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                       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, 2000
                           Commission File No. 0-18399

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

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

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

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

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

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


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

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

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


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

         Registrant's revenues for the year ended September 30, 2000:

                                   $1,163,310

         The aggregate market value of the Company's Common Stock held by
non-affiliates of the Registrant as of February 12, 2001 was approximately
$66,443 based upon the closing sales price of the Company's Common Stock as of
February 12, 2001 (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 February 12, 2001, was 2,375,796.

         The number of shares outstanding of the Registrant's Class B Common
Stock, par value $.001 per share, as of February 12, 2001, 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
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         PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
         --------------------------------------------------------------


When used in this Annual Report on Form 10-KSB, the words "may," "will,"
"expect," "anticipate," "continue," "estimate," "intend," and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 regarding events, conditions and financial
trends which may affect the Company's future plans of operations, business
strategy, operating results and financial position. Such statements are not
guarantees of future performance and are subject to risks and uncertainties and
actual results may differ materially from those included within the
forward-looking statements as a result of various factors. Such factors include,
among others: (i) the Company's ability to obtain additional sources of capital
to fund continuing operations in the immediate term; (ii) the Company's ability
to retain existing or obtain additional licensees who act as distributors of its
products; (iii) the Company's ability to obtain additional patent protection for
its encapsulation technology; and (iv) other economic, competitive and
governmental factors affecting the Company's operations, market, products and
services. Additional factors are described in the Company's other public reports
and filings with the Securities and Exchange Commission. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date made. Except as required by law, 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
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                                     PART I
                                     ------

ITEM 1
------

         BUSINESS
         --------

Background

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

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

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

         As a result of significant increases in marketing costs associated with
the expansion of existing product lines and the introduction of new products
during fiscal year ended September 30, 1998, which were not offset by sales
revenues during the period, the Company substantially utilized its working
capital resources. In order to provide working capital, the Company also entered
into a secured credit arrangement with Mr. Schuchert as of December 31, 1998.
The credit agreement provides for a two-year line of credit of up to $1,500,000
subject to the Company satisfying certain agreed upon quarterly operating budget
guidelines.

         As a result of additional costs associated with the development and
marketing of two new product lines during fiscal year ended September 30, 1999,
the Company fully utilized the $1,500,000 line of credit. In order to maintain
current operations for fiscal year ending September 30, 2000, the Company
obtained short term unsecured loans from its former President, Mr. Gerald
Simmons and Mr. John C. Walsh, a director of the Company in the aggregate amount
of $20,000. During fiscal 2000 and subsequently, Mr. Schuchert made additional
unsecured advances to the Company, the terms of which have not been finalized.
As of February 12, 2001, the outstanding principal balance of this unsecured
loan was $1,211,500.

                                       4
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         Mr. Schuchert has conditionally indicated his intention to fund the
Company's cash needs for the near term but is under no obligation to do so. If
the Company does not secure additional financing from Mr. Schuchert in the very
near term, the Company will not be able to continue as a going concern and will
suspend operations. See "ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION - Liquidity and Capital Resources."

         The Technology and its Applications

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

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

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

         The Company has developed a number of proprietary products utilizing
its SDMC technologies. These include non-regulated consumer goods and
dermatologic products consisting of sunscreens, lotions and moisturizers. These
products have been marketed by the Company under the LyphaZome(R), Celazome(R),
Octazome(R) and Daylong(R) names and under other proprietary names of licensees.
The Company currently markets its products under LyphaZome(R) and as well as
under other proprietary names of licensees. During fiscal 2000 the Company
introduced a line of skin care products under the Celazome(R) name. During
fiscal 1999 the Company discontinued the Octazome(R) and Daylong(R) name product
lines due to limited sales.

         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
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Business Strategy

         The Company's principal business goal in the short term is to obtain
sufficient capital to continue operations. Provided the Company is able to
secure additional capital necessary to fund operations beyond the near term, the
Company intends to continue to leverage the strengths of its SDMC technology to
form strategic relationships with revenue potential.

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

o        Continue to maintain the loyal base of the Company's OTC (Over the
         Counter) sunscreen and moisturizer franchise.

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

o        Aggressively identify marketing distribution partners for the Company's
         recently developed Celazome(R) `cosmeceutical' line.

o        Continue to pursue joint venture and merger candidates to expand its
         business base.

         However, there can be no assurances that any such transactions will be
successfully completed by the Company.

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

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

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

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

                                       6
<PAGE>

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

Sales and Marketing

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

         The Company has three principal licensing arrangements with major
European licensees. Under such arrangements the Company realizes revenues from
the sale of products to the licensees who act as distributors and from royalties
which are earned as the result of subsequent sales of these products by such
licensees. Of its licensees, Spirig AG and Nycomed Pharma AS represent in the
aggregate more than 63.8% of the Company's revenues. The Nycomed Pharma AS
license covers markets in Norway, Denmark, Belgium, Holland and Luxembourg.
Spirig AG is the Company's licensee for Switzerland, Germany and certain markets
in Eastern Europe.

         In August 2000, Spirig AG informed the Company that it would begin
transitioning its sunscreen to a non-LyphaZome technology. The transition will
begin subsequent to fiscal year ending September 30, 2000 and will be completed
by March 22, 2003, the expiration of Spirig AG's contract. The Company has
agreed to accept a fee from Spirig AG based on sales of the non-LyphaZome
sunscreens. This fee is in lieu of the normal licensing fee. At this point, the
Company is unable to quantify its projected loss of revenue from the Spirig AG
contract. To offset the potential revenue decreases from Spirig AG, the Company
is negotiating with a number of new international licensee/distributor
candidates. As of October 2000, Quinoderm, Ltd. has signed a licensee agreement
with the Company to distribute products in the United Kingdom and Ireland
markets.

         The Company also markets its products directly to professionals,
including physicians, podiatrists and aestheticians, and the consumer market
through its in-house sales staff. During fiscal year ended September 30, 2000
direct sales represented approximately 32.9% of the Company's total revenues.
During the first quarter of fiscal 2000, the Company launched a new line of skin
care products under the Celazome(R) name. Given the limited financial resources
of the Company, the Company curtailed its marketing efforts during the remainder
of fiscal 2000 pending the securing of additional financing to continue
operations.

Governmental Regulations

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

                                       7
<PAGE>

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

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

Patents and Proprietary Technology

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

         The Company has obtained patents for its novel method for making
lipid-based carrier vehicles or "SDMCs": U.S. Patent 5,133,965 issued on July
28, 1992 (now abandoned), and U.S. Patent 5,269,979 issued on December 14, 1993.
The Company made the decision to abandon the `965 patent by failing to pay a
maintenance fee due in Year 2000 to the United States Patent and Trademark
Office. The `979 patent relates to unique methodology for making relatively
small-sized, homogenous populations of lipid-based carrier vehicles. A
shelf-stable precursor solution containing a drug or other substance can be
converted into the vehicles by simple aerosolization or dilution with water. The
precursor solution can also be dried onto a surface, such as a bandage material,
and rehydrated upon contact with fluids at the wound site to deliver medicaments
to the wound. Counterpart patents have issued in Australia, Canada, Norway,
Israel, Japan, Hong Kong, 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 a counterpart application in Singapore. The granting fees have
been paid in Singapore, and issuance is expected in the near future.

         The Company is pursuing additional patent coverage in the United States
on other aspects of its SDMC technology. U.S. Patent 5,879,703 relates to
shelf-stable precursor solutions and issued on March 9, 1999. Counterpart
patents have been granted in Australia, Singapore and the EPC (validated in
Austria, Belgium, Denmark, France, Great Britain, Germany, Italy, Portugal,
Spain, Netherlands, Sweden, and Switzerland-Liechtenstein.) The Company has
counterpart applications pending in Canada, Hong Kong and Japan.

         Obtaining patents on the pending applications will add to the Company's
patent portfolio and will strengthen the Company's position with regard to
competitors' efforts to design around the

                                       8
<PAGE>

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

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

                                       9
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         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 February 12, 2001, the Company employed twelve (12) persons
including an interim chief executive officer, an interim chief financial
officer, a technical director, an aesthetic marketing and sales director,
warehouse, sales and administrative personnel.

Risk Factors

         In addition to the other information contained in this 10-KSB, you
should carefully consider the following risk factors. Management believes that
the risks and uncertainties described below comprise many of the material risks
and uncertainties facing the Company. However, additional risks and
uncertainties may also harm its business operations.

The Company's viability as a going concern is in doubt.

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

                                       10
<PAGE>

Limited market for the Company's Common Stock increases the possible volatility
of the Company's stock prices and the value of any investment in the Company's
equity may be reduced.

         The public trading market for shares of the Company's Common Stock is
limited on the OTC Bulletin Board. Our directors, officers and principal
stockholders hold over 53.5% of the outstanding Common Stock of the Company
which has reduced the supply of shares eligible for public resale and reduced
the trading market for the Company's Common Stock. There can be no assurances
that an active trading market for the Company's Common Stock will be developed
or be sustained. By its very nature, trading on the OTC Bulletin Board provides
only limited market liquidity. In addition, the stock markets generally have
experienced, and continue to experience, extreme price and volume fluctuations
which have affected the market price of many small cap companies and which have
often been unrelated to the operating performance of these companies. These
broad market fluctuations, as well as general economic and political conditions,
may adversely affect the market price of the Company's Common Stock.

We must identify new management to develop and implement our business plan.

         As of the date of this Annual Report, each of our executive officers is
serving in that capacity on an interim basis while we search for a management
team which can develop and implement a business plan for our products and
technologies. In light of our current financial condition and historic results
of operations, it may be difficult to recruit qualified individuals. Failure to
recruit a qualified management team to develop and implement a business plan
will have an adverse effect on us.

Senior management beneficially owns a significant percentage of the Company's
Common Stock and therefore has significant influence over the election of
directors.

         Our officers, directors and principal stockholders own approximately
83.7% of the Common Stock of the Company on a fully diluted basis. See Item 11 -
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." In addition,
prior to the conversion of the Series A Preferred Stock, the holder is entitled
to the number of votes cast by the holders of outstanding Common Stock, plus
seven (7) votes. Consequently, upon exercise of their vested options and
warrants and by virtue of Delaware law, these stockholders are in a position to
elect all of our directors and possibly control the outcome of other corporate
matters without the approval of our other stockholders. In addition, applicable
statutory provisions and the ability of the Board of Directors to issue one or
more series of Preferred Stock without stockholder approval could deter or delay
unsolicited changes in control of the Company by discouraging open market
purchases of our stock or a non-negotiated tender or exchange offer for such
stock, which may be disadvantageous to our stockholders who may otherwise desire
to participate in such a transaction and receive a premium or their shares.

The Company has a potential need for collaboration with corporate sponsors.

         Based upon available information, it is likely that substantial
expenditures will be required in order for the Company to conduct further
research and development, testing, manufacturing and marketing of certain
products which utilize its SDMC technologies. In the absence of

                                       11
<PAGE>

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

Competition for the development and sale of non-regulated skin care and consumer
goods products is intense.

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

The further development, production, testing, manufacturing and marketing of
products in regulated fields which incorporate SDMC formulations may require
regulatory review and/or approval of the FDA and comparable agencies in other
countries.

         The nature and extent of regulation may differ with respect to
different products. Given our limited capital resources, we are not currently
pursuing products which require FDA approval. However, in the event that we are
able to secure financing adequate to pursue production of regulated products,
the testing and regulatory pre-market approval process ("PMA") involves rigorous
pre-clinical and clinical testing and approval by FDA and other

                                       12
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comparable agencies and usually takes several years and requires the expenditure
of substantial resources, for which the Company may seek third party
collaboration. There can be no assurance that regulatory approvals will be
obtained for any of the intended applications of the Company's proposed
technologies, once developed. A significant portion of the Company's available
reserves may be used for continuing research and development of the Company's
technologies. These expenditures will be made without any assurance that
approvals will be obtained and before it can be ascertained whether any of the
regulated products proposed to be developed by the Company can be
commercialized. The inability to obtain, or delays in obtaining, such approvals
would materially adversely affect the Company's ability to commence marketing
any regulated products developed by application of its technologies. The Company
currently markets certain products pursuant to the Federal Food, Drug and
Cosmetic Act. If the Company markets products that FDA does not consider to be
"substantially equivalent" to an appropriate previously marketed product, FDA
will require approval pursuant to the more burdensome PMA process. Furthermore,
the Company cannot predict whether there will be, or the extent of, any
potentially adverse government regulations or administrative actions which may
arise in the future.

The Company is engaged in a field increasingly characterized by extensive
research and development efforts.

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

The clinical testing, manufacturing and marketing of the Company's SDMC
formulations, or products which incorporate such formulations, will likely
entail certain risks of products liability.

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

ITEM 2
------

         PROPERTIES
         ----------

         The Company owns no real property. The Company leases approximately
8,404 square feet of office, laboratory, production and warehouse facilities
located in Largo, Florida. The lease, dated December 18, 1997 as amended March
20, 1998, provides for a monthly rental of $7,413 for a term of five years,
ending December 31, 2003. In addition, the Company sub-leased an approximately
2,670 square feet warehouse facility next to its offices. This lease dated March
30, 1999, provides for a month rental of $1,613 for a term of 1 year ending
March 30, 2000. The Company continued to sub-lease this warehouse on a month to
month basis ending December 31, 2000. As of December 31, 2000, the Company no
longer sub-leases this warehouse. The 8,404 square feet facilities are adequate
for the Company's current and foreseeable needs.

                                       13
<PAGE>

ITEM 3
------

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

         None.

ITEM 4
------

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

         None.

                                       14
<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, 1999 and 2000, and for the first and second quarters of its
fiscal year ending September 30, 2001. No trading market exists for shares of
the Company's Class B Common Stock.

         Fiscal 1999                        HIGH                       LOW
         -----------                        ----                       ---

         First Quarter                       .625                     .1875
         Second Quarter                     .4375                     .25
         Third Quarter                     1.0625                     .25
         Fourth Quarter                    1.0625                     .375

         Fiscal 2000                        HIGH                       LOW
         -----------                        ----                       ---

         First Quarter                     1.00                       .25
         Second Quarter                     .6875                     .25
         Third Quarter                      .375                      .25
         Fourth Quarter                     .3125                     .125

         Fiscal 2001                        HIGH                       LOW
         -----------                        ----                       ---

         First Quarter                      .17                       .05
         Second Quarter                     .06                       .06
         (January 1 - February 12, 2001)


         The closing price of the Company's Common Stock on February 12, 2001
was $ .06.

                                       15
<PAGE>

         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.

         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 February 12, 2001, 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
February 12, 2001, the Company had 422 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 2,187 record holders, including such shares
held in "street name."

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

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

ITEM 6
------

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

Background
----------

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

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

                                       16
<PAGE>

         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 year ended September 30, 1998, which were not offset by sales
revenues during the period, the Company substantially utilized its working
capital resources. In order to provide working capital, the Company also entered
into a secured credit arrangement with Mr. Schuchert as of December 31, 1998.
The credit agreement provides for a two-year line of credit of up to $1,500,000
subject to the Company satisfying certain agreed upon quarterly operating budget
guidelines.

         As a result of additional costs associated with the development and
marketing of two new product lines during fiscal year ended September 30, 1999,
the Company fully utilized the $1,500,000 line of credit. In order to maintain
current operations for the fiscal year ended September 30, 2000, the Company
obtained short term unsecured loans from its former President, Mr. Gerald
Simmons and Mr. John C. Walsh, a director of the Company in the aggregate amount
of $20,000. During fiscal 2000, and subsequently, Mr. Schuchert made additional
unsecured advances to the Company, the terms of which have not been finalized.
As of February 12, 2001, the outstanding principal balance of this unsecured
loan was $1,211,500.

         Mr. Schuchert has conditionally indicated his intention to fund the
Company's cash needs for the near term but is under no obligation to do so. If
the Company does not secure additional financing from Mr. Schuchert in the very
near term, the Company will not be able to continue as a going concern and will
suspend operations. See "ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION - Liquidity and Capital Resources."

         Results of Operations
         ---------------------

         During the fiscal year ended September 30, 2000, the Company realized a
net loss of $1,523,142 on revenues of $1,163,310, compared to a net loss of
$1,734,517 on revenues of $1,363,562 for the fiscal year ended September 30,
1999. This decrease in net losses is attributable primarily to the overall
reduction in operating expenses during the fiscal year ended September 30, 2000.
This decrease in operating expenses was primarily due to reduction in personnel,
legal fees, clinical research studies, marketing efforts relating to new
projects, and sales and marketing expenses relating to the Company's new skin
care brand, Celazome(R).

         Revenues for fiscal year ended September 30, 2000 of $1,163,310
represented a decrease of $200,252 or 14.7% from revenues of $1,363,562 during
fiscal year ended September 30, 1999. The decrease in revenues was a result of
the discontinued sunscreen brand, Daylong(R) in the golf market, discontinued
royalties from the Company's European licensee in Norway due to new licensee
agreement.

                                       17
<PAGE>

         During the fiscal year ended September 30, 2000, the Company incurred
operating expenses of $2,102,553, represented a decrease of $732,552 or 25.8%
over operating expenses of $2,835,105 for the prior fiscal year ending September
30, 1999. This decrease in operating expenses was primarily due to reduction in
personnel, legal fees, clinical research studies, marketing efforts relating to
new projects, and sales and marketing expenses relating to the Company's new
skin care brand, Celazome(R).

         During the fiscal year ended September 30, 2000, the Company incurred
interest expense of $249,212, a 271.1% increase over interest expense of $67,154
for the prior fiscal year ending September 30, 1999. This increase in interest
expense is associated with the secured line of credit arrangement and the
unsecured loan with Mr. Joseph S. Schuchert, Jr. (See "Liquidity and Capital
Resources.")

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 MarketSM during May 1994 and the securities
have since traded on the less liquid market of the OTC Bulletin Board.

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

         As a result of such significant increase in marketing costs and legal
fees, which were not offset by sales revenues, the Company had substantially
utilized its working capital resources by December 1998. In order to provide
working capital, the Company entered into a secured credit arrangement with Mr.
Schuchert as of December 31, 1998. The Credit Agreement (the "Credit Agreement")
provides for a secured line of credit of up to $1,500,000, the principal and
unpaid interest of which was due on December 31, 2000, 180 days from written
demand of Mr. Schuchert as lender or upon an event of default under the
agreement. As of February 12, 2001, Mr. Schuchert has not called the credit
agreement on the Company, but is under no obligation to do so. 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 February 12, 2001, the Company had $1,500,000 outstanding
under this facility plus accrued interest of $298,298 as of January 31, 2001.
The proceeds of the loan have been utilized to fund operations and to pay legal
fees in connection with the Dermik lawsuit which was settled in March 1999.
Under the terms of the warrant granted in connection with the Credit Agreement,
Mr. Schuchert is entitled to purchase 1.6 shares of Common Stock for each dollar
advanced under the facility and 1.6 shares of Common Stock for each dollar of
accrued interest that is unpaid when due under the facility at an exercise price
of $.65 per share with an expiration

                                       18
<PAGE>

date of December 31, 2003. As of February 12, 2001, Mr. Schuchert is entitled to
purchase an aggregate of 2,877,276 shares of Common Stock upon the exercise of
such warrant.

         As of September 30, 2000, the Company had a working capital deficit of
$2,638,362, a decrease in working capital of $3,023,826 from the level of
working capital of $385,464 as of September 30, 1999. The decrease in working
capital is primarily attributable to increased expenses associated with sales
and marketing efforts relating to existing and new markets, financial software
to comply with Y2K, accrued interest on the Credit Agreement, and the
reclassification of the $1,500,000 credit agreement with Mr. Schuchert due
December 31, 2000 from long term to current liabilities. As a result of such
increased expenditures, which were not offset by sales revenues, the Company
substantially utilized its working capital resources by October 1999. In order
to provide working capital in the near term, the Company obtained short term
unsecured loans, consisting of $5,000 from its then President, Mr. Gerald T.
Simmons, and $15,000 from John C. Walsh, a Director of the Company, all of which
have been repaid.

         Since October 1999, the Company has substantially relied upon advances
by Mr. Schuchert, a Director of the Company, to provide working capital to fund
operations. Mr. Schuchert made the advances as an additional unsecured loan, the
terms of which have not been finalized. As of February 12, 2001, the outstanding
principal balance of this unsecured loan was $1,211,500 plus estimated accrued
interest of $115,884 as of January 31, 2001. As of February 12, 2001 the
Company's cash position was $127,381. Given the limited financial resources of
the Company, the Company is continuing to reduce operating expenses. In
addition, the Company is continuing to de-emphasize building an internal sales
infrastructure and is concentrating its efforts on establishing partnerships
and/or joint ventures with sales channels that do not require up front
investment or overhead expense. Among others, these relationships may include
commission only sales personnel and E-Commerce marketing partners. Based upon
the Company's current budget guidelines, management believes that the Company
has sufficient capital to enable the Company to meet its anticipated operating
expenses through February 28, 2001. Mr. Schuchert has conditionally indicated
his intention to fund the Company's cash needs for the near term but is under no
obligation to do so. If the Company does not secure additional financing from
Mr. Schuchert in the very near term, the Company will not be able to continue as
a going concern and will suspend operations.

         In August 2000, Spirig AG informed the Company that it would begin
transitioning its sunscreen to a non-LyphaZome technology. The transition will
begin subsequent to fiscal year ending September 30, 2000 and will be completed
by March 22, 2003, the expiration of Spirig AG's contract. The Company has
agreed to accept a fee from Spirig AG based on sales of the non-LyphaZome
sunscreens. This fee is in lieu of the normal licensing fee. At this point, the
Company is unable to quantify its projected loss of revenue from the Spirig AG
contract. To offset the potential revenue decreases from Spirig AG, the Company
is negotiating with a number of new international licensee/distributor
candidates. As of October 2000, Quinoderm, Ltd. has signed a licensee agreement
with the Company to distribute products in the United Kingdom and Ireland
markets.

                                       19
<PAGE>

         Year 2000 Compliance

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

Effects of Inflation

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

ITEM 7
------

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

         Financial statements are included under Item 13(A) and may be found at
pages F-1 through F-18.

ITEM 8
------

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

         None.

                                       20
<PAGE>

                                    PART III
                                    --------

ITEM 9
------

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

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

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

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

Gerald T. Simmons              56      Former Chief Executive Officer and
                                       President (1)

Christopher J. Whitaker        41      Interim Chief Executive Officer and Vice
                                       President of Operations

Francis J. Werner              47      Interim Chief Financial Officer and
                                       Director of Finance and Administration

James E. Fuchs                 73      Secretary and Director

Joseph S. Schuchert, Jr.       70      Chairman and Director

Dr. Christopher Brown          47      Director

Carol Rae                      55      Director

John C. Walsh                  60      Director

(1) Mr. Simmons resigned as Chief Executive Officer and President effective
    November 30, 2000.

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

Gerald T. Simmons

         Mr. Simmons had served as Chief Executive Officer and President from
December 1, 1998 to his resignation on November 30, 2000. Prior to Fountain
Pharmaceuticals, Inc. he held the position of President, Chief Executive Officer
and Director of MantiCore Pharmaceuticals, Inc., a development stage drug
delivery company from December 1996 to December 1998. Prior to MantiCore, Mr.
Simmons was President, Chief Executive Officer and Director of Cellegy
Pharmaceuticals, Inc. (NASDAQ-CLGY), a dermatology and drug delivery company
from December 1992 to January 1996. Prior to senior business development
assignments with two biotechnology companies, Mr. Simmons was employed by
Schering-Plough Corp. as Director of Marketing for OTC consumer products and as
Vice President, New Ventures with responsibility for new product development as
well as mergers and acquisitions for consumer operations. Mr. Simmons is a
Director of MantiCore Pharmaceuticals, Inc. He received his MBA from the
University of Buffalo and a BA from Canisius College.

                                       21
<PAGE>

Christopher J. Whitaker

         Mr. Whitaker has been Vice President of Operations since August 3,
1998. Currently he is serving as Interim Chief Executive Officer. He joined the
Company in March 1998 as Director of Marketing. Prior to joining the Company in
March 1998, Mr. Whitaker was Vice President of Marketing and New Product
Development from 1996 through 1998 for HT Marketing Inc., a small consumer
products company. From 1987 through 1995, Mr. Whitaker held various positions
with Schering-Plough, a leading international pharmaceutical company. Among the
positions held, Mr. Whitaker served as Senior Product Manager for several
nationally known brands such as Coppertone and Correctol, as well as new product
and business development. In total, he has over fifteen years of increasing
responsible rolls in consumer packaged goods marketing and has experience
marketing skincare and sun care products on leading consumer brands. He received
his MBA from Indiana University and a BS in Engineering from the University of
Cincinnati.

Francis J. Werner

         Mr. Werner has been the Director of Finance and Administration for the
Company since July 1992. Currently he is serving as Interim Chief Financial
Officer. He joined the Company in May 1990 as Controller. He is responsible for
all financial and treasury functions, SEC reporting, human resources and
administration. Prior to working for the Company, from 1986 to 1990, he was
Plant Controller with a leading medical device company, Storz Ophthalmics, Inc.,
a subsidiary of American Cyanamid Company, which manufactures interocular lenses
for cataract surgery. At Storz, he was instrumental in the design and
implementation of an automated cost reporting system and internal control/audit
systems. In total, he has over twenty-seven years broad experience in accounting
and finance, accumulated in both public and private accounting. He holds a
Bachelor of Science degree in Business Administration (area of Accounting) from
Christian Brothers University.

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, from 1997 through 1999,
Executive Director and since 1999, President of the Silver Shields Foundation,
which supports the education of children and widows of New York/New
Jersey/Connecticut 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.

                                       22
<PAGE>

Joseph S. Schuchert, Jr.

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

Dr. Christopher Brown

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

Carol Rae

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

John C. Walsh

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

                                       23
<PAGE>

         Board of Directors; Audit Committee
         -----------------------------------

         The Board of Directors held four meetings during fiscal 2000. The
Company has an Audit Committee of the Board of Directors which was created at a
meeting of the Board of Directors on October 9, 1997. The Committee consists of
Mr. Fuchs, Mr. Schuchert and Ms. Rae. The Audit Committee is the Company's
principal liaison with the Company's independent auditors and is primarily
responsible for the review of accounting procedures and methods employed in
connection with the Company's audit programs and related management policies.
During fiscal 2000 the Audit Committee held one meeting. The Board of Directors
has no other committees.

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

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

         As of December 16, 1999, for years of past service, Ms. Rae was granted
options to purchase 24,000 shares of Common Stock under the 1998 Plan at an
exercise price of $.625 per share with the options expiring as of September 23,
2004.

         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 2000, all Reporting Persons
timely complied with all filing requirements applicable to them, except (i) Form
5's relating to the grant of options to Messrs. Brown, Fuchs, Walsh and
Schuchert, and Ms. Rae, and (ii) a Form 5 relating to the number of shares of
Common Stock by Ms. Rae.

                                       24
<PAGE>

ITEM 10
-------

         EXECUTIVE COMPENSATION
         ----------------------

<TABLE>
<CAPTION>
                                            SUMMARY COMPENSATION TABLE
=========================================================================================== =======================
                                                                                                  Long Term
                                    Annual Compensation                                          Compensation
------------------------------------------ ------------------- ------------- -------------- -----------------------

                                                Fiscal Year
Name and Principal Position                        Ended
                                               September 30      Salary ($)     Bonus ($)       Options/SARS (#)

------------------------------------------ ------------------- ------------- -------------- -----------------------
<S>                                        <C>                 <C>           <C>            <C>

Gerald T. Simmons(1)(2)                           2000           $ 77,782         -0-               4,636(7)
Former Chief Executive Officer and                1999           $104,500       $5,000            344,744(7)
President                                         1998             -0-            -0-                -0-

Christopher J. Whitaker(3)                        2000           $124,442         -0-                -0-
Interim Chief Executive Officer and Vice          1999           $110,962       $25,000           37,500(8)
President of Operations                           1998           $ 45,673         -0-                -0-

Francis J. Werner(4)                              2000           $97,991          -0-                -0-
Interim Chief Financial Officer and               1999           $86,912          -0-                -0-
Director of Finance and Administration            1998           $75,000          -0-                -0-

John C. Walsh(5)(6)                               2000             -0-            -0-                -0-
Director, Former Chairman, Chief                  1999           $130,962         -0-             24,000(9)
Executive Officer and President                   1998           $181,731         -0-                -0-

========================================== =================== ============= ============== =======================
</TABLE>

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

(2) Mr. Simmons resigned from his position as Chief Executive Officer and
    President on November 30, 2000. Mr. Simmons did not receive a severance
    arrangement. See "Employment Arrangements and Change of Control."

(3) Mr. Whitaker was hired on March 30, 1998 as Director of Marketing. On August
    3, 1998, Mr. Whitaker was appointed Vice President of Operations. Effective
    February 1, 2001 assumed the position as Interim Chief Executive Officer and
    Vice President of Operations.

(4) Mr. Werner was hired on May 21, 1990 as Controller. On July 1, 1992 Mr.
    Werner was appointed Director of Finance and Administration. Effective
    February 1, 2001 assumed the position as Interim Chief Financial Officer and
    Director of Finance and Administration.

                                       25
<PAGE>

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

(6) 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.

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

(8) Represents option to purchase Common Stock granted as of December 8, 1998.
    The options have an exercise price of $.56 per share. 25,000 options vest
    1/3 per year over a period of three years starting December 8, 1998 and
    expire on December 8, 2003. 12,500 options vest 1/3 per year over a period
    of three years starting December 8, 1999 and expire on December 8, 2003.

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

                                       26
<PAGE>

         OPTION/SAR GRANTS TABLE

<TABLE>
<CAPTION>
                                       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      Expiration
Name                                Year       Granted (#)         Fiscal Year         ($/Sh)          Date
----------------------------------- ---------- ------------------- ------------------- --------------- ----------------
<S>                                 <C>        <C>                 <C>                 <C>             <C>

Gerald T. Simmons                     2000           4,636(1)            34.0%              $.56         12/08/2003
Former Chief Executive Officer
and President

Christopher J. Whitaker               2000           -0-(2)               0.0%              -0-               -
Interim Chief Executive Officer
and Vice President of Operations

Francis J. Werner                     2000           -0-(2)               0.0%              -0-               -
Interim Chief Financial Officer
and Director of Finance and
Administration

John C. Walsh                         2000           -0-(2)               0.0%              -0-               -
Director, Former Chairman,
Chief Executive Officer and
President
=================================== ========== =================== =================== =============== ================
</TABLE>

(1) Represents options to purchase Common Stock granted as of December 8, 1998,
    as adjusted as of September 30, 2000 for certain anti-dilution provisions
    pursuant to Mr. Simmons' employment agreement. The options have an exercise
    price of $.56 per share and a term expiring on December 8, 2003. The options
    vested 20% as of the date of grant with the balance vesting 20% on each
    anniversary of the date of grant.

(2) No options were granted during fiscal year 2000.

                                       27
<PAGE>

         OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE

<TABLE>
<CAPTION>

========================================================================================================================
                              Aggregated Options/SAR Exercises in Last Fiscal Year
                                           and FY-End Option/SAR Value
---------------------------------------------------------------------------- ------------------------ ------------------
                                                                                                      Value of
                                                                             Number of Unexercised    Unexercised
                                                                             Options/SARs at FY-End   In-the-Money
                                                                             (#)                      Options/SARs at
                                                                                                      FY-End ($)(1)
----------------------------------- --------- ----------------- ------------ ------------------------ ------------------

                                              Shares            Value
Name                                Fiscal    Acquired on       Realized     Exercisable/             Exercisable/
                                    Year      Exercise (#)      ($)          Unexercisable            Unexercisable
----------------------------------- --------- ----------------- ------------ ------------------------ ------------------
<S>                                 <C>       <C>               <C>          <C>                      <C>

Gerald T. Simmons                   2000            -0-             -0-      (E)138,787/(U)210,593    (E)$0/(U)$0
Former Chief Executive Officer
and President

Christopher J. Whitaker             2000            -0-             -0-      (E)20,832/(U)16,668      (E)$0/(U)$0
Interim Chief Executive Officer
and Vice President of Operations

Francis J. Werner                   2000            -0-             -0-      (E)37,500/(U)-0-         (E)$0/(U)$0
Interim Chief Financial Officer
and Director of Finance and
Administration

John C. Walsh                       2000            -0-             -0-      (E)6,000/(U)18,000       (E)$0/(U)$0
Director, Former Chairman, Chief
Executive Officer and President
=================================== ========= ================= ============ ======================== ==================
</TABLE>

(1) Based upon the closing price of the Company's Common Stock of $.15 per share
    as reported on the NASDAQ OTC Bulletin Board as of September 30, 2000.

         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 Chief Executive Officer and
President of the Company. Mr. Simmons is provided with an annual salary of
$130,000. The Agreement provides for a term of one year with successive
year-to-year renewals unless either party shall elect not to renew upon

                                       28
<PAGE>

thirty days prior written notice. The Agreement contains a non-competition and
non-solicitation provision that survives his actual employment for a term of two
years. Mr. Simmons was also granted options to purchase 173,121 shares of Common
Stock (5% of the outstanding Common Stock of the Company including outstanding
options, warrants and convertible securities) at an exercise price of $.56 per
share. The options are subject to adjustment pursuant to certain anti-dilution
protection provisions for securities issued by the Company prior to December 31,
1999, including the outstanding Series A Convertible Preferred Stock held by
Holdings and any securities issued by the Company in connection with any debt
funded by Eaglestone Capital or any of its affiliates. On November 30, 2000, Mr.
Simmons resigned as Chief Executive Officer and President of the Company. Mr.
Simmons' contract was then terminated. Provided that Mr. Simmons continued to be
employed by the Company, the options vest 20% each year commencing on the date
of grant. All options vest in the event of a change in control of the Company as
set forth in the Agreement. As of February 12, 2001, Mr. Simmons has options to
purchase 349,380 shares of Common Stock of which approximately 40% have vested.
Subsequent to his resignation from the Company, Mr. Simmons has until February
28, 2001 to exercise 138,787 options that have vested

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

         Stock Options
         -------------

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

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

         As of February 12, 2001, the Company had options to purchase 709,380
shares of Common Stock outstanding under the 1998 Plan to directors and
employees at exercise prices of $.56 to .625 per share. See "Employment
Arrangements and Change of Control."

                                       29
<PAGE>

ITEM 11
-------

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

         The following table sets forth, as of February 12, 2001, 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>

Gerald T. Simmons
837 4th Avenue                                 138,787(2)                  5.5%                  5.5%
Salt Lake City, UT 84103

Christopher J. Whitaker                         40,332(4)                  1.7%                  1.7%
4758 Stoneview Circle
Oldsmar, FL 34677

Francis J. Werner                               37,600(5)                  1.6%                  1.5%
1845 Seton Drive
Clearwater, FL 33763

James Fuchs                                     55,000(6)                  2.3%                  2.2%
565 Park Avenue
New York, NY  10021

Dr. Christopher Brown                           18,218(7)                   *                     *
240 Keystone Road
Sheridan, WY  82801

Carol Rae                                       32,500(8)                  1.3%                  1.3%
13117 North Creekview Road
Rapid City, SD  57702

Joseph S. Schuchert, Jr.                     4,149,679(9)                 63.5%                 63.4%(10)
Fountain Holdings, LLC
c/o Eaglestone Capital Services, Inc.
400 Oceangate, Suite 1125
Long Beach, CA  90802

John C. Walsh                                1,257,100(11)                52.7%                 52.3%
9 North Pelican Drive
Avalon, NJ  08202

All Directors and Officers as a Group        5,691,716                    83.7%                 83.5%
(8 Persons)

</TABLE>

*    Represents less than 1%

                                       30
<PAGE>

(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, 2001.

(2)  Does not include Common Stock options to purchase 210,593 shares at an
     exercise price of $.56 per share which was granted December 8, 1998 and
     which have not vested. Per the Company's 1998 Stock Option Plan (the
     "Plan"), the 138,787 Common Stock options must be exercised only within
     three months after the termination of employment and within the option
     period. Mr. Simmons resigned as Chief Executive Officer and President on
     November 30, 2000. The 138,787 Common Stock options must be exercised no
     later than February 28, 2001 or they will be cancelled.

(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 33,332 shares of Common Stock issuable upon the exercise of
     options at an exercise price of $.56 per share. Does not include Common
     Stock options to purchase 4,168 shares at an exercise price of $.56 per
     share which was granted December 8, 1998 and which have not vested.

(5)  Includes 37,500 shares of Common Stock issuable upon the exercise of
     options at an exercise price of $.56 per share.

(6)  Includes 25,000 shares of Common Stock issuable upon the exercise of
     options at an exercise price of $.56 per share and 30,000 shares of Common
     Stock issuable upon the exercise of options at an exercise price of $.625
     per share. Does not include Common Stock options to purchase 18,000 shares
     at an exercise price of $.625 per share which were granted September 23,
     1999 and which have not vested.

(7)  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. Also includes 6,000 shares of Common Stock issuable upon
     the exercise of options at an exercise price of $.625 per share. Does not
     include Common Stock options to purchase 18,000 shares at an exercise price
     of $.625 per share which were granted September 23, 1999 and which have not
     vested.

(8)  Includes 30,000 shares of Common Stock issuable upon the exercise of
     options at an exercise price of $.625 per share. Does not include Common
     Stock options to purchase 18,000 shares at an exercise price of $.625 per
     share which were granted September 23, 1999 and which have not vested.

                                       31
<PAGE>

(9)  Includes 1,264,151 shares of Common Stock and 2,252 shares of Class B
     Common Stock issuable upon conversion of the Preferred Stock held by
     Holdings. Holdings is held 50% by Mr. Schuchert and 50% by his spouse, Ms.
     Karalyn R. Schuchert. Mr. Schuchert is the managing member of Holdings.
     Also includes 2,877,276 shares of Common Stock issuable upon the exercise
     of a Common Stock purchase warrant at an exercise price of $.65 per share.
     In addition, including 6,000 shares of Common Stock issuable upon the
     exercise of options at an exercise price of $.625 per share. Does not
     include Common Stock options to purchase 18,000 shares at an exercise price
     of $.625 per share which were granted September 23, 1999 and which have not
     vested.

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

(11) Includes 6,000 shares of Common Stock issuable upon the exercise of options
     at an exercise price of $.625 per share. Does not include Common Stock
     options to purchase 18,000 shares at an exercise price of $.625 per share
     which were granted September 23, 1999 and which have not vested.

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

         As of December 5, 1997, there are 2,000,000 shares of Preferred Stock,
$.001 par value per share, authorized and outstanding, all of which is held by
Holdings. Prior to the conversion of the Preferred Stock, the holders of the
Preferred Stock are entitled to the number of votes to be cast by the holders of
all of the then issued and outstanding Common Stock and Class B Common Stock
plus seven (7) votes in all elections of directors, which enables such holders
to elect a majority of the Board of Directors. In all other matters presented to
stockholders for a vote, whether required by applicable corporate law or
otherwise, the holders of Preferred Stock vote as a class and no vote of the
stockholders will be effective without the approval of the holders of a majority
of the shares of the Preferred Stock. Dr. Christopher Brown, Mr. Joseph S.
Schuchert, Jr. and Ms. Carol Rae were appointed to the Board of Directors as
nominees of Holdings. As of February 12, 2001, the shares of Preferred Stock are
convertible into approximately 1,264,151 shares of Common Stock and 2,252 shares
of Class B Common Stock.

ITEM 12
-------

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

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

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

                                       32
<PAGE>

         Line of Credit Agreement and Grant of Warrant
         ---------------------------------------------

         As of December 31, 1998, the Company entered into a credit arrangement
with Mr. Schuchert. The Credit Agreement provides for a secured line of credit
of up to $1,500,000, the principal and unpaid interest of which is due on the
earlier of December 31, 2000, 180 days from written demand of the lender or upon
an event of default under the agreement. As of February 12, 2001, Mr. Schuchert
has not called the credit agreement on the Company, but is under no obligation
to do so. As of February 12, 2001, the Company had $1,500,000 plus accrued
interest as of January 31, 2001 of $298,298 outstanding under this facility.
Under the terms of the warrant granted to Mr. Schuchert in connection with the
Credit Agreement, Mr. Schuchert is entitled to purchase 1.6 shares of Common
Stock for each dollar advanced under the facility at a purchase price of $.65
per share with an expiration date of December 31, 2003. As of February 12, 2001,
Mr. Schuchert is entitled to purchase an aggregate of 2,877,276 shares of Common
Stock upon the exercise of such warrant. See "ITEM 6 - MANAGEMENT'S DISCUSSION
AND ANALYSIS OR PLAN OF OPERATION - Liquidity of Capital Resources."

         Grant of Options to Directors
         -----------------------------

         As of December 16, 1999, for years of past service, the Company granted
to Ms. Rae, a director, stock options to purchase 24,000 shares of Common Stock
under the 1998 Plan at an exercise price of $.625 per share with the options
expiring as of September 23, 2004.

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

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

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

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

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

                                       33
<PAGE>

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

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

         Loans From Affiliates
         ---------------------

         In order to maintain current operations for the fiscal year ended
September 30, 2000, the Company obtained short term unsecured loans, consisting
of $5,000 from Mr. Gerald T. Simmons, the Company's then President and $15,000
from Mr. John C. Walsh, a Director of the Company at an interest rate of 10.25%
per annum, all of which have been repaid. In addition, during fiscal year ended
September 30, 2000 and subsequent to fiscal 2000, Mr. Schuchert made advances to
the Company as an additional unsecured loan, the terms of which have not been
finalized. As of February 12, 2001, the outstanding principal balance of this
unsecured loan was $1,211,500 plus estimated accrued interest of $115,884 as of
January 31, 2001. (See "ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION - Liquidity and Capital Resources."

ITEM 13
-------

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

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

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

         Balance Sheet as of September 30, 2000                   F-2

         Statements of Operations for the years ended             F-3
         September 30, 2000 and 1999

         Statements of Stockholders' Deficit for the              F-4
         years ended September 30, 2000 and 1999

         Statements of Cash Flows for the years ended             F-5
         September 30, 2000 and 1999

         Notes to Financial Statements of Fountain                F-6 thru F-18
         Pharmaceuticals, Inc. for the years ended
         September 30, 2000 and 1999

B.       Financial Statement Schedules:
         None.

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

                                       34
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                       35
<PAGE>

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

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

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

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

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

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

10.9              Facility Sub-lease Agreement between the Registrant and Kenlee
                  Precision Corporation.

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

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

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

10.13             Consulting Agreement between the Registrant and Yarra, Societe
                  Anonyme effective March 21, 2000. (Filed herewith)

10.14             License Agreement between the Registrant and Quinoderm, LTD.
                  effective October 9, 2000. (Filed herewith)

27       Financial Data Schedule (Edgar format only)

D.       Reports on Form 8-K
         None.

                                       36
<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) 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 14th day of February, 2001.

                                     FOUNTAIN PHARMACEUTICALS, INC.

                                     By: /s/ Christopher J. Whitaker
                                         ---------------------------------------
                                         Christopher J. Whitaker
                                         Interim Chief Executive Officer and
                                         Vice President of Operations

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

<TABLE>
<CAPTION>

Principal Executive Officer                 Title                                         Date
---------------------------                 -----                                         ----
<S>                                         <C>                                           <C>

/s/ Christopher J. Whitaker                 Interim Chief Executive Officer and           February 14, 2001
----------------------------                Vice President of Operations
Christopher J. Whitaker


Principal Financial and Accounting
----------------------------------
Officer
-------

/s/ Francis J. Werner                       Interim Chief Financial Officer and           February 14, 2001
----------------------------                Director of Finance and Administration
Francis J. Werner


Directors
---------

/s/ Joseph S. Schuchert, Jr.                Chairman of the Board and Director            February 14, 2001
----------------------------
Joseph S. Schuchert, Jr.

/s/ James E. Fuchs                          Secretary and Director                        February 14, 2001
----------------------------
James E. Fuchs

/s/ John C. Walsh                           Director                                      February 14, 2001
----------------------------
John C. Walsh

/s/ Dr. Christopher Brown                   Director                                      February 14, 2001
----------------------------
Dr. Christopher Brown

/s/ Carol A. Rae                            Director                                      February 14, 2001
----------------------------
Carol A. Rae
</TABLE>
<PAGE>

         INDEX TO FINANCIAL STATEMENTS
         -----------------------------

                                                                            Page
                                                                            ----

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

Balance Sheet as of September 30, 2000                                      F-2

Statements of Operations for the years ended                                F-3
September 30, 2000 and 1999

Statements of Stockholders' Deficit for the                                 F-4
years ended September 30, 2000 and 1999

Statements of Cash Flows for the years ended                                F-5
September 30, 2000 and 1999

Notes to Financial Statements of Fountain                                   F-6
Pharmaceuticals, Inc. for the years ended
September 30, 2000 and 1999


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

Exhibit    Description                                         Method of Filing
-------    -----------                                         ----------------

10.13      Consulting Agreement between the Registrant and
           Yarra, Societe Anonyme effective March 21, 2000.    Filed herewith

10.14      License Agreement between the Registrant and
           Quinoderm, Ltd. effective October 9, 2000.          Filed herewith

27         Financial Data Schedule                             Edgar format only
<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, 2000, and the related statements of
operations, stockholders' deficit and cash flows for each of the years in the
two-year period then ended.  These financial statements are the responsibility
of the Company's management.  Our responsibility is to express an opinion on
these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fountain Pharmaceuticals, Inc.,
as of September 30, 2000, and the results of its operations and its cash flows
for each of the years in the two-year period then ended in conformity with
generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.  As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a working capital and net capital deficiency which raise substantial
doubt about its ability to continue as a going concern.  Management's plans in
regard to these matters are also described in Note 1.  The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

                                    /s/ Aidman, Piser & Company, P.A.

December 28, 2000 except for Notes 1 and 7, for which the date is January 16,
2001
Tampa, Florida

                                      F-1
<PAGE>

                         FOUNTAIN PHARMACEUTICALS, INC.
                                 BALANCE SHEET
                               SEPTEMBER 30, 2000

                                     ASSETS
<TABLE>
<S>                                                               <C>
Current assets:
 Cash and cash equivalents                                        $    88,687
 Accounts receivable, net of allowance for
  uncollectible accounts of $10,600                                    50,409
 Inventories                                                          233,169
 Prepaid expenses                                                       6,184
                                                                  ------------
  Total current assets                                                 378,449

Property and equipment, net                                            101,819
Patent costs, less accumulated amortization
 of $45,408                                                            157,884
Other assets                                                            10,046
                                                                  ------------
                                                                  $    648,198
                                                                  ============
                     LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
 Accounts payable and accrued expenses                            $    219,114
 Current maturities of long-term debt                                   17,810
 Due to related party:
  Note payable                                                       2,476,000
  Accrued interest                                                     303,887
                                                                  ------------

  Total current liabilities                                          3,016,811

Long-term debt, less current maturities                                 13,799
                                                                  ------------

  Total liabilities                                                  3,030,610
                                                                  ------------

Commitments                                                                  -

Stockholders' deficit:
 Series A preferred stock, par value $.001, 2,000,000 shares
  authorized, issued and outstanding
   (liquidation preference $2,498,000 in excess of par)                  2,000
 Common stock, par value $.001, 50,000,000
  shares authorized; 2,375,796 issued and outstanding                    2,376
 Class B common stock; par value $.001, 50,000,000 shares
  authorized; 4,505 shares issued and outstanding                            5
 Additional paid-in capital                                         17,086,682
 Accumulated deficit                                               (19,473,475)
                                                                  ------------
  Total stockholders' deficit                                       (2,382,412)
                                                                  ------------

                                                                  $    648,198
                                                                  ============
</TABLE>

                                      F-2
<PAGE>

                        FOUNTAIN PHARMACEUTICALS, INC.
                           STATEMENTS OF OPERATIONS
                    YEARS ENDED SEPTEMBER 30, 2000 AND 1999

<TABLE>
<CAPTION>
                                                            2000           1999
                                                        ------------   ------------
<S>                                                     <C>            <C>
Revenue                                                 $  1,163,310   $  1,363,562

Cost of sales                                                178,295        392,057
Write down of inventory to market                            143,506         46,370
                                                        ------------   ------------
                                                             321,801        438,427
                                                        ------------   ------------

Gross profit                                                 841,509        925,135
                                                        ------------   ------------

Operating expenses:
 Research and development                                    368,469        412,890
 General and administrative                                  495,535      1,017,641
 Selling                                                   1,181,818      1,368,146
 Depreciation and amortization                                56,731         36,428
                                                        ------------   ------------

                                                           2,102,553      2,835,105
                                                        ------------   ------------

Loss from operations                                      (1,261,044)    (1,909,970)
                                                        ------------   ------------

Other income (expenses):
 Interest income                                               3,953          8,179
 Interest expense                                           (249,212)       (67,154)
 Other income (expense)                                      (16,839)       234,428
                                                        ------------   ------------
                                                            (262,098)       175,453
                                                        ------------   ------------

Loss before income taxes                                  (1,523,142)    (1,734,517)

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

Net loss                                                 ($1,523,142)   ($1,734,517)
                                                        ============   ============

Basic and diluted net loss per common share                    ($.64)         ($.73)
                                                        ============   ============

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


                      See notes to financial statements.

                                      F-3
<PAGE>

                        FOUNTAIN PHARMACEUTICALS, INC.
                      STATEMENTS OF STOCKHOLDERS' DEFICIT
                    YEARS ENDED SEPTEMBER 30, 2000 AND 1999

<TABLE>
<CAPTION>

                                                                                   Class B
                                     Preferred Stock         Common Stock        Common Stock         Additional
                                 -----------------------   -----------------   -------------------     Paid-in       Accumulated
                                  Shares       Amount       Shares    Amount     Shares     Amount     Capital         Deficit
                                 ---------  ------------   ---------  ------   -----------  ------   ------------   -------------
<S>                              <C>        <C>            <C>        <C>      <C>          <C>      <C>            <C>
Balances, October 1, 1998        2,000,000  $     2,000    2,375,796  $2,376        4,505       $5   $17,056,450    ($16,215,816)

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

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

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

Balances, September 30, 1999     2,000,000        2,000    2,375,796   2,376        4,505        5    17,077,128     (17,950,333)

Options and warrants issued
 to directors for services               -            -            -       -            -        -         9,554               -

Net loss for the year                                                                                          -      (1,523,142)
                                 ---------  -----------    ---------  ------   ----------   ------   -----------    ------------

Balances, September 30, 2000     2,000,000  $     2,000    2,375,796  $2,376        4,505       $5   $17,086,682    ($19,473,475)
                                 =========  ===========    =========  ======   ==========   ======   ===========    ============
</TABLE>

<TABLE>
<CAPTION>
                                                            Treasury Stock
                                                         ---------------------
                                                          Shares       Amount           Total
                                                         --------     --------      -------------
<S>                                                      <C>          <C>          <C>
Balances, October 1, 1998                                    12         ($24)      $    844,991

Retirement of treasury stock                                (12)          24                  -

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

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

Balances, September 30, 1999                                  -            -           (868,824)

Options and warrants issued
 to directors for services                                    -            -              9,554

Net loss for the year                                         -            -         (1,523,142)
                                                         ------       ------       ------------

Balances, September 30, 2000                                  -          $ -        ($2,382,412)
                                                         ======       ======       ============
</TABLE>

                       See notes to financial statements.

                                      F-4
<PAGE>

                         FOUNTAIN PHARMACEUTICALS, INC.
                            STATEMENTS OF CASH FLOWS
                    YEARS ENDED SEPTEMBER 30, 2000 AND 1999

<TABLE>
<CAPTION>
                                                              2000           1999
                                                          ------------   ------------
<S>                                                       <C>            <C>
Cash flows from operating activities:
 Net loss                                                 ($1,523,142)   ($1,734,517)
 Adjustments to reconcile net loss to net cash
  used in operating activities:
   Expenses funded by issuance of options and
     warrants                                                   9,554         20,702
   Depreciation                                                47,315         27,140
   Amortization                                                 9,416          9,288
   Loss on disposal of property and equipment                       -          1,989
   Increase (decrease) in cash due to changes in:
     Accounts receivable                                       46,809        107,975
     Inventories                                              194,447       (232,376)
     Prepaid expenses                                          69,222        (42,683)
     Other assets                                                (400)        (3,051)
     Accounts payable and accrued expenses                    147,295        152,736
                                                          -----------    -----------
Net cash used in operating activities                        (999,484)    (1,692,797)
                                                          -----------    -----------

Cash flows from investing activities:
 Deferred patent costs incurred                               (22,904)       (14,158)
 Acquisition of property and equipment                        (25,855)       (51,065)
                                                          -----------    -----------

Net cash used in investing activities                         (48,759)       (65,223)
                                                          -----------    -----------

Cash flows from financing activities:
 Repayment of liabilities not subject to compromise                 -         (2,584)
 Proceeds from related party advances                         976,000      1,500,000
 Payments on long-term debt                                   (16,068)       (14,497)
                                                          -----------    -----------
Net cash provided by financing activities                     959,932      1,482,919
                                                          -----------    -----------

Decrease in cash and cash equivalents                         (88,311)      (275,101)

Cash and cash equivalents, beginning of year                  176,998        452,099
                                                          -----------    -----------

Cash and cash equivalents, end of year                     $   88,687     $  176,998
                                                          ===========    ===========
</TABLE>

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

Interest paid was $4,747 and $7,732 for the years ended September 30, 2000 and
1999, respectively.


                      See notes to financial statements.

                                      F-5
<PAGE>

                        FOUNTAIN PHARMACEUTICALS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 2000 AND 1999

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

   Nature of business:

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

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

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

   Management's plans regarding liquidity and capital resources:

   The Company has suffered recurring losses from operations and, as of
   September 30, 2000, has a working capital and net capital deficiency.  While
   revenues have been higher from 1998 through 2000 than those achieved
   historically and while management has implemented certain cost cutting
   measures in 2000, losses have continued to occur due to substantial selling
   expenses for new products which did not generate revenues to the extent
   expected.  The Company has continued to experience losses through the first
   quarter of fiscal 2001 (unaudited) and, further, has been notified by one of
   its significant European licensees that the licensee may reduce the level of
   sales of the Company's licensed product in 2001, which may have the effect of
   reducing Company revenues from this licensee in the future.

                                      F-6
<PAGE>

                        FOUNTAIN PHARMACEUTICALS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 2000 AND 1999

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

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

   The Company's losses have been historically funded by sales of capital stock,
   capital contributions and loans from stockholders or other related parties.
   In order to provide working capital for fiscal 1999, the Company entered into
   a secured credit agreement with a director of the Company which provided for
   a two-year line of credit of up to $1,500,000. The Company fully utilized the
   $1,500,000 line of credit during fiscal year 1999. This loan is currently due
   and no formal extension has been granted although, as of January 16, 2001,
   the lender had not demanded repayment on this loan. The Company borrowed an
   additional $976,000 and $235,500 from this same director through September
   2000 and during the four months ended January 2001, respectively. The terms
   of these unsecured advances have not been finalized. The director has
   conditionally indicated his intention to fund the Company's cash needs for
   the near term but is under no obligation to do so.

   Based upon its present operating expenses and debt obligations, taking into
   account available cash reserves, the Company will not be able to continue as
   a going concern beyond the immediate term without additional debt or equity
   funding, as to which there can be no assurances.

   Inventories:

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

   Property and equipment:

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

   Patent costs:

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

                                      F-7
<PAGE>

                        FOUNTAIN PHARMACEUTICALS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 2000 AND 1999

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

   Advertising costs:

   The costs associated with producing and communicating advertising are
   expensed in the period incurred.  Advertising costs were approximately
   $165,000 and $188,000 during 2000 and 1999, 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.

   Reclassifications:

   Certain reclassifications have been made to 1999 amounts to conform with the
   current year presentation.

   Stock-based compensation:

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

                                      F-8
<PAGE>

                        FOUNTAIN PHARMACEUTICALS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 2000 AND 1999

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

   Net loss per share:

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

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

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

   Major customer information:

   During the years ended September 30, 2000 and 1999 the Company derived
   revenues from two customers which individually exceeded 10% of total revenues
   as follows:

<TABLE>
<CAPTION>
                                                             2000      1999
                                                           --------  --------
<S>                                                        <C>       <C>
     Customer 1 (European)                                 $525,000  $618,000
     Customer 2 (European)                                 $217,000  $428,000
</TABLE>

   Total export revenues were approximately as follows:

<TABLE>
<CAPTION>
                                                             2000       1999
                                                           --------  ----------
<S>                                                        <C>       <C>
       Europe                                              $755,000  $1,090,000
       South America                                         26,000      24,000
                                                           --------  ----------
                                                           $781,000  $1,114,000
                                                           ========  ==========
</TABLE>

   Fair value of financial instruments:

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

   Concentrations of credit risk:

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

                                      F-9
<PAGE>

                        FOUNTAIN PHARMACEUTICALS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 2000 AND 1999

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

   Concentrations of credit risk (continued):

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

                                      F-10
<PAGE>

                        FOUNTAIN PHARMACEUTICALS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 2000 AND 1999

3.   Business segment information:

     The Company has operations classified as two business segments: 1) domestic
     sales of dermatologic products, and 2) international sales of dermatologic
     products to distributors and the sale of the rights to the Company's
     technology. The "domestic" category is an aggregation of the LyphaZome(R)
     and Celazome(R) product lines for 2000 and the LyphaZome(R), Celazome(R),
     Octazome(R), and Daylong(R) product lines for 1999. The "all other"
     category relates to new business and unlaunched product lines that did not
     generate any revenue. There were no significant intersegment sales or
     transfers during 2000 or 1999.

     Summarized financial information by business segment for 2000 and 1999 is
     as follows:

<TABLE>
<CAPTION>
                                                                   2000
                                 -------------------------------------------------------------------------
                                  Corporate        Domestic    International      Other          Total
                                 -----------      ----------   -------------    ----------     -----------
<S>                              <C>              <C>          <C>              <C>            <C>
   Total revenue                 $    25,000      $  383,099     $  755,211     $       -     $  1,163,310
                                                                                              ============

   Cost of sales                           -         299,093         22,708             -     $    321,801
                                                                                              ============

   Income (loss)
    before income
    taxes                         (1,415,584)       (683,283)       621,168       (45,443)     ($1,523,142)
                                                                                              ============

   Total assets/1/                   648,198               -              -             -     $    648,198
                                                                                              ============

   Depreciation
    and
    amortization/1/                   56,731               -              -             -     $     56,731
                                                                                              ============

   Capital
    expenditures/1/                   25,855               -              -             -     $     25,855
                                                                                              ============

<CAPTION>
                                                                   1999
                                 -------------------------------------------------------------------------
                                  Corporate        Domestic    International      Other          Total
                                 -----------      ----------   -------------    ----------     -----------

   Total revenue                 $         -      $  274,317     $1,089,245     $       -     $  1,363,562
                                                                                              ============

   Cost of sales                           -         160,348        278,079             -     $    438,427
                                                                                              ============

   Income (loss)
    before
    income taxes                  (1,540,380)       (621,577)       712,005      (284,565)     ($1,734,517)
                                                                                              ============

   Total assets/1/                 1,054,559               -              -             -     $  1,054,559
                                                                                              ============

   Depreciation
    and
    amortization/1/                   36,428               -              -             -     $     36,428
                                                                                              ============

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

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

                                      F-11
<PAGE>

                        FOUNTAIN PHARMACEUTICALS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 2000 AND 1999

4.   Inventories:

     Inventories at September 30, 2000 consist of the following:

       Raw materials                                          $  81,160
       Finished goods                                           300,709
       Less allowance for obsolescence                         (148,700)
                                                              ---------
                                                              $ 233,169
                                                              =========

5.   Property and equipment:

     Property and equipment at September 30, 2000 consists of the following:

       Machinery and equipment                                $ 199,326
       Office equipment                                         209,776
       Leasehold improvements                                    35,298
                                                              ---------
                                                                444,400
       Accumulated depreciation                                 342,581
                                                              ---------
                                                              $ 101,819
                                                              =========

6.   Long-term debt:

     Long-term debt at September 30, 2000 consists of two equipment loans which
     bear interest at the prime rate plus .5% and are collateralized by the
     equipment and cash equivalents.

     Future maturities of long-term debt are as follows:

     Year ending September 30,
     -------------------------
              2001                                            $ 17,810
              2002                                              13,799
                                                              --------
                                                              $ 31,609
                                                              ========

7.   Related party transactions:

     Note payable, related party represents advances from a director and
     principal stockholder of the Company's controlling entity under a
     $1,500,000 line of credit agreement and $976,000 in unsecured advances from
     the director. The line of credit advances are secured by substantially all
     Company assets, bear interest at the greater of 9% or the prime rate plus
     1 1/2%, and were repayable on December 31, 2000. However, as of January 16,
     2001, the director had not demanded repayment on this loan. The Company has
     accrued interest on the $976,000 unsecured advances at the greater of 9% or
     the prime rate plus 1 1/2%, but the terms of these advances have not been
     finalized. In connection with the $1,500,000 line of credit and related
     accrued interest, the Company granted the director a warrant to acquire 1.6
     shares of common stock for each dollar advanced and each dollar of accrued
     interest. The warrants are exercisable at $.65 per share and expire in
     December

                                      F-12
<PAGE>

                        FOUNTAIN PHARMACEUTICALS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 2000 AND 1999

7.   Related party transactions (continued):

     2003. There were 2,771,974 total warrants outstanding under this agreement
     at September 30, 2000 (included in the tabulations in Note 8). Interest
     expense on the note and the advance was approximately $244,000 and $59,000
     for the years ended September 30, 2000 and 1999 (all of which is unpaid and
     included in accrued interest, related party in the 2000 balance sheet).

8.   Stockholders' deficit:

     Series A preferred stock:

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

     Voting rights:

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

     Stock option plan:

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

                                      F-13
<PAGE>

                        FOUNTAIN PHARMACEUTICALS, INC.
                        NOTES TO FINANCIAL STATEMENTS
                   YEARS ENDED SEPTEMBER 30, 2000 AND 1999

8.   Stockholders' deficit (continued):

     Common stock options and warrants:

     The Company recognized compensation expense to non-employee directors of
     approximately $10,000 in 2000 and $21,000 in 1999 associated with the
     issuance of options and warrants. The fair value of options and warrants
     issued to employees in 2000 and 1999 was nominal as determined using the
     "Black-Scholes" option-pricing model.

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

          Underlying stock price at grant date         $   .150 - .625
          Exercise price                               $    .56 - .65
          Dividend yield                                     0%
          Risk free interest rate                            6%
          Volatility                                        40%

     Common stock options and warrants issued, redeemed and outstanding during
     the years ended September 30, 2000 and 1999 are as follows:

<TABLE>
<CAPTION>
                                                                                     Weighted Avg.
                                                                    Number of          Exercise
                       Description                            Options and Warrants   Price/Share
     ----------------------------------------------           --------------------   -------------
     <S>                                                      <C>                    <C>

       Issued and outstanding at October 1, 1998                    162,500             $1.71

       Issued in 1999                                             3,223,181               .61

       Expired in 1999                                              (25,000)              .66

       Surrendered in 1999/1/                                      (112,500)              .80
                                                                  ---------             -----

       Issued and outstanding at September 30, 1999               3,248,181               .63

       Issued in 2000                                               314,507               .65

       Expired in 2000                                              (33,000)              .58
                                                                  ---------             -----

       Issued and outstanding at September 30, 2000               3,529,688             $ .63
                                                                  =========             =====
</TABLE>

                                      F-14
<PAGE>

                        FOUNTAIN PHARMACEUTICALS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 2000 AND 1999

8.   Stockholders' deficit (continued):

     Common stock options and warrants (continued):

     These common stock options and warrants were issued to current or former
     officers, directors, shareholders and employees. Those that remain
     outstanding at September 30, 2000 are as follows:

<TABLE>
<CAPTION>
                        Vesting Period     Exercise    Expiration    Remaining       Number
     Issue Date             Yrs            Price         Date         Life        Outstanding
     ----------        --------------    ----------   ----------    ---------     -----------
     <S>               <C>               <C>          <C>           <C>           <C>
     July 1996               0           $   .56/2/   December 2000    .25 Yrs         40,000

     December 1998           0           $   .56      December 2000    .25 Yrs        112,500

     December 1998           0           $   .65      December 2003   3.25 Yrs      2,771,974

     December 1998         0-4           $   .56      December 2003   3.25 Yrs        413,214

     September 1999        0-3           $  .625      September 2004     4 Yrs        162,000

     October 1999            3           $  .625      October 2004       4 Yrs          3,000

     December 1999           0           $  .625      September 2004     4 Yrs         24,000

     May 2000                3           $  .625      May 2005         4.5 Yrs          3,000
                                                                                   ----------
                                                                                    3,529,688
                                                                                   ==========
</TABLE>

/1/These options and warrants were surrendered pursuant to terms related to the
   grant of new options. (see previous page)
/2/The Company repriced these options and warrants from $.80 in December 1999.

                                     F-15
<PAGE>

                        FOUNTAIN PHARMACEUTICALS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 2000 AND 1999


9.   Employee benefit plan:

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

10.  Income taxes:

     Deferred tax assets consist of the following at September 30, 2000:

<TABLE>
      <S>                                                       <C>
      Net operating loss carryover                              $ 2,260,000
      Obsolete inventory allowance                                   56,000
      Accrued interest not currently deductible                     114,000
      Other                                                          26,000
      Valuation allowance                                        (2,456,000)
                                                                -----------
                                                                $         -
                                                                ===========
</TABLE>

     Income tax (expense) benefit consists of the following:

<TABLE>
<CAPTION>
                                                            2000          1999
                                                          ---------    ---------
      <S>                                                 <C>          <C>
      Current:
       Federal                                            $       -    $       -
                                                          ---------    ---------

      Deferred:
       Deferred                                            (168,000)       8,000
       Benefit of net operating loss carryover (a)         (418,000)    (604,000)
       Change in valuation allowance                        586,000      596,000
                                                          ---------    ---------
                                                                  -            -
                                                          ---------    ---------
                                                          $       -    $       -
                                                          =========    =========
</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
                                           ------------------------------------
                                               2000                    1999
                                           ------------             -----------
     <S>                                   <C>                      <C>
     Statutory tax rate                        34.0%                   34.0%
     State tax                                  3.5%                    3.5%
     Change in deferred tax asset
      valuation allowance                     (37.5%)                 (37.5%)
                                           --------                 -------

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

                                     F-16
<PAGE>

                        FOUNTAIN PHARMACEUTICALS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 2000 AND 1999

10. Income taxes (continued):

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

11. Commitments:

    Lease obligations:

    The Company leases its office and warehouse facilities under a five-year,
    non-cancelable operating lease for approximately $7,000 per month.
    Additionally, the Company leases various warehouse space and equipment under
    various non-cancelable operating leases for various terms from 12 to 60
    months for approximately $1,600 per month. Rent expense under all operating
    leases approximated $131,000 and $112,000 for 2000 and 1999, respectively.

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

         Year ending September 30,
         -------------------------
                   2001               $ 99,845
                   2002                 96,499
                   2003                 22,976
                                      --------
                                      $219,320
                                      ========

    License agreement and royalty:

    During 1999, the Company entered into an 18 month agreement with an
    unrelated third party for an exclusive sub-license for the use of certain
    proprietary information, technology and patents. The Company paid $100,000
    in 1999 in consideration for this sub-license and for the Company's
    exclusive right to test the viability of a skin care concept in certain
    marketing channels. In addition, the Company will pay a royalty of 8% of net
    sales resulting from products sold utilizing the associated technology.
    Royalty expense was nominal in 2000 and no royalty expense was incurred
    during 1999. The agreement expired in November 2000.

                                      F-17
<PAGE>

                        FOUNTAIN PHARMACEUTICALS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED SEPTEMBER 30, 2000 AND 1999

11. Commitment (continued):

    Representation agreement:

    In March 2000, the Company entered into a 2-year representation agreement
    whereby the representatives will search for potential marketing partners for
    the Company's LyphaZome(R) product line. The Company agrees to pay $10,000
    upon the execution of each marketing agreement and a commission based on the
    net revenue generated by the agreement over the subsequent four years. There
    was no expense incurred in relation to this agreement during 2000.

12. Subsequent events:

    License agreement:

    During October 2000, the Company entered into a 5-year agreement that
    assigns the right to manufacture, market and sell the Company's SDMC
    dermatological products under independent trade names in Ireland and the UK.
    The Company will receive an 8% royalty on net sales of these products.

                                      F-18