<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-KSB
                Annual Report Pursuant to Section 13 or 15(d) of
                       the Securities Exchange Act of 1934

                  For the fiscal year ended SEPTEMBER 30, 1999
                           Commission File No. 0-18399

                         FOUNTAIN PHARMACEUTICALS, INC.
             (Exact name of registrant as specified in its charter)

Delaware                                    62-1386759
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

                   7279 BRYAN DAIRY ROAD, LARGO, FLORIDA 33777
                    (Address of Principal Executive Offices)

       Registrant's telephone number, including area code: (727) 548-0900

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

                          COMMON STOCK, PAR VALUE $.001
                                (Title of Class)


           Securities registered pursuant to Section 12(g) of the Act:
                                      NONE


         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 past 12 months (or for such shorter period that the Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.

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


         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. [ ]
<PAGE>   2
         Registrant's revenues for the year ended September 30, 1999:

                                   $2,210,771

         The aggregate market value of the Company's Common Stock held by
non-affiliates of the Registrant as of December 22, 1999 was approximately
$488,144 based upon the closing sales price of the Company's Common Stock as of
December 22, 1999 (see Footnote (1) below).


                     APPLICABLE ONLY TO REGISTRANTS INVOLVED
           IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:


         Indicate by check mark whether the Registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

                       Yes   X                    No
                           -----                     -----

                    APPLICABLE ONLY TO CORPORATE REGISTRANTS:

         The number of shares outstanding of the Registrant's class of Common
Stock, par value $.001 per share, as of December 22, 1999, was 2,375,796.

         The number of shares outstanding of the Registrant's Class B Common
Stock, par value $.001 per share, as of December 22, 1999, was 4,505.


                      DOCUMENTS INCORPORATED BY REFERENCE:
                                      NONE

                 Transitional Small Business Disclosure Format:

                       Yes                        No   X
                           -----                     -----



----------
(1)      The information provided shall in no way be construed as an admission
         that any person whose holdings are excluded from the figure is not an
         affiliate or that any person whose holdings are included is an
         affiliate and any such admission is hereby disclaimed. The information
         provided is included solely for recordkeeping purposes of the
         Securities and Exchange Commission.


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         PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT


When used in this Annual Report on Form 10-KSB, the words "may," "will,"
"expect," "anticipate," "continue," "estimate," "intend," and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 regarding events, conditions and financial
trends which may affect the Company's future plans of operations, business
strategy, operating results and financial position. Such statements are not
guarantees of future performance and are subject to risks and uncertainties and
actual results may differ materially from those included within the
forward-looking statements as a result of various factors. Such factors include,
among others: (i) the Company's ability to obtain additional sources of capital
to fund continuing operations in the immediate term; (ii) the Company's ability
to retain existing or obtain additional licensees who act as distributors of its
products; (iii) the Company's ability to obtain additional patent protection for
its encapsulation technology; and (iv) other economic, competitive and
governmental factors affecting the Company's operations, market, products and
services. Additional factors are described in the Company's other public reports
and filings with the Securities and Exchange Commission. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date made. The Company undertakes no obligation to publicly
release the result of any revision of these forward-looking statements to
reflect events or circumstances after the date they are made or to reflect the
occurrence of unanticipated events.


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                                     PART I

ITEM 1

         BUSINESS

BACKGROUND

         The Company was organized during 1989 to develop and commercialize
certain proprietary compound encapsulation technologies. Following several years
of continued developmental efforts, the Company was able to secure patents on
several aspects of its technologies in the United States and Europe, introduce
branded products in certain markets and develop strategic associations with
pharmaceutical companies.

         From inception through 1994, the Company remained in the development
stage while experiencing substantial losses. Its principal source of capital was
derived from a series of private financing transactions and an initial public
offering in 1990. Sales revenues during this period were insufficient to offset
the Company's operating costs and liabilities. Consequently, the Company filed
for protection under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the Middle District of Florida, Tampa
Division on November 30, 1994. Upon successfully reorganizing its operations and
finances, the Company emerged from bankruptcy in July 1996.

         In July 1997, the Company completed a private placement of 2,000,000
newly-designated and issued shares of Series A Convertible Preferred Stock (the
"Preferred Stock") to Fountain Holdings, LLC ("Holdings"), a Wyoming limited
liability company, controlled by Joseph S. Schuchert, Jr. As a result of this
private placement (the "Private Placement"), the Company obtained additional
working capital of $2.5 million, which it utilized to enhance the expansion of
the Company's sales and marketing program, as well as to further the Company's
research and development efforts. As a result of significant increases in
marketing costs associated with the expansion of existing product lines and the
introduction of new products during fiscal 1998, which were not offset by sales
revenues during the period, the Company substantially utilized its working
capital resources. In order to provide working capital, the Company entered into
a secured credit arrangement with Mr. Schuchert as of December 31, 1998. The
credit agreement provides for a two-year line of credit of up to $1,500,000
subject to the Company satisfying certain agreed upon quarterly operating budget
guidelines. As a result of additional costs associated with the development and
marketing of two new product lines during fiscal 1999, the Company fully
utilized the $1,500,000 line of credit. In order to maintain current operations
subsequent to fiscal 1999, the Company obtained short term unsecured loans from
its President, Mr. Gerald Simmons and Mr. John C. Walsh, a director of the
Company. During the first quarter of fiscal 2000 Mr. Schuchert made advances to
the Company as an additional unsecured demand loan, the terms of which have not
been finalized. As of December 22, 1999, the outstanding principal balance of
this demand loan was $410,000. While Mr. Schuchert has indicated that he may
provide the Company with a line of credit of up to $1,000,000 in the aggregate,
the Company has not entered into any written commitment or loan agreement with
Mr. Schuchert to that effect. There can be no assurances that an agreement with
Mr. Schuchert will be obtained, or if obtained that the terms of such financing
will be advantageous to the Company. If the Company does not secure additional
financing in the


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immediate term the Company will not be able to continue as a going concern and
will suspend operations. The Company intends to continue to seek additional
sources of capital, including debt and equity financing. However, there can be
no assurances that such financing will be available or that it will be available
upon terms advantageous to the Company. See "ITEM 6 MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION - LIQUIDITY AND CAPITAL RESOURCES."

         THE TECHNOLOGY AND ITS APPLICATIONS

         The Company's base of proprietary technologies involves the creation of
compound encapsulation and delivery systems of subcellular size designated by
the Company as "Solvent Dilution MicroCarriers" ("SDMCs"). SDMCs are microscopic
man-made spheres that can be engineered to entrap pharmaceuticals or other
biologically active molecules.

         These technologies are intended to enable the Company to create SDMC
formulations with defined biochemical and biological properties which are
designed to permit the production of stable delivery systems. The SDMCs are
intended to provide enhanced compound delivery through entrapment and
encapsulation of a wide variety of compounds or chemical formulations which are
designed to be released in a manner that should enhance localized delivery. Once
the contents of the SDMC are released, the constituent materials used to form
the micro-carriers are utilized by living cells and degraded. The SDMCs are
principally intended for use in connection with dermal applications,
solubilization of compounds, parenteral and oral formulations and
non-pressurized aerosol preparations.

         Since inception, the Company's focus has been upon the creation of new
proprietary products through the application of its encapsulation technologies
to existing compounds, thereby in the process creating a new and enhanced
product which offers advantages over a non-encapsulated format. The Company has
also undertaken test encapsulations on products that are proprietary to other
companies with the goal of securing appropriate licensing or other joint venture
arrangements for such products.

         The Company has developed a number of proprietary products utilizing
its SDMC technologies. These include non-regulated consumer goods and
dermatologic products consisting of sunscreens, lotions and moisturizers. These
products have been marketed by the Company under the LyphaZome(R), Celazome(TM),
Octazome(R) and Daylong(R) names and under other proprietary names of licensees.
The Company currently markets its products under LyphaZome(R) and as well as
under other proprietary names of licensees. The Company recently introduced a
line of skin care products under the Celazome(TM) name. During fiscal 1999 the
Company discontinued the Octazome(R) and Daylong(R) name product lines.

         The Company has also in the past pursued the development of other
non-regulated products for use in a variety of applications as well as other
proprietary products that are subject to FDA regulation, such as certain burn
care compounds, vaccines and topical steroids.

         The Company will continue to pursue collaborative efforts with other
companies to develop additional regulated compounds.


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         BUSINESS STRATEGY

         The Company's principal business goal in the immediate term is to
obtain sufficient capital to continue operations. Provided that the Company is
able to secure additional capital necessary to fund operations beyond the near
term, the Company intends to continue to leverage the strengths of its SDMC
technology to develop products for the following key business sectors:

-    Continue to expand the Company's OTC (Over the Counter) sunscreen franchise
     by expanding its distribution base to physicians and developing innovative
     new products in this category.

-    Aggressively develop new products that may be candidates for entry into the
     expanding cosmeceutical product sector. (A "cosmeceutical" is generally
     defined as a product that has biological activity, but is not regulated as
     a drug by the FDA).

-    Continue to pursue clinical investigation of existing pharmaceutical
     compounds that may be administered to humans more efficiently and
     potentially with less side effects utilizing the Company's patented SDMC
     technology.

-    Continue to expand OTC, cosmecutical and prescription products through its
     international strategic partner relationships.

-    The Company will pursue joint venture, merger and acquisition candidates to
     expand its business base. However, there can be no assurances that any such
     transactions will be successfully completed by the Company.

         Immediate term operation of the Company and the execution of any of the
Company's expansion plans will require additional sources of financing beyond
the current resources of the Company. Management is actively pursuing additional
sources of financing. However, there can be no assurances to that such financing
will be available or that it will be available upon terms advantageous to the
Company. See "ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- LIQUIDITY AND CAPITAL RESOURCES."

         Additionally, the Company will continue to pursue arrangements with
third parties whereby the Company can expand its markets and the costs of
marketing and distribution of its products are not borne by the Company.
Generally, in its licensing arrangements, the Company provides the raw materials
or finished product for distribution and sale by the third party licensee. The
licensee remains responsible for all marketing and sales efforts.

         On a case by case basis in the United States, the Company will
determine its interest in collaborative arrangements with larger pharmaceutical
companies in the advancement of new regulated products through the approval
process and into the marketplace. In general, for international approvals and
marketing, the Company intends to rely on such larger organizations.

         Currently, the Company principally licenses and supplies moisturizers
and sunscreen products through its licensing arrangements with pharmaceutical
companies. See "SALES AND MARKETING." While the Company's sales currently focus
upon its line of sunscreen and moisturizer products, management believes that
provided that the Company is able to obtain sufficient financing to continue


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operation beyond the near term, expansion of the Company's licensing
arrangements and the scope of product development activities may offer marketing
opportunities for additional consumer products. However, there can be no
assurances to that effect.

         SALES AND MARKETING

         From inception through 1994, the Company had undertaken its marketing
activities principally through the efforts of management and independent sales
and marketing consultants who initiated sales efforts with certain retail
department stores, hospitals and health care institutions, retail pharmaceutical
chains and scientific organizations. However, over the past five years, in view
of the Company's limited financial resources, it has focused its principal
marketing efforts on the sale of products through licensing arrangements with
certain pharmaceutical companies. Management believes that these licensing
arrangements have offered significant marketing opportunities without imposing
material operating expenses upon the Company, and that these types of
arrangements should be expanded.

         The Company has three principal licensing arrangements with major
European licensees. Under such arrangements the Company realizes revenues from
the sale of products to the licensees who act as distributors and from royalties
which are earned as the result of subsequent sales of these products by such
licensees. Of its licensees, Spirig AG and Nycomed Pharma AS represent in the
aggregate more than 86% of the Company's revenues. The Nycomed Pharma AS license
covers markets in Norway, Denmark, Belgium, Holland and Luxembourg. Spirig AG is
the Company's licensee for Switzerland, Germany and certain markets in Eastern
Europe.

         The Company also markets its products directly to professionals,
including physicians, podiatrists and aestheticians, and the consumer market
through its in-house sales staff. During fiscal 1999 direct sales represented
approximately 11.5% of the Company total revenues. During the first quarter of
fiscal 2000, the Company launched a new line of skin care products under the
Celazome(TM) name. Given the limited financial resources of the Company, the
Company intends to curtail its marketing efforts in the immediate term pending
the securing of additional financing to continue operations.

GOVERNMENTAL REGULATIONS

         The Company had undertaken the development of a number of products
which incorporate its SDMC technologies in regulated fields. These products
remain in various stages of development, from preliminary laboratory research,
pre-clinical testing to human clinical testing and are being considered for
further developmental efforts by the Company to the extent additional funds are
available, or with the collaboration of a corporate sponsor or joint venture
participant.

         Regulation by governmental authorities in the United States and other
countries is a significant factor in the production and marketing of regulated
products. In order to clinically test, produce and market products for human
therapeutic use, mandatory procedures and safety standards established by the
FDA and comparable agencies in foreign countries must be followed. The procedure
for seeking and obtaining the required governmental approvals for a new product
in a regulated field involves many steps, including animal testing to determine
safety, efficacy and potential toxicity and, eventually, clinical testing on
humans which is likely to continue several years and involves the expenditure of
substantial resources.


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         Certain of the products previously developed or targeted for
development by the Company are largely unregulated and do not require any
regulatory approvals or filings with any regulatory agencies. This principally
entails the Company's moisturizer products. Certain other products of the
Company are regulated as over-the-counter drugs. These products are required to
receive additional testing for stability purposes and must consist of "approved
materials." These products are subject to stringent recordkeeping requirements.
However, no filing or pre-approval process with any regulatory agency must be
complied with in connection with these products.

PATENTS AND PROPRIETARY TECHNOLOGY

         The Company has obtained and is continuing to actively pursue patent
protection for certain component elements of its proprietary encapsulation
technologies, both in the United States and abroad.

         The Company has obtained patents for its novel method for making
lipid-based carrier vehicles or "SDMCs": U.S. Patent 5,133,965 issued on July
28, 1992, and U.S. Patent 5,269,979 issued on December 14, 1993. These patents
relate to unique methodology for making relatively small-sized, homogenous
populations of lipid-based carrier vehicles. A shelf-stable precursor solution
containing a drug or other substance can be converted into the vehicles by
simple aerosolization or dilution with water. The precursor solution can also be
dried onto a surface, such as a bandage material, and rehydrated upon contact
with fluids at the wound site to deliver medicaments to the wound. Counterpart
patents have issued in Australia, Canada, Norway, Israel, Spain and EPC
(European Patent Convention). The European patent was validated in Austria,
Belgium, France, Great Britain, Germany, Italy, Luxembourg, Netherlands, Sweden,
and Switzerland-Liechtenstein. The Company has counterpart applications in
Japan, Hong Kong, and Singapore. The granting fees have been paid in Singapore,
and issuance is expected in the near future.

         The Company is pursuing additional patent coverage in the United States
on other aspects of its SDMC technology. This application relates to
shelf-stable precursor solutions U.S. Patent 5,879,703 issued on March 9, 1999.
Counterpart patent has been granted in Australia. The Company has counterpart
applications pending in Canada, the EPC, Hong Kong, Japan, and Singapore.

         Obtaining patents on the pending applications will add to the Company's
patent portfolio and will strengthen the Company's position with regard to
competitor's efforts to design around the Company's existing patents. Although
the Company continues to believe the pending applications contain patentable
claims, there is no assurance that the respective Patent Offices will ultimately
grant these claims. Further, there are no assurances that the Company's issued
patents will not be designed around, infringed upon, or successfully challenged
by others in litigation. No assurance can be given that the Company will have
sufficient resources to either institute or defend any action by or against the
Company with respect to such patents. While the Company believes that the
protection afforded by a patent would be important to its business, the Company
would continue operations by relying upon trade-secrets, know-how and continuing
technological advancements in order to maintain its competitive position. Trade
secret protection, however, may be limited by foreign publication of the patent
application and by the issuance of the patents mentioned above.

         There can be no assurance the patents the Company may obtain will
afford the Company commercially significant protection of its proprietary
technology, provide the Company with any significant competitive advantages, or
that challenges will not be instituted against the validity or


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enforceability of such patents, or if instituted that any such challenges will
not be successful. The cost of litigation to uphold the validity and prevent
infringement of a patent can be substantial. In addition, no assurance can be
given that the Company will have sufficient resources to either institute or
defend any action, suit or other proceeding by or against the Company with
respect to any claimed infringement of a patent or other proprietary rights. In
the event that the Company shall in the near future lose the protection afforded
by a patent, such event could have material adverse effect on the Company's
operations. There can be no assurance that the Company's technologies will not
infringe patents or other rights owned by others, license to which may not be
available to the Company.

COMPETITION

         Competition for the development and sale of non-regulated
pharmaceutical and consumer goods products is intense. The Company and its
licensees will be competing against consumer goods and other companies that have
substantial resources and are well positioned to subsidize the cost of product
development, establish distribution channels, develop marketing plans and hire
sales persons. Notwithstanding that management believes that the Company's
encapsulated products provide benefits over existing products, there can be no
assurances that the Company's marketing and sales efforts, either directly or
through licensees, will be successful in light of such intense competition.

         Competition in the drug delivery and microencapsulation industries is
based upon such factors as safety of products, competitive product advantages,
performance, ease of application, acceptance by ultimate consumers and health
care professionals, and the marketing and distribution of products. The
Company's competitive position will be based upon the development of alternative
approaches using new or improved formulations to accomplish desired results.
Existing alternatives to the Company's technologies include conventional
formulations for compounds, biodegradable polymeric systems and liposomes.
Application of the Company's technologies to certain products remains in an
early phase of development and no assurances can be given that any of the
Company's potential products will gain sufficient competitive advantages to
generate meaningful commercial demands.

         The Company will be competing in an area in which there is potential
for extensive technological innovation in a relatively short period of time.
Competition will be based upon the Company's ability to commercialize
technological developments.

         Other public and private companies are engaged directly or indirectly
in drug encapsulation and drug delivery research activities both for therapeutic
and consumer goods applications. Many of these companies have substantially
greater financial and technical resources than the Company. There can be no
assurances that the Company's competitors will not succeed in developing
products which are more effective or safer than those to be developed by the
Company, or that such competitors may obtain government approval in less time
than the Company.

HUMAN RESOURCES

         The Company conducts its operations and implements its business
strategy through the use of employees and consultants engaged as independent
contractors. Consultants are generally engaged to assist in scientific matters
or in connection with sales and marketing endeavors.


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         As of December 22, 1999, the Company employed twenty (20) persons
including its chief executive officer, a vice president of operations, a
director of finance and administration, a technical director, an aesthetic
marketing and sales director, warehouse, sales and administrative personnel.

RISK FACTORS

         IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS 10-KSB, YOU
SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS. MANAGEMENT BELIEVES THAT
THE RISKS AND UNCERTAINTIES DESCRIBED BELOW COMPRISE MANY OF THE MATERIAL RISKS
AND UNCERTAINTIES FACING THE COMPANY. HOWEVER, ADDITIONAL RISKS AND
UNCERTAINTIES MAY ALSO HARM ITS BUSINESS OPERATIONS.

THE COMPANY'S VIABILITY AS A GOING CONCERN IS IN DOUBT.

         The Company has suffered recurring loses from operations and as of the
date of this 10-KSB has a net capital deficiency. Based upon its present
operating expenses, taking into account available cash reserves and marketable
securities, the Company will not be able to continue as a going concern beyond
the immediate term without an infusion of additional capital to fund operations.
Thus, the continued operations of the Company are wholly dependent upon its
ability to generate material sales revenues or secure other sources of debt or
equity financing, as to which there can be no assurances. Even if the Company
obtains additional working capital in the immediate term, to the extent
operating expenses increase in the future, which may be likely given the
Company's present business strategy, the need for additional funding may be
accelerated. This opinion results, in part from the fact that at the time the
financial statements were issued, the Company did not have sufficient liquidity
to meet its projected cash obligations beyond the immediate term. Thus, the
Company believes that, without additional financing, it will not have sufficient
liquidity to meet its cash obligations as they become due in the immediate term
without significant additional working capital.

LIMITED MARKET FOR THE COMPANY'S COMMON STOCK INCREASES THE POSSIBLE VOLATILITY
OF THE COMPANY'S STOCK PRICES AND THE VALUE OF ANY INVESTMENT IN THE COMPANY'S
EQUITY MAY BE REDUCED.

         The public trading market for shares of the Company's Common Stock is
limited on the OTC Bulletin Board. Our directors, officers and principal
stockholders hold over 52% of the outstanding Common Stock of the Company which
has reduced the supply of shares eligible for public resale and reduced the
trading market for the Company's Common Stock. There can be no assurances that
an active trading market for the Company's Common Stock will be developed or be
sustained. By its very nature, trading on the OTC Bulletin Board provides only
limited market liquidity. In addition, the stock markets generally have
experienced, and continue to experience, extreme price and volume fluctuations
which have affected the market price of many small cap companies and which have
often been unrelated to the operating performance of these companies. These
broad market fluctuations, as well as general economic and political conditions,
may adversely affect the market price of the Company's Common Stock.


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THE SUCCESSFUL IMPLEMENTATION OF THE COMPANY'S BUSINESS STRATEGY IS DEPENDENT
UPON MANAGEMENT PERSONNEL AND EXECUTIVE OFFICERS.

         The Company's operations are dependent upon the continued services of
senior management and upon the Company's ability to hire and retain qualified
management and technical personnel. The loss of services of any of those
executive officers or other management or personnel, whether as a result of
death, disability or otherwise, would have a material adverse effect upon the
Company's business.

SENIOR MANAGEMENT BENEFICIALLY OWNS A SIGNIFICANT PERCENTAGE OF THE COMPANY'S
COMMON STOCK AND THEREFORE HAS SIGNIFICANT INFLUENCE OVER THE ELECTION OF
DIRECTORS.

         Our officers, directors and principal stockholders own approximately
82.6% of the Common Stock of the Company on a fully diluted basis. See Item 11 -
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." In addition,
prior to the conversion of the Series A Preferred Stock, the holder is entitled
to the number of votes cast by the holders of outstanding Common Stock, plus
seven (7) votes. Consequently, upon exercise of their vested options and
warrants and by virtue of Delaware law, these stockholders are in a position to
elect all of our directors and possibly control the outcome of other corporate
matters without the approval of our other stockholders. In addition, applicable
statutory provisions and the ability of the Board of Directors to issue one or
more series of Preferred Stock without stockholder approval could deter or delay
unsolicited changes in control of the Company by discouraging open market
purchases of our stock or a non-negotiated tender or exchange offer for such
stock, which may be disadvantageous to our stockholders who may otherwise desire
to participate in such a transaction and receive a premium or their shares.

THE COMPANY HAS A POTENTIAL NEED FOR COLLABORATION WITH CORPORATE SPONSORS.

         Based upon available information, it is likely that substantial
expenditures will be required in order for the Company to conduct further
research and development, testing, manufacturing and marketing of certain
products which utilize its SDMC technologies. In the absence of material
revenues from the sale of certain of the Company's non-regulated products and in
recognition of the limited resources presently available to the Company, the
Company may seek the collaboration of a corporate sponsor or joint venture
participant in order to provide funding to subsidize such expenditures. There
can be no assurances that the Company will locate or obtain the collaboration of
any such corporate sponsor or joint venture participant. In the event such
corporate collaboration cannot be obtained, the Company may not have sufficient
funding, or wish to allocate a substantial portion of its limited financial
resources in order to continue such development efforts. In the event, however,
that such sponsorship or participation is obtained, the Company will, most
likely, be required to provide such corporate sponsor or joint venture
participant with a significant interest in the Company, the development of its
products, its potential profits upon the development of any potential products
or the exclusive rights to manufacture, license, market and/or sell any such
products. In this event, the ability of the Company to fully exploit the profits
potentially available upon the commercialization of its technologies may be
significantly limited.


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COMPETITION FOR THE DEVELOPMENT AND SALE OF NON-REGULATED SKIN CARE AND CONSUMER
GOODS PRODUCTS IS INTENSE.

         There are many companies, both public and private, including well-known
pharmaceutical and consumer goods companies, that have developed products that
have attained significant consumer acceptance for extended periods of time,
thereby making competition in these fields extremely difficult. The Company will
also be subject to significant competitive pressures in connection with the
development and sale of regulated products. There are also many companies, both
public and private, including well known pharmaceutical companies that have
developed compound delivery systems based upon other technologies, as well as
technologies similar to that of the Company. Although it is management's opinion
that these systems do not demonstrate the benefits of SDMC encapsulation, the
state of the art is still in its developmental stages, thus, there can be no
assurances that the Company's technologies will attain any material commercial
success. Many of the companies with whom the Company competes have substantially
greater financial and technical resources and production and marketing
capabilities than the Company, for both regulated and non-regulated products.
Many of these companies have significantly greater experience than the Company
in the development, marketing, sale and distribution of new products, as well as
the implementation of pre-clinical testing and human trials of new or improved
pharmaceutical products, or in obtaining the approval of FDA or other regulatory
authorities. It is possible that the Company's competitors may succeed in
developing products that are safer or more effective than those of the Company,
and in obtaining approval of FDA for such products.

THE FURTHER DEVELOPMENT, PRODUCTION, TESTING, MANUFACTURING AND MARKETING OF
PRODUCTS IN REGULATED FIELDS WHICH INCORPORATE SDMC FORMULATIONS MAY REQUIRE
REGULATORY REVIEW AND/OR APPROVAL OF THE FDA AND COMPARABLE AGENCIES IN OTHER
COUNTRIES.

         The nature and extent of regulation may differ with respect to
different products. Given our limited capital resources, we are not currently
pursuing products which require FDA approval. However, in the event that we are
able to secure financing adequate to pursue production of regulated products,
the testing and regulatory pre-market approval process ("PMA") involves rigorous
pre-clinical and clinical testing and approval by FDA and other comparable
agencies and usually takes several years and requires the expenditure of
substantial resources, for which the Company may seek third party collaboration.
There can be no assurance that regulatory approvals will be obtained for any of
the intended applications of the Company's proposed technologies, once
developed. A significant portion of the Company's available reserves may be used
for continuing research and development of the Company's technologies. These
expenditures will be made without any assurance that approvals will be obtained
and before it can be ascertained whether any of the regulated products proposed
to be developed by the Company can be commercialized. The inability to obtain,
or delays in obtaining, such approvals would materially adversely affect the
Company's ability to commence marketing any regulated products developed by
application of its technologies. The Company currently markets certain products
pursuant to the Federal Food, Drug and Cosmetic Act. If the Company markets
products that FDA does not consider to be "substantially equivalent" to an
appropriate previously marketed product, FDA will require approval pursuant to
the more burdensome PMA process. Furthermore, the Company cannot predict whether
there will be, or the extent of, any potentially adverse government regulations
or administrative actions which may arise in the future.


                                       12
<PAGE>   13
THE COMPANY IS ENGAGED IN A FIELD INCREASINGLY CHARACTERIZED BY EXTENSIVE
RESEARCH AND DEVELOPMENT EFFORTS.

New developments in lipid and liposome research as well as alternative
drug-delivery systems and other pharmaceutical products are expected to continue
at a rapid pace. Developments by others could render the Company's technology
obsolete or not competitive. The Company's success will depend, in part, upon
its ability to achieve and maintain a competitive position with respect to those
technologies.

THE CLINICAL TESTING, MANUFACTURING AND MARKETING OF THE COMPANY'S SDMC
FORMULATIONS, OR PRODUCTS WHICH INCORPORATE SUCH FORMULATIONS, WILL LIKELY
ENTAIL CERTAIN RISKS OF PRODUCTS LIABILITY.

Although the Company has presently secured products liability insurance, there
can be no assurances that such coverage will continue to be available in the
future or that the present amount and scope of any coverage will be adequate to
protect the Company in the event of a successful product liability claim.

THE COMPANY POTENTIALLY HAS EXPOSURE TO THE YEAR 2000 PROBLEM.

The Company utilizes electronic technology which includes computer hardware and
software systems that process information and perform calculations that are
date- and time-dependent. The coming of the year 2000, the so-called Year 2000
problem, poses pervasive and complex problems. Virtually every computer
operation, including manufacturing equipment and other non-information systems
equipment, unless it is Year 2000 compliant, will be affected in some way by the
rollover of the two-digit year value from "99" to "00" and the recognition by
some electronic technology of "00" as the year 1900 rather than 2000. The
Company may not only be negatively affected by the failure of its own systems to
be Year 2000 compliant, but may also be negatively affected by the Year 2000
non-compliance of its vendors, customers, lenders and any other party with which
it transacts business.

Its failure or the failure of any party with which it conducts business to be
Year 2000 compliant in a timely manner could have a material adverse impact on
its operations. If its systems or the systems of its significant vendors,
customers, lenders and other outside parties with which it transacts business
were to fail because they were not Year 2000 compliant, it would incur
significant costs and inefficiencies. Due to general uncertainty inherent in the
Year 2000 problem, resulting in part from the uncertainty of the Year 2000
readiness of third parties, it cannot be sure that it will be able to resolve
problems associated with the Year 2000 issue in a timely and cost effective
manner. Its inability to do so may adversely affect its operations and business,
or expose us to third-party liability.


                                       13
<PAGE>   14
ITEM 2

         PROPERTIES

         The Company owns no real property. The Company leases approximately
8,404 square feet of office, laboratory, production and warehouse facilities
located in Largo, Florida. The lease, dated December 18, 1997 as amended March
20, 1998, provides for a monthly rental of $6,950 for a term of five years,
ending December 31, 2003. In addition, the Company sub-leases an approximately
2,670 square feet warehouse facility next to its offices. This lease dated March
30, 1999, provides for a month rental of $1,613 for a term of 1 year ending
March 30, 2000. These facilities are adequate for the Company's current and
foreseeable needs.

ITEM 3

         LEGAL PROCEEDINGS

         In March 1999, the Company settled out of court its claim against
Dermik Laboratories, Inc. and its parent company, Rohone-Poulene Rorer, for the
cancellation of a previous distribution agreement. As a result of this
settlement, the Company and Dermik Laboratories, Inc. have met several times to
investigate programs of mutual interest, including potential applications of the
Company's patented LyphaZome(R) drug delivery technology. Both companies plan to
continue discussion in the future but there are no assurances to that affect.

ITEM 4

         SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         On July 1, 1999, the Company filed with the Securities and Exchange
Commission an Information Statement notifying the stockholders that the 1998
Stock Options Plan was approved by written consent of the holder of 1,251,100
shares (52.2%) of the outstanding Common Stock and the holder of all of the
Preferred Stock as permitted under Section 228 of the Delaware General
Corporation Law. The approval of the 1998 Plan by the stockholders of the
Company became effective July 21, 1999.


                                       14
<PAGE>   15
                                     PART II

ITEM 5

MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         A.       MARKET INFORMATION

                  The Company's Common Stock presently trades on the OTC
Bulletin Board under the symbol "FPHI". Until May 31, 1994, the Company's Units,
Common Stock, Class A Warrants and Class B Warrants were listed on the National
Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ").

         Effective May 31, 1994, the Company's securities were delisted from The
NASDAQ SmallCap Market(SM) because, as a result of declining equity and assets,
the Company no longer satisfied the quantitative listing standards required for
continued listing. During May 1995, the Company's Units, and Class A and Class B
Warrants expired.

         The following table sets forth certain information with respect to the
high and low market prices of the Company's Common Stock for the fiscal years
ended September 30, 1998 and 1999, and for the first quarter of its fiscal year
ending September 30, 2000. No trading market exists for shares of the Company's
Class B Common Stock.

<TABLE>
<CAPTION>
Fiscal 1998                         HIGH                       LOW
-----------                         ----                       ---
<S>                                 <C>                       <C>
First Quarter                       1.50                      1.0625
Second Quarter                      2.0625                     .875
Third Quarter                       1.625                      .875
Fourth Quarter                      1.1875                     .4375

Fiscal 1999                         HIGH                       LOW
-----------                         ----                       ---
First Quarter                        .625                      .1875
Second Quarter                       .4375                     .25
Third Quarter                       1.0625                     .25
Fourth Quarter                      1.0625                     .375

Fiscal 2000                         HIGH                       LOW
-----------                         ----                       ---
First Quarter                       1.00                       .25
(October 1 - December 22, 1999)
</TABLE>

         The closing price of the Company's Common Stock on December 22, 1999
was $ .438.

         The high and low prices (based on the average bid and ask prices) for
the Company's Common Stock, as reported by The NASDAQ SmallCap Market(SM) and
the OTC Bulletin Board, as applicable. Such prices are inter-dealer prices
without retail mark-ups, mark-downs or commissions and may not represent actual
transactions.


                                       15
<PAGE>   16
         B.       REVERSE STOCK SPLIT

                  In order to facilitate the conversion of the Company's
Preferred Stock and to enhance the market price and liquidity of the Company's
Common Stock, the Company effectuated a one for twenty reverse stock split,
specifically, a conversion of every twenty issued and outstanding shares into
one share of the same class of Common Stock as of December 11, 1997 (the
"Reverse Stock Split"). As of December 22, 1999, the Company had 2,380,301
shares of Common Stock outstanding.

         C.       HOLDERS

                  Records of the Company's stock transfer agent indicate that as
of December 22, 1999, the Company had 441 record holders of its Class B Common
Stock and Common Stock. Since a significant number of the shares of the Company
are held by financial institutions in "street name," it is likely that the
Company has significantly more stockholders than indicated above. The Company
estimates that it has approximately 2,005 record holders, including such shares
held in "street name."

         D.       DIVIDENDS

                  The Company has not paid any cash dividends, to date, and does
not anticipate or contemplate paying cash dividends in the foreseeable future.
It is the present intention of management to utilize all available funds for
working capital of the Company.

ITEM 6

            MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

BACKGROUND

         The Company was organized during 1989 to develop and commercialize
certain proprietary compound encapsulation technologies. Following several years
of continued developmental efforts, the Company was able to secure patents on
several aspects of its technologies in the United States and Europe, introduce
branded products in certain markets and develop strategic associations with
pharmaceutical companies.

         From inception through 1994, the Company remained in the development
stage while experiencing substantial losses. Its principal source of capital was
derived from a series of private financing transactions and an initial public
offering in 1990. Sales revenues during this period were insufficient to offset
the Company's operating costs and liabilities. Consequently, the Company filed
for protection under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the Middle District of Florida, Tampa
Division on November 30, 1994. Upon successfully reorganizing its operations and
finances, the Company emerged from bankruptcy in July 1996.

         In July 1997, the Company completed a private placement of 2,000,000
newly-designated and issued shares of Series A Convertible Preferred Stock (the
"Preferred Stock") to Fountain Holdings, LLC ("Holdings"), a Wyoming limited
liability company, controlled by Joseph S. Schuchert, Jr. See "ITEM 11 -
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND


                                       16
<PAGE>   17
MANAGEMENT." As a result of this private placement (the "Private Placement"),
the Company obtained additional working capital of $2.5 million, which it
utilized to enhance the expansion of the Company's sales and marketing program,
as well as to further the Company's research and development efforts. As a
result of significant increases in marketing costs associated with the expansion
of existing product lines and the introduction of new products during fiscal
1998, which were not offset by sales revenues during the period, the Company
substantially utilized its working capital resources. In order to provide
working capital, the Company entered into a secured credit arrangement with Mr.
Schuchert as of December 31, 1998. The credit agreement provides for a two-year
line of credit of up to $1,500,000 subject to the Company satisfying certain
agreed upon quarterly operating budget guidelines. As a result of additional
costs associated with the development and marketing of two new product lines
during fiscal 1999, the Company fully utilized the $1,500,000 line of credit. In
order to maintain current operations subsequent to fiscal 1999, the Company
obtained short term unsecured loans from its President, Mr. Gerald Simmons and
Mr. John C. Walsh, a director of the Company. During the first quarter of fiscal
2000 Mr. Schuchert made advances to the Company as an additional unsecured
demand loan, the terms of which have not been finalized. As of December 22,
1999, the outstanding principal balance of this demand loan was $410,000. While
Mr. Schuchert has indicated that he may provide the Company with a line of
credit of up to $1,000,000 in the aggregate, the Company has not entered into
any written commitment or loan agreement with Mr. Schuchert to that effect.
There can be no assurances that an agreement with Mr. Schuchert will be
obtained, or if obtained that the terms of such financing will be advantageous
to the Company. If the Company does not secure additional financing in the
immediate term the Company will not be able to continue as a going concern and
will suspend operations pending such financing. The Company intends to continue
to seek additional sources of capital, including debt and equity financing.
However, there can be no assurances that such financing will be available or
that it will be available upon terms advantageous to the Company. See "ITEM 6 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - LIQUIDITY AND
CAPITAL RESOURCES."

         RESULTS OF OPERATIONS

         During the fiscal year ended September 30, 1999, the Company realized a
net loss of $1,734,517 on revenues of $2,210,771, compared to a net loss of
$1,629,141 on revenues of $1,542,868 for the fiscal year ended September 30,
1998. This increase in net losses is attributable primarily to expenses relating
to increased sales and marketing efforts in connection with the Company's new
skin care brand, Celazome(TM), which was launched in October 1999 in the
aesthetician market, clinical research studies, interest expense on a secured
line of credit arrangement with Mr. Joseph S. Schuchert, Jr. and legal fees
relating to the Dermik Laboratories, Inc. lawsuit. See "ITEM 3 - LEGAL
PROCEEDINGS."

         Revenues for fiscal 1999 of $2,210,771 represented an increase of
$667,903 or 43.3% from revenues of $1,542,868 during fiscal 1998. The increase
in revenues was a result, primarily, of the introduction of a new ultra
sunscreen containing Parsol 1789 in northern Europe, telemarketing efforts of
the Company's LyphaZome(R) brand to the podiatrists' market and the introduction
of a new pediatric sunscreen and a sunscreen containing Parsol 1789 in the
Company's LyphaZome(R) brand to the professional market.


                                       17
<PAGE>   18
         During the fiscal year ended September 30, 1999, the Company incurred
operating expenses of $2,839,641, a 19.9% increase over operating expenses of
$2,367,857 for the prior year ending September 30, 1998. This increase in
expenses was primarily due to increased sales and marketing efforts relating to
existing and new markets, research and development relating to new projects and
formulations, and legal fees relating to Dermik Laboratories, Inc. lawsuit.

LIQUIDITY AND CAPITAL RESOURCES

         From inception through the quarter ended June 30, 1994, the Company's
principal sources of working capital were derived from a series of private
financing transactions and an initial public offering in 1990. As a result of
the Company's declining equity and assets, the Company's securities were
delisted from The NASDAQ SmallCap Market(SM) during May 1994 and the securities
have since traded on the less liquid market of the OTC Bulletin Board.

         During the period from the quarter ended June 30, 1994 throughout the
bankruptcy proceedings, the Company's operations were funded primarily through
sales of products and from royalties, as well as the sale of 25,000,000 shares
(pre-split) of the Company's Common Stock to its then Chief Executive Officer at
a purchase price of $250,000 in December 1995. Since emerging from bankruptcy,
the Company's primary source of working capital have been sales revenues, short
term advances from the Company's then Chief Executive Officer and proceeds of
$2.5 million generated from a private placement offering in July 1997.

         As a result of such significant increase in marketing costs and legal
fees, which were not offset by sales revenues, the Company had substantially
utilized its working capital resources by December 1998. In order to provide
working capital, the Company entered into a secured credit arrangement with Mr.
Schuchert as of December 31, 1998. The Credit Agreement provides for a secured
line of credit of up to $1,500,000, the principal and unpaid interest of which
is due on the earlier of December 31, 2000, 180 days from written demand of Mr.
Schuchert as lender or upon an event of default under the agreement. The line of
credit bears interest at an adjustable monthly rate equal to the greater of (i)
the prime rate quoted in the Wall Street Journal, plus 1-1/2% or (ii) 9%, which
is payable monthly or may be accrued. The facility is secured by all of the
assets of the Company (subject to any existing liens). The facility is subject
to the Company satisfying certain agreed upon quarterly operating budget
guidelines. As of December 22, 1999, the Company had $1,500,000 outstanding
under this facility plus accrued interest of $83,978 as of November 30, 1999.
The proceeds of the loan have been utilized to fund operations and to pay legal
fees in connection with the Dermik lawsuit. Under the terms of the warrant
granted in connection with the Credit Agreement, Mr. Schuchert is entitled to
purchase 1.6 shares of Common Stock for each dollar advanced under the facility
and 1.6 shares of Common Stock for each dollar of accrued interest that is
unpaid when due under the facility at an exercise price of $.65 per share with
an expiration date of December 31, 2003. As of December 22, 1999, Mr. Schuchert
is entitled to purchase an aggregate of 2,534,364 shares of Common Stock upon
the exercise of such warrant.

         As of September 30, 1999, the Company had working capital of $385,464,
a decrease of $259,740 from the level of working capital of $645,204 as of
September 30, 1998. The decrease in working capital is primarily attributable to
increased expenses associated with sales and marketing efforts relating to
existing and new markets, research and development relating to new projects and
formulations, legal fees relating to Dermik Laboratories, Inc. lawsuit and
financial software to comply


                                       18
<PAGE>   19
with Y2K. As a result of such increased expenditures, which were not offset by
sales revenues, the Company substantially utilized its working capital resources
by October 1999. In order to provide working capital in the near term, the
Company obtained short term unsecured loans, consisting of $5,000 from Mr.
Gerald T. Simmons, the Company's President, and $15,000 from John C. Walsh, a
Director of the Company. In addition, Mr. Schuchert, a Director of the Company,
made advances to the Company as an additional unsecured demand loan, the terms
of which have not been finalized. As of December 22, 1999, the outstanding
principal balance of this demand loan was $410,000. Given the limited financial
resources of the Company, the Company recently instituted a program to curtail
operating expenses pending the securing of additional financing. Based upon the
Company's current budget guidelines, management believes that the Company has
sufficient capital to enable the Company to meet its anticipated operating
expenses through January 31, 2000. If the Company does not secure additional
financing in the immediate term it will not be able to continue as a going
concern and it will suspend operations. While Mr. Schuchert has indicated that
he may provide the Company with a line of credit of up to $1,000,000 in the
aggregate, the Company has not entered into any written commitment for a loan
agreement with Mr. Schuchert to that effect. There can be no assurances that
such financing will be available or that it will be available upon terms
advantageous to the Company. Notwithstanding potential loan from Mr. Schuchert,
the Company is in the process of pursuing additional sources of capital,
including debt and equity financing. Failure to obtain such additional financing
or the earlier termination of the financing arrangements with Mr. Schuchert
would cause the Company to suspend operations.

         During fiscal 1999, the Company's other principal sources of working
capital were derived from revenues, royalties, the litigation settlement with
Dermik Laboratories, Inc., and a $100,000 line of credit from First Union
National Bank of Florida ("First Union"). The Company terminated its line of
credit in February 1999 in connection with the termination of Mr. Walsh's
personal guarantee of such line of credit.

         YEAR 2000 COMPLIANCE

         As has been widely reported, many computer systems process dates based
on two digits for the year of a transaction and are unable to process dates in
the year 2000 and beyond. In connection with its ongoing information system
management efforts, financial and operation systems have been assessed, and
detailed plans have been developed and are being implemented to make the
necessary modifications to ensure year 2000 compliance. During July 1999, the
Company purchased software necessary to comply with Y2K. The financial impact of
making the required system changes for year 2000 compliance did not have a
material effect on the Company's financial statements.

         EFFECTS OF INFLATION

         The Company does not expect inflation to materially effect its results
of operations, however, it does expect that its operating costs and the cost of
capital equipment to be acquired in the future may be subject to general
economic and inflationary pressures.


                                       19
<PAGE>   20
ITEM 7

         FINANCIAL STATEMENTS

         Financial statements are included under Item 13(A) and may be found at
pages F-1 through F-19.

ITEM 8

         CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         None.

                                    PART III

ITEM 9

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

         A.       IDENTIFICATION OF EXECUTIVE OFFICERS AND DIRECTORS

         The following table sets forth certain information with respect to each
of the executive officers and directors of the Company. Each of the directors
named below will serve until the next annual meeting of the stockholders or
until their successors are elected or appointed and qualified.

<TABLE>
<CAPTION>
Name                            Age        Position(s) Held
----                            ---        ----------------
<S>                             <C>        <C>
Gerald T. Simmons               55         Chief Executive Officer and President

James E. Fuchs                  72         Secretary and Director

Joseph S. Schuchert, Jr.        69         Chairman and Director

Dr. Christopher Brown           46         Director

Carol Rae                       53         Director

John C. Walsh                   59         Director
</TABLE>

         B.       BUSINESS EXPERIENCE

GERALD T. SIMMONS

         Mr. Simmons has served as Chief Executive Officer and President since
December 1, 1998. He most recently held the position of President, Chief
Executive Officer and Director of MantiCore Pharmaceuticals, Inc., a development
stage drug delivery company from December 1996 to December 1998. Prior to
MantiCore, Mr. Simmons was President, Chief Executive Officer and Director of
Cellegy Pharmaceuticals, Inc. (NASDAQ-CLGY), a dermatology and drug delivery
company from


                                       20
<PAGE>   21
December 1992 to January 1996. Prior to senior business development assignments
with two biotechnology companies, Mr. Simmons was employed by Schering-Plough
Corp. as Director of Marketing for OTC consumer products and as Vice President,
New Ventures with responsibility for new product development as well as mergers
and acquisitions for consumer operations. Mr. Simmons is a Director of MantiCore
Pharmaceuticals, Inc. He received his MBA from the University of Buffalo and a
BA from Canisius College.

JAMES E. FUCHS

         Mr. Fuchs has been a member of the Company's Board of Directors since
November 1990 and assumed the office of Treasurer of the Company in April 1992.
Mr. Fuchs is Chairman and Chief Executive Officer of The Grenfox Group, Inc., a
company in the business of developing environmentally friendly products for the
ink and coatings market. He was Chairman and Chief Executive Officer of Fuchs,
Cuthrell & Co., Inc., an international human resources consulting firm
specializing in corporate executive outplacement and post-career planning from
1970 to 1994. Among the executive positions he has held are managerial and
account executive positions for the National Broadcasting Company; Vice
President and Senior Corporate Marketing Officer of Curtis Publishing Company;
Vice President, Marketing and Communications, and Director of Mutual
Broadcasting Systems; President and Director of Mutual Sports, Inc., and Senior
Vice President, Marketing, and a Director for a specialized executive consulting
firm. From 1982 through 1996, Mr. Fuchs was Chairman and, since 1997, has been
Executive Director of the Silver Shields Foundation, which supports the
education of children and widows of New York/New Jersey area law enforcement
officers and firefighters that are killed in the line of duty. Mr. Fuchs is a
Yale graduate and a two-time U.S. Olympic medallist and gold medallist in the
shot put and discus in the first Pan American Games. He is a member of the Board
of Directors of the United States Olympic Committee.

JOSEPH S. SCHUCHERT, JR.

         Mr. Schuchert has been a member of the Company's Board of Directors
since July 1997 and was appointed Chairman in June, 1999. He is Chairman and
co-founder of Kelso & Company, Inc., one of the oldest and most established
firms specializing in private equity investing and in leveraged acquisitions.
Mr. Schuchert received a BS in electrical engineering from Carnegie Mellon
University and an LLB from the University of Pittsburgh Law School. Mr.
Schuchert serves as a Trustee at Carnegie Melon University of Pittsburgh Law
School. Mr. Schuchert serves as a Trustee at Carnegie Mellon University and is a
member of the Board of Directors of American Standard, Inc., Earle M. Jorgensen
Company and the United States Chamber of Commerce.

DR. CHRISTOPHER BROWN

         Dr. Brown has been a member of the Company's Board of Directors since
July 1997. Dr. Brown is board certified in both internal medicine and infectious
diseases and currently practices internal medicine in Sheridan, Wyoming. Dr.
Brown also consults for Eaglestone Capital, a private equity group, with
responsibilities including the evaluation of medical and biotechnology companies
with investment potential. Previously, Dr. Brown was employed at the National
Institutes of Health (NIH) in Bethesda, Maryland, for ten years, where he was
involved in basic and clinical research in HIV immunology as well as neutrophil
biology.


                                       21
<PAGE>   22
CAROL RAE

         Ms. Rae has been a member of the Company's Board of Directors since
December 11, 1997. Ms. Rae is President and Chief Executive Officer of
Integrated Media and Marketing, LLC, a multi-media production and marketing
company based in Rapid City, South Dakota. Ms. Rae also serves as President of
MedVal Technologies International, Inc., a manufacturer of orthopedic splints
headquartered in Rapid City, South Dakota. Between 1989 and 1995, she was
President and Chief Executive Officer of Magnum Diamond Corporation of Rapid
City, South Dakota, a manufacturer of ophthalmic surgical instruments. Ms. Rae
currently serves as a Director for Homestake Mining Company based in San
Francisco and also serves as a Director of Van Koevering Company of Des Moines,
Iowa.

JOHN C. WALSH

         John C. Walsh was the President, Chief Executive Officer from 1992
until his resignation as of December 1, 1998. He has continued to serve as a
director of the Company, a position he as held since 1992. From 1989 to 1992,
Mr. Walsh was an investor in several private business interests. Prior to 1989,
Mr. Walsh held various positions with Merck & Co., Inc., a leading international
pharmaceutical company, for over twenty years. Among the positions held, Mr.
Walsh served as Senior Vice-President, Europe, with responsibility for
operations representing approximately 25% of Merck's business, and as
Vice-President, Latin-America with responsibility for regional operations. He
served as Managing Director of Merck, Sharpe & Dohme, Brazil and Merck, Sharpe &
Dohme, Venezuela, subsidiaries of Merck. Mr. Walsh holds a Bachelor of Science
Degree from Villanova University and is a Certified Public Accountant.

         BOARD OF DIRECTORS; AUDIT COMMITTEE

         The Board of Directors held four meetings during fiscal 1999. The
Company has an Audit Committee of the Board of Directors which was created at a
meeting of the Board of Directors on October 9, 1997. The Committee consists of
Mr. Fuchs, Mr. Schuchert and Ms. Rae. The Audit Committee is the Company's
principal liaison with the Company's independent auditors and is primarily
responsible for the review of accounting procedures and methods employed in
connection with the Company's audit programs and related management policies.
During fiscal 1999 the Audit Committee held no meetings. The Board of Directors
has no other committees.

         DIRECTORS' COMPENSATION

         The Company has a policy of not granting fees to directors who attend a
regularly scheduled or special meeting of its Board of Directors. However, the
Company may reimburse out-of-state directors for their cost of travel and
lodging to attend such meetings.

         As of September 23, 1999, the Company granted to each of Dr. Brown, Mr.
Fuchs, Ms. Rae, Mr. Schuchert, Jr. and Mr. Walsh, Directors of the Company,
stock options to purchase 24,000 shares of Common Stock under the 1998 Plan at
an exercise price of $.625 per share with an expiration date of September 23,
2004. The options vest 25% per year for a period of 4 years commencing September
23, 2000. In addition, for years of past service, each of Mr. Fuchs and Ms. Rae
were granted options to purchase 24,000 shares of Common Stock under the 1998
Plan at an exercise price of $.625 per share with the options expiring as of
September 23, 2004.


                                       22
<PAGE>   23
         INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

         None.

         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

         Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires directors and certain officers of the Company, as well as persons who
own more than 10% of a registered class of the Company's equity securities
("Reporting Persons"), to file reports with the Securities and Exchange
Commission. The Company believes that during fiscal 1999, all Reporting Persons
timely complied with all filing requirements applicable to them, except (i) a
Form 3 for Mr. Simmons, (ii) Form 4's relating to the grant of options to
Messrs. Brown, Fuch, Walsh and Schuchert, and Ms. Rae, and (iii) a Form 4
relating to the number of shares of Common Stock by Ms. Rae.

ITEM 10

         EXECUTIVE COMPENSATION

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                               Long Term
                                 Annual Compensation                                         Compensation
----------------------------------------------------------------------------------         ----------------
                                           Fiscal Year
                                              Ended
Name and Principal Position                September 30    Salary ($)    Bonus ($)         Options/SARS (#)
---------------------------                ------------    ----------    ---------         ----------------
<S>                                        <C>             <C>           <C>               <C>
Gerald T. Simmons(1)                          1999          $104,500       $5,000             344,744(4)
Chief Executive Officer and President         1998            -0-            -0-                 -0-
                                              1997            -0-            -0-                 -0-

John C. Walsh(2) (3)                          1999          $130,962         -0-               24,000(5)
Director, Former Chairman, Chief              1998          $181,731         -0-                 -0-
Executive Officer and President               1997          $118,269         -0-                 -0-
</TABLE>

(1)      As of December 1, 1998, Mr. Simmons was appointed Chief Executive
         Officer and President pursuant to an employment agreement. SEE
         "EMPLOYMENT ARRANGEMENTS AND CHANGE OF CONTROL."

(2)      Mr. Walsh resigned from his position as Chief Executive Officer and
         President on December 1, 1998, but remains as a Company Director. As
         part of his severance arrangement, Mr. Walsh received full salary and
         accompanying benefits through August 3, 1999. SEE "ITEM - 12 CERTAIN
         RELATIONSHIP AND RELATED TRANSACTIONS."

(3)      Pursuant to the Company's Plan of Reorganization, Mr. Walsh was
         entitled to receive aggregate payments of $21,615 payable commencing
         February 1996 and ending August 1998 as accrued and unpaid salary and
         expenses. As of September 30, 1998, the obligation was satisfied in
         full.


                                       23
<PAGE>   24
(4)      Represents options to purchase Common Stock granted as of December 8,
         1998, as adjusted as of September 30, 1999 for certain anti-dilution
         provisions pursuant to Mr. Simmons' employment agreement. The options
         have an exercise price of $.56 per share and a term expiring on
         December 8, 2003. The options vested 20% as of the date of grant with
         the balance vesting 20% on each anniversary of the date of grant.

(5)      Represents options to purchase Common Stock granted as of September 23,
         1999. The options have an exercise price of $.625 per share. The
         options vest 25% per year over a period of 4 years, and expire on
         September 23, 2004.

OPTION/SAR GRANTS TABLE

                    Option/SAR Grants in the Last Fiscal Year

                                Individual Grants

<TABLE>
<CAPTION>
                                                                    % of Total
                                                                   Options/SARs
                                                                    Granted to      Exercise or
                                    Fiscal     Options/SARs        Employees in      Base Price
       Name                          Year       Granted (#)        Fiscal Year         ($/Sh)       Expiration Date
       ----                         ------     ------------        ------------     -----------     ---------------
<S>                                 <C>        <C>                 <C>              <C>             <C>
Gerald T. Simmons                    1999       344,744(1)            64.3%            $   .56        12/08/2003
Chief Executive Officer and
President

John C. Walsh
Director, Former Chairman,           1999        24,000(2)             0.0%(3)         $   .625        9/23/2004
Chief Executive Officer and
President
</TABLE>

(1)      Represents options to purchase Common Stock granted as of December 8,
         1998, as adjusted as of September 30, 1999 for certain anti-dilution
         provisions pursuant to Mr. Simmons' employment agreement. The options
         have an exercise price of $.56 per share and a term expiring on
         December 8, 2003. The options vested 20% as of the date of grant with
         the balance vesting 20% on each anniversary of the date of grant.

(2)      Represents options to purchase Common Stock granted as of September 23,
         1999. The options vest 25% per year over a period of 4 years commencing
         on the first anniversary of the date of grant.

(3)      Options to purchase Common Stock granted after Mr. Walsh resigned from
         his position as Chief Executive Officer and President on December 1,
         1998.


                                       24
<PAGE>   25
OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE


              Aggregated Options/SAR Exercises in Last Fiscal Year
                           and FY-End Option/SAR Value

<TABLE>
<CAPTION>
                                                                                                              Value of
                                                                                       Number of             Unexercised
                                                                                      Unexercised           In-the-Money
                                                                                    Options/SARs at        Options/SARs at
                                                                                       FY-End (#)           FY-End ($)(1)
                                                                                    ---------------        ---------------
                                                        Shares          Value
                                          Fiscal     Acquired on       Realized      Exercisable/            Exercisable/
       Name                                Year      Exercise (#)        ($)        Unexercisable           Unexercisable
       ----                               ------     ------------      --------     -------------           -------------
<S>                                       <C>        <C>               <C>        <C>                      <C>
Gerald T. Simmons                          1999          -0-             -0-      (E)68,948/(U)275,796       (E)$0/(U)$0
Chief Executive Officer and
President

John C. Walsh                              1999          -0-             -0-      (E)0/(U)24,000             (E)$0/(U)$0
Director, Former Chairman, Chief
Executive Officer and President
</TABLE>

(1)      Based upon the closing price of the Company's Common Stock of $.375 per
         share as reported on the NASDAQ OTC Bulletin Board as of September 30,
         1999.

         EMPLOYMENT ARRANGEMENTS AND CHANGE OF CONTROL

         As of December 1, 1998, the Company entered into an Employment
Agreement with Mr. Gerald T. Simmons to serve as President and Chief Executive
Officer of the Company. Mr. Simmons is provided with an annual salary of
$130,000. The Agreement provides for a term of one year with successive
year-to-year renewals unless either party shall elect not to renew upon thirty
days prior written notice. The Agreement contains a non-competition and
non-solicitation provision that survives his actual employment for a term of two
years. Mr. Simmons was also granted options to purchase 173,121 shares of Common
Stock (5% of the outstanding Common Stock of the Company including outstanding
options, warrants and convertible securities) at an exercise price of $.56 per
share. The options are subject to adjustment pursuant to certain anti-dilution
protection provisions for securities issued by the Company prior to December 31,
1999, including the outstanding Series A Convertible Preferred Stock held by
Holdings and any securities issued by the Company in connection with any debt
funded by Eaglestone Capital or any of its affiliates. Provided that Mr. Simmons
continues to be employed by the Company, the options vest 20% each year
commencing on the date of grant. All options vest in the event of a change in
control of the Company as set forth in the Agreement. As of December 22, 1999,
Mr. Simmons has options to purchase 348,231 shares of Common Stock of which
approximately 40% are vested.


                                       25
<PAGE>   26
         The Agreement also provides Mr. Simmons with various benefits including
medical, dental, life and disability insurance and reimbursement of expenses
including up to $6,000 per month of commuting expenses during the initial six
months of the Agreement and certain relocation expenses thereafter, as
applicable.

         STOCK OPTIONS

         As of December 8, 1998, the Company adopted the "Fountain
Pharmaceuticals, Inc. 1998 Stock Option Plan" (the "1998 Plan"). Nonqualified
and incentive stock options may be granted under the 1998 Plan. The term of
options granted under the 1998 Plan are fixed by the plan administrator
provided, however, that the maximum option term may not exceed ten (10) years
from the grant date and the exercise price per share may not be less than the
fair market value per share of the Common Stock on the grant date. Under the
1998 Plan, all full-time employees of the Company or its subsidiaries, including
those who are officers and directors, non-employee directors and consultants are
eligible to receive options pursuant to the 1998 Plan, if selected. Directors
and consultants are also eligible. The 1998 Plan provides for the authority to
issue options covering up to 750,000 shares of the Company's Common Stock;
provided, however, that option to purchase no more than 500,000 shares shall be
granted to any one participant.

         The 1998 Option Plan is administered by a committee of the Board of
Directors or the full Board of Directors. The Board of Directors may modify,
amend, or terminate the 1998 Plan at any time except that, to the extent then
required by applicable law, rule, or regulation, approval of the holders of a
majority of the Common Stock represented in person or by proxy at a meeting of
the shareholders will be required to increase the maximum number of shares of
Common Stock available for grant under the 1998 Plan (other than increases due
to adjustments in accordance with the 1998 Plan). No modification, amendment, or
termination of the 1998 Plan shall adversely affect the rights of a participant
under a grant previously made to him without the consent of such participant.

         As of December 22, 1999 the Company had options to purchase 735,231
shares of Common Stock outstanding under the 1998 Plan to directors and
employees at exercise prices of $.56 to .625 per share. See "EMPLOYMENT
ARRANGEMENTS AND CHANGE OF CONTROL."

ITEM 11

         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth, as of December 22, 1999, information
with respect to the securities holdings of all persons which the Company,
pursuant to filings with the Securities and Exchange Commission, has reason to
believe may be deemed the beneficial owners of more than 5% of the Company's
outstanding Common Stock and Class B Common Stock. The following table indicates
the beneficial ownership of such individuals numerically calculated based upon
the total number of shares of Common Stock and Class B Common Stock outstanding
and alternatively calculated based upon the percentage voting power allocated to
such share ownership taking into account the disproportionate voting rights
attributed to the Class B Common Stock. Also set forth in the table is the
beneficial ownership of all shares of the Company's outstanding stock, as of
such date, of all officers and directors, individually and as a group.


                                       26
<PAGE>   27
<TABLE>
<CAPTION>
                                                    Amount of                 Percent of             Percent of
         Name and Address                    Beneficial Ownership(1)     Beneficial Ownership      Voting Power(3)
         ----------------                    -----------------------     --------------------      ---------------
<S>                                          <C>                         <C>                       <C>
Gerald T. Simmons
7279 Bryan Dairy Road                                138,787(2)                 5.5%                    5.5%
Largo, FL 33777

James Fuchs                                           49,000(4)                 2.0%                    2.0%
565 Park Avenue
New York, NY 10021

Dr. Christopher Brown                                 12,218(5)                  *                       *
240 Keystone Road
Sheridan, WY 82801

Carol Rae                                             26,500(6)                 1.1%                    1.1%
13117 North Creekview Road
Rapid City, SD 57702

Joseph S. Schuchert, Jr                            3,800,767(7)                61.5%                   61.4%(8)
Fountain Holdings, LLC
c/o Eaglestone Capital Services, Inc.
400 Oceangate, Suite 1125
Long Beach, CA 90802

John C. Walsh                                      1,251,100(9)                52.6%                   52.2%
9 North Pelican Drive
Avalon, NJ 08202

All Directors and Officers as a Group              5,278,372                   82.6%                   82.4%
(6 Persons)
</TABLE>

----------
* Represents less than 1%

(1)      Except as otherwise indicated, includes total number of shares
         outstanding and the number of shares which each person has the right to
         acquire within 60 days through the exercise of warrants or the
         conversion of Preferred Stock pursuant to Item 403 of Regulation S-B
         and Rule 13d-3(d)(1), promulgated under the Securities Exchange Act of
         1934. Also reflects 2,380,301 shares of the Company's Common Stock
         (including Class B Common Stock) outstanding as of December 22, 1999.

(2)      Does not include Common Stock options to purchase 209,444 shares at an
         exercise price of $.56 per share which was granted December 8, 1998,
         but which have not vested.

(3)      This column takes into account the disproportionate voting rights
         granted to the holders of the Class B Common Stock. Holders of Class B
         Common Stock are entitled to five (5) votes for every share held.

(4)      Includes 25,000 shares of Common Stock issuable upon the exercise of
         options at an exercise price of $.56 per share and 24,000 shares of
         Common Stock issuable upon the exercise of options at an exercise price
         of $.625 per share. Does not include Common Stock options to purchase
         24,000 shares at an exercise price of $.625 per share which were
         granted September 23, 1999 and which have not vested.


                                       27
<PAGE>   28
(5)      Includes 1,363 shares of Common Stock held by Dr. Brown's spouse,
         Elizabeth G. Brown, and 3,196 shares of Common Stock held by Dr. Brown
         as custodian for his children.

(6)      Includes 24,000 shares of Common Stock issuable upon the exercise of
         options at an exercise price of $.625 per share. Does not include
         Common Stock options to purchase 24,000 shares at an exercise price of
         $.625 per share which were granted September 23, 1999 and which have
         not vested.

(7)      Includes 1,264,151 shares of Common Stock and 2,252 shares of Class B
         Common Stock issuable upon conversion of the Preferred Stock held by
         Holdings. Holdings is held 50% by Mr. Schuchert and 50% by his spouse,
         Ms. Karalyn R. Schuchert. Mr. Schuchert is the managing member of
         Holdings. Also includes 2,534,364 shares of Common Stock issuable upon
         the exercise of a Common Stock purchase warrant at an exercise price of
         $.65 per share.

(8)      Assumes the conversion of the Preferred Stock into shares of Common
         Stock and Class B Common Stock. See "VOTING RIGHTS OF PREFERRED STOCK."

(9)      Does not include Common Stock options to purchase 24,000 shares at an
         exercise price of $.625 per share which were granted September 23, 1999
         and which have not vested.

         VOTING RIGHTS OF PREFERRED STOCK

         As of December 5, 1997, there are 2,000,000 shares of Preferred Stock,
$.001 par value per share, authorized and outstanding, all of which is held by
Holdings. Prior to the conversion of the Preferred Stock, the holders of the
Preferred Stock are entitled to the number of votes to be cast by the holders of
all of the then issued and outstanding Common Stock and Class B Common Stock
plus seven (7) votes in all elections of directors, which enables such holders
to elect a majority of the Board of Directors. In all other matters presented to
stockholders for a vote, whether required by applicable corporate law or
otherwise, the holders of Preferred Stock vote as a class and no vote of the
stockholders will be effective without the approval of the holders of a majority
of the shares of the Preferred Stock. Dr. Christopher Brown, Mr. Joseph S.
Schuchert, Jr. and Ms. Carol Rae were appointed to the Board of Directors as
nominees of Holdings. As of December 22, 1999, the shares of Preferred Stock are
convertible into approximately 1,264,151 shares of Common Stock and 2,252 shares
of Class B Common Stock.

ITEM 12

         CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


         EMPLOYMENT ARRANGEMENT

         As of December 1, 1998, the Company entered into an employment
agreement with Mr. Simmons, to serve as Chief Executive Officer and President of
the Company. See "ITEM 10 - EXECUTIVE COMPENSATION - EMPLOYMENT ARRANGEMENTS AND
CHANGE OF CONTROL."


                                       28
<PAGE>   29
         LINE OF CREDIT AGREEMENT AND GRANT OF WARRANT

         As of December 31, 1998, the Company entered into a credit arrangement
with Mr. Schuchert. The Credit Agreement provides for a secured line of credit
of up to $1,500,000, the principal and unpaid interest of which is due on the
earlier of December 31, 2000, 180 days from written demand of the lender or upon
an event of default under the agreement. As of December 22, 1999, the Company
had $1,500,000 plus accrued interest as of November 30, 1999 of $83,978
outstanding under this facility. Under the terms of the warrant granted to Mr.
Schuchert in connection with the Credit Agreement, Mr. Schuchert is entitled to
purchase 1.6 shares of Common Stock for each dollar advanced under the facility
at a purchase price of $.65 per share with an expiration date of December 31,
2003. As of December 22, 1999, Mr. Schuchert is entitled to purchase an
aggregate of 2,534,364 shares of Common Stock upon the exercise of such warrant.
See "ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -
LIQUIDITY OF CAPITAL RESOURCES."

         GRANT OF OPTIONS TO DIRECTORS

         As of December 8, 1998, the Company granted to Mr. Fuchs, a director,
stock options to purchase 25,000 shares of Common Stock under the 1998 Plan at
$.56 per share with an expiration date of December 20, 2003, subject to the
surrender of 25,000 outstanding warrants.

         As of September 23, 1999, the Company granted to each of Dr. Brown, Mr.
Fuchs, Ms. Rae, Mr. Schuchert, Jr. and Mr. Walsh, Directors of the Company,
stock options to purchase 24,000 shares of Common Stock under the 1998 Plan at
an exercise price of $.625 per share with an expiration date of September 23,
2004. The options vest 25% per year for a period of 4 years commencing September
23, 2000. In addition, for years of past service, each of Mr. Fuchs and Ms. Rae
were granted options to purchase 24,000 shares of Common Stock under the 1998
Plan at an exercise price of $.625 per share with the options expiring as of
September 23, 2004.

         SEVERANCE ARRANGEMENT

         In conjunction with the resignation of Mr. Walsh as Chief Executive
Officer as of December 1, 1998, the Company agreed to continue to pay Mr. Walsh
his salary and benefits through August 3, 1999.

         PURCHASE OF SECURITIES

         On July 17, 1997, the Company completed the sale of 2,000,000
newly-designated and issued shares of Series A Convertible Preferred Stock in a
private transaction. The Preferred Stock was sold for $2.5 million in a private
transaction to Fountain Holdings, LLC, a Wyoming limited liability company
controlled by Mr. Joseph S. Schuchert, Jr. Mr. Schuchert joined the Company's
Board of Directors in connection with this transaction. The Preferred Stock was
sold pursuant to the terms of a Stock Purchase and Subscription Agreement dated
July 11, 1997 (the "Stock Purchase Agreement").

         Under the terms of the Stock Purchase Agreement, the holders of the
Preferred Stock may convert their Preferred Stock into shares of the Company's
Common Stock and Class B Common Stock, representing one-half of the
approximately 50,656,149 (pre-split) issued and outstanding shares of stock as
of July 17, 1997 (which included for that purpose 3,050,000 (pre-split) shares
reserved for


                                       29
<PAGE>   30
issuance pursuant to certain outstanding Common Stock purchase warrants). On a
post-split basis, the Preferred Stock is currently convertible into 1,264,151
shares of Common Stock at 2,252 shares of Class B Common Stock. The conversion
rate of the Preferred Stock is adjustable for certain events such as a
reclassification, reorganization, combination and stock-split.

         PAYMENT OF ACCRUED SALARY AND EXPENSES

         In accordance with the Company's Plan of Reorganization, Mr. Walsh
received from the Company $21,615 payable commencing February 1996 and ending
August 1998 as unpaid salary and expenses that were accrued during the period
from October 1994 through November 1994. See "ITEM 10 - EXECUTIVE COMPENSATION."

         LINE OF CREDIT GUARANTY

         The line of credit obtained by the Company with First Union National
Bank of Florida on October 17, 1996, was secured by the Company's accounts
receivable and inventory, and was further secured by an unconditional guaranty
by Mr. Walsh, the Company's former Chairman of the Board and now a Director.
During fiscal 1999, all obligations under this line of credit were paid in full
and the Company terminated the line of credit. See "ITEM 6 - MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - LIQUIDITY AND CAPITAL RESOURCES."

         LOANS FROM AFFILIATES

         Subsequent to fiscal 1999, the Company obtained short term unsecured
loans, consisting of $5,000 from Mr. Gerald T. Simmons, the Company's President
and $15,000 from Mr. John C. Walsh, a Director of the Company at an interest
rate of 10.25% per annum. As of December 22, 1999, the principal balance of the
loan from Mr. Simmons was $0 and the principal balance of the loan from Mr.
Walsh was $15,000. In addition, during the first quarter of fiscal 2000 Mr.
Schuchert made advances to the Company as an additional unsecured demand loan,
the terms of which have not been finalized. As of December 22, 1999, the
outstanding principal balance of this demand loan was $410,000. (See "ITEM 6 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - LIQUIDITY AND
CAPITAL RESOURCES."

ITEM 13

         EXHIBITS, LIST AND REPORTS ON FORM 8-K

A.       Financial Statements filed as part of this Report: Page Reference

Report of Independent Auditors on Financial                         F-1
Statements of Fountain Pharmaceuticals, Inc.

Balance Sheet as of September 30, 1999                              F-2

Statements of Operations for the years ended                        F-3
September 30, 1999 and 1998

Statements of Stockholders' Deficit for the years ended             F-4
September 30, 1999 and 1998


                                       30
<PAGE>   31
Statements of Cash Flows for the years ended                       F-5 thru F-6
September 30, 1999 and 1998

Notes to Financial Statements of Fountain                          F-7 thru F-19
Pharmaceuticals, Inc. for the years ended
September 30, 1999 and 1998

B.       Financial Statement Schedules:

         None.

C.       The following Exhibits are filed as part of this Report:

Exhibit No.       Description

2.1               Amended Plan of Reorganization dated August 14, 1995
                  (Incorporated by reference to the Company's Current Report on
                  Form 8-K filed on March 28, 1996 ("March 1996 Form 8-K"))

2.2               Amended Disclosure Statement dated August 14, 1995
                  (Incorporated by reference to the March 1996 Form 8-K)

3.1               Certificate of Incorporation of the Registrant, filed March
                  23, 1989 (Incorporated by reference to Exhibit 3.1 of the
                  Registration Statement on Form S-1 filed on January 4, 1990,
                  Registration Number 33-32824 (the "Form S-1"))

3.2               Certificate of Amendment of Certificate of Incorporation,
                  filed April 10, 1989 (Incorporated by reference to Exhibit 3.2
                  of the Form S-1)

3.3               Restated Certificate of Incorporation of the Registrant, filed
                  November 13, 1989 (Incorporated by reference to Exhibit 3.3 of
                  the Form S-1)

3.4               By-Laws of the Registrant (Incorporated by reference to
                  Exhibit 3.4 of the Form S-1)

3.5               Certificate of Designation, Preference and Rights of Series A
                  Preferred Stock (Incorporated by reference to Exhibit 3.5 of
                  the Company's Current Report on Form 8-K filed on July 31,
                  1997 ("July 1997 Form 8-K"))

4.1               Copy of Specimen Stock Certificate (Incorporated by reference
                  to Exhibit 4.1 of the Form S-1)

4.2               Form of Warrant Agreement granted to James Goddard, Weldon
                  Crow, Francis Werner, James Fuchs and James Vatell
                  (Incorporated by reference to Exhibit 4.2 to the July 1997
                  Form 8-K)

4.3               Copy of Specimen Stock Certificate of Series A Preferred Stock
                  (Incorporated by reference to Exhibit 4.3 to the July 1997
                  Form 8-K)

4.4               Registration Rights Agreement between the Registrant and
                  Fountain Holdings, LLC, dated July 11, 1997 (Incorporated by
                  reference to Exhibit 4.4 to the July 1997 Form 8-K)

4.5               Registration Rights Agreement between the Registrant and John
                  C. Walsh dated July 11, 1997 (Incorporated by reference to
                  Exhibit 4.5 to the July 1997 Form 8-K)


                                       31
<PAGE>   32
4.6               Warrant Agreement dated December 31, 1998 between the
                  Registrant and Joseph S. Schuchert, Jr. (incorporated by
                  reference to Exhibit 4.6 to the Registrant's Annual Report on
                  Form 10-KSB for the fiscal year ended September 30, 1998
                  ("1998 10-KSB"))

10.1              Transfer of Technology Agreement (Incorporated by reference to
                  Exhibit 10.3 of the Form S-1)

10.2              Fountain Pharmaceuticals, Inc. 1998 Stock Option Plan
                  (Incorporated by reference to the Registrant's Information
                  Statement filed with the Securities and Exchange Commission as
                  of July 1, 1999)

10.3              Stock Purchase and Subscription Agreement between the
                  Registrant and Fountain Holdings, LLC, dated July 11, 1997
                  (Incorporated by reference to Exhibit 10.4 to the July 1997
                  Form 8-K)

10.4              Employment Agreement by and between the Registrant and Gerald
                  T. Simmons dated December 1, 1998 (Incorporated by reference
                  to Exhibit 10.5 to the Registrant's 1998 10-KSB)

10.5              Credit and Security Agreement dated December 31, 1998 between
                  the Registrant and Joseph S. Schuchert, Jr. (Incorporated by
                  reference to Exhibit 10.6 to the Registrant's 1998 10-KSB)

10.6              Promissory Note dated December 31, 1998 between the Registrant
                  and Joseph S. Schuchert, Jr. (Incorporated by reference to
                  Exhibit 10.7 to the Registrant's 1998 10-KSB)

10.7              Patent, Trademark and License Mortgage Agreement dated
                  December 31, 1998 between the Registrant and Joseph S.
                  Schuchert, Jr. (Incorporated by reference to Exhibit 10.8 to
                  the Registrant's 1998 10-KSB)

10.8              Facility Lease Agreement as amended March 20, 1998 between the
                  Registrant and Highwoods Properties/Florida Holdings,
                  L.P./Highwoods Realty GP Corporation its Authorized Agent.
                  (Incorporated by reference to Exhibit 10.9 to the Registrant's
                  1998 10-KSB)

10.9              Facility Sub-lease Agreement between the Registrant and Kenlee
                  Precision Corporation. (Filed herewith)

10.10             Sub-License Agreement between the Registrant and Y.S.
                  Laboratories, Inc. dated May 27, 1999. (Filed herewith)

10.11             Consulting Agreement between the Registrant and Francis W.
                  Parnell, M.D. effective June 1, 1999. (Filed herewith)

10.12             Consulting Agreement between the Registrant and Diana Parnell,
                  M.D. effective June 1, 1999. (Filed herewith)

27       Financial Data Schedule (Edgar format only)

D.       Reports on Form 8-K
         None.


                                       32
<PAGE>   33
                                   SIGNATURES

         Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant certifies that it has reasonable grounds to believe that it meets
all the requirements of filing on Form 10-KSB, and has duly caused this Form
10-KSB to be signed on its behalf by the undersigned, thereunto duly authorized
on the 29th day of December, 1999.


                                FOUNTAIN PHARMACEUTICALS, INC.


                                By: /s/ Gerald T. Simmons
                                    --------------------------------------------
                                    Gerald T. Simmons, President and
                                    Chief Executive Officer
                                    (Principal Executive and Accounting Officer)

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Form 10-KSB has been signed by the following persons in the capacities and
on the dates indicated.

<TABLE>
<CAPTION>
Directors                           Title                        Date
---------                           -----                        ----
<S>                                 <C>                          <C>
/s/ Joseph S. Schuchert, Jr.        Chairman and Director        December 29, 1999
----------------------------
Joseph S. Schuchert, Jr.


/s/ James E. Fuchs                  Secretary and Director       December 29, 1999
----------------------------
James E. Fuchs


/s/ John C. Walsh                   Director                     December 29, 1999
----------------------------
John C. Walsh


/s/ Dr. Christopher Brown           Director                     December 29, 1999
----------------------------
Dr. Christopher Brown


/s/ Carol A. Rae                    Director                     December 29, 1999
----------------------------
Carol A. Rae
</TABLE>
<PAGE>   34
                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Report of Independent Auditors on Financial                                  F-1
Statements of Fountain Pharmaceuticals, Inc.

Balance Sheet as of September 30, 1999                                       F-2

Statements of Operations for the years ended                                 F-3
September 30, 1999 and 1998

Statements of Stockholders' Deficit for the                                  F-4
years ended September 30, 1999 and 1998

Statements of Cash Flows for the years ended                                 F-5
September 30, 1999 and 1998

Notes to Financial Statements of Fountain                                    F-7
Pharmaceuticals, Inc. for the years ended
September 30, 1999 and 1998
</TABLE>
<PAGE>   35
                          Independent Auditors' Report

Board of Directors
Fountain Pharmaceuticals, Inc.
Largo, Florida

We have audited the accompanying balance sheet of Fountain Pharmaceuticals, Inc.
(the "Company"), as of September 30, 1999, and the related statements of
operations, stockholders' equity and cash flows for each of the years in the
two-year period then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly in all
material respects, the financial position of Fountain Pharmaceuticals, Inc., as
of September 30, 1999, and the results of its operations and its cash flows for
each of the years in the two-year period then ended 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 discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency which 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 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

                                               /S/ AIDMAN, PISER & COMPANY, P.A.




November 9, 1999, except for Note 1 for which the date is December 16, 1999
Tampa, Florida


                                      F-1
<PAGE>   36
                         FOUNTAIN PHARMACEUTICALS, INC.
                                  BALANCE SHEET
                               SEPTEMBER 30, 1999

<TABLE>
<S>                                                                    <C>
                                     ASSETS
Current assets:
   Cash and cash equivalents                                           $    176,998
   Accounts receivable, net of allowance for
     uncollectible accounts of $17,450                                       97,219
   Inventories                                                              427,616
   Prepaid expenses                                                          75,406
                                                                       ------------
     Total current assets                                                   777,239

Property and equipment, net                                                 123,279
Patent costs, less accumulated amortization
   of $35,993                                                               144,395
Other assets                                                                  9,646
                                                                       ------------

                                                                       $  1,054,559
                                                                       ============

                      LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
   Accounts payable and accrued expenses                               $    316,285
   Accrued interest                                                          59,422
   Current maturities of long-term debt                                      16,068
                                                                       ------------
     Total current liabilities                                              391,775

Long-term debt, less current maturities                                      31,609

Note payable, related party                                               1,500,000
                                                                       ------------
     Total liabilities                                                    1,923,384
                                                                       ------------

Commitments                                                                    --

Stockholders' deficit:
   Series A preferred stock, par value $.001, 2,000,000 shares
     authorized, issued and outstanding
       (liquidation preference $2,498,000 in excess of par)                   2,000
   Common stock, par value $.001, 50,000,000
     shares authorized; 2,375,796 issued and outstanding                      2,376
   Class B common stock; par value $.001, 5,000,000 shares
     authorized; 4,505 shares issued and outstanding                              5
   Additional paid-in capital                                            17,077,127
   Accumulated deficit                                                  (17,950,333)
                                                                       ------------
     Total stockholders' deficit                                           (868,825)
                                                                       ------------

                                                                       $  1,054,559
                                                                       ============
</TABLE>


                       See notes to financial statements.


                                      F-2
<PAGE>   37
                         FOUNTAIN PHARMACEUTICALS, INC.
                            STATEMENTS OF OPERATIONS
                     YEARS ENDED SEPTEMBER 30, 1999 AND 1998


<TABLE>
<CAPTION>
                                                                1999                 1998
                                                            -----------          -----------
<S>                                                         <C>                  <C>
Revenue                                                     $ 2,210,771          $ 1,542,868

Cost of sales                                                 1,281,100              867,568
                                                            -----------          -----------

Gross profit                                                    929,671              675,300
                                                            -----------          -----------

Operating expenses:
   Research and development                                     412,890              394,174
   General and administrative                                 1,017,641              574,601
   Selling                                                    1,372,682            1,374,916
   Depreciation and amortization                                 36,428               24,166
                                                            -----------          -----------

                                                              2,839,641            2,367,857
                                                            -----------          -----------

Loss from operations                                         (1,909,970)          (1,692,557)
                                                            -----------          -----------

Other income (expenses):
   Interest income                                                8,179               86,249
   Interest expense                                             (67,154)             (10,521)
   Other income (expense)                                       234,428              (12,312)
                                                            -----------          -----------
                                                                175,453               63,416
                                                            -----------          -----------

Loss before income taxes                                     (1,734,517)          (1,629,141)

Income taxes                                                       --                   --
                                                            -----------          -----------

Net loss                                                    $(1,734,517)         $(1,629,141)
                                                            ===========          ===========

Basic and diluted net loss per common share                 $      (.73)         $      (.68)
                                                            ===========          ===========

Weighted average basic number of shares outstanding           2,380,301            2,380,301
                                                            ===========          ===========
</TABLE>


                       See notes to financial statements.


                                      F-3
<PAGE>   38
                         FOUNTAIN PHARMACEUTICALS, INC.
                      STATEMENTS OF STOCKHOLDERS' DEFICIT
                     YEARS ENDED SEPTEMBER 30, 1999 AND 1998


<TABLE>
<CAPTION>
                                                            Class B
                                    Common Stock          Common Stock       Preferred Stock     Additional
                               ---------------------   -----------------  --------------------     Paid-in      Accumulated
                                 Shares       Amount   Shares     Amount    Shares      Amount     Capital        Deficit
                               ---------     -------   ------     ------  ---------    -------  ------------   ------------
<S>                            <C>           <C>       <C>        <C>     <C>          <C>      <C>            <C>
Balances,
   October 1, 1997             2,375,808     $ 2,376    4,505     $    5  2,000,000    $ 2,000  $ 17,056,449   $(14,586,675)

Repurchase of treasury
   stock                             (12)

Net loss for
   the year                         --          --       --         --         --         --            --       (1,629,141)
                               ---------     -------    -----     ------  ---------    -------  ------------   ------------

Balances,
   September 30, 1998          2,375,796       2,376    4,505          5  2,000,000      2,000    17,056,449    (16,215,816)

Retirement of treasury
   stock                            --          --       --         --         --         --             (24)          --

Options and warrants issued
   to directors for services        --          --       --         --         --         --          20,702           --

Net loss for the year               --          --       --         --         --         --            --       (1,734,517)
                               ---------     -------    -----     ------  ---------    -------  ------------   ------------

Balances,
   September 30, 1999          2,375,796     $ 2,376    4,505     $    5  2,000,000    $ 2,000  $ 17,077,127   $(17,950,333)
                               =========     =======    =====     ======  =========    =======  ============   ============
</TABLE>


<TABLE>
<CAPTION>
                                     Treasury
                                       Stock
                                 -----------------
                                 Shares     Amount         Total
                                 ------     ------     ------------
<S>                              <C>        <C>        <C>
Balances,
   October 1, 1997                 --       $ --       $  2,474,155

Repurchase of treasury
   stock                             12        (24)             (24)

Net loss for
   the year                        --         --         (1,629,141)
                                   ----     ------     ------------

Balances,
   September 30, 1998                12        (24)         844,990

Retirement of treasury
   stock                            (12)        24             --

Options and warrants issued
   to directors for services       --         --             20,702

Net loss for the year              --         --         (1,734,517)
                                   ----     ------     ------------

Balances,
   September 30, 1999              --       $ --       $   (868,825)
                                   ====     ======     ============
</TABLE>


                       See notes to financial statements.


                                      F-4
<PAGE>   39
                         FOUNTAIN PHARMACEUTICALS, INC.
                            STATEMENTS OF CASH FLOWS
                     YEARS ENDED SEPTEMBER 30, 1999 AND 1998


<TABLE>
<CAPTION>
                                                             1999            1998
                                                         -----------     -----------
<S>                                                      <C>             <C>
Cash flows from operating activities:
   Net loss                                              $(1,734,517)    $(1,629,141)
   Adjustments to reconcile net loss to
     net cash used in operating activities:
       Expenses funded by issuance
         of options and warrants                              20,702            --
       Depreciation                                           27,140          15,214
       Amortization                                            9,288           8,952
       Loss on disposal of property and equipment              1,989            --
       Increase (decrease) in cash due to changes in:
         Accounts receivable                                 107,975         (96,176)
         Inventories                                        (232,376)        (99,562)
         Prepaid expenses                                    (42,683)         (1,363)
         Other assets                                         (3,051)            790
         Accounts payable and accrued expenses               152,736          99,567
                                                         -----------     -----------
Net cash used in operating activities                     (1,692,797)     (1,701,719)
                                                         -----------     -----------

Cash flows from investing activities:
   Deferred patent costs incurred                            (14,158)        (10,441)
   Acquisition of property and equipment                     (51,065)        (41,085)
                                                         -----------     -----------

Net cash used in investing activities                        (65,223)        (51,526)
                                                         -----------     -----------

Cash flows from financing activities:
   Repurchase of treasury stock                                 --               (24)
   Repayment of:
     Amounts not subject to compromise                        (2,584)        (29,469)
     Amounts subject to compromise                              --           (92,298)
   Proceeds from (repayment of) related party loan         1,500,000         (40,000)
   Payments on long-term debt                                (14,497)         (3,936)
                                                         -----------     -----------
Net cash provided by (used in) financing activities        1,482,919        (165,727)
                                                         -----------     -----------

Decrease in cash and cash equivalents                       (275,101)     (1,918,972)
Cash and cash equivalents,
   beginning of year                                         452,099       2,371,071
                                                         -----------     -----------

Cash and cash equivalents,
   end of year                                           $   176,998     $   452,099
                                                         ===========     ===========
</TABLE>


                                   (Continued)


                                      F-5
<PAGE>   40
                         FOUNTAIN PHARMACEUTICALS, INC.
                      STATEMENTS OF CASH FLOWS (CONTINUED)
                     YEARS ENDED SEPTEMBER 30, 1999 AND 1998


                 SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION

Interest paid was $7,732 and $12,388 for the years ended September 30, 1999 and
1998, respectively.


      SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES

During 1998, the Company obtained third party financing of $66,110 for the
purchase of equipment.


                       See notes to financial statements.


                                      F-6
<PAGE>   41
                         FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998



1.       NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
         ACCOUNTING POLICIES:

         Nature of business:

         Fountain Pharmaceuticals, Inc. (the "Company"), incorporated in the
         State of Delaware on March 23, 1989, was organized to develop and
         commercialize certain proprietary compound encapsulation technologies
         for use in health care, agricultural, veterinary and consumer market
         items using technologies developed privately and assigned to the
         Company. These technologies involve development of man-made spheres
         composed of soybean lipids that are engineered to entrap
         pharmaceuticals or other biologically active molecules within the
         membranes of the soybean lipids, hence a compound delivery
         encapsulation system known as "Solvent Dilution Micro Carriers"
         ("SDMC's"). The SDMC's are principally intended for use in connection
         with dermal applications, solubilization of compounds, parenteral and
         oral formulations and non-pressurized aerosol preparations. Following
         several years of continued developmental efforts, the Company was able
         to secure patents on several aspects of its technologies in the United
         States and Europe and initiate certain marketing programs.

         The Company has developed a number of proprietary products utilizing
         its SDMC technologies. These include non-regulated consumer goods and
         dermatologic products consisting of sunscreens, lotions and
         moisturizers. These products have been marketed by the Company under
         the LyphaZome(R), Celazome(TM), Octazome(R), and Daylong(R) names and
         under other proprietary names of licensees. The Octazome(R) and
         Daylong(R) lines were discontinued in 1999.

         The principal source of the Company's current revenues are from sales
         of these products to distributors and royalties which are earned as the
         result of the subsequent sale of these products by the distributors.

         Management's plans regarding liquidity and capital resources:

         During 1999 and 1998 the Company substantially increased revenues but
         has continued to experience significant losses which were primarily
         caused by substantial selling expenses for new products which did not
         generate revenues to the extent expected and high general and
         administrative expense relative to sales levels. Additionally, the
         Company has continued to experience losses through the first quarter of
         fiscal 2000 (unaudited). The Company's losses have been historically
         funded by sales of capital stock and additional capital contributions.


                                      F-7
<PAGE>   42
                         FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998


1.       NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
         ACCOUNTING POLICIES (CONTINUED):

         Management's plans regarding liquidity and capital resources
         (continued):

         In order to provide working capital for fiscal 1999, the Company
         entered into a secured credit agreement with a director of the Company
         which provided for a two-year line of credit of up to $1,500,000
         subject to the Company satisfying certain agreed upon quarterly
         operating budget guidelines. As a result of additional costs associated
         with the development and marketing of two new product lines during
         fiscal 1999, the Company fully utilized the $1,500,000 line of credit
         and substantially all of its other cash resources. In order to maintain
         operations subsequent to September 30, 1999, the Company has obtained
         short term unsecured loans from its President and two directors of the
         Company aggregating $430,000. While one of the Company's directors has
         indicated that he may provide the Company with a line of credit of up
         to $1,000,000 in the aggregate, the Company has not entered into any
         written commitment or loan agreement to that effect. There can be no
         assurances that an agreement will be consummated or, if obtained, that
         the terms of such financing will be advantageous to the Company. If the
         Company does not secure additional financing in the immediate term the
         Company will likely not be able to continue as a going concern and will
         suspend operations pending receipt of such financing. Notwithstanding
         the potential loan from the director, the Company intends to continue
         to seek additional sources of capital, including debt and equity
         financing. However, there can be no assurances that such financing will
         be available or that it will be available upon terms advantageous to
         the Company.

         Chapter 11 reorganization:

         On November 30, 1994, the Company filed a voluntary petition for
         reorganization under Chapter 11 of Title II of the United States Code.
         The Reorganization Plan became effective on December 20, 1995 and on
         July 25, 1996 the U.S. Bankruptcy Court issued a final decree. At the
         date of the effectiveness of the Plan and thereafter, the Company
         continued to account for its assets at their historical cost basis (did
         not adopt "Fresh Start" accounting). The Company has repaid all
         prepetition liabilities (insofar as was provided for in the
         Reorganization Plan) at September 30, 1999.

         Inventories:

         Inventories are stated at the lower of cost or market. Cost is
         determined generally on a first-in, first-out method.


                                      F-8
<PAGE>   43
                         FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998


1.       NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
         ACCOUNTING POLICIES (CONTINUED):

         Property and equipment:

         Property and equipment are stated at cost. Depreciation is provided on
         the straight-line method over the estimated useful lives of the assets,
         which range from 3 to 7 years.

         Patent costs:

         Patent costs are deferred pending the outcome of patent applications
         including the appeals process. Successful patent costs are amortized
         over the legal life of the patent. Unsuccessful or abandoned patent
         costs are charged to expense when determined to be worthless.

         Advertising costs:

         The costs associated with producing and communicating advertising are
         expensed in the period incurred. Advertising costs were approximately
         $188,000 and $310,000 during 1999 and 1998, respectively.

         Cash and cash equivalents:

         For purposes of the statements of cash flows, cash and cash equivalents
         are defined as all highly liquid unrestricted investments purchased
         with an original maturity of three months or less. In addition, the
         Company considers certain secured debt instruments, which can be
         liquidated upon demand, to be cash equivalents.

         Use of estimates:

         Preparation of these 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
         dates of the financial statements and the reported amounts of revenues
         and expenses during the reporting periods. Actual results could differ
         from those estimates.


                                      F-9
<PAGE>   44
                         FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998


1.       NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
         ACCOUNTING POLICIES (CONTINUED):

         Stock-based compensation:

         The Company accounts for compensation costs associated with stock
         options and warrants issued to employees under the provisions of
         Accounting Principles Board Opinion No. 25 ("APB 25") whereby
         compensation is recognized to the extent the market price of the
         underlying stock exceeds the exercise price of the option granted. The
         Company has adopted the disclosure provisions of Financial Accounting
         Standard No. 123 - Accounting for Stock-Based Compensation ("FAS 123"),
         which requires disclosure of compensation expense that would have been
         recognized if the fair-value based method of determining compensation
         had been used for all arrangements under which employees and others
         receive shares of stock or equity instruments. Stock-based compensation
         to non-employees is accounted for using the fair value based method.

         Net loss per share:

         Net loss per share was computed based on the weighted average number of
         shares outstanding during the periods presented.

         Diluted earnings per share is considered to be the same as basic
         earnings per share since the effect of the issuance of common stock
         options is anti-dilutive.

         New accounting pronouncements:

         During 1999, the Company adopted Financial Accounting Standards Board
         Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
         Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of
         an Enterprise and Related Information."

         SFAS 130 presents standards for reporting and display of comprehensive
         income and its components (revenues, expenses, gains and losses)
         including those currently required to be accounted for as direct
         charges or credits to the statement of stockholders' equity in a full
         set of general-purpose financial statements. Adoption of this standard
         had no significant impact on the Company. SFAS No. 131 requires that
         public companies report financial and descriptive information about its
         reportable operating segments, which are defined as those components
         that are evaluated regularly by the chief operating officer in
         determining resource allocations and performance assessments.


                                      F-10
<PAGE>   45
                         FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998


2.       MAJOR CUSTOMER INFORMATION, FAIR VALUE OF FINANCIAL INSTRUMENTS AND
         CONCENTRATIONS OF CREDIT RISK:

         Major customer information:

         During the years ended September 30, 1999 and 1998 the Company derived
         revenues from two customers which individually exceeded 10 percent of
         total revenues as follows:

<TABLE>
<CAPTION>
                                                     1999                1998
                                                  ----------          ----------
<S>                                               <C>                 <C>
Customer 1 (European)                             $1,466,000          $  991,000
Customer 2 (European)                             $  428,000          $  227,000
</TABLE>

         Approximately 52% of accounts receivable at September 30, 1999 was due
         from two customers.

         Total export revenues were approximately as follows:

<TABLE>
<CAPTION>
                                                   1999                  1998
                                                ----------            ----------
<S>                                             <C>                   <C>
Europe                                          $1,936,000            $1,266,000
South America                                       20,000                25,000
                                                ----------            ----------
                                                $1,956,000            $1,291,000
                                                ==========            ==========
</TABLE>

         Fair value of financial instruments:

         All financial instruments are held or issued for purposes other than
         trading. The carrying amount of cash and cash equivalents, accounts
         receivable, and accounts payable approximates fair value because of the
         short maturity of those investments. The carrying amount of note
         payable, related party approximates the fair value based on current
         market rates offered to the Company.

         Concentrations of credit risk:

         Financial instruments that potentially subject the Company to
         significant concentrations of credit risk consist principally of trade
         accounts receivable and cash and cash equivalents. Cash and cash
         equivalents include $60,000 in variable rate demand (par put) bonds.

         The Company sells its products principally to companies in the medical
         field located primarily in Europe. Management assesses the financial
         stability of each of its major customers prior to contract negotiations
         and establishes credit limits for smaller customers to limit its risk.
         The Company does not require collateral or other security to support
         customer receivables. Because the Company sells a significant portion
         of its products and maintains individually significant receivables
         balances with major customers, if the financial condition and
         operations of these customers deteriorate below critical levels, the
         Company's operating results could be adversely affected.


                                      F-11
<PAGE>   46
                         FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998


3.       BUSINESS SEGMENT INFORMATION:

         The Company has operations classified as two business segments: 1)
         domestic sales of dermatologic products, and 2) international sales of
         dermatologic products to distributors and the sale of the rights to the
         Company's technology. The "domestic" category is an aggregation of the
         LyphaZome(R), Celazome(TM), Octazome(R), and Daylong(R) product lines.
         The "all other" category relates to new business and unlaunched product
         lines that did not generate any revenue. There were no significant
         intersegment sales or transfers during 1999 or 1998.

         Summarized financial information by business segment for 1999 and 1998
         is as follows:

<TABLE>
<CAPTION>
                                                          1999
                        --------------------------------------------------------------------------
                         Corporate        Domestic     International       Other          Total
                         ---------        --------     -------------       -----          -----
<S>                     <C>             <C>            <C>             <C>             <C>
Total revenue           $      --       $   254,548     $ 1,956,223    $      --       $ 2,210,771
                                                                                       ===========

Cost of sales                  --           160,348       1,120,752           --       $ 1,281,100
                                                                                       ===========

Income (loss) before
  income taxes           (1,540,380)       (641,346)        731,774       (284,565)    $(1,734,517)
                                                                                       ===========

Total assets(1)           1,054,559            --              --             --       $ 1,054,559
                                                                                       ===========

Depreciation and
  amortization(1)            36,428            --              --             --       $    36,428
                                                                                       ===========

Capital
  expenditures(1)            51,065            --              --             --       $    51,065
                                                                                       ===========
</TABLE>

<TABLE>
<CAPTION>
                                                         1998
                        ---------------------------------------------------------------------
                         Corporate        Domestic     International   Other         Total
                         ---------        --------     -------------   -----         -----
<S>                     <C>             <C>            <C>             <C>        <C>
Total revenue           $      --       $   252,018     $ 1,290,850    $  --      $ 1,542,868
                                                                                  ===========

Cost of sales                  --           144,255         723,313       --      $   867,568
                                                                                  ===========

Income (loss) before
  income taxes           (1,267,153)       (929,525)        567,537       --      $(1,629,141)
                                                                                  ===========

Total assets(1)           1,132,719            --              --         --      $ 1,132,719
                                                                                  ===========

Depreciation and
  Amortization(1)            24,166            --              --         --      $    24,166
                                                                                  ===========

Capital
  Expenditures(1)            41,085            --              --         --      $    41,085
                                                                                  ===========
</TABLE>

(1) The Company does not allocate assets, depreciation and amortization or
capital expenditures by segment for internal purposes.


                                      F-12
<PAGE>   47
                         FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998


4.       INVENTORIES:

         Inventories at September 30, 1999 consist of the following:

<TABLE>
<S>                                                                   <C>
Raw materials                                                         $ 148,945
Finished goods                                                          332,671
Less allowance for obsolescence                                         (54,000)
                                                                      ---------
                                                                      $ 427,616
                                                                      =========
</TABLE>

5.       PROPERTY AND EQUIPMENT:

         Property and equipment at September 30, 1999 consists of the following:

<TABLE>
<S>                                                                   <C>
Machinery and equipment                                               $ 193,632
Office equipment                                                        155,231
Leasehold improvements                                                   35,298
Capital projects in progress                                             34,384
                                                                      ---------
                                                                        418,545
Accumulated depreciation                                               (295,266)
                                                                      ---------
                                                                      $ 123,279
                                                                      =========
</TABLE>

6.       LONG-TERM DEBT:

         Long-term debt at September 30, 1999 consists of two equipment loans
         which bear interest at 9% and are collateralized by the equipment and
         cash equivalents.

         Future maturities of long-term debt are as follows:

<TABLE>
<S>                                                                      <C>
Year ending September 30,
         2000                                                            $16,068
         2001                                                             17,810
         2002                                                             13,799
                                                                         -------
                                                                         $47,677
                                                                         =======
</TABLE>

7.       RELATED PARTY TRANSACTIONS:

         Note payable, related party represents advances from the principal
         stockholder of the Company's controlling entity under a $1,500,000 line
         of credit agreement. The note is secured by substantially all Company
         assets and bears interest at the greater of 9% or the prime rate plus
         1-1/2%. Outstanding principal and interest are payable in full December
         31, 2000. Interest expense on this note was approximately $59,000 for
         the year ended September 30, 1999.


                                      F-13
<PAGE>   48
                         FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998


8.       STOCKHOLDERS' DEFICIT:

         Series A preferred stock:

         In 1997, the Company issued 2,000,000 shares of voting convertible
         participating preferred stock for $2.5 million. The preferred stock has
         a liquidation preference of $1.25 per share (this equates to a
         potential restriction of retained earnings resulting from the
         involuntary liquidation preference of $2,498,000 in excess of par value
         of such preferred stock). The preferred shares may be converted into
         1,264,151 shares of common stock and 2,252 shares of Class B common
         stock, which equates to a conversion price of approximately $.10 per
         share, the market value per share of the common stock at the date of
         issuance of the preferred stock.

         Voting rights:

         Shareholders of common stock and Class B common stock are entitled to
         one and five votes per share, respectively. Holders of shares of Series
         A preferred stock shall be entitled to a number of votes in total that
         equal the total number of votes to be cast by holders of all then
         issued and outstanding shares of common stock and Class B common stock,
         plus seven votes in all elections of directors.

         Stock option plan:

         In December 1998, the Company adopted the "Fountain Pharmaceuticals,
         Inc. 1998 Stock Option Plan" (the "Plan"). Nonqualified and incentive
         stock options may be granted under the 1998 Plan. The term of options
         granted under the Plan will be fixed by the Plan Administrator
         provided, however, that the maximum option term may not exceed 10 years
         from the grant date and the exercise price per share may not be less
         than the fair market value per share of the common stock on the grant
         date. Under the 1998 Plan, all full-time employees of the Company or
         its subsidiaries, including those who are officers and directors are
         eligible to receive options pursuant to the Plan, if selected.
         Non-employee directors and consultants will also be eligible. The Plan
         will provide for the authority to issue options covering up to 750,000
         shares of the Company's common stock; provided, however, that options
         to purchase no more than 500,000 shares shall be granted to any one
         participant.

         Common stock options and warrants:

         In 1999, the Company issued options and warrants to purchase 3,223,181
         shares of common stock to its existing officers, directors and
         employees. The Company recognized compensation expense to non-employee
         directors of approximately $21,000 in 1999 associated with the issuance
         of 2,664,103 of these options and warrants. The fair value of the
         balance of 559,078 options and warrants, which were issued to employees
         in 1999, was nominal as determined using the "Black-Scholes"
         option-pricing model.


                                      F-14
<PAGE>   49
                         FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998


8.       STOCKHOLDERS' DEFICIT (CONTINUED):

         Common stock options and warrants (continued):

         The "Black-Scholes" option-pricing model assumptions are as follows:

<TABLE>
<S>                                                              <C>
Underlying stock price at grant date                             $  .218 - .625
Exercise price                                                   $  .56  - .65
Dividend yield                                                               0%
Risk free interest rate                                                      6%
Volatility                                                                  40%
</TABLE>

         Common stock options and warrants issued, redeemed and outstanding
         during the years ended September 30, 1999 and 1998 (retroactively
         adjusted for 1 for 20 reverse split) are as follows:

<TABLE>
<CAPTION>
                                                                                             Number of
                                 Description                                            Options & Warrants
                                 -----------                                            ------------------
<S>                                                                                     <C>
Option and warrants issued and outstanding at October 1, 1997 (weighted average
  exercise price of $1.80)                                                                   172,500

Less option and warrants expired in 1998 (weighted average exercise price of
$15.60)                                                                                      (10,000)
                                                                                          ----------
Option and warrants issued and outstanding at September 30, 1998 (weighted average
  exercise price of $1.71)                                                                   162,500

Option and warrants issued in 1999 (weighted average exercise
  price of $.61)                                                                           3,223,181

Less options and warrants expired in 1999 (weighted average exercise price of $.66)          (25,000)

Less options and warrants surrendered in 1999(1) (weighted average
  exercise price of $.80)                                                                   (112,500)
                                                                                          ----------
Options and warrants issued and outstanding at September 30, 1999 (weighted
  average exercise price of $.63)                                                          3,248,181
                                                                                          ==========
</TABLE>


                                      F-15
<PAGE>   50
                         FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998


8.       STOCKHOLDERS' DEFICIT (CONTINUED):

         Common stock options and warrants (continued):

         These common stock option and warrants were issued to current or former
         officers, directors, shareholders and employees. Those that remain
         outstanding at September 30, 1999 are as follows:

<TABLE>
<CAPTION>
                             Vesting Period     Exercise       Expiration        Remaining        Number
         Issue Date                Yrs           Price            Date              Life        Outstanding
         ----------          --------------     --------       ----------        ---------      -----------
<S>                          <C>                <C>          <C>                 <C>            <C>
         July 1996                 0             $.56(2)     December 2000        1.25 Yrs          40,000

         December 1998             0             $.56        December 2003        1.25 Yrs         112,500

         December 1998             0             $.65        December 2003        4.25 Yrs       2,495,103

         December 1998             0-4           $.56        December 2003        4.25 Yrs         429,578

         September 1999            0-3           $.625       September 2004          5 Yrs         171,000
                                                                                                 ---------

                                                                                                 3,248,181
                                                                                                 =========
</TABLE>

(1) These options and warrants were surrendered pursuant to terms related to the
grant of new options. (See previous page)

(2) The Company repriced these options and warrants from $.80 in December 1998.


                                      F-16
<PAGE>   51
                         FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998


9.       EMPLOYEE BENEFIT PLAN:

         The Company has implemented a 401(k) profit sharing plan covering
         substantially all employees. The plan does not provide for employer
         contributions.

10.      INCOME TAXES:

         Deferred tax assets consist of the following at September 30, 1999:

<TABLE>
<S>                                                                 <C>
Net operating loss carryover                                        $ 1,842,000
Obsolete inventory allowance                                             20,000
Other                                                                     8,000
Valuation allowance                                                  (1,870,000)
                                                                    -----------
                                                                    $      --
                                                                    ===========
</TABLE>

         Income tax (expense) benefit consists of the following:

<TABLE>
<CAPTION>
                                                          1999           1998
                                                       ---------      ---------
<S>                                                    <C>            <C>
Current:
  Federal                                              $    --        $    --
                                                       ---------      ---------

Deferred:
  Deferred                                                 8,000          4,000
  Benefit of net operating loss carryover (a)           (604,000)      (622,000)
  Change in valuation allowance                          596,000        618,000
                                                       ---------      ---------
                                                              --             --
                                                       ---------      ---------
                                                       $    --        $    --
                                                       =========      =========
</TABLE>

         The expected income tax benefit at the statutory tax rate differed from
         income taxes in the accompanying statements of operations as follows:

<TABLE>
<CAPTION>
                                                         Percentage of loss before
                                                                income taxes
                                                         -------------------------
                                                            1999           1998
                                                           ------         ------
<S>                                                        <C>            <C>
Statutory tax rate                                           34.0%          34.0%
State tax                                                     3.5%           3.5%
Change in deferred tax asset
  valuation allowance                                       (37.5%)        (37.5%)
                                                           ------         ------

Effective tax rate in accompanying
  statement of operations                                       0%             0%
                                                           ======         ======
</TABLE>


                                      F-17
<PAGE>   52


                         FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998


10.      INCOME TAXES (CONTINUED):


         (a)      Under Section 382 and 383 of the Internal Revenue Code of
                  1986, if an ownership change occurs with respect to a "loss
                  corporation", as defined, there are annual limitations on the
                  amount of net operating loss and research and development tax
                  credit carryovers which are available to the Company. The
                  taxable income of a loss corporation for any tax year ending
                  after an ownership change may be offset by pre-change loss
                  carryovers only to the extent of the section 382 and 383
                  limitation for that year. Events occurred in 1996 which
                  created an ownership change in excess of fifty percent for
                  income tax purposes; therefore, the Company believes that the
                  availability of the pre-change net operating loss carryover
                  $(12,700,000) and research and development credit carryover
                  $(250,000) will be substantially limited in the future and, as
                  such, the Company has previously accounted for the loss of
                  such carryover by reducing the deferred tax asset and
                  associated valuation allowance. The post-change net operating
                  loss carryover of $3,300,000 will expire 2012-2014.

11.      COMMITMENTS:

         Lease obligations:

         The Company leases its office and warehouse facilities under a
         five-year, non-cancelable operating lease for approximately $7,000 per
         month. Additionally, the Company leases various warehouse space and
         equipment under various non-cancelable operating leases for various
         terms from 12 to 60 month terms for approximately $1,600 per month.
         Rent expense under all operating leases approximated $112,000 and
         $83,000 for 1999 and 1998, respectively.

         Obligations under the non-cancelable operating leases are as follows:

<TABLE>
<S>                                                                    <C>
Year ending September 30,
          2000                                                         $ 106,701
          2001                                                            99,845
          2002                                                            96,499
          2003                                                            22,976
                                                                       ---------
                                                                       $ 326,021
                                                                       =========
</TABLE>

         License agreement and royalty:

         During 1999, the Company entered into an 18 month agreement with an
         unrelated third party for an exclusive sub-license for the use of
         certain proprietary information, technology and patents. The Company
         paid $100,000 in 1999 in consideration for this sub-license and for the
         Company's exclusive right to test the viability of a skin care concept
         in certain marketing channels. In addition, the Company will pay a
         royalty of 8% of net sales resulting from products sold utilizing the
         associated technology. No royalty expense was incurred during 1999.


                                      F-18
<PAGE>   53
                         FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998


11.      COMMITMENT (CONTINUED):

         Consulting agreements:

         During 1999, the Company entered into two consulting agreements whereby
         the consultants will provide advice and assistance for the
         manufacturing and marketing of products utilizing the technology
         acquired by the Company under the agreement discussed in the preceding
         paragraph. The first agreement provides for aggregate annual
         compensation of $60,000. The second agreement provides compensation on
         the basis of time devoted to the consultant's services to the Company
         at a rate of $4,000 per day. Consulting expense pursuant to these
         agreements aggregated approximately $22,000 in 1999.

         Representation agreements:

         During 1999, the Company engaged the services of a dermatological sales
         representative to market the Company's LyphaZome(R) product line under
         a 2-year representation agreement. The Company agrees to pay 25% of
         gross revenues received and collected from all new accounts for which
         the sales representatives provide staffing and service for the sale of
         Company products. Additional compensation is also provided under a
         specified bonus schedule. Total expense associated with this agreement
         aggregated approximately $2,500 in 1999.


                                      F-19
<PAGE>   54
            EXHIBIT INDEX


<TABLE>
<CAPTION>
Exhibit    Description                                             Method of Filing
-------    -----------                                             ----------------
<S>        <C>                                                     <C>
10.9       Facility Sub-lease Agreement between the Registrant     Filed herewith
           and Kenlee Precision Corporation.

10.10      Sub-License Agreement between the Registrant and
           Y.S. Laboratories, Inc. dated May 27, 1999.             Filed herewith

10.11      Consulting Agreement between the Registrant and
           Francis W. Parnell, M.D. effective  June 1, 1999.       Filed herewith

10.12      Consulting Agreement between the Registrant and
           Diana Parnell, M.D. effective  June 1, 1999.            Filed herewith

27         Financial Data Schedule                                 Edgar format only
</TABLE>