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, 1997
                           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. [ ]




<PAGE>



      Registrant's revenues for the year ended September 30, 1997:
                                        $1,317,994

      The  aggregate  market  value  of  the  Company's  Common  Stock  held  by
non-affiliates  of the  Registrant  as of  December  5,  1997 was  approximately
$2,680,774,  based upon the closing sales price of the Company's Common Stock as
of December 5, 1997 (see Footnote (1) below).


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


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

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

                    APPLICABLE ONLY TO CORPORATE REGISTRANTS:

      The  number  of shares  outstanding  of the  Registrant's  class of Common
Stock, par value $.001 per share, as of December 5, 1997, 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 5, 1997, was 90,100.


                      DOCUMENTS INCORPORATED BY REFERENCE:
                                      None
                                      ----

                 Transitional Small Business Disclosure Format:

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






______________________

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



                                        2

<PAGE>



         PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
         --------------------------------------------------------------


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




























                                        3


<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.

      In July 1997,  the Company  completed  a private  placement  of  2,000,000
newly-designated and issued shares of Series A Convertible  Preferred Stock (the
"Preferred  Stock") to Fountain  Holdings,  LLC ("Holdings"),  a Wyoming limited
liability  company,  controlled by Joseph S. Schuchert,  Jr. As a result of this
private  placement (the "Private  Placement"),  the Company obtained  additional
working  capital of $2.5  million,  which it  intends to utilize to enhance  the
expansion of the Company's  sales and marketing  program,  as well as to further
the  Company's  research and  development  efforts.  See "ITEM 6 -  MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - Liquidity and Capital Resources."



                                        4

<PAGE>



      THE TECHNOLOGY AND ITS APPLICATIONS

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

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

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

      The Company has developed a number of proprietary  products  utilizing its
SDMC technologies.  These include non-regulated  consumer goods and dermatologic
products consisting of sunscreens, lotions and moisturizers. These products have
been marketed by the Company under the 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 some
will remain a lower corporate priority.  The Company intends to proceed with the
development of certain other regulated products utilizing funds obtained through
the Private Placement in July 1997. See "Background".  The Company will continue
to pursue  collaborative  efforts  with other  companies  to develop  additional
regulated products.



                                        5


<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,  and at a time  when  the  Company's
financial  resources were very limited,  the Company  re-directed  the principal
focus of its efforts and resources towards the development and marketing of less
regulated  items  including  a full line of skin care  products  and  sunscreens
utilizing the SDMC technology.  With the infusion of additional  capital in July
1997  (see  "Background"),  the  Company  plans to expand  its  effort to market
unregulated  products  and to readdress  the  development  of certain  regulated
products.  Additionally,  the Company will continue to pursue  arrangements with
third  parties  whereby  the  Company  can expand its  markets  and the costs of
marketing  and  distribution  of its  products  are not  borne  by the  Company.
Generally, in its licensing arrangements, the Company provides the raw materials
or finished product for  distribution and sale by the third party licensee.  The
licensee remains responsible for all marketing and sales efforts.

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

      Currently,  the Company principally licenses and supplies moisturizers and
sunscreen  products  through  its  licensing  arrangements  with  pharmaceutical
companies.  See "Sales and Marketing." 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 were made  available in connection  with
the implementation of the Plan, and for which additional funds are now available
as a result of the Private Placement.  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 marketing opportunities for additional consumer
products. However, there can be no assurances to that effect.

      SALES AND MARKETING

      From  inception  through 1994,  the Company had  undertaken  its marketing
activities  principally  through the efforts of management and independent sales
and  marketing  consultants  who  initiated  sales  efforts with certain  retail
department stores, hospitals and health care institutions, retail pharmaceutical
chains and scientific organizations. However, over the past 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
have offered  significant  marketing  opportunities  without  imposing  material
operating expenses upon the Company, and that these types of arrangements should
be expanded.  Additionally,  the Company now intends to participate  directly in
markets where such efforts are deemed appropriate.



                                        6


<PAGE>



      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 82% of the sales of the  Company's  products.  The  Nycomed
Pharma  license  covers  markets  in  Norway,  Denmark,   Belgium,  Holland  and
Luxembourg.  Spirig AG, the  Company's  licensee  for  Switzerland  and Germany,
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 on
November 25, 1997, the Company filed a complaint  against Dermik.  See "ITEM 3 -
LEGAL   PROCEEDINGS".   The  Company  is  actively  pursuing  similar  marketing
arrangements  with  other  licensees,   including  several  who  had  previously
expressed  interest in the Company's  products.  The Company plans to focus upon
expanding  into  markets,  which may  include,  but are not limited to, Asia and
South America.

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  now be,  with the
availability of new funds via the private  placement  noted above,  reconsidered
for further developmental efforts by the Company, or with the collaboration of a
corporate sponsor or joint venture participant.

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

      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.



                                        7


<PAGE>



PATENTS AND PROPRIETARY TECHNOLOGY

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

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

      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



                                        8

<PAGE>


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

COMPETITION

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

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

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

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





                                        9


<PAGE>



HUMAN RESOURCES

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

      As of December 5, 1997, the Company  employed seven (7) 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 $4,900 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
      -----------------

      On November 25, 1997, the Company filed a complaint  (Docket No.: November
Term  1997,  No.  3611) in the Court of Common  Pleas for  Philadelphia  County,
against Dermik Laboratories, Inc., alleging a breach and improper termination by
Dermik of the parties' contract to distribute Daylong(R) sunscreen products.

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, 1996 and 1997, and for the first quarter of its fiscal year
ended  September 30, 1998. No trading  market exists for shares of the Company's
Class B Common Stock.

      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
      Second Quarter                    .17               .063
      Third Quarter                     .25               .06
      Fourth Quarter                    .40               .15
                                
      Fiscal 1998                       HIGH              LOW
      -----------                       ----              ---
      First Quarter                      .19              .12
      (October 1-December 5, 1997)

      The closing  price of the  Company's  Common Stock on December 5, 1997 was
$.12.

      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.    Sales of Securities
            -------------------

            On July 17,  1997,  the  Company  completed  the  sale of  2,000,000
newly-designated and issued shares of Series A Convertible  Preferred Stock in a
private placement transaction.  The Preferred Stock was sold for $2.5 million in
a private  transaction to Fountain  Holdings,  LLC, a Wyoming limited  liability
company,  controlled  by Joseph  S.  Schuchert,  Jr.,  who  joined  the Board of
Directors  of the  Company in  connection  with such  transaction.  See "ITEM 11
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT- Voting Rights of
Preferred Stock."

      C.    Reverse Stock Split
            -------------------

            In order to facilitate  the  conversion  of the Company's  Preferred
Stock and to enhance the market  price and  liquidity  of the  Company's  Common
Stock,  the  Company  has  undertaken  a one for  twenty  reverse  stock  split,
specifically,  a conversion of every twenty issued and  outstanding  shares into
one share of the same class of Common Stock (the "Reverse Stock  Split").  As of
October 9, 1997,  the Board of  Directors  of the  Company  adopted  resolutions
authorizing  the Reverse Stock Split. As of November 12, 1997, the Reverse Stock
Split was also duly  authorized  and  approved by the holders of the majority of
the Common Stock and by all of the holders of the Company's  Preferred  Stock by
written  consent in lieu of a special  meeting.  As of November  19,  1997,  the
Company  furnished an  Information  Statement to the holders of shares of Common
Stock and Class B Common Stock  providing  notice of the Reverse  Stock Split to
such  stockholders.  The Company  anticipates  that the Reverse Stock Split will
become  effective as of December 11, 1997,  upon the  amendment to the Company's
Restated  Certificate  of  Incorporation  which  provides for such Reverse Stock
Split.  However,  there  can be no  assurances  to that  effect.  See  "ITEM 6 -
MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OR PLAN OF  OPERATION  -  Liquidity  and
Capital Resources."

      D.    Holders
            -------

            Records of the Company's  stock  transfer  agent indicate that as of
December 5, 1997, the Company had 436 record holders of its Class B Common Stock
and Common Stock.  Since a  significant  number of the shares of the Company are
held by financial  institutions  in "street name," it is likely that the Company
has significantly  more stockholders than indicated above. The Company estimates
that it has  approximately  2,776 record holders,  including such shares held in
"street name."

      E.    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



                                       12


<PAGE>


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.

ITEM 6
------

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

Background
----------

      The Company was organized during 1989 to develop and commercialize certain
proprietary  compound  encapsulation  technologies.  Following  several years of
continued  developmental  efforts,  the  Company  was able to secure  patents on
several aspects of its  technologies  in the United States and Europe,  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.

      In July 1997,  the Company  completed  a private  placement  of  2,000,000
newly-designated  and issued shares of Series A Convertible  Preferred  Stock to
Fountain  Holdings,  LLC, a Wyoming  limited  liability  company,  controlled by
Joseph S.  Schuchert,  Jr. As a result of the  Private  Placement,  the  Company
obtained additional working capital of $2.5 million, which it intends to utilize
to enhance the expansion of the Company's sales and marketing  program,  as well
as to further the Company's research and development efforts.



                                           13

<PAGE>



      RESULTS OF OPERATIONS

      During the fiscal year ended  September 30, 1997,  the Company  realized a
net loss of  $296,602  on  revenues  of  $1,317,994,  compared  to net income of
$302,634 on revenues of $1,676,819 for the fiscal year ended September 30, 1996.
This  decrease in net income was  attributable  primarily to decreased  revenues
during fiscal 1997 and an extraordinary  gain of $334,761 recorded during fiscal
1996 as a result of debt reduction pursuant to the Plan.

      Revenues for fiscal 1997 of $1,317,994  represented a decrease of $358,825
or 21.4% from revenues of $1,676,819 during fiscal 1996. Such decreased revenues
were a  result,  primarily,  of  discontinued  product  lines and  services,  in
addition  to the  negative  impact of adverse  climatic  conditions  experienced
during the fiscal year 1997 in Europe,  which due to the seasonal  nature of its
principal product, a sunscreen,  resulted in lower sales volume. Management also
anticipates  that this  seasonality  of  revenue  will be reduced in time as the
Company's product line and geographic expansion continues.

      During the fiscal year ended  September  30,  1997,  the Company  incurred
operating  expenses of $912,326,  a 12.7%  increase over  operating  expenses of
$809,629 for the prior year ending September 30, 1996. This increase in expenses
was primarily due to research and development  expenses relating to new projects
and additional personnel.

      LIQUIDITY AND CAPITAL RESOURCES

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

      During the period from the  quarter  ended June 30,  1994  throughout  the
bankruptcy  proceedings,  the Company's operations were funded primarily through
sales  of  products  and from  royalties.  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 1995.

      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
$124,351.  Payments  pursuant to the Plan were current as of September 30, 1997,
and management expects all such required payments to be made on a timely basis.

      As of September 30, 1997,  the Company had working  capital of $2,322,748,
an increase of  $2,088,511  from the level of working  capital of $234,237 as of
September 30, 1996. Such increase in working  capital is primarily  attributable



                                       14


<PAGE>


to the sale of $2.5 million of Preferred Stock in July 1997. During Fiscal 1997,
the  Company's  other  principal  sources of working  capital  were derived from
revenues,  a $100,000 line of credit with First Union  National Bank of Florida,
and short term advances of $80,000 from the Company's Chief  Executive  Officer.
As of December 5, 1997, the Company had no outstanding balance under its line of
credit.

      During July 1997, the Company  completed a Private  Placement of 2,000,000
shares of Series A Convertible  Preferred Stock to Fountain Holdings,  LLC. As a
result of the Private Placement, the Company obtained additional working capital
of $2.5  million,  which  management  believes will enhance the expansion of the
Company's  sales and  marketing  program,  as well as to further  the  Company's
research and  development  efforts.  The Preferred  Stock is  convertible at the
election of the holder,  into approximately 25.3 million shares of the Company's
Common  Stock,  which  currently  represents   approximately  one-third  of  the
Company's outstanding stock on a post-conversion basis. Prior to conversion, the
holders  of the  Preferred  Stock  have the  right to  elect a  majority  of the
Company's  Board of Directors and to vote as a class on all matters that require
a vote of stockholders.  See "ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT - Voting Rights of Preferred Stock."

      Historically,  the  Company's  unexercised  warrants  had been a potential
source of capital for the Company.  However, all previously existing Class A, B,
C and D warrants have expired.  The 3,450,001  common stock  warrants  presently
vested and outstanding bear exercise prices ranging from $.04 to $.78. Given the
market price of the Company's  Common  Stock,  it is feasible that some of these
warrants could be exercised, but there can be no assurance in this matter. Based
upon the Company's current capital  structure,  an exercise of all of the issued
and  outstanding  warrants,  notwithstanding  market  conditions,  would  not be
possible  since the number of warrants  exceeds the number of shares that remain
authorized  and  available  for issuance.  However,  in order to facilitate  the
conversion of the Company's  Preferred Stock and to enhance the market price and
liquidity of the Company's  Common Stock,  the Company has  undertaken a one for
twenty  reverse stock split,  specifically,  a conversion of every twenty issued
and  outstanding  shares into one share of the same class of Common Stock. As of
October 9, 1997,  the Board of  Directors  of the  Company  adopted  resolutions
authorizing  the Reverse Stock Split. As of November 12, 1997, the Reverse Stock
Split was also duly  authorized  and  approved by the holders of the majority of
the Common Stock and by all of the holders of the Company's  Preferred  Stock by
written  consent in lieu of a special  meeting.  As of November  19,  1997,  the
Company  furnished an  Information  Statement to the holders of shares of Common
Stock and Class B Common Stock  providing  notice of the Reverse  Stock Split to
such  stockholders.  The Company  anticipates  that the Reverse Stock Split will
become  effective as of December 11, 1997,  upon the  amendment to the Company's
Restated  Certificate  of  Incorporation  which  provides for such Reverse Stock
Split. However, there can be no assurances to that effect.

      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-17.

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.  Ms. Carol Rae will
commence  her  service  as a  director  as of  December  11,  1997.  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                 57          President, Chief Executive Officer,
                                          Chief Financial Officer and Chairman

James E. Fuchs                70          Vice Chairman, Secretary and Director

Joseph S. Schuchert, Jr.      67          Director

Dr. Christopher Brown         44          Director

Carol Rae                     51          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.



                                           17

<PAGE>



JAMES E. FUCHS

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

JOSEPH S. SCHUCHERT, JR.

      Mr.  Schuchert has been a member of the Company's Board of Directors since
July 1997. He is Chairman,  CEO and co-founder of Kelso & Company,  Inc., one of
the oldest and most established  firms  specializing in private equity investing
and in leveraged acquisitions both as a principal and as financial advisor since
1971. Kelso makes equity investments on behalf of investment  partnerships which
it manages;  and,  since 1980 has acquired  more than 51 companies for more than
$10  billion  of  aggregate  acquisition  price.  Prior to  joining  Kelso,  Mr.
Schuchert   specialized  in  corporate,   securities  and  tax  law  before  his
involvement in ESOP corporate finance techniques.  Mr. Schuchert received a B.S.
in electrical engineering from Carnegie Mellon University and an L.L.B. from the
University  of  Pittsburgh  Law  School.  Mr.  Schuchert  serves as a Trustee at
Carnegie Mellon University and is a member of the Board of Directors of American
Standard,  Inc.,  Earle M.  Jorgensen  Company and the United States  Chamber of
Commerce.  Mr.  Schuchert  is active in and serves as a  director  of Four Winds
Ministries,  Inc., a ministry which supports and directs homes for unwed mothers
and abused women,  and a national  Christian  radio  broadcast known as "Come Up
Higher."

DR. CHRISTOPHER BROWN

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



                                       18

<PAGE>


involved in basic and clinical  research in HIV immunology as well as neutrophil
biology.  For three of the ten years,  he directed the Diagnostic and Immunology
Research  Laboratory  in  Kinshasa,  Zaire.  This  laboratory  was  part  of  an
international  HIV research  project  jointly  funded and directed by NIH,  CDC,
Institute of Tropical Medicine, Tufts University, and the Armed Forces Institute
of Pathology.  His research has been published in peer-reviewed journals and his
work has been presented at a number of international meetings.

CAROL RAE

      Ms. Rae will  commence  her  service as a  director  of the  Company as of
December  11,  1997.  Ms.  Rae is  President  and  Chief  Executive  Officer  of
Integrated  Media and  Marketing,  LLC, a multi-media  production  and marketing
company based in Rapid City,  South Dakota.  Ms. Rae also serves as President of
MedVal  Technologies  International,  Inc., a manufacturer of orthopedic splints
headquartered  in Rapid  City,  South  Dakota.  Between  1989 and 1995,  she was
President and Chief  Executive  Officer of Magnum  Diamond  Corporation of Rapid
City, South Dakota, a manufacturer of ophthalmic surgical  instruments.  Ms. Rae
currently  serves as a Director  for  Homestake  Mining  Company,  a gold mining
company based in San Francisco, California with operations throughout the world.
Ms. Rae also serves as a Director of VanKoevering Company of Des Moines, Iowa, a
manufacturer of interactive  pianos. Ms. Rae has over twenty years experience in
the sales and marketing of emerging  medical and computer  technologies  and has
held a variety of executive positions with such companies.

      Board Committee
      ---------------

      The Company has an Audit  Committee  of the Board of  Directors  which was
created at a meeting of the Board of Directors on October 9, 1997. The Committee
consists of Mr. Fuchs,  Mr. Schuchert and, as of December 11, 1997, Ms. Rae. The
Audit  Committee  has held no meetings.  The Audit  Committee  is the  Company's
principal  liaison  with the  Company's  independent  auditors  and is primarily
responsible  for the review of  accounting  procedures  and methods  employed in
connection  with the Company's audit programs and related  management  policies.
The Board of Directors has no other committees.

      Directors' Compensation
      -----------------------

      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.

      Involvement in Certain Legal Proceedings
      ----------------------------------------

      None.



                                       19


<PAGE>



      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 1997, all Reporting  Persons timely complied
with all filing  requirements  applicable  to them,  except for certain  reports
which were subsequently filed with the Securities and Exchange Commission. These
reports include: (i) a Form 5 for each of Messrs. John Walsh and James Fuchs and
Dr. James Goddard;  (ii) Forms 3 and 5 for Mr. James Vatell;  and (iii) a Form 3
for each of Mr. Joseph Schuchert, Jr., and Dr. Christopher Brown.

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)                       1997         $118,269             -0-
Chairman, Chief Executive Officer      1996         $137,308             -0-
and President                          1995         $125,000             -0-
=====================================================================================

(1)   Pursuant to the  Company's  Plan of  Reorganization,  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, 1997, $15,210 of the $21,615 had been paid.

</TABLE>

















                                          20


<PAGE>



OPTION/SAR GRANTS TABLE

<TABLE>
<CAPTION>

                      Option/SAR Grants in the Last Fiscal Year
=========================================================================================
                                  Individual Grants
-----------------------------------------------------------------------------------------
                                                 % of Total
                                                 Options/SARs    Exercise
                                                 Granted to      or Base
                       Fiscal   Options/SARs     Employees in    Price       Expiration
Name                   Year     Granted (#)      Fiscal Year     ($/Sh)      Date
-----------------------------------------------------------------------------------------
<S>                    <C>            <C>              <C>           <C>         <C>
John C. Walsh          1997(1)        -0-              -0-           -0-         -0-
Chairman,
Chief Executive
Officer and President
=========================================================================================

(1)   No options were granted during Fiscal Year 1997.



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        1997(1)        -0-           -0-     (U)0/(E)-0-     (E)$0/(U)-0-
Chairman, Chief
Executive Officer,
and President
=========================================================================================

(1)   Mr. Walsh does not have any stock options.

</TABLE>








                                       21


<PAGE>



GRANT OF WARRANTS TO A DIRECTOR

      In December 1995, the Company granted warrants to purchase Common Stock to
Mr. Fuchs, as well as certain directors who have subsequently  resigned from the
Board of Directors.  Mr. Fuchs was granted  500,000  warrants,  vesting pro rata
over three years, at an exercise price of $.04 per share,  based upon the market
price of the Company's Common Stock (the "Warrants").  In exchange,  the Company
canceled 350,000 outstanding  warrants. In connection with the sale of Preferred
Stock on July 17, 1997, Mr. Fuchs' Warrants became fully vested.  See "ITEM 11 -
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."









































                                       22


<PAGE>



ITEM 11
-------

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

      The following table sets forth, as of December 5, 1997,  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.

<TABLE>
<CAPTION>

                                               Amount of                Percent of          Percent of
Name and Address                        Beneficial Ownership(3)    Beneficial Ownership   Voting Power(2)
----------------                        -----------------------    --------------------   ---------------
<S>                                          <C>                         <C>                  <C>  
John C. Walsh                                25,022,000                  52.6%                52.2%
7279 Bryan Dairy Road
Largo, FL  33777

James Fuchs                                     500,000(3)                1.0%                 1.0%
565 Park Avenue
New York, NY  10021

Joseph S. Schuchert, Jr./                    25,328,074(4)               34.7%                34.7%(5)
Fountain Holdings, LLC
c/o Eaglestone Capital Services, Inc.
400 Oceangate, Suite 1125
Long Beach, CA  90802

Dr. Christopher Brown                           244,366(6)                  *(7)                 *(7)
240 Keystone Road
Sheridan, WY  82801

Carol Rae(8)                                          0                     0                    0
13117 North Creekview Road
Rapid City, SD  57702

All Directors and Officers as a Group        51,094,440                  69.6%                69.3%      
(5 Persons)(8)


(1)   Except as otherwise  indicated,  includes  total number of shares  outstanding  and the number of
      shares which each person has the right to acquire within 60 days through the exercise of warrants
      or the conversion of Preferred Stock pursuant to Item 403 of Regulation S-B and Rule 13d-3(d)(1),
      promulgated  under the Securities  Exchange Act of 1934. Also reflects  47,606,149  shares of the
      Company's Common Stock (including Class B Common Stock) outstanding as of December 5, 1997.










                                                   23


<PAGE>



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

(3)   Prior to conversion, includes 500,000 shares of Common Stock issuable upon the exercise of common
      stock purchase warrants at an exercise price of $.04 per share.

(4)   Includes  25,283,024  shares of Common Stock and 45,050  shares of Class B Common Stock  issuable
      upon  conversion of the Preferred Stock held by Holdings.  Holdings is held 50% by Mr.  Schuchert
      and 50% by his  spouse,  Ms.  Karalyn R.  Schuchert.  Mr.  Schuchert  is the  managing  member of
      Holdings.

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

(6)   Includes 27,270 shares of Common Stock held by Dr. Brown's spouse, Elizabeth G. Brown, and 63,921
      shares of Common Stock held by Dr. Brown as custodian for his children.

(7)   Represents less than one percent.

(8)   Ms. Rae will commence her service as a director as of December 11, 1997.
</TABLE>

      Voting Rights of Preferred Stock
      --------------------------------

      As of December 5, 1997,  there are  2,000,000  shares of Preferred  Stock,
$.001 par value per share,  authorized and outstanding,  all of which is held by
Holdings.  Prior to the  conversion of the Preferred  Stock,  the holders of the
Preferred Stock are entitled to the number of votes to be cast by the holders of
all of the then issued and  outstanding  Common  Stock and Class B Common  Stock
plus seven (7) votes in all elections of  directors,  which enables such holders
to elect a majority of the Board of Directors. In all other matters presented to
stockholders  for a  vote,  whether  required  by  applicable  corporate  law or
otherwise,  the  holders of  Preferred  Stock vote as a class and no vote of the
stockholders will be effective without the approval of the holders of a majority
of the  shares  of the  Preferred  Stock.  In  connection  with  the sale of the
Preferred Stock, Dr.  Christopher  Brown and Mr. Joseph S. Schuchert,  Jr., were
appointed to the Board of Directors  as nominees of Holdings.  In addition,  Ms.
Carol Rae will  commence her service as director as of December  11, 1997,  as a
nominee of Holdings.  As of December 5, 1997, the shares of Preferred  Stock are
convertible  into  approximately  25,283,024  shares of Common  Stock and 45,050
shares  of  Class  B  Common  Stock,   which  upon  conversion  would  represent
approximately 34.7% of the outstanding Common Stock and Class B Common Stock.


















                                       24

<PAGE>



ITEM 12
-------

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

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

            During December 1995, the Company issued Warrants to Mr. Fuchs.  See
"ITEM 10 - EXECUTIVE COMPENSATION - Grant of Warrants to a Director."

      Purchase of Securities
      ----------------------

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

      Under  the terms of the  Stock  Purchase  Agreement,  the  holders  of the
Preferred  Stock may convert their  Preferred Stock into shares of the Company's
Common  Stock  and  Class  B  Common   Stock,   representing   one-half  of  the
approximately  50,656,149 issued and outstanding  shares of stock as of July 17,
1997 (which  included for that purpose  3,050,000  shares  reserved for issuance
pursuant to certain outstanding common stock purchase warrants).  The conversion
rate  of the  Preferred  Stock  is  adjustable  for  certain  events  such  as a
reclassification, reorganization, combination and stock-split.

      Payment of Accrued Salary and Expenses
      --------------------------------------

      In  accordance  with the 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, 1997, $15,210 of the $21,615 had been
paid. See "ITEM 10 - EXECUTIVE COMPENSATION."

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

      The line of credit  obtained by the Company with First Union National Bank
of Florida on October 17, 1996, 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."




                                       25


<PAGE>



      Officer Loans
      -------------

      During Fiscal 1997,  the Company  obtained  funding from three  short-term
loans in the total amount of $80,000 from the Company's President at an interest
rate of 10% per annum.  As of December 5, 1997,  $60,000 of the $80,000 had been
paid.

      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."





































                                       26


<PAGE>



ITEM 13
-------

      EXHIBITS, LIST AND REPORTS ON FORM 8-K
      --------------------------------------

A.    Financial Statements filed as part of this Report:

                                                                Page Reference
                                                                --------------

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

      Balance Sheet as of September 30, 1997                         F-2

      Statements of Operations for the years ended                   F-3
      September 30, 1997 and 1996

      Statements of Stockholders' Equity for the                     F-4
      years ended September 30, 1997 and 1996

      Statements of Cash Flows for the years ended                   F-5
      September 30, 1997 and 1996

      Notes to Financial Statements of Fountain                 F-6 thru F-17
      Pharmaceuticals, Inc. for the years ended
      September 30, 1997 and 1996

B.    Financial Statement Schedules:

      None.

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

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

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

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

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

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


                                       27

<PAGE>



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

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

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

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

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

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

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

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

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  Registrant  and First Union National
            Bank of Florida dated October 17, 1996 (Incorporated by reference to
            the Company's Annual Report on Form 10-KSB for the fiscal year ended
            September 30, 1996)

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

27          Financial Data Schedule (Edgar format only)






                                       28


<PAGE>



D.    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, 1997:

1.    Current  Report  on Form  8-K  filed  with  the  Securities  and  Exchange
      Commission on July 31, 1997,  relating to Changes in Control of Registrant
      and Sale of Securities.










































                                       29


<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
10th day of December, 1997.


                                    FOUNTAIN PHARMACEUTICALS, INC.


Date:  December 10, 1997            By:    /s/ John C. Walsh
      --------------------------          -----------------------------------
                                          John C. Walsh, President
                                          Chief Executive Officer
                                          (Principal Executive and Accounting
                                           Officer)

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

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

/s/ John C. Walsh                President, Chief           December 10, 1997
----------------------------     Executive Officer       
John C. Walsh                    (Principal Executive    
                                 and Accounting Officer) 
                                 Chairman                
                                 

/s/ James E. Fuchs               Vice Chairman,             December 10, 1997
----------------------------     Secretary, Director 
James E. Fuchs                   


/s/ Joseph S. Schuchert, Jr.     Director                   December 10, 1997
----------------------------
Joseph S. Schuchert, Jr.


/s/ Dr. Christopher Brown        Director                   December 10, 1997
----------------------------
Dr. Christopher Brown

                                       30

<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,  1997,  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, 1997,  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.





November 5, 1997
Tampa, Florida











                                       F-1



<PAGE>

                         FOUNTAIN PHARMACEUTICALS, INC.
                                  BALANCE SHEET
                               SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
                               ASSETS (Note 5)
<S>                                                                <C>         
Current assets:
   Cash and cash equivalents                                       $  2,371,071
   Accounts receivable (Note 2)                                         109,808
   Inventories (Notes 3 and 4)                                           95,678
   Prepaid expenses                                                      31,360
                                                                   ------------
     Total current assets                                             2,607,917

Furniture and equipment, less accumulated depreciation
   of $254,699                                                            9,360
Patent costs, less accumulated amortization
   of $22,064                                                           138,036
Other assets                                                              6,595
                                                                   ------------

                                                                   $  2,761,908
                                                                   ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Current maturities of (Note 4):
     Liabilities not subject to compromise                         $     29,469
     Liabilities subject to compromise                                   92,298
   Accounts payable and accrued expenses (Note 7)                       123,402
   Notes payable, officer (Note 7)                                       40,000
                                                                   ------------

     Total current liabilities                                          285,169

Liabilities not subject to compromise,
   non-current (Note 4)                                                   2,584
                                                                   ------------

Commitment (Note 10)

Stockholders' equity (Note 6):
   Preferred stock, par value $.001, 2,000,000 shares
     authorized, issued and outstanding
     (1.2 votes per share)                                                2,000
   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                                        17,011,224
   Accumulated deficit                                              (14,586,675)
                                                                   ------------
     Total stockholders' equity                                       2,474,155
                                                                   ------------

                                                                   $  2,761,908
                                                                   ============
</TABLE>




                       See notes to financial statements.
                                       F-2


<PAGE>

                         FOUNTAIN PHARMACEUTICALS, INC.
                            STATEMENTS OF OPERATIONS
                     YEARS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>

                                                             1997              1996
                                                        -------------     ------------
<S>                                                     <C>               <C>         
Revenue (Note 2)                                        $  1,317,994      $  1,676,819

Cost of sales                                                689,169           854,210
                                                        -------------     ------------

Gross profit                                                 628,825           822,609
                                                        -------------     ------------

Operating expenses:
   Research and development                                  230,323            95,466
   General and administrative                                369,309           360,242
   Selling                                                   281,942           312,358
   Depreciation and amortization                              30,752            41,563
                                                        -------------     ------------

                                                             912,326           809,629
                                                        -------------     ------------

Income (loss) from operations                           (    283,501)           12,980
                                                        -------------     ------------

Other income (expenses):
   Interest income                                            24,835                 -
   Interest expense                                     (     27,327)     (     20,680)
   Other income (expense)                               (     10,609)            4,635
   Loss on disposal of equipment                                   -      (      2,830)
   Reorganization expenses (Note 1)                                -      (     26,232)
                                                        -------------     -------------
                                                        (     13,101)     (     45,107)
                                                        -------------     -------------

Loss before income taxes and extraordinary item         (    296,602)     (     32,127)

Income taxes (Note 9)                                              -                 -
                                                        -------------     ------------

Loss before extraordinary item                          (    296,602)     (     32,127)

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

Net income (loss)                                       ($   296,602)     $    302,634
                                                        =============     ============

Earnings per share (Note 6):
   Primary and fully diluted earnings per common share:
     Income (loss) before extraordinary item            ($       .01)     $          -
     Extraordinary gain                                            -               .01
                                                        -------------     ------------
     Net income (loss)                                  ($       .01)     $        .01
                                                        =============     ============

   Weighted average number of shares outstanding:
     Primary                                              47,516,049        42,073,362
     Fully diluted                                        54,424,114        42,263,361

</TABLE>

                       See notes to financial statements.
                                       F-3


<PAGE>


                                     FOUNTAIN PHARMACEUTICALS, INC.
                               STATEMENTS OF STOCKHOLDERS' EQUITY (NOTE 6)
                                 YEARS ENDED SEPTEMBER 30, 1997 AND 1996
                  
<TABLE>
<CAPTION>
     

                                                     Class B                               
                               Common Stock        Common Stock      Preferred Stock     Additional      
                           --------------------   ---------------  ------------------      Paid-in      Accumulated 
                             Shares      Amount   Shares   Amount   Shares     Amount      Capital        Deficit           Total
                           ----------   -------   ------   ------  ---------   ------   ------------    ------------    ------------
<S>                        <C>          <C>       <C>         <C>              <C>      <C>             <C>             <C>
Balances,                                                  
   October 1, 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
                                                           
Issuance of preferred                                      
   stock                         --        --       --        --   2,000,000    2,000      2,498,000            --        2,500,000
                                                           
Stock offering costs             --        --       --        --        --       --          (39,278)           --          (39,278)
                                                           
Compensation costs                                         
   for vested warrants           --        --       --        --        --       --           23,400            --           23,400
                                                           
Net loss for                                               
   the year                      --        --       --        --        --       --             --          (296,602)      (296,602)
                           ----------   -------   ------   -----   ---------   ------   ------------    ------------    -----------
                                                           
Balances,                                                  
   September 30, 1997      47,516,049   $47,516   90,100     $90   2,000,000   $2,000   $ 17,011,224    ($14,586,675)   $ 2,474,155
                           ==========   =======   ======   =====   =========   ======   ============    ============    ===========
                                                           
                                                           
</TABLE>















































                                                         
                                           See notes to financial statements.
                                                          F-4




<PAGE>
                                 
                                      
                         FOUNTAIN PHARMACEUTICALS, INC.
                            STATEMENTS OF CASH FLOWS
                     YEARS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
                                                                        1997              1996
                                                                   -------------     ------------
<S>                                                                 <C>              <C>         
Cash flows from operating activities:
   Net income (loss)                                                ($  296,602)     $    302,634
   Adjustments to reconcile net income (loss) to
     net cash used in operating activities:
       Director compensation resulting from issuance of warrants         23,400                 -
       Extraordinary gain                                                     -      (    334,761)
       Depreciation                                                      22,563            38,321
       Loss on disposal of assets                                             -             2,831
       Write-down of inventory                                                -            68,535
       Amortization                                                       8,189             3,241
       Increase (decrease) in cash due to changes in:
           Accounts receivable                                          126,225      (    168,793)
           Inventories                                                    9,188             9,545
           Prepaid expenses                                              15,214      (     23,397)
           Other assets                                            (        345)     (      2,285)
           Accounts payable and accrued expenses                         15,312             7,585
                                                                   -------------     ------------
   Net cash used in operating activities                           (     76,856)     (     96,544)
                                                                   -------------     -------------

Cash flows from investing activities:
   Deferred patent costs incurred                                  (      7,650)     (     55,717)
   Acquisition of furniture and equipment                                     -      (      7,671)
                                                                   -------------     -------------

Net cash used in investing activities                              (      7,650)     (     63,388)
                                                                   -------------     -------------

Cash flows from financing activities:
   Proceeds from:
     Issuance of common stock                                                 -           250,000
     Issuance of preferred stock                                      2,500,000                 -
   Stock offering costs incurred                                   (     39,278)                -
   Repayment of:
     Amounts not subject to compromise                             (     26,809)     (     16,814)
     Amounts subject to compromise                                 (     84,983)     (     88,852)
   Proceeds from officer loan                                            80,000                 -
   Repayment of officer loan                                       (     40,000)                -
                                                                   -------------     ------------
Net cash provided by financing activities                             2,388,930           144,334
                                                                   -------------     ------------
Increase (decrease) in cash and cash equivalents                      2,304,424      (     15,598)
Cash and cash equivalents,
   at beginning of year                                                  66,647            82,245
                                                                   -------------     ------------

Cash and cash equivalents,
   at end of year                                                  $  2,371,071      $     66,647
                                                                   =============     ============

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

Interest paid was $23,017 and $20,680 for the years ended September 30, 1997 and 1996,
respectively.

</TABLE>


                       See notes to financial statements.
                                       F-5


<PAGE>


                         FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996



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

       NATURE OF BUSINESS:

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

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

       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
       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.

                                  (Continued)
                                      F-6


<PAGE>


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

       CHAPTER 11 REORGANIZATION (CONTINUED):

       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.

       See Note 4 for  essential  terms  of the  plan  relating  to  payment  of
       prepetition liabilities.

       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 previously estimated allowed amounts were recorded as
       a $334,761  extraordinary  gain in the 1996 statement of operations.  All
       prepetition  liabilities are classified in the accompanying September 30,
       1997 balance  sheet  (current or  long-term)  based upon the terms of the
       confirmed  Reorganization  Plan.  Other  reorganization  costs of $26,232
       (primarily legal fees) are also separately reported in the 1996 statement
       of operations.

       Under the terms of the  reorganization  plan Shareholders  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
       were  issued  to  an  individual   who  is  the  President  and  majority
       shareholder of the Company.

       At the date of the effectiveness of the Plan and thereafter,  the Company
       continued to account for its assets at their  historical  cost basis (did
       not adopt "Fresh Start" accounting).

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








                                  (Continued)
                                      F-7




<PAGE>


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

       INVENTORIES:

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

       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  $28,000  and
       $44,000 during 1997 and 1996, respectively.

       RESEARCH AND DEVELOPMENT:

       Expenses for the design and  development  of the Company's  products were
       $230,323 and $95,466 during 1997 and 1996, respectively.

       CASH AND CASH EQUIVALENTS:

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















                                  (Continued)
                                      F-8



<PAGE>


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

       USE OF ESTIMATES:

       Preparation of these  financial  statements in conformity  with generally
       accepted accounting  principles requires management to make estimates and
       assumptions that affect the reported amounts of assets and liabilities at
       the  dates  of the  financial  statements  and the  reported  amounts  of
       revenues and expenses during the reported periods.

       EMPLOYEE STOCK-BASED COMPENSATION:

       The Company accounts for compensation costs associated with stock options
       and  warrants  issued to employees  under the  provisions  of  Accounting
       Principle  Board  Opinion  No.  25 ("APB  25")  whereby  compensation  is
       recognized to the extent the market price of the underlying stock exceeds
       exercise price of the option granted. During the year ended September 30,
       1997  the  Company   adopted  the  disclosure   provisions  of  Financial
       Accounting Standard No. 123 Accounting for Stock-Based Compensation ("FAS
       123"), which requires disclosure of compensation  expense that would have
       been   recognized  if  the   fair-value   based  method  of   determining
       compensation had been used for all arrangements under which employees and
       others receive shares of stock or equity instruments.

       NET INCOME (LOSS) PER SHARE:

       Net  income/loss  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.

       NEW ACCOUNTING PRONOUNCEMENTS:

       In  1997,  the  Financial   Accounting   Standards  Board  (FASB)  issued
       Statements of Financial Accounting Standards (SFAS) No. 128 "EARNINGS PER
       SHARE", SFAS No. 130, "REPORTING COMPREHENSIVE INCOME", and SFAS No. 131,
       "DISCLOSURES  ABOUT SEGMENTS OF AN ENTERPRISE  AND RELATED  INFORMATION",
       all of which will be effective for the Company's 1999 fiscal year.









                                  (Continued)
                                      F-9




<PAGE>


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

       NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED):

       SFAS No. 128  simplifies  the earnings per share  calculations  and makes
       them comparable to international  standards.  SFAS 130 presents standards
       for  reporting  and display of  comprehensive  income and its  components
       (revenues, expenses, gains and losses) including those currently required
       to be  accounted  for as direct  charges or credits to the  statement  of
       stockholders'   equity  in  a  full  set  of  general-purpose   financial
       statements.  SFAS No. 131 requires that public companies report financial
       and  descriptive  information  about its reportable  operating  segments,
       which are defined as those components that are evaluated regularly by the
       chief  operating   officer  in  determining   resource   allocations  and
       performance assessments.

       Adoption  of  SFAS  No.  128 and No.  130 are not  anticipated  to have a
       material impact on the company's financial statements. Management has not
       yet  determined the effects of adoption of SFAS No. 131 on items reported
       in its financial statements.

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

       MAJOR CUSTOMER INFORMATION:

       During the years ended  September  30, 1997 and 1996 the Company  derived
       revenues from two  customers  which  individually  exceeded 10 percent of
       total revenues as follows:

  
                                                             1997         1996
                                                         ----------   ----------
          Customer 1 (European)                          $  854,000   $  857,000
          Customer 2 (European)                          $  219,000   $  352,000
      
        Total export sales were approximately as follows:
                                                             1997         1996
                                                         ----------   ----------
               Europe                                    $1,109,000   $1,258,000
               Asia                                           6,000       33,000
               South America                                 40,000       25,000
                                                         ----------   ----------
                                                         $1,155,000   $1,316,000
                                                         ==========   ==========








                                  (Continued)
                                      F-10


<PAGE>


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

       FAIR VALUE OF FINANCIAL INSTRUMENTS:

       All  financial  instruments  are held or issued for  purposes  other than
       trading.  The  carrying  amount  of cash and cash  equivalents,  accounts
       receivable,  and accounts payable  approximates fair value because of the
       short  maturity of those  investments.  The carrying value of liabilities
       not  subject to  compromise  approximates  fair value based on the stated
       rate of interest. The carrying value of liabilities subject to compromise
       were discounted; therefore, the recorded values approximate fair value.

       CONCENTRATIONS OF CREDIT RISK:

       Financial instruments that potentially subject the Company to significant
       concentrations  of credit  risk  consist  principally  of trade  accounts
       receivable  and  cash  and cash  equivalents.  Cash and cash  equivalents
       include $2,000,000 in variable rate demand (par put) bonds,  secured by a
       $2,000,000 letter of credit from a reputable financial institution.

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

       Accounts  receivable consist  principally of receivables from one primary
       customer.

3.     INVENTORIES:

       Inventories at September 30, 1997 consist of the following:

         Raw materials                                              $    97,677
         Finished goods                                                  46,001
         Less allowance for obsolescence                            (    48,000)
                                                                    ------------
                                                                    $    95,678
                                                                    ===========







                                  (Continued)
                                      F-11




<PAGE>


4.     CHAPTER 11 REORGANIZATION:

       Essential  terms of and liabilities  associated  with the  reorganization
       plan are as follows:

         Liabilities not subject to compromise at September 30, 1997 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 9.5
         percent,  is payable in monthly  installments  over 33 months  from the
         effective date of the plan.

         Liabilities  subject to  compromise  consist of unsecured  claims which
         were paid at 50 percent of the allowed  amounts of such claim,  without
         interest, in eleven quarterly installments:

5.     NOTE PAYABLE, BANK:

       On October 17, 1996 the Company obtained a $100,000 line of credit from a
       bank to be used to fund working  capital needs.  There were no borrowings
       against the line of credit at September  30, 1997.  Borrowings  will bear
       interest at the prime rate plus 1/2% 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.  The Company was either in  compliance  with, or had
       obtained waivers for, such covenants at September 30, 1997.

6.     STOCKHOLDERS' EQUITY:

       ISSUANCE OF PREFERRED STOCK:

       In July 1997, the Company issued 2,000,000  shares of voting  convertible
       participating  preferred stock for $2.5 million.  The shares of preferred
       stock have voting  rights  equal to that of the Common and Class B Common
       stock and also  provide  for  specific  voting  rights  with  respect  to
       election of the Board of Directors. The Preferred stock has a liquidation
       preference of $1.25 per share. The Preferred shares may be converted into
       Common  and Class B Common  stock in  amounts  equal to 1/2 of the issued
       Common and Class B Common  shares  plus 1/2 of the shares  available  for
       redemption by Management Warrant holders.









                                  (Continued)
                                      F-12




<PAGE>


6.     STOCKHOLDERS' EQUITY:

       COMMON STOCK WARRANTS:

       Common stock warrants issued,  redeemed and outstanding  during the years
       ended September 30, 1997 and 1996 are as follows:


                                                                     Number of
                      Description                                     Warrants
       ---------------------------------------------------          ------------
       Warrants issued and outstanding at October 1,
        1995 (weighted average exercise price $1.18)                  4,600,001

       Less warrants expired in 1996 (exercise price $.82)          ( 1,300,000)

       Issued in 1996 to certain directors and employees,
        exercise price, $.04, expire 2000                             3,050,000

       Less warrants canceled (exercise price $.78)                 ( 1,700,000)
                                                                    ------------

       Warrants issued and outstanding at September 30,
        1996 (weighted average exercise price $.68)                   4,650,001

       Less warrants expired in 1997 (weighted average
        exercise price $2.27)                                       ( 1,200,000)
                                                                    ------------

       Warrants issued and outstanding at September 30,
        1997 (weighted average exercise price $.13)                   3,450,001
                                                                    ============

       Common stock  warrants  which were issued to current or former  officers,
       directors,  shareholders and employees  ("Management  Warrants"),  all of
       which  are  fully  vested  and   currently   exercisable,   which  remain
       outstanding at September 30, 1997 consist of the following:

                        Exercise    Expiration        Remaining    Number of
          Issue Date     Price         Date            Life         Warrants
         -------------  --------    -------------    ----------   ----------  
         March 1993     $   .78     March 1998       6 Months       400,001
         December 1995  $   .04     December 2000    2 1/4Years   3,050,000
                                                                  ---------

                                                                  3,450,001
                                                                  =========





                                  (Continued)
                                      F-13




<PAGE>


6.     STOCKHOLDERS' EQUITY (CONTINUED):

       COMMON STOCK WARRANTS (CONTINUED):

       As discussed  in Note 1, the Company  adopted the  disclosure  provisions
       only of FAS 123 during 1997.  During  December  1995,  the Company issued
       warrants to purchase  3,050,000 shares of common stock (152,500 after the
       1 for 20  reverse  stock  split  discussed  in Note  11) to its  existing
       officers,  directors and  employees  which were to vest over a three year
       period  commencing in July 1996. In 1997, the Company amended the warrant
       agreements  to  provide  for 100%  vesting of these  warrants  if a major
       change in capital structure or Board of Director control occurred.  These
       warrants,  therefore,  became  100%  vested  upon  the  issuance  of  the
       preferred  stock  and  subsequent  change  of  control  of the  Board  of
       Directors in July 1997. The Company has recognized  compensation  expense
       to  directors  of  $23,400 in 1997  associated  with  1,300,000  of these
       warrants.  The fair value of the balance of 1,750,000  of these  warrants
       which  had  been  issued  to  employees  in  December   1995   aggregated
       approximately   $32,000  as   determined   using  the   "Black   Scholes"
       option-pricing  model.  Since these  warrants  became  fully  vested upon
       issuance of preferred shares in July 1997,  compensation  cost of $28,875
       would have been recognized in 1997 had the Company adopted the accounting
       provisions of FAS 123. Proforma net income (loss) and earnings (loss) per
       share would have been  ($325,477) and ($0.01)  respectively  in 1997, and
       $302,634 and $.01 in 1996,  if the  accounting  provisions of FAS 123 had
       been adopted.

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

         Underlying stock price at grant date                       $.047
         Exercise price                                               .04
         Dividend yield                                                0%
         Risk free interest rate                                       6%
         Volatility                                                   10%

       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.








                                  (Continued)
                                      F-14



<PAGE>


6.     STOCKHOLDERS' EQUITY (CONTINUED):

       STOCK OPTION AND RIGHTS PLAN (CONTINUED):

       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, 1997, no SARs had been granted.

7.     RELATED PARTY TRANSACTIONS:

       NOTES PAYABLE, OFFICER:

       During 1997,  the Company  borrowed  $80,000  from the  President to fund
       short term working  capital  needs.  The notes  payable are unsecured and
       bear  interest at 10%. The balance due on the notes at September 30, 1997
       was $40,000 plus accrued interest of $1,817.

       OTHER RELATED PARTY TRANSACTIONS:

       During  1997,   the   President   elected  to  defer  payment  of  salary
       approximating $32,000. These amounts,  including accrued interest thereon
       at 10 percent,  are included in Accounts  Payable and Accrued Expenses in
       the accompanying balance sheet.

8.     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.

9.     INCOME TAXES:

       Deferred tax assets consist of the following at September 30, 1997:

         Net operating loss carryover                             $    616,000
         Tax credit carryforwards                                      105,000
         Obsolete inventory allowance                                   18,000
         Other                                                          22,000
         Valuation allowance                                      (    761,000)
                                                                  -------------
                                                                  $       -
                                                                  =============



                                  (Continued)
                                      F-15



<PAGE>

9.     INCOME TAXES (CONTINUED):

       Income tax (expense) benefit consists of the following:

                                                           1997         1996
                                                       ----------    ----------
         Current:
           Federal                                     $     -       $     -
                                                        ---------     ---------
         
         Deferred:                                                     
           Deferred                                        70,000      (387,000)
           Benefit of net operating loss carryover       (311,000)     (168,000)
           Loss of net operating loss and tax credit                   
              carryovers resulting from change in                      
              ownership (a)                                  -       (4,277,000)
           Change in valuation allowance                  241,000     4,832,000
                                                        ---------    ----------
                                                             -             -
                                                        ---------    ----------
                                                       $     -      $      -
                                                        =========    ==========
                                                                              
       (a) Under Section 382 and 383 of the Internal Revenue Code of 1986, if an
           ownership  change  occurs  with respect to a "loss  corporation",  as
           defined, there are annual limitations  on the amount of net operating
           loss and research and  development  tax credit  carryovers  which are
           available to the  Company.  The taxable income of a loss  corporation
           for any tax year ending  after an  ownership  change may be offset by
           pre-change loss carryovers  only to the extent of the section 382 and
           383 limitation for that year. The Reorganization, and the issuance of
           common  stock  warrants  in  1996  among  other  events,  created  an
           ownership change in excess of fifty  percent for income tax purposes;
           therefore,  the  Company  believes  that the availability of the pre-
           change  net  operating  loss carryover ($12,700,000) and research and
           development credit ($250,000) will be substantially  limited  in  the
           future and as such the Company has  accounted  for the  loss  of such
           carryover. The post-change net operating loss carryover of $1,200,000
           will expire in 2011.

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

       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 (loss)
                                                        before income taxes
                                                     ---------------------------
                                                          1997         1996
                                                     ------------   ------------
         Statutory tax rate                            (   34.0%)        34.0%
         State tax                                     (    3.5%)         3.5%
         Change in deferred tax asset
           valuation allowance                             37.5%     (   37.5%)
                                                     ------------   ------------

         Effective tax rate in accompanying
           statement of operations                            0%            0%
                                                     ============   ============

                                  (Continued)
                                      F-16

<PAGE>


10.    COMMITMENT:

       The Company leases its office and warehouse  facilities under a two-year,
       non-cancelable  operating lease for $4,900 per month.  Rent expense under
       all operating leases was  approximately  $58,000 and $52,000 for 1997 and
       1996,  respectively.  The  agreement  provides  for  an  option  for  one
       additional year.

       Obligations under the operating lease are as follows:

                 Year ending September 30,
                        1998                              $   58,800
                        1999                                  29,400
                                                          ----------
                                                          $   88,200
                                                          ==========

11. SUBSEQUENT EVENT:

       Subsequent to September 30, 1997, the Board of Directors declared a 1 for
       20 reverse stock split of both Common stock and Class B Common stock. The
       par values  remain  unchanged.  This  reverse  stock split is expected to
       become  effective on December 11, 1997.  The following  proforma  amounts
       consider  the  effect of the  reverse  split as if it had been  effective
       during all periods presented in the accompanying financial statements:

                                                        1997           1996
                                                   -------------   ------------
       Primary and fully diluted earnings
         per common share:
           Loss before extraordinary item          (        .12)   (        .02)
           Extraordinary gain                                 -             .16
                                                   -------------   ------------
              Net income (loss)                    (        .12)            .14
                                                   =============   ============

       Weighted average shares outstanding:
         Primary                                      2,375,802       2,103,668
         Fully diluted                                2,721,206       2,113,168

       Management warrants outstanding (Note 6)         152,500         232,500










                                      F-17