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, 1996
                           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: (813) 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.   [X]

      Registrant's revenues for the year ended September 30, 1996:

                                   $1,676,819
                                   

      The  aggregate  market  value  of  the  Company's  Common  Stock  held  by
non-affiliates  of the  Registrant  as of December  26,  1996 was  approximately
$1,357,301.


<PAGE>


                     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 26, 1996, was 47,516,049.

      The number of shares outstanding of the Registrant's Class B Common Stock,
par value $.001 per share, as of December 26, 1996, was 90,100.

                      DOCUMENTS INCORPORATED BY REFERENCE:

                                      None
                                      
                 Transitional Small Business Disclosure Format:

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



















                                        2


<PAGE>
                                     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,  initiate
certain  marketing  programs  and develop  strategic  associations  with several
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  significant  liabilities  incurred  by the
Company in its past  development  and marketing  efforts.  Unable to develop any
material   sales   revenues  or  secure   additional   proceeds  from  financing
transactions, during 1994 the Company had substantially curtailed operations and
by November 30, 1994,  had 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.

      While in bankruptcy,  the Company was able to successfully  reorganize its
operations  and  finances.  It achieved  significant  reductions in overhead and
other costs of  operations,  while  recognizing  an  increase in revenues  and a
redirection of its marketing efforts to focus upon its licensing arrangements.

      The  Company's  Plan of  Reorganization,  which was  approved  and  became
effective on December 20, 1995 (the "Plan"),  resulted in, among other things, a
substantial reduction in the Company's outstanding  liabilities,  an infusion of
capital by the Company's Chief  Executive  Officer through the purchase of newly
issued shares of the Company's Common Stock and the Company's emergence from the
bankruptcy  proceedings.  On July 25, 1996, the U.S.  Bankruptcy  Court issued a
final  decree  stating  the Court no longer  has  jurisdiction  over  matters in
connection  with the  bankruptcy.  See  "ITEM 6 -  MANAGEMENT'S  DISCUSSION  AND
ANALYSIS OR PLAN OF OPERATION."

      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






                                        3


<PAGE>


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 Octazome(R),  LyphaZome(R) and Daylong(R)
names and under other proprietary names of licensees.

      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 has  previously
conducted  human clinical  testing of  encapsulated  silver  sulfadiazine  under
strictly  established medical protocols.  Due to the difficulty of the protocols
involved,  however,  insufficient  numbers of patients have been tested so as to
permit the extraction of conclusive test results  necessary to continue  seeking
regulatory  approval  from  the FDA.  Due to the  substantial  time and  expense
involved in developing regulated products such as silver sulfadiazine compounds,
these and other regulated  products have not yet been fully developed and remain
a lower corporate  priority.  The Company will only proceed with the development
of  regulated  products  as and to the extent  that funds  and/or  collaborative
efforts with other companies become available.









                                        4


<PAGE>


      Business Strategy

      The Company's  initial focus was on the development of its own proprietary
health care  products  using  SDMCs;  however,  in  recognition  of the material
expenses and delays  associated  with  obtaining  regulatory  approvals  for the
commercialization  of regulated products,  the Company re-directed the principal
focus of its efforts and limited resources towards the development and marketing
of  less  regulated  items  including  a full  line of skin  care  products  and
sunscreens utilizing the SDMC technology.

      In recognition of its limited  capital  resources,  the Company's  current
business  strategy  is to  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.   Pending  the
availability of adequate capital resources, additional products may be developed
by the Company.

      Management  intends to focus in the near term  primarily  upon  increasing
sales  of  existing   non-regulated   products   consisting   of  sunscreen  and
moisturizing  products  through its licensing  arrangements,  and utilizing such
arrangements to distribute new non-regulated  products which may be developed by
the Company as funds and/or corporate  sponsorship become available.  See "Sales
and Marketing."

      In light of the material expense and delays associated with developing and
obtaining  approval of regulated  products,  the Company  will only  continue to
develop such regulated  products through  collaborative  arrangements with major
pharmaceutical  companies.  See "Governmental  Regulations." In the absence of a
joint venture arrangement, corporate sponsorship or the availability of adequate
funding for this purpose,  further development of regulated products will likely
remain a low corporate priority.

      Currently,  the Company principally licenses and supplies moisturizers and
sunscreen  products  through  its newly  expanded  licensing  arrangements  with
pharmaceutical companies. See "Sales and Marketing." The Company recommenced its
research and development  efforts with the addition of a laboratory  facility in
the third  quarter of fiscal 1996,  for which funds have been made  available in
connection  with the  implementation  of the Plan.  See  "ITEM 6 -  MANAGEMENT'S
DISCUSSION  AND  ANALYSIS  OR PLAN OF  OPERATION."  While  the  Company's  sales
currently focus upon its line of sunscreen and moisturizer products,  management
believes that expansion of the Company's licensing arrangements and the scope of
product development  activities may offer a marketing opportunity for additional
consumer products. However, there can be no assurances to that effect.








                                        5


<PAGE>


      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 three years, in view
of the  Company's  limited  financial  resources,  it has focused its  marketing
efforts on the sale of products  through  licensing  arrangements  with  certain
pharmaceutical companies.  Management believes that these licensing arrangements
offer significant  marketing  opportunities  without imposing material operating
expenses upon the Company.

      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  represent  in the
aggregate  more than 85% of the sales of the  Company's  products.  The  Nycomed
Pharma  license,  which covered  markets in Norway and Denmark,  was expanded in
1996 to include  markets in  Belgium,  Holland  and  Luxembourg.  Spirig AG, the
Company's  licensee for Switzerland and Germany,  also expanded its arrangements
with the Company to include  markets in Eastern  Europe.  In January  1996,  the
Company  entered  into a  long-term  license  and supply  agreement  with Dermik
Laboratories, Inc. As of November 1996, Dermik terminated the agreement based on
their  interpretation of a technical provision of the agreement.  The Company is
not in  agreement  with  Dermik's  interpretation  and have  engaged  counsel to
determine the Company's  legal remedies in this regard.  The Company is actively
pursuing similar marketing arrangements with other licensees,  including several
who had previously  expressed interest in the Company's  products.  In May 1996,
the  Company  entered  into a seven year  license  and supply  agreement  with a
pharmaceutical company in Colombia. Revenues from this agreement are expected to
be  recognized  in the  third  fiscal  quarter  1997.  However,  there can be no
assurances to that effect.

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 will not be  subject  to
further  development  without the  collaboration of a corporate sponsor or joint
venture participant,  or unless adequate funding otherwise becomes available for
these purposes.









                                        6


<PAGE>

      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.  In the past, the Company
has  undertaken  clinical  testing in seeking  approval of certain  products and
incurred significant costs. In light of such costs, further government approvals
will not be pursued by the  Company  unless it is  undertaken  with a  corporate
sponsor.

      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 which were
unregulated  in the past such as its  sunscreen  products  are now  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 been  allowed  or issued in  Israel,  Spain,  and  Australia.  The
European  Patent Office  ("EPO")  issued a Notice of Allowance on June 14, 1996.
The Company is awaiting  publication of the official  Notice of Grant and is now
in the process of  preparing to validate  the patent in the  following  European
countries:









                                        7


<PAGE>



Austria,   Belgium,   France,  Great  Britain,   Germany,   Italy,   Luxembourg,
Netherlands,  Singapore, Sweden, and Switzerland- Liechtenstein. The Company has
counterpart applications on file in other foreign countries in which examination
has either not yet been  initiated by the patent office of the country  involved
or where the Company has not yet requested examination.

      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.  A patent application of the presently pending application
contained  similar  claims to those now being  pursued  which were rejected over
prior art,  including the prior SDMC patents  already owned by The Company.  The
Company is  awaiting  the first  Official  Action  from the PTO  concerning  the
pending application.  If the claims are rejected,  the Company will evaluate its
options for responding, including the possibility of submitting additional data.

      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 PTO 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 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










                                        8


<PAGE>



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 by virtue of its licenses 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.



                                        9


<PAGE>



Consultants  are  generally  engaged  to  assist  in  scientific  matters  or in
connection with sales and marketing endeavors.

      As of December 26, 1996,  the Company  employed six (6) persons  including
its chief  executive  officer,  a director  of  finance  and  administration,  a
technical director, warehouse and administrative personnel.

ITEM 2
------

      PROPERTIES
      ----------

      The Company owns no real property.  The Company leases approximately 6,000
square feet of office,  laboratory  and warehouse  facilities  located in Largo,
Florida.  The lease  provides  for a monthly  rental of $4,500 for a term of two
years,  which commenced April 1, 1996, with an option for an additional one year
period.  This  facility is adequate for the  Company's  current and  foreseeable
needs.

ITEM 3
------

      LEGAL PROCEEDINGS
      -----------------

      Effective  November 30, 1994,  the Company filed a voluntary  petition for
reorganization under Chapter 11 of Title II of the United States Bankruptcy Code
in the United States Bankruptcy Court for the Middle District of Florida,  Tampa
Division (the "Bankruptcy  Court"). On May 15, 1995, the Plan was filed with the
Bankruptcy  Court.  The Plan,  as amended  August 14,  1995,  was  confirmed  on
November 20, 1995, and became  effective on December 20, 1995. The United States
Bankruptcy  Court issued a final decree on July 25, 1996. As such,  the Court no
longer has jurisdiction over matters in connection with the bankruptcy.

ITEM 4
------

      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
      ---------------------------------------------------

      None.








                                       10


<PAGE>
                                     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, 1995 and 1996, and for the first quarter of its fiscal year
ended  September 30, 1997. No trading  market exists for shares of the Company's
Class B Common Stock.

      Fiscal 1995                   HIGH              LOW
      -----------                   ----              ---
      First Quarter                   .075            .01
      Second Quarter                  .065            .008
      Third Quarter                   .065            .065
      Fourth Quarter                  .175            .018

      Fiscal 1996                   HIGH              LOW
      -----------                   ----              ---
      First Quarter                   .063            .016
      Second Quarter                  .547            .188
      Third Quarter                   .25             .188
      Fourth Quarter                  .172            .109

      Fiscal 1997                   HIGH              LOW
      -----------                   ----              ---
      First Quarter                  .20              .05
      (October 1-December 26)

      The closing price of the  Company's  Common Stock on December 26, 1996 was
$.0625.

      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.


                                       11


<PAGE>

      B.    Holders
            -------

            Records of the Company's  stock  transfer  agent indicate that as of
December  26,  1996,  the Company  had 439 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 3,900 record holders,  including such shares
held in "street name."

      C.    Dividends
            ---------

            The Company has not paid any cash  dividends,  to date, and does not
anticipate or contemplate paying cash dividends in the foreseeable future. Under
the Plan,  security  holders may not receive any  distribution or dividend until
and  unless all prior  claims  payable  under the Plan are paid in full.  To the
extent  that the  Company  is  permitted  to pay  dividends,  it is the  present
intention of management to utilize all  available  funds for working  capital of
the Company.




























                                       12


<PAGE>


ITEM 6
------

      MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
      ---------------------------------------------------------

Background
----------

      During the quarter  ended  December  31,  1995,  the Company  emerged from
bankruptcy  proceedings  which commenced in November 1994. During and subsequent
to the bankruptcy  proceedings,  the principal source of the Company's  revenues
has  been  from  sales  of  its  sunscreen  products  to  licensees  who  act as
distributors and from royalties which are earned as the result of the subsequent
sales of these products by such distributors.

      During the fiscal year ended  September 30, 1995 ("Fiscal 1995") while the
Company was in bankruptcy  proceedings,  management restructured the Company and
significantly reduced its overall cost structure such that revenues derived from
sales and  royalties  were  sufficient to cover the  Company's  costs.  As such,
management no longer considers itself to be in the development stage.

      The Company's Plan of Reorganization (the "Plan"),  which became effective
on December 20, 1995,  resulted in, among other things, a substantial  reduction
in the Company's outstanding  liabilities,  infusion of capital by the Company's
Chief  Executive  Officer  through the  purchase of newly  issued  shares of the
Company's  Common  Stock  and  the  Company's   emergence  from  the  bankruptcy
proceedings.  The U.S.  Bankruptcy  Court  entered its final  decree on July 25,
1996,  and as such,  the  Court no  longer  has  jurisdiction  over  matters  in
connection with the bankruptcy.

      Results of Operations

      During the fiscal year ended September 30, 1996, the Company  realized net
income of $302,634 on revenues of $1,676,819, compared to net income of $231,075
on revenues of  $1,158,698  for the fiscal year ended  September  30, 1995.  The
increased net income was a result of the Company's  increased  sales over fiscal
1995 to its European  licensees,  royalties,  technical  service fees, and gains
recorded pursuant to the Plan.

      Revenues for fiscal 1996 of $1,676,819 represented an increase of $518,121
or 44.7% from  revenues  of  $1,158,698  during  fiscal  1995.  The  increase in
revenues was a result,  primarily,  of the expanding acceptance of the Company's
products by  dermatologists  in northern  Europe and royalties from its European
licensees.

      During the fiscal year ended  September  30,  1996,  the Company  incurred
operating  expenses of $809,629,  a 28.9%  increase over  operating  expenses of
$628,178 for the prior year ending September 30, 1995. This increase in expenses
was primarily  due to legal and  accounting  fees relative to regulatory  filing
requirements,  insurance  costs,  increased marketing  efforts, start up expense



                                       13


<PAGE>



relating  to the  Company's  new  R&D  facilities,  and the  re-engaging  of the
Company's technical director.

      The Company emerged from  bankruptcy  proceedings by virtue of a confirmed
plan effective  December 20, 1995. The U.S.  Bankruptcy  Court entered its final
decree on July 25, 1996, and as such, the Court no longer has jurisdiction  over
matters  in  connection  with  the  bankruptcy.  Following  its  emergence  from
bankruptcy,  and for the near term,  the Company's  operations  will continue to
focus upon  increasing  sales  through  its  existing  licensees  and the active
pursuit of new  license  arrangements  and  expanding  upon these  associations.
Management  believes that the sales of its products will continue to increase as
the  Company  gains  access  through  its  licensing   arrangements  to  broader
geographic markets. However, there can be no assurances to this effect.

      Liquidity and Capital Resources

      From  inception  through the quarter  ended June 30, 1994,  the  Company's
principal  sources  of  working  capital  were 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. The securities have since
traded on the less liquid  market of the OTC Bulletin  Board,  which has limited
the Company's efforts to obtain  additional  working capital through the sale of
its securities.

      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.  Under  the  terms  of the  Plan,  the
liabilities  of the Company  were reduced by  approximately  55% and the Company
obtained  working  capital  of  $250,000  as the result of the  purchase  by the
Company's Chief Executive  Officer of 25,000,000  shares of the Company's Common
Stock at a purchase  price of $.01 per share in  December  1996.  See "ITEM 12 -
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."

      As of September 30, 1996, the Company had working capital of $234,237,  an
increase  of  $79,182  from the  level of  working  capital  of  $155,055  as of
September 30, 1995. Such increase in working  capital is primarily  attributable
to the 55% reduction in the Company's  liabilities,  an infusion of capital from
the  sale  of the  Company's  Common  Stock  pursuant  to  the  Plan  and  trade
receivables.

      Under the Plan,  the Company  was  subject to $319,278 of pre-  bankruptcy
liabilities  to be paid  under the Plan over a maximum  of  thirty-three  months
which commenced February 1996. Presently,  pre- bankruptcy liabilities amount to
$236,142.  Payments  pursuant to the Plan were current as of September 30, 1996,
and management expects all such required payments to be made on a timely basis.








                                       14


<PAGE>



      As of October 17, 1996,  the Company was granted a $100,000 line of credit
at an  interest  rate  of prime  plus .5%  from  First  Union  National  Bank of
Florida. This line of credit is secured by the Company's accounts receivable and
inventory.  The  Company  intends  to  utilize  this line of credit to  purchase
additional inventory and/or fund the Company's research and development efforts,
as necessary.

      Providing  that  operations  reflect  continued  growth,  the  Company may
attempt to obtain  financing  through the sale of  additional  securities.  This
would require a restructuring of the Company's capital structure which currently
has  insufficient  authorized  capital stock  available to  facilitate  any such
financing  transaction.  Additional  capital may be  utilized  to  increase  the
Company's   research  and   development   efforts  and  to  seek   collaborative
associations with pharmaceutical  companies.  Increases in equity and assets may
also enable the Company to relist its  securities  on NASDAQ and thereby  regain
access to a more liquid trading market. However, there can be no assurances that
the Company's business strategy can be realized.

      Historically,  the  Company's  unexercised  warrants  had been a potential
source of capital financing for the Company.  However,  all previously  existing
Class A, B, C and D Warrants have expired.  The 2,583,334  common stock warrants
presently  vested and  outstanding  bear  exercise  prices  ranging from $.04 to
$2.50. Given the market price of the Company's Common Stock, it is feasible that
some of these Warrants can be exercised,  but there can be no assurances in this
matter.

      In addition to the Warrants  identified above, the Company has also issued
2,033,333  additional  Warrants to its existing  directors and certain employees
which vest over a two year period commencing in July 1997.

      Based upon the Company's current capital structure,  an exercise of all of
the issued and  outstanding  Warrants  would not be possible since the number of
Warrants  (assuming  full  vesting)  exceeds  the number of shares  that  remain
authorized  and available  for  issuance.  An inability to issue shares upon the
exercise of the Warrants could  conceivably  delay any funding which the Company
could  otherwise  receive from the exercise of such  Warrants  pending  adequate
capitalization.  Management  does not believe  this is likely to occur given the
vesting  provisions of certain of the outstanding  Warrants,  the present market
price of the Company's  Common Stock and since a restructuring  of the Company's
capital structure would likely occur prior to any exercise of such Warrants.

      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.






                                       15


<PAGE>


ITEM 7
------

      FINANCIAL STATEMENTS
      --------------------

      Financial  statements  are  included  under Item 13(A) and may be found at
pages F-1 through F-21.

ITEM 8
------

      CHANGES IN AND DISAGREEMENTS  WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      ----------------------------  --------------------------------------------
      DISCLOSURE
      ----------

      None.






























                                       16


<PAGE>

                                    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.

Name                          Age         Position(s) Held
----                          ---         ----------------

John C. Walsh                 56          President, Chief Executive
                                            Officer, Chief Financial
                                            Officer and Chairman

James L. Goddard, M.D.        73          Director

James E. Fuchs                69          Vice Chairman, Treasurer,
                                            Secretary and Director

James Vatell                  66          Director


      B.    Business Experience
            -------------------
John C. Walsh

      John C.  Walsh  has been the  President,  Chief  Executive  Officer  and a
director of the Company  since 1992 and  Chairman of the Board since 1994.  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.  He also has broad
experience in the financial  management and accounting fields. Mr. Walsh holds a
bachelor of science degree from Villanova  University and is a Certified  Public
Accountant.

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.


                                      17

<PAGE>


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. Mr. Fuchs is a Yale graduate and a two-time U.S. Olympic medalist and gold
medalist  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.

James L. Goddard, M.D.

      James L. Goddard,  M.D., has been a director of the Company since December
1, 1989. Dr. Goddard received his pre-medical education at Temple University. He
received his M.D. degree from George Washington University School of Medicine in
1949 and a Masters of Public  Health  from  Harvard  School of Public  Health in
1954.  From  1972 to the  present,  Dr.  Goddard  has been a  consultant  to the
pharmaceutical  industry in  addition  to being  Chairman of the Board of Ormont
Drug and  Chemical  Company  from 1972 until 1977 and  Chairman  of the Board of
Keystone  Medical  Services,  Inc., from 1983 until 1988. From 1970 to 1972, Dr.
Goddard  was  employed  as  Program  Advisor  (Family  Planning)  for  the  Ford
Foundation  in New  Delhi,  India,  and from 1968 to 1970 as  Vice-President  of
Health  Services,  EDP  Technology.   In  addition,  Dr.  Goddard  served  as  a
Commissioner of the United States Food and Drug Administration from 1966 to 1968
and in various other governmental positions prior thereto.

James Vatell

      James Vatell has been a director of the Company  since  December  1995. He
has been a shareholder  in the Company for several years and has been aiding the
Company on an uncompensated  basis on a number of business  development  issues.
Mr.  Vatell is a former USAir  captain and a graduate of  Embry-Riddle  Aviation
Institute.  He is an  investor  and  adviser  to a number  of  private  business
enterprises.

      Directors' Fees
      ---------------

      The Company  has adopted a policy of granting  fees of $500 per meeting to
each outside  director who attends a regularly  scheduled or special  meeting of
its  Board of  Directors.  In  addition,  the  Company  reimburses  out-of-state
directors for their cost of travel and lodging to attend such meetings.







                                       18


<PAGE>

      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 1996, all Reporting  Persons timely complied
with all filing requirements applicable to them.

ITEM 10
-------

      EXECUTIVE COMPENSATION
      ----------------------
<TABLE>
<CAPTION>

                          SUMMARY COMPENSATION TABLE
=====================================================================================
                                                                      Long Term
                      Annual Compensation                           Compensation
-------------------------------------------------------------------------------------
                                    Fiscal Year
                                       Ended
   Name and Principal Position     September 30    Salary ($)     Options/SARS (#)
-------------------------------------------------------------------------------------
<S>                                    <C>          <C>                  <C>
John C. Walsh(1)                       1996         $137,308             -0-
Chairman, Chief Executive              1995         $125,000             -0-
Officer and President                  1994         $138,462             -0-
=====================================================================================

(1)   Pursuant to the Plan, Mr. Walsh is 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, 1996,  $8,804
      of the $21,615 had been paid.

OPTION/SAR GRANTS TABLE

                   Option/SAR Grants in the Last Fiscal Year
=========================================================================================
                                    Individual Grants
-----------------------------------------------------------------------------------------
                                             % of Total
                                Options/     Options/SARs     Exercise
                                SARs         Granted to       or Base
                     Fiscal     Granted      Employees in     Price        Expiration
Name                 Year       (#)          Fiscal Year      ($/Sh)       Date
-----------------------------------------------------------------------------------------
<S>                   <C>          <C>            <C>          <C>          <C>
John C. Walsh         1996(1)      -0-            -0-          -0-          -0-
Chairman,
Chief Executive
Officer and
President
=========================================================================================
__________________________
(1)   No options were granted during Fiscal Year 1996.
</TABLE>
                                      19

<PAGE>

<TABLE>
<CAPTION>

OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE

=========================================================================================
                 Aggregated Options/SAR Exercises in Last Fiscal Year
                            and FY-End Option/SAR Value
-----------------------------------------------------------------------------------------
                                                                           Value of
                                                           Number of       Unexercised
                                                           Unexercised     In-the-Money
                                                           Options/SARs    Options/SARs
                                                           at FY-End (#)   at FY-End ($)
-----------------------------------------------------------------------------------------

                                Shares        Value
                       Fiscal   Acquired on   Realized     Exercisable/    Exercisable/
Name                   Year     Exercise (#)  ($)          Unexercisable   Unexercisable
-----------------------------------------------------------------------------------------
<S>                    <C>            <C>         <C>      <C>             <C>    
John C. Walsh          1996           -0-         -0-      (U)0/(E)-0-     (E)$0/(U)-0-
Chairman, Chief
Executive Officer,
and President
=========================================================================================

</TABLE>

Grant of Warrants to Certain Directors

      In December  1995,  the Company  granted  warrants to purchase  its Common
Stock to certain  directors and cancelled all outstanding  Warrants held by such
persons in accordance with the following schedule:

                              Number of                 Number of
Name                          Granted Warrants(1)       Warrants Cancelled
----                          -------------------       ------------------

James Goddard, M.D.                 500,000                   100,000

James Fuchs                         500,000                   350,000

James Vatell(2)                     300,000                     -0-

(1) The Warrants were granted as of December 18, 1995,  at an exercise  price of
    $.04 per share, which was equal to the closing price of the Company's Common
    Stock on such date as traded on the OTC Bulletin  Board.  The Warrants  vest
    pro rata over a three year period commencing July 1996.

(2) Represents  Warrants granted in connection with Mr. Vatell joining the Board
    of Directors as of December 18, 1995.

      These Warrants were not granted under the Company's stock option plan. The
Warrants granted,  as well as the underlying shares of common stock,  constitute
"restricted  securities"  under Rule 144 promulgated under the Securities Act of
1933, as amended.



                                       20


<PAGE>



ITEM 11
-------

      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
      --------------------------------------------------------------

      The following table sets forth, as of December 26, 1996,  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.

                              Amount & Nature                        % of
                              of Beneficial           % of           Voting
Name and Address              Ownership(1)            Ownership      Power(2)
----------------              ------------            ---------      --------

James E. Fuchs                  166,667(3)               *               *
565 Park Avenue
New York, NY  10021

James L. Goddard, M.D.          235,667(3)               *               *
347A Avenue Sevilla
Laguna Hills, CA  92653

John C. Walsh                25,022,000                 52.56%          52.17%
7279 Bryan Dairy Road
Largo, FL  33777

James Vatell                    465,000(4)               *               *
29 Richmond Hill Road
Greenwich, CT  06831

All Directors and            25,889,334(5)              53.89%          53.49%
Officers as a Group
(4 Persons)
___________________________________

(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  pursuant to Item 403 of Regulation
    S-B and Rule 13d- 3(d)(1),  promulgated under the Securities Exchange Act of
    1934.  Also  reflects  47,606,149  shares  of  the  Company's  Common  Stock
    (including Class B Common Stock) outstanding as of the date of this Report.

                                       21


<PAGE>

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

(3) Does not include Warrants to purchase 333,333 shares at an exercise price of
    $.04 per share, which have not vested.

(4) Does not include Warrants to purchase 200,000 shares at an exercise price of
    $.04 per share granted to Mr. Vatell in connection with joining the Board of
    Directors, which have not vested.

(5) Does not include  Warrants to purchase an aggregate of 866,666  shares at an
    exercise price of $.04, which have not vested.
________________________________

*   Less than 1%.

ITEM 12
-------

      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
      ----------------------------------------------

      Grant of Warrants to Directors
      ------------------------------

      During the first quarter of fiscal 1996,  the Company  issued  Warrants to
certain directors,  among others. See "ITEM 10 EXECUTIVE COMPENSATION - Grant of
Warrants to Certain Directors."

      Purchase of Common Stock
      ------------------------

      In order to infuse  capital into the Company in accordance  with the Plan,
in December 1995, Mr. Walsh,  the Company's Chief Executive  Officer,  purchased
25,000,000  restricted  shares of the Company's Common Stock at a purchase price
of $.01 per  share,  which was in excess of the  market  price of the  Company's
Common Stock on the date the Plan was submitted to the Bankruptcy Court.

      Payment of Accrued Salary
      -------------------------

      In  accordance  with the Plan,  Mr.  Walsh is entitled to receive 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. As of September 30, 1996,  $8,804 of the $21,615 had been
paid. See "ITEM 10 - EXECUTIVE COMPENSATION."

      Line of Credit Guaranty
      -----------------------

      The line of credit obtained by the Company on October 17, 1996  is secured
by the Company's accounts receivable and inventory, and is further secured by an
unconditional  guaranty by Mr. Walsh, the Company's Chief Executive Officer. See
"ITEM 6 - MANAGEMENT'S  DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - Liquidity
and Capital Resources."

                                       22

<PAGE>

      Directors' Fees
      ---------------

      The Company has adopted a policy of granting fees and reimbursing expenses
of outside  directors who attend regularly  scheduled or special meetings of its
Board of Directors. See "ITEM 9 - DIRECTORS,  EXECUTIVE OFFICERS,  PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT."

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 Sheets as of September 30, 1996 and                 F-2
      1995.

      Statements  of  Operations  for the years ended             F-3
      September 30, 1996 and 1995.

      Statements  of  Stockholders'  Equity  (Deficit)            F-4
      for the years ended September 30, 1996 and 1995.

      Statements  of Cash Flows for the years ended               F-5 thru F-6
      September 30, 1996 and 1995.

      Notes to Financial Statements of Fountain                   F-7 thru F-21
      Pharmaceuticals, Inc. for the years ended
      September 30, 1996 and 1995.

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)

2.2               Amended   Disclosure   Statement   dated   August   14,   1995
                  (Incorporated by reference to the Company's  Current Report on
                  Form 8-K filed on March 28, 1996)


                                       23


<PAGE>



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)

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

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

10.2              Stock Option Plan  (Incorporated  by reference to Exhibit 10.4
                  of the Form S-1)

10.3              Loan Agreement by and between the Registrant  and First  Union
                  National   Bank  of  Florida  dated  October  17,  1996 (Filed
                  herewith)

27                Financial Data Schedule (Electronic filing only)

      Reports on Form 8-K
      -------------------

      The Company filed the following Current Report on Form 8-K during the last
quarter of the fiscal year ended September 30, 1996:   None.
















                                       24


<PAGE>



                                   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


                                          FOUNTAIN PHARMACEUTICALS, INC.


Date:  December 30, 1996                  By:  /s/ John C. Walsh
      ------------------                      ----------------------------------
                                                John C. Walsh, President
                                                Chief Executive 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.

Directors                        Title                    Date
---------                        -----                    ----


/s/ John C. Walsh                President,               December 30, 1996
-------------------------        Chief Executive    
John C. Walsh                    Officer (Principal
                                 Accounting        
                                 Officer)           
                                 

/s/ James Fuchs                  Vice Chairman,           December 30, 1996
-------------------------        Secretary-Treasurer
James Fuchs                      


/s/ James L. Goddard             Director                 December 30, 1996
-------------------------
James L. Goddard


/s/ James Vatell                 Director                 December 30, 1996
-------------------------
James Vatell



<PAGE>


                          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,  1996  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, 1996 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.




                                            AIDMAN, PISER & COMPANY, P.A.

Tampa, Florida
November 8, 1996



















                                      F- 1

<PAGE>
                         FOUNTAIN PHARMACEUTICALS, INC.
                                 BALANCE SHEET
                              SEPTEMBER 30, 1996 

                                     ASSETS
                                                                          1996  
                                                                   ------------ 
Current assets:
   Cash and cash equivalents                                       $     66,647
   Accounts receivable                                                  236,032
   Inventories (Notes 3 and 4)                                          104,866
   Prepaid expenses                                                      46,574
                                                                   ------------

     Total current assets                                               454,119

Furniture and equipment, less accumulated depreciation
   ($232,136, 1996; $216,366, 1995)                                      31,924
Patent costs, less accumulated amortization ($22,064,
   1996; $18,824 1995)                                                  138,575

Other assets                                                              6,250
                                                                   ------------

Total assets                                                       $    630,868
                                                                   ============

                      LIABILITIES AND SHAREHOLDERS' EQUITY
                                                                         1996 
                                                                   ------------
 Current liabilities:
   Current portion of (Note 4):
      Liabilities not subject to compromise                        $     26,808
      Liabilities subject to compromise                                  84,983
   Accounts payable and accrued expenses                                108,091
                                                                   ------------

      Total current liabilities                                         219,882
                                                                   ------------
   Liabilities not subject to compromise,
      non-current (Note 4)                                               32,053
                                                                   ------------
   Liabilities subject to compromise,
      non-current (Note 4)                                               92,298
                                                                   ------------
   Commitments and Contingency (Notes 5 and 8)

   Stockholders' equity (deficit) (Note 5):
      Preferred stock, par value $.001,
        2,000 shares authorized                                            --   
      Common stock, par value $.001,

        50,000,000 shares authorized; 47,516,049
        issued and outstanding (one vote per
        share)                                                           47,516
      Class B common stock; par value $.001,
        5,000,000 shares authorized; 90,100
        shares issued and outstanding (five
        votes per share)                                                     90
      Additional paid-in capital                                     14,529,102
      Accumulated deficit                                           (14,290,073)
                                                                   ------------
        Total stockholders' equity (deficit)                            286,635
                                                                   ------------

      Total liabilities and stockholders' equity                   $    630,868
                                                                   ============

                       See notes to financial statements
                                      F- 2


<PAGE>
                         FOUNTAIN PHARMACEUTICALS, INC.
                            STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                            Years ended September 30,
                                                         ----------------------------- 
                                                               1996             1995
                                                         -------------    ------------
<S>                                                      <C>              <C>  
Revenue (Note 2)                                         $  1,676,819     $  1,158,698


Cost of sales                                                 854,210          483,640
                                                         -------------    ------------

Gross profit                                                  822,609          675,058
                                                         -------------    ------------

Operating expenses:
   Research and development                                    95,466           37,160
   General and administrative                                 360,242          285,103
   Selling                                                    312,358          247,082
   Depreciation and amortization                               41,563           58,833
                                                         ------------     ------------

                                                              809,629          628,178
                                                         -------------    ------------

Income from operations                                         12,980           46,880
                                                         -------------    ------------

Other income (expenses):
   Interest expense                                      (     20,680)               -
   Other income                                                 4,635                -
   Loss on disposal of equipment                         (      2,830)               -
   Reorganization expenses (Note 1)                      (     26,232)    (     60,441)
                                                         -------------    -------------
                                                         (     45,107)    (     60,441)
                                                         -------------    -------------

Loss before income taxes and extraordinary item          (     32,127)    (     13,561)

Income taxes (Note 7)                                               -                -
                                                         -------------    ------------

Loss before extraordinary item                           (     32,127)    (     13,561)

Extraordinary gain, net of $0 income taxes (Note 1)           334,761          244,636
                                                         -------------    ------------

Net income                                               $    302,634     $    231,075
                                                         =============    ============

Earnings per share:
   Primary and fully diluted earnings per common share:
     Income (loss) before extraordinary item             $          -     $          -
     Extraordinary gain                                           .01              .01
                                                         -------------    ------------
     Net income                                          $        .01     $        .01
                                                         =============    ============

Weighted average number of shares outstanding:
   Primary                                                 42,073,362       22,606,149
   Fully diluted                                           42,263,361       27,919,875
</TABLE>
                        See notes to financial statements
                                      F- 3


<PAGE>

                         FOUNTAIN PHARMACEUTICALS, INC.

              STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (NOTE 5)
                 FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
                                                                     Class B   
                                         Common Stock             Common Stock            Additional
                                ----------------------------  ----------------------       Paid-in      Accumulated
                                    Shares          Amount         Shares     Amount       Capital         Deficit          Total
                                ------------   -------------  -----------   --------   -------------   -------------  ------------
<S>                          <C>          <C>                 <C>      <C>        <C>             <C>               <C>       
Balances,  October 1, 1994        22,516,049   $      22,516       90,100   $     90   $  14,304,102   ($14,823,782)     ($497,074)

Net income for the year                    -               -            -          -               -        231,075        231,075
                                -------------  --------------  ----------   --------   -------------   ------------   ------------

Balances,  September 30, 1995     22,516,049          22,516       90,100         90      14,304,102    (14,592,707)      (265,999)

Stock issued pursuant to
   reorganization plan            25,000,000          25,000            -          -         225,000              -        250,000

Net income for the year                    -               -            -          -               -        302,634        302,634
                                ------------   -------------   ----------   --------   -------------   ------------   ------------

Balances,  September 30, 1996     47,516,049   $      47,516       90,100   $     90   $  14,529,102   ($14,290,073)  $    286,635
                                ============   =============   ==========   ========   =============   ============   ============

</TABLE>
























































                        See notes to financial statements
                                      F- 4



<PAGE>

                         FOUNTAIN PHARMACEUTICALS, INC.
                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                        Years Ended September 30,
                                                                     ------------------------------ 
                                                                           1996             1995
                                                                     -------------    -------------
<S>                                                                  <C>              <C>    
Cash flows from operating activities:
   Net income                                                        $    302,634     $    231,075
   Adjustments to reconcile net income to net cash provided
     by (used in) operating activities:
       Extraordinary gain                                            (    334,761)    (    244,636)
       Depreciation                                                        38,321           49,679
       Loss on disposal of assets                                           2,831                -
       Write-down of inventory                                             68,535                -
       Amortization                                                         3,241            3,350
       Write-off of abandoned patents                                           -            5,804
       Increase (decrease) in cash due to changes in assets and
         liabilities:
           Accounts receivable, trade                                (    168,793)          25,513
           Inventories                                                      9,545           40,174
           Prepaid expenses                                          (     23,397)    (     18,767)
           Other assets                                              (      2,285)          15,561
           Accounts payable and accrued expenses                            7,585     (      9,989)
                                                                     -------------    -------------
   Net cash provided by (used in) operating activities               (     96,544)          97,764
                                                                     -------------    ------------

Cash flows from investing activities:
   Deferred patent costs incurred                                    (     55,717)    (     16,740)
   Acquisition of furniture and equipment                            (      7,671)    (      4,579)
                                                                     -------------    -------------

Net cash used in investing activities                                (     63,388)    (     21,319)
                                                                     -------------    -------------

Cash flows from financing activities:
   Proceeds from:
     Issuance of common stock                                             250,000                -
   Repayment of:
     Amounts not subject to compromise                               (     16,814)               -
     Amounts subject to compromise                                   (     88,852)               -
                                                                     -------------    ------------
Net cash provided by financing activities                                 144,334                -
                                                                     -------------    ------------
Increase (decrease) in cash and cash equivalents                     (     15,598)          76,445
Cash and cash equivalents, at
   beginning of year                                                       82,245            5,800
                                                                     -------------    ------------

Cash and cash equivalents, at end
   of year                                                           $     66,647     $     82,245
                                                                     =============    ============
</TABLE>







    
                                   (Continued)
                                      F- 5



<PAGE>


                         FOUNTAIN PHARMACEUTICALS, INC.
                      STATEMENTS OF CASH FLOWS (CONTINUED)



                 Supplemental schedule of cash flow information
                 ----------------------------------------------

Interest  paid was  $20,680 and $0 for the years  ended  September  30, 1996 and
1995, respectively.

Operating   cash   receipts  and   payments   resulting   from  the   bankruptcy
reorganization  during the year ended  September  30, 1995 were $0 and  $46,048,
respectively.






































                       See notes to financial statements.
                                      F- 6


<PAGE>
                                     
                         FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995

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 an advanced
       compound delivery system (compound encapsulation) 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 Company's initial focus was on the development of its own proprietary
       health care products using SDMCs' however, in recognition of the material
       expense and delays associated with obtaining regulatory approvals for the
       commercialization  of regulated  products,  the Company  re-directed  the
       principal  focus  of  its  efforts  and  limited  resources  towards  the
       development  and marketing of less regulated  items including a full line
       of  skin-care   products  and  sun-screens  using  the  SDMC  technology.
       Additionally,  the Company  previously  devoted efforts towards  securing
       research and  development  contracts for  development  and enhancement of
       products using SDMC  technology on behalf of third party companies in the
       ethical  or  consumer  product  businesses,  with  the  ultimate  goal of
       participation in royalties or other forms of compensation.

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


















                                      F- 7


<PAGE>

                         FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995


1.     Nature of  business,  basis of  presentation  and summary of  significant
       accounting policies (continued):

       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  "Bankruptcy  Code") in the United States  Bankruptcy  Court for the
       Middle District of Florida, Tampa Division, (the "Bankruptcy Court").

       The Company's Chapter 11 filing resulted primarily from historical losses
       incurred  by the  Company  and  judgments  entered  against  the  Company
       associated  with  default  under  a  lease  agreement  and  default  of a
       settlement of a breach of employment contract claim.

       On  May  15,  1995,  the  Debtor's  Disclosure  Statement  and  Plan  for
       Reorganization  (collectively referred to as "The Reorganization Plan" or
       "the  Plan") were filed with the  Bankruptcy  court.  The  Reorganization
       Plan, as amended  August 14, 1995, was confirmed on November 20, 1995 and
       became  effective  on December  20, 1995 (the  "Effective  Date").  Since
       confirmation and  effectiveness of the  Reorganization  Plan, the Company
       has resumed  normal  operations.  On July 25, 1996,  the U.S.  Bankruptcy
       Court  issued a final  decree  and  therefore  the  court no  longer  has
       jurisdiction over matters in connection with the bankruptcy.

       The essential terms of the plan are as follows:

         Secured claims, principally amounts due pursuant to the Company's lease
         agreement for which said amounts were secured by a security interest in
         inventory  and  equipment,  will be paid in full with interest at 9 1/2
         percent over a thirty-three month term.

         Priority  wage  claims  were  paid  in  quarterly  installments  over a
         six-month period, without interest.

         Unsecured  claims will be paid at 50 percent of the allowed  amounts of
         such claim, without interest, in eleven quarterly installments.











                                      F- 8


<PAGE>


                         FOUNTAIN PHARMACEUTICALS, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                 FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995


1.     Nature of  business,  basis of  presentation  and summary of  significant
       accounting policies (continued):

       Chapter 11 Reorganization:

         Shareholders have retained their interest,  without alteration,  except
         as follows:  Equity  security  holders will receive no  distribution or
         dividend until and unless all prior claims are paid in full as provided
         above.  Pursuant to the Plan, the Company issued  25,000,000  shares of
         common  stock for $.01 per  share,  the rate at which the  shares  were
         trading as of the date the amended  plan was filed with the  Bankruptcy
         Court,  for a total of  $250,000.  These  shares have been issued to an
         individual  who  is  the  President  and  majority  shareholder  of the
         Company.

         At the date of 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).  Liabilities were recorded in the
         accompanying  1995  balance  sheet at their  estimated  allowed  amount
         (allowed by the Bankruptcy Court). The difference between those amounts
         and the amounts  previously  recorded were  accounted for as a $244,636
         extraordinary gain in the 1995 statement of operations.

         At the  date of the  Plan's  effectiveness  (December  20,  1995),  the
         difference  between  the net  present  value of the  settled  amount of
         liabilities and the estimated  allowed  amounts  (recorded at September
         30, 1995) have been  recorded as a $334,761  extraordinary  gain in the
         1996  statement  of  operations.   All   prepetition   liabilities  are
         classified  in the  accompanying  September  30, 1996 and 1995  balance
         sheets  (current or  long-term)  based upon the terms of the  confirmed
         Reorganization  Plan. Other reorganization costs of $26,232 and $60,441
         (primarily  legal  fees) are also  separately  reported in the 1996 and
         1995 statement of operations respectively.

         A final  decree  was  issued  July 25,  1996 by the  bankruptcy  court,
         discharging the Company from Chapter 11 reorganization.










                                      F- 9


<PAGE>


                         FOUNTAIN PHARMACEUTICALS, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                 FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995


1.     Nature of  business,  basis of  presentation  and summary of  significant
       accounting policies (continued):

       Liquidity and management's plans regarding operations:

       In recognition of its limited capital  resources,  the Company's  current
       business  strategy  is to  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.
       Management  intends to focus in the near term primarily  upon  increasing
       sales of existing  non-regulated  products  consisting  of sunscreen  and
       moisturizing products through its licensing arrangements.

       Currently, the Company principally licenses and supplies moisturizers and
       sunscreen products through its newly expanded licensing arrangements with
       pharmaceutical  companies  and expects to continue to do so in 1997.  The
       Company  has  three  principal  licensing  arrangements  with  two  major
       European  licensees,  which cover  markets in Norway,  Denmark,  Belgium,
       Holland,  Luxembourg,  Switzerland,  Germany  and Eastern  Europe.  While
       securing  additional  license  arrangements may not result in significant
       revenues in the near term,  management  believes that its current efforts
       to secure an arrangement with a major  pharmaceutical  company with broad
       geographic markets offers the potential for sales growth.  However, there
       can be no assurances to that effect.

       Management  anticipates  that  operating  expenses are likely to increase
       modestly  during the year ending  September 30, 1997 to reflect the costs
       of  additional   personnel,   as  well  as  the  addition  of  laboratory
       facilities.  Management believes,  however, that the Company will realize
       revenues during Fiscal 1997 sufficient to satisfy these expenses, as well
       as other anticipated obligations under the Plan.

       Inventories:

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













                                     F- 10


<PAGE>


                         FOUNTAIN PHARMACEUTICALS, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                 FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995


1.     Nature of  business,  basis of  presentation  and summary of  significant
       accounting policies (continued):

       Furniture and equipment:

       Furniture and equipment are stated at cost.  Depreciation  is provided on
       the straight-line method over the estimated useful lives of the assets.

       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  $44,000  and
       $27,000 during 1996 and 1995, respectively.

       Research and development:

       Expenses for the design and  development  of the Company's  products were
       $95,466 and $37,160, during 1996 and 1995, 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.

       Use of estimates:

       Preparation of these  financial  statements in conformity  with generally
       accepted   accounting   principles  requires  the  use  of  estimates  by
       management, principally in the area of inventory obsolescence. Management
       does not believe that any change in this estimate within the ensuing year
       will have a material effect on the financial statements.












                                     F- 11

<PAGE>


                         FOUNTAIN PHARMACEUTICALS, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                 FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995


1.     Nature of  business,  basis of  presentation  and summary of  significant
       accounting policies (continued):

       Net income per share:

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

       Fully diluted  earnings per share is considered to be the same as primary
       earnings  per share  since the  effect of  certain  potentially  dilutive
       securities is immaterial.

2.     Major customer information and concentrations of credit risk:

       During the years ended  September  30, 1996 and 1995 the Company  derived
       revenues from customers which  individually  exceeded 10 percent of total
       revenues. They are approximately as follows:

                                                        1996         1995
                                                    ----------   ----------

        Customer 1 (European)                       $  857,000   $  659,000
        Customer 2 (European)                       $  352,000   $  200,000

       Total export sales were approximately as follows:
                                                        1996         1995
                                                    ----------   ----------

          Europe                                    $1,258,000   $  912,000
          Asia                                          33,000       95,000
                                                    ----------   ----------
                                                    $1,291,000   $1,007,000
                                                    ==========   ==========














                                     F- 12


<PAGE>


                         FOUNTAIN PHARMACEUTICALS, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                 FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995

2.     Major customer information and concentrations of credit risk
       (continued):

       Financial instruments that potentially subject the Company to significant
       concentrations  of credit  risk  consist  principally  of trade  accounts
       receivable.  The Company sells its products  principally  to companies in
       the medical field located  primarily in the United  States,  Europe,  and
       Asia.  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.

3.     Inventories:

       Inventories consist of the following:
                                                                  1996       
                                                             -------------     
         Raw materials                                       $     104,678     
         Finished goods                                             64,831     
         Less allowance for obsolescence                     (      64,643)    
                                                             -------------     
                                                             $     104,866     
                                                             =============     

       Inventories   were  written  down  $69,000  and  $0  in  1996  and  1995,
       respectively.

















                                     F- 13


<PAGE>


                         FOUNTAIN PHARMACEUTICALS, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                 FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995


4.   Prepetition liabilities:

       Liabilities not subject to compromise at September 30, 1996 consists of a
       secured claim due to the former landlord. In November 1993, a judgment in
       the amount of $100,567 was entered  against the Company.  Pursuant to the
       Bankruptcy  order,  the claim,  including  interest at 9.45  percent,  is
       payable in monthly installments over 33 months from the effective date of
       the plan.

       Liabilities subject to compromise consist of:
                                                                        1996    
                                                                     ---------  
        Class 2, priority wage and employee benefits (b)             $    --    
        Class 5, secured tax claims (b)                                   --    
        Class 6, general unsecured (a)                                 177,281  
        Class 7, unsecured claims less than $100 (b)                     --     
                                                                     ---------  
                                                                       177,281  
        Less current portion                                           (84,983) 
                                                                     ---------  
                                                                     $  92,298  
                                                                     =========  

       (a)  These  claims  will be paid at 50  percent  of the  allowed  amount,
       without  interest.  As a result of  confirmation  of the plan the Company
       recognized  additional debt  forgiveness  income in 1996 of approximately
       $335,000.

       (b)  During the  petition  period,  certain  compromises  with  regard to
       prepetition  liabilities were reached.  As such,  during 1995 the Company
       recognized forgiveness of debt aggregating  approximately $245,000, which
       represented the difference  between the previously  recorded  amounts and
       the amounts allowed by the Court.

       Annual maturities of prepetition liabilities are as follows:

         Year Ending September 30,
         -------------------------
                         1997                $     111,791
                         1998                      124,351
                                             -------------
                                             $     236,142
                                             =============






                                     F- 14


<PAGE>

                                     FOUNTAIN PHARMACEUTICALS, INC.

                               NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                           FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>

5. Stockholders' equity:

    Common stock warrants:

    Common stock warrants issued, redeemed and outstanding during the years ended September 30, 1996 and 1995 are as follows:

                                                                   Class                                   
                                              ---------------------------------------------    Note      Management
                                                   A          B          C           D        Warrants     Warrants         Other
                                              ----------  ---------  ----------  ----------  ---------  -----------    ----------
     <S>                                      <C>         <C>         <C>        <C>         <C>        <C>            <C>
     Common stock warrants outstanding
      at October 1, 1994 consist of the
      following:
        Issued in connection with investor
          notes in an offering exempt from
          registration through March 1990,
          exercise price of $.75 expired
          August 1994 through March 1995.                                                     316,912

        Issued in connection with a May 1990
          initial public offering:
            Class A exercise price $1,
              expired May 1995                4,027,056
            Class B, exercise price $2,
              expired May 1995                           6,315,195

        Issued to officers and directors,
          exercise prices ranging from $.75
          to $1.00, expiring in 1995                                                                         56,000

        Issued to certain employees and
          consultants, exercise prices
          ranging from $.75 to $.81, expiring
          in 1995.                                                                                            2,500       200,000
                                              ---------   ---------  ----------  ----------   --------   ----------    ----------

              Subtotal                        4,027,056   6,315,195      -            -        316,912       58,500       200,000
</TABLE>













































                                                                F- 15


<PAGE>

                                          FOUNTAIN PHARMACEUTICALS, INC.

                                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                              FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995

<TABLE>
<CAPTION>

5. Stockholders' equity (continued):

    Common stock warrants (continued):
                                                                   Class                                   
                                              ---------------------------------------------    Note      Management
                                                   A          B          C           D        Warrants     Warrants         Other
                                              ----------  ---------  ----------  ----------  ---------  -----------    ----------
     <S>                                      <C>         <C>         <C>        <C>         <C>        <C>            <C>
     Balance forward                          4,027,056   6,315,195       -            -       316,912       58,500       200,000

     Issued, January 1991, exercise price of
       $.82, expiring 1996                                                                                1,300,000

     Issued in connection with November
       1991 private offering, expiring
       October 1994:
         Class C, exercise price of $1.00                            5,450,000
         Class D, exercise price of $2.00                                         5,450,000

     Issued to certain officers, directors
       and stockholders/consultants,
       exercise price ranging from $.78
       to $3.62, expiring 1995 through 1999                                                               2,800,000
     Issued to certain employees, exercise
       price, $.78 vest over 3 years,
       expiring 1998 through 1999.                                                                          617,000
                                              ----------  ---------  ----------  ----------  ---------  -----------    ----------
 
     Warrants outstanding, October 1, 1994     4,027,056  6,315,195   5,450,000   5,450,000    316,912    4,775,167       200,000

     Less warrants expired in 1995            (4,027,056)(6,315,195) (5,450,000) (5,450,000)  (316,912)    (208,500)     (200,000)
                                              ----------  ---------  ----------  ----------  ---------  -----------    ---------- 

     Warrants outstanding September 30, 1995        -          -           -           -          -       4,566,667          -
     Less warrants expired in 1996                                                                       (1,300,000)
     Less warrants cancelled in 1996                                                                     (1,700,000)
     Issued to certain directors, exercise
       price of $.04 vest over 3 years, expiring
       2001.                                                                                              1,300,000
     Issued to certain employees, exercise
       price of $.04 vest over 3 years, expiring
       2001.                                                                                              1,750,000
                                              ----------  ---------  ----------  ----------  ---------  -----------    ----------
     Warrants outstanding
       September 30, 1996                           -          -            -          -          -       4,616,667          -
                                              ==========  =========  ==========  ==========  =========  ===========    ==========
</TABLE>
































                                                                      F- 16


<PAGE>


                         FOUNTAIN PHARMACEUTICALS, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                 FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995

5.   Stockholders' equity (continued):

       Common stock warrants (continued):

       Common stock  warrants  which were issued to current or former  officers,
       directors,  shareholders  and  employees  ("Management  Warrants")  which
       remain outstanding at September 30, 1996 consist of the following:

                                      Exercise      Expiration        Number of
           Issue Date                  Price            Date           Warrants
         --------------            ------------     -------------     ---------

         December 1991             $      2.50      December 1996     1,000,000

         March 1992                $      1.12      March 1997          200,000

         March 1993                $       .78      March 1998          366,667

         December 1995             $       .04      December 2000     3,050,000
                                                                    -----------
                                                                      4,616,667
                                                                    ===========

       During December 1995, the Company issued 3,050,000 warrants to certain of
       its existing  officers,  directors and employees  which vest over a three
       year period  commencing in July 1996.  These warrants are  exercisable at
       $.04  per  share.  All of  these  warrants,  once  vested,  would  not be
       exercisable  since the Company's  current capital  structure  (50,000,000
       authorized shares) would not be sufficient to permit the issuance of such
       number of shares.  This would  conceivably  provide  the  holders of such
       warrants  with a cause of action  against  the  Company for breach of its
       contractual  obligations under the warrants.  Management does not believe
       this is  likely  to  occur  since  adjustment  of the  Company's  capital
       structure would likely occur prior to any exercise of such warrants.















                                     F- 17


<PAGE>


                         FOUNTAIN PHARMACEUTICALS, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                 FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995


5.   Stockholders' equity (continued):

       Stock option and rights plan:

       The  Company  has  adopted a stock  option and rights  plan (the  "Plan")
       covering 500,000 shares of the Company's common stock,  pursuant to which
       officers,  directors,  key employees and  consultants  of the Company are
       eligible to receive qualified  incentive,  as well as non-qualified stock
       options  and  stock  appreciation's  rights  ("SAR's").  Incentive  stock
       options  granted under the Plan are  exercisable  up to 10 years from the
       date of grant at an exercise price not less than the fair market value of
       the common stock on the date of the grant.

       Notwithstanding,  the term of an incentive stock option granted under the
       Plan to a  shareholder  owning more than 10 percent of the voting  rights
       may not exceed five years,  and the exercise price of an incentive  stock
       option  granted to such  shareholder  may not be less than 110 percent of
       the fair  market  value  of the  common  stock on the date of the  grant.
       Certain stock options and SARs,  which give holders  participation in the
       appreciation  of the  Company  common  stock,  may be  granted  on  terms
       determined  by the Board of  Directors or a committee  designated  by the
       Board.

       At September 30, 1996, no SARs had been granted.

6.   Employee benefit plan:

       During  1993,  the  Company  implemented  a 401(k)  profit  sharing  plan
       covering  substantially  all  employees.  The plan does not  provide  for
       employer contributions.

7.   Income taxes:

       Deferred tax assets consist of the following:

                                                                     1996      
                                                                -------------  
                                                       
         Net operating loss carryover                           $    305,000   
         Tax credit carryforwards                                    105,000   
         Start-up costs deferred                                      56,000   
         Obsolete inventory allowance                                 24,000   
         Other                                                        30,000   
         Valuation allowance                                    (    520,000)  
                                                                -------------  
                                                                $          -   
                                                                =============  
                                           

                                     F- 18


<PAGE>

                         FOUNTAIN PHARMACEUTICALS, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                 FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995

7.   Income taxes (continued):

       Income tax (expense) benefit consists of the following:

                                                           1996         1995
                                                       ------------  ---------

         Current:
           Federal                                     $         -   $       -
                                                       ------------  ---------

         Deferred:
           Deferred                                    (   387,000)  ( 333,000)
           Benefit of net operating loss carryover     (   168,000)    150,000
           Loss of net operating loss and tax credit
              carryovers resulting from change in
              ownership (a)                            ( 4,277,000)          -
           Decrease in valuation allowance               4,832,000     183,000
                                                       ------------  ---------
                                                                 -           -
                                                       ------------   --------
                                                       $         -   $       -
                                                       ============  =========


       Income tax expense associated with the extraordinary item, forgiveness of
       debt,  before and after the benefit of net operating  loss  carryover was
       $125,000 and $0, respectively in 1996 and $85,000 and $0, respectively in
       1995.

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

                                                 Percentage of income before
                                                         income taxes
                                             ----------------------------------
                                                 1996                   1995
                                              ---------              --------
         Statutory tax rate                        34%                    34%

         Change in deferred tax asset
           valuation allowance                (    34%)              (    34%)
                                              ---------              ---------
         Effective tax rate in
           accompanying statement of
           operations                               0%                     0%
                                              =========              ========



                                     F- 19


<PAGE>

                         FOUNTAIN PHARMACEUTICALS, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                 FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995

7.   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.   The
           Reorganization,  other  issuance's  of common stock in 1995,  and the
           issuance  of  common  stock  warrants  in 1996 and 1995,  created  an
           ownership  change in the  Company's  equity  securities  in excess of
           fifty  percent;  therefore,  the  availability  of the pre-change net
           operating loss carryover  ($12,700,000)  and research and development
           credit ($250,000) will be substantially  limited in the future and as
           such the  Company has  accounted  for the loss of such  carryover  in
           1996. The  post-change  net operating loss carryover of $515,000 will
           expire in 2011.



























                                     F- 20


<PAGE>


                         FOUNTAIN PHARMACEUTICALS, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                 FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995


8.   Facilities rental:

       The Company leases its office and warehouse facilities under a cancelable
       month-to-month  operating lease.  Rent expense under all operating leases
       were  approximately  $52,000 and $26,000 during the years ended September
       30, 1996 and 1995, respectively.  In March 1996, the Company entered into
       a two-year, non-cancelable rental agreement for the lease of 6,000 square
       feet of office,  laboratory and warehouse space at $4,500 per month.  The
       agreement provides for an option for one additional year.

       Obligations under the non-cancellable operating lease are as follows:

            Year ending September 30,
            -------------------------

                    1997                           $     57,780
                    1998                                 28,890
                                                   ------------
                                                   $     86,670
                                                   ============

9.   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, accounts payable and accrued expenses approximates fair value
       because of the short maturity of those investments. The carrying value of
       liabilities  not subject to  compromise  approximate  fair value based on
       their stated rate of interest.  The carrying value of liabilities subject
       to compromise were discounted  therefore the recorded amounts approximate
       fair value.

10.    Subsequent event:

       On  October  17,  1996 the  Company  arranged  a bank line of credit  for
       $100,000 to be used to fund  working  capital  needs.  Future  borrowings
       against the line of credit will bear interest at Prime plus .50% and will
       be secured by the Company's assets and guaranteed by a related party. The
       Loan Agreement  contains certain  provisions and covenants  which,  among
       other  things,  limit  future  indebtedness  and  require  the Company to
       maintain specified levels of net worth and cash flow.









                                     F- 21



<PAGE>

                                  EXHIBIT INDEX

Exhibit No.       Description                                             Page
-----------       -----------                                             ----

10.3              Loan Agreement by and between the Registrant
                  and First Union National Bank of Florida
                  dated October 17, 1996


27                Financial Data Schedule (Electronic filing only)