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, 1998
                           Commission File No. 0-18399

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

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

                   7279 Bryan Dairy Road, Largo, Florida 33777
                   -------------------------------------------
                    (Address of Principal Executive Offices)

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

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

                          Common Stock, par value $.001
                          -----------------------------
                                (Title of Class)


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

         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.

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

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


<PAGE>
                                                                 
         Registrant's revenues for the year ended September 30, 1998:
                                                      $1,542,868

         The aggregate market value of the Company's Common Stock held by
non-affiliates of the Registrant as of January 8, 1999 was approximately
$279,246, based upon the closing sales price of the Company's Common Stock as of
January 8, 1999 (see Footnote (1) below).


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


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

                          Yes   X                    No
                              ----                      ----


                    APPLICABLE ONLY TO CORPORATE REGISTRANTS:

         The number of shares outstanding of the Registrant's class of Common
Stock, par value $.001 per share, as of January 8, 1999, was 2,375,796.

         The number of shares outstanding of the Registrant's Class B Common
Stock, par value $.001 per share, as of January 8, 1999, was 4,505.


                      DOCUMENTS INCORPORATED BY REFERENCE:
                                      None
                                      ----

                 Transitional Small Business Disclosure Format:

                          Yes                        No   X
                              ----                      ----

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

                                       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, introduce
branded products in certain markets and develop strategic associations with
pharmaceutical companies.

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

         In July 1997, the Company completed a private placement of 2,000,000
newly-designated and issued shares of Series A Convertible Preferred Stock (the
"Preferred Stock") to Fountain Holdings, LLC ("Holdings"), a Wyoming limited
liability company, controlled by Joseph S. Schuchert, Jr. As a result of this
private placement (the "Private Placement"), the Company obtained additional
working capital of $2.5 million, which it utilized to enhance the expansion of
the Company's sales and marketing program, as well as to further the Company's
research and development efforts. As a result of significant increases in
marketing costs associated with the expansion of existing product lines and the
introduction of new products during fiscal 1998, which were not offset by sales
revenues during the period, the Company substantially utilized its working
capital resources. Accordingly, the Company initiated a program to obtain
additional working capital. In order to provide working capital in the near
term, as of December 31, 1998, the Company entered into a secured credit
arrangement with Mr. Schuchert. The credit agreement provides for a two-year
line of credit of up to $1,500,000 subject to the Company satisfying certain
agreed upon quarterly operating budget guidelines. In order to fund operations
in the long term and pursue its business strategy, the Company intends to
continue to seek additional sources of capital, including debt and equity
financing. However, there can be no assurances that such financing will be
available or that it will be available upon terms advantageous to the Company.
See "ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -
Liquidity and Capital Resources."

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

                                       5
<PAGE>
         Business Strategy

         The Company intends to continue to leverage the strengths of its SDMC
technology to develop products for the following key business sectors:

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

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

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

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

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

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

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

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

         Currently, the Company principally licenses and supplies moisturizers
and sunscreen products through its licensing arrangements with pharmaceutical
companies. See "Sales and Marketing." While the Company's sales currently focus
upon its line of sunscreen and moisturizer products, management believes that
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.

                                       6
<PAGE>
         Sales and Marketing

         From inception through 1994, the Company had undertaken its marketing
activities principally through the efforts of management and independent sales
and marketing consultants who initiated sales efforts with certain retail
department stores, hospitals and health care institutions, retail pharmaceutical
chains and scientific organizations. However, over the past three years, in view
of the Company's limited financial resources, it has focused its marketing
efforts on the sale of products through licensing arrangements with certain
pharmaceutical companies. Management believes that these licensing arrangements
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.

         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 Amersham represent in the
aggregate more than 74% of the sales of the Company's products. The Nycomed
Pharma license covers markets in Norway, Denmark, Belgium, Holland and
Luxembourg. Spirig AG is the Company's licensee for Switzerland, Germany and
certain markets in Eastern Europe.

         Governmental Regulations

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

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

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

                                       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, and
Switzerland-Liechtenstein. The Company has counterpart applications in Canada,
Japan, Hong Kong, and Singapore. The granting fees have been paid in Canada and
Singapore, and issuance is expected in the near future.

         The Company is pursuing additional patent coverage in the United States
on other aspects of its SDMC technology. This application relates to
shelf-stable precursor solutions. A Notice of Allowance has been received in the
U.S. application, and a patent has been granted in Australia. The Company has
counterpart applications pending in Canada, the EPC, Hong Kong, Japan, and
Singapore.

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

         There can be no assurance the patents the Company may obtain will
afford the Company commercially significant protection of its proprietary
technology, provide the Company with any significant competitive advantages, or
that challenges will not be instituted against the validity or enforceability of
such patents, or if instituted that any such challenges will not be successful.
The cost of litigation to uphold the validity and prevent infringement of a
patent can be substantial. In addition, no assurance can be given that the
Company will have sufficient resources to either institute or defend any action,
suit or other proceeding by or against the Company with respect to any claimed
infringement of a patent or other proprietary rights. In the event that the
Company shall in the near future lose the protection afforded by a patent, such
event could have material adverse effect on the 

                                       8
<PAGE>

Company's operations. There can be no assurance that the Company's technologies
will not infringe patents or other rights owned by others, license to which may
not be available to the Company.

         Competition

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

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

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

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

         Human Resources

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

         As of January 8, 1999, the Company employed sixteen (16) persons
including its chief executive officer, a vice president of operations, a
director of finance and administration, a technical director, an aesthetic
marketing and sales director, warehouse, sales and administrative personnel.

                                      9
<PAGE>
ITEM 2
------

         PROPERTIES
         ----------

         The Company owns no real property. The Company leases approximately
6,000 square feet of office, laboratory, production and warehouse facilities
located in Largo, Florida. The lease, dated December 18, 1997 as amended March
20, 1998, provides for a monthly rental of $6,950 for a term of five years,
ending December 31, 2003. This facility is adequate for the Company's current
and foreseeable needs.

ITEM 3
------

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

         The law firm of Blank, Rome, Comisky and McCauley, LLP represents the
Company with regard to disputes against Dermik Laboratories, Inc. and Rhone
Poulenc Rorer ("RPR") relating to damages allegedly suffered by the Company as a
result of, among other things, Dermik's termination of a supply and distribution
agreement (the "Agreement"). Dermik is a subsidiary of RPR. The Agreement called
for Dermik to be the licensee of the Company's sunscreen product for a period of
10 years and for Dermik to distribute the product in the United States and
certain territories outside the United States.

         On or about October 28, 1996 Dermik notified the Company that, in its
opinion, the Company had not been able to demonstrate compliance with certain
contractual and regulatory requirements by October 31, 1996 and that, on this
basis, that Dermik was exercising an alleged right under the contract to
terminate it on that basis.

         The Company instituted a lawsuit in November 1997 against Dermik
alleging a cause of action for breach of the Agreement. Later, in November 1998,
the Company filed court documents seeking permission to amend the Dermik lawsuit
to assert further claims of tortuous breach of contract and civil conspiracy
with RPR. Dermik is expected to oppose this and the Court will render a decision
sometime in the future. At the same time, the Company filed a separate lawsuit
against RPR alleging causes of action of breach of contract, tortuous breach of
contract, civil conspiracy with Dermik, and tortuous interference by RPR with
the contractual relationship between Dermik and the Company. The current Case
Scheduling Order governing the Dermik case calls for discovery to continue
through the middle of February 1999 at which time dispositive motion practice is
to commence. If the case goes through motion practice, it is to enter the trial
pool on August 1, 1999.

         RPR has not yet answered or otherwise responded to the complaint
against it. It is anticipated that RPR will move to have the complaint dismissed
for failure to state a legally cognizable claim. The Company intends to oppose
any such motion.

  
                                     10

<PAGE>
         The Company's various complaints seek damages from Dermik Laboratories,
Inc. and RPR in excess of $10,000,000 each. These matters are currently pending
in the Philadelphia County Court of Common Pleas, Trial Division under the
following case captions.

         Fountain Pharmaceuticals, Inc. vs. Dermik Laboratories, Inc. 
         ------------------------------------------------------------
         C.C.P. Philadelphia County, November Term, 1997, No. 3611

         Fountain Pharmaceuticals, Inc. vs. Dermik Laboratories, Inc.
         ------------------------------------------------------------
         C.C.P. Philadelphia County, October Term, 1998, No. 2549

         Fountain Pharmaceuticals, Inc. vs./ Rhone Poulenc Rorer, Inc.
         -------------------------------------------------------------
         C.C.P. Philadelphia County, October Term, 1998, No. 2551

         Dermik, like RPR, will likely move for summary judgment as to the
complaint against it once discovery is closed with the aim of having the case
dismissed before trial. The Company intends to oppose any such motion.

ITEM 4
------

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

         None.

                                       11
<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 MarketSM 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, 1997 and 1998, and for the first quarter of its fiscal year
ended September 30, 1999. No trading market exists for shares of the Company's
Class B Common Stock.

   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                       1.50                     1.0625
   Second Quarter                      2.0625                    .875
   Third Quarter                       1.625                     .875
   Fourth Quarter                      1.1875                    .4375

   Fiscal 1999                        HIGH                       LOW
   -----------                        ----                       ---
   First Quarter                      .625                       .1875
   Second Quarter                     .4375                      .25
   (January 1-January 8, 1999)

   The closing price of the Company's Common Stock on January 8, 1999 was $.25.

         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 MarketSM 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.

                                       12
<PAGE>


         B. Reverse Stock Split
            -------------------

         In order to facilitate the conversion of the Company's Preferred Stock
and to enhance the market price and liquidity of the Company's Common Stock, the
Company effectuated a one for twenty reverse stock split, specifically, a
conversion of every twenty issued and outstanding shares into one share of the
same class of Common Stock as of December 11, 1997 (the "Reverse Stock Split").
As of January 8, 1999, the Company had 2,380,301 shares of Common Stock
outstanding.

         C. Holders
            -------

         Records of the Company's stock transfer agent indicate that as of
January 8, 1999, the Company had 435 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 2,155 record holders, including such shares held in
"street name."

         D. Dividends
            ---------

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

                                       13
<PAGE>


ITEM 6
------

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

         Background
         ----------

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

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

         In July 1997, the Company completed a private placement of 2,000,000
newly-designated and issued shares of Series A Convertible Preferred Stock (the
"Preferred Stock") to Fountain Holdings, LLC ("Holdings"), a Wyoming limited
liability company, controlled by Joseph S. Schuchert, Jr. See "ITEM 11 -
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." As a result of
this private placement (the "Private Placement"), the Company obtained
additional working capital of $2.5 million, which it utilized to enhance the
expansion of the Company's sales and marketing program, as well as to further
the Company's research and development efforts. As a result of significant
increases in marketing costs associated with the expansion of existing product
lines and the introduction of new products during fiscal 1998, which were not
offset by sales revenues during the period, the company substantially utilized
its working capital resources. Accordingly, the Company initiated a program to
obtain additional working capital. In order to provide working capital in the
near term, as of December 31, 1998, the Company entered into a secured credit
arrangement with Mr. Schuchert. The credit agreement provides for a two year
line of credit of up to $1,500,000 subject to the Company satisfying certain
agreed upon quarterly operating budget guidelines. In order to fund operations
in the long term and pursue its business strategy, the Company intends to
continue to seek additional sources of capital, including debt and equity
financing. However, there can be no assurances that such financing will be
available or, that it will be available upon terms advantageous to the Company.
See "Liquidity and Capital Resources."

                                       14
<PAGE>
         Results of Operations
         ---------------------

         During the fiscal year ended September 30, 1998, the Company realized a
net loss of $1,629,141 on revenues of $1,542,868, compared to a net loss of
$296,602 on revenues of $1,317,994 for the fiscal year ended September 30, 1997.
This increase in net losses is attributable primarily to expenses relating to
increased sales and marketing efforts in connection with the Company's new
sunscreen brand in the golf market, Daylong(R) and legal fees relating to the
Dermik Laboratories, Inc. lawsuit. See "ITEM 3 - LEGAL PROCEEDINGS."

         Revenues for fiscal 1998 of $1,542,868 represented an increase of
$224,874 or 17.1% from revenues of $1,317,994 during fiscal 1997. The increase
in revenues was a result, primarily, of expanding acceptance of the Company's
products by dermatologists in northern Europe, telemarketing efforts of the
Company's LyphaZome(R) brand to the podiatrists' market, and the launch of the
Company's new sunscreen brand in the golf market, Daylong(R).

         During the fiscal year ended September 30, 1998, the Company incurred
operating expenses of $2,367,857, a 159.5% increase over operating expenses of
$912,326 for the prior year ending September 30, 1997. This increase in expenses
was primarily due to increased sales and marketing efforts relating to existing
and new markets, research and development relating to new projects and
formulations, legal fees relating to Dermik Laboratories, Inc. lawsuit, 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 during May 1994 and the securities have
since traded on the less liquid market of the OTC Bulletin Board.

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

         As of September 30, 1998, the Company had working capital of $645,204,
a decrease of $1,677,544 from the level of working capital of $2,322,748 as of
September 30, 1997. The decrease in working capital from September 30, 1997,
reflects increased expenses associated with sales and marketing efforts relating
to existing and new markets, research and development relating to new projects
and formulations, legal fees relating to Dermik Laboratories, Inc. lawsuit and
additional personnel. As a result of such significant increase in marketing
costs and legal fees, which were not offset by sales revenues, the Company had
substantially utilized its working capital resources by December 1998.
Accordingly, the Company initiated a program to obtain additional working
capital. In order to provide working capital in the near term, as of December
31, 1998, the Company entered into a secured credit arrangement with Mr.
Schuchert. The Credit Agreement

                                       15
<PAGE>

provides for a secured line of credit of up to $1,500,000, the principal and
unpaid interest of which is due on the earlier of December 31, 2000, 180 days
from written demand of the lender or upon an event of default under the
agreement. The line of credit bears interest at an adjustable monthly rate equal
to the greater of (i) the prime rate quoted in the Wall Street Journal, plus 1
1/2% or (ii) 9%, which is payable monthly or may be accrued. The facility is
secured by all of the assets of the Company (subject to any existing liens). The
facility is subject to the Company satisfying certain agreed upon quarterly
operating budget guidelines. As of January 8, 1999, the Company had $400,000
outstanding under this facility. Under the terms of the Agreement, Mr. Schuchert
receives warrants to purchase 1.6 shares of Common Stock for each dollar
advanced under the facility at a purchase price of $.65 per share with an
expiration date of December 31, 2003. As of January 8, 1999, Mr. Schuchert has
been granted warrants to purchase an aggregate 640,000 shares of Common Stock.

         The Company's sales revenues during fiscal 1998 and the first quarter
of fiscal 1999 were not adequate to offset expenses. Based upon the Company's
current budget guidelines as agreed to with Mr. Schuchert as lender, management
believes that the funds available under the line of credit would be sufficient
to enable the Company to meet its anticipated operating expenses through
December 31, 1999. However, in order to continue longer term operations and to
pursue its business strategy, the Company will require additional financing
unless and until sales revenues provide sufficient working capital. The Company
is in the process of pursuing such additional sources of financing. There can be
no assurances that such financing will be available or that it will be available
upon terms advantageous to the Company. Failure to obtain such additional
financing or the earlier termination of the line of credit would have a material
adverse effect on the Company's ability to operate beyond December 1999.

         During Fiscal 1998, the Company's other principal sources of working
capital were derived from revenues, a $100,000 line of credit and equipment
financing arrangements from First Union National Bank of Florida ("First
Union"). The line of credit bears interest at a rate of prime plus .5%, payable
upon demand. Pursuant to the equipment financing arrangement, First Union loaned
the Company $66,110 at an interest rate of 9% for a 48 month term beginning June
1998. As of January 8, 1999 the Company has an outstanding balance due under its
line of credit of $100,000. The balance due on the equipment financing as of
January 8, 1999 is $58,688.

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

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

         Effects of Inflation
         --------------------

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

                                       16
<PAGE>

be subject to general economic and inflationary pressures.

ITEM 7
------

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

                  Financial statements are included under Item 13(A) and may be
found at pages F-1 through F-20.

ITEM 8
------

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

         None.

                                       17
<PAGE>
                                    PART III
                                    --------

ITEM 9
------

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

         A. Identification of Executive Officers and Directors
            --------------------------------------------------

         The following table sets forth certain information with respect to each
of the executive officers and directors of the Company. Each of the directors
named below will serve until the next annual meeting of the stockholders or
until their successors are elected or appointed and qualified.
<TABLE>
<CAPTION>
Name                                        Age        Position(s) Held
----                                        ---        ----------------
<S>                                         <C>        <C>                                     
Gerald T. Simmons                           54         Chief Executive Officer and President

James E. Fuchs                              71         Secretary and Director

Dr. Christopher Brown                       45         Director

Carol Rae                                   52         Director

Joseph S. Schuchert, Jr.                    68         Director

John C. Walsh                               58         Chairman and Director
</TABLE>

         B. Business Experience
            -------------------

Gerald T. Simmons

         Mr. Simmons has served as Chief Executive Officer and President since
December 1, 1998. He most recently held the position of President, CEO and
Director of MantiCore Pharmaceuticals, Inc., a development stage drug delivery
company from December 1996 to December 1998. Prior to MantiCore, Mr. Simmons was
President, CEO and Director of Cellegy Pharmaceuticals, Inc. (NASDAQ-CLGY), a
dermatology and drug delivery company from December 1992 to January 1996. Prior
to senior business development assignments with two biotechnology companies, Mr.
Simmons was employed by Schering-Plough Corp. as Director of Marketing for OTC
consumer products and as Vice President, New Ventures with responsibility for
new product development as well as mergers and acquisitions for consumer
operations. Mr. Simmons will remain a Director of MantiCore Pharmaceuticals,
Inc. He received his MBA from the University of Buffalo and a BA from Canisius
College.

                                       18

<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 medallist and gold medallist in the
shot put and discus in the first Pan American Games. He is a member of the Board
of Directors of the United States Olympic Committee.

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

                                       19

<PAGE>

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."

John C. Walsh

         John C. Walsh was the President, Chief Executive Officer from 1992
until his resignation as of December 1, 1998. He will continue to serve as a
director of the Company, which he has been 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.

         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 Ms. Rae. The Audit Committee held one
meeting during Fiscal 1998 with representatives of the Company's accounting firm
of Aidman, Piser and Company, P.A., Certified Public Accountants. 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 a policy of not granting fees to directors who
attend a regularly scheduled or special meeting of its Board of
Directors. However, the Company may reimburse out-of-state directors
for their cost of travel and lodging to attend such meetings.

                                       20
<PAGE>

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

         None.

         Compliance with Section 16(a) of the Exchange Act
         -------------------------------------------------

         Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires directors and certain officers of the Company, as well as persons who
own more than 10% of a registered class of the Company's equity securities
("Reporting Persons"), to file reports with the Securities and Exchange
Commission. The Company believes that during Fiscal 1998, all Reporting Persons
timely complied with all filing requirements applicable to them.

ITEM 10
-------

         EXECUTIVE COMPENSATION
         ----------------------
<TABLE>
<CAPTION>
                                   SUMMARY COMPENSATION TABLE
  =================================================================================================================
                                                                                                 Long Term
                                   Annual Compensation                                         Compensation
  =================================================================================================================
                                                     Fiscal Year
                                                       Ended
           Name and Principal Position              September 30         Salary ($)          Options/SARS (#)
  =================================================================================================================
<S>                                                     <C>               <C>                        <C>
  John C. Walsh(1) (2)                                  1998              $181,731                  -0-
  Chairman, Former Chief Executive Officer              1997              $118,269                  -0-
  and President                                         1996              $137,308                  -0-
  =================================================================================================================
</TABLE>

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

     Mr. Walsh resigned from his position as Chief Executive Officer
     and President as of December 1, 1998, but remains the Company's
     Chairman of the Board and a Director. As part of his severance
     arrangement, Mr. Walsh will continue to receive full salary and
     accompanying benefits through August 3, 1999. See "ITEM - 12
     CERTAIN RELATIONSHIP AND RELATED TRANSACTONS."

(2)  As of December 1, 1998, Mr. Simmons was appointed Chief Executive
     Officer and President pursuant to an employment agreement. See
     "Employment Arrangements and Change of Control."

                                       21
<PAGE>
<TABLE>
<CAPTION>

OPTION/SAR GRANTS TABLE

                                       Option/SAR Grants in the Last Fiscal Year
  =================================================================================================================
                                                    Individual Grants
  =================================================================================================================
                                                                % of Total
                                                                Options/SARs        
                                                                Granted to           Exercise or                      
                                Fiscal     Options/SARs         Employees in         Base Price                       
  Name                          Year       Granted (#)          Fiscal Year          ($/Sh)        Expiration Date    
  =================================================================================================================
<S>                               <C>                <C>                 <C>               <C>             <C>
  John C. Walsh                   1998(1)           -0-                 -0-               -0-             -0-
  Chairman,
  Chief Executive Officer and
  President
  =================================================================================================================
</TABLE>

   (1) No options were granted during Fiscal Year 1998.


<TABLE>
<CAPTION>

OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE

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

                                         Shares              Value
                              Fiscal     Acquired on         Realized      Exercisable/        Exercisable/
  Name                        Year       Exercise (#)        ($)           Unexercisable       Unexercisable
  =================================================================================================================
<S>                           <C>                 <C>              <C>        <C>   <C>           <C>    <C>
  John C. Walsh               1998(1)            -0-              -0-      (U)0/(E)-0-         (E)$0/(U)-0-
  Chairman,
  Chief Executive Officer,
  and President
  =================================================================================================================
</TABLE>

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

         Employment Arrangements and Change of Control
         ---------------------------------------------

         As of December 1, 1998, the Company entered into an Employment
Agreement with Mr. Gerald T. Simmons to serve as President and Chief
Executive Officer of the Company. Mr. Simmons is provided with an
annual salary of $130,000. The Agreement provides for a term of 

                                       22
<PAGE>

one year with successive year-to-year renewals unless either party shall elect
not to renew upon thirty days prior written notice. The Agreement contains a
non-competition and non-solicitation provision that survives his actual
employment for a term of two years. Mr. Simmons was also granted options to
purchase 173,121 shares of common stock (5% of the outstanding common stock of
the Company including outstanding options and warrants) at an exercise price of
$.56 per share. The options include certain anti-dilution protection provisions
for securities issued by the Company prior to December 31, 1999, including the
conversion, if at all, of the outstanding Series A Convertible Preferred Stock
held by Holdings. Provided that Mr. Simmons continues to be employed by the
Company, the options vest 20% each year commencing on the date of grant. All
options vest in the event of a change in control of the Company as set forth in
the Agreement.

         In the event of a change in control prior to the end of the initial
term, Mr. Simmons may elect to receive a severance payment of six months salary
and insurance premiums, and the term of the non-compete and non-solicitation
provision would be reduced to six months from the date of termination. The
Agreement also provides Mr. Simmons with various benefits including medical,
dental, life and disability insurance and reimbursement of expenses including up
to $6,000 per month of commuting expenses during the initial six months of the
Agreement and certain relocation expenses thereafter, as applicable.

  



                                       23

<PAGE>
         Stock Options
         -------------

         The Company's Stock Option Plan adopted in 1989 provides for the
issuance of incentive stock options, non-qualified options and stock
appreciation rights which may be issued to officers, directors, key employees
and consultants. An aggregate of 25,000 shares of Common Stock are reserved for
issuance under this plan. As of January 8, 1999 there were no options
outstanding under this plan. This plan expires by its term on June 11, 1999.

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

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

         On December 8, 1998 the Company granted options to purchase 204,000
shares of Common Stock under the 1998 Plan to directors and employees at an
exercise price of $.56 per share. In addition, the Company granted to Mr.
Simmons, the Chief Executive Officer, options to purchase an aggregate of
173,121 shares of Common Stock pursuant to his Employment Agreement. See
"Employment Arrangements and Change of Control."


                                       24
<PAGE>
         ITEM 11
         -------
                  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  ---------------------------------------------------
                  MANAGEMENT
                  ----------

                  The following table sets forth, as of January 8, 1999,
         information with respect to the securities holdings of all persons
         which the Company, pursuant to filings with the Securities and Exchange
         Commission, has reason to believe may be deemed the beneficial owners
         of more than 5% of the Company's outstanding Common Stock and Class B
         Common Stock. The following table indicates the beneficial ownership of
         such individuals numerically calculated based upon the total number of
         shares of Common Stock and Class B Common Stock outstanding and
         alternatively calculated based upon the percentage voting power
         allocated to such share ownership taking into account the
         disproportionate voting rights attributed to the Class B Common Stock.
         Also set forth in the table is the beneficial ownership of all shares
         of the Company's outstanding stock, as of such date, of all officers
         and directors, individually and as a group.
<TABLE>
<CAPTION>

                                                         Amount of                 Percent of             Percent of
           Name and Address                       Beneficial Ownership(1)     Beneficial Ownership      Voting Power(3)
           ----------------                       -----------------------     --------------------      ---------------
<S>        <C>                                          <C>                        <C>                        <C> 
           Gerald T. Simmons
           7279 Bryan Dairy Road                        34,624(2)                  1.4%                       1.4%
           Largo, FL  33777

           James Fuchs                                  25,000(4)                  1.0%                       1.0%
           565 Park Avenue
           New York, NY  10021

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

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

           Joseph S. Schuchert, Jr./                 1,906,403(6)                 44.5%                      44.4%(7)
           Fountain Holdings, LLC
           c/o Eaglestone Capital Services, Inc.
           400 Oceangate, Suite 1125
           Long Beach, CA  90802

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

           All Directors and Officers as a Group     3,229,345                    74.3%                      74.1%
           (6 Persons)
</TABLE>
         ---------------------

         * Represents less than 1%

         (1) Except as otherwise indicated, includes total number of shares
             outstanding and the number of shares which each person has the
             right to acquire within 60 days through the exercise of warrants or
             the conversion of Preferred Stock pursuant to Item 403 of
             Regulation S-B and Rule 13d-3(d)(1), promulgated under the
             Securities Exchange Act of 1934. Also reflects 2,380,301 shares of
             the Company's Common Stock (including Class B Common Stock)
             outstanding as of January 8, 1999.

                                       25
<PAGE>

         (2) Does not include common stock purchase options to purchase 138,497
             shares at an exercise price of $.56 per share which was granted
             December 8, 1998 but which have not vested.

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

         (4) Includes 25,000 shares of Common Stock issuable upon the exercise
             of options at an exercise  price of $.56 per share.

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

         (6) Includes 1,264,151 shares of Common Stock and 2,252 shares of Class
             B Common Stock issuable upon conversion of the Preferred Stock held
             by Holdings. Holdings is held 50% by Mr. Schuchert and 50% by his
             spouse, Ms. Karalyn R. Schuchert. Mr. Schuchert is the managing
             member of Holdings. Also includes 640,000 shares of common stock
             issuable upon the exercise of common stock purchase warrants at an
             exercise price of $.65 per share.

         (7) Assumes the conversion of the Preferred Stock into shares of Common
             Stock and Class B Common Stock. See "Voting Rights of Preferred 
             Stock."

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

                  As of December 5, 1997, there are 2,000,000 shares of
         Preferred Stock, $.001 par value per share, authorized and outstanding,
         all of which is held by Holdings. Prior to the conversion of the
         Preferred Stock, the holders of the Preferred Stock are entitled to the
         number of votes to be cast by the holders of all of the then issued and
         outstanding Common Stock and Class B Common Stock plus seven (7) votes
         in all elections of directors, which enables such holders to elect a
         majority of the Board of Directors. In all other matters presented to
         stockholders for a vote, whether required by applicable corporate law
         or otherwise, the holders of Preferred Stock vote as a class and no
         vote of the stockholders will be effective without the approval of the
         holders of a majority of the shares of the Preferred Stock. Dr.
         Christopher Brown, Mr. Joseph S. Schuchert, Jr. and Ms. Carol Rae were
         appointed to the Board of Directors as nominees of Holdings. As of
         January 8, 1999, the shares of Preferred Stock are convertible into
         approximately 1,264,151 shares of Common Stock and 2,252 shares of
         Class B Common Stock.

                                       26
<PAGE>

         ITEM 12
         -------
                  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
                  ----------------------------------------------

                  Employment Arrangement
                  ----------------------

                  As of December 1, 1998, the Company entered into an employment
         agreement with Mr. Simmons, to serve as Chief Executive Officer and
         President of the Company. See "ITEM 10 - EXECUTIVE COMPENSAT1ON -
         Employment Arrangements and Change of Control."

                  Line of Credit Agreement and Grant of Warrants
                  ----------------------------------------------

                  As of December 31, 1998, the Company entered into a credit
         arrangement with Mr. Schuchert. The Credit Agreement provides for a
         secured line of credit of up to $1,500,000, the principal and unpaid
         interest of which is due on the earlier of December 31, 2000, 180 days
         from written demand of the lender or upon an event of default under the
         agreement. As of January 8, 1999, the Company had $400,000 outstanding
         under this facility. Under the terms of the Agreement, Mr. Schuchert
         receives warrants to purchase 1.6 shares of Common Stock for each
         dollar advanced under the facility at a purchase price of $.65 per
         share with an expiration date of December 31, 2003. As of January 8,
         1999, Mr. Schuchert has been granted warrants to purchase an aggregate
         640,000 shares of Common Stock. See "ITEM 6 - MANAGEMENT'S DISCUSSION
         AND ANALYSIS OR PLAN OF OPERATION - Liquidity of Capital Resources."

                  Grant of Options to Director
                  ----------------------------

                  As of December 8, 1998, the Company granted to Mr. Fuchs, a
         director, incentive stock options to purchase 25,000 shares of Common
         Stock under the 1998 Plan at $.56 per share with an expiration date of
         December 20, 2000, subject to the surrender of 25,000 outstanding
         warrants.

                  Severance Arrangement
                  ---------------------

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

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

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


                                       27
<PAGE>

                  Under the terms of the Stock Purchase Agreement, the holders
         of the Preferred Stock may convert their Preferred Stock into shares of
         the Company's Common Stock and Class B Common Stock, representing
         one-half of the approximately 50,656,149 (pre-split) issued and
         outstanding shares of stock as of July 17, 1997 (which included for
         that purpose 3,050,000 (pre-split) shares reserved for issuance
         pursuant to certain outstanding common stock purchase warrants). On a
         post-split basis, the Preferred Stock is currently convertible into
         1,264,151 shares of Common Stock at 2,252 shares of Class B Common
         Stock. The conversion rate of the Preferred Stock is adjustable for
         certain events such as a reclassification, reorganization, combination
         and stock-split.

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

                  In accordance with the Company's Plan of Reorganization, Mr.
         Walsh 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, 1998, the obligation was paid in
         full. 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 Chairman of the
         Board and a Director. See "ITEM 6 - MANAGEMENT'S DISCUSSION AND
         ANALYSIS OR PLAN OF OPERATION - Liquidity and Capital Resources."

                  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 January 16, 1998,
         the obligation had been paid in full.

                  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."

                                       28
<PAGE>
         ITEM 13
         -------
                  EXHIBITS, LIST AND REPORTS ON FORM 8-K
                  --------------------------------------

         A.       Financial Statements filed as part of this Report:
<TABLE>
<CAPTION>
                                                                                            Page Reference
                                                                                            --------------
<S>                                                                                                <C>
                  Report of Independent Auditors on Financial                                    F-1
                  Statements of Fountain Pharmaceuticals, Inc.

                  Balance Sheet as of September 30, 1998                                         F-2

                  Statements of Operations for the years ended                                   F-3
                  September 30, 1998 and 1997

                  Statements of Stockholders' Equity for the                                     F-4
                  years ended September 30, 1998 and 1997

                  Statements of Cash Flows for the years ended                                   F-5 thru F-6
                  September 30, 1998 and 1997

                  Notes to Financial Statements of Fountain                                      F-7 thru F-20
                  Pharmaceuticals, Inc. for the years ended
                  September 30, 1998 and 1997
</TABLE>

         B.       Financial Statement Schedules:

                  None.

         C.       The following Exhibits are filed as part of this Report:
<TABLE>
<CAPTION>
         Exhibit No.       Description
         -----------       -----------
<S>      <C>               <C>
         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)

                                       29

<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)

         4.6               Warrant Agreement dated December 31, 1998 between the
                           Registrant and Joseph S. Schuchert, Jr. (Filed
                           herewith).

         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)

         10.5              Employment Agreement by and between the Registrant
                           and Gerald T. Simmons dated December 1, 1998 (File
                           herewith)

         10.6              Credit and Security Agreement dated December 31, 1998
                           between the Registrant and Joseph S. Schuchert, Jr.
                           (File herewith)

                                       30
<PAGE>


         10.7              Promissory Note dated December 31, 1998 between the
                           Registrant and Joseph S. Schuchert, Jr. (File
                           herewith)

         10.8              Patent, Trademark and License Mortgage Agreement
                           dated December 31, 1998 between the Registrant and
                           Joseph S. Schuchert, Jr. (Filed herewith)

         10.9              Facility Lease Agreement as amended March 20, 1998
                           between the Registrant and Highwoods
                           Properties/Florida Holdings, L.P./Highwoods Realty GP
                           Corporation its Authorized Agent. (Filed herewith)

         27                Financial Data Schedule (Edgar format only)

</TABLE>



                                       31
<PAGE>

         D.       Reports on Form 8-K
                  -------------------

                  None.


















                                       32

<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 13th day of January, 1999.


                                FOUNTAIN PHARMACEUTICALS, INC.


Date:  January 13, 1999         By: /s/ Gerald T. Simmons
      -----------------             -------------------------------------------
                                    Gerald T. Simmons, President and
                                    Chief Executive Officer
                                    (Principal Executive and Accounting Officer)

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

Directors                            Title                                  Date
---------                            -----                                  ----
<S>                                 <C>                              <C>
/s/ John C. Walsh                    Chairman and Director          January 13, 1999
----------------------------
John C. Walsh


/s/ James E. Fuchs                   Secretary and Director         January 13, 1999
----------------------------
James E. Fuchs


/s/ Joseph S. Schuchert, Jr.         Director                       January 13, 1999
----------------------------
Joseph S. Schuchert, Jr.


/s/ Dr. Christopher Brown            Director                       January 13, 1999
--------------------------
Dr. Christopher Brown


/s/ Carol A. Rae                     Director                       January 13, 1999
---------------------------
Carol A. Rae
</TABLE>


                                       33
 <PAGE>

                          INDEX TO FINANCIAL STATEMENTS



                                                                        Page
                                                                        ----

Report of Independent Auditors'                                          F-1

Balance Sheets as of September 30, 1998                                  F-2

Statements of Operations for the Years Ended
   September 30, 1998 and 1997                                           F-3

Statements of Stockholders' Equity for the Years
   Ended September 30, 1998 and 1997                                     F-4

Statements of Cash Flows for the Years Ended
   September 30, 1998 and 1997                                           F-5

Notes to Financial Statements for the Years Ended
   September 30, 1998 and 1997                                           F-7

<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, 1998, 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.

As discussed in Note 1 to the financial statements, the Company has experienced
continuing losses. Management's plans to address this matter, which include a
$1,500,000 loan from a related party, are also described in Note 1. 

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, 1998, 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.

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


November 19, 1998, except for Notes 1 and 11
for which the date is January 7, 1999.
Tampa, Florida

                                       F-1



<PAGE>
                         FOUNTAIN PHARMACEUTICALS, INC.
                                  BALANCE SHEET
                               SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
<S>                                <C>                                     <C>              
                                 ASSETS (Note 5)

Current assets:
   Cash and cash equivalents (Note 6)                                      $         452,099
   Accounts receivable, net of allowance for
     uncollectible accounts of $16,000 (Note 2)                                      205,194
   Inventories (Note 3)                                                              195,240
   Prepaid expenses                                                                   32,723
                                                                           -----------------
     Total current assets                                                            885,256

Property and equipment, net (Notes 4 and 6)                                          101,343
Patent costs, less accumulated amortization
   of $26,705                                                                        139,525
Other assets                                                                           6,595
                                                                           -----------------
                                                                           $       1,132,719
                                                                           =================
                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Current maturities of:
     Liabilities not subject to compromise                                 $           2,584
     Long-term debt (Note 6)                                                          14,497
   Accounts payable and accrued expenses                                             222,971
                                                                         -------------------
     Total current liabilities                                                       240,052
                                                                         -------------------
Long-term debt, less current maturities (Note 6)                                      47,677
                                                                         -------------------
Commitment (Note 10)

Stockholders' equity (Note 7):
   Series A Preferred stock, par value $.001, 2,000,000 shares
     authorized, issued and outstanding
       (liquidation preference $2,498,000 in excess of par)                            2,000
   Common stock, par value $.001, 50,000,000
     shares authorized; 2,375,796 issued                                               2,376
   Class B common stock; par value $.001, 5,000,000 shares
     authorized; 4,505 shares issued and outstanding                                       5
   Additional paid-in capital                                                     17,056,449
   Accumulated deficit                                                   (        16,215,816)
   Treasury stock at cost (12 shares)                                    (                24)
                                                                         -------------------
     Total stockholders' equity                                                      844,990
                                                                         -------------------
                                                                         $         1,132,719
                                                                         ===================
</TABLE>

                       See notes to financial statements.
                                       F-2

<PAGE>
                         FOUNTAIN PHARMACEUTICALS, INC.
                            STATEMENTS OF OPERATIONS
                     YEARS ENDED SEPTEMBER 30, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                 1998             1997
                                                          ---------------  ---------------
<S>                                                           <C>          <C>            
Revenue (Note 2)                                              $1,542,868   $     1,317,994

Cost of sales                                                    867,568           689,169
                                                          ---------------  ---------------

Gross profit                                                     675,300           628,825
                                                          ---------------  ---------------

Operating expenses:
   Research and development                                      394,174           230,323
   General and administrative                                    574,601           369,309
   Selling                                                     1,374,916           281,942
   Depreciation and amortization                                  24,166            30,752
                                                          ---------------  ---------------

                                                               2,367,857           912,326
                                                          ---------------  ---------------

Loss from operations                                          (1,692,557)  (       283,501)
                                                          ---------------  ----------------

Other income (expenses):
   Interest income                                                86,249            24,835
   Interest expense                                       (       10,521)  (        27,327)
   Other expense                                          (       12,312)  (        10,609)
                                                          ---------------  ----------------
                                                                  63,416   (        13,101)
                                                          ---------------  ----------------

Loss before income taxes                                  (    1,629,141)  (       296,602)

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

Net loss                                                  ($   1,629,141)  ($      296,602)
                                                          ===============  ================

Earnings per share:
   Basic and diluted earnings per common share:
     Net loss                                             ($         .68)  ($         0.12)
                                                          ===============  ================

   Weighted average number of shares outstanding:
     Basic                                                     2,380,301         2,380,301

</TABLE>
                       See notes to financial statements.
                                       F-3
<PAGE>
                                                                                
                         FOUNTAIN PHARMACEUTICALS, INC.
                   STATEMENTS OF STOCKHOLDERS' EQUITY (NOTE 7)
                     YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
                                                                  Class B                                             Additional    
                                 Common Stock                   Common Stock                 Preferred Stock            Paid-in     
                            Shares          Amount         Shares         Amount          Shares         Amount         Capital     
                         -------------  -------------  --------------  -------------  -------------  --------------  -------------  
<S>                         <C>         <C>                    <C>     <C>                           <C>             <C>            
Balances,
   October 1, 1996          2,375,808   $      2,376           4,505   $          5              -   $           -   $ 14,574,327   

Issuance of preferred
   stock                            -              -               -              -      2,000,000           2,000      2,498,000   

Stock offering costs                -              -               -              -              -               -   (     39,278)  

Compensation costs
   for vested warrants              -              -               -              -              -               -         23,400   

Net loss for
   the year                         -              -               -              -              -               -              -   
                         -------------  -------------  --------------  -------------  -------------  --------------  -------------  

Balances,
   September 30, 1997       2,375,808          2,376           4,505              5      2,000,000           2,000     17,056,449   

Repurchase of treasury
   stock                 (         12)             -               -              -              -               -              -   

Net loss for the year               -              -               -              -              -               -              -   
                         -------------  -------------  --------------  -------------  -------------  --------------  -------------  

Balances,
   September 30, 1998       2,375,796   $      2,376           4,505   $          5      2,000,000   $       2,000   $ 17,056,449   
                         =============  =============  ==============  =============  =============  ==============  =============  

(TABLE CONTINUED)

                                                      Treasury                         
                              Accumulated               Stock                          
                                Deficit        Shares          Amount          Total   
                            -------------   -------------  -------------  -------------
                            



Balances,               
   October 1, 1996            ($14,290,073)              -   $          -   $    286,635          
                                                                                                  
Issuance of preferred                                                                             
   stock                                 -               -              -      2,500,000          
                                                                                                  
Stock offering costs                     -               -              -   (     39,278)         
                                                                                                  
Compensation costs                                                                                
   for vested warrants                   -               -              -         23,400          
                                                                                                  
Net loss for                                                                                      
   the year                   (    296,602)              -              -   (    296,602)         
                              -------------   -------------  -------------  -------------         
                                                                                                  
Balances,                                                                                         
   September 30, 1997         ( 14,586,675)              -              -      2,474,155          
                                                                                                  
Repurchase of treasury                                                                            
   stock                                 -              12   (         24)  (         24)         
                                                                                                  
Net loss for the year         (  1,629,141)              -              -   (  1,629,141)         
                              -------------   -------------  -------------  -------------         
                                                                                                  
Balances,                                                                                         
   September 30, 1998         ($16,215,816)             12   ($        24)  $    844,990          
                              =============   =============  =============  =============         
                              
</TABLE>
                       See notes to financial statements.
                                       F-4

<PAGE>
                         FOUNTAIN PHARMACEUTICALS, INC.
                            STATEMENTS OF CASH FLOWS
                     YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
                                                                                           1998               1997
                                                                                    -----------------   ----------------
<S>                                                                                 <C>                 <C>              
Cash flows from operating activities:
   Net loss                                                                         ($     1,629,141)   ($       296,602)
   Adjustments to reconcile net loss to
     net cash used in operating activities:
       Director compensation resulting from issuance of warrants                                   -              23,400
       Depreciation                                                                           15,214              22,563
       Amortization                                                                            8,952               8,189
       Increase (decrease) in cash due to changes in:
           Accounts receivable                                                      (         96,176)            126,225
           Inventories                                                              (         99,562)              9,188
           Prepaid expenses                                                         (          1,363)             15,214
           Other assets                                                                          790    (            345)
           Accounts payable and accrued expenses                                              99,567              15,312
                                                                                    -----------------   ----------------
   Net cash used in operating activities                                            (      1,701,719)   (         76,856)
                                                                                     ----------------   -----------------
Cash flows from investing activities:
   Deferred patent costs incurred                                                   (         10,441)   (          7,650)
   Acquisition of property and equipment                                            (         41,085)                  -
                                                                                    -----------------   ----------------

Net cash used in investing activities                                               (         51,526)   (          7,650)
                                                                                    -----------------   -----------------
Cash flows from financing activities:
   Repurchase of treasury stock                                                     (             24)
   Proceeds from issuance of preferred stock                                                       -           2,500,000
   Stock offering costs incurred                                                                   -    (         39,278)
   Repayment of:
     Amounts not subject to compromise                                              (         29,469)   (         26,809)
     Amounts subject to compromise                                                  (         92,298)   (         84,983)
   Proceeds from officer loan                                                                      -              80,000
   Repayment of officer loan                                                        (         40,000)   (         40,000)
   Payments on note payable, bank                                                   (          3,936)                  -
                                                                                    -----------------   ----------------
Net cash provided by (used in) financing activities                                 (        165,727)          2,388,930
                                                                                    -----------------   ----------------

Increase (decrease) in cash and cash equivalents                                    (      1,918,972)          2,304,424
Cash and cash equivalents,
   at beginning of year                                                                     2,371,071             66,647
                                                                                    -----------------   ----------------
Cash and cash equivalents,
   at end of year                                                                   $         452,099   $      2,371,071
                                                                                    =================   ================
</TABLE>
                                   (Continued)
                                       F-5

<PAGE>
                         FOUNTAIN PHARMACEUTICALS, INC.
                            STATEMENTS OF CASH FLOWS
                     YEARS ENDED SEPTEMBER 30, 1998 AND 1997


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

Interest paid was $12,388 and $23,017 for the years ended September 30, 1998 and
1997, respectively.


              Supplemental schedule of non-cash financing activity
              ----------------------------------------------------

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






                                                                                
                       See notes to financial statements.
                                       F-6



<PAGE>
                         FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997

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

       Nature of business:

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

       The Company intends to continue to leverage the strengths of its SDMC
       technology to successfully develop products for the following key
       business sectors in 1999:

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

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


                                      F-7
<PAGE>
                         FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997

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

       Nature of business (continued):

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

       o    Continue to expand OTC, cosmeceutical and prescription products
            through its international strategic partner relationships.

       Additionally, the Company will continue to persue 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.

       Based on the Company's revised marketing strategy, management expects
       that the Company's revenue levels will continue to increase during 1999
       and that the Company will generate positive operating cash flow by
       December 1999. However, no assurance can be given that the Company will
       be successful in these efforts.

       Management's plans regarding liquidity and capital resources:

       During 1998 and 1997 the Company substantially increased revenues but has
       continued to experience significant losses which were primarily caused by
       substantial selling expenses for a new product which did not generate
       revenues to the extent expected. Additionally, the Company has continued
       to experience losses through the first quarter of fiscal 1999. The
       Company's losses have been historically funded by capital contributions,
       but management expects available cash to be fully utilized by January
       1999. In that regard, the principal stockholder of the Company's
       controlling entity has agreed to fund operating deficits through December
       1999 and, in that regard, has subsequently agreed to loan the Company
       $1,500,000 under a line of credit agreement, which is secured by
       substantially all Company assets and subject to compliance with certain
       budget guidelines. The Company borrowed the first $400,000 under this
       agreement in January 1999.

                                       F-8

<PAGE>
                         FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997


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

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

       Based upon the Company's current budget guidelines as agreed to with
       lender, management believes that the $1,500,000 available under the line
       of credit would be sufficient to enable the Company to meet its
       anticipated operating expenses through December 31, 1999. However, in
       order to continue longer term operations and to pursue its business
       strategy, the Company will require additional financing unless and until
       sales revenues provide sufficient working capital. The Company is in the
       process of pursuing such additional sources of financing. There can be no
       assurances that such financing will be available or that it will be
       available upon terms advantageous to the Company. Failure to obtain such
       additional financing or the earlier termination of the line of credit
       would have a material adverse effect on the Company's ability to operate
       beyond December 1999.

       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 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. The Reorganization Plan became effective on
       December 20, 1995 and on July 25, 1996 the U.S. Bankruptcy Court issued a
       final decree. As such, the court no longer has jurisdiction over matters
       in connection with the bankruptcy. Remaining prepetition liabilities at
       September 30, 1998, which consist of liabilities not subject to
       compromise, are classified in the accompanying September 30, 1998 balance
       sheet based upon the terms of the confirmed Reorganization Plan. 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). Subsequent to September 30, 1998, 
       the Company paid off all prepetition liabilities.

       Inventories:

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


                                      F-9


<PAGE>
                         FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997


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

       Property 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,
       which range from 3 to 7 years.

       Patent  costs:

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

       Advertising costs:

       The costs associated with producing and communicating advertising are
       expensed in the period incurred. Advertising costs were $310,000 and
       $28,000 during 1998 and 1997, respectively.

       Research and development:

       Expenses for the design and development of the Company's products were
       $394,174 and $230,323 during 1998 and 1997, respectively.

       Cash and cash equivalents:

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

       Use of estimates:

       Preparation of these financial statements in conformity with generally
       accepted accounting principles requires management to make estimates and
       assumptions that affect the reported amounts of assets and liabilities
       and disclosure of contingent assets and liabilities at the dates of the
       financial statements and the reported amounts of revenues and expenses
       during the reporting periods. Actual results could differ from those
       estimates.

                                      F-10
<PAGE>
                         FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997


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

       Stock-based compensation:

       The Company accounts for compensation costs associated with stock options
       and warrants issued to employees under the provisions of Accounting
       Principles Board Opinion No. 25 ("APB 25") whereby compensation is
       recognized to the extent the market price of the underlying stock exceeds
       the exercise price of the option granted. 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. Stock-based
       compensation to non-employees is accounted for using a fair value
       approach.

       Net loss per share:

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

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

       New accounting pronouncements:

       In 1997, the Financial Accounting Standards Board (FASB) issued
       Statements of Financial Accounting Standards (SFAS) No. 130, "Reporting
       Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
       Enterprise and Related Information," which will be effective for the
       Company's 1999 fiscal year.

       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.


                                      F-11
<PAGE>
                         FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997


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

       New accounting pronouncements (continued):

       Adoption of SFAS No. 130 is 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, 1998 and 1997 the Company derived
       revenues from two customers which individually exceeded 10 percent of
       total revenues as follows: 
<TABLE>
<CAPTION>
                                                                 1998           1997
                                                                 ----           ----
<S>                                                           <C>            <C>       
       Customer 1 (European)                                  $ 991,000      $ 854,000 
       Customer 2 (European)                                  $ 191,000      $ 219,000
</TABLE>

       Approximately 70% of accounts receivable at September 30, 1998 was due
       from a single customer.

       Total export sales were approximately as follows:
<TABLE>
<CAPTION>

                                                             1998                 1997
                                                     ------------------    -----------------
<S>                                                  <C>                   <C>              
              Europe                                 $       1,220,000     $       1,109,000
              Asia                                                   -                 6,000
              South America                                     29,000                40,000
                                                     ------------------    -----------------
                                                     $       1,249,000     $       1,155,000
                                                     ==================    =================
</TABLE>

       Fair value of financial instruments:

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

                                      F-12


<PAGE>
                         FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997


2.     Major customer information, fair value of financial instruments and
       concentrations of credit risk (continued):

       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 $400,000 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.

3.     Inventories:

       Inventories at September 30, 1998 consist of the following:

         Raw materials                                        $         174,484
         Finished goods                                                  79,756
         Less allowance for obsolescence                      (          59,000)
                                                              ------------------
                                                              $         195,240
                                                              ==================

4.     Property and equipment:

       Property and equipment at September 30, 1998 consists of the following:

         Machinery and equipment                              $         192,624
         Office equipment                                               141,795
         Leasehold improvements                                          35,298
                                                              -----------------
                                                                        369,717
         Accumulated depreciation                             (         268,374)
                                                              ------------------
                                                              $         101,343
                                                              ==================

                                      F-13

<PAGE>
                        FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997


5.     Note payable, bank:

       The Company has available 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, 1998. Borrowings will bear interest at
       the prime rate plus 1/2% and will be secured by substantially of the
       Company's assets and guaranteed by a related party.
 
6.     Long-term debt:

       Long-term debt consists of two 48-month equipment loans entered into
       during 1998. The loans bear interest at 9% and are collateralized by the
       equipment and cash equivalents.

       Future maturities of long-term debt are as follows:

       Year ending September 30,
       -------------------------
                    1999                              $          14,497
                    2000                                         16,068
                    2001                                         17,810
                    2002                                         13,799
                                                      -----------------
                                                      $          62,174
                                                      =================

7.     Stockholders' equity:

       Series A Preferred stock:

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

                                      F-14

<PAGE>
                        FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997


7.     Stockholders' equity (continued):

       Voting rights:

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

       Common stock warrants:

       As disclosed in Note 1 to the financial statements, the Company adopted
       the disclosure provisions only of FAS 123 during 1997. During December
       1995, the Company issued warrants to purchase 152,500 shares of common
       stock 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 the Board of
       Directors 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 recognized compensation
       expense to directors of $23,400 in 1997 associated with 65,575 of these
       warrants. The fair value of the balance of 86,925 of these warrants which
       were 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 costs of $28,875 would have been
       recognized in 1997 had the Company adopted the accounting provisions of
       FAS 123. Proforma net loss and loss per share would have been ($325,477)
       and ($0.14) in 1997, 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                $   1.50
           Exercise price                                      $  1.475
           Dividend yield                                             0%
           Risk free interest rate                                    6%
           Volatility                                                10%


                                      F-15

<PAGE>
                        FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997


7.     Stockholders' equity (continued):

       Common stock warrants (continued):

       Common stock warrants issued, redeemed and outstanding during the years
       ended September 30, 1998 and 1997 (retroactively adjusted for 1 for 20
       reverse split) are as follows:
<TABLE>
<CAPTION>
                                                                                             Number
                                                                                               of
                                     Description                                            Warrants
                                     -----------                                            --------
<S>                                                                                             <C>    
         Warrants issued and outstanding at September 30, 1996
           (weighted average exercise price of $13.60)                                          232,500

         Less warrants expired in 1997 (weighted average exercise price of $45.40)        (      60,000)
                                                                                         --------------
         Warrants issued and outstanding at September 30, 1997 
           (weighted average exercise price $1.80)                                              172,500

         Less warrants expired in 1998 (weighted average exercise price $15.60)           (      10,000)
                                                                                         --------------
         Warrants issued and outstanding at September 30, 1998
           (weighted average exercise price $1.71)                                              162,500
                                                                                         ==============
</TABLE>
         These common stock warrants were issued to current or former officers,
         directors, shareholders and employees. All are fully vested and
         currently exercisable. Those that remain outstanding at September 30,
         1998 are as follows:
<TABLE>
<CAPTION>

                                        Exercise             Expiration             Remaining             Number of
         Issue Date                       Price                 Date                  Life                Warrants
         ----------                       -----                 ----                  ----                --------
<S>                                 <C>                            <C>              <C>                        <C>    
         December 1995              $   .80               December 2000             2.25      Yrs              152,500
         December 1993              $ 15.60               December 1998              .25      Yrs               10,000
                                                                                                     -----------------
                                                                                                               162,500
                                                                                                     =================
</TABLE>


                                      F-16


<PAGE>

                        FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997


7.     Stockholders' equity (continued):

       Stock option plan:

       The Company has adopted a stock option and rights plan in 1989 (the
       "Plan") covering 25,000 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 rights ("SAR's"). Incentive stock
       options granted under the Plan are exercisable up to 10 years from the
       date of grant at an exercise price not less than the fair market value of
       the common stock on the date of the grant.

       Notwithstanding, the term of an incentive stock option granted under the
       Plan to a shareholder owning more than 10 percent of the voting rights
       may not exceed five years, and the exercise price of an incentive stock
       option granted to such shareholder may not be less than 110 percent of
       the fair market value of the common stock on the date of the grant.
       Certain stock options and SAR's, 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, 1998, no SAR's had been granted.

8.     Employee benefit plan:

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


                                      F-17

<PAGE>
                        FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997


9.     Income taxes:

       Deferred tax assets consist of the following at September 30, 1998:
<TABLE>
<CAPTION>
<S>                                                                                                  <C>              
         Net operating loss carryover                                                                $       1,238,000
         Obsolete inventory allowance                                                                           22,000
         Other                                                                                                  14,000
         Valuation allowance                                                                         (       1,274,000)
                                                                                                     -----------------
                                                                                                     $               -
                                                                                                     =================
</TABLE>

       Income tax (expense) benefit consists of the following:
<TABLE>
<CAPTION>
                                                                                            1998              1997
                                                                                      --------------    --------------
<S>                                                                                   <C>               <C>           
         Current:
           Federal                                                                    $            -    $            -
                                                                                      --------------    --------------

         Deferred:
           Deferred                                                                            4,000            70,000
           Benefit of net operating loss carryover (a)                                (      622,000)   (      311,000)
           Change in valuation allowance                                                     618,000           241,000
                                                                                      --------------    --------------
                                                                                                   -                 -
                                                                                      --------------    --------------
                                                                                      $            -    $            -
                                                                                      ==============    ==============
</TABLE>
       The expected income tax benefit at the statutory tax rate differed from
       income taxes in the accompanying statements of operations as follows:
<TABLE>
<CAPTION>

                                                                                     Percentage of loss before
                                                                                           income taxes
                                                                           --------------------------------------------
                                                                                   1998                    1997
                                                                           --------------------    --------------------
<S>                                                                                      <C>                     <C>  
         Statutory tax rate                                                              34.0%                   34.0%
         State tax                                                                        3.5%                    3.5%
         Change in deferred tax asset
           valuation allowance                                             (             37.5%)    (             37.5%)
                                                                           --------------------    --------------------
         Effective tax rate in accompanying
           statement of operations                                                          0%                      0%
                                                                           ====================    ====================
</TABLE>


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

                                      F-18

<PAGE>
                        FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997


10.    Commitment:

       The Company leases its office and warehouse facilities under a five-year,
       non-cancelable operating lease for approximately $6,000 per month plus
       taxes and nominal operating expenses. Rent expense under all leases
       approximated $83,000 and $58,000 for 1998 and 1997, respectively.

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

                       Year ending September 30,
                       -------------------------
                             1999                            $          74,000
                             2000                                       76,000
                             2001                                       79,000
                             2002                                       81,000
                             2003                                       20,000
                                                             -----------------
                                                             $         330,000
                                                             =================

11.    Subsequent events:

       Stock option plan:

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

       The Company, simultaneous with adoption of the plan, granted options to
       purchase 204,000 shares of Common Stock under the 1998 Plan to directors
       and employees at an exercise price of $.56 per share which will vest in
       three equal annual installments. In addition, the Company granted the
       Chief Executive Officer options to purchase an aggregate of 173,121
       shares of Common Stock under the Plan, also exercisable at $.56 per
       share, which vest 20 percent immediately and the balance over four years.

       Furthermore, on December 8, 1998, all warrants previously issued and
       outstanding were repriced at $.56 per share.

                                      F-19
<PAGE>
                        FOUNTAIN PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997


11.    Subsequent events (continued):

       Subsequent financing:

       As discussed in Note 1, on December 31, 1998 the Company executed a loan
       agreement with a director of the Company which provides for maximum
       funding of $1,500,000. The facility is subject to satisfaction of certain
       agreed upon quarterly operating guidelines. The loan bears interest at
       the greater of 9% or the prime rate plus 1 1/2%, is secured by
       substantially all assets and matures December 31, 2000. In conjunction
       therewith, the Company also granted the lender the right to purchase
       shares of common stock at $.65 per share. These warrants entitle the
       lender to acquire 1.6 shares of common stock for each dollar of principal
       advanced and 1.6 shares for each dollar of accrued interest unpaid when
       due. These warrants expire December 31, 2003.



                                      F-20

<PAGE>

                                 EXHIBIT INDEX
                                 -------------



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


   4.6               Warrant Agreement dated December 31, 1998 between the
                     Registrant and Joseph S. Schuchert, Jr. (Filed
                     herewith).

   10.5              Employment Agreement by and between the Registrant
                     and Gerald T. Simmons dated December 1, 1998 (File
                     herewith)

   10.6              Credit and Security Agreement dated December 31, 1998
                     between the Registrant and Joseph S. Schuchert, Jr.
                     (File herewith)

   10.7              Promissory Note dated December 31, 1998 between the
                     Registrant and Joseph S. Schuchert, Jr. (File
                     herewith)

   10.8              Patent, Trademark and License Mortgage Agreement
                     dated December 31, 1998 between the Registrant and
                     Joseph S. Schuchert, Jr. (Filed herewith)

   10.9              Facility Lease Agreement as amended March 20, 1998
                     between the Registrant and Highwoods
                     Properties/Florida Holdings, L.P./Highwoods Realty GP
                     Corporation its Authorized Agent. (Filed herewith)

   27                Financial Data Schedule