improve the safety and efficacy of many
approved drug formulations as well as those under development. Similarly, our
proprietary small molecule drugs can be designated to target different
disease-causing proteins and genes that are being identified by researchers in
universities and biopharmaceutical companies. Our strategy is to form
partnerships with many companies and achieve broad penetration in both the
diagnostic and the therapeutic product markets.

         We intend to use our corporate structure and transaction expertise to
create shareholder value through strategic alliances, including mergers and
acquisitions, with service businesses generating revenues that leverage and
complement our custom DNA and peptide synthesis business. There are a large
number of small boutique businesses engaged in subspecialties (custom synthesis;
gene sequencing; molecular analysis for mutations, genetic diversity and gene
expression; and creation and testing of genetically engineered animal disease
models) that are under growing pressure to lower their costs, yet improve the
quality of their services. We intend to pursue a strategic consolidation of
selected small operations with complementary geographic and customer markets
under our public corporate umbrella and create a business operation that can
generate revenues while providing high quality specialized services in the
rapidly growing fields of genetic research and drug discovery and evaluation
based on emerging knowledge of disease genetics.

         All of our technologies are under development and not commercially
marketed. Accordingly, we need additional capital from financing, corporate
partnerships or federal grants in order to advance our technologies toward
commercial feasibility. If we are unable to obtain sufficient additional funds
in a timely manner, the development of our technologies and our financial
condition will be materially adversely affected.

         Our company was originally incorporated under the laws of the State of
California in August 1990 under the name Magnetic Resonance Therapeutics, Inc.
that was reorganized through a merger with and into Electropharmacology, Inc., a
Delaware corporation, in February 1995. During 1998, we reorganized into a
biotechnology company through a series of transactions, including (i) acquiring
two privately held business entities engaged in developing new molecular
technologies for drugs for cancer and inflammation and (ii) divesting our past
business related to the manufacturing and renting of our SofPulse device in the
nursing home and physical therapy markets to focus on the biopharmaceutical
applications of the underlying PREMS technology. We also acquired from Elan
Corporation, plc, an iontophoresis patch technology for topical dermatology
applications and an equity investment in our Company. Pending shareholder
approval, we will change our name to Gemini Health Technologies Inc. Our
executive offices are located at 1109 NW 13th Street, Gainesville, Florida 32601
and our telephone number is (352) 367-9088.



Our Technologies and Development Strategy
-----------------------------------------

         Drug Delivery Technologies:  Our technologies take advantage of the

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ability of a novel flexible patch system for iontophoresis that is uniquely
suited to deliver drugs locally through skin surface and our ability to
broadcast PREMS through superficial soft tissues in order to achieve increases
in local blood flow and thus direct blood-borne drugs to the treated tissues.
The company's management believes that the use of iontophoresis and PREMS could
eventually be attractive adjuncts to improve the delivery of many approved and
future drugs to disease tissues.

         We acquired a worldwide license for non-cosmetic dermatology and wound
care to a flexible iontophoresis patch technology developed by Elan Corporation,
a world leader in the development of drug delivery technologies. The principle
of iontophoresis has been reported in the literature to be effective in
facilitating drug transport across the skin. The flexible patch that we licensed
from Elan is a commercially useful iontophoresis technology with promising
applications in a wide range of skin disorders and wounds since the patch can
cover various locations on the body.

         Since 1991, our company has developed, tested and demonstrated the use
of broadcast PREMS energy in increasing the local blood flow in superficial
tissues. There are published reports on the beneficial effects of
electromagnetic signals in the repair of damaged tissues. We focused on the
creation of commercially useful devices to deliver the radiofrequency range of
pulsed electromagnetic signals. Our first PREMS device, SofPulse, was cleared
for commercial marketing in 1991 and has been extensively used to reduce pain
and swelling of superficial soft tissues associated with acute or chronic tissue
injuries. Our PREMS device technology holds significant potential in increasing
the delivery of diagnostic agents and therapeutic drugs, taken by injection or
orally, carried by the bloodstream to superficial organs such as the breast,
brain, prostate and joints.

         Our drug delivery product development programs will first focus on
clinical studies of iontophoresis for dermatology drugs (such as for psoriasis)
and PREMS for agents to treat or image breast or brain cancers. We expect that
these studies will also help us quantify the extent of improvement in the
delivery of various topical drugs by iontophoresis and injectable drugs by
PREMS. We intend to use this information to form licensing and joint development
agreements with companies developing biopharmaceutical drugs. In our partnership
with Elan, we intend to combine iontophoresis with PREMS in a flexible patch
system. This novel product will be used to enhance the delivery and the activity
of drugs in wound care and the healing of tissues such as arthritis-damaged
cartilage.

         For long-term applications of our drug delivery technologies, our
scientists are researching the molecular changes associated with the various
clinical effects reported with PREMS and electrical fields. The results are
expected to lead to applications of PREMS and iontophoresis in "drug
enhancement", which is increasing the sensitivity of treated tissues to drugs.
Drug enhancement should be synergistic with the initial applications of PREMS
and iontophoresis in improving the delivery of drugs.

         Drug Design Technologies: Our scientists have been engaged in creating
a growing library of proprietary small molecule drugs targeted at proteins
encoded by genes implicated in complex diseases such as cancer, inflammation and
chronic degenerative diseases of tissues. We also are the exclusive, worldwide
licensee under pending patent applications and design technologies for a family
of small molecule drugs from Aronex Pharmaceutical ("Aronex"), a biotechnology
company in Texas that is developing novel formulations of drugs to treat cancer
and infection. Dr. James Kaput, our vice president of molecular biology, has
been engaged in developing technologies and databases ("bioinformatics") for

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diet-regulated genes that are linked to diseases such as cancer, diabetes and
obesity. Collaborative programs with our scientific consultants, Drs. George
Fareed and Sheldon Schuster, have led to the identification of a novel protein
that is encoded by a rare microorganism and that appears to make cancer cells
metastatic, or able to spread through the body. The genes and proteins
identified from these research and development programs represent the initial
targets for our proprietary small molecule drugs. Our small molecule drugs are
made from the building blocks of genes ("nucleosides/nucleobases") and proteins
("amino acids") and the design program has been funded in part by Small Business
Innovations Research ("SBIR") grants awarded to our scientists.

         As a separate business, we also use our design and chemical synthesis
expertise to generate revenues by making and selling custom DNA probes and
peptides for academic researchers and biopharmaceutical companies. The need for
custom DNA and peptides has been steadily growing as more gene sequencing and
biochemical research on proteins encoded by these genes are conducted in
academia as well as industrial research and development. Custom DNA molecules
are also being used to (i) create gene chips and microarrays for diagnostics,
(ii) analyze gene mutations and genetic diversity in the human population
("genetic polymorphism and epidemiology") for the assessment of disease
predisposition or response to drugs, and (iii) conduct gene activity analyses in
diseased tissues as well as in response to drugs. Custom peptides are used in
immunoassays for clinical testing and scientific research.

         We have two primary development objectives in our drug design program:

         I. Small molecule drug products - We will grow our proprietary small
         molecule drug library and collaborate with researchers who identify
         protein or gene targets for these drugs. Upon identifying potential
         targets, we will form licensing and co-development agreements with
         corporate partners to screen our small molecule drug library for
         various clinical market applications. Our initial product development
         program in drug design is focused on two small molecule drugs from our
         library that target proteins implicated in malignant cancers and
         inflammation. We intend to expand our small molecule drug library to
         target clinically relevant proteins or genes for which we can establish
         high throughput screening methods that can determine the potential
         clinical value of drugs. Our corporate partnerships will focus on
         larger companies so that we can exploit the market potential for our
         small molecule drugs in degenerative diseases (such as arthritis,
         Alzheimer's disease and osteoporosis), inflammation, metabolic diseases
         (such as obesity and diabetes) and chronic infection-associated
         complications.

         II. Custom molecular service business - We are focusing our service
         business in custom DNA and peptide synthesis to meet the growing needs
         of government funded research and private sector product design
         efforts. We will capitalize on the following trends: (i) the rapid
         growth in gene sequencing needs in the Human Genome Project; (ii)
         product development programs for new chips and microarrays in the
         growing gene diagnostics industry; and (iii) the increasing need for
         molecular reagents in research on genetic mechanisms of complex
         diseases. We are pursuing strategic alliances, including mergers and
         acquisitions, with business entities that are engaged in custom
         synthesis as well as other high margin molecular services that use
         custom designed DNA and peptides. Our growth strategy through strategic
         alliances contemplates the expansion of our service business to include
         analyses of genetically engineered animals, especially mice, that are
         emerging as models for studying the genetics of human diseases and
         predicting the safety and efficacy of pharmaceutical products

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         ("pharmacogenomics").


Background, Recent Change of Business and Restructuring
-------------------------------------------------------


         Background - From 1992 to August 1998, our company operated primarily
as a medical device company that sold and rented its manufactured SofPulse
devices primarily to nursing homes and the physical therapy market. SofPulse
delivers PREMS that is used as an adjunct to reduce swelling and pain in
superficial soft tissue injuries.

         While the SofPulse device brought in modest revenues, our company's
expenses always exceeded its revenues. The SofPulse sales and rental business
was severely curtailed in July 1997, when the Health Care Financing
Administration announced a national policy of non-reimbursement by Medicare for
devices such as SofPulse. Even though the Health Care Financing Administration
was later enjoined from implementing this policy, the SofPulse business never
recovered to its previous levels and our company continued to incur substantial
operating losses. It became apparent to the management that the SofPulse sales
and rental business could never generate enough cash to complete the clinical
trials necessary to document and quantify the effects of PREMS on pain and
swelling and more importantly, to develop the proprietary PREMS technology for
the large growing markets of drug delivery and tissue regeneration.

         Asset Sale to ADM - After concluding it could not create shareholder
value by pursuing both the SofPulse device and PREMS technology businesses, the
company's management implemented a strategy to create value from each of the two
businesses, pay down its substantial accumulated payables and generate future
working capital for the company's technology development plans. In order to
focus on the PREMS technology development in large potential markets such as
cancer and tissue repair, management decided to sell the SofPulse assets,
manufacturing and marketing rights to ADM Tronics Unlimited of Northvale, New
Jersey, a medical device company whose common stock traded on the Nasdaq
SmallCap Market at the time of the sale but has since been de-listed and
currently trades on the Over The Counter Bulletin Board. ADM Tronics paid the
Company with approximately 2.9 million shares of ADMT stock and $150,000 in
cash, with the Company keeping 1.4 million shares and using approximately l.5
million shares to satisfy a secured note payable. The sale was completed in
August 1998. ADM Tronics also agreed to register the stock it issued to our
company so we could sell the ADM Tronics stock starting in August 1999. ADM
Tronics also granted our company a warrant to purchase additional shares of ADM
Tronics common stock if revenue from the SofPulse business for the twelve months
following the sale reached specified levels.

         Equity Restructuring - To simplify our equity structure, in August
1998, our company issued approximately 1.96 million new shares of common stock
to the holders of most of our outstanding warrants and all of our outstanding
preferred stock in exchange for these warrants and preferred stock. At the time,
this restructuring resulted in an approximate 48% increase in the number of
shares of outstanding common stock.


         Biotechnology Business Acquisitions - In August 1998, our company also
acquired two privately held companies engaged in the design and the development
of small molecule drugs as part of its strategy to pursue and grow its core
technology.


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         HealthTech Development Inc.: The Company first acquired HealthTech
         Development, Inc. ("HTD"), a development stage biotech company
         researching molecules to block cancer metastasis without toxic side
         effects. Because several lines of evidence link a tumor's ability to
         metastasize to a protein found in a mycoplasma, or a rare
         microorganism, HTD research has focused on designing a family of small
         peptide molecules that the company intends to advance through animal
         model testing and pilot clinical studies.

         In addition to its cancer program, HTD research includes a proprietary
         genetic database to identify diet-regulated genes that are implicated
         in complex diseases such as cancer, diabetes, obesity and
         cardiovascular diseases. The identification of new protein and gene
         targets is expected to complement the expertise of Gemini Biotech (see
         below) in the development of small molecule drugs.

         We acquired HTD in a merger that gave approximately 6.2 million shares
         of our company's common stock to HTD shareholders, resulting in an
         approximate 100% increase in the number of the Company's outstanding
         common stock, to approximately 12.5 million shares. HTD shareholders
         also have the right to earn up to approximately 1.65 million additional
         shares of the company's common stock upon HTD's achievement of certain
         milestones.

         Gemini Biotech, Ltd.: In our second acquisition, we bought Gemini, a
         privately held biotechnology limited partnership with special expertise
         in the design and synthesis of small molecule drugs. The purchase was a
         complex transaction in which 6 million shares of the company's common
         stock will be issued to the Gemini partners in June 1999. Once the
         company stock is issued to the Gemini partners, our company will have
         approximately 22.1 million shares of common stock outstanding, and the
         Gemini partners will beneficially own approximately 27.3% of our
         company's common stock. The Gemini partners also have the right to earn
         up to an additional 2.05 million shares of our company's common stock
         upon Gemini's achievement of certain milestones.

         Gemini scientists possess unique expertise in designing and
         synthesizing proprietary small molecule drugs created from
         "nucleobases" (the building blocks of genes) and "amino acids" (the
         building blocks of proteins). Gemini also has an exclusive license to a
         family of small molecule drugs and related design technology. Gemini's
         current drug library comprises potential drugs to combat cancer and
         inflammation. In addition, these small molecule drugs can be screened
         against protein and gene targets identified by others as
         disease-causing or disease-controlling.

         Gemini, as a separate business, had been using its synthesis and design
         expertise to make and sell custom DNA and peptides to academic
         researchers and biopharmaceutical companies engaged in gene sequencing
         and gene diagnostic product design.

         Recent Elan Transactions - Soon after the closing of our corporate
reorganization, in September 1998, the company entered into agreements with two
different subsidiaries of Elan Corporation, plc ("Elan"). Elan is an
international leader in the development of novel drug delivery technologies for
pharmaceutical and biotechnology drugs. Elan is publicly traded on the New York
Stock Exchange.

         Elan License Acquisition:  The Company acquired from Elan Pharm

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         International, Ltd. a worldwide license for non-cosmetic dermatology
         and wound healing, to a new flexible iontophoresis patch technology.
         Elan scientists have been engaged in developing product prototypes to
         increase drug delivery by the application of a mild electrical current
         - a method called iontophoresis that has been recognized for three
         decades. One outcome of Elan's efforts over the past decade has been
         the development of a flexible patch for iontophoresis. The patch system
         is uniquely suitable for the topical application of dermatology drugs
         locally at sites of skin disorders regardless of the location, shape or
         size of the diseased skin site. Elan also agreed to collaborate with
         our company to develop a flexible patch system for our PREMS technology
         as well as a patch system that combines our PREMS and Elan's
         iontophoresis technologies. We intend to pursue the application of
         iontophoresis and PREMS in enhancing the delivery of drugs and
         biologics to diseased tissues and promoting the regeneration of cells
         in tissues damaged by trauma or chronic diseases. We made a total
         payment of $7.5 million for the acquisition of the Elan technology and
         product prototype design. We will make future payments of prescribed
         license fees and royalties payable from the revenues from product sales
         and/or sublicensing to future corporate partners.

         Elan Securities Transaction: Another subsidiary of Elan, Elan
         International Services, Ltd., purchased $7.5 million of preferred stock
         and warrants in our Company. The preferred stock is convertible into
         our common stock at a conversion ratio of one share of common stock for
         each $1.20 of preferred stock investment, or currently 6.25 million
         shares of common stock. The warrants can be exercised to purchase one
         million shares of our common stock at an exercise price of $2.50 per
         share for a seven year period. The preferred stock accrues dividends at
         a rate of 10% per year and dividends are paid semi-annually in cash or
         in kind, at the Company's option, and must be redeemed after seven
         years, unless the Company has insufficient funds. In that case, Elan
         International must either elect to extend the redemption date to a date
         acceptable to the Company or accept common stock in lieu of redemption.
         Elan International also has the right to nominate one member to the
         Company's Board of Directors.

         Elan International also agreed to invest an additional $2 million to
         buy our common stock or other equity securities at the average share
         price for twenty trading days prior to the date of sale of our shares
         to Elan International. By March 31, 1999, we had issued approximately
         2.8 million shares to Elan International for $1.5 million. Subsequent
         to May 17, 1999, Elan International acquired additional common stock,
         convertible preferred stock, and a warrant to purchase common stock of
         the Company for $500,000, which has completed their $2 million
         investment. Under the agreement with Elan, a substantial portion of the
         proceeds from Elan's investment must be used by our company to fund
         further development of iontophoresis products.

         Resulting Equity Structure - Before the above transactions, the Company
had approximately 4.1 million shares of common stock outstanding, approximately
2 million warrants, and 250,000 shares of preferred stock issued. After these
transactions and the issuance of the stock to the Gemini partners, the Company
will have outstanding redeemable preferred stock convertible into approximately
6.6 million shares of common stock, approximately 22.1 million shares of common
stock and approximately 2.8 million warrants to purchase common stock
outstanding.


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Industry Overview
-----------------

         As the population ages, the provision of care for patients who suffer
from complex diseases in a cost-effective manner is becoming a growing challenge
worldwide. With the evolution of managed care, health care providers are
searching for new drugs and more effective methods to deliver the drugs that do
not require hospital facilities or skilled staff. More effective drugs with
predictable therapeutic outcomes (as well as side effects) and without complex
shipment or storage requirements are expected to increase patient compliance and
reduce the cost of patient care related to monitoring for unknown clinical
outcomes. The availability of superior and controlled delivery technologies is
expected to allow ambulatory patients to receive long-term treatment without the
need to be hospitalized for chronic intravenous delivery of drugs. The ability
to deliver a drug to the disease site is expected to increase the efficacy and
reduce toxicity to unaffected organs and thus reduce the overall cost of patient
care by using less drug and avoiding patient monitoring and management for side
effects.

         Based on the needs of patients with complex diseases, the emerging
trend in the managed care system is "disease management" to achieve acceptable
clinical outcomes at reasonable costs since a total cure for most chronic or
complex diseases is unlikely. For example, the treatment of a young diabetic
patient with an acute wound will be different from treating a chronic ulcer in a
seventy year old diabetic patient. Similarly, a young patient with malignant
prostate cancer will require a different treatment scheme than an eighty year
old individual with benign prostate hypertrophy. In the near-term, the ability
to improve the delivery of available drugs to diseased sites is expected to
improve patient outcomes at lower costs. In addition, the design of new drugs
based on the rapidly emerging knowledge about the genetics and biochemistry of
complex diseases is expected to have significant long-term impact on
cost-effective patient care.

         Drug Delivery. A number of biotechnology as well as traditional
pharmaceutical drugs can be made more effective and less toxic if they are
targeted to the tissues affected by the disease being treated. Standard
injection or oral administration usually leads to a sharp rise in blood level
followed by the clearance from the blood stream within a few hours for most
pharmaceutical drugs (that are small molecules) or a couple of days for most
biotechnology drugs (that are large protein molecules). The amount of the drug
delivered to the diseased tissue during any time period is a function of its
concentration in blood multiplied by the total amount of blood flowing through
the tissue while the substance is in the blood stream. As the substance is
cleared from the blood stream over time, the rate of deposition of the substance
into the tissue also drops. A drug that clears rapidly from the blood stream
(commonly, the traditional small molecule pharmaceutical drugs) must be taken in
large quantities in order for sufficient drug to be delivered to the diseased
tissues within the time period that the drug is in the blood stream. Such high
levels in the blood stream may be toxic to other tissues that are disease-free.
Controlled slow release capsules, mist inhalers, slowly biodegradable implants,
skin patches and programmable pumps have been used to extend the duration of
small molecule pharmaceutical drugs in the blood stream and avoid the need for
high dose. A drug that persists in for a long time (the large molecule
biotechnology protein drugs) may be injected in smaller amounts. However, these
large molecule drugs are usually inefficient in their ability to diffuse through
the walls of the blood vessels and be deposited in the tissues.

         In recent years, however, drug delivery technologies have moved beyond
the traditional extended or controlled release pills and metered dose inhalers.
Drug

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delivery is being increasingly used to allow the right dose of an active
pharmaceutical ingredient to be delivered at the right time - and more
increasingly, at the right target tissue site. Some analysts estimate that there
are more than 200 products in the pipeline of the drug delivery industry. The
approaches to achieve better delivery include biodegradable implants, injectable
microparticles, pumps, aerosols and electric fields. Traditional drugs have also
been chemically linked to large biotechnology proteins and then injected into
patients in order to increase the duration of these small molecules in the blood
stream and the delivery to a target tissue recognized by the protein, for
example, antibody-chemotherapeutic drug conjugates. The principal routes of
administration for the delivery and administration of products are oral, the
bloodstream, the respiratory system (nasal and lungs) and the skin. Different
drug delivery technologies are being developed to address the specific needs
arising from the nature of the drugs and the preferred routes of delivery for
the drug to reach the diseased tissue.

         The value of drug delivery technologies arises from increasing the
effectiveness of drugs, reducing the toxicity to disease-free tissues and
reducing the cost of drugs by lowering the dosage administered to the patient.
As a result, there is likely to be increased patient compliance and improved
patient outcome. An efficient drug delivery technology is especially beneficial
to the highly potent (and frequently, more toxic) drugs and the high value
biotechnology products that are large molecules, are expensive to manufacture
and are inefficiently delivered into tissue sites.

         Many of the drug delivery technologies that are either in use or under
development are invasive. These involve an injection (in the bloodstream or a
tissue) or implantation (under the skin or in the affected tissue) of the drug.
Also, almost all drug delivery technologies (injection, implantation, inhalation
and ingestion) require that the drug is mixed, chemically combined or
incorporated into the delivery vehicle and that the delivery vehicle is
non-toxic to the site of application and/or all human tissues and organs. These
requirements may limit the applicability of many drug delivery technologies,
especially for approved formulations of drugs or new drugs that are sensitive to
many of the substances used to control drug delivery.

         Iontophoresis is based on the application of a mild electrical current
to facilitate the transport of drugs across the charge gradient through the
layers of skin. It is a non-invasive means that takes advantage of the
electrical charge of a drug molecule and the largest available delivery surface
(the skin) of the body. PREMS broadcast increases local blood flow in tissues.
It is a non-invasive means that is potentially applicable to facilitate the
delivery of any systemic drug (a drug carried by the bloodstream) following an
injection or an oral administration, to a superficial organ (such as breast,
brain, prostate and joints) into which the PREMS can penetrate. Both of these
modalities have been used in various human applications and have not shown
demonstrable adverse effects. Recent advances in engineering have led to the
ability to design novel non-invasive products based on these modalities to
target specific organs in a human body.

         Drug Design. Traditionally, pharmaceutical products have been
discovered through the screening of thousands of compounds, either from existing
chemical libraries (such as aspirin) or compounds produced in a fermentation
broth (such as penicillin). The advent of genetic engineering founded the
biotechnology industry where naturally occurring biological molecules
(primarily, protein drugs and most recently, the gene therapy drugs) are
produced by monoclonal antibody and recombinant DNA technologies. While the
traditional pharmaceutical approach is a random and inefficient process, the
biotechnology products are large

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molecules that are expensive to produce, store, ship and administer. Emerging
knowledge about genes, the proteins encoded by these genes and the genetic
elements that regulate the activities ("expression") of genes in normal and
diseased states of cells has created the opportunity to "design" novel small
molecule drugs.

         Genes, Proteins and Diseases. Most normal functions carried out by a
         cell are dependent on the well controlled production and action of
         various proteins that either perform a structural function (for
         example, the cell membrane and the organelles such as the nucleus and
         mitochondria inside the cell) or a catalytic function (such as enzymes
         that synthesize vitamins or reproduce the genetic material of the
         cell). The blueprint for the production of proteins is encoded in the
         genetic material, DNA, that constitutes the chromosomes of a cell. In
         addition to containing the information needed to encode the proteins
         (the "coding sequences"), the genetic material of all cells contains
         genetic sequences (the "regulatory sequences") that regulate the
         activity of the coding sequences. Each coding sequence is read
         ("transcribed") by various enzymes to create an instructional template
         ("messenger RNA") that represents a different form of nucleic acid and
         that is used by the protein synthesis machinery of the cell to assemble
         the correct amino acids into the functional polymer, a protein, the
         workhorse of a cell's activities. Regulatory sequences customarily
         interact with certain proteins and regulate the activity of coding
         sequences and thus affect the levels of the proteins encoded by such
         coding sequence in a cell. Information related to the proteins and
         genes and their involvement in maintaining the healthy state of a cell
         or organ or in causing or exacerbating a disease process provides new
         tools for effective and accurate diagnosis and safe and efficacious
         therapy.

         Gene Mutation and Activity (expression). A defect (a genetic mutation)
         in a coding sequence can alter the encoded protein resulting in an
         alteration of the function of the protein. A defect in a regulatory
         sequence can alter the activity of the coding sequence it regulates. A
         defect in a coding sequence that encodes a protein which interacts with
         a regulatory sequence can also affect the activity of the coding
         sequence regulated by the regulatory sequence. These minor
         perturbations in genes or proteins that perform critical functions can
         lead to the malfunctioning of a cell, which is the basis of a disease.
         Even without a genetic mutation, various substances (such as chemicals,
         pollutants, diet) or conditions (such as infection, aging, degenerative
         diseases, hormonal changes) can alter the physiology of a cell and
         cause changes in the activities of genes (and thus the levels of
         proteins encoded by them) or proteins.

         Genetics and Biochemistry of Complex Diseases. Unlike acute diseases
         (such as an acute infection or bone fracture caused by an accident),
         complex diseases (such as cancer, chronic infection, autoimmune
         diseases, chronic wounds in diabetic patients) may result from and/or
         involve a multitude of genes or proteins. Often a mutation in a single
         gene or a change in the activity of a gene or a protein encoded by the
         gene can initiate a cascade of events that, in turn, affect other genes
         and proteins and lead to the progression or exacerbation of a disease
         condition. In many cases, the disease is not diagnosed until the
         cascade has already been in progress (such as in metastatic cancer,
         arthritis) well beyond the initial alteration. Also, a drug or a
         treatment method that can counteract the initial alteration may have
         significant unwanted or adverse side effects since the initial gene or
         protein may be required for certain normal "housekeeping" activities of
         the unaffected healthy cells (such as in the case of many autoimmune
         diseases, chronic wounds and

                                       12

<PAGE>

         aging-related diseases that cause tissue degeneration). Biomedical
         research and the knowledge developed through the use of biotechnology
         products (that are mostly naturally occurring proteins) are leading to
         a better understanding of the various stages of complex diseases and
         the roles of various proteins or genes encoding such proteins in the
         different stages.

         Small molecule drugs that are designed based on the knowledge of the
activities of the protein or gene targets implicated in complex diseases have
the advantages of traditional pharmaceuticals (easy to produce, store, ship and
administer or deliver) as well as of biotechnology products (specific,
predictable action that mimics natural cellular processes). In addition, these
designed drugs do not have the disadvantages of either the traditional
pharmaceuticals as relates to the unpredictable safety and efficacy profile or
the biotechnology products as relates to expensive manufacturing and difficult
storage and shipment. Small molecule drugs can be designed to specifically
target the individual gene or protein responsible for each of the different
stages in the progression of complex diseases and thus revolutionize patient
care.

         The success of the small molecule drug design approach is dependent on
correctly identifying the protein/gene target(s), validating the role of the
target (the mechanism of action of the target) in the specific stage of a
complex disease and designing compounds that effectively and predictably affect
the action or the production of the target. Nucleobases (the building blocks of
the genetic material) and amino acids (the building blocks of proteins) are
naturally occurring small molecules. These can be chemically synthesized
inexpensively and also can be modified or used to build small polymers with
novel biological activities that affect, in a predictable manner, the function
of a protein or the encoding gene or the regulation of a gene's activity caused
by the binding of proteins to genes within a cell.

Detailed Description of The Core Technologies
---------------------------------------------

         Our two proprietary technology platforms are:

         o   Drug Delivery - non-invasive enhancement of topical and injectable
             drugs; and

         o   Drug Design - the rational design and synthesis of small molecule
             drugs.

         Non-Invasive Drug Delivery. Our drug delivery technologies are based on
the application of mild electric current and pulses of electromagnetic energy
that can be non-invasively applied to superficial tissues and either cause
increased delivery of drugs to the target tissues or increase the sensitivity of
the target tissues to other drugs.

         Iontophoresis in Dermatology. We licensed from Elan a flexible
         iontophoresis patch technology that enables the application of a mild
         electric current from a fabric-like material in a controlled manner to
         achieve a more effective transfer of a wide variety of drugs across
         skin. It has been reported in the scientific literature that
         iontophoresis of ionic drugs (drug molecules that carry an electrical
         charge) provides between a 20 - 60 fold increase in penetration over
         traditional topical application. We intend to focus on the use of the
         licensed technology to treat surface tissues, including dermatology and
         wound healing. The most significant advantages of iontophoresis in our
         area of focus are


                                       13

<PAGE>

                  o      the elimination of systemic toxicity by limiting the
                         release of only a small quantity of the drug into the
                         bloodstream,
                  o      the delivery of a relatively high concentration of the
                         drug at the tissue site where the drug will potentially
                         achieve the maximum benefit,
                  o      the ability to apply the technology to any drug with an
                         electrical charge (or a drug that can be easily
                         formulated or modified to create an electrical charge),
                  o      the ability to achieve a rapid start and stop to the
                         delivery of the drug by turning the electrical current
                         on and off, respectively, and
                  o      uniform delivery of a drug over a skin surface area
                         regardless of the size or the contour.

         Dermatologists are well aware of the shortcomings of current methods of
         topical application and have begun to study and adopt advanced drug
         delivery technologies. Studies have shown that iontophoresis may become
         an important new, safe and effective technique for enhancing drug
         delivery in such diverse applications as local neuralgia and
         anesthesia, antiviral and anti-inflammatory therapies, and acne
         treatment. The flexible iontophoretic patch system which we licensed
         from Elan is applicable in an entire family of unique products that we
         hope will be distinguished as the leading iontophoretic delivery system
         for the dermatology market. The key advantages of this technology are:

                  Efficacy:
                  o      improved penetration of dermatological products into
                         the skin,
                  o      rapid delivery onset and cessation, and
                  o      uniformity of penetration over the entire skin area
                         being treated;
                  Availability:
                  o      treatment pad can comfortably adapt and fit to any
                         contour of the skin regardless of the anatomical
                         location on the body, and
                  o      special electrode technology protects sensitive areas;
                  Disposability:
                  o      safe, skin compatible materials, and
                  o      no cleaning or maintenance requirement.

         The development of the basic iontophoretic technology into the first
         product prototype for dermatology is essentially complete and
         accordingly, we believe that clinical studies for the intended clinical
         applications may be initiated rapidly.

         PREMS - SofPulse. We have developed our PREMS technology that has been
         shown to augment blood flow in superficial soft tissues. PREMS is a
         unique noninvasive approach with no known adverse effect in humans as
         the pulsing of energy fields are designed to avoid tissue heating and
         induce electric fields (E-fields) through the treated tissue without
         damaging cell structure. The increase in blood flow at the tissue
         treated by the application of PREMS should enhance the delivery of
         therapeutic or imaging agents for cancers to superficial organs such as
         breast, prostate and brain. Accordingly, PREMS is expected to increase
         the effectiveness of large molecule biotechnology drugs
         (antibody-based, gene-based and other protein products) that have
         limited tissue penetration. PREMS also is expected to reduce the side
         effects of most drugs by reducing the total

                                       14

<PAGE>

         dosage that needs to be injected in order to deliver sufficient drug to
         the diseased tissue. Accordingly, PREMS may be used to enhance the
         delivery of anti-inflammatory drugs to arthritic joint cartilage and
         anti-infective or growth-promoting products to wounds and other skin
         lesions in the dermatology market. PREMS may be used in combination
         with other drug delivery approaches such as "transdermal patches" and
         "controlled release implants". We own three issued U.S. patents and
         other pending applications in various countries with respect to PREMS.
         Our PREMS is distinct from three other similar technologies: low
         frequency pulsed electromagnetic fields ("PEMF"), direct Electrical
         Stimulation ("E- Stim") and pulsed radio frequency ("PRF") diathermy.
         PEMF (ca. 50 Hz frequency) has been used since 1977 to facilitate
         healing of nonunion bone fractures (fractures which refuse to heal) and
         is administered through coils attached to (or implanted in) the patient
         in close proximity to the site of the fracture. Over the past 20 years,
         clinical research in the field of PEMF has demonstrated that these
         fields promote the healing of human and other mammalian bone tissue
         under selected conditions. E-Stim (in the form of galvanic currents at
         about 1 milliamp per square centimeter surface area) has been used
         since the 1960s to achieve therapeutic effects (muscle, nerve and other
         soft tissue injuries) and is administered by placing electrodes in
         direct contact with the tissue by the use of conductive gels and
         garments. PRF (ca. 27.12 MHZ radio frequency range) has been used over
         the past 30 years to achieve varying degrees of tissue heating
         ("diathermy") depending on the frequency or the amplitude and the total
         dosage.

         Our PREMS is delivered as controlled pulses of high energy (27.12 MHZ
         radio frequency) at a low average power and short duty cycles (the
         total duration of signal delivery during a course of administration)
         relative to traditional PRF-based diathermy. This frequency falls in
         the range of 13 MHZ to 27.12 MHZ that is approved by the Federal
         Communications Commission as the radio frequency band for medical
         applications. During the past twenty years, several research reports
         have been published claiming the ability of PREMS to modulate cells in
         a nonthermal manner, or without heating, presumably through the
         induction of an electric field throughout the tissue being treated with
         broadcast electromagnetic signals. We developed and marketed SofPulse,
         a medical device that broadcast PREMS, and over the past six years
         obtained clinical information in a wide range of patients that
         demonstrates the safety of this modality. Available clinical
         information also has shown the alleviation of soft tissue edema,
         especially around chronic wounds, that appears to be the consequence of
         the ability of PREMS to increase local blood flow.


         We believe that the safety information will enable us to expedite
clinical studies on the ability of PREMS to increase and measure the extent of
such increase in the delivery of biotechnology and pharmaceutical drugs to
superficial organs such as breast, brain, prostate and major joints. We also
intend to leverage the fact that our PREMS technology does not require any
changes in the formulation or the mode of administration of a drug. This feature
is expected to simplify formation of corporate partnerships to apply PREMS in
enhancing the delivery of the partners' drugs. PREMS may also complement some of
the other drug delivery approaches such as "transdermal" and biodegradable
implant-based local release. An increase in local blood flow that can be
achieved on an "as needed" basis by broadcasting PREMS at tissue may be used to
control the amount of drugs being delivered by these alternate technologies to
the tissue.

         Drug Design - Small Molecule Drugs.  Our small molecule drugs may be

                                       15

<PAGE>

designed to have predetermined features with exquisite specificity and potency
for protein or gene targets that are implicated in the onset or progression of a
wide variety of diseases. The specific binding of these small molecule drugs may
be used to cause a change in the activity of the protein or gene target and
thereby achieve a therapeutic activity. Alternatively, the binding may be used
in sensitive and rapid diagnosis of diseases in which these targets are
implicated.

         We specialize in the design and synthesis of novel modifications of
nucleobases (nucleosides and nucleotides). Our nucleoside design technology is
used to create novel small polymers, "oligonucleotides", made from a combination
of chemical variants of the four monomer units (designated A, T, G and C) that
naturally occur in the genetic material. The structural diversity and functional
attributes of nucleobases and oligonucleotides far exceed those achievable with
traditional pharmaceuticals. Nucleobase-derived small molecules are uniquely
suitable for the following:

         o        proteins that replicate the genetic material during the
                  reproduction of organisms and thus serve as targets for the
                  design of anti-infective or anti-proliferative small molecule
                  drugs;
         o        proteins that regulate gene activity ("expression") and thus
                  serve as targets for the design of drugs to manipulate cell
                  function in tissue regeneration;
         o        proteins that function as catalysts (donors) or substrates
                  (recipients) in energy transfer reactions and thus serve as
                  targets for drugs that alter the growth, metabolism and/or
                  regeneration of cells; or
         o        genes that undergo changes in structure (mutation or
                  amplification) or activity (expression) and thus serve as
                  targets for molecular diagnostics or gene-regulating drugs.

         Our drug design technology capitalizes on the above properties to
create proprietary small molecule drugs made of nucleobases and
nucleobase-derived small polymers. We have a growing library of therapeutic
nucleobase molecules that have been designed to achieve therapeutic effects in
cancer and complex chronic diseases. We also are expanding our small molecule
drug design technology in the area of drugs derived from amino acids, the
building blocks of proteins, and chemical modifications of amino acids. For many
protein targets, our expertise in synthetic chemistry enables us to design and
synthesize small domains of proteins (called "peptides") that are comprised of
only a few amino acids. Different peptide portions of a target protein can
exhibit biological activities with clinical relevance.

         The molecules currently comprising our proprietary small molecule drug
library fall in three categories:

         o        "Mimics" - bind to or resemble the active site of a target
                  protein or gene that is implicated in regulating the activity
                  of the target;

         o        "AlloEnhancers" - bind to a site other than the active site of
                  a target protein and alter the active site in a manner that
                  renders the target protein sensitive to other drugs; and

         o        "Phosphorygonists" -affect the transfer of phosphate groups
                  implicated in energy transfer reactions and thus alter the
                  biological activity of the target protein molecules.


                                       16

<PAGE>

         Our initial targets for our drug design technology are gene and protein
targets with known involvement in cancer and inflammation (such as rheumatoid
arthritis). We are implementing an integrated three-step approach for the design
of our proprietary small molecule drugs:

         o        The identification of a Target - a protein or a gene that
                  mediates or regulates a cellular process in the onset or
                  progression of a complex disease;

         o        Rational design of Small Molecule Drugs - Nucleobase- or amino
                  acid- derived small molecules designed to affect the
                  action/production of the target; and

         o        The identification of a Lead Drug - the most potent, specific
                  and non-toxic small molecule drug selected by screening in a
                  clinically predictive laboratory test and/or animal model.

         Our initial targets for our drug design technology have been selected
based on the results of research by leading investigators in academic
institutions who are collaborating with our scientists. We integrate our small
molecule drug design programs with the research programs of our collaborators on
the mechanisms of action of the protein targets (or the genes that encode the
protein targets) in the onset or the progression of the respective complex
diseases. We have exclusively licensed a group of novel chemical modifications
of nucleobases for therapeutic drug design. The inventor of these compounds, Dr.
Ganapathi Revankar, is an international expert in nucleoside chemistry. Under
Dr. Revankar's supervision, we are developing additional proprietary compounds
that target two cell controlling protein factors - "Tumor Necrosis Factor-alpha"
and "Transcription Factor NFkB". One of our scientific advisors, Dr. Bharat
Aggarwal of the Baylor College of Medicine in Houston, Texas, is considered to
be an international leader in cell-controlling protein factors, called
cytokines, that are implicated in cancer and inflammation. Effective small
molecule drugs that target cytokines have potential applications in cancer and
inflammatory diseases such as rheumatoid arthritis. We have acquired licenses
and have filed patent applications for design and screening methods relating to
small molecule drugs for specific protein or gene targets with known clinical
applications and novel molecular compositions.

         We also are a leader in the field of designing chemical modifications
of nucleosides that can be used to create gene probes that combine ("hybridize")
with target genes in a manner that would cause predictable structural changes
such that even minor alterations in these genes may be effectively detected. One
class of proprietary modifications is designed for gene probes for "chip-based"
and "microarray-based" DNA diagnostics that monitor several genes simultaneously
and detect single changes ("point mutations") in genes. Our expertise combines
the experience of Dr. Krishna Jayaraman, president of our Gemini Biotech
partnership, and Dr. Michael Hogan of Baylor College of Medicine, a scientific
advisor to our Company. We have been steadily growing our activity in special
chemistry required to design gene probes (oligonucleotides) that can be used to
produce microarrays and chips with high gene probe density that are being
developed by other companies. These microarrays and chips are also expected to
be used to assess the safety and efficacy of pharmaceutical or biotechnology
drugs (pharmacogenomics) and select lead drugs based on detailed molecular
effects on cells that contain disease-linked protein or gene targets.

Commercialization Strategy
--------------------------

         We intend to exploit our non-invasive drug delivery technologies to
improve

                                       17

<PAGE>

the clinical effectiveness of biopharmaceutical drugs being marketed or
developed by other companies. Our proprietary small molecule drugs are intended
to be developed, manufactured and marketed through partnerships with larger
pharmaceutical and biotechnology companies.

         Drug Delivery. Our drug delivery technologies will be used as a
"value-added" complement to drugs and biotechnology products by increasing their
delivery to targeted organs (such as breast, brain, prostate, skin and joints).
The commercial benefits arising from reduced drug dosage, increased efficacy
and/or reduced toxicity to disease-free organs are intended to be leveraged into
corporate partnerships to provide licensing and royalty revenues and research
and development payments. Our initial drug delivery focus will be on improving
the delivery of cancer drugs by PREMS and of selected dermatology drugs by
iontophoresis. In addition to advancing the drug delivery technologies towards
initial products, our clinical studies are expected to generate information to
support the application of the technologies to other drugs.

         The principle of iontophoresis has been available for more than two
decades but a product that can be conveniently applied to various locations on
the body and for the diversity of drugs for dermatologic applications had not
been designed. The flexible iontophoretic patch developed by Elan and licensed
by us effectively solves these past limitations. The initial prototype patch
consists of an electrode pad, made of a conductive ink printed on a flexible
substrate made of a soft paper tissue that is inexpensive, easy to apply and
comfortable to wear at various locations. The pad may be premedicated or the
user may spread a gel containing a drug substance onto the surface and
subsequently press the pad covering all or a portion of the skin surface to be
treated. The pad can be mass produced at a low cost in any desired shape and
size for increased comfort and patient compliance. The patch is powered by a
reusable, battery-powered control unit that weighs less than one ounce and can
be reused several times. The patch is designed to address the needs of
prescription dermatology drugs for topical applications in wound healing,
inflammation (such as psoriasis or dermatitis), acne and infection.

         The use of electromagnetic energy fields has been investigated during
the past thirty years and many clinically beneficial effects on hard (bone) as
well as soft (skin) tissue damages have been reported. Since 1991, our
scientific team and their collaborators have been engaged in developing a
technology based on the principle of using PREMS that can be non-invasively
delivered by broadcast to superficial organs and tissues. Superficial tissues
include breast, brain, prostate and joints. Studies conducted for our company at
the Miami Heart Institute to examine the effect of PREMS in patients with
chronic wounds showed a rapid increase in local blood flow in the tissue where
the PREMS was being applied. This increase in blood flow should deliver a larger
amount of a drug in the blood stream to the treated organ. As a result, this
modality can complement essentially all other drug delivery formulations
(injected or ingested) since no change in the mode of administration of the drug
will be required. There are an estimated fifty marketed drugs developed by the
biotechnology industry that must be given by injection, usually several times
per day or week for a wide range of applications, including contrast agents for
diagnostic imaging (of cancerous and other lesions) and therapeutic drugs. For
some drugs, such as the high potency yet toxic chemotherapeutic drugs, effective
delivery to the target tissue by increasing blood flow following an injection
may transform a currently unusable compound to a highly beneficial drug. In
addition, a more effective delivery may enable one to lower the dosage of an
anti-inflammatory drug being used to treat arthritic joints or expensive
biotechnology drugs to regenerate damaged tissues.

         Based on the potential complementary effects of mild electrical
currents

                                       18

<PAGE>

and electromagnetic fields, it is conceivable that appropriate combination of
these two means will have novel commercial applications. Our primary research
strategy is to use the tools of molecular biotechnology to identify the
mechanisms of action of electrical fields delivered by iontophoresis or induced
by PREMS in the cells in the treated tissues. The results are expected to
provide new insights into the mechanisms underlying the therapeutic effects
(blood flow increase and tissue regeneration) that have been reported in the
scientific literature. In collaboration with Elan, we intend to design and
evaluate novel proprietary products that deliver iontophoretic electric fields,
PREMS energy and/or a combination that will cause predictable tissue response.
Our commercialization strategy will be to develop novel clinical applications of
our non-invasive drug delivery technologies by exploiting the two primary modes
of action:

         o        drug delivery enhancement in targeted organs; and

         o        enhancement of sensitivity of cells to other drugs.

         Drug Design. Our initial drug design focus is on two small molecule
drugs that target proteins implicated in malignant cancers. Our drug design
technology will be used to grow our library of proprietary small molecule drugs
that are designed to target proteins and/or genes that are being implicated in
complex diseases as the genetic and biochemical knowledge of disease processes
advance. We intend to broadly apply our proprietary small molecule drug library
and design expertise to autoimmune diseases (such as inflammation, asthma and
rheumatoid arthritis) and tissue degenerative diseases (such as ulcer,
Alzheimer's disease, osteoporosis and arthritis). We intend to seek corporate
partnerships for specific drugs or for specific gene/protein targets whereby
manufacturing and marketing rights will be granted to the partners in exchange
for license fees, milestone payments, royalties and research and development
funding to our company.

         As a separate business, we offer a service business based on contract
synthesis of small molecules for academic researchers and corporate clients. We
intend to use this business as a source of revenue in the near-term by
exploiting the following trends:
         o        the need for new custom-designed molecular reagents as tools
                  for research on the genetic basis of diseases; and
         o        the trend in the pharmaceutical industry towards rational
                  design and high throughput screening that use the knowledge of
                  disease genetics to understand or predict the potential safety
                  and efficacy of future drugs.

         Our current strategy is to focus on designing and synthesizing small
molecules made from the building blocks of natural biological molecules. We are
a leader in the design and synthesis of nucleobases (the building blocks of the
genetic material) and their analogs and polymers. We have a growing proprietary
library of nucleobase-derived molecules that have been selected based on their
expected biological activity. Historically, these molecules have been primarily
used to create diagnostic products, called "gene probes", based on their
specific binding ("hybridization") to the genetic material of living organisms.
However, it is now widely recognized that nucleobase-derived molecules can bind
to proteins that regulate gene activity by interacting with specific regions of
the genetic material of cells since the nucleobase-derived molecules can be
designed to mimic the desired genetic materials. In addition, nucleobases also
serve as the "energy currency" that are utilized in a large number of
biochemical processes that are critical to a cell's growth and metabolism. We
are also expanding our expertise in the design and synthesis of small molecules
based on

                                       19

<PAGE>

amino acids (building blocks of proteins) and their analogs that may be designed
to affect the activity of protein targets.

         We are integrating our expertise in the design of novel small molecule
drugs with the knowledge of proteins and/or the genes encoding them that are
implicated in the control of critical cell functions implicated in complex
diseases. Our goal is to design and develop drugs with predictable targeting
specificity at specific proteins or genes and thus achieve higher potency and
lower toxicity than the currently available drugs. Based on the knowledge of the
structure and the function of a protein or gene target, small molecules may be
designed that would directly compete with ("mimicry" effect), inactivate
("antagonistic" effect), or predictably change the structure ("allosteric"
effect) of a target. As a result, it may be possible to render a protein or gene
target more sensitive to the effect of an existing drug. This may allow one to
use a lower dosage of a drug that would otherwise be unacceptably toxic. Most
importantly, there is new realization that the genetic diversity among humans
frequently results in minor alterations in the structure of a protein or gene
target - a phenomenon called "genetic polymorphism". We believe that the ability
of nucleobase-derived small molecule drugs to alter the structure of a protein
or gene target can be exploited in solving the lack of effectiveness of certain
drugs in patient populations resulting from small genetic differences
(polymorphism) between subpopulations.

         Our commercial strategy is to focus on the targets listed in the table
below to apply our drug design technology in order to create therapeutic drugs
for the diseases in which the targets are implicated:



                                       20

<PAGE>

         TARGET                                        DISEASE
--------------------------------------------------------------------------------
I.  Transport/Cell Membrane
Proteins
                                               Cancer (breast, prostate,
    > p37 protein family                       melanoma and ovary)

    > Amino acid                               Cancer (liver and possibly
transporters                                   others)

    > Pump (matrix                             Cancer (obstetric and
degrading) protein(s)                          gynecologic)
--------------------------------------------------------------------------------

II.  Cell Controlling
Factors

    > Tumor necrosis                           Cancer, Inflammation, Sepsis
factor(s)

    > Transcription                            Cancer, Inflammation
factor(s)
--------------------------------------------------------------------------------

III.  Enzymes

    > Amidotransferases                        Childhood leukemia, Infection

    > Lysine biosynthesis                      Neonatal sepsis, Allergy

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

         We have selected these targets based on the following:

         o        The targets are documented by scientific evidence to be
                  important in cancer and other complex diseases; and/or

         o        Small molecule drugs, especially those designed by our
                  scientists, are expected to bind to and change the activity of
                  these targets; and

         o        Our scientists have access to high throughput screening
                  necessary to select a specific small molecule drug as a
                  product development candidate from our drug library.


         Collaboration - New Targets for Drugs. Our senior scientific staff and
scientific advisors possess significant experience in the design and synthesis
of nucleobases and molecules derived from them. Our scientists collaborate with
leading investigators at major academic institutions, including Baylor College
of Medicine and the MD Anderson Cancer Center in Houston, Texas; the
Biotechnology Program at the University of Florida in Gainesville, Florida; and
the Biotechnology Laboratory at the Northwestern University in Chicago,
Illinois. The Company also designs and synthesizes peptides, which are small
polymers made from amino acids (the building blocks of proteins). We establish
collaborative relationships with leading biotechnology scientists in academic
institutions in order to obtain the emerging knowledge on the proteins or genes
that are involved in various stages of complex diseases. This knowledge of the
mechanisms of action of these proteins and genes is used by our scientists to
design novel small molecules (nucleobases-derived or peptides) that can affect
the activities

                                       21

<PAGE>

of the target protein or gene. We have licensed as well as designed and
synthesized small molecules that target the proteins implicated in cancer
metastasis and arthritis. We intend to grow our small molecule drug library
through additional in-house design and synthesis as well as through licensing
agreements.

         We are establishing collaborations with companies engaged in the
emerging field of bioinformatics to create genetic databases on novel genes as
future targets for proprietary small molecule drugs. Nutrition is now recognized
as an important factor in the onset, progression and treatment outcome in
patients with chronic diseases, including cancer, heart diseases, diabetes and
chronic degenerative disorders (arthritis, osteoporosis and Alzheimer's
disease). Accordingly, our initial focus is on databases relating to
quantitative changes that are caused by specific nutrients in the expression of
disease-linked genes. These databases are also expected to facilitate the
identification and selection of "nutraceuticals" (nutrients and pharmaceuticals)
from natural products. We intend to form corporate partnerships on our small
molecule drugs or nutraceuticals for use in improving the effects of other drugs
or reducing disease incidence in people who are at higher genetic risk of
predisposition to diseases.

         Corporate Transactions. Our initial strategic focus will be to use our
corporate structure and transaction expertise to create shareholder value
through strategic alliances, including mergers and acquisitions, with service
businesses generating revenues that leverage and complement our custom DNA and
peptide synthesis business. We believe that there is an opportunity in the
research community and the biopharamceutical industry for custom synthesis of
small molecules as reagents for drugs and diagnostics development. Most
researchers and many companies now outsource such activities in order to have
access to the latest technologies and more rapid service that an established
entity committed to such business can provide. There are a large number of small
boutique businesses engaged in subspecialties (custom synthesis; gene
sequencing; molecular analysis for mutations, genetic diversity and gene
expression; creation and testing of genetically engineered animal disease
models) that are under growing pressure to lower their costs and yet improve the
quality of their services. We intend to pursue a strategic consolidation of
selected small operations with complementary geographic and customer markets
under our public corporate umbrella and create a business operation that can
generate revenues while providing high quality specialized services in the field
of molecular and genetic research as well as product discovery, evaluation and
development.

         We also intend to seek strategic acquisition opportunities for new
products and technologies for cancer and other complex diseases.



Product Development Programs
----------------------------

         Our initial product development programs focus on the following:

         o        Clinical studies for drug delivery technologies:

                  Iontophoresis for Dermatology Drugs. The first product
                  prototype of our iontophoretic patch licensed from Elan is
                  ready to be produced cost-effectively for us by Elan and/or
                  its agents in sample quantities for the purposes of clinical
                  trials. We intend to optimize preferred conditions for the
                  patch to promote the penetration of steroidal and
                  non-steroidal substances used in

                                       22

<PAGE>

                  dermatology by using a clinically predictive in vitro system.
                  The test system allows quantitative comparison of the change
                  in iontophoretic delivery of drugs. Based on the results of
                  the optimization studies to be conducted, we will initiate a
                  clinical study for an approved prescription dermatology drug
                  that shows limited efficacy due to poor penetration. We will
                  use end points accepted by the clinical community in order to
                  assess the benefits of the iontophoretic delivery in improving
                  the efficacy of the test drug. The clinical study will also be
                  used to obtain quantitative drug penetration data in humans
                  that is expected to validate the in vitro test system. We
                  expect to use this system subsequently to establish the
                  conditions for the patch's use in follow-on clinical
                  applications and additional drugs in wound care with our
                  corporate partners.

                  PREMS for Cancer Imaging and Treatment Drugs. We intend to use
         the SofPulse device, our initial product using our PREMS technology,
         that delivers PREMS operating at a carrier frequency of 27.12 MHZ with
         a pulse width of 65 microseconds and provides up to 36 different
         combinations of incident magnetic fields and pulses per second.
         SofPulse was cleared for commercial marketing by the United States Food
         and Drug Administration ("FDA") in 1991. This initial product is used
         as an adjunct for the palliation of post-operative edema and pain in
         superficial soft tissues. The use of this device following surgeries
         and in sub-acute care (chronic wounds and tissue injuries) in over
         300,000 administrations in thousands of patients has demonstrated human
         safety of our PREMS. We intend to conduct clinical development of PREMS
         under one or more Investigational Device Exemptions ("IDE"s) filed with
         the FDA. Using the SofPulse, we have identified initial signal
         specifications and conditions to achieve rapid and sustainable increase
         in local blood flow in tissues by PREMS. The change in blood flow can
         be ceased within several minutes after the administration is stopped.
         The results of two pilot clinical studies conducted at Miami Heart
         Institute on patients with chronic wounds have provided us with
         information about the duration of treatment and the level of increase
         in blood flow. This information will be used by us to optimize the
         settings (energy levels) and the duration of PREMS treatment in
         achieving increased delivery of cancer imaging and/or treatment drugs
         to the breast or brain. We are selecting drugs that are either approved
         or in clinical development and that are expected to benefit from what
         we believe will be a significant increase in drug delivery to the
         targeted tissue resulting from treatment with PREMS.

         o        Laboratory and animal evaluation of proprietary small molecule
                  drugs:

                  Transport Protein-Targeted Drugs to Treat Cancer Metastasis.
                  We are designing proprietary molecules that are targeted at
                  and thus expected to interfere with the function of a
                  metastatic cell-associated molecule ("MCAM") - the p37
                  transport protein. This protein was first identified as one of
                  a group of proteins targeted by the immune system in cancer
                  patients who went into remission following experimental cancer
                  cell vaccine treatment. Similar to the case with the now well
                  recognized "multiple drug resistance" protein (found in
                  cancers that do not respond to a number of chemotherapeutic
                  agents), the p37 protein belongs to a protein family encoded
                  by genes involved in nutrient transport in certain rare
                  strains of Mycoplasma. The MCAM p37 target is found on
                  metastatic cancer cells. Our laboratory research also
                  indicates that

                                       23

<PAGE>

                  the addition of this protein to cancer cells that do not
                  metastasize causes the cells to behave similarly to cells from
                  metastatic cancers. Our small molecule drugs designed for the
                  p37 protein target are not required to kill cancer cells but
                  prevent the ability of cancer cells harboring p37 to
                  metastasize. Our objective is to create the first family of
                  drugs that will be able to treat cancer without the toxic
                  effects associated with all other forms of cancer treatment
                  that are designed to kill both cancerous cells and healthy,
                  normal cells. In addition, these drugs would not be expected
                  to induce resistance in the cancer cells. The design and
                  development of this family of therapeutic compounds are based
                  on a technology owned by us. Initial applications of the p37 -
                  targeted small molecule drug candidates in breast cancer and
                  melanoma have been chosen based on (i) the results of
                  published clinical studies and basic research conducted at
                  University of California, Los Angeles and McGill University
                  and (ii) the results of our current research program in
                  collaboration with scientists at the University of Florida and
                  Michigan State University. Our product development program
                  focuses on the creation and evaluation of small molecule drugs
                  that mimic various portions of the p.37 protein target in a
                  laboratory test system that is designed to screen such drugs
                  for their ability to interfere with metastatic (or invasive)
                  behavior of tumor cells. The results will be used to select
                  the most potent drugs for evaluation in one or more clinically
                  predictive animal model systems, which will be followed by
                  initiating a clinical study under an IND or its foreign
                  equivalent. Our product development program also is screening
                  human tumors in order to select the type of tumor where the
                  presence of the p37 target is common and, accordingly, will be
                  likely to respond to a p37 - targeted small molecule drug.
                  Based on the results of these studies, we may market the
                  detection method as a prognostic test to diagnostic pathology
                  laboratories engaged in the business of sophisticated analysis
                  of cancer biopsies.

                  Protein Factor-Targeted Phosphazoles for Cancer and
                  Inflammation. We have evaluated a family of nucleobase
                  analogs, called Phosphazoles, that are targeted at Tumor
                  Necrosis Factor-alpha and the Transcription Factor-NFkB. Dr.
                  Aggarwal, Chief of Cytokine Research at the MD Anderson Cancer
                  Center ("MDACC") in Houston, Texas, is an international expert
                  in Tumor Necrosis Factors and has been involved in studying
                  this protein target since the late 1970s. Preliminary
                  laboratory studies conducted at the MDACC, have led to the
                  identification of certain members of the Phosphazole group of
                  small molecule drugs based on high potency and low toxicity as
                  compared to other small molecule drugs evaluated against these
                  protein targets. A number of Phosphazole small molecule drugs
                  have also been screened at the National Cancer Institute
                  ("NCI") for anti-cancer activity and three have been referred
                  to its Biological Evaluation Committee. Based on the results
                  of the studies at the MDACC and NCI, we intend to perform
                  additional laboratory studies and evaluate the lead drug
                  candidate in one or more clinically predictive animal models
                  prior to conducting a controlled Phase I/II clinical study
                  planned for 1999.

         o        Product engineering to design two proprietary new drug
                  delivery devices:

                  Flexible PREMS and PREMS-Iontophoresis Combination Systems. We
and

                                       24

<PAGE>

                  our corporate partner, Elan, have considerable know-how
                  relating to electromagnetic signal engineering and
                  iontophoresis product engineering. In a collaborative program,
                  prototypes of a flexible PREMS pad and a combination
                  iontophoresis-PREMS pad are being developed by the engineering
                  research and development group at Elan and/or its agents based
                  on design specifications that are currently available to our
                  company. These prototypes are expected to be modified based on
                  the results of the initial drug delivery product evaluation
                  activities discussed above.

Research Programs
-----------------

         We are engaged in research programs designed to improve upon our
current product candidates and to explore new applications of our core
technologies through collaboration with leading investigators in academic
institutions. We were the recipient of three Phase I Small Business Innovations
Research ("SBIR") grants from the National Institutes of Health in 1998. We
intend to engage in follow-on collaborative discovery activities and initiate
research programs with additional scientists.

         Drug Delivery.  Our drug delivery research plan includes:
         -------------

         o        Drug Enhancement by PREMS and/or Iontophoretic Currents.  It
                  has been indicated in the scientific literature that the
                  application of an electrical field by placing electrodes or
                  the induction of an  electric field by broadcasting
                  electromagnetic signals causes changes at the cellular level.
                  We intend to focus our in-house research program on
                  researching the molecular effects of PREMS-induced and
                  iontophoretic electric fields in order to develop new
                  information regarding the effects of these fields on cells and
                  tissues.  We intend to use this information to extend clinical
                  applications of PREMS-induced and iontophoretic electric
                  fields, individually or in combination, by increasing the
                  effectiveness of drugs through altering cell physiology in
                  target tissues. Our current research program is aimed at
                  evaluating PREMS and iontophoretic E-fields with respect to
                  their ability to alter biochemical processes and gene
                  activities of cells in order to either render diseased cells
                  more responsive to pharmaceutical agents or achieve
                  therapeutic effects by direct effects on disease-regulating
                  biochemical steps.  One mechanism by which increased response
                  or sensitivity may be achieved is presumed to be through
                  changes in the cell membrane caused by the E-field that in
                  turn changes the flow of ions or nutrients into and out of the
                  cell. The resulting products are expected to augment the
                  effects of biotechnology drugs, such as growth factors, and
                  pharmaceuticals for the treatment of degenerative diseases of
                  tissues such as skin, bone, nerve tissues and joint cartilage.
                  Our research program will specifically focus on designing
                  PREMS signals that enhance gene expressions and cellular
                  functions implicated in tissue regeneration.

         Drug Design.  The focus of our drug design research includes:
         -----------

         o        New Drugs and Drug Screening. Our scientists are collaborating
                  with our scientific advisors to design, synthesize and
                  evaluate a growing library of proprietary nucleobase analogs
                  to target cell- controlling protein factors such as Tumor
                  Necrosis factors and Transcription factors. We also are
                  designing novel small molecule

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<PAGE>

                  drugs, designated as NHTB, that are analogs of amino acids and
                  are designed to block the function of a transport protein
                  target that is involved in the uptake of certain amino acid
                  nutrients by cells. We have proprietary know-how to change
                  differentially the level of this transport protein target in
                  cancer cells as compared to their normal counterparts,
                  especially in the liver. The initial drugs are therefore being
                  pursued for ultra-sensitive imaging of liver cancer. We
                  believe that the NHTB drugs may also be used in imaging other
                  tumors and that derivatives of NHTB may be designed to kill
                  cancer cells through nutritional manipulation. We are
                  expanding our capabilities for drug design in the area of
                  enzymes (biological catalysts that alter the activities of
                  various protein targets). Our initial focus is on a group of
                  enzymes called "amidotransferases" that are implicated in
                  certain cancer cell metastasis and bacterial reproduction. Dr.
                  Sheldon Schuster, a member of our scientific and medical
                  advisory board, is an internationally recognized expert in the
                  study of this enzyme family and is collaborating with our
                  scientists to establish effective screening approaches in
                  order to select a lead drug for each of two conditions -
                  childhood leukemia that is refractory to chemotherapy and new
                  antibiotic-resistant infections such as new forms of
                  tuberculosis.

                  We believe that our growing expertise in the area of
                  validating the action mechanisms of protein or gene targets in
                  complex diseases and creating high throughput screening for
                  molecules that are active against such targets can be
                  leveraged to form partnerships with pharmaceutical and
                  biotechnology companies who possess larger libraries of
                  chemical compounds. Similarly, we believe our growing library
                  of small molecule drugs that are able to bind to various
                  families of biologically active proteins or genes can be used
                  to establish partnerships with companies engaged primarily in
                  the business of selecting targets for complex diseases.

         o        Protein Targets for Diagnostic Pathology.  We exclusively
                  licensed from Vanderbilt University another MCAM, called the
                  "pump protein", that is an enzyme produced and secreted at
                  high levels by cancer cells with metastatic potential. We
                  recently obtained, in the name of Vanderbilt, a U.S. patent
                  related to the use of this MCAM.  We have certain antibody
                  reagents and gene probes directed against the pump protein and
                  the transport proteins described above as a group of MCAMs
                  that are potential targets for diagnosing the more
                  "malignant" types of tumors from others. We intend to evaluate
                  rapidly the utility of these MCAMs in diagnostic and
                  prognostic testing (either by gene probes or by antibody
                  testing) of cancer through collaborations with diagnostic
                  pathology laboratories engaged in specialized  cancer
                  diagnostic testing. We believe that one or more of these
                  markers may complement the current panels of specialized
                  genetic and immunologic testing conducted on tumor biopsies
                  and used by the pathologists to arrive at a definitive
                  diagnosis.

         o        Disease-Specific Genetic Databases -New Target Identification.
                  We are developing proprietary genetic tests and databases
                  related to the effects of specific dietary ingredients on
                  chronic diseases such as cancer, heart disease and obesity.
                  Since most chronic diseases involve simultaneous changes in
                  the levels of activity, or "expression", of multiple genes,
                  we, unlike most of our competitors,

                                       26

<PAGE>

                  are developing "quantitative (QuEST) databases" for gene
                  families for each major chronic disease. The continued
                  development of this technology was initially funded by a SBIR
                  grant to our Company and other grants to Dr. James Kaput who
                  is our Vice President of Molecular Biology and Scientific
                  Planning, and formerly served as the chief scientist of the
                  GeneQuEST program I at HTD. Dr. Kaput joined our scientific
                  management team on October 12, 1998. The QuEST databases will
                  have a novel focus, the influence of specific dietary
                  ingredients, since nutrition is now recognized as a major
                  factor in both the incidence and the progression of most
                  chronic diseases. Our first prototype database will use a
                  library of nearly 5,000 tissue specimens produced in a mouse
                  model to study the effects of specific sterols implicated in
                  enhancing the onset of certain forms of cancer. We also are
                  building an initial pilot database in humans relating to the
                  effects of cholesterol-related dietary ingredients on the risk
                  of breast cancer in collaboration with the Preventive
                  Nutrition Department of the Northwestern University School of
                  Medicine.

                  These databases are intended to provide us with novel targets
                  for our drug design and proprietary methodologies related to
                  gene expression analysis in cells involved in complex
                  diseases. We intend to enter into agreements with developers
                  of pharmaceuticals and specialty food products to predict or
                  monitor safety and efficacy of such products
                  ("pharmacogenomics") and to screen for novel nutrients
                  (nutraceuticals or functional foods) that may reduce the risk
                  or enable better treatment of complex diseases such as cancer,
                  chronic wounds and osteoporosis. The databases may also be
                  useful in monitoring population at high genetic risk for
                  specific diseases.

Molecular Services Business

         As a separate business, we use our small molecule drug expertise to
design, produce and sell custom DNA probes and synthetic peptides to
biotechnology companies and research centers. We also design and sell DNA probes
to the developers of new chip-based and microarray-based DNA diagnostics and
companies who provide gene sequencing services. The demand for these products
has significantly increased during the past five years to support PCR
(polymerase chain reaction) tests, human genome sequencing and biopharmaceutical
research and development programs for screening and evaluation of novel drugs
and diagnostics. We currently design and supply oligonucleotide gene probes with
custom chemical modifications to both commercial companies and academic medical
centers for use in diagnostic products and in Human Genome Project research
programs, respectively. We intend to develop and market our design and synthesis
expertise to meet the additional demand for gene probes that is expected during
the next five to ten years in the chip-based and microarray based DNA
diagnostics industry. Our commercialization plan also includes strategic
alliances, including mergers and acquisitions, with other custom synthesis
companies and providers of related services such as gene sequencing.

         Dr. Krishna Jayaraman, Vice Chairman of our Company and an
internationally recognized expert in the field of DNA probe design, is
collaborating with Dr. Michael Hogan, Professor of Molecular Physiology and
Biophysics at the Baylor College of Medicine of Houston, Texas, who is one of
the leaders in the field of microarray based DNA diagnostics and a member of our
scientific and medical advisory board. This collaborative program is partially
funded by a SBIR grant from the NIH and is focused on developing novel small
nucleobase polymer molecules that will specifically address the needs of the
microarray-based

                                       27

<PAGE>

diagnostics. We believe that the resulting technology will enable us to rapidly
grow our specialized service business by expanding our customer base and by
creating new probes that we hope will establish us as a leading supplier of DNA
probes for microarray-based diagnostics.

         We are exploring an alliance with a new specialized "genetic
phenotyping" service that will address a new and growing biomedical research and
development market need involving the use of genetically engineered animals,
especially mice. Three of the nation's leading pathologists and veterinary
pathologists have agreed to work with us to establish a state of the art
capability to perform sophisticated morphologic analyses to define the
phenotypic expression in genetically engineered animal models, which will
complement our current capability to perform gene expression analysis in tissue
specimens. The use of genetically engineered animals, particularly mice, has
grown rapidly during the past few years as a result of the vast amounts of
genetic information produced from the Human Genome Project. Scientists can now
create defects in selected target genes or insert candidate genes associated
with a disease in mice and produce offsprings that carry a known gene defect
("knockout") or a new gene ("transgenic"). These mice serve as models for
studying known human diseases as well as predicting safety, efficacy and side
effects of drugs for such diseases. In order to obtain clinically valuable
information, research scientists need both pathology analysis that delineates
tissue structure-function defects and gene expression analysis in the tissue
cells that provide detailed molecular information with respect to the effects on
the target gene or its protein product. We intend to expand our services to
include specialized phenotypic analyses of transgenic and knock-out animal
models ("specialized genetic pathology") and gene activity analyses on tissues
of such animals and specimens from animal model studies on pharmacologic
evaluation of drugs ("pharmacogenomics"). We believe that these services will
produce revenues and also create an opportunity for our scientists to create
valuable genetic phenotyping databases that will significantly enhance the value
of our phenotyping services and have potential applications in drug design as
well as safety and efficacy evaluation.


Potential Markets for Company's Products
----------------------------------------

         Drug Delivery. The segment of the drug delivery market that is being
targeted as a field of application for our non-invasive drug delivery
technologies was estimated to be about $11.5 billion in 1996 and growing at an
annual rate of about 20%. An attractive aspect of the emerging drug delivery
technologies is that their commercial value can be demonstrated by improving the
utility of available approved products. In addition, regulatory approval for
commercial marketing for such value enhancement application is expected to be
less time consuming than the development of a new drug. A number of technologies
are being developed and evaluated by different companies for various clinical
indications. The potential for noninvasively achieving increased local blood
flow by PREMS to organs such as the breast and brain may have significant
advantage over other methods in delivering cancer drugs, especially the highly
toxic chemotherapeutic agents or the biotechnology products that are large
molecules with limited tissue delivery. Additional applications of PREMS include
the delivery of anti-inflammatory drugs for the treatment of arthritis and
tissue repair drugs in wound care and osteoporosis. The market for iontophoresis
for prescription dermatology drugs includes severe acne, psoriasis, dermatitis,
aging-associated wrinkling, pigmentation disorders, baldness and localized
viral, bacterial and fungal infections. The prescription dermatology drug market
is estimated to be more than $3 billion annually.


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<PAGE>

         Drug Design - Small Molecule Drugs. The small molecule drugs being
initially designed by our scientists target biochemical pathways inside of
cancer cells or on enzyme molecules released by cancer cells for growth and
spread. Our drug delivery technology based on PREMS is expected to improve the
delivery of cancer imaging and treatment drugs. The global market for cancer
drugs exceeds $4 billion annually and over $5 billion is spent annually for
cancer diagnosis. Approximately 1.4 million new cases of cancer are diagnosed
each year. In addition, millions of cancer patients who underwent remission
following traditional treatments during the past three to five years will
relapse with a higher mortality rate. Cancer is the second leading cause of
death in the U.S., and approximately one of every three Americans will get
cancer. The National Cancer Advisory Board reports that more than 8 million
people in the U.S. have cancer. The most difficult aspect of effectively
treating cancer is the treatment of cancer spread, or "metastasis", since it
requires high and toxic dosages of chemotherapy or available biotechnology drugs
and cannot be treated by radiation or surgery.

         In addition to cancer, the proteins and genes that are expected to be
targeted by our small molecule drugs are implicated in inflammation (such as
arthritis), other chronic diseases (such as Alzheimer's and osteoporosis) and
certain infections (such as warts and acne) with potential combined markets of
several billion dollars. The flexible iontophoretic patch technology is expected
to improve the efficacy of our anti-infective small molecule drugs.

         Drug Design - Molecular Services and Bioinformatics. The evolving
molecular medicine market includes not only novel diagnostic and treatment
products but also the use of molecular information to prevent the incidence and
to improve treatment outcomes of chronic diseases. Molecular diagnostic tests
have claimed a progressively growing percentage of the total diagnostic business
(currently estimated at $36 billion annually) and some analysts estimate that
the total market for molecular testing in disease diagnosis will exceed $5
billion by the year 2002. Our small molecule service business targets the gene
probe market that is estimated by analysts to be more than $1 billion annually
in the U.S. alone and growing at about 20% per year. In addition, our new
technology to create modified probes that enhance the sensitivity and
specificity of DNA diagnostics is expected to target the new products based on
microarray products that monitor hundreds of genes simultaneously. This new
market is expected to exceed $2 billion by the year 2003. Additional specialized
services that use our small molecule-based services relating to genetically
engineered animal models may exceed $250 million per year based on the estimated
200,000(+) such strains that are expected to be analyzed at $1,000 to $2,000 for
each strain.

         Potential Future Markets.  Potential long-term markets for our core
technologies include:

                  o        Application of our PREMS electromagnetic signals or
                           iontophoretic electric fields in tissue repair; and
                  o        Genetic databases related to the nutritionally
                           regulated genes.

         Analysts estimate that the market for products used in the repair and
regeneration of skin and cartilage from wounds, inflammatory diseases and
arthritis exceeds $5 billion annually, based on the number of procedures
performed to repair tissue damage from trauma and degenerative diseases. The
potential market size for products or treatment modalities for peripheral nerve
damage and degenerative brain disease such as Alzheimer's disease is also in the
multibillion dollar range. Genetic databases being developed by the gene
sequencing companies ("functional genomics" and "pharmacogenomics") are being

                                       29

<PAGE>

used by pharmaceutical and biotechnology companies to screen new drug candidates
and create diagnostic gene probes. Within the past few years, the licensing and
other revenues paid to "genomics" companies for the use of these databases have
exceeded $200 million. Our QuEST databases complement the current databases and
are expected to be used by the companies developing therapeutic products to
further refine the selection of drug candidates for chronic diseases such as
heart disease, osteoporosis, cancer and diabetes. In addition, the use of our
QuEST databases and gene activity profile analysis is expected to be applicable
to more than five million Americans who are projected to be members in various
diet/nutrition, wellness and anti-aging programs by the year 2001. Finally, we
expect that our database of genetic phenotyping of genetically engineered
animals will be used by companies developing genetic diagnostic and therapeutic
products.

         Competition in the markets being targeted by our products is intense.
In addition to all the major pharmaceutical and biotechnology companies, several
commercial companies such as Vertex Pharmaceuticals, Millennium Pharmaceutical,
Lynx Therapeutics and Gene Logic Inc. are engaged in the design or the
identification of gene targets for novel small molecule drugs based on gene
discoveries; Collagenex Pharmaceuticals, Medarx Inc. and others are creating
products to treat cancer metastasis; Iomed Inc., Sano and Nanosystems (now
subsidiaries of Elan), Alkermes and others are pursuing novel drug delivery
technologies. These and many other companies, as well as numerous academic and
not-for-profit research centers, are pursuing clinical indications and product
candidates that are substantially similar to those we are developing. Numerous
commercial, academic and not-for-profit research centers also have developed and
are developing various types of genetic databases.

Patents, Intellectual Property and Proprietary Information
----------------------------------------------------------

         We have exclusive licenses to and/or ownership of certain patents and
pending patent applications relating to our core technologies. We actively seek,
when appropriate, protection of our products and proprietary information by
means of United States and foreign patents, trademarks and contractual
arrangements. In addition, we rely upon trade secrets and contractual agreements
to protect certain of our proprietary information and products.

         As of March 31, 1999, we owned three issued U.S. patents related to the
PREMS technology and products, an exclusive license to one issued U.S. patent
related to a cancer cell-associated enzyme, an exclusive license to a pending
patent application relating to a family of nucleobase compounds. We also owned
certain other pending applications related to cancer cell targets, nucleobase
compounds, genetic database development methodology for nutritionally regulated
genes, and controlled release delivery matrices for certain drugs and
biologicals.

         Drug Delivery Intellectual Property. We have licensed from Elan certain
rights to several pending patent applications relating to the flexible
iontophoretic patch technology. We also own the following three issued U.S.
patents related to our PREMS technology:

         o        #5,370,680 dated December 6, 1994 entitled "Athermapeutic
                  Apparatus Employing Electromagnetic Fields";

         o        #5,584,863 dated December 17, 1996 entitled "Pulsed Radio
                  Frequency Electrotherapeutic System"; and

         o        #5,723,001 dated March 3, 1998 entitled "Apparatus and Method
                  for Treating Human Body Tissue with Electromagnetic
                  Radiation".

                                       30

<PAGE>

         We also have one corresponding case issued in Canada and a pending
application designating a number of foreign countries. We intend to file
additional applications in the U.S. and foreign countries based on the results
of the contemplated clinical and molecular studies and claim certain
applications of therapeutically active PREMS, methods of delivering the same and
uses therefor.

         We are the assignee of U.S. patent application number 08/381,769
(filing date February 1, 1995) entitled "Calcium Phosphate Precipitate
Formulations and Uses Therefor" related to controlled delivery of biological and
drug substances with potential use in tissue regeneration.

         Drug Design and Targets Intellectual Property.  We have exclusively
licensed from Aronex Pharmaceutical a U.S. patent application corresponding to
a provisional application number 60/023907 (filing date August 14, 1996)
entitled "Phosphazole Compounds" and all corresponding patent applications
thereto.  This application relates to nucleobase modifications.

         We have exclusively licensed U.S. patent #5,726,015 dated March 10,
1998 entitled "Method to Determine Metastatic Potential of Tumor Cells" and
related know-how from Vanderbilt University as a potential target for our cancer
product development program.

         We are in final stages of filing two additional U.S. patent
applications that are assigned to our company relating to nucleobase
modifications for "DNA diagnostic" and "protein-targeting therapeutic"
applications. We also are in final stages of filing two additional U.S. patent
applications that are assigned to our company, one of which relates to the
"design and uses of compounds related to a metastatic cancer cell-associated
molecule implicated in invasivity or spread of cancers" and the other relates to
"a method of identifying diet- regulated disease-linked genes, databases and
uses therefor".

         There can be no assurance that any patents will issue from any of our
pending patent applications or, even if patents issue or have issued, that the
claims thereof will provide us with any significant protection against
competitive products or otherwise be valuable commercially. Our patent
applications in foreign countries are either not filed yet with respect to
certain inventions and are not being prosecuted in all major foreign countries
in other instances. There can be no assurance that we or our corporate partners
will have the financial resources to file and prosecute patent applications in
all major foreign countries.

         With respect to proprietary know-how that is not patentable and for
processes for which patents are difficult to enforce, we have chosen to rely on
trade secret protection and confidentiality agreements to protect our interests.
We believe that several elements of our product development and research involve
proprietary know-how, technology or data which are not covered by patents or
patent applications. Some of this data will be the subject of patent
applications whereas other data will be maintained as proprietary trade secret
information. We have taken security measures to protect our proprietary know-how
and technologies and confidential data and continue to explore further methods
of protection. While we require all employees, consultants and collaborators to
enter into confidentiality agreements, there can be no assurance that
proprietary information will not be disclosed, that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets, or that we can
meaningfully protect our trade secrets. In the case of a strategic partnership
or other collaborative

                                       31

<PAGE>

arrangement which requires the sharing of data, our policy is to make available
to our partner only such data as are relevant to the partnership or arrangement,
under controlled circumstances, and only during the contractual term of the
strategic partnership or collaborative arrangement, and subject to a duty of
confidentiality on the part of our partner or collaborator. There can be no
assurance, however, that such measures will adequately protect our data.

Manufacturing
-------------

         We will rely, at least in part, on third party manufacturers to produce
our drugs or other products for preclinical and clinical studies and also for
commercial production of most of our products that are approved for marketing.
We have not yet established a quality assurance program, including a set of
standard operating procedures, intended to ensure that third party manufacturers
under contract produce our compounds in accordance with the FDA's current Good
Manufacturing Practices and other applicable regulations.

         We believe that all of our existing product candidates can be produced
using available methods, primarily through standard techniques of pharmaceutical
synthesis. We currently do not have the capacity to manufacture our potential
products, are dependent on third party manufacturers or collaborative partners
for such production for preclinical research and clinical trial purposes and
expect to be dependent on such manufacturers or collaborative partners for some
or all commercial production of any of our products that are approved for
marketing. We believe that we will be able to continue to negotiate arrangements
on commercially reasonable terms and that it will not be necessary for us to
develop internal production capability in order to develop our products
successfully. In the event that we are unable to obtain contract manufacturing,
or obtain such manufacturing on commercially reasonable terms, we may not be
able to commercialize our products as planned. Our objective is to maintain
flexibility in deciding whether to develop internal manufacturing capabilities
for certain of our potential products. We have only a limited expertise in the
manufacture of class III medical devices and no experience in manufacturing
pharmaceutical or biotechnology products or in conducting manufacturing testing
programs required to obtain FDA and other regulatory approvals. We can not
assure that we will develop such capabilities successfully.

         Since our potential products are at an early stage of development, we
will need to improve or modify our existing processes and capabilities to
produce any product for clinical trials or commercial marketing. We cannot
quantify the time or expense that may ultimately be required to improve or
modify our existing process technologies, but it is possible that such time or
expense could be substantial.

         The production of our products is expected to be based in part on
technology that we believe will be proprietary. We may license this technology
to contract manufacturers to enable them to manufacture compounds for our
product development programs. We can not assure that such manufacturers will
abide by any limitations or confidentiality restrictions in licenses with us. In
addition, any such manufacturer may develop process technology related to the
manufacture of our products that such manufacturer owns either independently or
jointly with us. This would increase our reliance on such manufacturer or
require us to obtain a license from such manufacturer in order to have our
products manufactured. We can not be sure that any such license would be
available on terms acceptable to us, if at all.

         Some of our corporate partners are expected to have certain
manufacturing rights with respect to our products under development, and there
can be no

                                       32

<PAGE>

assurance that such corporate partners' rights will not impede our ability to
conduct the development programs and commercialize any resulting products in
accordance with the schedules and in the manner currently contemplated by us.

Competition
-----------

         We are engaged in biopharmaceutical fields characterized by extensive
research efforts, rapid technological progress and intense competition. There
are many public and private companies, including pharmaceutical companies,
chemical companies and biotechnology companies, engaged in developing products
for the human therapeutic applications targeted by us. Further, we believe that
interest in the application of drug design and related technologies may continue
and may accelerate as the technologies become more widely understood. We are
aware of efforts by others to develop products in each of the areas in which we
have products in development. In order for us to compete successfully in these
areas, we must demonstrate improved safety, efficacy, ease of manufacturing and
market acceptance over our competitors, who have received regulatory approval
and are currently marketing. Furthermore, academic institutions, governmental
agencies and other public and private research organizations are conducting
research to develop technologies and products that may compete with those under
development by us. In addition, other technologies are, or may in the future
become, the basis for competing products. We can not be certain that our
competitors will not succeed in developing technologies and products that are
more effective than the ones we are developing or that would render our
technology and products obsolete or noncompetitive. We also can not be sure that
our products will be able to compete effectively with products which are
currently on the market.

         Many of our competitors have substantially greater financial, technical
and human resources than we do. In addition, many of our competitors have
significantly greater experience than our staff in conducting preclinical
testing and human clinical trials of new pharmaceutical products, and in
obtaining FDA and other regulatory approvals of products. Accordingly, certain
of our competitors may succeed in obtaining regulatory approval for products
more rapidly than we would. If we obtain regulatory approval and commence
commercial sales of our products, we will also compete with respect to
manufacturing efficiency and sales and marketing capabilities, areas in which we
currently have no experience.

Product Pricing and Reimbursement
---------------------------------

         Our ability, with or without corporate partners, to commercialize our
products successfully will depend in part on the extent to which appropriate
reimbursement levels for the cost of such products and related treatment are
obtained from government authorities, private health insurers and other
organizations, such as health maintenance organization or HMOs. Third party
payors and government authorities are continuing efforts to contain or reduce
the cost of health care. For example, in certain foreign markets, pricing and/or
profitability of prescription pharmaceuticals are subject to government control.
There can be no assurance that similar controls will not be implemented in the
United States. Also, the trend toward managed health care in the United States
and the concurrent growth of organizations such as HMOs, which could control or
significantly influence the purchase of health care services and products, may
result in lower prices for our products. The cost containment measures that
health care providers and third party payors are instituting and any proposed or
future health care reform measures, including any reductions in Government
reimbursement programs such as Medicaid and Medicare, could affect our or our
partners' ability to sell our products.


                                       33

<PAGE>

         The success of our products in the United States and other significant
markets will depend, in part, upon the extent to which a consumer will be able
to obtain reimbursement for the cost of such products from government health
administration authorities, third-party payors and other organizations.
Significant uncertainty exists as to the reimbursement status of newly approved
therapeutic products. Even if a product is approved for marketing, there can be
no assurance that adequate reimbursement will be available. We are unable to
predict what additional legislation or regulation relating to the health care
industry or third-party coverage and reimbursement may be enacted in the future
or what effect the legislation or regulation would have on our business.

Sales and Marketing
-------------------

         We divested our sales and marketing force for SofPulse, the medical
device that was divested as a part of our recent restructuring (See-"Background,
Recent Changes of Business and Restructuring"). We do not plan to build our own
sales and marketing team in the near future. We intend to focus on direct
contacts into the academic research community to market our special services
using our drug design expertise during the foreseeable future. We also have
established alliances with a third party distributor to market our services and
research reagents that we produce. In the long-term, our goal would be to use
our corporate partners' sales forces to market our products.

Employees
---------

         As of March 31, 1999, the Company had 16 full-time employees, 6 of whom
hold doctorate degrees while others hold advanced business or technical degrees.
Of the Company's 16 full-time employees on that date, 6 were engaged in research
and development, 5 in molecular services, and 5 in marketing and general
administration. The Company's future success depends in significant part upon
the continued service of its key technical and senior management personnel and
its continuing ability to attract and retain highly qualified technical and
managerial personnel. None of the Company's employees are represented by a labor
union and the Company considers its relations with its employees to be good.


Item 2.  Description of Property.

         The Company maintains leased administrative, manufacturing and research
office space at three facilities. The Company's principal executive offices,
which consist of approximately 1,800 square feet of useable space, are located
at 1109 NW 13th Street, Gainesville, Florida. This facility is leased to the
Company until September 1999. Its research facility located in the Sid Martin
Biotechnology Institute at 12085 Research Drive, Alachua, Florida, which
consists of approximately 1,100 square feet of usable space, is licensed by the
Company until November 1999. Its Gemini Biotech research and manufacturing
facility, which consists of approximately 7,300 square feet of useable space, is
located at 8701-D New Trails Drive, The Woodlands, Texas. These facilities are
leased to the Company until April 2000. The Company believes its existing
facilities are adequate and suitable for its present needs and that additional
space will be available as needed.


Item 3.  Legal Proceedings.

         In August 1994, a competitor of the Company filed a lawsuit against the
Company and certain of its present and former directors and officers alleging
the defendants had engaged in deceptive acts and practices, false advertising,
unfair

                                       34

<PAGE>

competition, breach of contracts of fiduciary duties between the plaintiff and
certain Company employees, and the Company's involvement in facilitating or
participating in the breach of contracts. The plaintiff is seeking an injunction
to rectify the effects of the misconduct, an unspecified amount of compensatory
damages, disgorgement of profits, treble damages, punitive damages and
attorney's fees. The plaintiff also seeks unspecified injunctive relief
prohibiting the Company from engaging in the alleged acts and ordering the
defendants to take remedial action to rectify the effects on consumers and the
plaintiff caused by the alleged acts. The Company believes it has meritorious
defenses which it will pursue vigorously and has filed a counterclaim against
the plaintiff and its president, Dr. Jesse Ross. The parties to the litigation
are currently in settlement negotiations. The Company's future product
development, including the development of the technology underlying the SofPulse
product, is not likely to be adversely affected by the outcome. However, there
can be no assurance that the outcome of such action will be resolved favorably
to the Company or that such litigation will not have an adverse effect on the
Company's liquidity, financial condition and results of operations.


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

     No matters were submitted to a vote of security holders during the fourth
quarter of 1998.





                                     Part II

Item 5.  Market for the Company's Common Equity and Related Stockholder
         Matters


         From May 12, 1995 to September 23, 1997, the Company's Common Stock was
traded on the Nasdaq Small Cap Market under the symbol "EPHI." On September 23,
1997, Nasdaq notified our Company that our stock would be delisted from the
Nasdaq SmallCap Market as of the close of business on September 23, 1997 due to
noncompliance with the minimum capital and surplus requirement and minimum value
of the public market float and trading price of our shares. Our stock is now
trading on the OTC Bulletin Board under the symbol "EPHI". The following table
sets forth, for the periods indicated, the range of high and low bid quotations
for our Common Stock as reported by Nasdaq. However, our Company's Common Stock
generally is not actively traded or is traded in low volumes. Therefore, we
cannot be sure that market quotations for our Common Stock are indicative of
prices at which actual sales of these shares will occur. These quotations
represent inter-dealer prices, without retail markup, markdown or commissions,
and do not necessarily represent actual transactions. Further, we cannot be sure
that a public trading market for the Company's Common Stock will continue to
exist.


                                       35

<PAGE>
<TABLE>
<CAPTION>
<S>                                                                <C>                        <C>
                                                                   High                       Low
                                                                   ----                       ---

         Fiscal year ended December 31, 1997:
         ------------------------------------
              First Quarter                                       $6.50                      $2.00
              Second Quarter                                      $3.50                      $1.72
              Third Quarter                                       $2.00                      $ .38
              Fourth Quarter                                      $1.19                      $ .23

         Fiscal year ended December 31, 1998:
         ------------------------------------
              First Quarter                                       $ .47                      $ .26
              Second Quarter                                      $ .80                      $ .29
              Third Quarter                                       $1.32                      $ .58
              Fourth Quarter                                      $ .97                      $ .33

         Fiscal year ended December 31, 1999:
         ------------------------------------
              First Quarter                                       $ .30                      $ .34
              Second Quarter (through May 17)                     $ .95                      $ .30

</TABLE>


         On May 17, 1999, the closing price of the Common Stock on the OTC
Bulletin Board was $.72 per share. As of such date, there were approximately 87
registered stockholders of record of our Common Stock. To date, we have not
declared or paid any cash dividends on our Common Stock.


Item 6.  Management's Discussion and Analysis of Financial Condition and
         Results of Operation

         The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains certain forward-looking statements
which involve risk and uncertainties. Actual events and results may differ
materially from those anticipated in these forward looking statements as a
result of various factors, including the matters set forth elsewhere in this
Form 10- KSB.


General

         Electropharmacology, Inc. was created through a series of transactions
with the goal to create a unique biotechnology company focused on the
development of proprietary products in the areas of drug design and drug
delivery with significant commercial potential worldwide.

Recent Change of Business - Sale of Business and Recent Acquisition
-------------------------------------------------------------------

         From 1990 to August 1998, our Company had been engaged in the business
of developing medical device applications for its proprietary PREMS technology,
including primarily the manufacturing and marketing of a PREMS device called
SofPulse. In August 1998, the Company sold its SofPulse business and completed
two acquisitions that transformed it into a biotechnology development company
(see "Item 1. Description of Business -- Background, Recent Change of Business
and Restructuring"). We intend to use our drug design expertise acquired through
our recent transactions to create novel small molecule drugs that target
proteins and genes which control complex diseases. In September 1998, the
Company entered into an agreement with subsidiaries of Elan, under to which the
Company has acquired a license from Elan for certain applications of Elan's
flexible iontophoretic patch technology (see "Item 1. Description of Business --
Background, Recent Change of Business and Restructuring" -- "Recent Elan
Transactions"). We intend to pursue the application of iontophoresis and PREMS

                                       36

<PAGE>

in enhancing the delivery of drugs and biologics to diseased tissues and
promoting the regeneration of cells in tissues damaged by trauma or chronic
diseases.

         During 1997, the Company's management concluded that it could not
create shareholder value by pursuing on its own both the growth of the SofPulse
device business and the PREMS technology business focused upon drug delivery
devices. Accordingly, the Company implemented a strategy to create value from
each of the two lines of businesses under separate business structures. In May
1998, the Company entered into an asset purchase agreement with ADM Tronics
under which ADM Tronics acquired in August 1998 most of our SofPulse device
units and certain other assets specifically related to the SofPulse
manufacturing and marketing operations. In June 1998, the Company entered into
agreements to acquire HealthTech and Gemini, respectively, two privately held
companies engaged in the design and development of small molecule drugs. As a
result of the consummation of these two acquisitions in August 1998, the Company
has combined its PREMS technology development business with a broad portfolio of
biotechnologies, collaborative affiliations with major medical institutions and
relationships with internationally recognized scientists. See "Item 1.
Description of Business-- Background, Recent Change of Business and
Restructuring" and -- "Detailed Description of the Core Technologies".

         In September 1998, the Company also received from subsidiary of Elan a
world-wide license to Elan's non-systemic, flexible iontophoretic patch
technology for non-cosmetic dermatology and wound care applications. The
agreement also envisions the development of a flexible patch version of PREMS
technology as well as a combination patch incorporating iontophoresis and PREMS.
The Company has the world-wide rights to therapeutic applications of the
improved PREMS product as well as combinations of PREMS and iontophoresis in
non-cosmetic dermatology and wound care applications. We paid Elan $7.5 million
for the acquisition and transfer of the technology and will pay prescribed
royalties and license fees to Elan based on the Company's future revenues, if
any, from the commercialization of the technology by the Company or its
licensees.

         In September 1998, another Elan subsidiary invested $7.5 million to
acquire shares of the Company's Series A Convertible Preferred Stock and
warrants to purchase up to one million shares of the Company's common stock at
$2.50 per share. The Preferred Stock has a conversion price of $1.20 per share,
subject to certain adjustments for dilution, 10% per year dividends paid
semi-annually in cash or in kind, at the Company's option, and mandatory
redemption after a seven year period, unless the Company has insufficient funds.
In such case, Elan must elect to extend the redemption date to a date acceptable
to the Company or accept common stock in lieu of redemption. The Elan subsidiary
also agreed to invest, upon request by the Company, $2 million to acquire shares
of the Company's common stock or other equity securities at a price equal to the
per share price at which the Company sells up to an additional $2 million of the
Company's common stock to other investors or if no sale was consummated, at the
average closing price of the Company's common stock for the 20 consecutive
trading days prior to the acquisition, and, in any event, at a maximum price of
$1.375 per share. The Company agreed to provide Elan with registration rights
for the common stock beneficially owned by Elan. Elan is also entitled to
nominate one director to serve on the Company's board of directors.


Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
-------------------------------------------------------------------------

         The Company's revenue for the year ended December 31, 1998 was $620,484
as compared to $2,401,249 for the year ended December 31, 1997, or a decrease of

                                       37

<PAGE>

$1,780,765. This 74.2% decrease was attributable to a $1,966,246 or 81.9%,
decrease in SofPulse rental and sales revenues in the year ended December 31,
1998, as compared to the same period in 1997. The Company's rental revenues were
materially adversely affected in July 1997 by the issuance by the Health Care
Financing Administration ("HCFA") of a national policy of non-reimbursement by
Medicare for all forms of electrotherapy for wound healing. HCFA was enjoined
from implementing this national policy under a U.S. District Court ruling in
November 1997; however, rental revenues did not increase significantly following
the injunction. At May 27, 1998, the effective date of the transfer of the
SofPulse rental and sales revenue, there were 98 units under monthly rental
contracts as compared to 391 units at May 1, 1997. Accordingly, monthly rental
revenues in May 1998 were $68,418, as compared to $259,437 in May 1997. In
addition, the Company had no SofPulse rental or sale revenues in the last seven
months of the year ended December 31, 1998 due to the SofPulse asset transfer in
May 1998. Revenue from the sales of SofPulse units and other sales also
decreased from $700,763 in the year ended December 31, 1997 to $75,860 in the
comparable period in 1998. During 1998, the Company sold 12 used SofPulse
devices as compared to 79 new and used devices in 1997. This decrease in sales
of SofPulse units was partially offset by revenues of $158,833 during 1998
attributable to Gemini's revenues from synthesis of gene probes and research
grants from the date of Gemini's acquisition by the Company to year end.

         Cost of revenue for the year ended December 31, 1998 was $410,087, as
compared to $611,702 for the year ended December 31, 1997, a decrease of
$201,615. This 33% decrease reflects the decreased number of SofPulse devices
sold during 1998, as compared to 1997 and the reduction in depreciation expense
on the SofPulse units due to the transfer of the SofPulse assets and revenues to
ADM Tronics in May 1998. This decrease was partially offset by cost of revenues
of $240,707 attributable to Gemini's operations from the date of Gemini's
acquisition by the Company to year end.

         Selling, general and administrative expenses were $1,962,403 for the
year ended December 31, 1998, compared to $3,177,031 for the year ended December
31, 1997, a decrease of $1,214,628 or 38.2%. As a consequence of the Company's
deteriorating cash position and its sale to ADM Tronics of most of its SofPulse
devices and certain related manufacturing and marketing assets, the Company
underwent a reduction in personnel from 27 employees in March 1997 to six
employees at June 30, 1998. This decrease is primarily due to reductions in the
salaries and related benefits associated with personnel reductions in sales and
marketing, clinical support services and manufacturing departments, and
reductions in outside legal, accounting and consulting expenses, as well as
sales commissions, public relations, travel and marketing expenses.

         The decrease in expenses is partially offset by $400,875 in expenses
attributable to the additional personnel, sales and marketing, research and
development, manufacturing and administrative expenses associated with Gemini's
custom DNA and peptide synthesis, and drug design business.

          In conjunction with the acquisitions of HTD and Gemini, $3,357,783 and
$3,952,331, respectively, of the purchase price was allocated to and recorded as
various intangible assets. Concurrently, we evaluated these assets, determined
that such assets were permamently impaired due to the Company's current period
and historical operating losses, and recognized a $7,310,114 impairment loss on
these intangible assets in 1998. In conjunction with the acquisition of Elan's
flexible iontophoresis technology in 1998, we allocated $6 million of the 7.5
million cost to in-process research and development and the remaining $1.5
million to goodwill. Concurrently, we evaluated the goodwill of $1.5 million,
determined the asset was permanently impaired due to the Company's current
period and historical operating losses, and recognized a 1.5 million impairment
loss in 1998. We also determined the licensed Elan technology had various
ascertainable long-term requirements for additional human testing, financial
resources and further development in order to realize economic benefits. As a

                                       38

<PAGE>

result of the long-term development requirements, substantial costs, and
uncertainties related to the technological feasibility and commercialization of
the licensed Elan technolgy,we recorded a one-time charge of $6 million to write
off in-process research and development.

         As part of the valuation of the Gemini acquisition, Gemini's inventory
of reagents was written up by $731,493 in 1998. Subsequently, the Company
determined the inventory value was not recoverable and provided for a provision
for inventory obsolescence of $731,493.

         Research and development expenses decreased to $53,823 in 1998 as
compared to $214,686 in 1997, primarily as a result of the reduction in basic
scientific research due to lack of available funds.

         Interest income of $31,882 for the year ended December 31, 1998 was
primarily attributable to interest earned on Elan's $600,000 cash investment in
the Company's common stock during the fourth quarter of 1998. In comparison,
interest income in 1997 was $9,894 due to less funds being available for short
term investment in 1997.

         Interest expense was $108,892 for the year ended December 31, 1998 as
compared to $25,135 for the year ended December 31, 1997, primarily due to an
increase in the amount of outstanding debt. We had outstanding at December 31,
1998, note payables of $101,730 to finance insurance premiums, a note payable of
$118,430 to our former auditors, a Gemini note payable of $1,189,809 to finance
its operations, and debt outstanding to directors of the Company in the amount
of $129,580, representing advances and foregone salary.

         In the year ended December 31, 1998, the Company recognized a one-time
$780,724 gain on sale of the SofPulse devices assets to ADM Tronics, offset in
part by a $64,500 loss on disposal of excess or obsolete office equipment in the
move of the administrative offices to Gainesville, Florida. In comparison, in
the comparable period in 1997, the Company recorded a loss on the disposal of
equipment of $30,506.

         In the year ended December 31, 1998, minority interest of $2,040,000
was recorded as a reduction to the Company's net loss and relates to the
minority shareholders' 32% interest in Gemini Health Technologies L.P., an
operating subsidiary 68% controlled by the Company.

         The above resulted in a net loss of $14,675,433 for the year ended
December 31, 1998 compared to a net loss of $1,647,917 for the year ended
December 31, 1997.

Liquidity and Capital Resources
-------------------------------

         The Company's cash requirements have been and will continue to be
significant. Since its inception, the Company has satisfied its operating
requirements primarily through the issuance of equity and debt securities and
loans from stockholders, revenues from rental and sale of SofPulse devices, and,
to a lesser extent, Gemini's custom DNA and peptide synthesis business. At
December 31, 1998, the Company had a working capital deficit of $453,321 and an
accumulated deficit of $30,795,815.

         Net cash used by operating activities in 1998 was $816,086 as compared
to net cash provided in operating activities of $99,339 in 1997. Net cash was
used primarily to fund the losses from operations. Net cash used in 1998
investing activities was $7,146,863, which was used primarily to acquire certain
technologies from Elan totaling $7,500,000. This use of cash was partially
offset by the proceeds of $164,420 from the sale of equipment ($150,000 from the

                                       39

<PAGE>

sale of the SofPulse devices to ADM Tronics) and $346,820 of cash acquired in
the Gemini acquisition. In comparison, net cash used in 1997 investing
activities was $25,145. At December 31, 1998, the Company did not have any
material commitments for capital expenditures. Net cash provided in financing
activities was $7,895,775 for 1998 as compared to $186,221 of cash used by these
activities in 1997. This increase is primarily attributable to investments of
$7.5 million in redeemable convertible preferred stock and warrants and $600,000
in common stock by Elan International. This increase was partially offset by
repayments of $192,193 on notes payable. Subsequent to December 31, 1998, Elan
International has invested an additional $1.4 million in the Company's common
stock, additional redeemable preferred stock and warrants to purchase common
stock. Under the licensing agreement with Elan Pharma, a substantial portion of
the proceeds from Elan International's investment must be used by the Company to
fund further development of products.

         The Company expects its cash needs will continue to increase in the
future periods, primarily because it will incur additional expenses related to
the development of small molecule drugs and the iontophoresis flexible patch
technology licensed from Elan, in addition to its efforts to develop novel
medical applications for its core PREMS technology. The Company will need to
raise substantial additional funds to continue the development and
commercialization of these technologies and products. The future cash needs of
the Company will depend significantly on many factors that relate to the
development of drug delivery and small molecule drug products, including but not
limited to, continued scientific progress in the research and development
programs; the results of research and development; preclinical studies and
clinical trials; acquisition of products and technologies, if any; relationships
with corporate partners, if any; competing technological and market
developments; the time and costs involved in obtaining regulatory approvals; the
costs involved in filing, prosecuting and enforcing patent claims; the time and
costs of manufacturing scale-up and commercialization activities and other
factors.

         Under the present circumstances, the Company's ability to continue as a
going concern depends on its ability to obtain additional financing. The Company
is exploring alternative sources of additional financing. The Company in
November 1998 filed with the Securities and Exchange Commission a registration
statement to register for public sale approximately shares of its common stock
in order to raise approximately $2,000,000; however, the registration statement
has not yet become effective. The Company also intends to seek additional Small
Business Innovations Research grants, including Phase II grants (common average
funding at about $500,000 for each grant), and Federal Advanced Technology
Program grants. The Company believes that with a successful implementation of
its strategic plan, additional capital also may become available through a
combination of larger federal grants, corporate strategic alliances and
additional public financing. However, other than the proposed sale of $1.4
million of the Company's common stock to Elan as of December 31, 1998 (of which
$1.4 million has been received subsequent to year end) (see --"Item 1. Business
- Background, Recent Change of Business and Restructuring - Recent Elan
Transactions"), a substantial portion of which must be used for specified
research and development activities, and potential proceeds from the sale of
common stock of ADM Tronics, which sales are subject to certain restrictions, no
definitive sources of additional financing have been identified at this time,
nor can there be any assurance that additional financing will be obtained on
favorable terms. The Company's ability to obtain financing through the issuance
of its common stock was materially adversely affected when Nasdaq notified the
Company in September 1997 the Company's stock would be delisted from the Nasdaq
SmallCap Market as of the close of business on September 23, 1997 due to
noncompliance with the requirements related to minimum working capital, minimum

                                       40

<PAGE>

surplus and minimum value of the Company's public market float. The Company is
now quoted on the OTC Bulletin Board, but there can be no assurance a public
trading market for the Company's common stock will continue to exist.

         Losses from the Gemini operations have consumed significant cash
resources from the Company. While the custom DNA synthesis business of Gemini
Biotech has been rapidly growing, the operation has continued to require
additional investment in personnel, materials, facilities and equipment,
resulting in substantially higher operating expenses. During May 1999, the
Company has been evaluating plans to significantly reduce these operating losses
and cash outflows while retaining the value of the custom DNA synthesis services
business. Among the options being evaluated are strategic alliances, including
mergers and acquisition of related or complementary molecular services business
for the medical research market; downsizing Gemini's operations, including a
reduction in salaries and personnel; the outsourcing of a portion of the custom
DNA synthesis business to reduce operating expenses; and raising additional
investment capital in order to sustain continuing operations. The plans for the
restructuring include the compromise and settlement of certain Gemini
liabilities, including trade payables, lease obligations, employment agreements
and a $1.2 million secured loan to an insurance company.

      We cannot predict whether the operating and financing strategies and plans
described above, if implemented by the Company, will be successful. If the
Company is unable to restructure, improve its operations, and ultimately obtain
additional financing, it may be forced to discontinue further development of its
technologies, marketing of its service business or to sell its assets.

         At December 31, 1998, the Company had a net operating loss ("NOL")
carryforward of $3,895,000 available to offset future taxable income, if any,
through the year 2012. In 1993, 1995 and 1998, changes in ownership of greater
than 50% occurred as a result of the Company issuing equity securities. As a
result, a substantial limitation may be imposed upon the future utilization of
its NOL carryforward.


Inflation
---------

         The amounts presented in the financial statements do not provide for
the effect of inflation on the Company's operations or its financial position.
Amounts shown for property, plant and equipment and for costs and expenses
reflect historical cost and do not necessarily represent replacement cost or
charges to operations based on replacement cost. The loss would be higher than
reported if the effects of inflation were reflected by charging operations with
amounts that represent replacement costs or by using other inflation
adjustments.


Year 2000 Compliance
--------------------

         The year 2000 issue is the result of possible shortcomings in
electronic data processing systems and other electronic equipment that may not
have been programmed to process data accurately when the last two digits of the
year change from 99 to 00 which could adversely affect the Company's operations.

         The Company has completed an inventory of computer systems and other
electronic equipment that may be affected by the year 2000 issue and that are
necessary to conduct Company operations. Management has determined that all
computer and electronic systems identified during the inventory are year 2000
compliant.

                                       41

<PAGE>

         Because of the unprecedented nature of the year 2000 issue, the effects
and success of related remediation efforts will not be fully determinable until
the year 2000 and thereafter. Management cannot assure that the Company is or
will be year 2000 ready, that the Company's remediation efforts will be
successful in whole or in part, or that parties with whom the Company does
business will be year 2000 compliant.


Recent Accounting Pronouncements
--------------------------------

         In March 1998, the Accounting Standards Executive Committee issued
AICPA Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). This statement provides
guidance on accounting for the costs of computer software developed or obtained
for internal use and identifies characteristics of internal use software as well
as assists in determining when computer software is for internal use. SOP 98-1
is effective for fiscal years beginning after December 15, 1998, with earlier
application permitted. The Company does not expect adoption of this SOP to have
a material impact on its financial position or results of operations.

         In March 1998, the Accounting Standards Executive Committee issued
AICPA Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities." This Statement of Position provides guidance on the financial
reporting of start-up costs and organization costs. It requires the cost of
start-up activities and organization costs be expensed as incurred. The SOP is
effective for financial statements for fiscal years beginning after December 15,
1998. The Company does not expect adoption of this SOP to have a material impact
on its financial statements.



                                       42

<PAGE>

Item 7.  Financial Statements



                    AUDITED CONSOLIDATED FINANCIAL STATEMENTS
                  FOR THE YEARS ENDED DECEMBER 31,1998 AND 1997



                                TABLE OF CONTENTS



<TABLE>
<CAPTION>
<S>                                                                                   <C>

                                                                                       Page
                                                                                       ----


Report of Sweeney, Gates & Co.
Independent Public Accountants..........................................................F-2

Report of Ernst & Young LLP, Independent
Certified Public Accountants............................................................F-3

CONSOLIDATED FINANCIAL STATEMENTS


Consolidated Balance Sheet..............................................................F-4

Consolidated Statements of Operations...................................................F-5

Consolidated Statements of Stockholders' Equity.........................................F-6

Consolidated Statements of Cash Flows...................................................F-7

Notes to the Consolidated Financial Statements..........................................F-9

</TABLE>




                                       F-1

<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


         The Board of Directors and Stockholders
         Electropharmacology, Inc.


         We have audited the accompanying consolidated balance sheet of
         Electropharmacology, Inc. as of December 31, 1998 and the related
         consolidated statements of operations, stockholders' equity (net
         capital deficiency) and cash flows for the year ended December 31,
         1998. 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 audit.

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

         In our opinion, the consolidated financial statements referred to above
         present fairly, in all material respects, the financial position of
         Electropharmacology, Inc. as of December 31, 1998, and the results of
         its consolidated operations and its consolidated cash flows for the
         year ended December 31, 1998 in conformity with generally accepted
         accounting principles.

         The accompanying consolidated financial statements have been prepared
         assuming that the Company will continue as a going concern. As
         discussed in Note 2 to the consolidated financial statements, the
         Company has suffered recurring losses from operations that raise
         substantial doubt about its ability to continue as a going concern.
         Management's plans in regard to these matters are also described in
         Note 2. The financial statements do not include any adjustments that
         might result from the outcome of this uncertainty.


                                                     Sweeney, Gates & Co.
         Fort Lauderdale, Florida
         April 28, 1999
                                       F-2

<PAGE>

               Report of Independent Certified Public Accountants

Board of Directors
Electropharmacology, Inc.

We have audited the accompanying statements of operations, shareholders' equity
(net capital deficiency) and cash flows of Electropharmacology, Inc. (the
"Company") for the year ended December 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of
Electropharmacology, Inc. for the year ended December 31, 1997, in conformity
with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 2 to
the financial statements, the Company incurred significant recurring operating
losses and has both a working capital deficit and a net capital deficiency.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 2. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that might result from
the outcome of this uncertainty.


                                                      /s/ ERNST & YOUNG LLP


West Palm Beach, Florida
March 31, 1998

                                       F-3

<PAGE>

                            ELECTROPHARMACOLOGY, INC.

                           CONSOLIDATED BALANCE SHEET

                                DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S>                                                                                 <C>
ASSETS

Current assets:
    Cash and cash equivalents                                                       $ 160,011
    Accounts receivable, net of allowance for doubtful
        accounts of $61,184                                                            83,497
    Subscription receivable - current                                                 900,000
    Other receivables                                                                   2,769
    Inventory                                                                           7,172
    Investment                                                                      1,400,000
    Prepaid expenses                                                                  133,737
                                                                                  -------------
        Total current assets                                                        2,687,186

Property and equipment, net of
    accumulated depreciation of $217,752                                              382,347

Patents, net of accumulated amortization of $20,306                                    83,048

Other assets                                                                            8,750
                                                                                  =============
                                                                                  $ 3,161,331
                                                                                  =============
</TABLE>

    The accompanting notes are an integral part of these financial statements


                                       F-4

<PAGE>


                            ELECTROPHARMACOLOGY, INC.

                           CONSOLIDATED BALANCE SHEET

                                DECEMBER 31, 1998


LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S>                                                                                 <C>

Current liabilities:
    Notes payable - short term                                                      $ 220,160
    Notes payable - related parties                                                   129,580
    Current portion of long term debt                                               1,189,809
    Current portion of capital leases                                                  30,034
    Accounts payable                                                                  482,643
    Accrued expenses                                                                  181,639
                                                                                  ------------
        Total current liabilities                                                   2,233,865

Capital leases, long term portion                                                      45,539
Minority interest                                                                   2,031,429
Mandatorily redeemable convertible preferred stock,
    $.01 par value, 7,500 authorized, issued and outstanding                        7,458,926

Stockholders' Equity:
    Convertible preferred stock, $.01 par value, 9,992,500 shares
        authorized, no shares issued and outstanding                                        -
    Common stock, $.01 par value; 30,000,000 shares authorized;
        13,282,687 issued and outstanding, 2,435,320 shares subscribed                157,180
    Additional paid-in capital                                                     21,726,928
    Accumulated other comprehensive income                                            803,279
    Retained deficit                                                              (30,795,815)
                                                                                  ------------
                                                                                   (8,108,428)
    Subscription receivable                                                          (500,000)
                                                                                  ------------
           Total stockholders' equity                                              (8,608,428)
                                                                                  ------------
                                                                                  $ 3,161,331
                                                                                  ============
</TABLE>


    The accompanting notes are an integral part of these financial statements


                                       F-5

<PAGE>


                            ELECTROPHARMACOLOGY, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
<S>                                                                       <C>                 <C>

                                                                               1998               1997
Revenue:
    Rentals                                                                 $ 359,143         $ 1,700,486
    Sales                                                                     261,341             700,763
                                                                          ------------       --------------
Total revenue                                                                 620,484           2,401,249
                                                                          ------------       --------------
Expenses:
    Cost of revenue                                                           410,087             611,702
    Selling, general and administrative                                     1,962,403           3,177,031
    Research and development                                                   53,823             214,686
    Inventory obsolescence                                                    731,493                   -
    Impairment loss on intangible assets                                    8,811,114                   -
    Impairment loss on in-process research and development                  6,000,000                   -
                                                                          ------------       --------------
      Total operating expenses                                             17,968,920           4,003,419
                                                                          ------------       --------------
    Operating loss                                                        (17,348,436)         (1,602,170)
                                                                          ------------       --------------
Other income (expense):
    Gain (loss) on disposal of equipment                                      716,223             (30,506)
    Interest and other income                                                  31,882               9,894
    Interest expense                                                         (108,892)            (25,135)
    Other expense                                                              (6,210)                  -
                                                                          ------------       --------------
                                                                              633,003             (45,747)
                                                                          ------------       --------------

Loss before minority interest                                             (16,715,433)         (1,647,917)
                                                                          ------------       --------------

Minority interest                                                           2,040,000                   -
                                                                          ------------       --------------
Net loss                                                                  (14,675,433)         (1,647,917)
Preferred stock dividends                                                    (815,071)                  -
                                                                          ------------       --------------
Net loss available to common stockholders                                $(15,490,504)       $ (1,647,917)
                                                                          ============       ==============
Net loss per share - basic and diluted                                        $ (2.15)            $ (0.45)
                                                                          ============       ==============
Weighted average number of common shares
  outstanding - basic and diluted                                           7,214,469           3,697,611
                                                                          ============       ==============
</TABLE>

    The accompanting notes are an integral part of these financial statements


                                       F-6

<PAGE>


                            ELECTROPHARMACOLOGY, INC.

    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)

                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
                                                                                                                     Accumulated
                                       Preferred Stock            Common Stock         Additional                     Other
                                       $.01 Par Value            $.01 Par Value         Paid-in       Deferred     Comprehensive
                                       Shares      Amount      Shares      Amount        Capital     Compensation      Income
                                      ---------  ---------  -----------  ---------   -------------- -------------- ---------------
<S>                                    <C>        <C>        <C>         <C>          <C>            <C>             <C>
Balance, January 1, 1997               421,950    $ 4,220    3,540,165   $ 35,402     $ 14,834,010   $        -      $        -

Issuance of common
    stock for services                       -          -      348,519      3,484          307,125            -               -

Issuance of common stock
    for employees' stock plan                -          -       14,003        140           16,785            -               -

Retirement of treasury stock                 -          -      (10,493)      (105)          (1,758)           -               -

Conversion of preferred stock
    to common stock                   (179,000)    (1,790)     179,000      1,790                -            -               -

Issuance of stock options to
    purchase shares of common stock          -          -            -          -           98,750      (67,678)              -

Net loss                                     -          -            -          -                -            -               -
                                      ---------  ---------  -----------  ---------   -------------- -------------- ---------------

Balance December 31, 1997              242,950      2,430    4,071,194     40,711       15,254,912      (67,678)              -

Issuance of common stock for services        -          -       67,610        676           24,041            -               -

Induced conversion of preferred stock (242,950)    (2,430)   1,872,000     18,720          730,080            -               -

Issuance of stock in settlement
    of accounts payable                      -          -      322,581      3,226          124,940            -               -

Issuance of common stock
    for acquisition                          -          -    6,172,100     61,721        3,253,576            -               -

Issuance of warrants with convertible
    mandatorily redeemable
    preferred stock                          -          -            -          -          400,000            -               -

Issuance of common stock and
    stock subscription receivable            -          -      777,202     32,126        1,967,875            -               -

Amortization and cancellation of
    deferred compensation                    -          -            -          -          (28,496)      67,678               -

Dividend related to induced
    conversion of preferred stock            -          -            -          -                -            -               -

Dividend on convertible
    preferred stock                          -          -            -          -                -            -               -

Unrealized gain on securities                -          -            -          -                -            -         803,279

Net loss                                     -          -            -          -                -            -               -
                                      ---------  ---------  -----------  ---------   -------------- -------------- ---------------
Balance, December 31, 1998                   -   $      -   13,282,687   $157,180    $  21,726,928    $       -     $   803,279
                                      ---------  ---------  -----------  ---------   -------------- -------------- ---------------



(restubbed table)
                                                                                         Total
                                                                                      Stockholders'
                                                                                        Equity
                                       Treasury     Retained        Subscription       (Net Capital
                                          Stock       Deficit        Receivable        Deficiency)
                                      -----------  -------------  --------------   ----------------
<S>                                     <C>        <C>             <C>                <C>
Balance, January 1, 1997                $(60,000   $(13,599,257)   $       -          $1,214,375

Issuance of common
    stock for services                         -              -            -             310,609

Issuance of common stock
    for employees' stock plan                  -              -            -              16,925

Retirement of treasury stock              60,000        (58,137)           -                   -

Conversion of preferred stock
    to common stock                            -              -            -                   -

Issuance of stock options to
    purchase shares of common stock            -              -            -              31,072

Net loss                                       -     (1,647,917)           -          (1,647,917)
                                      -----------  -------------  --------------   ----------------

Balance December 31, 1997                      -    (15,305,311)           -             (74,936)

Issuance of common stock for services          -              -            -              24,717

Induced conversion of preferred stock          -              -            -             746,370

Issuance of stock in settlement
    of accounts payable                        -              -            -             128,166

Issuance of common stock
    for acquisition                            -              -            -           3,315,297

Issuance of warrants with convertible
    mandatorily redeemable
    preferred stock                            -              -            -             400,000

Issuance of common stock and
    stock subscription receivable              -              -     (500,000)          1,500,001

Amortization and cancellation of
    deferred compensation                      -              -            -              39,182

Dividend related to induced
    conversion of preferred stock              -       (627,571)           -            (627,571)

Dividend on convertible
    preferred stock                            -       (187,500)           -            (187,500)

Unrealized gain on securities                  -              -            -             803,279

Net loss                                       -    (14,675,433)           -         (14,675,433)
                                      -----------  -------------  --------------   ----------------
Balance, December 31, 1998             $       -   $(30,795,815)   $(500,000)       $ (8,608,428)
                                      -----------  -------------  --------------   ----------------

</TABLE>


    The accompanting notes are an integral part of these financial statements


                                       F-7
<PAGE>


                            ELECTROPHARMACOLOGY, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>

                                                                                       1998                1997
Cash flows from operating activities:
<S>                                                                               <C>                  <C>
Net loss                                                                          $(14,675,433)        $(1,647,917)
       Adjustments to reconcile net income to net
         cash provided by operating activities:
             Depreciation and amortization                                             167,865             303,093
             Issuance of common stock and warrants for services                         37,217             310,609
             Issuance of stock options to purchase common stock                              -              31,072
             Issuance of notes payable for services                                     63,654             822,378
             (Gain) loss on disposal of equipment                                     (716,223)             30,506
             Provision for doubtful accounts                                                 -               9,214
             Increase in inventory obsolescence allowance                              731,493              99,518
             Issuance of common stock in settlement of accounts payable                128,166                   -
             Induced conversion of warrants                                            118,800                   -
             Amortization of deferred compensation                                      67,678                   -
             Accretion of redeemable convertible preferred stock                       171,429                   -
             Impairment loss of in-process research and development                  6,000,000                   -
             Impairment loss of purchased intangible assets                          8,811,114                   -
             Loss attributable to minority interest                                 (2,040,000)                  -
     Changes in operating assets and liabilities
             Increase in trade notes receivable                                              -             210,442
             Decrease in accounts receivable                                            85,907             398,584
             Decrease in other receivables                                              29,979                   -
             (Increase) decrease in inventory                                          145,061             (67,294)
             Increase in rental equipment                                                    -            (194,469)
             Decrease in prepaid expenses                                               23,328             129,037
             Decrease in other assets                                                    9,251                   -
             Increase in accounts payable                                              102,329              60,743
             Decrease in accrued expenses, commissions,
                payroll and customer deposits                                          (78,421)           (396,177)
                                                                                    -----------          ----------

                Net cash provided by (used in) operating activities                   (816,806)             99,339

Cash flows from investing activities:
             Purchases of property and equipment                                       (41,694)                  -
             Proceeds from sale of property and equipment                              164,420               7,299
             Cash paid for licensing and technology                                 (7,500,000)                  -
             Net cash acquired from acquisitions                                       346,820                   -
             Purchase of patents, other assets and deposits                                  -             (32,444)
                                                                                    -----------          ----------
                Net cash used in investing activities                               (7,030,454)            (25,145)
                                                                                    -----------          ----------
</TABLE>

   The accompanting notes are an integral part of these financial statements


                                       F-8

<PAGE>


                            ELECTROPHARMACOLOGY, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>

                                                                                  1998                1997
<S>                                                                           <C>                   <C>

Cash flows from financing activities:
            Proceeds from the issuance of mandatorily redeemable,
                convertible preferred stock                                   $ 7,500,000                $ -
            Proceeds from issuance of common stock, net
                of subscription receivables                                       600,000                  -
            Proceeds from issuance of common stock                                      -             16,925
            Repayment of notes payable                                           (192,193)          (104,548)
            Repayment of capital leases                                           (12,032)           (22,898)
            Proceeds from notes payable - related parties                               -             45,000
            Repayment of notes payable - related parties                                -           (120,700)
                                                                              ------------         -----------
                Net cash provided by (used in) financing activities             7,895,775           (186,221)
                                                                              ------------         -----------
Net increase (decrease) in cash                                                    48,515           (112,027)
Cash at the beginning of year                                                     111,496            223,523
                                                                              ------------         -----------
Cash at end of year                                                             $ 160,011          $ 111,496
                                                                              ============         ===========
Supplemental disclosure of cash flow information:
     Cash paid during the period for interest                                    $ 69,153           $ 12,287
                                                                              ============         ===========
     Cash paid during the period for income taxes                                     $ -                $ -
                                                                              ============         ===========
</TABLE>

    The accompanting notes are an integral part of these financial statements


                                       F-9
<PAGE>

                            ELECTROPHARMACOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1998 AND 1997


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Nature of business and major suppliers - Electropharmacology, Inc., a
         Delaware corporation (the "Company") was incorporated on August 31,
         1990 under the laws of the state of California under the name Magnetic
         Resonance Therapeutics, Inc., and reorganized through a merger in
         February 1995 with and into Electropharmacology, Inc. Until August 24,
         1998, the Company designed, manufactured and marketed SofPulse devices
         that delivered pulsed electromagnetic signals through radio
         frequencies. The Company concentrated on medical applications for these
         devices.

         The Company consummated a corporate reorganization on August 24, 1998
         when it became a biotechnology company through a series of
         transactions, including (i) the acquisition of two privately held
         business entities engaged in developing molecular technologies for
         drugs combating cancer and rheumatoid arthritis, and (ii) the sale of
         the past business operations related to the manufacturing and leasing
         of SofPulse devices in order to focus on the biopharmaceutical
         applications of the underlying SofPulse technology. As a result, the
         Company is engaged in developing drug delivery technologies to deliver
         pharmaceutical drugs and biotechnology products more effectively to
         diseased tissues, and drug design technologies to create new drugs
         aimed at the genes and proteins that cause or control complex diseases.
         The Company is further engaged in the custom synthesis of
         oligonucleotides, peptides, genes and novel nucleosides.

         The research activities of the Company focus on the design and
         synthesis of therapeutic drugs and diagnostic agents using nucleic acid
         based compounds. The Company has built a library of proprietary and
         exclusively licensed compounds for the treatment of cancer and
         rheumatoid arthritis. The Company, through its partnership, Gemini
         Biotech, Ltd. ("Gemini"), also produces and markets custom DNA and
         peptides to academic researchers and biopharmaceutical companies.

         Principles of consolidation - The accompanying consolidated financial
         statements include the accounts of the Company, its wholly owned
         subsidiaries and partnerships. All material intercompany accounts and
         transactions have been eliminated in consolidation. Minority interest
         consists of the ownership interest of the minority partners of Gemini
         Health Technologies, L.P. (the "Partnership").

         Revenue recognition - Rental revenue is recognized over the
         month-to-month period in which the related equipment is under lease to
         a customer, primarily on a per use basis. Sales revenue is recognized
         upon shipment and the transfer of ownership of the product.

         Cost of Revenue - Cost of revenue for the years ended December 31, 1998
         and 1997 includes costs associated with rental of the SofPulse units of
         approximately $169,380 and $485,000 respectively.

         Investments - The Company accounts for marketable securities in
         accordance with the provisions of Statement of Financial Accounting
         Standards No. 115 "Accounting for Certain Investments in Debt and
         Equity Securities" ("SFAS 115"). Securities held are classified as
         "available for sale" and are carried in the financial statements at
         fair value. Realized gains and losses are included in earnings, while
         unrealized gains and losses are excluded from earnings and reported as
         comprehensive income, a component of stockholders' equity.

         Inventory - Inventory at December 31, 1998, consisted primarily of
         supplies used in research activities and is valued at the lower of cost
         (average cost method) or market.

                                      F-10

<PAGE>

                            ELECTROPHARMACOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1998 AND 1997


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


         Patents - Patents are amortized using the straight-line method over 17
         years from the date of issuance of the patents, or over the remaining
         useful lives.

         Property and equipment - Property and equipment are stated at cost.
         Major improvements are capitalized, while maintenance and repairs are
         expensed when incurred. The cost and accumulated depreciation for
         property and equipment sold, retired, or otherwise disposed of are
         relieved from the accounts, and resulting gains or losses are reflected
         in income.

         The cost of property and equipment is depreciated over the estimated
         useful lives of the related assets. The cost of leasehold improvements
         is amortized over the lesser of the length of the related leases or the
         estimated useful lives of the improvements. Depreciation is computed on
         the straight-line method for financial reporting purposes, and on the
         declining balance method for income tax purposes.

         Asset impairment - The Company periodically evaluates the
         recoverability of its long-lived assets, comparing the respective
         carrying values to the current and expected future cash flows to be
         generated from such assets. In accordance with Statements of Financial
         Accounting Standards No 121, "Accounting for the Impairment of
         Long-lived Assets" ("SFAS 121"), the recoverability of property and
         equipment, intangible assets and goodwill are evaluated on a separate
         basis for the Company and each acquisition.

         Stock based compensation - The Company has elected to follow Accounting
         Principles Board Opinion No. 25 "Accounting for Stock Issued to
         Employees" ("APB 25"), and related interpretations in accounting for
         its employee stock options. Accordingly, no compensation expense has
         been recognized for its stock options granted to employees because the
         exercise price is equal to the market value of the underlying stock at
         the date of the grant. The Company provides additional pro forma
         disclosures as required under Statement of Financial Accounting
         Standard, No. 123 "Accounting for Stock-Based Compensation" ("SFAS
         123").

         Deferred Compensation - Deferred compensation related to stock options
         is amortized over the period during which the options become
         exercisable.

         Income taxes - The Company provides for income taxes under the
         provisions of Statement of Financial Accounting Standard, No. 109,
         "Accounting For Income Taxes" ("SFAS 109"), which requires the asset
         and liability method of accounting for income taxes in which deferred
         tax assets and liabilities are recognized for the future tax
         consequences attributable to differences between the financial
         statement carrying amounts of existing assets and liabilities and their
         respective tax bases. Deferred tax assets and liabilities are measured
         using the enacted tax rates expected to apply to taxable income in the
         years in which those temporary differences are expected to be recovered
         or settled.

         Advertising costs - Advertising costs included in selling, general and
         administrative expenses are expensed as incurred and were $4,086 and
         $48,000 for 1998 and 1997, respectively.

         Net loss per share -The Company has adopted the Financial Accounting
         Standards Board No. 128, "Earnings Per Share" ("SFAS No. 128"), which
         established new standards for computing and presenting earnings per
         share. SFAS No. 128 replaced the calculation of primary and fully
         diluted earnings per share with basic and diluted earnings per share.

                                      F-11

<PAGE>

                            ELECTROPHARMACOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1998 AND 1997


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


         All loss per share amounts have been presented to conform to the SFAS
         No. 128 presentation. For the years ended December 31, 1998 and 1997,
         options and warrants were excluded from the computation of net loss per
         share because the effect of inclusion would be anti-dilutive due to the
         Company's net operating losses.

         Use of estimates and concentration of credit risk - 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 revenue and expenses during the
         reporting period. Actual results could differ significantly from those
         estimates.

         The Company provides credit to customers based on an evaluation of the
         customer's financial condition, generally without requiring collateral.
         Exposure to losses on receivables is principally dependent upon each
         customer's financial condition. The Company monitors its exposure for
         credit losses and maintains an allowance for anticipated losses.

         In 1997, the Company's customers consisted of healthcare providers such
         as nursing homes, hospitals and physician practices with no specific
         geographic concentration. Sales to three customers National Patient
         Care Services, Inc.("NPC"), Physiologic Reps, Inc.and Matt Starring
         accounted for 36%, 30% and 11% respectively, of the Company's total
         sales in 1997.

         Fair value of financial instruments - The fair value of the Company's
         financial instruments such as accounts receivable, accounts payable,
         notes payable and capital leases approximate their carrying value.

         Business segment - The Company operates principally in one business
         segment that develops technology and development stage products for the
         health care industry.

         New accounting pronouncements - In April 1998, the Accounting Standards
         Executive Committee released Statement of Position 98-5, "Reporting on
         the Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5 requires that
         start-up costs, including organizational costs, be expensed as
         incurred. The Company has accepted early adoption of SOP 98-5 and has
         expensed all start-up costs.

         Reclassifications - Certain reclassifications have been made to the
         1997 financial statements to conform to the 1998 presentation.

                                      F-12

<PAGE>


                            ELECTROPHARMACOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1998 AND 1997


2.       LIQUIDITY AND GOING CONCERN

         The accompanying financial statements have been prepared on a going
         concern basis, which contemplates the realization of assets and the
         satisfaction of liabilities and commitments in the normal course of
         business.

         The Company reported a net loss of $14,675,433 for the year ended
         December 31, 1998 and cumulative net operating losses aggregating
         $30,795,815 through December 31, 1998. In addition, at December 31,
         1998, the Company had a net capital deficiency of $8,608,428. The
         company is also in default on a note for $1,189,809 to its major
         creditor, an insurance company. The insurance company has not exercised
         it rights and remedies in its agreement, but there is no assurance that
         the insurance company will not call the note.

         On August 24, 1998, the Company reorganized to better enable the
         Company to focus its efforts on research and development activities
         (see Note 3). In August 1998, the Company sold substantially all of the
         assets and certain liabilities related to the manufacturing, sales and
         marketing of its SofPulse device while retaining rights to the
         underlying therapeutic electromagnetic signal technology (see Note 3).
         This transaction resulted in cash of $150,000, the acquisition of
         marketable securities with a value of $596,721 on August 24, 1998 and
         the satisfaction of $778,166 of notes payable, accrued interest and
         accounts payable. Also, as more fully described in Note 3, on September
         30, 1998, the Company received a commitment from Elan International
         Services, Ltd. ("Elan International"), a subsidiary of Elan Corporation
         plc, to invest $2,000,000 in shares of the Company's common stock. As
         of April 28, 1999, the Company had received $1,500,000 of the
         commitment.

         The Company's 1999 operating plan contemplates stringent cost controls
         and a staged commitment to product development and clinical studies
         until additional funds are obtained from increased revenues from
         Gemini's custom DNA and peptide synthesis, Federal research grants, or
         the raising of additional investment capital.

         The Company cannot predict whether the operating and financing plans
         described above will be successful. If the Company is unable to
         successfully obtain additional financing, it may not be able to
         continue as a going concern and may be unable to meet its obligations.
         Additionally, the Company is dependent on the support of Elan
         International. Should Elan International withdraw its support the
         Company may not be able to meet its commitments (see Note 3). The
         financial statements do not include any adjustments that might be
         necessary if the Company is unable to continue as a going concern.

                                      F-13

<PAGE>

                            ELECTROPHARMACOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1998 AND 1997


3.       CORPORATE REORGANIZATION

         On August 24, 1998 the Company consummated a corporate reorganization,
         consisting of five steps. First, the Company contributed all its assets
         and liabilities (other than those assets and liabilities related to its
         business of manufacturing and distributing the SofPulse device [the
         "SofPulse Business"]) to its wholly-owned subsidiary, EPI HealthTech
         Inc., a Delaware corporation ("EPI Sub") in exchange for 100 shares of
         EPI Sub's common stock. Second, HealthTech Development Inc. ("HTD"), a
         privately held Company, was merged into EPI Sub, with the shareholders
         of HTD receiving 6,172,095 shares of the Company's common stock (such
         number of shares being substantially equivalent to the number of shares
         of the Company's common stock outstanding). Third, EPI Sub contributed
         all its assets and liabilities (including both the assets and
         liabilities contributed to it by the Company and the assets and
         liabilities of HTD) to Gemini Health Technologies, L.P., a newly formed
         Delaware limited partnership (the "Partnership") in exchange for
         12,505,480 partnership units of the Partnership (such number of
         partnership units corresponding to the number of shares of the
         Company's common stock issued and outstanding following the issuance of
         shares of the Company's common stock to the shareholders of HTD).
         Simultaneously with the contribution of EPI Sub's assets and
         liabilities to the Partnership, the partners of Gemini, a privately
         held Texas limited partnership, transferred all of their limited
         partnership interests in Gemini Biotech, Ltd., and all the stock of
         Gemini's general partner, Gemini Biotech, Inc. ("GBI"), to the
         Partnership in exchange for 6,000,000 partnership units in the
         Partnership. These partnership units are exchangeable, subject to
         certain restrictions, for shares of the Company's common stock, on the
         basis of one share of the Company's common stock for each partnership
         unit. Fourth, the Company issued 1,961,107 shares of its common stock
         to holders of certain warrants and all outstanding preferred stock of
         the Company in exchange for such warrants and preferred stock. Fifth,
         the Company sold substantially all its assets and specified liabilities
         relating to the SofPulse Business to a wholly-owned subsidiary of ADM
         Tronics Unlimited, Inc. ("ADMT"), a publicly traded company.

         Subsequent to the reorganization, the operations previously conducted
         by the Company (other than the SofPulse Business), HTD and Gemini are
         now being conducted by the Partnership and Gemini. EPI Sub is the
         general partner of the Partnership and the prior limited partners of
         Gemini are the limited partners of the Partnership. The Partnership
         agreement requires that property received from common stock issuances
         by the Company be contributed to the Partnership with an increase in
         EPi Sub's Partnership interest as determined by a formula. The Company
         elected not to contribute the capital received by Elan International as
         a capital contribution to the Partnership, and accordingly, has not
         adjusted EPi Sub's majority partnership interest. The Partnership is
         the limited partner of Gemini and GBI remains the general partner of
         Gemini.

         Acquisitions
         -------------

         The HTD and Gemini acquisitions have been accounted for as purchase
         transactions. The total purchase price of $3,315,297 for HTD and
         $4,071,429 for Gemini were allocated to the fair market value of the
         assets acquired and the liabilities assumed. In accordance with the
         provisions of Accounting Principles Board No. 16 Business Combinations
         ("APB 16") and Accounting Principles Board No. 17 Intangible Assets
         ("APB 17"), all identifiable assets acquired, including identifiable
         intangible assets, were assigned a portion of the purchase price on the
         basis of their fair values.

                                      F-14

<PAGE>

                            ELECTROPHARMACOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1998 AND 1997


3.       CORPORATE REORGANIZATION (continued)

<TABLE>
<CAPTION>
         The calculation of the purchase price of HTD was as follows:
<S>                                                                                        <C>
              Common stock issued (6,172,000 shares valued
                  at $0.5372 per share)                                                     $   3,315,297
                                                                                            =============

              The allocation of the purchase price was as follows:

              Assets, other than intangible                                                 $       1,014
              Liabilities assumed                                                                 (44,500)
              Intangibles                                                                       3,358,783
                                                                                           --------------

              Total purchase price                                                          $   3,315,297
                                                                                            =============
</TABLE>

         Concurrently with its valuation, and in accordance with SFAS 121,
         management evaluated the various intangible assets in the amount of
         $3,358,783 recorded in the HTD acquisition and determined that such
         assets were permanently impaired due to the Company's current period
         operating loss combined with a history of operating losses. Therefore,
         an impairment charge for the total amount of the intangibles of
         $3,358,783 was recognized in 1998.

         As a condition to the HTD merger agreement, an additional 1,650,000
         shares of common stock of the Company may be issued to former
         stockholders of HTD based on the achievement of certain minimum
         revenues and net pretax profits through the HTD technologies.

         The calculation of the purchase price of Gemini was as follows:
<TABLE>
<CAPTION>
<S>                                                                                        <C>
              Partnership units issued (6,000,000 units convertible
                  into 6,000,000 shares of common stock of the Company after
                  12 months, valued at .678 per share)                                      $  4,071,429

              The allocation of the purchase price was as follows:

              Assets, other than intangibles                                                $  1,456,907
              Liabilities assumed                                                             (1,337,809)
              Intangibles                                                                      3,952,331
                                                                                            -------------


              Total purchase price                                                          $  4,071,429
                                                                                            =============
</TABLE>

         Concurrently with its valuation, and in accordance with SFAS 121,
         management evaluated the various intangible assets and determined that
         such assets were permanently impaired due to the Company's current
         period operating loss combined with a history of operating losses.
         Therefore, an impairment for the total amount of the intangibles of
         $3,952,331 was recognized in 1998.

                                      F-15

<PAGE>

                            ELECTROPHARMACOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1998 AND 1997


3.       CORPORATE REORGANIZATION (continued)


         As part of the valuation of the Gemini acquisition, inventory was
         written up by $731,138. Subsequently, the Company determined the
         inventory value was not recoverable and provided for a provision for
         inventory obsolescence of $731,138.

         As a condition of the Gemini merger agreement, up to 2,050,000
         additional partnership units (convertible into 2,050,000 shares of
         common stock of the Company) may be issued to the former limited
         partners of Gemini based on the achievement of certain revenues and
         pretax profits from Gemini's custom DNA and peptide synthesis services
         and/or certain development milestones.

         Sale of operation
         -----------------

         On August 24, 1998, the Company completed the sale of its SofPulse
         business as part of the corporate reorganization. Prior to completion
         of the transaction, management and operation of the SofPulse business
         were assumed by ADMT on May 27, 1998. The assets sold consisted of
         inventory, supplies and SofPulse units. The selling price was
         $1,396,721; $150,000 in cash and 2,925,000 shares of ADMT valued at
         $1,246,721.

         Total revenues related to the SofPulse operations for the seven months
         and twenty-four days ending August 24, 1998, and for the twelve months
         ending December 31, 1997 were $435,003 and $2,401,249, respectively.

         Assets sold consisted of the following:
<TABLE>
<CAPTION>
                                                                                             August 24,
                                                                                                1998
                                                                                                ----

<S>                                                                                         <C>
              SofPulse units                                                                $   459,753
              Inventory                                                                         154,575
              Supplies
                                                                                                  4,624
                                                                                           --------------
              Net assets disposed of                                                        $   618,952
                                                                                           ==============
</TABLE>

         Settlement of certain liabilities
         ---------------------------------

         A mentioned above, on August 24, 1998, the Company sold substantially
         all the assets of its SofPulse medical device business to ADMT. The
         Company utilized 1,525,000 shares of the 2,925,000 shares mentioned
         above, and issued 322,581 shares of its common stock to pay $709,378 of
         a secured note payable and accrued interest and $68,788 of unsecured
         payables to the Company's former counsel for legal fees (see Note 4).

                                      F-16

<PAGE>


                            ELECTROPHARMACOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1998 AND 1997


3.       CORPORATE REORGANIZATION (continued)


         Conversion of preferred stock and exchange of warrants
         ------------------------------------------------------

         On August 24, 1998, in connection with the merger of HTD, the Company
         issued 1,575,000 common shares, valued at $627,571 for the conversion
         of 242,950 shares of preferred stock. The preferred stock was
         convertible at a price of $4.74 per share which was at a discount from
         the market price of $6.50 per share, at the option of the holder, into
         one share of common stock, subject to adjustment in certain
         circumstances, at any time until November 13, 2000 at which time the
         preferred stock would have automatically converted to common stock.
         Additionally, on August 24, 1998, the Company issued 297,000 common
         shares, valued at $118,800, in exchange for 1,961,107 of outstanding
         warrants. These warrants were exercisable at prices between $5.42 and
         $9.00 per warrant and expired on various dates between August 1998 and
         November 2005. As a result of the conversion of the preferred shares,
         the Company recorded a dividend of $627,571, and as a result of the
         conversion of the warrants, the Company recorded consulting expense of
         approximately $118,800, as costs to induce both conversions.

         Elan license agreement and investment in the Company
         ----------------------------------------------------

         On September 30, 1998, Elan International, invested $7,500,000 in the
         Company to acquire 7,500 shares of redeemable, convertible preferred
         stock (at a conversion ratio of one share of common stock for each
         $1.20 of preferred stock investment), and warrants to acquire up to
         1,000,000 shares of common stock of the Company at an exercise price of
         $2.50 per share. The preferred stock accrues a mandatory dividend of
         10% per annum, payable semi-annually, in cash or in-kind, at the
         Company's option. Using the Black-Scholes option-pricing model, the
         warrants were valued at $400,000 as of the date of issuance.
         Accordingly, the Company recorded a value of $7,100,000 for the
         mandatorily redeemable, convertible preferred stock, and $400,000 for
         the warrants, which was recorded as additional paid-in capital. The
         $400,000 is being amortized over the term of the warrants (seven
         months) and increases the value of the mandatorily redeemable,
         convertible preferred stock as it is amortized. At December 31, 1998,
         the value of the mandatorily redeemable convertible preferred stock was
         $7,458,926, which includes a mandatory dividend of $187,500.

         On September 30, 1998, the Company acquired a worldwide license to
         certain technology for non-cosmetic dermatology and wound care
         applications from Elan Pharma International Limited ("Elan Pharma"),
         another subsidiary of Elan Corporation plc. The Company made a payment
         of $7,500,000 to Elan Pharma for licenses to utilize pending patent
         applications, product design and know-how which are in the process of
         being approved by regulatory authorities, and certain in-process
         research and development. The cost was allocated $6,000,000 to
         in-process research and development and $1,500,000 to goodwill. The
         Company will also pay royalties and license fees to Elan Pharma based
         on the Company's future revenues relating to the technology.

         The Company's management determined the licensed technology had various
         ascertainable long-term requirements for additional human testing and
         financial resources, and for further development in order to realize
         economic benefits. As a result of the long term development
         requirements, substantial costs, and uncertainties related to the
         technological feasibility and commercialization of the licensed
         technology, the Company recorded a one-time charge of $6,000,000 to
         write off in-process research and development.

                                      F-17

<PAGE>

                            ELECTROPHARMACOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1998 AND 1997

3.       CORPORATE REORGANIZATION (continued)


         Concurrently, in accordance with SFAS 121, management evaluated the
         goodwill of $1,500,000 and determined that the asset was permanently
         impaired due to the Company's current period operating loss combined
         with a history of operating losses. Therefore, an impairment loss for
         the $1,500,000 was recognized in 1998.

         On September 30, 1998, Elan International committed to invest
         $2,000,000 to acquire shares of the Company's common stock at the
         20-day average closing price preceding each such investment, at a
         maximum purchase price of $1.375 per share. On October 30, 1998, Elan
         acquired 777,202 shares of common stock for $600,000. On January 4,
         1999, Elan International acquired an additional 2,057,143 shares of
         common stock for $900,000. Elan International has agreed to acquire
         additional shares or another form of security for the remaining
         $500,000 during the first six months of 1999. A significant portion of
         the funds has been restricted solely for use in funding research and
         development activities relating to the Elan Pharma technology.

         Pro forma financial results
         ---------------------------

         The following pro forma condensed combined statements of operations for
         the years ending December 31, 1998 and 1997 reflects adjustments for:
         (i) the acquisitions by the Company of HTD and Gemini; (ii) the sale of
         substantially all assets related to the Company's SofPulse device to
         ADMT; and (iii) the acquisition of a worldwide license from Elan
         Pharma.

         The pro forma adjustments assume these transactions occurred as of
         January 1, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
                                                                              1998              1997
                                                                            Pro forma         Pro forma
                                                                            combined          combined
                                                                          (as adjusted)     (as adjusted)

<S>                                                                      <C>                <C>
              Total revenue                                              $    684,978       $    185,259
                                                                         ===============  ===============

              Net loss                                                   $(12,764,236)      $(10,758,248)
                                                                         ===============  ===============

              Earnings per share - basic and
                  diluted net loss per share                             $      (1.01)      $      (0.89)
                                                                         ---------------  ---------------

              Weighted average number of common
                  shares outstanding - basic and diluted                   12,624,154         12,064,290
                                                                         ===============  ===============
</TABLE>

                                      F-18

<PAGE>


                            ELECTROPHARMACOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1998 AND 1997


4.       MARKETABLE SECURITIES

         As discussed in Note 3, the Company acquired 2,925,000 common shares of
         ADMT as part of its sale of the SofPulse business on August 24, 1998.
         The shares of ADMT were valued at approximately $0.426 per share on the
         date of acquisition. As part of the agreement, 1,525,000 of the common
         shares of ADMT were transferred to a creditor in partial settlement of
         a note payable due a law firm on August 24, 1998. The remaining
         1,400,000 shares were restricted as to sale both by ADMT and the law
         firm for one year from August 24, 1998. Under SFAS 115, restricted
         stock that has a restriction that expires in less than one year may be
         carried as unrestricted for that portion of the shares that qualify for
         sale within one year. In this case all shares qualify for sale in less
         than one year from December 31, 1998, and, therefore, the Company
         carries the ADMT common stock as available for sale. Any unrealized
         gains and losses are recorded as comprehensive income, a component of
         stockholders' equity. At December 31, 1998, the gross unrealized gain
         on the 1,400,000 shares was $803,279, and the fair market value was
         $1,400,000.

         On December 16, 1998, ADMT common stock was delisted by NASDAQ from the
         NASDAQ Small Cap Market and these shares currently trade on the OTC
         Bulletin Board. On April 28, 1999, the gross unrealized gain was
         $61,279 and the fair market value was $658,000.


5.       PROPERTY AND EQUIPMENT

         Property and equipment at December 31, 1998 was as follows:
<TABLE>
<CAPTION>
                                                                                               Estimated
                                                                                              Useful life
                                                                                              -----------

<S>                                                                 <C>                       <C>
              Office equipment                                      $      157,210            5 to 7 years
              Lab equipment                                                439,638            5 to 7 years
              Leasehold improvements                                         3,251         Lease or useful life
                                                                     --------------
                                                                           600,099

              Less accumulated depreciation                               (217,752)
                                                                     --------------
              Total                                                  $     382,347
                                                                     ==============
</TABLE>

         Depreciation charged to income for the years ended December 31, 1998
         and 1997 was $161,559 and $297,963, respectively.

                                      F-19

<PAGE>

                            ELECTROPHARMACOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1998 AND 1997


6.       NOTES PAYABLE
<TABLE>
<CAPTION>

<S>                                                                                                  <C>
         Notes payable at December 31, 1998 consisted of the following:

         Note payable (non-interest bearing) to an accounting firm, due February 28, 1999             $    118,430

         Note payable to finance insurance premiums with interest at 8%,
           due November 1999                                                                                98,144

         Note payable to finance insurance premiums, with interest at 12.75%,
           due April 1999                                                                                    3,586

         Variable rate note payable to an insurance company, due July 1, 2006                            1,189,809
                                                                                                    --------------
                                                                                                         1,409,969

         Less current portion                                                                           (1,409,969)
                                                                                                    --------------
                                                                                                      $          -
         Long term portion of notes payable                                                         ==============
</TABLE>

         On June 27, 1997, Gemini entered into a loan agreement (the "Loan")
         with an insurance company in the amount of $1,315,000. The loan
         amortizes over 101 payments ending July 1, 2006. Interest is two points
         over prime. At December 31, 1998, the rate was 9.75%. Collateral for
         the Loan is Gemini's assets, including accounts receivable, inventory,
         and property and equipment owned now or acquired in the future. On
         December 22, 1998, the Loan was modified to add as additional
         collateral the Company's corporate guarantee and 65 SofPulse devices
         owned by the Company. The President of Gemini, and his wife, have
         personally guaranteed the repayment of the indebtedness. In addition,
         repayment of the Loan is guaranteed in part by the Rural Biological
         Science Department of the U.S. Department of Agriculture.

         The terms of the Loan include maintaining certain financial covenants,
         principally relating to working capital liquidity and net working
         capital ratios, and permitted purchases and expenses. The covenants
         also include a limitation on compensation and distributions. All of the
         amounts outstanding under the agreement become due and payable if an
         event of default occurs. As of December 31, 1998, Gemini was not in
         compliance with certain ratios relating to net worth and working
         capital. Additionally, subsequent to year end, the Company has not made
         the required payments for April and May of 1999. Accordingly, the
         entire amount has been shown as a current liability at December 31,
         1998. The insurance company currently has the right to accelerate
         payment of the Loan.

         On October 28, 1998, the Company executed a promissory note to its
         former independent certified public accountants for audit fees. The
         note was non-interest bearing until its due date, February 28, 1999, at
         which time if not paid, the note bears interest of 12% per annum. The
         terms of the note provided for monthly payments of $10,000 until
         February 28, 1999, when the remaining balance was due in full. As of
         December 31, 1998, the balance was $118,430. The note was not paid in
         full on February 28, 1999.

                                      F-20

<PAGE>


                            ELECTROPHARMACOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1998 AND 1997


7.       NOTES PAYABLE TO RELATED PARTIES

         During October 1997, the Company issued three notes payable to two
         officers and a member of the board of directors in exchange for cash
         advances of $45,000 and non-payment of salaries of $20,926. The notes
         bear interest at prime plus 1% (8.75% at December 31, 1998) and are due
         on demand. The balances due under the notes at December 31, 1998 were
         $65,926.

         On April 12, 1997, the Company and the former Chief Executive Officer
         entered into a severance agreement that provides for, among other
         things, a cash payment by the Company of $128,700 in settlement of all
         rights under his employment agreement with the Company. The loan and
         accrued interest was paid in installments through January 1998. The
         balance due under this agreement at December 31, 1997 was $8,000.

         Effective as of August 24, 1998, as a result of the merger with HTD and
         the acquisition of Gemini and in conjunction with certain change of
         control provisions in the employment contract of the Company's Chief
         Executive Officer, the Company recorded a note payable to the Chief
         Executive Officer for $63,654 to be used for his exercise of 244,823
         options to purchase common stock at $.26 per share. As of December 31,
         1998, the options had not been exercised (see Note 3).


8.       CAPITAL LEASES

         The Company is the lessee of office and laboratory equipment under
         capital leases expiring in various years through 2003. The assets and
         liabilities under capital leases are recorded at the lower of the
         present value of the minimum lease payments or the fair value of the
         asset. The assets are depreciated over their estimated useful lives.
         Depreciation of assets under capital leases is included in depreciation
         expense for 1998 and 1999.

         Depreciation on assets under capital leases charged to expense in 1998
was $20,773.

         Following is a summary of property held under capital leases at
December 31, 1998:
<TABLE>
<CAPTION>
<S>                                                                  <C>
              Office equipment                                       $      28,343
              Lab equipment                                                 66,000
                                                                     ---------------

                                                                            94,343
              Less accumulated depreciation                                (20,773)
                                                                     ---------------
                                                                     $      73,570
                                                                    ===============
</TABLE>

                                      F-21

<PAGE>


                            ELECTROPHARMACOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1998 AND 1997


8.       CAPITAL LEASES (continued)

         Minimum future lease payments under capital leases as of December 31,
         1998 for each of the next five years and in the aggregate are:
<TABLE>
<CAPTION>
                       Year ended

                          <S>                                                     <C>
                          1999                                                    $        35,926
                          2000                                                             35,483
                          2001                                                             11,070
                          2002                                                              3,014
                          2003                                                              2,637
                       Thereafter                                                               -
                                                                                  -----------------
                                                                                           88,130
              Less amount representing interest                                           (12,557)
                                                                                  -----------------
              Present value of net minimum lease payments                         $        75,573
                                                                                  =================
</TABLE>

         Interest rates on capitalized leases vary from 11.50% to 12.65%, and
         are imputed based on the lessor's implicit rate of return.


9.       SHAREHOLDERS' EQUITY AND WARRANTS

         On November 1, 1996, the Company's stockholders' approved proposals to
         increase the Company's authorized common stock from 10,000,000 to
         30,000,000 shares of $.01 par value common stock, and from 1,000,000 to
         10,000,000 shares of the $.01 par value preferred stock.

         In December 1995, the Company repurchased 10,493 shares of common stock
         for $60,000 in connection with the resignation of the Company's chief
         operating officer. The entire 10.493 shares were retired by the Company
         in October 1997.

         In April 1997, a ten-year warrant to purchase 25,000 shares of common
         stock was issued to the former president as part of his severance
         agreement. The fair value of the warrants based on the Black-Scholes
         valuation method was $1.80 per share and was expensed during 1997. In
         May 1997, an investor converted 179,000 shares of preferred stock into
         179,000 shares of common stock resulting in no proceeds being paid the
         Company.

         During 1997, the Company issued 250,000 shares of common stock at $.40
         per share to a consultant of the Company for certain investor relations
         work. The Company recorded expense of $100,000 in 1997 in connection
         with this transaction, based on the fair market value of the Company's
         common stock on the issue date of the shares.


                                      F-22

<PAGE>

                            ELECTROPHARMACOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1998 AND 1997



9.       SHAREHOLDERS' EQUITY AND WARRANTS (continued)

         During 1998 and 1997, the Company issued 40,823 and 75,482 shares of
         common stock, respectively, to officers of the Company in lieu of cash
         for payment of outstanding employment related liabilities, totaling
         $17,217 and $158,609, respectively. The amounts were charged to expense
         in the respective years.

         Effective January 1, 1996, the Company established the
         Electropharmacology, Inc. 1996 Non-Employee Directors' Equity
         Compensation Plan (the "Compensation Plan"). The Compensation Plan
         provides for the issuance of common stock as compensation for serving
         as a director of the Company. During 1998 and 1997, the Company issued
         26,787 and 23,037 shares of common stock, respectively, under the
         Compensation Plan and expensed approximately $20,000 and $32,500,
         respectively, relative to the issued common stock.

         Effective November 1, 1996, the board of directors approved an Employee
         Stock Purchase Plan ("ESPP") covering all employees who meet certain
         service period requirements. The ESPP provided for the sale of common
         stock to employees of the Company at a price equal to 85% of the lesser
         of market value at the end of or beginning of each respective quarter.
         During 1997, the Company issued 14,003 shares. The ESPP was terminated
         on October 1, 1997.

         As more fully described in Note 3, during August 1998, the Company
         issued 1,872,000 shares of common stock in return for the conversion of
         242,950 preferred shares and 1,961,107 warrants. As a result of these
         transactions, the Company recorded a dividend of $627,571 and an
         expense of $118,800 as inducement related charges.

         On September 30, 1998, the Company granted an eight-year warrant to
         Elan International to purchase 1,000,000 shares of common stock at
         $2.50 per share.

         The following table summarizes information relative to the Company's
         warrants that are exercisable through April 12, 2007:
<TABLE>
<CAPTION>
                                                                        Shares             Price Range
                                                                        ------             -----------

<S>                                                                    <C>               <C>
         Outstanding January 1, 1997                                   3,027,707         $1.00 to $9.00
         Granted                                                          25,000              $2.25
                                                                      -----------

         Outstanding December 31, 1997                                 3,052,707         $1.00 to $9.00
         Exchanged                                                    (1,961,107)        $5.42 to $9.00
         Canceled                                                       (782,946)        $5.03 to $6.00
         Granted                                                       1,000,000              $2.50
                                                                      -----------

         Outstanding December 31, 1998                                 1,308,654         $1.00 to $5.50
                                                                      ===========
</TABLE>

                                      F-23

<PAGE>


                            ELECTROPHARMACOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1998 AND 1997


9.       SHAREHOLDERS' EQUITY AND WARRANTS (continued)


         The Company's authorized but unissued common shares reserved for
issuance were as follows:
<TABLE>
<CAPTION>
                                                                                 Number of shares
                                                                         ----------------------------------
                                                                                   December 31,
                                                                              1998                 1997
                                                                              ----                 ----

<S>                                                                         <C>                  <C>
         Exercise of warrants                                               1,308,654            3,052,707
         Stock option plans                                                   975,488              590,778
         Convertible preferred stock                                        6,250,000              242,950
                                                                          --------------       --------------
                                                                            8,534,142            3,886,435
                                                                          ==============       ==============
</TABLE>


10.      STOCK OPTIONS

         In April 1993, the Company adopted a stock option plan which was
         amended on November 1, 1996 (the "Plan") for officers, directors,
         employees and consultants. The options granted may be either "incentive
         stock options" (for officers and employees only) within the meaning of
         Section 422A of the Internal Revenue Code, and/or nonqualified stock
         options (for officers, employees, directors and consultants). The
         exercise price of incentive stock options may not be less than 100% of
         the fair market value of the Company's common stock as of the date of
         grant (110% of the fair market value if the grant is to an employee who
         owns more than 10% of the outstanding common stock). As of December 31,
         1998, only the Chief Executive Officer of the Company owns more than
         10% of the Company's common stock. Nonqualified stock options may be
         granted under the Plan at an exercise price less than the fair market
         value of the common stock on the date of the grant. If nonqualified
         stock options are granted for less than the market value the Company
         must record compensation expense for the difference between fair market
         value and the option price.

         As of December 31, 1997, the board of directors authorized the granting
         of options for up to 1,500,000 shares of common stock. Grants of
         options to purchase 590,778 common shares, (215,020 of which are
         considered incentive stock options), have been formalized under the
         Plan. The options generally vest immediately or ratably up to ten years
         on differing vesting schedules. The options expire at dates ranging
         from two to ten years after date of grant.

         During 1997, the Company granted stock options to consultants for the
         purchase of 72,500 shares of common stock at exercise prices ranging
         from $3.38 to $5.75 per share. Deferred compensation of $98,750 was
         recorded in connection with the issuance of these options based on the
         Black-Scholes valuation model using the assumptions described herein
         and the estimated lives of the options. During 1998 these options
         either fully vested due to the reorganization in August 1998 or were
         cancelled. Compensation expense relating to these stock options
         recorded for 1998 and 1997 was $67,678 and $31,072, respectively.


                                      F-24

<PAGE>

                           ELECTROPHARMACOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1998 AND 1997


10.      STOCK OPTIONS (continued)

         The following table summarizes information about stock options at
December 31, 1998:
<TABLE>
<CAPTION>
                                  Outstanding Stock Options                     Exercisable Stock Options

                                             Weighted                                      Weighted
                                              Average       Weighted                        Average        Weighted
             Exercise                        Remaining       Average                       Remaining       Average
              Price                         Contractual     Exercise                      Contractual      Exercise
              Range            Shares          Life           Price          Shares          Life           Price
              -----            ------          ----           -----          ------          ----           -----

<S>           <C>              <C>             <C>          <C>             <C>               <C>           <C>
              $ .26- $.35      553,752         9.71         $  .29          553,752           9.71          $  .29
               $.51-$1.06      375,000         8.94            .88           61,500           9.32            1.02
              $1.81-$3.06       69,500         5.37           2.53           69,500           5.37            2.53
              $4.75-$5.50      290,736         7.27           5.30          290,736           7.27            5.30
              -----------  -------------   ------------   ------------   -------------   ------------     -----------
               $.26-$5.50    1,288,988                      $ 5.37          975,488                         $ 5.37
              ===========  =============                  ============   =============                    ===========
</TABLE>


         The following table summarizes activity for the years ended December
31, 1998 and 1997:
<TABLE>
<CAPTION>
                                                                     1998                             1997
                                                                     ----                             ----

                                                                          Weighted                         Weighted
                                                                          Average                          Average
                                                                          Exercise                         Exercise
                                                         Shares           Price             Shares          Price

<S>                             <C>                     <C>              <C>               <C>             <C>
         Outstanding on January 1,                      590,778          $   4.73          1,113,860       $   4.98
         Exercised                                            -                 -                  -              -
         Expired                                        (22,424)             3.20                  -              -
         Forfeited                                            -                 -                  -              -
         Canceled                                      (205,618)             3.30           (608,082)          4.87
         Granted                                        926,252               .53             85,000           2.55
                                                     ---------------   -------------     --------------   ------------

         Outstanding on December 31,                  1,288,988          $   1.71            590,778       $   4.73
                                                     ---------------   -------------     --------------   ------------

         Exercisable on December 31,                    975,488                              501,950
                                                     ---------------   -------------     --------------   ------------
         Shares available on December 31,
           for options that may be granted              211,012                              909,222
                                                     ===============                     =============

         Weighted average fair value
           of options granted                              $.09                                $1.30
                                                           ====                                =====

</TABLE>

                                      F-25

<PAGE>

                           ELECTROPHARMACOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1998 AND 1997


10.      STOCK OPTIONS (continued)

         As required by SFAS 123, pro forma information regarding net income and
         earnings per share has been determined as if the Company had accounted
         for its employee stock options under the fair value method. The fair
         value for these options was estimated at the date of grant using the
         Black-Scholes option-pricing model with the following assumptions used
         for grants in 1998 and 1997:
<TABLE>
<CAPTION>
                                                                 For the year ended December 31,
                                                                  1998                1997
                                                                  ----                ----

<S>                                                               <C>              <C>
                  Risk free interest rate                         4.58%            5.71%-6.69%
                  Expected lives (years)                         2.9-10               4-10
                  Expected volatility                             1.72                .681
                  Expected dividend yield                           -                   -
</TABLE>

         The Company's proforma information under SFAS 123 for the years ended
         December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
                                                  1998                               1997
                                                  ----                               ----
                                           As               Pro               As               Pro
                                        Reported           Forma           Reported           Forma
                                        --------           -----           --------           -----

<S>                                   <C>               <C>              <C>               <C>
         Net loss                     $(14,675,433)     $(14,841,336)    $(1,647,917)      $(2,015,631)
         Preferred stock
          dividends                       (815,071)         (815,071)              -                 -
                                     --------------    --------------  ---------------    ---------------
         Net loss available
          to common
          stockholders                $(15,490,504)     $(15,656,407)    $(1,647,917)      $(2,015,631)
                                       ============      ============      ===========       ===========
         Net loss per share:
         Basic and diluted              $(2.15)             $(2.17)          $(.45)            $(.55)
                                        =======             =======          ======            ======
</TABLE>

         The Black-Scholes option valuation model was developed for use in
         estimating the fair value of traded options that have no vesting
         restrictions and are fully transferable. In addition, option valuation
         models require the input of highly subjective assumptions including the
         expected stock price volatility. Because the Company's employee stock
         options have characteristics significantly different from traded
         options, and because changes in the subjective input assumptions can
         materially affect the fair value estimate, the existing models, in
         management's opinion, do not necessarily provide a reliable single
         measure of the fair value of its employee stock options.

         For the purposes of pro forma disclosures, the estimated fair value of
         the options is amortized to expense over the options' vesting period.
         The effect of compensation expense from stock option awards on pro
         forma net loss reflects only the vesting of 1995 through 1998 awards in
         1998 and the vesting of 1995 through 1997 awards in 1997, in accordance
         with Statement 123. Because compensation expense associated with a
         stock option award is recognized over the vesting period, the initial
         impact of applying Statement 123 may not be indicative of compensation
         expense in future years, when the effect of the amortization of
         multiple awards will be reflected in pro forma net loss.

                                      F-26

<PAGE>

                           ELECTROPHARMACOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1998 AND 1997


11.      INCOME TAXES

         As of December 31, 1998, the Company had net operating loss
         carryforwards of approximately $9,967,000 available to offset future
         taxable income. Such carryforwards, which may provide future tax
         benefits, expire in the years 2008 through 2012. Research tax credits
         of $187,000 expire in the years 2008 through 2018. During the years
         1993, 1995 and 1998 changes in ownership of greater than 50% occurred
         as a result of the Company issuing equity securities. As a result, a
         substantial limitation may be imposed upon the future utilization of
         its net operating loss carryforwards.

         For financial reporting purposes, a valuation allowance of $3,895,000
         has been recognized to offset the net deferred tax asset related to
         these carryforwards. Realization of the benefits related to
         pre-acquisition losses may be lost due to change in business and
         ownership rules under the Internal Revenue Code.

         Significant components of the Company's deferred income taxes are as
follows at December 31,:
<TABLE>
<CAPTION>
                                                                               1998             1997
                                                                               ----             ----

<S>                                                                     <C>               <C>
         Net operating loss carryforwards                               $    3,751,000    $   4,033,395
         Other                                                                 148,000          221,262
                                                                        ---------------   --------------

         Deferred tax assets                                                 3,899,000        4,254,657
         Deferred tax liabilities - equipment                                   (4,000)        (99,097)
                                                                        ---------------   --------------

                                                                             3,895,000        4,155,560
         Less valuation allowance                                           (3,895,000)      (4,155,560)
                                                                        ---------------    -------------

         Net deferred tax assets                                        $            -    $           -
                                                                        ===============    =============
</TABLE>

         The net change in valuation allowance for the years ended December 31,
         1998, and 1997 was a decrease of approximately $261,000 and an increase
         of approximately $680,000, respectively.

         The difference between the benefit for income taxes and the amount,
         which results from applying the federal statutory tax rate of 34% to
         the loss, is due to the non-deductible items and increase in the
         valuation allowance in 1998 and 1997, resulting in no tax benefit
         reported in any of those years.
<TABLE>
<CAPTION>
                                                                            1998              1997
                                                                            ----              ----

<S>                                                                       <C>               <C>
         Tax at statutory rate                                            (34.00)%          (34.00)%
         State taxes, net of federal benefit                               (3.63)%           (3.61)%
         Non-deductible items                                              35.53 %             .16 %
         Change in valuation items                                           .67 %           41.28 %
         Other                                                             (2.77)            (3.82)%
                                                                         -----------       -----------
                                                                               -                 -
                                                                         -----------       -----------
</TABLE>

                                      F-27

<PAGE>

                           ELECTROPHARMACOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1998 AND 1997



12.      SUPPLEMENTAL CASH FLOW INFORMATION


         Supplemental disclosure of non-cash investing and financing activities
         at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
                                                                                       1998              1997
                                                                                       ----              ----

<S>                                                                                <C>                 <C>
         Issuance of common stock for services                                     $   37,217          $  310,609
         Issuance of note payable for services                                         63,654                   -
         Issuance of note payable for audit fees, net                                 118,430                   -
         Notes payable for prepaid insurance                                          137,268             235,975
         Purchase of assets under direct capital lease financing                       28,343                   -
         Induced conversion of preferred stock to common stock                        627,571                   -
         Conversion of warrants to common stock                                       118,800                   -
         Common stock subscriptions receivable                                      1,400,000                   -
         Sale of a business operation:
           Investment in securities                                                 1,246,721                   -
           Assets disposed of,  net                                                   618,952                   -
         Details of settlement with outside legal counsel:
           Transfer of investment in securities                                       650,000                   -
           Issuance of common stock                                                   128,166                   -
         Issuance of common stock for an acquisition                                3,315,297                   -
         Net value of additional partnership units acquired
           in an acquisition                                                        4,071,429                   -
</TABLE>


13.      TERMINATION OF DISTRIBUTION AGREEMENT

         The Company announced on July 18, 1997 that its purchase-distribution
         agreement with NPC was terminated following the announcement by the U.
         S. Health Care Financing Administration ("HCFA") of its new policy
         denying Medicare reimbursement for the use of all electrical
         stimulation, including pulsed electromagnetic fields, in treating
         wounds. The multi-year distribution agreement for the sale and rental
         of SofPulse devices was initially executed as of May 1, 1997 and
         required NPC to purchase from the Company specified minimum quotas of
         SofPulse devices in exchange for exclusive distribution rights to three
         selected market applications of SofPulse in the U. S. NPC was also to
         assume responsibility for the growth and operation of the Company's
         current fleet of rental devices including the Company's sales and
         marketing group and was to make monthly payments to the Company for
         five years and pay royalties to the Company on NPC's rental revenues.
         The Company also "sold" approximately $270,000 of accounts receivable
         arising from April 1997 rental revenues to NPC for an initial payment
         from NPC in the amount of $200,000. Subsequently, NPC remitted the
         balance, less bad debts and interest charges to the Company. During
         1998, the Company settled all outstanding obligations and matters with
         NPC. Upon the termination of the NPC purchase-distribution agreement,
         the Company reacquired the marketing rights and control of its fleet of
         SofPulse devices from NPC. Subsequently, a U. S. District Court
         enjoined HCFA in November 1997 from implementing the national policy
         noted above and HCFA notified the fiscal intermediaries in Febuary of
         1998 not to abide by the July 1997 national policy memorandum.


                                      F-28

<PAGE>

                           ELECTROPHARMACOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1998 AND 1997


14.      COMMITMENTS AND CONTINGENCIES


         Lease Commitments

         The Company leases its administrative facilities, lab facilities and
         certain equipment under operating leases or a license agreement with
         remaining terms as of December 31, 1998 ranging from two months to
         fifteen months at an average monthly rate of $7,549.

         Future minimum rental payments required under operating leases that
         have an initial term in excess of one year as of December 31, 1998, are
         as follows:


                      1999                               $  41,230
                      2000                                   1,530
                                                        ------------
                      Total                              $  41,760
                                                        ------------

         Rent expense under operating leases was $66,319 and $73,258 for the
         years ended  December 31, 1998 and 1997, respectively.


14.      COMMITMENTS AND CONTINGENCIES (continued)


         Employment Agreements

         As of December 31, 1997, the Company had employment agreements with
         certain executive officers, the terms of which expire at various times
         through December 31, 2001. In the corporate reorganization of the
         Company, these agreements were terminated and replaced by memoranda
         from the Board of Directors to the executive officers outlining, in
         general, their revised terms of employment. In addition, on August 19,
         1998, a new employment agreement was entered into with the President
         and Chief Executive Officer of Gemini , the term of which expires
         August 18, 2001.

         On August 25, 1998, the board of directors issued a memorandum to the
         Chief Executive Officer and President of the Company ("CEO"),
         outlining, in general, the terms of his employment effective as of
         September 1, 1998. The memorandum provides for an initial base salary
         of $130,000, which subsequently increased to $150,000, and may increase
         up to $200,000 in a series of stepped increments upon the achievement
         of specified milestones. The memorandum also provides for the grant to
         the CEO of a ten-year option to purchase 500,000 shares of the
         Company's common stock at the stock price at the close of trading on
         August 25, 1998, which vested based on the achievement of specific
         milestones set by the board of directors. The grant is subject to an
         increase in the number of shares available for issuance under the
         Company's stock option plan sufficient to cover the grant. In the event
         that the CEO's employment is terminated without "cause" before three
         years, he is entitled to severance of six months' salary, subject to
         his mitigation of such payment by seeking other employment. All of his
         stock options will vest immediately and will remain exercisable for the
         original term of the option in the event his employment is terminated
         due to an acquisition by merger with a third party that he has not
         recommended and/or approved.


                                      F-29

<PAGE>


                           ELECTROPHARMACOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1998 AND 1997


14.      COMMITMENTS AND CONTINGENCIES (continued)


         On August 25, 1998, the Board of Directors issued a memorandum to the
         Executive Vice President, ("EVP") outlining, in general, his terms of
         employment, effective as of September 1, 1998. The memorandum provided
         for an initial base salary of $80,000, which may increase up to
         $110,000 upon certain events, including the achievement of certain
         annual revenues. The memorandum also provides that the EVP will be
         entitled to an override on sales revenue at specified percentages. Once
         his aggregate annual compensation equals or exceeds $200,000, the
         Company and the EVP will negotiate a new mutually acceptable
         compensation arrangement. The memorandum also provides for the grant to
         the EVP of a ten-year option to purchase 200,000 shares of the
         Company's common stock at the stock price at close of trading on the
         date of grant, which vests over a five year period. The vesting may
         accelerate based on meeting certain sales revenue growth targets and
         other events. The grant is subject to an increase in the number of
         shares available for issuance under the Company's stock option plan
         sufficient to cover the grant.

         As part of the reorganization transactions, the Company entered into an
         employment agreement with the Chief Executive Officer and President
         (the "President") of Gemini, in August of 1998, for a term expiring in
         August of 2001. This agreement provided for a base salary of $120,000
         which subsequently increased to $150,000 and may increase to $200,000
         based on certain corporate milestones and revenues of Gemini. The
         agreement also provided that the Company will grant to the President on
         the date of the agreement an option to purchase 250,000 shares of
         common stock, vesting subject to certain vesting provisions over three
         years. The agreement also provides that if the President's employment
         is terminated other than for "cause", the President will receive an
         amount equal to 85% of the remaining portion of the base salary due
         under the terms of the agreement, unless there is a permitted
         resignation following a relocation of the President due to a change in
         control not proposed or recommended by him. In such case, the President
         would receive the sum of his annual base salary and the average annual
         bonus received by him during the previous two-year period. In the event
         of termination without "cause" or by permitted resignation, the
         President continues to receive benefits pursuant to the Company's
         welfare programs and prerequisite plans until the earliest of one year
         after his termination, the end of the term of the agreement, or until
         he is re-employed. In addition, all of the President's options will
         immediately vest and be exercisable for the full term of the option.

         Contingencies and Litigation

         In August 1994, a competitor of the Company filed a lawsuit against the
         Company and certain of its present and former directors and officers
         alleging the defendants had engaged in deceptive acts and practices,
         false advertising, unfair competition, breach of contracts of fiduciary
         duties between the plaintiff and certain Company employees. They also
         alleged the Company was involved in facilitating or participating in
         the breach of contracts. The plaintiff is seeking an injunction to
         rectify the effects of the misconduct, an unspecified amount of
         compensatory damages, disengorgement of profits, treble damages,
         punitive damages and attorney's fees. The plaintiff also seeks
         unspecified injunctive relief prohibiting the Company from engaging in
         the alleged acts and ordering the defendants to take remedial action to
         rectify the effects on consumers and the plaintiff caused by the
         alleged acts. The Company believes it has meritorious defenses, which
         it will pursue vigorously and has filed a counterclaim against the
         plaintiff and its President. Management is unable to make a meaningful
         estimate of the likelihood or amount or range of loss that could result
         from an unfavorable outcome of the pending litigation. It

                                      F-30

<PAGE>

                           ELECTROPHARMACOLOGY, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                           DECEMBER 31, 1998 AND 1997


14.      COMMITMENTS AND CONTINGENCIES (continued)


         is possible the Company's results of operations or cash flows in a
         particular quarter or annual period or its financial position could be
         materially affected by an unfavorable outcome. However, no liability
         has been recorded in the financial statements.

         On July 14, 1998, a former employee of the Company filed a complaint
         alleging failure by the Company to make payments of $20,000 due to him
         under an agreement pursuant to which the former employee and the
         Company had agreed to the terms of the termination of their
         employer-employee relationship. In December 1998, the former employee
         and the Company entered into a settlement agreement under which the
         Company is obligated to pay $16,500 in monthly installments of $1,500
         beginning on December 1, 1998.

                                      F-31
<PAGE>

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


                  On March 12, 1999, the Company advised representatives of
Ernst & Young LLP that Ernst & Young would no longer be engaged as the
independent accountants to audit the Company's financial statements for the
fiscal year ending December 31, 1998 and terminated the relationship. The
Company's decision to change accountants was based on the amount of professional
fees charged by Ernst & Young in the previous two years. The decision to change
the accountants was recommended by the Audit Committee of the Board of Directors
and approved by the Board of Directors of the Company.

                  Ernst & Young's audit reports on the Company's financial
statements for the past two fiscal years ending December 31, 1997 were qualified
as to uncertainty due to the Company's significant recurring operating losses,
working capital deficit and net capital deficiency which raised substantial
doubt about the Company's ability to continue as a going concern. In connection
with its audits for the two most recent fiscal years ended December 31, 1997 and
during the subsequent interim periods, there have been no disagreements with
Ernst & Young on any matter of accounting principles or practices, financial
statement disclosures, or auditing scope or procedure which disagreement, if not
resolved to the satisfaction of Ernst & Young, would have caused it to make a
reference to the subject matter of the disagreement in connection with its
report. The Company engaged Sweeney, Gates & Company as its new independent
accountants effective March 16, 1999.


       Item 9.  Directors and Executive Officers; Compliance with Section 16(b)
                of the Exchange Act.

                  The directors and executive officers of the Company as of
April 14, 1999 were as follows:
<TABLE>
<CAPTION>
<S>                                              <C>              <C>
         NAME                                    AGE                      POSITION
         -----                                   ---                      --------

         Arup Sen, Ph.D.                         47               Chairman of the Board, Chief
                                                                  Executive Officer, President and
                                                                  Secretary

         Krishna Jayaraman,Ph.D.                 50               Chief Executive Officer and
                                                                  President, Gemini Biotech and
                                                                  Vice Chairman of the Board

         David Saloff                            46               Chief Financial Officer,Executive
                                                                  Vice President - Marketing and
                                                                  Director

         Richard Kneipper                        55               Vice Chairman of the Board

         Bernard V. Carrico                      53               Director

         Stephen Seiler                          43               Director

         Murray Feldman                          63               Director

</TABLE>

                                       43

<PAGE>

              DR. ARUP SEN has been Chairman of the Board of Directors, Chief
Executive Officer and President of the Company since April 1997 and prior
thereto was Executive Vice President since November 1996. He co-founded
HealthTech Development Inc., a biotechnology commercialization company, in
December 1993 and served as its Chairman and Chief Executive Officer until
November 1996 and thereafter was Chairman until HealthTech's merger with the
Company in August 1998. From April, 1995 until November 1996 he also served as
Vice Chairman of HealthTech Diagnostics Corporation, a specialty clinical
testing laboratory with multiple locations throughout the U.S. Dr. Sen was
President of Dallas Biomedical, Inc., a medical technology venture capital fund
in Dallas, Texas, from July 1992 until August, 1993. Dr. Sen received a Ph.D. in
biochemistry in from Princeton University and has served on the staff of the
National Cancer Institute and the Research Institute of Scripps Clinic. He is an
inventor in more than 20 U.S. and foreign patents related to the diagnosis and
treatment of cancer, osteoporosis, atherosclerosis, immune diseases and AIDS.
Dr. Sen serves on the board of directors of Aquagene, Inc., a development stage
biotechnology company developing transgenic fish for human pharmaceutical
production, and Bio- Florida, the Florida state chapter of the Bio Industry
Organization, and is a courtesy professor at University of Florida, Gainesville
Biotechnology Program.

              DR. KRISHNA JAYARAMAN has been Chief Executive Officer and
President of the Gemini Biotech Division and Vice Chairman of the Board of
Directors of the Company since August 1998, the date of the Company's
acquisition of  Gemini Biotech, Ltd.  and its general partner and predecessor,
Gemini Biotech, Inc. d/b/a Delargen Corp.  Dr. Jayaraman has been President and
founder of Gemini Biotech, Ltd.  since 1995.  From 1994 to 1995, Dr. Jayaraman
was the President and founder of Biotex Resources Corporation, a manufacturer
and marketer of research reagents in The Woodlands, Texas.  Prior thereto, Dr.
Jayaraman was a Director of Developmental Chemistry at Triplex  Pharmaceutical
Corporation of The Woodlands, Texas from 1992 until its merger to form Aronex
Pharmaceutical in 1994, where he was responsible for two departments and
technical management. Dr. Jayaraman received a Ph.D. in Biochemistry from the
Indian Institute of Science, Bangalore.  Dr. Jayaraman holds an Adjunct
Professorship at Baylor College of Medicine, has authored over 50 publications
and is an inventor in 6 U.S. patents.

              RICHARD K. KNEIPPER has been Vice Chairman of the Board of
Directors since August 1998. Mr. Kneipper was the co-founder and served as
President and Chief Executive Officer of HealthTech Development Inc. from 1996
until its merger into the Company in August 1998. He co-founded in 1995 and
served as the Chairman of the Board of HealthTech Diagnostics Corporation, a
specialty clinical testing laboratory with multiple locations throughout the
U.S., where he led its mergers and acquisitions, private financing and a sale of
substantially all assets to a public company in January 1997. Mr. Kneipper was a
senior partner at the law firm of Jones, Day, Reavis & Pogue from 1982 until
1996, when he elected to become Of Counsel in order to devote a significant
portion of his time to various business activities. He received his Bachelors of
Science degree from Washington & Lee University and his J.D. degree from Cornell
University. Mr. Kneipper is Chief Administrative Officer and a director of
Premier HealthNet Services, Inc., a healthcare information services company, a
director of International Sourcing Ltd., an information services company, and
Genopath Technologies Inc., which provides phenotyping services for genetically
engineered animals.

              DAVID SALOFF has been Executive Vice President - Marketing and a
director of the Company since  the completion of its recent corporate
reorganization in August 1998 and has served as Chief Financial Officer since
April 1997.  Mr. Saloff served as Vice Chairman of the Board and Executive Vice

                                       44

<PAGE>

President of Corporate Development of the Company from August 1996 to August
1998. Prior thereto, Mr. Saloff served as Chairman of the Board, President and
Chief Executive Officer since founding the Company in August 1990. He received a
Bachelors Degree in Business Administration from Adelphi University and is the
recipient of one U.S. patent.

              MURRAY FELDMAN has been a director of the company since September
1996. Since June 1982, Mr. Feldman has been President of Murray Financial
Associates, Inc., a company primarily engaged in originating, selling and
servicing residential mortgages.  Mr. Feldman is the uncle of David Saloff.

              BERNARD V. CARRICO, JR. has been a Director of the Company since
August 1998.  Since March 1998, he has been a co-founder, President and Chief
Executive Officer of Argo Funding Company, LLC, a private investment firm.  From
1995 to August, 1997, he co-founded The Heartland Capital Appreciation Fund, LP
with Ms. Alice Walton and served as the President and Chief Executive Officer of
this $52 million investment fund.  Prior thereto, Mr. Carrico served as First
Vice President of Drexel Burnham Lambert in Dallas from 1987 to 1990; President
and Chief Operating Officer of Western Capital Corporation, a privately owned
investment company in Dallas, Texas from 1985 to 1987; and Chief Operating
Officer of Christiana Company, a Western Capital Corporation affiliate in
Dallas, Texas; and as Chief Financial Officer of Texas Federal Financial
Corporation of Dallas (NASDAQ).  Mr. Carrico received a B.S. from St. Joseph's
College, Indiana and an M.B.A. from Wayne State University, Detroit, Michigan.

              STEPHEN SEILER has been a director of the Company since December
1998. Since 1995, he has been Executive Vice President of Planning, Investment &
Development for Elan Corporation plc., a pharmaceutical company. Prior to
joining Elan, Mr. Seiler was an investment banker with Paribas Capital Markets
in New York and London from 1991 to 1995. Mr. Seiler previously practiced
corporate law with Paul, Weiss, Rifkind, Wharton & Garrison. Elan Corporation,
plc, is entitled to nominate one director to serve on the Company's Board of
Directors pursuant to an agreement between the Company and Elan. Stephen Seiler
is Elan's current nominee for director.

         BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

              Section 16(a) of the Securities and Exchange Act of 1934 requires
the Company's directors, executive officers and persons who own more than 10% of
the Company's common stock, to file with the Securities and Exchange Commission
("SEC") initial reports of ownership and reports of changes in ownership of
common stock and other equity securities of the Company. Officers, directors and
greater than 10% shareholders are required by the SEC regulation to furnish the
Company with copies of all Section 16(a) reports they file. The Company
undertakes to file on behalf of its directors, executive officers, and certain
of its greater than 10% shareholders all such required Section 16(a) Reports. To
the Company's knowledge, based solely on review of the copies of such reports
furnished to or filed by the Company or written representations from its
officers and directors or advice that no filings were required, during the 1998
fiscal year all officers, directors and greater than 10% beneficial owners have
complied with the Section 16(a) filing requirements except for one late filing
with respect to four acquisition transactions by Arup Sen, one late filing with
respect to four exchange transactions by Murray Feldman, one late filing with
respect to two stock option grants to David Saloff, one late filing of a
statement of initial ownership by each of Stephen Seiler and James Kaput, and
one late filing with respect to one stock option grant to each of Richard
Kneipper and Bernard Carrico.


                                       45

<PAGE>

         Item 10.  Executive Compensation.

              The following table sets forth certain information regarding
compensation paid during each of the Company's last three fiscal years to the
Company's President and Chief Executive Officer and the Company's one other
executive officer employed by the Company (the "Named Executives") whose total
annual salary and bonus for 1998 exceeded $100,000. Krishna Jayaraman, President
and Chief Executive Officer of Gemini Biotech, would have been included in the
table had Gemini Biotech had been acquired by the Company on January 1, 1998
instead of August 1998.
<TABLE>
<CAPTION>
                           Summary Compensation Table
                                                                                                Long-term Compensation
                                                                                                ----------------------
                                      Annual Compensation                                  Awards                    Payout
                                      -------------------                                  ------                    ------

                                                                                          Securities
                                                            Other Annual   Restricted     Underlying                All Other
         Name and               Fiscal                      Compensation     Stock        Options/      LTIP       Compensation
         Principal Position     Year   Salary($)  Bonus($)    ($)          Awards($)(5)   Sars(#)       Payout($)       ($)
         ------------------     ----   ---------  --------  -----------    ------------   ----------   ----------  ------------

<S>                             <C>     <C>          <C>        <C>               <C>      <C>          <C>          <C>
         Arup Sen               1998    132,981      0          500(1)            0        261,966      63,654(7)        0
         Chairman, President    1997    123,604      0        6,000(1)      152,446(2)      25,000         0             0
          & Chief Executive     1996     25,962              14,621(3)       39,858(5)      75,000         0             0
          Officer

         David Saloff           1998    115,563      0        1,000(2)            0        134,286(6)      0             0
           Director  &          1997    137,219      0       10,000(2)            0              0         0             0
           Executive Vice       1996    143,297      0        8,500               0        100,000         0             0
           President
         -----------------------------------
</TABLE>

         (1)      Represents a car allowance.

         (2)      Represents the value on the various dates of grant of 116,047
                  shares of Common Stock received by Dr. Sen in lieu of cash
                  compensation.

         (3)      Includes a $833 car allowance and $13,838 for the payment of
                  taxes on deferred compensation.

         (4)      Represents the value on the various dates of grant of 12,526
                  shares of Common Stock received by Dr. Sen for reimbursement
                  of relocation expenses and in lieu of cash and 1,688 shares of
                  Common Stock valued at $8,696 at December 31, 1996.

         (5)      Aggregate restricted stock holdings at December 31, 1998 for
                  Dr. Sen and Mr. Saloff were 2,278,394 and 259,199 shares,
                  respectively, of Common Stock valued at $740,478 and $84,240,
                  respectively, on December 31,1998. All restricted stock awards
                  vest immediately and are entitled to receive dividends paid on
                  the Common Stock, if any.

         (6)      Includes 100,000 options issued in exchange for the
                  cancellation of options granted in 1996.

         (7)      Represents amount payable to Dr. Sen representing aggregate
                  exercise price of 244,823 options to purchase common stock
                  pursuant to Dr. Sen's prior employment agreement under which
                  the Company's obligated to pay Dr. Sen the exercise price of
                  the options upon a change in control. See "Employment
                  Contracts, Termination of Employment, and Change of Control
                  Agreements."

                                       46

<PAGE>


                            COMPENSATION OF DIRECTORS

                  Pursuant to the Company's Non-Employee Directors' Equity
Compensation Plan, the Company pays each non-employee director $2,500 per fiscal
quarter in Common Stock priced at the closing on the last business day of
trading in such quarter, payable after January 1 of the following year. At the
time that a non-employee director joins the Board of Directors, the director is
granted a stock option of 15,000 shares of Common Stock, which option is granted
upon the director's attendance at the first meeting of the Board of Directors,
vests immediately with respect to 20% of the underlying shares and with respect
to the remaining shares vests an additional 20% of the shares upon each
anniversary year thereafter. The option granted to the non-employee director is
priced at the fair market value on the date of grant determined by the average
of the last trading price on the 20 business days prior to the date of grant.

                  Directors who are also employees of the Company do not receive
compensation for their participation as members of the Board of Directors of the
Company.

         EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT, AND CHANGE OF CONTROL
         AGREEMENTS

                  On August 25, 1998, the Board of Directors issued a memorandum
to Arup Sen, outlining in general the terms of employment of Dr. Sen as Chief
Executive Officer of EPI, effective as of September 1, 1998. The memorandum
provides for an initial base salary of $130,000, which has increased to $150,000
and may further increase up to $200,000 in a series of stepped increments upon
the achievement of specified milestones. The memorandum also provides that the
Company will grant to Dr. Sen a ten- year option to purchase 500,000 shares at
the stock price at close of trading on the date of grant (August 25, 1998),
175,000 of which would have vested based on the achievement of specific
milestones set by the Board of Directors, with the remainder to vest upon the
achievement of other such milestones. Issuance of these options is subject to an
increase in the number of shares reserved for issuance under the Company's Stock
Option Plan sufficient to cover such grant. Stock and cash bonuses are to be at
the sole discretion of the Board of Directors. In the event that Dr. Sen's
employment is terminated without "cause" before three years, Dr. Sen is entitled
to a severance of six months' base salary subject to his mitigation of such
payment by seeking other employment. All his stock options will vest immediately
and will remain exercisable for the original term of the option in the event his
employment is terminated due to an acquisition by or merger with a third party
not recommended and/or approved by Dr. Sen, or without "cause".

                  Prior to the reorganization of the Company in August 1998, Dr.
Sen had previously been a party to an employment agreement which granted him
certain options in lieu of cash salary the exercise price of which was to be
paid by the Company upon a change of control. On August 24, 1998, the Company
recorded a related party payable to Dr. Sen for $63,654 related to the exercise
of these options.

                  For a description of the employment agreement entered into
between the Company and Krishna Jayaraman, the President and Chief Executive
Officer of Gemini Biotech and a Vice Chairman of the Company, on August 19, 1998
see "--Certain Transactions."


                  On August 25, 1998, the Board of Directors issued a memorandum
to David Saloff, outlining in general the terms of employment of Mr. Saloff as
Executive

                                       47

<PAGE>

Vice President, Sales and Marketing of the Company, effective as of September 1,
1998. The memorandum provides for an initial base salary of $80,000, which may
increase up to $110,000 upon certain events, including the achievement of
certain annual revenues to be calculated by annualizing the prior six months'
revenues. The memorandum also provides that Mr. Saloff will be entitled to an
override on sales revenue, specified percentages of annualized revenue
calculated on the previous month's revenues. Once Mr. Saloff's aggregate annual
compensation equals or exceeds $200,000, the Company and Mr. Saloff will
negotiate a new mutually agreeable compensation arrangement. The memorandum also
provides that the Company will grant to Mr. Saloff on August 25, 1998, a
ten-year option to purchase 200,000 shares of Company common stock at the stock
price at close of trading on the grant date with 20% of the shares covered
thereby vesting upon the first anniversary date, and an additional 20% each
succeeding anniversary date, with vesting to accelerate based on meeting certain
sales revenue growth targets and other events related to PREMS technologies and
products. Issuance of these options is subject to an increase in the number of
shares reserved for issuance under the Stock Option Plan sufficient to cover
such grant. Stock and cash bonuses are to be at the sole discretion of the Board
of Directors. In the event that Mr. Saloff's employment is terminated without
"cause" before 18 months, Mr. Saloff is entitled to a severance of the prior six
months' compensation. The severance payment is subject to his mitigation of such
payment by seeking other employment unless Mr. Saloff has not been given notice
of termination at least three months prior to the end of the 18-month period and
Dr. Sen is no longer serving as the Company's Chief Executive Officer at such
time. All of his stock options will vest immediately and will remain exercisable
for the original term of the option in the event his employment is terminated
due to an acquisition by or merger with a third party not recommended and/or
approved by Mr. Saloff, or without "cause".


                                       48

<PAGE>

                                  STOCK OPTIONS

         Option Grants During 1998 Fiscal Year

                  The following table provides information related to options
granted to the Named Executives during fiscal 1998.

<TABLE>
<CAPTION>

                                      Individual Grants
                             ---------------------------------------------------------------------------------
                                      Number of                  % of Total
                                      Securities                 Options/SARS          Exercise
                                      Underlying                 Granted to            or  Base
                                      Options/SARS               Employees in            Price        Exp.
           Name                       Granted )                  Fiscal Year             $/Share      Date
 -----------------------          -----------------          -----------------          -------       ----

<S>                                   <C>                          <C>                     <C>      <C>
         Arup Sen                     244,823(1)                   26.4%                   .26      01/01/08
                                       17,143(2)                    1.9%                   .35      02/01/08
         David Saloff                 200,000(2)(3)                10.8%                   .32      04/14/08
                                       34,286(2)                    3.7%                   .35      02/01/08
</TABLE>

----------------------------
                  (1)      Shares vested 50% on the grant date and the remaining
                           50% on July 1, 1998. Upon a change in control of the
                           Company on August 24, 1998, the Company was obligated
                           to pay to Dr. Sen the aggregate exercise price of the
                           options ($63,654) to exercise such options.

                  (2)      Shares vested immediately on the grant date.

                  (3)      Options were issued in exchange for the cancellation
                           of same number of options granted in August 1996 at
                           an exercise price of $5.50.


         Option Exercises During 1998 Fiscal Year and Fiscal Year End Option
Values

                  The following table provides information related to options
held by the Named Executives. No stock options were exercised by a Named
Executive during fiscal 1998. The Company does not have any outstanding stock
appreciation rights.





                                       49

<PAGE>
<TABLE>
<CAPTION>
                                                                 Number of Securities                 Value of Unexercised
                                                                 Underlying Unexercised               In-The-Money
                                                                 Options/SARS at FY-End(#)            Options /SAR
                                                                                                      at FY-End ($)(1)
                         Shares Acquired   Value
                         on Exercise(#)    Realized $(2)      Exercisable      Unexercisable     Exercisable     Unexercisable
                         --------------    -------------      -----------      -------------     -----------     -------------
<S>                            <C>               <C>            <C>                  <C>            <C>                <C>
    Arup Sen                   0                 0              361,966              0              17,138             0

    David  Saloff              0                 0              134,286              0                   0             0
</TABLE>

         (1)      The closing price for the Company's Common Stock as reported
                  through the OTC Bulletin Board on December 31, 1998, the last
                  trading day of the 1998 fiscal year, was $.33. Value is
                  calculated on the basis of the difference between the option
                  exercise price and $.33 multiplied by the number of shares of
                  Common Stock underlying the option.

         (2)      Value is calculated based on the difference between the option
                  exercise price and the closing market price of the Common
                  Stock on the date of exercise multiplied by the number of
                  shares to which the exercise relates.

         REPORT OF BOARD OF DIRECTORS ON REPLACEMENT OF OPTIONS

                  On May 17, 1999, the Board of Directors authorized the grant
to David Saloff of 100,000 stock options at an exercise price equal to the
closing market price on such date ($.32 per share) as replacement options for
100,000 options granted to Mr. Saloff in August 1996 at an exercise price equal
to $5.50 per share. The original options were granted to Mr. Saloff for previous
services rendered and interest-free loans made by Mr. Saloff to the Company. The
replacement options vested immediately as did the canceled options. The Board
replaced Mr. Saloff's options because the canceled options were so far below the
market value of the Company's common stock that they no longer provided a
long-term incentive for Mr. Saloff.


                                           Arup Sen
                                           Murray Feldman


         ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

                  The following table sets forth information as of May 17, 1999,
regarding the beneficial ownership of Common Stock by each person known by the
Company to own beneficially 5% or more of the outstanding shares of Common
Stock, each director and executive officers of the Company, and the directors
and executive officers of the Company as a group. The persons named in the table
have sole voting and investment power with respect to all shares of Common Stock
owned by them, unless otherwise noted. The address for each person below listed
is c/o the Company, 1109 NW 13th Street, Gainesville, Florida 32601, unless
otherwise noted.

                                       50

<PAGE>
<TABLE>
<CAPTION>
                                                             Amount and Nature of                Percent of
               Name of Beneficial Owner                      Beneficial Ownership                   Class
               ------------------------                      --------------------                   -----
         <S>                                                    <C>                                <C>
         Arup Sen, Chairman of the Board,
         Chief Executive Officer and President                  2,747,053(1)(2)                     16.64%

         James Kaput, Vice President, Gemini
          Biotech                                               1,422,002(2)                         8.81%

         Richard K.Kneipper, Vice Chairman
          and Director                                          1,410,536(2)(3)                      8.74%

         Murray Feldman, Director                                 941,232(2)(5)                      5.82%

         David Saloff, Director and Executive
          Vice President                                          393,485(2)(5)                      2.42%

         Krishna Jayaraman, Vice Chairman
          and Chief Executive Officer, Gemini
         Biotech Division                                       6,050,000(6)                        27.26%

         Bernard Carrico, Director                                 13,534(3)                          *

         Stephen Seiler, Director                                  10,693(3)                          *

         Elan International Services, Ltd.
         102 St James Court
         Flatts, Smith Parish, Bermuda, FL04                   11,097,245(7)                        46.18%

         Norton Herrick
         2295 Corporate Blvd., NW
         Suite 222
         Boca Raton, FL 33431                                   1,893,950(2)(8)                     11.73%

         Paragon Capital Corporation
         Spear, Leeds, Kellogg, LLC
         c/o George Levine
         1250 E. Hallandale Beach Blvd.
         Suite 300
         Hallandale, FL 33309 (2)                                 540,774                            3.35%


         All directors and executive officers
                  as a group (7 persons)                       11,566,533(9)                        50.91%
</TABLE>

         *        Less than one percent (1%)

         (1)      Includes 361,966 shares subject to presently exercisable
                  options.
         (2)      In connection with the reorganization of the Company on August
                  24, 1998, a Master Agreement dated June 28, 1998 was entered
                  into among (i) the Company (ii) Norton Herrick, David Saloff,
                  Murray Feldman, George Levine, and Paragon Capital Corporation
                  at Spear, Leeds & Kellogg, LLC

                                       51

<PAGE>

                  (collectively, the "EPHI Group"), (iii) Arup Sen, James Kaput
                  and Richard Kneipper (collectively, the "HTD Group") and (iv)
                  Krishna Jayaraman and his wife, Shashikala Jayaraman
                  (collectively, the "Gemini Group"). Pursuant to the Master
                  Agreement, the EPHI Group, the HTD Group and the Gemini Group
                  agreed that following the consummation of the reorganization,
                  in connection with the election of directors of the Board of
                  Directors of the Company, they shall each vote their shares of
                  Common Stock in favor of a seven-person board of directors,
                  consisting of two persons nominated by the EPHI Group, two
                  person nominated by the HTD Group, two persons nominated by
                  the Gemini Group and one person who is the Chief Executive
                  Officer. In addition, in connection with the election of the
                  EPHI Group's nominees, Mr. Herrick and Mr. Feldman have agreed
                  with each other to support the nomination of, and vote their
                  shares in favor of a person selected by the other. The Master
                  Agreement will terminate on the earliest to occur of (i) two
                  years from the effective date of the reorganization, or (ii)
                  the date on which the market capitalization of the Company
                  equals or exceeds $40,000,000 for any period of 20 trading
                  days within any six-month period. To the extent that this
                  person or persons shares voting power pursuant to the Master
                  Agreement, such person or persons may be deemed to be a member
                  of a "group" with the EPHI Group, the HTD Group and the Gemini
                  Group pursuant to Rule 13d-5 under the Securities Exchange Act
                  of 1934, (the "Exchange Act") and this person or persons is
                  deemed to beneficially own the shares of Common Stock
                  currently beneficially owned by each of the other members of
                  the group with which this person or persons shares such voting
                  power, namely, Mr. Herrick (1,893,950 shares of Common Stock),
                  Mr. Saloff (259,199 shares of Common Stock and presently
                  exercisable options to purchase 134,286 shares of Common
                  Stock), Mr. Feldman (918,732 shares of Common Stock and
                  presently exercisable options to purchase 22,500 shares of
                  Common Stock), Mr. Levine and Paragon Capital Corporation at
                  Spear, Leeds & Kellogg, LLC (540,774 shares of Common Stock),
                  Dr. Sen (2,385,087 shares of Common stock and presently
                  exercisable options to purchase 361,966 shares of Common
                  Stock), Mr. Kneipper (1,407,536 shares of Common Stock and
                  presently exercisable options to purchase 3,000 shares of
                  Common Stock), Mr. Kaput (1,422,002 shares of Common Stock)
                  and Mr. Jayaraman (presently exercisable options to purchase
                  50,000 shares of Common Stock and the right to exchange
                  partnership units for 6,000,000 shares of Common Stock). As of
                  May 17, 1999, the shares of Common Stock beneficially owned by
                  the EPHI Group, the HTD Group and the Gemini Group
                  represented approximately 67.79% of the issued and outstanding
                  shares of Common Stock, calculated in accordance with Rule
                  13d-3 under the Exchange Act (based on 16,143,325 shares of
                  Common Stock issued and outstanding at May 17, 1999, plus the
                  3,000, 134,286, 22,500, 361,966 and 6,050,000 shares of Common
                  Stock, respectively, issuable to Messrs. Kneipper, Saloff,
                  Feldman, Sen and Jayaraman, respectively, upon exercise of
                  certain options or rights in each case which may be deemed to
                  be beneficially owned by such persons and which are deemed
                  outstanding for purposes of this computation). Each such
                  person or persons shares voting power of the shares of Common
                  Stock beneficially owned by the respective group to which he
                  belongs as described above, but has no other rights with
                  respect to such shares and disclaims beneficial ownership of
                  such shares.
         (3)      Includes 3,000 shares subject to presently exercisable
                  options.
         (4)      Includes 22,500 shares subject to presently exercisable
                  options.
         (5)      Includes 134,286 shares subject to presently exercisable
                  options.
         (6)      Includes 50,000 shares subject to presently exercisable
                  options and the right to convert partnership units in the
                  Gemini Health Technologies, L.P. into 6,000,000 shares of
                  Common Stock after June 18, 1999.

                                       52

<PAGE>

         (7)      Includes 7,886.7 shares and right to receive 375 shares of
                  Series A Convertible Preferred Stock convertible into
                  6,572,223 and 312,500 shares, respectively, of common stock,
                  and a warrant to purchase 1,000,000 shares of common stock
                  exercisable on May 1, 1999.
         (8)      Mr. Herrick disclaims beneficial ownership of 60,000 shares of
                  Common Stock owned by Rozel International Holdings, which
                  shares are pledged to Mr. Herrick as security for a loan.
         (9)      Includes 577,752 shares subject to presently exercisable
                  options and 6,000,000 shares subect to presently exercisable
                  rights to exchange partnership units for common stock.



         ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


                  In connection with the Company Reorganization in August 1998,
Mr. Herrick, a greater than 5% beneficial owner of the Company, and the Company
agreed that upon consummation of the reorganization all shares of preferred
stock and all warrants held by Mr. Herrick (242,950 and 1,300,000, respectively)
would be redeemed and exchanged for an aggregate of 1,575,000 shares of Common
Stock. In addition, each of Mr. Feldman, a director and greater than 5%
beneficial owner of the Company, and Paragon, a greater than 5% beneficial owner
of the Company, agreed with the Company that upon consummation of the
Reorganization, all warrants owned by each of them (373,607 and 187,500,
respectively), would be redeemed and exchanged for 160,000 shares and 90,000
shares of Common Stock, respectively. These exchanges resulted in a 1.872
million, or approximate 45% increase in the number of shares of then outstanding
stock of the Company.

                  In connection with the sale of the SofPulse assets to ADM
Tronics in August 1998, the Company used 1.525 million shares of ADM Tronics
common stock received to satisfy $650,000 of a $709,379 secured note payable for
previously incurred legal expenses owed to Jones, Day, Reavis and Pogue
("Jones, Day"), the Company's former legal counsel. The Company also entered
into an agreement with Jones, Day to allow Jones, Day to liquidate its ADM
Tronics stock until August 1999. In addition, in connection with the
reorganization, the Company issued to Jones, Day 322,831 shares of common stock
valued at $128,166 to satisfy the remaining portion of the note payable and
other past due payables to Jones, Day for legal services previously rendered.
Richard Kneipper, Vice Chairman of the Company and a greater than 5% beneficial
owner of the Company, serves as of counsel to Jones, Day.

                  In connection with the merger of HealthTech into the Company
in August 1998, the Company issued an aggregate of 6,172,095 shares of common
stock of the Company to the shareholders of HealthTech, including Arup Sen,
Chairman of the Board, President and Chief Executive Officer of the Company
(2,250,203), Richard Kneipper (1,350,228) and James Kaput (1,422,002). The
HealthTech stockholders have the right to earn up to an additional 1.65 million
shares through December 31, 1999 upon the occurrence of certain milestones with
respect to HealthTech technologies.

                  In its second acquisition, the Company bought Gemini Biotech,
Ltd., a privately held biotechnology limited partnership. The purchase was a
complex transaction in which 6 million shares of the Company common stock will
be issued to Krishna Jayaraman, Vice Chairman and Chief Executive Officer and
President of the Biotech Division, and his wife, Shashikala Jayaraman, in June
1999. Prior to the time that the common stock is issued to the Jayaramans, the
Jayaramans serve as the limited partners and minority interest in the Company's
operating entity, Gemini Health Technologies L.P. The Jayaramans also have the
right, ending in December 1999, to earn up to an additional 2.05 million shares
of the Company common stock

                                       53

<PAGE>

upon the achievement of certain milestones with respect to Gemini services and
technologies.

                  As part of the Gemini acquisition in August 1998, the Company
entered into an employment agreement with Krishna Jayaraman dated August 19,
1998, for a term expiring on August 19, 2001 for Dr. Jayaraman's services as
President and Chief Executive Officer of the Gemini Biotech Division of the
Company. This agreement provides for a base salary of $120,000 which has
increased to $150,000 and may further increase to $200,000 based on certain
corporate milestones and revenues of the Gemini Biotech Division. He also is
entitled to benefits, a term life contract, an automobile allowance and four
weeks vacation per year. The agreement also provides that the Company will grant
to Dr. Jayaraman on the date of the agreement an option to purchase 250,000
shares of Common Stock with 50,000 of the shares covered thereby vesting
immediately, 62,500 of the shares covered thereby vesting on each of the first
and second anniversaries of the agreement and an additional 75,000 of the shares
covered thereby vesting on the third anniversary of the date of the agreement.
The agreement also provides that if Dr. Jayaraman's employment is terminated by
him by permitted resignation or by the Company other than for "cause", Dr.
Jayaraman will receive an amount equal to 85% of the remaining portion of the
base salary due him under the term of the agreement, unless there is a permitted
resignation following a relocation of Dr. Jayaraman due to a change in control
not proposed or recommended by Dr. Jayaraman. In such case, Dr. Jayaraman would
receive the sum of his annual base salary and the average annual bonus received
by him during the previous two-year period. In the event of termination without
"cause" or by permitted resignation, Dr. Jayaraman will continue to receive
benefits pursuant to the Company's welfare programs and perquisite plans until
the earliest of one year after his termination, the end of the term of the
agreement, or until Dr. Jayaraman is re-employed. In addition, all of Dr.
Jayaraman's options will immediately vest and be exercisable for the full term
of the option. Dr. Jayaraman is also subject to a non-compete agreement as part
of his employment agreement.

                  In September 1998, Elan International Services invested $7.5
million in convertible preferred stock of the Company, and agreed to invest an
aggregate of $2 million to buy our common stock or other equity securities at
the average share price for 20 trading days prior to the date of investment. By
May 17, 1999, Elan International had acquired 3,212,522 shares of common stock,
387 shares of convertible preferred stock and 2,520,821 warrants to purchase
common stock of the Company for $2,000,000, which has completed Elan
International's investment. Under the agreement with Elan International, a
substantial portion of the proceeds from Elan International's investment must be
used by the Company to fund further development of iontophoresis products under
the license agreement.

                  The Company acquired from Elan Pharma International, a company
under common control with Elan International Services, a worldwide license to a
new flexible iontophoresis patch technology in September 1998. The Company made
a total payment of $7.5 million for the acquisition of the Elan technology and
product prototype design. The Company will make future payments of prescribed
license fees and royalties payable from the revenues from product sales and/or
sublicensing to future corporate partners.


                  In February 1999, Arup Sen, Chairman of the Board, President
and Chief Executive Officer of the Company, borrowed $85,000 from the Company,
evidenced by a demand promissory note bearing interest at the prime rate plus 1%
(currently 8.75%) per annum.


                                       54

<PAGE>


         Item 13.  Exhibits and Reports on Form 8-K

                  (a)      The following exhibits are filed as part of this
                           Annual Report on Form 10-K:

         Exhibit
         Number            Description of Exhibit


         2.1               Asset Purchase Agreement among Electropharmacology,
                           Inc. and ADM Tronics Unlimited, Inc. ("ADM") and AA
                           Northvale Medical Associates, Inc. dated May 27, 1998
                           ("ADM Agreement") (1)

         2.1.1             Letter Amendment to ADM Agreement dated August 18,
                           1998 (2)

         2.1.2             Warrant to EPI to purchase up to 1,500,000 shares of
                           ADM Common Stock dated August 18, 1998 (2)

         2.1.3             Voting Trust Agreement between Jones, Day, Reavis &
                           Pogue, Andre DeMino and EPI dated August 18, 1998 (2)

         2.1.4             Letter Agreement between Jones, Day, Reavis & Pogue
                           and EPI dated June 2, 1998 (2)

         2.2               Agreement of Merger and Plan of Reorganization among
                           Electropharmacology, Inc., EPI Sub., Inc.  and
                           HealthTech Development, Inc. ("HealthTech") dated
                           June 11, 1998 ("HealthTech Agreement")(3)

         2.3               Capital Contribution Agreement between EPI
                           HealthTech, Inc. ("EPI Sub"),  Gemini Biotech, Ltd.
                           ("Gemini"), Krishna and Shashikala Jayaraman and
                           Gemini Biotech, Inc., dated June 18, 1998 (4)

         2.4               Master Agreement dated as of June 28, 1998 among
                           HealthTech, Gemini, EPI, EPI Sub, and each of David
                           Saloff, George Levine, Paragon Capital at Spear,
                           Leeds & Kellogg, Norton Herrick, Murray Feldman and
                           20th Century Associates ("the Pre-Closing EPI
                           Stockholders"); Arup Sen, Richard Kneipper, James
                           Kaput ("the HealthTech Stockholders"); Krishna
                           Jayaraman, Shaskikala Jayaraman, and Gemini Biotech,
                           Inc.("the Gemini Partners") and other EPI
                           stockholders (4)

         2.4.2             First Amendment to Master Agreement dated August 3,
                           1998 between EPI, EPI Sub, Gemini and the Gemini
                           Partners (2)

         2.4.3             Letter Agreement dated as of July 27, 1998 by and
                           between Messrs. Herrick and Feldman (2)

         2.5               Registration Rights Agreement dated as of June 28,
                           1998 among EPI, certain of the Pre-Closing EPI
                           Stockholders, the HealthTech Stockholders and the
                           Gemini Partners (4)


                                       55

<PAGE>


         2.6               Agreement of Limited Partnership of Gemini Health
                           Technologies L.P.dated June 18, 1998 by and between
                           Krishna and Shaskikala Jayaraman and EPI HealthTech
                           Inc.(2)

         2.7               Unit Exchange Agreement by and between EPI, Krishna
                           and Shaskikala Jayaraman, and Gemini Health
                           Technologies L.P. dated June 18, 1998 (4)

         2.8               Contribution Agreement between EPI Sub and EPI dated
                           August 18, 1998 (2)

         3.1               Certificate of Incorporation, as amended (5)

         3.2               Amendment to Bylaws dated June 24, 1997 (2)

         3.2.1             Revised and Restated Bylaws of EPI (2)

         3.3               Letter Agreement dated August 27, 1998 between Elan
                           International Services, Ltd.,  Elan Pharma
                           International Limited ("EPIL") and
                           Electropharmacology, Inc. (6)

         3.4               Securities Purchase Agreement between EPI and Elan
                           International Services, Ltd. dated September 30, 1998
                           (2)

         3.5               License Agreement between EPI and  EPIL dated
                           September 30, 1998 (2)

         4.2               Certificate of Designations, Preferences and Rights
                           of Series A Convertible  Preferred Stock (2)

         4.3               Warrant to Elan International Services, Ltd. to
                           purchase up to 1,000,000 shares of EPI Common Stock
                           (2)

         4.4               Registration Rights Agreement between EPI and EPIL
                           dated September 30, 1998(2)

         10.1              Employment Agreement between EPI and Krishna
                           Jayaraman dated August 18,1998 (2)

         10.2              Memorandum to Arup Sen from EPI Board of Directors
                           regarding terms of employment dated August 25, 1998
                           (2)

         10.2.1            Employment Agreement, dated November 11, 1996 between
                           EPI and Arup Sen ("Sen Employment Agreement") (7)

         10.2.2            First Amendment, dated June 15, 1997 to Sen
                           Employment Agreement (8)

         10.2.3            Revised  and Restated Second Amendment, dated April
                           21, 1998, to Sen Employment Agreement (2)

         10.3              Memorandum to David Saloff from EPI Board of
                           Directors, dated August 25, 1998 regarding terms of
                           employment (2)

         10.4              Employee Nondisclosure, Confidentiality and
                           Noncompetition Agreement, dated August 24, 1998
                           between EPI and Arup Sen (2)


                                       56

<PAGE>

         10.5              Form of Consulting Advisory and Non-Competition
                           Agreement between EPI and each of James Kaput and
                           Richard Kneipper (2)

         10.5.1            Form of Consulting Advisor Confidentiality Agreement
                           between EPI and each of James Kaput and Richard
                           Kneipper (2)

         10.6              Benefit Life Insurance Loan Agreement between
                           Delargen Corp.dba Gemini Biotech, Ltd. and Benefit
                           Life Insurance Company dated June 25, 1997 (2)

         10.6.1            Modification of Benefit Life Insurance Company Loan
                           Agreement, Note (Adjustable Rate Note) and Other Loan
                           Documents dated January 6, 1999 (2)

         10.3              Promissory Note to Dr. Arup Sen from the Company
                           dated October 10, 1997. (8)

         10.4              Promissory Note to Murray Feldman from the Company
                           dated October 10, 1997. (8)

         10.5              Promissory Note to David Saloff from the Company
                           dated October 10, 1997. (8)

         10.16             Form of Non-Employee Directors' Equity Compensation
                           Plan, effective as of January 1, 1996. (5)

         10.17             The Company's 1993 Stock Option Plan, as amended
                           November 1, 1996. (7)

         16.2              Letter from Ernst & Young, LLP regarding response to
                           Change in Certifying Accountants, dated March 23,
                           1999 (8)

         24.1              Power of Attorney (9)

         27.1              Financial Data Schedule (9)

         ------------------
         (1)               Previously filed as an Exhibit to the Company's
                           current Report on Form 8-K dated June 15, 1998 and
                           incorporated by reference herein.
         (2)               Previously filed as an Exhibit Amendment No. 1 to the
                           Company's Quarterly Report on Form 10-QSB dated March
                           31, 1999 for the quarter ended September 30, 1998 and
                           incorporated by reference herein.
         (3)               Previously filed as an exhibit to the Company's
                           Current Report on Form 8-K dated June 26, 1998 and
                           incorporated by reference herein.
         (4)               Previously filed as an exhibit to the Company's
                           Current Report on Form 8-K dated July 6, 1998 and
                           incorporated by reference herein.
         (5)               Previously filed as an exhibit to the Company's
                           Annual Report on Form 10-KSB for the year ended
                           December 31, 1996 and incorporated by reference
                           herein.
         (6)               Previously filed as an exhibit to the Company's
                           Current Report on Form 8-K dated September 4, 1998
                           and incorporated by reference herein.
         (7)               Previously filed as an Exhibit to the Company's
                           Annual Report on Form 10-KSB for the year ended
                           December 31, 1997 and incorporated by reference
                           herein.

                                       57

<PAGE>

         (8)               Previously filed as an Exhibit to the Company's
                           Current Report on Form 8-K dated March 31, 1999 and
                           incorporated by reference herein.
         (9)               Filed herewith.

                  (b)      Reports on Form 8-K
                           None


                                       58


<PAGE>

                            Electropharmacology, Inc.


                In accordance with the Exchange Act, this Annual Report on Form
10-KSB has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.


                                  ELECTROPHARMACOLOGY, INC.

                                  BY:  /S/ Arup Sen
                                       --------------------------------------
                                       Arup Sen
                                       Chairman of the Board, Chief Executive
                                       Officer and President

                  Pursuant to the requirements of the Securities Act of 1933,
this Registrant Statement has been signed by the following persons in the
capacities indicated on April 8, 1999.

               Signatures                             Title
               ----------                             -----


             /s/ Arup Sen                         Chairman of the Board
             ------------------
             Arup Sen                             Chief Executive Officer and
                                                  President


                                                  Chief Financial Officer
                    *                             and Director (Principal
             ------------------
             David Saloff                         Financial and Accounting
                                                  Officer)


                    *                             Director
             ------------------
             Murray Feldman



                    *                             Vice Chairman of the Board
             ------------------
             Richard Kneipper



                    *                             Director
             ------------------
             Bernard Carrico



                    *                             Director
             ------------------
             Stephen Seiler



                    *                             Director
             ------------------
             Krishna Jayaraman


                                       59

<PAGE>

         * The undersigned, by signing his or her name hereto, does sign and
execute this Form 10-KSB pursuant to the Powers of Attorney executed on behalf
of the above-named officers and directors and contemporaneously filed herewith
with the Securities and Exchange Commission.



                                           By:    /s/ Arup Sen
                                              -------------------------------
                                                  Arup Sen
                                                  Attorney-in-fact




                                       60

<PAGE>