SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                                   FORM 10-KSB

            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                 SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
                                       OR
          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

   For the fiscal year ended June 30, 1998     Commission File No. 33-43976
   ---------------------------------------     ----------------------------
                  Delaware                              88-0218411
      (State or other jurisdiction of       (I.R.S. Employer Identification No.)
       Incorporation or organization)

                                BIORELEASE CORP.
             (Exact name of Registrant as specified in its charter)

               340 Granite Street, Suite 200, Manchester, NH 03102
               ---------------------------------------------------
               (Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code:    (603) 641-8443

Securities registered pursuant to Section 12(b) of the Act:   None
Securities registered pursuant to Section 12(g) of the Act:   Common Stock,
                                                              Class A
                         Common Stock Purchase Warrants
                         ------------------------------

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

                               Yes __X__ No _____

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

                               Yes __X__ No _____

The aggregate market value of the voting common stock held by non-affiliates (1)
of the registrant,  based on the average of high bid ($ .02) and low bid ($ .01)
prices of the Company's  Common Stock as of October 15, 1998,  is  approximately
$125,861.  This is based upon an average  of $.015  multiplied  by the number of
shares of Registrant's Common Stock held by non-affiliates (8,390,752 shares).

The number of shares  outstanding  of the  Registrant's  Common Stock,  $.01 par
value,  as of October 15, 1998 is 9,736,659  (which  excludes  550,000  treasury
shares).

(1)  "Affiliates"  solely for purposes of this item refers to those persons who,
during the 3 months  preceding  the filing of this Form  10-KSB  were  officers,
directors and/or  beneficial  owners of 5% or more of the Company's  outstanding
stock.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                  See Item 13.

Transitional Small Business Disclosure Format (check one):  Yes _____ No __X__


<PAGE>


                                 BIORELEASE CORP
                                   Form 10-KSB
                         Fiscal Year Ended June 30, 1998

                                Table of Contents

PART I

Item 1. Business:                                                             1
       General                                                                1
       The Subsidiary (Biorelease Technologies, Inc.)                         2
       Description of the Subsidiary's Technologies                           2
       ErythrogenTM Cell Culture Product and Business Opportunity             3
       ErythrogenTM Manufacturing, Sales and Marketing                        4
       Competition                                                            4
       Research and Development Policy                                        5
       Patents and Proprietary Technology                                     5
       Employees & Outside Consultants                                        5
Item 2. Properties:                                                           6
Item 3. Legal Proceedings                                                     7
Item 4. Submission of Matters to a Vote of Security Holders                   7

PART II

Item 5. Market for Company's Common Equity and Related Stockholder Matters.   7
Item 6. Management's Discussion and Analysis of Financial Condition and
         Results of Operations:                                               8
       Results of Operations                                                  8
       General                                                                8
       Year Ended June 30, 1998 compared to the Years Ended June 30, 1997     8
       Liquidity and Capital Resources                                        9
       Dividend Policy                                                        9
       Effect of Inflation                                                    9
       Litigation and Related Matters                                         9
Item 7. Financial Statements                                                  9
Item 8. Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosures.                                              10

PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons;
         Compliance with Section 16(a) of the Exchange Act                   11
        Compliance with Section 16(a) of The Securities Exchange Act of 1934 12
Item 10. Executive Compensation                                              13
Item 11. Security Ownership of Certain Beneficial Owners and Management      15
Item 12. Certain Relationships and Related Transactions                      16
        The Reorganization                                                   16
        The Company                                                          16
        The Subsidiary                                                       18
        The Selling Securityholders' Offering                                19
        The Exchange Offering                                                19
        Terminated Public Offering                                           19
Item 13. Exhibits and Reports on form 8-K.                                   19
        Reports on form 8-K                                                  19
        Exhibits                                                             19
        Exhibits incorporated by reference                                   20
SIGNATURES                                                                   21
SUPPLEMENTAL INFORMATION AND EXHIBITS                                        22


<PAGE>


PART I

Item 1.       Business

General

     The  Company,   Biorelease  Corp.   ("BIO")   including  its  biotechnology
subsidiary,  Biorelease Technologies,  Inc. (the "Subsidiary"), is a development
stage company. The Subsidiary holds technology and patents in the field of blood
substitutes and sustained release drug delivery  technology based on chondroitin
sulfate. Dr. R. Bruce Reeves, formerly the Company's President and CEO, resigned
effective  October 4, 1996 as an officer and Director of the  Company.  Dr. Leon
Gauci was named  President of the  Company's  subsidiary on January 13, 1997 and
served in that capacity until June 30, 1997. R T Robertson Consultants,  Inc., a
corporation  wholly-owned  by  members of Dr.  Reeves'  family,  entered  into a
consulting  agreement  with the  Company's  subsidiary  to oversee the  business
activities of the Company's  subsidiary  through June 30, 1997. Dr.  Maybury,  a
founder of the Company,  resigned as a director effective September 30, 1997. On
February 11, 1998 Dr.  Reeves was  appointed as acting  President of the Company
until a successor is qualified and elected.

     The Subsidiary began its biotechnology  activities in 1989 by acquiring the
hemoglobin  stabilization and processing  technologies of Oxygenetics,  an early
stage  California  based company to allow  Biorelease to become a participant in
the  $3 to $5  billion  synthetic  blood  business.  The  Subsidiary's  founders
included Richard Schubert, the Company's present Chairman, then President of the
American Red Cross,  Dr. R. Bruce Reeves and Dr. Paul Maybury,  a Director until
September 30, 1997. The Subsidiary  subsequently acquired sustained release drug
delivery technology based on chondroitin sulfate in order to expand its business
franchise  into other  therapeutic  areas.  Drug  delivery has become one of the
fastest growing areas in the pharmaceutical industry with companies increasingly
turning to novel delivery  systems to extend the patent life of existing  drugs,
increase  product  portfolios,  enhance  safety and  efficacy,  reduce  unwanted
side-effects,  improve  patient  compliance  and maintain  product sales against
competition.  Products  utilizing novel drug delivery  technologies have already
captured a significant share of several therapeutic markets and some systems may
be able  to  provide  new  therapies  by  modifying  the  activity  of  existing
compounds.

     The  Company  became  listed  on NASDAQ  (Small  cap) in 1992  following  a
business  combination  with the Subsidiary.  The Company's stock was delisted in
April,  of 1994 for  failing  to meet net asset  requirements  and its stock has
since  been  trading on the OTC  Electronic  Bulletin  Board.  During the fourth
quarter of this past fiscal year,  NASDAQ  changed the Company's  trading symbol
from BREL to BRLZ.

     The Company has invested approximately nine million dollars ($9 million) in
the Subsidiary's  technologies including support and administrative expenses. By
mid 1994,  following the delisting,  it was clear that the Company's  ability to
raise capital was  insufficient to allow it to become a self-standing  synthetic
blood producer in light of the large costs  necessary to bring such a product to
market.  For the past  three  fiscal  years the  Company  has  operated  without
employees,  using  consultants  and  research  affiliations  to conduct  limited
research on the Company's technologies.

     On October 8, 1996,  the  Company's  Board of  Directors  announced  it had
executed a letter of intent for the proposed  acquisition of TheraMed  Partners,
Inc.  ("TheraMed"),  a then recently formed,  privately-held company focusing on
acquiring   and   consolidating    late-stage    biotechnology   companies   and
pharmaceutical  synergistic  technologies.  The  letter of intent  provided  the
general  terms and  conditions  of a proposed  acquisition  of  TheraMed  by the
Company, whereby the management of TheraMed would receive a substantial interest
in BIO.  When  taken  together  with  shares  held by  existing  management  and
directors of the Company,  TheraMed stockholders and the Company's then existing
management  and  directors  together  would hold a  controlling  interest in BIO
following the  acquisition.  In February 1997, the Company  terminated the Stock
Purchase  Agreement  with  TheraMed.  Under  the terms of the  termination,  the
Company agreed to reimburse  TheraMed for up to $27,500  advanced by TheraMed to
the Company during the pendency of the acquisition.

     The Subsidiary  received notice from Baxter Healthcare Corp. that effective
January 1, 1998,  Baxter would not renew its exclusive  licensing  rights to the
Subsidiary's  chondroitin  sulfate  technology for blood  substitutes but rather
convert to a non-exclusive  license.  With the loss of future Baxter exclusivity
payments  and the lack of  adequate  working  capital  necessary  to exploit the
Subsidiary's  technology,  the  Company  expects  to offer for sale,  either the
entire  Subsidiary  (subject to Subsidiary  liabilities)  or to find a buyer for

                                       1

<PAGE>


each of the separate technologies owned by the Subsidiary. There is no assurance
that a suitable  purchaser  can be found.  On  February  19,  1998,  the Company
announced that it had signed a definitive  agreement to acquire Xenix Resources,
Inc., a privately owned Alabama corporation,  pursuant to which the Company will
acquire Xenix in a reverse  acquisition.  A Proxy Statement was prepared shortly
thereafter  describing this  transaction.  On April 15, 1998,  before this Proxy
Statement  was  filed,.  Xenix  notified  the  Company  that it had  experienced
material adverse change in its financial condition. The Company did not file the
Proxy  Statement  but has  continued to pursue the closing of this  transaction,
subject  to  finding  satisfactory  financial  performance  by Xenix  during the
intervening period.  Absent moving forward with the Xenix transaction,  BIO will
continue to seek acquisition or reorganization  candidates that can benefit from
the Company's publicly traded status.

The Subsidiary (Biorelease Technologies, Inc.)

     Since  acquisition  by the Company in 1992,  the  Subsidiary has focused on
development  and  promotion of its  proprietary  hemoglobin  based  cell-culture
additive,  ErythrogenTM,  along with  developing  applications  of its sustained
release  drug  technology.  During  fiscal year 1993,  the  Subsidiary  began to
generate  minimal  revenues  ($7,942)  from the first sales of  ErythrogenTM  in
non-FDA  regulated  applications.  ErythrogenTM  sales were  $15,121 and $21,705
during the years ended June 30, 1998 and 1997,  respectively  and $161,434  from
inception to June 30, 1998. The Subsidiary  received  $47,157 in fiscal 1998 and
$81,518 during the year ended June 30, 1997 for licensing  revenues inclusive of
patent cost reimbursement from Baxter Healthcare (see Next Paragraph) related to
their use of chondroitin  sulfate drug delivery for blood  substitutes.  At this
time, the Subsidiary has no products  approved by the FDA or in clinical  trials
and does not intend to conduct  clinical  trials or to develop a  pharmaceutical
marketing unit; rather, it plans to establish  collaborations for these purposes
with strategic partners that have sufficient expertise and resources.

     The Subsidiary has invested development resources into two core proprietary
technologies:  hemoglobin  stabilization  and sustained drug release  technology
based  on  chondroitin   sulfate.   The  Subsidiary's   cell  culture  additive,
ErythrogenTM,  uses hemoglobin  stabilizing  technology to produce a proprietary
cell culture  additive.  The Subsidiary  has  discontinued  direct  promotion of
ErythrogenTM to the research and laboratory  markets because of the high cost of
promotion.  Instead, the Subsidiary is focusing on industrial  applications.  It
has completed an application study with a supplier of hollow core bioreactors to
demonstrate the benefit of  ErythrogenTM  in the production of  pharmaceuticals.
From August, 1994 to December, 1995 the Subsidiary received financial support to
demonstrate  the benefit of its  chondroitin  sustained  release  technology  as
applied to a blood  substitute  product under  development by Baxter  Healthcare
(Baxter).  The Company was given notice that these  exclusive  licensing  rights
held by Baxter Healthcare would not be renewed after December 31, 1997,  instead
converting  into a  non-exclusive  license  resulting  in  cessation  of  future
payments. Through June 30, 1998, the Company received $355,620 of revenues under
the agreement.

     Since  closing  its  research  facilities  in June 1995,  the  Subsidiary's
primary  research  activities  are  being  conducted  at the  University  of New
Hampshire ("UNH") pursuant to a research agreement.  Research at UNH has focused
on cell culture application development of ErythrogenTM.  With the conversion of
the Baxter agreements from exclusive basis to non-exclusive  basis and resultant
loss of exclusivity  payments therefrom,  the Company expects to seek a buyer of
either the Subsidiary or its respective technologies.


Description of the Subsidiary's Technologies

                THE SUBSIDIARY'S HEMOGLOBIN BLOOD GAS TECHNOLOGY

     The subsidiary holds an allowance for a European Patent for the medical use
of nitric oxide and/or carbon  monoxide  complexed with any hemoglobin  compound
including  hemoglobin  based blood products  being  developed by others as blood
substitutes.  These blood gas compounds, long held to be both unstable and toxic
to human  cells,  have been shown  over the past  several  years by  independent
laboratories to exhibit significant medical and biologic benefit. Currently, the
Subsidiary  does not possess the resources  necessary to develop this technology
on its own.  It is the goal of the  Subsidiary  to either  find a buyer for this
technology or a company willing to provide the resources to further develop this
technology.

                                       2

<PAGE>


              CHONDROITIN SULFATE SUSTAINED DRUG RELEASE TECHNOLOGY

     While the  subsidiary  was pursuing its own blood  substitute  product,  it
acquired a sustained  release  drug  delivery  technology  based on  chondroitin
sulfate,  a naturally  occurring  compound found in the cartilage  tissue of all
cartilage  containing animals (including humans).  This technology,  patented in
the U.S. and abroad, has been applied by the subsidiary to a number of drugs and
biological compounds with the effect of extending the drug's in vivo dwell time.
This  technology  has received  development  support from Baxter  Healthcare and
resulted  in an  initial  licensing  agreement  in April  1996 with  Baxter  for
Baxter's  blood  substitute   application,   such  recently  revised  to  become
non-exclusive.  Chondroitin  sulfate enjoys key advantages that differentiate it
within  the drug  delivery  marketplace.  Unlike a number  of  competitive  drug
delivery  technologies,  chondroitin sulfate is naturally occurring in the body,
is highly  biocompatible  and is  readily  available  from a number  of  natural
sources. The subsidiary has complexed  chondroitin sulfate,  derived from bovine
sources, to various drugs and proteins. Commercial applications could enable the
Subsidiary to  participate,  with  corporate  partners,  in a new  generation of
sustained-release  drug delivery  applications for the  pharmaceutical  industry
with emphasis on large dose and chronically used drugs,  actively competing in a
drug delivery market that is currently estimated at tens of billions of dollars.
Because of the limited working capital  position of the Company,  the Subsidiary
will  seek  either a buyer for this  technology  or find a  partner  willing  to
provide the resources to develop this technology further.

     The Subsidiary acquired the U.S. and certain  international patents for its
sustained  drug  release  technology  based  on  chondroitin  sulfate.  Research
conducted  by  predecessors  and others in  support  of the patent  applications
indicates  that  chondroitin  sulfate  can  bind  with  biological  or  chemical
compounds and effect  prolonged  release of drug  activity.  Based upon research
conducted by the Company and scientific literature, the Subsidiary believes that
chondroitin sulfate can be modified and linked to a variety of compounds.

     Chondroitin  sulfate  is a  naturally  occurring  biopolymer  found  in the
connective tissues of mammals and other cartilage containing creatures.  It is a
biodegradable and biocompatible substance. Accordingly, management believes that
chemically  linking  chondroitin  sulfate  to a variety of  peptides,  proteins,
hormones  and  enzymes  is  not  expected  to  produce  toxic  effects  if  used
therapeutically in humans and animals.  Based upon the Subsidiary's  patents and
other published  studies,  management  believes that chondroitin  sulfate can be
used as a sustained  release  drug system.  The active drug would be  chemically
linked to chondroitin  sulfate.  The chondroitin sulfate would act as a carrier,
protecting the drug for a prolonged period,  allowing lower but sustained levels
of drug in the body. During the normal metabolic process the complex, over time,
would be slowly broken by physiological action,  thereby releasing optimal doses
for a prolonged  period.  The sustained  release system may allow for the use of
lower doses, potentially reducing the incidence of toxic side effects.

     Potential therapeutic  applications of such a sustained release drug system
would include drugs not suitable for mechanical  systems  (e.g.,  encapsulation)
and drugs that  currently  are  delivered  by  mechanical  systems  that produce
patient  discomfort  (e.g.,  by  injection).  Potential  drugs to be  linked  to
chondroitin  sulfate  include   antibiotics,   biopharmaceutical   products  and
anti-cancer  drugs, and topical  formulations  using  chondroitin  sulfate-bound
drugs.  No assurance can be given that the Subsidiary will be able to enter into
a sale or  collaborations  or, if such an arrangement is entered into,  that the
preclinical  data generated will result in further  collaboration or a licensing
opportunity.

ErythrogenTM Cell Culture Product and Business Opportunity

     The Subsidiary's focus, in the non-regulated  biologics industry,  has been
to develop a cell culture product by creating an additive based on its blood gas
technology for the cell culture additive market.  Cell culture is the process by
which living cells (bacterial,  plant, yeast, insect, and mammal) are propagated
in a controlled  environment (medium).  Cell culture is maintained at the proper
bath temperature and  supplemented  with nutrients and salts, and is utilized by
the  pharmaceutical  and  biotechnology   industries  to  generate   recombinant
products.  Agents that enhance the efficiency and  productivity  of cell culture
can be  developed  for  markets  that are both  sizable and  independent  of FDA
clinical trials. Fetal bovine serum (FBS), the serum component of blood obtained
from calf fetuses,  is the cell culture additive used most commonly  (represents
approximately  50% of the additive market) to provide  nutrition and enhance the
growth  of cells.  Cells  grown in  culture  can be used to  produce  biological
materials  including  antibiotics,  antibodies,  biopesticides,  and genetically
engineered proteins and viruses.

     In academic and  industrial  laboratories,  cells are propagated in vessels
ranging from plastic flasks to large stainless steel  bioreactors.  Cells can be
maintained  more  easily in flasks in  research  laboratories.  Scale-up of cell
cultures into large volume spinner/shaker flasks and bioreactors has encountered
difficulty in supplying  oxygen  uniformly to  high-density  cell  cultures.  No

                                       3

<PAGE>


method has been wholly  satisfactory in addressing this problem.  Biorelease has
developed purified,  stabilized tetrameric hemoglobin that utilizes hemoglobin's
oxygen carrying capability to increase the oxygen delivery to cells contained in
the media.  ErythrogenTM enhances the growth of cultured cells, especially those
of high-density cultures and reduces the amount of nutrients that must be added.
Most importantly,  ErythrogenTM  significantly  increases protein expression and
production.

     At the July 1994 XI Congress of International Society for Artificial Cells,
Blood Substitutes,  and Immobilization  Bio-technology Dr. Tony Goffe, of Unisyn
Technologies Corporation,  a supplier of bioreactor equipment and media products
to the cell culture industry,  reported results showing ErythrogenTM's  efficacy
in mammalian cell types (3C11 Hybridoma and 1581 Monoclonal antibodies). In this
significant study, Unisyn reported ErythrogenTM increased protein production for
both monoclonal  antibodies and hybridoma cells in their hollow core bioreactors
by a factor  of 80%  compared  to  control  media  without  ErythrogenTM  added.
Furthermore,  Unisyn compared  ErythrogenTM to other oxygen carriers,  including
perfluorocarbons and blood substitutes. ErythrogenTM showed substantially higher
activity than any other carrier studied. In the Company's fiscal year ended June
30, 1996,  under a cooperative  research  grant from the State of New Hampshire,
researchers  confirmed broad  stimulative  effect on a variety of mammalian cell
lines including  normal human epidermal  keratinocytes  (NHEK),  the cells which
make up skin tissue. In addition to the possible use in cosmetics, this research
may lead to  products  for wound  healing  and burns  (see  previous  discussion
relating to blood gas technology).

     The Subsidiary introduced its first cell culture additive, ErythrogenTM, in
late  1993.  ErythrogenTM  has been sold to a number of  research  laboratories,
including the NIH, as well as to a number of  biotechnology  and  pharmaceutical
companies for incorporation  into their experimental cell culture media. In 1995
the  subsidiary  received  an  initial  order for  ErythrogenTM  from  Sigma for
incorporation  into their tissue  culture  research  catalogue.  The  subsidiary
continues to develop new  applications  data under an ongoing  University of New
Hampshire cooperative research grant and expects to publish some of this data.

     The subsidiary  commenced  small-user sales of ErythrogenTM in the research
market several years ago. Revenues from research sales of ErythrogenTM have been
modest ($150,507 to date).

ErythrogenTM Manufacturing, Sales and Marketing

     The  Subsidiary  engaged a small  unaffiliated  manufacturer  of biological
products to perform specific  manufacturing and product  development  activities
for the Subsidiary. Manufacturing and product development was conducted pursuant
to periodic  work orders.  The  Subsidiary  owns the primary  equipment  used to
manufacture  ErythrogenTM.  This manufacturer has not manufactured  ErythrogenTM
for the  Subsidiary  for several  years because the  Subsidiary  currently has a
sufficient inventory of ErythrogenTM.  Based upon the Subsidiary's experience to
date,  management  believes that the manufacturer has the ability to manufacture
ErythrogenTM within the product  specifications  established for the utilization
of ErythrogenTM as a cell culture additive.  Since June 1995, the Subsidiary has
employed no sales or marketing staff.

Competition

     (a)ErythrogenTM's  initial testing  indicates that  ErythrogenTM  increases
cell densities and reduces cell doubling time and increases  protein  production
when added to insect and mammalian cell culture media.  Management believes that
these results stem, in part, from ErythrogenTM 's ability to increase the amount
of  available  oxygen for cell  utilization  and,  possibly,  decrease the level
needed of  certain  additives  such as FBS.  ErythrogenTM  technically  does not
compete with FBS because it is a supplement  to and not a  replacement  for FBS.
The Subsidiary knows of no other  commercially  available cell culture additives
that  provide  oxygenation  to  culture  media;  however,  a number  of  biotech
companies have the capability to produce similar products.  Management  believes
that, the Subsidiary's  patent position for hemoglobin  stabilization will limit
the degree to which these companies could sell similar products.  The Subsidiary
has received  notice of allowance  from the  European  Patent  Office of foreign
allowance. With any culture media supplement,  broad customer acceptance will be
a factor of the number of cell lines  enhanced by the  substance,  the product's
shelf life and cost, and its biological activity or other such features as might
affect or characterize  its performance.  The Subsidiary  generally will compete
with  manufacturers and suppliers of cell culture media  supplements,  and there
continue to be other  products in  development  that may compete  directly  with
those of the  Subsidiary.  Most of the  Subsidiary's  competitors  have  greater
financial  and  personnel  resources  than the  Subsidiary.  In the event that a
competitor  produces a comparable  product,  no assurance  can be given that the
Subsidiary will be able to successfully compete.

                                       4

<PAGE>


Research and Development Policy

     Ongoing Research and Development is important to the  Subsidiary's  ability
to provide  marketable  technology that keeps pace with the rapid  technological
change  associated with the  biotechnology and  pharmaceutical  industries.  The
Subsidiary  is  committed  to  continuing  collaborative  research to extend the
existing uses of ErythrogenTM  and to develop other cell culture uses related to
the hemoglobin stabilization technology.  During the fiscal years ended June 30,
1995 and 1994, the Subsidiary spent $230,444 and $654,019 and, respectively,  on
research and  development on its hemoglobin and  chondroitin  technologies.  The
research at University of New Hampshire was the only work undertaken  during the
past two fiscal years (1998 and 1997).  From October 1989 to June 30, 1998,  the
Subsidiary spent $2,558,041 on research and development (not including  $690,000
to purchase these two technologies).

     Pursuant  to an  agreement  with  the  University  of  New  Hampshire,  UNH
conducted research on the application  development of ErythrogenTM for mammalian
cells. Pursuant to the UNH Cooperative  Agreement,  which commenced December 19,
1994 and ran through December 31, 1997, the Subsidiary  contributed  $175,000 of
"in kind" matching  expenditures plus  contributing  $34,000 of equipment to UNH
for  research.  The Agreement  also called for funding,  to the level of $50,000
contributed  by the state of New  Hampshire.  The agreement  ended  December 31,
1997.

     Until  June  1995,  the  Subsidiary  had been  utilizing  its own  in-house
laboratory at its former facilities. However, as a part of the Subsidiary's 1995
reorganization  and  downsizing,   this  laboratory   facility  was  closed  and
laboratory  employees  terminated.  See "Item 2.  Properties" and "Item 3. Legal
Proceedings."  All work both in development of application data for ErythrogenTM
is now being  conducted  under the UNH  Cooperative  Agreement.  The  Subsidiary
cannot assure it can fund this program on a sustained  basis without  additional
capital or support from a collaborator.  Chondroitin  sulfate technology will be
promoted as a novel sustained release drug licensing opportunity.

Patents and Proprietary Technology

     The Company's  success in achieving  significant value for its technologies
will depend,  in part,  on its ability to obtain,  maintain and defend  patents,
protect trade secrets and operate without infringing the patent rights of others
both in the United States and in other  countries.  The Subsidiary  holds United
States patents as follows.  "Stabilization  of Proteins and Peptides By Chemical
Binding  with  Chondroitin"  (1986),  "Chondroitin  Drug  Complexes"  (1984),  a
Canadian patent for "Method for Protein Stabilization"  (utilizing  Chondroitin)
(1991)  and a  European  allowance  related  to its  hemoglobin  technology  for
"Continuous  Processes  for  Modifying  Biologically  Active  Materials  and the
Products  Therefrom" (1992). The Subsidiary received notice of allowance in 1996
from the European Patent Office (EPO) for European  applications of a patent for
its hemoglobin stabilization blood gas technology used in producing ErythrogenTM
and  possible  therapeutic  applications.  (See  the  discussion  of  Blood  Gas
Technology.)  Subject to available working capital, the Subsidiary has proceeded
to develop patent  coverage in several  European  countries under this approval.
The patent position of biotechnology companies generally is highly uncertain and
involves complex legal and factual questions.  There is a substantial backlog of
biotechnology  patent  applications  at the United  States  Patent and Trademark
Office. No consistent policy has emerged regarding the breadth of claims covered
in biotechnology  patents.  The patent protection for chondroitin  stabilization
extends  through  2003 in the U.S.  There can be no  assurance  that any  issued
patents  will  provide the Company with  competitive  advantages  or will not be
challenged  by others,  or that the  patents of others  will not have an adverse
effect on the ability of the Company to do business.  Furthermore,  there can be
no assurance that others will not independently  develop similar products,  will
not duplicate any of the Company's  proposed products or, will not design around
Company patents.  The prosecution or defense of patent infringement  litigation,
if required,  could involve the  commitment of substantial  management  time and
financial  resources  of  the  Company.  The  loss  or  challenge  of any of the
Company's  patents may have a material  adverse effect on the Company's  current
and proposed  operations.  Also the Company's  working capital  deficiency could
impact the Company's ability to pursue and maintain its patents.

Employees & Outside Consultants

     From  August  1994 until March 31,  1996,  the  Company  had one  full-time
employee,  Dr. R. Bruce Reeves,  the Company's  President (see Part iii, item 10
and 11).  Effective April 1, 1996 the Board of Directors  retained R T Robertson
Consultants,  Inc. as consultants to the Company,  including the services of Dr.
Reeves.  Dr. Reeves continued to serve through October 4, 1996 as a Director and
President of the Company. R T Robertson Consultants,  Inc. agreed to consult for
the  Subsidiary for up to six months through June 1997. On February 11, 1998 the
Company  appointed  Dr.  Reeves  as  acting  President  of the  Company  until a
successor  is  elected  and  qualified.   The  Company   engages  certain  other

                                       5

<PAGE>


consultants  on a part-time  and/or as needed basis.  During this past year, the
Company  engaged no technical  consultants on a regular basis.  Dr. Victor Chan,
formerly a senior manager of the Company coordinates technical  activities.  Dr.
Hiroshi Mizukami consults in the area of hemoglobin  research and Dr. Tony Goffe
consults in the area of  ErythrogenTM  applications  and continuing cell culture
development. All remain available to the Company on an as needed basis. Dr. Leon
Gauci served as President of the  Subsidiary  from January 1997 through June 30,
1997. Due to the Company's  current  financial  position and lack of significant
revenues,  the Company  expects to continue  this mode of operation for the near
future.

     The  Company  has  always  utilized   scientific   advisors  and  technical
consultants  with  recognized  expertise in areas relevant to the development of
the Company's technologies and proposed products. From time to time, the Company
consults  with  other  outside  advisors  individually  on issues  of  research,
development  and  planning.  The Company  has  separate  arrangements  with each
outside consultant.  Generally,  outside consultants are given stock options and
consulting fees and are reimbursed for expenses. During the years ended June 30,
1998,  and 1997,  the Company  paid $6,000 and $48,088 in expenses to  Technical
Consultants  and Scientific  Advisors.  As of the date hereof,  past and current
Scientific Advisors and Technical  Consultants own an aggregate of 56,984 Shares
of the Company's  Common Stock and 670,000  options to purchase a like number of
shares at prices ranging from $.07 to $6.00 per Share.  All outside  Consultants
are employed by employers other than the Company and may have  commitments to or
consulting  or advisory  arrangements  with other  entities that may limit their
availability  to the Company.  Some of these entities may also be competitors of
the Company.  Where a conflict of interest arises, while the conflict may not be
resolved to the benefit of the Company,  each  consultant  or advisor has agreed
not to divulge any  information  that is  proprietary  to the Company.  Although
Consultants may devote substantial time and effort on behalf of the Company,  no
individual  is  expected  to  devote  more  than a small  amount  of time to the
Company's business.

     Information relating to Scientific Consultants follows:

     HIROSHI  MIZUKAMI,  Ph.D.,  has been a Professor of Biological  Sciences at
Wayne State  University  in Detroit,  Michigan  since 1974.  He holds a Ph.D. in
Biophysics  from the  University  of Illinois.  Dr.  Mizukami  consults with the
Company on  researching  the properties of hemoglobin  and  chondroitin  sulfate
analogues.

     VICTOR T. CHAN, Ph.D., serves the Company as a Consultant.  Dr. Chan joined
the  Company  in March,  1993 and  served on a full time  basis as  Director  of
Analytical  Chemistry  and through  September,  1994 as  Director of  Laboratory
Operations.  Effective  October 1994, Dr. Chan became a part time  consultant to
the  Company.  Dr.  Chan was with  Ares  Serono  Group  for five  years  and was
instrumental in setting up their protein  chemistry group to provide  analytical
support for process  development  activities and pilot production.  Dr. Chan has
experience in both new product discovery and structure-function determination of
recombinant proteins and naturally derived products. Dr. Chan received his Ph.D.
from MIT in 1986 and  later  served  as a  postdoctoral  fellow  at Dana  Farber
Institute (Harvard Medical School).

     RANDAL (TONY) GOFFE, Ph.D.,  consults in the area of Erythrogen TM research
and development. Dr. Goffe was a co-founder of CellPro (Bothell, Washington) and
more recently served as V.P. and Chief Technical Officer for Unisyn Technologies
(Milford,  Mass.).  Currently  Dr,  Goffe is  President  and Founder of Genespan
Corporation (Bothell,  Washington).  Dr Goffe is the holder of 11 issued patents
and has authored over 35 scientific  papers.  Dr Goffe received a BS degree from
University  of London in 1974 and received his Ph.D.  from The City  University,
London, UK in 1978.

Item 2. Properties

     Since  October  20, 1997 the  principal  offices are located at 340 Granite
Street, Suite 200, Manchester,  NH. 03102, (603) 641-8443.  This location, in an
in-town multi-tenant office building, allows R T Robertson Consultants,  Inc. to
provide,  on a contract basis, the  administrative  functions of the Company and
the Subsidiary and technical  support and shipping for the ErythrogenTM  product
line.  The Company has no laboratory  facilities at present,  instead  utilizing
facilities at the University of New Hampshire on an as needed basis. The Company
expects to reimburse  Robertson for an allocated portion of the facilities used.
From June 1995 through  October 1997 the Company rented office  facilities at 10
Chestnut Drive, Unit D, Bedford, NH 03110. The Company relocated from its former
facilities at 8A Industrial Way, Salem, New Hampshire 03079 in June of 1995 (see
"Item 3. Legal Proceedings").

                                       6

<PAGE>


Item 3. Legal Proceedings

     Except as set forth  below,  the  Company is not  presently  a party to any
material litigation.

     On May 17, 1994,  Mr.  Lofink,  a  shareholder  and former  employee of the
Subsidiary, filed a law suit in Superior Court in California to recover certain,
then  remaining,  sums  due  (approximately  $40,000),  relating  to his  former
employment.  In April, 1995 the Company entered into a court approved settlement
with Mr.  Lofink in the amount of $43,475  calling  for  payment of $5,000  upon
signing and $1,000 monthly until December,  1996 when any remaining  balance was
to become due. This agreement was further  amended in fiscal 1996 to provide for
an extension in the due date to December  1997 by the  Subsidiary  continuing to
pay $1,000 monthly through this extended period.  In February,  1998 the Company
paid $8,000 and agreed to issue 20,000 of its shares in final settlement of this
obligation.  The Company  has  accrued  $1,000 on its  financial  statements  to
reflect this stock issuance (see Item 7 - Notes to Financial Statements).

Item 4. Submission of Matters to a Vote of Security Holders

     During the past four fiscal  years no matters  were  submitted to a vote of
security holders through the solicitation of proxies or otherwise.

PART II

Item 5. Market for Company's Common Equity and Related Stockholder Matters.

     (a) Market  Information -- The principal U.S. market in which the Company's
common  shares are traded (all of which are of one class,  $.01 par value Common
Stock) is the Over-the-Counter market. In August 1986, the Company completed its
initial  public  offering.  In April 1991,  the Company  issued  450,000 Class A
common stock purchase warrants,  400,000 of which have been exercised. The Class
A common stock purchase warrants was exercisable at $1.375 per Share and expired
July  5,  1995.  The  Common  Stock  was  listed  for  trading  on the  National
Association of Securities  Dealers  Automated  Quotation System ("NASDAQ") under
the symbol "BREL" until April 27, 1994 (excluding from February 28, 1994 through
March 17, 1994),  at which time it was delisted.  The Company's  common Stock is
traded in the  Over-the-Counter  market and is listed on the OTC Bulletin Board.
In July 1997 NASDAQ  assigned  the Company a new symbol  "BRLZ".  On October 15,
1998,  the  average  between the high and low  reported  bid price of the Common
Stock on the OTC Bulletin  Board was $.015 per Share.  The following  table sets
forth the range of quoted high and low bid prices of the Company's  Common Stock
on a  quarterly  basis for the fiscal  years  ended June 30,  1998 and 1997,  as
reported by the National  Quotation  Bureau.  These quotes reflect  inter-dealer
prices without retail  mark-up,  markdown or commission and may not  necessarily
represent actual transactions.

<TABLE>
<CAPTION>
                               Bid Price                                           Bid Price
Fiscal 1998                  Low      High      Fiscal 1997                      Low     High
-----------                  ----     ----      -----------                      ---     ----
<S>             <C> <C>     <C>     <C>                         <C> <C>        <C>       <C>  
First Quarter,                                  First Quarter
Ended September 30, 1997    $ .08   $ .115      Ended September 30, 1996       $ .125    $ .16
Second Quarter,                                 Second Quarter
Ended December 31, 1997     $ .03    $ .08      Ended December 31, 1996         $ .08    $ .14
Third Quarter                                   Third Quarter
Ended March 31, 1998        $ .03   $ .055      Ended September 30, 1997        $ .09    $ .09
Fourth Quarter                                  Fourth Quarter
Ended June 30, 1998        $ .035    $ .07      Ended June 30, 1997             $ .13    $ .13
</TABLE>

     (b) Holders -- The number of record  holders of the Company's  Common Stock
as of June 30, 1998 was 1,719 inclusive of those brokerage firms and/or clearing
houses holding the Company's  common shares for their  clientele (with each such
brokerage  house and/or  clearing  house being  considered  as one holder).  The
aggregate  number of shares of Common Stock  outstanding was 9,736,659 shares of
common stock excluding 550,000 shares held in treasury as of June 30, 1998.

     (c)  Dividends  -- The Company  made a dividend  distribution  of shares of
Vegas Chips,  Inc. in January  1992.  However,  the Company has not declared any
cash dividends since inception,  and has no present intention of paying any cash
dividends on its Common Stock in the  foreseeable  future,  as it intends to use
earnings, if any, to generate increased growth.

                                       7

<PAGE>


Item 6. Management's  Discussion and Analysis of Financial Condition and Results
        of Operations1

Results of Operations

General

     In April,  1994,  following a failed  financing and delisting by NASDAQ for
failure to maintain required asset levels, the Company experienced a severe cash
flow shortage and had to severely  curtail its funding of the Subsidiary as such
resources were being used to fund research on the Subsidiary's technologies.  In
May  1994,  the  Company  terminated   substantially  all  remaining  laboratory
personnel,  professional staff and administrative  personnel except for Dr. Chan
and Dr. Reeves. Since that time, the Company and the Subsidiary has focused only
on  ErythrogenTM   sales  activities  and   confidential   research  related  to
chondroitin sulfate sustained release sponsored in part by Baxter Healthcare.

     In June, 1995, because of continuing cash flow shortages and defaults under
the Subsidiary's  facility lease and equipment lease, all laboratory  operations
of the Subsidiary were terminated and the remaining  Subsidiary  staff were laid
off.  Late in June 1995 the  Company  moved to  facilities  in  Bedford,  NH. In
October 1997 the Company moved to its current  location in Manchester,  NH. As a
part of this  consolidation,  the Subsidiary sold all  non-essential  equipment,
destroyed  all   non-essential   inventory  of  ErythrogenTM   and  settled  its
outstanding  lease  obligations with both its equipment and facilities  lessors.
The  Subsidiary  also  reached  settlement  with a  number  of the  Subsidiary's
creditors by issuing stock in the Company in exchange for creditor releases (see
Financial Statements at Note 6). Currently, the Subsidiary continues to maintain
inventory  of  ErythrogenTM,  its cell  culture  additive  product,  in order to
provide for supply of the product to existing and new customers.

     Other than possible licensing opportunities, therapeutic products which may
be  derived  from the  Subsidiary's  technologies  are years  away  from  market
introduction and will require  significant  additional research and development,
including extensive preclinical and clinical testing and regulatory approval and
additional  resources the Subsidiary  presently  does not possess.  See "Item 1.
Business."

     Sales from  ErythrogenTM  for the year ended June 30, 1998, and 1997,  were
$8,717 and $26,265,  respectively.  During year end June 30, 1995 the Subsidiary
ceased promoting direct sales to research and laboratory  markets because of the
extremely high promotion costs necessary to access these markets.  Instead,  the
Subsidiary  has  focused  on  supplying  a  single  industrial   client,   which
incorporates ErythrogenTM in a proprietary media.

     In 1995, the Subsidiary  obtained its first significant  sponsored research
revenues.  This  revenue  amounted  to  $47,154  in 1998  and  $81,519  in 1997.
Chondroitin  sulfate sales were $6,404 in 1998 and $0 for 1997.  Other  revenues
were $550 in 1998 and  $1,500  in 1997.  Total  revenues  were  $62,825  in 1998
compared to $109,284 for the year ended June 30, 1997. Because of the closing of
the Subsidiary's  laboratory facilities,  it is unlikely sponsored research will
continue until the Subsidiary re-establishes new laboratory facilities, if ever.
Following its  restructuring  and  consolidation,  the  Subsidiary  has and will
continue  to focus on  industrial  ErythrogenTM  sales  and  continue  to pursue
licensing and/or sale of its chondroitin sulfate  therapeutic  sustained release
drug technology. The Company expects to seek a buyer of either the Subsidiary or
it's respective technologies.

Year Ended June 30, 1998 compared to the Year Ended June 30, 1997

     For the year ended June 30, 1998 the Company, including the Subsidiary, had
revenues of $62,825, cost of revenues of $2,041,  research and development costs
of $0,  purchased  technology costs of $0, general and  administrative  costs of
$63,117,  interest  expense of $8,435 and $1,500 in offering costs and no income
taxes.  This  resulted in a net loss of $12,268 for the year ended June 30, 1998
as compared with the year ended June 30, 1997,  in which the Company,  including
the Subsidiary,  had revenues of $109,284 cost of revenues of $7,999 general and
administrative costs of $168,765,  interest expense of $6,909,  $43,512 of costs
related to a terminated  public  offering,  income  recognized  on settlement of
liabilities of $13,096 and $0 income taxes  resulting in a net loss of $104,805.

                                       8

<PAGE>



The  decrease  in loss for year ended June 30,  1998  compared  to the  previous
fiscal year's loss resulted, primarily, from the elimination of the cell culture
operations,  the  suspending  of  research  activities  and  reduced  laboratory
operations,  reduced general and  administrative  expenses and decrease in costs
associated  with a terminated  public  offering.  This  difference is especially
apparent  when the Loss from  Operations  is  compared,  namely  $2,333 for 1998
verses $67,480 for 1997.

     Other non-operational expenses have decreased in the aggregate to $9,935 in
1998 as compared to $37,325 in 1997.  This  decrease is primarily  attributed to
the termination of the Baxter agreement and decreased general and administrative
costs.

Liquidity and Capital Resources

     From inception until the closing of the  Reorganization,  the  Subsidiary's
primary  source of funds has been the  proceeds  from  private  offerings of its
Common Stock and Stock in the Subsidiary. Since the Reorganization,  the primary
source of capital has been the Company's funds.

     At June 30, 1998, the Company had negative  working  capital of $253,664 as
compared with the  Company's  negative  working  capital of $295,150 at June 30,
1997. The change in the Company's working capital between June 30, 1998 and June
30, 1997 is attributable to settlements.

     During fiscal years 1998 and 1997, the Company benefited from the exclusive
licensing  agreement relating to research revenues from the Company's  sustained
release  technology  sponsored by Baxter  Healthcare.  This exclusive  agreement
ended  December  31,  1997.  The  Company  is  actively  seeking a buyer for the
Subsidiary's technologies and is actively seeking candidate companies that could
benefit from the Company's  publicly traded status and possible  reorganization.
The Company can give no assurance that these activities will be successful.

     The drastic  restructuring of its operations during the past four years has
allowed the Company to operate at significantly  lower expense levels than those
of the previous years.  Revenues from  ErythrogenTM  sales, have exceeded direct
costs for the last four fiscal years, but they are not sufficient,  to carry all
other  expenses  not  relating  to  ErythrogenTM,   especially  considering  the
conversion by Baxter from an exclusive to a  non-exclusive  license  arrangement
and loss of resulting exclusivity payments.

Dividend Policy

     The Company has not  declared or paid any  dividends  on its commons  stock
since its inception and does not anticipate  the  declaration or payment of cash
dividends in the foreseeable future. The Company intends to retain earnings,  if
any, to finance the development  and expansion of its business.  Future dividend
policy will be subject to the  discretion  of the Board of Directors and will be
contingent  upon future  earnings,  if any, the Company's  financial  condition,
capital requirements,  general business conditions and other factors. Therefore,
it is unlikely that dividends of any kind will ever be paid.

Effect of Inflation

     Management  believes that  inflation  has not had a material  effect on its
operations for the periods presented.

Litigation and Related Matters

     See "Item 3. Legal Proceedings." There are no other matters pending against
the Company as of the date of this report.

Item 7. Financial Statements

     The following  financial  statements  have been prepared in accordance with
the requirements of Item 310(a) of Regulation S-B.

                                   INDEX                             Page Number

INDEPENDENT AUDITORS' REPORT                                             F-1

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets
June 30, 1998 and 1997                                                   F-2
Consolidated Statements of Operations
Two years ended June 30, 1998 and for the
 cumulative period from inception to June 30, 1998                       F-3

                                       9

<PAGE>


Consolidated  Statements of Stockholders' Equity
(Deficit) for the two years ended June 30, 1998
and the cumulative  period from inception to June
30, 1998                                                                 F-4

Consolidated Statements of Cash Flows
Two years ended June 30, 1998 and for the cumulative
period from inception to June 30, 1998                                   F-5

Notes to Consolidated Financial Statements                               F-6

     All other schedules have been omitted because they are  inapplicable or not
required,  or the information is included elsewhere in the financial  statements
or notes thereto.

Item 8.  Changes  in  and  Disagreements  with  Accountants  on  Accounting  and
         Financial Disclosures.

     Except as set forth below,  there have been no changes in or  disagreements
with accountants with respect to accounting and/or financial  disclosure.  Note,
however, that in on September 26, 1994, the Company terminated Coopers & Lybrand
("Coopers") as its certified public accountant and retained Smith,  Batchelder &
Rugg. In February,  1995 Smith  Batchelder & Rugg affiliated  with Berry,  Dunn,
McNeil and Parker who have  expressed  their opinion on the Company's  Financial
Statements for the past four fiscal years.

     In connection  with the audits of the financial  statements of the Company,
for the  fiscal  years  ended  June 30,  1992 and 1993  and  during  the  period
commencing  July  1,  1993  through  the  date  of this  report,  there  were no
disagreements with Coopers on any matter of accounting  principles or practices,
financial  statement   disclosure,   or  auditing  scope  or  procedure,   which
disagreements, if not resolved to the satisfaction of Coopers, would have caused
them to make  reference  to the  subject  matter  of the  disagreement  in their
report.

     Except for an explanatory  paragraph  concerning  the Company's  ability to
continue as a going concern,  none of the Company's  accountants  reports on the
Company's  financial  statements  contained an adverse  opinion or disclaimer of
opinion,  nor was it  qualified  as to  uncertainty,  audit scope or  accounting
principles.  However,  there were  certain  reportable  events in the  Company's
Annual report for the year ended June 30, 1993 as follows:

     (i)The  Company's  Annual report on Form 10-KSB for the year ended June 30,
1993 ("1993 Form  10-KSB") was filed with the  Commission on September 28, 1993.
Coopers'  report on the  financial  statements  contained  therein  contained an
explanatory  paragraph relating to uncertainty  concerning the Company's ability
to continue as a going  concern  which  situation  was  further  discussed  in a
footnote to the financial statements.  During the period of preparation of these
financial  statements,  the  Company  was  engaged  in a "best  efforts"  public
offering to raise additional capital.

     Two  unsigned  draft  reports and  associated  footnotes  were  prepared by
Coopers,  one without a going  concern  explanatory  paragraph to be used if the
offering was completed  before  Coopers'  report was released,  the other with a
going concern  explanatory  paragraph if the offering was not completed.  By the
release date of Coopers'  report,  the offering had been  terminated and Coopers
released their signed report with the going concern  explanatory  paragraph.  As
noted above, the Company's 1993 Form 10-KSB contained the explanatory  paragraph
and related footnote disclosure.

     Sometime later,  the Company's  annual report to shareholders  (the "Annual
Report") was printed and, on or about January 4, 1994 was sent to  shareholders.
Through an administrative oversight, a disk containing a report (unsigned) which
did not include a going concern explanatory  paragraph and financial  statements
which did not contain related  footnote  disclosure was released to the printer.
This  oversight was  discovered  during the  preparation  of the 1994  Financial
Statements by the Company in reviewing it past Annual Report with its then newly
retained Auditors, Smith Bachelder & Rugg.

     The Company immediately  notified Coopers who, in turn, advised the Company
that, in their opinion,  the Company should inform the Commission and anyone who
may be relying on the Annual Report of this situation.  The Company informed the
former  accountant  that,  due to the length of time since the  distribution  of
Annual  Reports to  shareholders,  the filing with the Commission of the correct
information in the Company's  1993 Form 10-KSB and  subsequent  filings with the
Commission, the Company was of the opinion that no one could reasonably still be
relying on the Annual Report.  Accordingly,  the Company informed the Commission
and   shareholders   of  this  situation  in  connection  with  the  filing  and
distribution  to  shareholders of this Annual Report on Form 10-KSB for the year
ended June 30, 1994.

     (ii) In connection with consultations with Coopers concerning the Company's
March 1994  purchase of  preferred  stock of Genesis  Capital  Corporation  (now
Genesis  Farms,   Inc.)  (See  "Item  12.  Certain   Relationships  and  Related
Transactions  - The  Company"),  Coopers  informed  the  Company  that the value

                                       10

<PAGE>


assigned to the Company's  holding of that stock as presented in the Form 10-QSB
for the quarter  ended March 31, 1994 would need to be evaluated  in  connection
with  an  audit  of the  Company's  financial  statements  and  that  additional
documentation  might  be  necessary   concerning  the  value  assigned  to  that
investment if the Company's existing documentation proved to be inadequate.

     Neither of the above two issues was considered in the Company's decision to
terminate Coopers.  The decision to change accountants was approved by the Board
of Directors of the Company.

     On July 28,  1992,  the Company had  engaged  Coopers to be its  certifying
accountant  in place of Bradshaw,  Smith & Co.  ("former  accountant"),  who was
dismissed effective July 28, 1992.

     During the fiscal years ended June 30, 1991 and 1990 (periods for which the
former  accountant  audited the Company's  financial  statements) and during the
period from July 1, 1991  through the date hereof,  there were no  disagreements
with the former accountant on any matter of accounting  principles or practices,
financial  statement   disclosure,   or  auditing  scope  or  procedure,   which
disagreements,  if not resolved to the  satisfaction  of the former  accountant,
would have caused it to make reference to the subject matter of the disagreement
in connection with its reports.

     The former accountant's  report on the Company's  financial  statements for
either of the two fiscal  years  ended June 30, 1991 did not contain any adverse
opinion or disclaimer of opinion, nor was it qualified as to uncertainty,  audit
scope or accounting principles.

     The decision to engage Coopers as set forth above and to dismiss the former
accountant  was made by the new Board of Directors of the Company  subsequent to
the June 1992 reorganization of the Company and the Subsidiary.  Coopers was the
Subsidiary's independent auditors.

PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
        with Section 16(a) of the Exchange Act

     The following table delineates certain information concerning the directors
and executive officers of the Company:

<TABLE>
<CAPTION>
                                         Positions with                           Positions with
Name                       Age           the Company                              the Subsidiary
----                       ---           --------------                           --------------
<S>                        <C>                                       
Richard Schubert           61            Chairman, Board of Directors
                                         Director, Principal Financial Officer
R. Bruce Reeves            58            President (2)
Richard Whitney            60            Director                                 Director
P. Calvin Maybury          74            (1)                                      (1)
</TABLE>

(1)  Dr.  Maybury,  a founder of the Company,  resigned as a Director  effective
     September 30, 1997

(2)  Dr. Reeves served as President,  CEO and Director until October 4, 1996. He
     was re-appointed as acting President of the Company on February 11, 1998 to
     serve until a successor is duly qualified and elected.

     Directors  are elected by the  stockholders  to serve until the next annual
meeting of  stockholders  or until their  successors  have been elected and have
duly  qualified.  Officers are appointed to serve until the meeting of the Board
of Directors  following the next annual meeting of stockholders  and until their
successors have been elected and have qualified. Richard Whitney was appointed a
Director of the Company  following the  Reorganization  in  accordance  with the
provisions of an investment  agreement  between the  Subsidiary  and The Venture
Fund  of  Washington   (see  "Item  12.   Certain   Relationships   and  Related
Transactions-The Subsidiary").

     A summary of the business  experience of each current  officer and director
of the Company and the Subsidiary is as follows:

     RICHARD SCHUBERT has been Chairman of the Board of Directors of the Company
since July 1992. Mr. Schubert is currently a business consultant.  From December
1990 through  September  1995,  Mr.  Schubert was the President of The Points of
Light Foundation, a foundation created to encourage Americans to become directly
involved  in  consequential  community  service in respect  of  critical  social
issues. From June 1989 to December 1990 he was a business consultant.  He served
as  President  of the  American  Red  Cross  (1983-1989)  and was a former  Vice
Chairman and President of Bethlehem Steel until 1982. Mr. Schubert has extensive

                                       11

<PAGE>


experience in law,  business and  government.  During his career with  Bethlehem
Steel,  which began in 1961,  he was  appointed to serve in the public sector as
Assistant to the Under Secretary of Labor (1970)  Solicitor of the Department of
Labor (1971) and Under  Secretary of Labor (1973).  Mr.  Schubert is a member of
the  Council of  Foreign  Relations  and he serves as a director  of a number of
philanthropic and business organizations.  Mr. Schubert graduated Cum Laude from
Eastern  Nazarene  College in  Quincy,  Massachusetts  with a  Bachelor  of Arts
degree,  and from Yale Law School with a Bachelor of Law degree.  Mr.  Schubert,
along  with Dr.  Reeves,  serves  as an  officer  of NCPI,  Inc.,  a  non-profit
subsidiary of Eastern Nazarene College.

     R BRUCE REEVES,  Ph.D., has been the President and Chief Executive  Officer
of the  Company  since May 1993.  He has been  Secretary  and a Director  of the
Company since July 1992 and Chief Executive Officer, Secretary and a Director of
the Subsidiary until June 1995 when operations of the Subsidiary were curtailed.
In August 1995 Dr.  Reeves  agreed to serve as an Officer and  Director of NCPI,
Inc.,  an  affiliate  of  Eastern  Nazarene  College  of which Dr.  Reeves is an
alumnus.  Dr.  Reeves  has over  twenty-five  years of  experience  in  start-up
ventures,  and has  spent  over ten  years in  high-tech  business  and  product
development,  including five years  (1964-1969) with General Electric Company on
several  business  development  operations.  From 1969 to 1979 Dr.  Reeves was a
Principal  in a high tech start up company  and several  syndicated  real estate
partnerships.  From  1979 to 1989 he  served as  Chairman  and CEO of  Monadnock
Partners,  Inc., a family owned real estate  management and  development  entity
involved in hotels,  commercial  office  buildings and  multi-tenant  industrial
projects.  Dr. Reeves,  along with a corporate  affiliate,  was a principal in a
number of real estate  ventures  including four hotel projects in the Northeast.
Dr.  Reeves  oversaw  three  of  these  hotel  partnerships  through  bankruptcy
proceedings  in the New  Hampshire  and  Connecticut  Districts.  As a result of
related litigation and personal  guarantees for these  partnerships,  Dr. Reeves
filed for personal  bankruptcy  protection in the New Hampshire  District in May
1989 and certain  elements of the  proceedings  are still pending.  From 1989 to
1996,  Dr.  Reeves  devoted his full time to the  business of the  Company,  its
predecessor;  Fluid Life Systems, Inc. ("FLS") and the Subsidiary. Dr. Reeves is
currently an officer of RT Robertson, Inc., a family owned consulting firm which
provides management services to a number of companies, including the Company, on
an as needed basis.

     PAUL CALVIN MAYBURY,  Ph.D.,  was President and Chief Executive  Officer of
the Company from July 1992 to May 1993. He has been a Director of the Subsidiary
since  June 1991 and of the  Company  since  July  1992.  Dr.  Maybury  has over
thirty-six years of experience in the area of Physical Chemistry  research,  the
last twenty-four of which include research and development in the pharmaceutical
industry.  Dr.  Maybury was a professor of chemistry at the  University of South
Florida  ("USF")  from  1961  to 1992  and was  Chairman  of the  Department  of
Chemistry at USF from 1963 to 1974.  Dr. Maybury was Vice President and Director
of Research and Development (1980-1988), a Director (1976-1988) and a consultant
(1975-1979) to the Belmac  Corporation,  a public  pharmaceutical  company.  Dr.
Maybury holds professional  membership in the American Chemical Society and is a
Fellow of the American  Institute of Chemists.  Dr. Maybury  received a Ph.D. in
chemistry  from The Johns Hopkins  University in 1952.  Effective  September 30,
1997 Dr. Maybury resigned as a Director of the Company.

     RICHARD  WHITNEY has been a Director of the Company  since July 1992. He is
currently a Principal in a Snelling & Snelling  franchise  located in Washington
D.C.  Formerly Mr.  Whitney  served as a general  partner of The Venture Fund of
Washington (the "Fund") from 1989 until August of 1994. The Fund has investments
that include pension funds,  insurance  companies,  banks, and corporations.  It
has, as a corporate general partner,  ICF International that is a consulting and
engineering firm based in Washington,  DC. Mr. Whitney has managed venture funds
since 1972,  beginning  with direct  responsibility  for the  management  of the
Direct  Investment  Fund at  Overseas  Private  Investment  Corporation.  In the
mid-1970's,  he served as Executive Vice President of Narragansett  Capital.  In
1977,  with others,  Mr.  Whitney  purchased a controlling  interest in Columbia
Ventures,  Inc., an SBIC located in  Washington,  DC. Mr.  Whitney has served as
President  and a Director  of that  company  since 1978.  Mr.  Whitney is a past
director of the Alumni Association and Sports Foundation of Brown University.

Compliance with Section 16(a) of The Securities Exchange Act of 1934

     Based solely on a review of such  materials,  as required by the Securities
and Exchange Commission, the Company has no knowledge that any officer, director
or  beneficial  holder of more than ten  percent  of the  Company's  issued  and
outstanding  shares of Common  Stock  failed to file,  with the  Securities  and

                                       12

<PAGE>

Exchange  Commission,  any form or report  required  to be so filed  pursuant to
Section  16(a) of the  Securities  Exchange  Act of 1934  during the fiscal year
ended June 30, 1998.

Item 10. Executive Compensation

     The following table shows all the cash  compensation  paid or to be paid by
the Company or any of its  subsidiaries,  as well as certain other  compensation
paid or  accrued,  during the fiscal  years  indicated,  to the Chief  Executive
Officer for such period in all capacities in which he served. No other Executive
Officer  received total annual salary and bonus in excess of $100,000 during the
fiscal  years ended June 30,  1995 and 1994.  Through  June 30,  1997 Dr.  Gauci
received compensation totaling $30,000 as President of the Subsidiary. Dr. Gauci
is no longer drawing  compensation  and is available to serve as a Consultant on
an as needed basis.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                          Long-Term Compensation
                               Annual Compensation                        Awards                    Payouts
        (a)             (b)        (c)        (d)        (e)          (f)        (g)            (h)      (i)
                                                        Other
                                                       Annual     Restricted                          All Other
                                             Bonus     Compen-       Stock                             Compen-
Name and Principal                          Payouts    sation        Award                     LTIP    sation
Position              Year      Salary        ($)        ($)          ($)       SAR's           ($)      ($)
------------------------------  ------      ------       ---          ---     --------          ---      ---
<S>                   <C>           <C>        <C>        <C>          <C>   <C>                <C>      <C>
R. Bruce Reeves       1998         -0-        -0-        -0-          -0-         -0-           -0-      -0-
President and former  1997(1)   10,000        -0-        (2)          -0-         -0-           -0-      -0-
Chief Executive       1996      90,000        -0-        (2)          -0-     416,700           -0-      -0-
Officer               1995     120,000      50,000       (2)          -0-     496,500           -0-      -0-
                      1994     120,000        -0-        (1)          -0-     200,000(3)        -0-      -0-
                      1993     117,000      20,000       (1)          -0-         -0-           -0-      -0-
                      1992      86,000      10,000       -0-          -0-         -0-           -0-      -0-
</TABLE>

     (1) On April  1,  1996 the  direct  employment  of R.  Bruce  Reeves,  then
President/CEO of the Company  terminated.  All of Reeves' contractual rights and
unissued  options  were  assigned to R T Robertson  Consultants,  Inc., a Reeves
family affiliate. In fiscal years ended June 30, 1998 and 1997, respectively R T
Robertson Consultants, Inc. charged the Company $1,500 and $35,000 for executive
oversight of the Company and its  Subsidiary.  Between April 1 and June 30, 1996
R. T. Robertson billed the Company $33,300,  including  expense  reimbursements,
for  executive  oversight  of  the  Corporations.  Under  the  terms  of the R T
Robertson Consultants,  Inc. Agreement with the Company, Dr. Reeves, an employee
of R T Robertson Consultants, Inc. serves as President/CEO of the Company.

     (2) Value of benefits and other  perquisites are less than 10% of the total
annual salary and bonus.

     (3) Effective  October 4, 1996 these 200,000 options have been forfeited by
Dr. Reeves.

     The  following  table  sets  forth  information  with  respect to the Chief
Executive Officer concerning the grants of options and Stock Appreciation Rights
("SAR") during the past fiscal year:


                      OPTION/SAR GRANTS IN LAST FISCAL YEAR
                                Individual Grants

<TABLE>
<CAPTION>
        (a)                        (b)                   (c)                   (d)                  (e)
                                                    Options/SARs
                                Options/             Granted to
                                  SARs              Employees in        Exercise or Base        Expiration
Name                             Granted            Fiscal Year           Price ($/Sh)             Date
--------                        --------            ------------        ----------------        ----------
<S>                                                      <C>                  <C>
Chief Executive Officer                                  -0-                   0%
--------------------
</TABLE>

                                       13

<PAGE>


     The  following  table  sets  forth  information  with  respect to the Chief
Executive Officer concerning exercise of options during the last fiscal year and
unexercised options and SARs held as of the end of the fiscal year:


         Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR

<TABLE>
<CAPTION>
        (a)                        (b)                   (c)                   (d)                  (e)
                                                                                                 Value of
                                                                            Number of           Unexercised
                                                                           Unexercised         In-the-Money
                                                                          Options/SARs         Options/SARs
                                 Shares                                   at FY-End(#)         at FY-End(#)
                               Acquired on              Value             Exercisable/         Exercisable/
Name                          Exercise(#)            Realized($)          Unexercisable        Unexercisable
-----------                   ------------           -----------          -------------        -------------
<S>                                 <C>                   <C>                   <C>                  <C>
Chief Executive Officer            -0-                   -0-                   -0-                  -0-
</TABLE>


     The  following  table  sets  forth  information  with  respect to the Chief
Executive  Officer  concerning awards under long term incentive plans during the
last fiscal year:

           Estimated Future Payouts under Non-Stock Price-Based Plans

<TABLE>
<CAPTION>
        (a)                        (b)              (c)               (d)             (e)                  (f)

                                                Performance
                                Number of        or other
                              Shares, units    Period Until
                                Or Other       Maturation or       Threshold         Target            Maximum
Name                           Rights(#)          Payout           ($ or #)         ($ or #)          ($ or #)
---------                     ------------     -------------       ---------        --------          --------

<S>                               <C>              <C>               <C>              <C>               <C>
Chief Executive Officer            -0-              -0-               -0-              -0-               -0-
</TABLE>


     Directors  are not  compensated  for acting in their  capacity as Directors
except  for  options  granted  pursuant  to the  1992  Directors  Option  Plan..
Directors are reimbursed for their expenses  incurred in attending  meetings and
conducting their duties. In April 1995, the Directors, Messrs. Schubert, Maybury
and Whitney were awarded  129,000  options  exercisable  into 129,000  shares of
common stock at $.08 per share. In September 1995,  Directors Messrs.  Schubert,
Maybury and Whitney were awarded an additional  50,000 options  exercisable into
50,000  shares  of  common  stock  at $.17 per  share.  These  options  were for
consulting  services  unrelated  to their  position  as  directors.  The options
originally  were  to  expire  on  December  31,  1997  and  December  31,  1999,
respectively.  On February 11, 1997 the  exercise  period of these and all other
issued  options,  which  are  presently  outstanding,  were  extended  by  three
additional years.

     Though  March 31,  1996 R.  Bruce  Reeves,  President  and Chief  Executive
Officer had an employment agreement with the Company. Pursuant to the agreement,
Dr. Reeves receives an annual salary of $120,000. Pursuant to the Agreement, Dr.
Reeves also received  options to purchase 200,000 shares of the Company (see the
"Option/SAR  Grants in Last Fiscal  Year" table  above).  These  200,000  option
shares were  voluntarily  forfeited  by Dr.  Reeves  effective  October 4, 1996.
Effective April 1, 1996, the Company entered into a consulting  agreement with R
T Robertson Consultants,  Inc. to provide the services of Dr. Reeves through the
end of the fiscal year ending June 30, 1997.  Dr. Reeves served as President and
CEO until October 4, 1996 when he resigned.  Robertson consulted for the Company
through the end of fiscal year June 30,  1997 and, on an as needed  basis,  from
July 1997 through  January 1998. On February 11, 1998,  Dr. Reeves was appointed
by the board of Directors  to act as President of the Company  until a successor
is duly qualified and elected. .

     In May 1994, in  consideration of a partial salary deferral and Dr. Reeves'
continued  involvement  with the Company,  Dr.  Reeves was granted an additional
496,500 options  exercisable at a price of $.15 per share (the average per share
market  price on the date of  issue).  Effective  April 1, 1996 this  option was
terminated.  A new option was issued to R T Robertson  Consultants,  Inc.  These
options expire on December 31, 2002 if not exercised. (See item 11).

                                       14

<PAGE>


Item 11. Security Ownership of Certain Beneficial Owners and Management

(a)  Security Ownership of Certain Beneficial Owners -- The persons set forth on
     the charts  below are known to the Company to be the  beneficial  owners of
     more than 5% of the  Company's  outstanding  voting  Common Stock as of the
     date hereof.

     Genesis Farms, Inc (Formerly  Genesis Capital,  Inc)., 507 North Belt East,
Suite 240,  Houston,  TX 77060 has been  issued 1.5  Million  shares of Rule 144
stock  representing  15.4%  of  issued  shares  (13.5%  of  issued  shares  plus
exercisable  options).  The  Company has  initiated  an  agreement  with a party
claiming  to have an interest  in 1.4  million of these  shares to recover  1.25
million of these  shares of the  Company's  stock.  These  shares  were  earlier
exchanged  with Genesis in exchange for  advancing  certain  legal costs to this
party and  providing  certain  registered  shares of the Company's  stock.  This
agreement  does not  involve  the  Company  in any  litigation  related  to this
transaction.

     Sandra J. Reeves, 754 Strawhill,  Manchester,  NH 03104 owns 992,104 number
of shares individually and/or  beneficially.  Mrs. Reeves is a stockholder in RT
Robertson Consultants, Inc. and controls ninety percent (90%) of the shares of R
T Robertson  Consultants,  Inc.'s common stock. Mrs. Reeves is the spouse of Dr.
R.  Bruce  Reeves,   president  of  the  Company.  In  addition  R  T  Robertson
Consultants, Inc. holds 913,200 options convertible into a like number of shares
of common stock.  In the aggregate,  inclusive of common stock  outstanding  and
exercisable options,  Mrs. Reeves owns directly or beneficially  1,905,304shares
and/or options  representing 10.2% of issued shares (17.2% of issued shares plus
exercisable options) for named security owers.

     (b) Security  Ownership of Management -- Information  concerning the number
and  percentage  of shares of voting Common Stock of the Company owned of record
and beneficially by management, is set forth on the charts below.

<TABLE>
<CAPTION>
Name and                            Number of Shares                               Percent of
Address of                            Beneficially                                 Common Stock
Beneficial Owner                         Owned*                                   Outstanding**
---------------------               ----------------                              -------------
<S>                                 <C>                                               <C>  
R. Bruce Reeves                     1,950,697 (1)(5)                                  17.6%
754 Straw Hill
Manchester, NH 03104

Richard Schubert                    432,639 (1)(2)(4)                                  3.9%
7811 Old Dominion Drive
McLean, VA 22102

Richard Whitney                     318,771 (1)(2)(4)                                  2.9%
1612 K St. N.W. #308
Washington, DC 20006

All Officers and
Directors as a Group
  (3 Persons)                       2,702,107 (1)(2)(3)(4)(5)                         24.4%
---------------------------
</TABLE>

     * Except as indicated in the footnotes  below,  each person has sole voting
and dispositive power over the Shares indicated.

     ** Based  upon  9,736,659  shares  issued  and  outstanding  and  1,625,200
exercisable options for the above named persons, as of the date hereof.

     Notes:

                                       15

<PAGE>


(1)  Excludes  possible  subsequent  issuances of  additional  Shares based upon
     performance  criteria  (see "Item 12.  Certain  Relationships  and  Related
     Transactions-The Reorganization").

(2)  Includes 179,000 shares each for Messrs. Schubert, Maybury and Whitney that
     are issuable upon exercise of a like number of options that are pursuant to
     consulting agreements with these individuals.

(3)  Includes  140,508  Shares held  individually  by Dr.  Maybury's  wife.  Dr.
     Maybury disclaims  beneficial  ownership of the Shares held individually by
     his wife

(4)  All  Shares  are  owned  by The  Venture  Fund  of  Washington,  a  limited
     partnership.  Mr. Whitney is a limited partner owning  approximately 19% of
     the limited partnership.

(5)  Includes 40,500; 42,500; and 42,500 options currently exercisable under the
     Company's  Directors'  Stock Option Plan to Messrs.  Maybury,  Schubert and
     Whitney, respectively.

6)   Excludes 1,866,622 shares and/or options held by R T Robertson Consultants,
     Inc.,  Dr.  Reeves'  family  owned trust and Dr.  Reeves wife.  Dr.  Reeves
     disclaims  beneficial  ownership  and  personal  interest in shares held by
     these related parties.

Item 12. Certain Relationships and Related Transactions

The Reorganization

     By  Agreements  dated June 3, 1992  (collectively,  the  "Agreement"),  the
Company agreed to acquire up to 100% of the then issued and  outstanding  shares
of Common and Preferred  Stock of the  Subsidiary in exchange for  approximately
3,030,149 Shares of Common Stock (the "Reorganization"), plus certain contingent
Shares.  The Agreement  has been filed with the  Commission as an Exhibit to the
Registration  Statement (of which this Prospectus is a part) and is incorporated
herein  by  this  reference.  In  August  1992,  the  Subsidiary,  a  California
corporation, reincorporated in Delaware.

     The  purpose  of  the  Reorganization  was  to  provide  the  Company  with
substantive   operations  and  to  provide  the  Subsidiary  funds  to  commence
substantive operations.

     Effective  June 30,  1992,  pursuant  to the  terms of the  Agreement,  the
Subsidiary  stockholders  owning an aggregate of 4,342,037  shares of Subsidiary
Common  and/or  Preferred  Stock,  exchanged  these  Shares for an  aggregate of
2,463,711  Shares of Company Common Stock. The "Exchange Ratio" was one Share of
Subsidiary  Common or Preferred Stock for .56741 Company Shares of Common Stock.
An additional 240,085 Subsidiary Shares were subsequently  exchanged for 136,225
Company Shares (now  representing  26.7% of the Company's issued and outstanding
Shares when aggregated with the other Shares issued in the Reorganization).  The
remaining  Subsidiary stock (including  Common shares issuable upon the exercise
of certain  options and  warrants)  were not exchanged  because such  additional
exchange  would have  deprived the Company of the  exemption  from  registration
relied upon to effect the initial  exchanges (Rule 506 of Regulation D under the
Act).

     Although the Exchange Ratio is the same for all the Subsidiary Stock, there
are two categories of Subsidiary  stockholders,  each category having  different
registration  rights.  The first category holders have registration  rights with
regards to 10% of their  shares.  Further and, pro rata,  they are entitled to a
percentage of an aggregate of up to an additional 1,022,130 Shares of restricted
Common  Stock  (the  "Contingent  Shares"),   the  actual  aggregate  number  of
Contingent  Shares to be determined  based upon formulas related to annual gross
revenues or profits.  The rights to the Contingent  Shares are not transferable.
No Contingent  Shares have been issued to date and further,  management does not
expect any of these  contingent  shares to ever issue due to the  difficulty  in
achieving the conditions precedent thereto by June 30, 1996.

     None of the shares  with  registration  rights  were  registered  (see "The
Selling Security holders'  Offering" below) and all of the shares have been held
in excess of three years  making them  eligible  for resale,  subject to certain
limitations, under Rule 144.

The Company

     On January 17, 1992,  the Company  distributed  a majority of its shares of
Vegas Chips,  Inc., to the Company's  stockholders of record on a pro rata basis
as a dividend.  The dividend was  distributed  at the rate of .6 (6/10) share of
Vegas Chips, Inc. Common Stock for each one Share of Company Common Stock owned.

                                       16

<PAGE>


     On April 20, 1992, the Company sold 591,600 Shares of its restricted Common
Stock at $2.50 per Share for gross  proceeds  of  $1,479,000  (net  proceeds  of
$1,304,000) in a private  offering.  These Shares were to be registered for sale
to the public;  however,  none of the shares were  registered  (see "The Selling
Security  holders'  Offering"  below)  and all of the  shares  have been held in
excess of three  years  making  them  eligible  for  resale,  subject to certain
limitations,  under Rule 144. Union Equity Partners ("UEP") holds 2,400 options,
each option  entitling  the holder to purchase one Share at a price of $6.00 per
Share  through  January 20,  1999.  UEP was a broker  involved in the April 1992
private offering.  The Company has agreed to notify the holders of these options
anytime  it  intends  to file a  registration  statement  under the Act and,  if
requested by such  holders,  to register the Shares  issuable  upon  exercise of
these options in such registration statement.

     In May and July 1994,  the Company  issued options to purchase an aggregate
of 1,202,250  shares to current and former  officers and  consultants in lieu of
cash,  including  200,000  options to Grayson (see next  paragraph)  and 496,500
options to R. Bruce Reeves (see "Item 10. Executive Compensation").

     In July 1994, the Company  engaged Gerald Grayson and F. J. Daugherty d/b/a
Grayson & Associates  ("Grayson")  of Denver,  Colorado to assist the Company in
corporate development activities,  on an exclusive basis. Their services include
finding one or more corporate partners or others to provide funding or otherwise
assist in the further  development,  commercialization  or  distribution  of the
Company's products and technologies.  Grayson,  founded in 1986,  specializes in
assisting  merging  growth and  development  stage  companies in the  healthcare
industry.  For its first year of services,  Grayson received options to purchase
up to 200,000  shares of Company  Common Stock at an exercise  price of $.20 per
share. The agreement  initially ran for one year and is continuing on a month to
month basis under an informal extension without compensation.  The agreement can
be terminated on one month's  prior  notice.  Under the terms of the  agreement,
when  Grayson  secures  financing or provides  introductions  that lead to other
business  transactions,  Grayson will be entitled to a finder's fee. The finders
fee is  based  upon  8% of the  first  $1,000,000  of  financing  secured,  and,
thereafter  descending 1% per $1,000,000 for the next  $2,000,000 and 5% of each
$1,000,000  thereafter.  Other  business  transactions  carry a fee of 5% of the
first $2,000,000 in transaction value, descending 1% per $2,000,000 for the next
$6,000,000 and 1% of amounts in excess of $8,000,000.

     On March 31, 1994,  the Company  acquired  150,000 shares of 6% cumulative,
convertible  preferred  stock of  Genesis  Farms,  Inc.  (then  Genesis  Capital
Corporation)  ("Genesis") in consideration  for issuing  1,500,000 shares of the
Company's Common Stock. On March 31, 1994, the Company's stock had a fair market
value of one dollar. In accordance with generally accepted accounting principles
(the cost  method of  accounting  for  nonmarketable  investments),  the Company
recorded the investment in Genesis at $1,500,000.  Management believes the value
of Genesis stock has been permanently  impaired and has reduced the basis of the
Genesis preferred stock to $180,000 at June 30, 1995. Due to further impairment,
the asset was written  down to $0 at June 30, 1996,  the value of which  remains
unchanged at June 30, 1997 and 1998. The amount of the permanent  impairment was
determined  by  reviewing  recent  trading  price of  Genesis  common  stock and
relating  such via the  conversion  rights  of the  Preferred  stock  since  the
underlying  common  stock will be  salable  under Rule 144 within six months (as
required by SFAS No. 115). The value differs  significantly  from its historical
cost value. See Note 11 to the Consolidated  Financial Statements.  On September
16, 1996, the Company entered into agreement to advance $10,000 in legal fees to
a party claiming to have an interest in the shares  exchanged by the Company for
the Genesis shares. Under this agreement, if the Company is successful,  it will
recover up to 1.25 million of its own shares,  such to be canceled and to reduce
shares outstanding in like amount.  100,000 shares have been recovered as of the
date of this 10KSB report.

     In May 1994, the Company borrowed $12,000 from a  Director/Stockholder  for
one year at 9% interest  secured by 3,600 shares of Genesis  preferred stock. At
June 30, 1996 the Company  owed R T Robertson  Consultants,  Inc.  $87,734).  In
conjunction  with the now  terminated  TheraMed  transaction,  Robertson and Mr.
Schubert have agreed to defer payment of these amounts,  without interest, for a
period of up to three years ending 12/31/99.  This deferral remains in force and
anytime the Company reaches $2 million in working  capital,  these amounts shall
become due.  Mr.  Schubert  has  released  any  interest he holds in the Genesis
shares.

     In December 1996, the Company was advanced $27,500 from TheraMed  partners,
Inc. which is still outstanding.

     Between  December 1997 and January 1998 the Company  issued an aggregate of
365,000  shares of it's common stock in  settlement  of $33,441 of the Company's
and the Subsidiary's liabilities.

                                       17

<PAGE>


The Subsidiary

     Effective  June 1991,  the  Subsidiary  acquired FLS' assets  including the
Subsidiary  Technologies in exchange for  approximately  $595,000 in payments of
cash to and/or on behalf of FLS and through  the  assumption  of  specific  FLS'
liabilities.  In addition,  the  Subsidiary  issued  57,437 shares of its Common
Stock directly to certain FLS creditors.

     The  hemoglobin  stabilization  technology  was  acquired  by FLS,  without
warranty, from the Trustee in Bankruptcy of Pacific Brotherhood Investment Corp.
("PBIC").  George Lofink, president and CEO of FLS, was an officer, director and
principal  stockholder of PBIC. The PBIC technology was acquired in exchange for
$50,000  and the  assumption  of the costs  (approximately  $115,000  of funding
PBIC's litigation against certain parties previously  affiliated with PBIC ("the
Erythro  Litigation").  The Erythro  litigation  was  settled in December  1991.
Pursuant to the settlement and subsequent  negotiations,  the plaintiffs therein
relinquished any and all claims to the technology in return for $47,000,  all of
which has been paid.

     The drug  release  technology  rights were  initially  licensed by FLS from
Valcor Scientific Ltd.  ("Valcor") in exchange for future royalty  payments.  In
April  1992,  Norman  Eisner,  Valcor's  successor,  agreed to cancel all future
royalty  payments and to assign to the Company the Valcor patents and technology
for 327,500 shares of the  Subsidiary's  Common Stock.  In addition,  Mr. Eisner
accepted 82,073  additional  shares of the Subsidiary's  Common Stock in lieu of
$265,000 of the $350,000  minimum  royalty  payment called for under the license
agreement.  The remaining  $85,000 was paid in July 1992, at which time title to
the drug release  technology rights was assigned to the Company. A percentage of
the above  discussed  shares and funds were  given to a former  Valcor  research
consultant.

     In  connection  with  the  transfer  of  the  certain  Technologies  to the
Subsidiary  and, in settlement of the FLS'  employment  agreements with its then
president,  George Lofink, and its then Secretary, Linda Carter, the Company has
paid approximately  $91,582 to Mr. Lofink and has paid  approximately  $2,500 to
Ms. Carter.  In addition,  the Company has delivered notes to Mr. Lofink and Ms.
Carter.  The  combined  balance due on these notes at June 30, 1995 was $38,975.
(see "Item 3. Legal Proceedings" for further discussion  regarding these notes).
The Subsidiary also paid $131,386 and 1,200 Shares in legal fees incurred by Mr.
Lofink in his defense of the Erythro litigation.

     Prior to the  Reorganization  the Subsidiary owed to its  predecessor,  FLS
approximately $173,314 (consisting of $116,852 in loans and $31,355 for services
from its  predecessor and $25,107 in loans to present and former officers and/or
directors of the Subsidiary  and/or officers  and/or  directors of the Company).
With the exception of $1,260,  all of these  liabilities  were canceled prior to
the reorganization in exchange for the issuance of an aggregate of 62,565 shares
of the  Subsidiary's  Common Stock. All of these 62,565  Subsidiary  shares were
exchanged for 35,500 Shares of the Company's Common Stock in the  Reorganization
and were to be registered in the Selling Security holders' Offering. None of the
shares were registered (see "The Selling Security holders'  Offering" below) and
all of the shares have been held in excess of two years making them eligible for
resale, subject to certain limitations, under Rule 144.

     In December 1991, the Subsidiary  issued 751,000 shares of Preferred  Stock
for gross  proceeds  of  $375,500 in a private  offering  to  investors  who are
accredited.

     In March 1992, the Subsidiary issued 171,430 shares of its Common Stock for
gross  proceeds  of $250,000 to The Venture  Fund of  Washington  (the  "Fund").
Pursuant to the terms of the investment agreement between the Subsidiary and the
Fund,  the  Subsidiary  agreed to nominate  two Fund  designees  to the Board of
Directors  of the  Subsidiary  and  any of its  successors.  In  addition,  each
Subsidiary  Director  agreed to vote in favor of the appointment of the two Fund
designees.  In accordance  with the investment  agreement,  Richard  Whitney and
Walter Flamenbaum, M.D., the two Fund designees, were appointed Directors of the
Company  following  the  reorganization  which  appointments  were  confirmed by
stockholders at the Company's  October 29, 1992 annual meeting.  Dr.  Flamenbaum
resigned from the Board in June 1993.

     In April 1992, the  Subsidiary  issued 6,858 shares of its Common Stock for
gross proceeds of $10,000 to an unaffiliated accredited investor.

     The  shares  issued  to the  Fund  and to the  unaffiliated  investor  were
exchanged  for Shares of Common Stock of the Company in the  Reorganization  and
were to be registered in the Selling Security holders'  Offering.  None of these
shares were registered (see "The Selling Security holders'  Offering" below) and
all of the shares have been held in excess of two years making them eligible for
resale, subject to certain limitations, under Rule 144.

     In June 1992,  the  Subsidiary  issued  Common Stock  purchase  warrants to
purchase up to 153,313  shares of the  Subsidiary's  Common Stock at an exercise
price of $1.40 per share (the price  equivalent  to the  Company's  Common Stock

                                       18

<PAGE>


offering price in its April 1992 private  offering).  These warrants were issued
to Paul Calvin  Maybury,  Richard F. Schubert,  R. Bruce Reeves,  Glen Urquhart,
Richard Whitney and Walter Flamenbaum, as a group. These warrants have expired.

     In  August  1992,   the   Subsidiary   changed  its  name  to   "BIORELEASE
Technologies,  Inc."  and its state of  incorporation  by  merging  into a newly
formed Delaware corporation.

     In June  1996,  the  Company  issued  509,396  shares of its  Common  Stock
(inclusive of 41,305 shares that were issued effective July, 1996) in settlement
of,  $5,783 in 1997,  $29,366 in 1996 and $286,283 in 1995 of the  Company's and
the Subsidiary's liabilities.

The Selling Securityholders' Offering

     The Company had filed a registration statement to register 1,093,973 Shares
on behalf of certain  Selling  Security  holders for sale to the public.  Of the
1,093,973 shares 462,373 shares were being registered  pursuant to the Company's
commitments under the  Reorganization  Agreement and certain creditors (see "The
Reorganization" above). 40,000 shares were registered pursuant to the settlement
of the Raab litigation (see "Item 3. Legal  Proceedings").The  remaining 591,600
Shares were registered pursuant to the Company's commitment under the terms of a
private  offering  conducted  in April  1992  prior to the  consummation  of the
Reorganization  (see  "The  Company"  above).  In  addition,   the  Company  was
registering  250,000 shares issuable upon exercise of 250,000  options.  In June
1994, the Company  determined not to proceed with the Selling Security  holders'
offering  because  all of the  shares  being  registered  on behalf  of  Selling
Security  holders  therein became  eligible for resale under Rule 144 and all of
the options (exercisable into the other shares registered therein) had expired.

The Exchange Offering

     As noted above, in "The Reorganization," 4,582,122 shares of the Subsidiary
were  exchanged  for  2,599,936  Shares of the Company.  In order to acquire the
remaining  767,071 shares of the  Subsidiary's  Common Stock  (including  shares
issuable upon exercise of certain options and warrants), the Company had filed a
registration  statement to register 435,244 Shares for issuance to the remaining
Subsidiary  Stockholders in exchange for their  Subsidiary  shares.  The Company
believes  this  exchange of shares will be  postponed  indefinitely  because the
Company believes it cannot meet State and Federal securities regulations related
to this exchange.

Terminated Public Offering

     In July 1993, the Company  registered  160,000 Units for sale to the public
at a price of $15.00 per Unit on a "40,000  Unit-or-none  best  efforts"  basis.
Each Unit  consisted  of five  shares of Common  Stock and three  Class B Common
Stock to Purchase  Warrants.  During the offering  period,  prior to sale of the
minimum  offering,  there was a decline in the bid price of the Company's Common
Stock. As a result,  the Company and the Underwriter  terminated the offering in
September 1993.

PART IV

Item 13. Exhibits and Reports on form 8-K.

Reports on Form 8-K

     The  Company  has filed the  following  Reports on Form 8-K during the year
ended June 30, 1995 with the  principal  office of the  Securities  and Exchange
Commission in  Washington,  DC. Form 8-K filed with the  Securities and Exchange
Commission  on September  29, 1994;  Amendment  No. 1 thereto (Form 8-K/A) filed
with the Securities and Exchange Commission on November 3, 1994.

Exhibits

     NONE

                                       19

<PAGE>


<TABLE>
<CAPTION>
Exhibits incorporated by reference

<S>  <C>                                                <C>
     3a         Certificate of Incorporation of Company (1)
     3b         Amendment to Certificate of Incorporation of Company (1)
     3c         By-Laws of the Company (1)
     10c        Stock Reorganization Agreement between the Company and the Subsidiary (2)
     10d        1992 Stock Option Plan (3)
     10e        1992 Directors' Stock Option Plan (3)
     10f        Patent-Chondroitin Drug Complexes (4)
     10g        Patent-Stabilization of Proteins and Peptides by Chemical Binding with Chondroitin (4)
     10i        Consulting Agreement with Wall Street Consultants (4)
     10j        Options with USA, Wall Street Consultants and Union Equity Partners (4)
     10l        TSI Agreement (4)
     10m        Cell Trends Agreement (4)
     10n        Dr. Reeves' Employment Agreement (5)
     10o        Chestnut Drive lease
     14a        Canadian patent for "Method for Protein Stabilization"(4)
     14b        European patent for "Continuous Processes for Modifying Biologically
                Active Materials and the Products Therefrom"(4)
     16a        Accountants' Letter (6)(7)
     22c        Subsidiaries (see "Item 1. Business")
</TABLE>

---------------------------

     (1) Previously  filed with the Commission as an Exhibit to the Registration
Statement on Form S-1, as amended,  file No.  33-43976  and, by this  reference,
incorporated herein.

     (2) Previously filed as an exhibit to the Company's Form 8-K filed with the
Commission June 8, 1992, file No. 0-15260, and, by this reference,  incorporated
herein.

     (3) Previously  filed as an Exhibit to the Company's Form 10-K for the year
ended June 30, 1992 filed with the  Commission on September  28, 1992,  file No.
0-15260, and, by this reference, incorporated herein.

     (4) Previously  filed with the Commission as an Exhibit to the Registration
Statement on Form S-1, as amended,  file No.  33-59902  and, by this  reference,
incorporated herein.

     (5)  Previously  filed with the  Commission  as an Exhibit to the Company's
Form  10-KSB  for the year ended June 30,  1993  filed  with the  Commission  on
September 28, 1994,  file no.  33-43976,  and, by this  reference,  incorporated
herein.

     (6) Previously filed as an exhibit to the Company's Form 8-K filed with the
Commission July 30, 1992, file No. 0-15260, and, by this reference, incorporated
herein.

     (7)  Previously  filed as an exhibit to the Company's Form 8-K/A filed with
the  Commission  November 3, 1994,  file No.  0-15260,  and, by this  reference,
incorporated herein.

     Statements  contained  in  this  Form  10-KSB  as to  the  contents  of any
agreement or other document  referred to are not complete.  Where such agreement
or other  document  is an  exhibit  to the  Report or is  included  in the forms
indicated  above,  each such statement is deemed  amplified and qualified in all
respects by such provisions.

                                       20

<PAGE>


                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                 BIORELEASE CORP


Dated: November 13, 1998             By /s/ Richard F. Schubert
                                            -----------------------
                                            Richard F. Schubert, Chairman

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

SIGNATURES                          TITLE                      DATE


/s/ Richard F. Schubert     Chairman,                      November 13, 1998
    ---------------------   --------------------------     ---------------------
    Richard F. Schubert     Director and
                            Principal Financial Officer


/s/ Richard Whitney         Director                       November 13, 1998
    ---------------------   --------------------------     ---------------------
    Richard Whitney

                                       21

<PAGE>


                      SUPPLEMENTAL INFORMATION AND EXHIBITS

Supplemental  Information to be Furnished With Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act.

                                 Does not apply.

                                       22

<PAGE>

                         BIORELEASE CORP. AND SUBSIDIARY
                        (A Development Stage Enterprise)

                        Consolidated Financial Statements

                                  June 30, 1998

                        With Independent Auditors' Report

<PAGE>


                          INDEPENDENT AUDITORS' REPORT


The Stockholders and Board of Directors
Biorelease Corp.

We have audited the accompanying consolidated balance sheets of Biorelease Corp.
and  Subsidiary (a development  stage  enterprise) as of June 30, 1998 and 1997,
and the related consolidated statements of operations,  changes in stockholders'
deficit,  and cash flows for the years then ended. These consolidated  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  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  consolidated  financial  statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and disclosures in the  consolidated  financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
consolidated  financial  statement  presentation.  We  believe  that our  audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of Biorelease Corp. and
Subsidiary as of June 30, 1998 and 1997, and the results of their operations and
their cash flows for the years then ended, in conformity with generally accepted
accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going  concern.  As discussed in Note 1, the
Company  is a  development  stage  enterprise  that,  since its  inception,  has
incurred  operating  losses,  and the Company does not have  sufficient  working
capital to support its future  operations on an ongoing basis.  Because of these
factors,  there is  substantial  doubt  about its ability to continue as a going
concern.  Management's plans in regard to these matters are discussed in Note 1.
The consolidated  financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

The consolidated financial statements of Biorelease Corp. and Subsidiary for the
period  from  inception  to June 30,  1998  have  been  audited  by us and other
auditors.  Those reports  expressed an unqualified  opinion on those statements,
with an explanatory  paragraph regarding the uncertainty of the entity's ability
to continue as a going concern.



Manchester, New Hampshire
October 27, 1998


<PAGE>


                BIORELEASE CORP. AND SUBSIDIARY D/B/A BIORELEASE
                        (A Development Stage Enterprise)

                           Consolidated Balance Sheets

                             June 30, 1998 and 1997

                                     ASSETS

                                                          1998             1997
                                                          ----             ----
Current assets
   Cash                                           $       1,320     $     15,277
   Accounts receivable - trade                            8,455            8,099
                       - other                              745              195
   Inventory                                             18,434           19,681
   Prepaid expenses and other current assets                  -              180
                                                       --------         --------
           Total current assets                          28,954           43,432
                                                       --------         --------

Equipment, net                                           10,971           18,987
                                                       --------         --------

Other assets
   Intangible assets, net                                20,449           32,347
   Other                                                    300              699
                                                       --------         --------
           Total other assets                            20,749           33,046
                                                       --------         --------

           Total assets                           $      60,674     $     95,465
                                                       ========         ========

--------------------------------------------------------------------------------
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

                                      - 2 -

<PAGE>


                      LIABILITIES AND STOCKHOLDERS' DEFICIT

                                                           1998           1997
                                                           ----           ----
Current liabilities
   Note payable                                       $   27,500     $        -
   Accounts payable                                      113,515        116,397
   Accrued expenses                                       93,954        141,243
   Current portion of notes payable - stockholders        46,100         58,575
   Other current liabilities                               1,549          2,367
   Deferred income                                             -         20,000
                                                      ----------     ----------
           Total current liabilities                     282,618        338,582
                                                      ----------     ----------

Notes payable - long-term portion
   Stockholders                                           14,955         14,955
   Other                                                  16,000         16,000
                                                      ----------     ----------
           Total notes payable - long-term portion        30,955         30,955
                                                      ----------     ----------

Other liabilities - related party                         87,734         87,734
                                                      ----------     ----------

           Total liabilities                             401,307        457,271
                                                      ----------     ----------

Commitments and contingencies (Note 5)

Stockholders' deficit
   Common stock of $.01 par value; 50,000,000 shares
       authorized,  10,286,659 and 9,921,659 shares
       issued and 9,736,659 and 9,371,659 shares
       outstanding as of June 30, 1998 and 1997,
       respectively                                      102,867         99,216
   Additional paid-in capital                          9,140,088      9,110,298
   Development stage accumulated deficit              (9,528,088)    (9,515,820)
   Stock subscriptions receivable                        (50,000)       (50,000)
                                                      ----------     ----------
                                                        (335,133)      (356,306)
   550,000 shares of treasury stock - at par               5,500          5,500
                                                      ----------     ----------
          Total stockholders' deficit                   (340,633)      (361,806)
                                                      ----------     ----------

          Total liabilities and stockholders' deficit $   60,674     $   95,465
                                                      ==========     ==========


<PAGE>


                BIORELEASE CORP. AND SUBSIDIARY D/B/A BIORELEASE
                        (A Development Stage Enterprise)

                      Consolidated Statements of Operations

                     Years Ended June 30, 1998 and 1997 and

              the Cumulative Period from Inception to June 30, 1998


<TABLE>
<CAPTION>
                                                                                                                 Period From
                                                                                  For the Year Ended June 30,   Inception to
                                                                                     1998            1997       June 30, 1998
                                                                                     ----            ----       -------------
<S>                                                                            <C>             <C>             <C>          
Revenues
   Sales                                                                       $      15,121   $      26,266   $     161,434
   Sponsored research                                                                 47,154          81,518         355,620
   Grant revenues                                                                          -               -          33,117
   Other income                                                                          550           1,500           9,050
                                                                                  ----------      ----------      ----------
        Total revenues                                                                62,825         109,284         559,221

Cost of revenues                                                                       2,041           7,999          25,337
                                                                                  ----------      ----------      ----------
        Gross profit                                                                  60,784         101,285         533,884
                                                                                  ----------      ----------      ----------
Costs and expenses
   Research and development                                                                -               -       2,558,041
   Purchased technology                                                                    -               -         690,000
   General and administrative                                                         63,117         168,765       4,267,514
   Cell culture operations                                                                 -               -         601,116
                                                                                  ----------      ----------      ----------
        Total costs and expenses                                                      63,117         168,765       8,116,671
                                                                                  ----------      ----------      ----------
        Loss from operations                                                          (2,333)        (67,480)     (7,582,787)
                                                                                  ----------      ----------      ----------
Other income (expense)
   Interest, net                                                                      (8,435)         (6,909)         72,007
   Litigation costs                                                                        -               -         (99,242)
   Offering costs                                                                     (1,500)        (43,512)       (336,446)
   Option compensation                                                                     -               -        (219,375)
   Other                                                                                   -               -         (23,034)
   Accelerated lease commitment cost                                                       -               -        (315,000)
   Recognized loss for decline in value of investment                                      -               -      (1,500,000)
   Gain on sale of equipment                                                               -               -          62,616
   Income recognized on settlements                                                        -          13,096         293,606
                                                                                  ----------      ----------      ----------
        Other expense, net                                                            (9,935)        (37,325)     (2,064,868)
                                                                                  ----------      ----------      ----------
        Loss before provision for income taxes and cumulative
            effect of change in accounting principle                                 (12,268)       (104,805)     (9,647,655)

Provision for income taxes
                                                                                           -               -         343,873
                                                                                  ----------      ----------      ----------
        Loss before cumulative effect of change in accounting principle              (12,268)       (104,805)     (9,991,528)

Cumulative effect of change in accounting principle
                                                                                           -               -         463,440
                                                                                  ----------      ----------      ----------

Net loss                                                                       $     (12,268)  $    (104,805)  $  (9,528,088)
                                                                                  ==========      ==========      ==========

Weighted average shares                                                            9,551,242       9,388,325       6,034,765
                                                                                  ==========      ==========      ==========

Basic and diluted loss per share                                               $       (0.00)  $       (0.01)  $       (1.58)
                                                                                  ==========      ==========      ==========
</TABLE>

--------------------------------------------------------------------------------
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.



<PAGE>


                BIORELEASE CORP. AND SUBSIDIARY D/B/A BIORELEASE
                        (A Development Stage Enterprise)

                Consolidated Statements of Stockholders' Deficit

                       Years Ended June 30, 1998 and 1997


<TABLE>
<CAPTION>
                                          Common Stock                       Development
                                      Number                  Additional        Stage          Stock                       Total
                                        of         Capital     Paid-in       Accumulated    Subscription   Treasury    Stockholders'
                                   Issued Shares   Amount      Capital         Deficit       Receivable     Stock         Deficit
                                   -------------   -------    ----------     -----------    ------------   --------    -------------
<S>           <C> <C>                <C>         <C>         <C>            <C>             <C>           <C>           <C>         
Balance, June 30, 1996               9,880,354   $   98,803  $  9,113,927   $  (9,411,015)  $  (50,000)   $   (4,500)   $  (252,785)
   Issuance of common stock for
       settlement of liabilities        41,305          413         5,371               -            -             -          5,784
   Acquisition of treasury stock             -            -        (9,000)              -            -        (1,000)       (10,000)
   Net loss                                  -            -             -        (104,805)           -             -       (104,805)
                                    ----------   ----------  ------------   -------------   ----------    ----------    -----------

Balance, June 30, 1997               9,921,659       99,216     9,110,298      (9,515,820)     (50,000)       (5,500)      (361,806)
   Issuance of common stock for
       services                        365,000        3,651        29,790               -            -             -         33,441
   Net loss                                  -            -             -         (12,268)           -             -        (12,268)
                                    ----------   ----------  ------------   -------------   ----------    ----------    -----------

Balance, June 30, 1998              10,286,659   $  102,867  $  9,140,088   $  (9,528,088)  $  (50,000)   $   (5,500)   $  (340,633)
                                    ==========   ==========  ============   =============   ==========    ==========    ===========
</TABLE>

--------------------------------------------------------------------------------
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


<PAGE>


                BIORELEASE CORP. AND SUBSIDIARY D/B/A BIORELEASE
                        (A Development Stage Enterprise)

                      Consolidated Statements of Cash Flows

                       Years Ended June 30, 1998 and 1997

              the Cumulative Period From Inception to June 30, 1998

<TABLE>
<CAPTION>
                                                                                                                 Period From
                                                                                For the Year Ended June 30,     Inception to
                                                                                   1998            1997         June 30, 1998
                                                                                   ----            ----         -------------
<S>                                                                              <C>             <C>            <C>         
Cash flows from operating activities
   Net loss                                                                      $   (12,268)    $(104,805)     $(9,528,088)
   Adjustments to reconcile net loss to net cash provided (used) by
       operating activities
           Depreciation and amortization                                              19,914        26,586          255,930
           Cumulative effect of change in accounting principle                             -             -         (463,440)
           Recognized loss on investment                                                   -             -        1,500,000
           Loss on sale of assets                                                          -             -          (38,704)
           Loss on extinguishment of debt                                                  -             -           42,000
           Common stock issued in exchange for
                Purchased technology                                                       -             -          605,000
                Services rendered                                                     33,441         5,784          128,453
           Common stock options issued in exchange for services rendered                   -             -           52,300
           Amortization of unearned compensation                                           -             -          140,625
           Repricing of A warrants                                                         -             -           78,750
           (Increase) decrease in
                Accounts receivable                                                     (356)       (7,536)          (8,455)
                Inventory                                                              1,247         7,998          (18,434)
                Prepaid expenses and other current assets                                180         1,499              360
                Other receivables                                                       (550)         (195)            (745)
                Other assets                                                             399             -             (300)
                Deferred tax assets                                                        -             -          463,440
           Increase (decrease) in
                Accounts payable                                                      (2,882)       25,760          184,466
                Accrued expenses                                                     (47,289)       70,601          101,422
                Other current liabilities                                               (818)         (682)          (1,500)
                Deferred income                                                      (20,000)       20,000                -
                Other liabilities                                                          -             -           90,783
                                                                                 -----------     ---------      -----------
                    Net cash provided (used) by operating activities                 (28,982)       45,010       (6,416,137)
                                                                                 -----------     ---------      -----------
Cash flows from investing activities
   Purchase of collateralized mortgage obligation                                          -             -       (1,000,000)
   Proceeds from collateralized mortgage obligation                                        -             -        1,000,000
   Purchase of fixed assets                                                                -             -         (333,187)
   Purchase of intangible assets                                                           -        (8,933)        (105,205)
   Proceeds from sale of assets                                                            -             -          189,742
                                                                                 -----------     ---------      -----------
                    Net cash used by investing activities                                  -        (8,933)        (248,650)
                                                                                 -----------     ---------      -----------
Cash flows from financing activities
   Advance from and amounts due to stockholders                                            -             -          594,385
   Repayment of advances                                                                   -             -         (159,975)
   Notes payable                                                                      15,025       (12,000)         104,555
   Issuance of common stock                                                                -             -        2,105,966
   Treasury stock acquisition                                                              -       (10,000)         (10,000)
   Recapitalization                                                                                               4,031,176
                                                                                 -----------     ---------      -----------
                    Net cash provided (used) by financing activities                  15,025       (22,000)       6,666,107
                                                                                 -----------     ---------      -----------

                    Net increase (decrease) in cash                                  (13,957)       14,077            1,320

Cash, beginning of year                                                               15,277         1,200                -
                                                                                 -----------     ---------      -----------

Cash, end of year                                                                $     1,320     $  15,277      $     1,320
                                                                                 ===========     =========      ===========
</TABLE>

--------------------------------------------------------------------------------
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


<PAGE>


                BIORELEASE CORP. AND SUBSIDIARY D/B/A BIORELEASE
                        (A Development Stage Enterprise)

                   Notes to Consolidated Financial Statements

                             June 30, 1998 and 1997

Organization

Biorelease Corp. (the Company) and Biorelease  Technologies,  Inc.  (Subsidiary)
are being  presented as a  development  stage  enterprise to acquire and develop
technology  to  facilitate  the  development,   licensing,   manufacturing,  and
marketing of biotech and therapeutic product lines.

1.   Summary of Significant Accounting Policies

     Basis of Presentation

     The  financial   statements  of  the  parent,   Biorelease  Corp.  and  its
     subsidiary, Biorelease Technologies, Inc., which is approximately 90% owned
     by  Biorelease   Corp.,   are  presented  on  a  consolidated   basis.  All
     intercompany   balances  and  transactions  have  been  eliminated  in  the
     accompanying consolidated financial statements.

     Use of Estimates

     The  preparation  of 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  date  of the
     financial  statements  and the  reported  amounts of revenues  and expenses
     during  the  reporting  period.  Actual  results  could  differ  from those
     estimates.

     Future Operations

     These  consolidated  financial  statements have been presented on the basis
     that the Company is a going concern,  which contemplates the realization of
     assets  and  the  satisfaction  of  liabilities  in the  normal  course  of
     business. As a development stage enterprise, the Company currently does not
     have sufficient  available funds to support its technology  development and
     related  marketing  efforts over any extended  period of time.  Because the
     Company has limited working capital,  there is substantial  doubt about its
     ability to  continue  as a going  concern  without  additional  capital and
     attainment of profitable  operations.  Management expects to offer for sale
     either the entire Subsidiary, subject to Subsidiary liabilities, or to find
     a buyer for each of the separate  technologies owned by the Subsidiary.  In
     addition,  the Company will seek acquisition or  reorganization  candidates
     which can benefit from the Company's publicly traded status.


<PAGE>



                BIORELEASE CORP. AND SUBSIDIARY D/B/A BIORELEASE
                        (A Development Stage Enterprise)

                   Notes to Consolidated Financial Statements

                             June 30, 1998 and 1997


1.   Summary of Significant Accounting Policies (Continued)

     Revenues

     Revenues from product sales are recorded when shipped.

     Inventory

     Inventory is stated at the lower of cost  (first-in,  first-out) or market.
     Management  estimates  the shelf  life of its  inventory  to remain  potent
     through June 30, 1999.  The shelf life of the product  beyond June 30, 1999
     will be  evaluated at that time,  with the  potential  for an  obsolescence
     write-down on inventory due to loss of biological activity.

     Equipment

     Equipment is stated at cost.  Depreciation  and  amortization  are provided
     using an  accelerated  method over the  estimated  useful  lives of five to
     seven years.  Repairs and maintenance are charged to expense when incurred.
     Any gain or loss  resulting  from the  disposal of equipment is included in
     operations and the cost and related  accumulated  depreciation  are removed
     from the respective account balances.

     Intangible Assets

     Intangible assets consist of costs incurred to obtain and maintain patents.
     These  costs are being  amortized  on the  straight-line  method  over five
     years.

     Income Taxes

     Deferred  income taxes are  recognized for the tax  consequences  in future
     years of differences  between the tax bases of assets and  liabilities  and
     their  financial  reporting  amounts at each year-end  based on enacted tax
     laws and  statutory  tax  rates  applicable  to the  periods  in which  the
     differences are expected to affect taxable income. Valuation allowances are
     established  when  necessary  to reduce  deferred  tax assets to the amount
     expected  to be  realized.  Income tax  expense is the tax  payable for the
     period  and the  change  during  the  period in  deferred  tax  assets  and
     liabilities.


<PAGE>


                BIORELEASE CORP. AND SUBSIDIARY D/B/A BIORELEASE
                        (A Development Stage Enterprise)

                   Notes to Consolidated Financial Statements

                             June 30, 1998 and 1997

1.   Summary of Significant Accounting Policies (Concluded)

     Loss Per Common Share

     Loss per common  share is computed  using the  weighted  average  number of
     common  shares  outstanding  during  each  period.  For  all  fiscal  years
     presented,   common  stock  options  are  not  included  in  the  Company's
     computation of diluted net loss per share, as the inclusion of these shares
     would be anti-dilutive; therefore, diluted loss per share is equal to basic
     loss per share.

     As of June 30, the net loss per share was calculated as follows:

                                                                    Period from
                                                                    inception to
                                1998               1997            June 30, 1998
                              ---------          ---------         -------------
     Net loss             $     (12,268)     $    (104,805)     $    (9,527,088)
     Shares                   9,551,242          9,388,325                6,034
                              ---------          ---------            ---------

     Per share amount     $      (0.00)      $       (0.01)     $         (1.58)
                              =========          =========            =========

2.   Equipment

     Equipment consisted of the following as of June 30:

                                            1998              1997
                                          --------          --------
     Equipment                        $     41,270     $      41,270
     Less accumulated depreciation          30,299            22,283
                                            ------            ------

                                      $     10,971     $      18,987
                                            ======            ======

     Depreciation  expense for the years ended June 30, 1998 and 1997 was $8,016
     and $11,053, respectively.

<PAGE>

                BIORELEASE CORP. AND SUBSIDIARY D/B/A BIORELEASE
                        (A Development Stage Enterprise)

                   Notes to Consolidated Financial Statements

                             June 30, 1998 and 1997


3.   Intangible Assets

     Intangible assets consisted of the following as of June 30:

                                                          1998           1997
                                                          ----           ----

     Patents                                       $     80,039   $     80,039
     Less accumulated amortization                       59,590         47,692
                                                         ------         ------

                                                   $     20,449   $     32,347
                                                         ======         ======

     Amortization expense for the years ended June 30, 1998 and 1997 was $11,898
     and $15,533, respectively.

4.   Notes Payable

     Notes payable consisted of the following as of June 30:

                                                          1998        1997
                                                          ----        ----
     Stockholders

     Unsecured promissory notes, bearing interest at
        9%, payable quarterly, due date December 31,
        1995. The notes have not been extended and
        are due and payable. They are included in
        current liabilities.                           $  43,600   $  43,600

     Unsecured non-interest-bearing notes, with
        payments of $1,000 due monthly and $417
        due quarterly. The Company reached settlement
        on these notes (see Note 5). The first note
        requires any amount still outstanding to be
        paid December 1997. This note was paid in full
        February 1998. The second note is currently
        payable in full.                                   2,500      14,975

     Promissory note, payments of interest only at
        9%, balance due May 1995, collateralized
        by Genesis preferred stock. The Company has
        renegotiated the note and has extended the
        due date to December 31, 1999.                    14,955      14,955

     Other

     Unsecured promissory note, quarterly payments
         of interest only at 10.25%, balance due
         July 1998.                                       16,000      16,000

     Unsecured, non-interest-bearing promissory
         note payable, due on demand.                     27,500
                                                       ---------   ---------
                                                         104,555      89,530
     Less current portion                                 73,600      58,575
                                                       ---------   ---------

     Notes payable, excluding current portion        $    30,955   $  30,955
                                                       =========   =========



<PAGE>

                BIORELEASE CORP. AND SUBSIDIARY D/B/A BIORELEASE
                        (A Development Stage Enterprise)

                   Notes to Consolidated Financial Statements

                             June 30, 1998 and 1997

4.   Notes Payable (Concluded)

     Principal amounts due under notes payable are as follows:

     1999                                                      $      73,600
     2000                                                             16,000
     2001                                                             14,955

5.   Commitments and Contingencies

     On February 19, 1998, the Company announced that it had signed a definitive
     agreement  to acquire  Xenix  Resources,  Inc., a privately  owned  Alabama
     corporation,  for an exchange of shares  pursuant to which the Company will
     acquire  Xenix in a reverse  acquisition.  A Proxy  Statement  was prepared
     shortly  thereafter  describing  this  transaction  but was never filed. On
     April 15, 1998, Xenix notified the Company that it had experienced material
     adverse  changes in its financial  condition.  The Company has continued to
     pursue the closing of this transaction, subject to its finding satisfactory
     financial performance by Xenix during the intervening period.

     Beginning July 1, 1997, the Company has no leased  premises.  Future office
     rental will be included in the related party consulting agreement (see Note
     10).  The Company had a lease  agreement  which  expired  June 30, 1997 for
     premises in Bedford,  New  Hampshire.  The lease called for monthly rent of
     $295,  plus  utilities  and a  prorata  share  of  taxes  and  common  area
     maintenance fees.

     Rent expense,  including a prorata share of other costs, was $1,548 for the
     year ended June 30, 1997.

     During  1994,  a  noteholder  had  brought  suit  against  the  Company for
     repayment of $40,000 of principal and costs of collection.  Under the terms
     of the note,  at the Company's  option,  the note could be satisfied by the
     noteholder receiving Company stock of equivalent value. The noteholder is a
     stockholder of the Company. A court approved  settlement was reached during
     1995 in the amount of $43,475.  The Company  agreed to pay a monthly amount
     of $1,000  through  December 1996 where upon the remaining  balance is due.
     Interest on late payments is accrued at the rate of 10%. In February  1998,
     the Company paid $8,000 and agreed to issue 20,000  shares of the Company's
     common  stock in final  settlement  of this  obligation.  The  Company  has
     accrued  $1,000  for this  settlement,  which is  accounted  for in accrued
     expenses.

     The Company was not insured for product  liability  from May 1994 to August
     1994. The product  liability  insurance policy was renewed and effective in
     August 1994. This policy was canceled January 1995.



<PAGE>

                BIORELEASE CORP. AND SUBSIDIARY D/B/A BIORELEASE
                        (A Development Stage Enterprise)

                   Notes to Consolidated Financial Statements

                             June 30, 1998 and 1997


6.   Income Taxes

     The Company has not filed  federal or state tax returns for the years ended
     December 31, 1993, 1994, 1995, 1996, and 1997. There will be no federal tax
     liability for the years then ended.  In addition,  there are  approximately
     $5,000 of state business tax liabilities recorded as of June 30, 1998.

     For income tax filing purposes, the Company recognizes revenue and expenses
     on a cash basis and its fiscal year-end is December 31.

     The net current and  long-term  deferred  taxes  consisted of the following
     components as of June 30:

<TABLE>
<CAPTION>
                                                                   1998 Tax Effect
                                       ----------------------------------------------------------------------
                                                                Asset                       Liability
                                                      -------------------------   ---------------------------
                Item                       Total         Current      Long-Term      Current        Long-Term
                                       ------------   -----------    ----------   ------------     ----------
<S>                                    <C>            <C>            <C>          <C>              <C>       
     Accrual to cash adjustment        $     76,185   $    79,738    $        -   $     (3,553)    $        -
     Net operating loss deduction         1,047,515             -     1,047,515              -              -
                                       ------------   -----------    ----------   ------------     ----------
                                          1,123,700        79,738     1,047,515         (3,553)             -
     Valuation allowance                 (1,123,700)      (76,185)   (1,047,515)             -              -
                                       ------------   -----------    ----------   ------------     ----------

                                       $              $     3,553    $        -   $     (3,553)    $        -
                                       ============   ===========    ==========   ============     ==========
</TABLE>


<TABLE>
<CAPTION>
                                                                   1997 Tax Effect
                                       ----------------------------------------------------------------------
                                                                Asset                       Liability
                                                      -------------------------   ---------------------------
                Item                       Total         Current      Long-Term      Current        Long-Term
                                       ------------   -----------    ----------   ------------     ----------
<S>                                    <C>            <C>            <C>          <C>              <C>       
     Accrual to cash adjustment        $     95,783   $    98,978    $        -   $     (3,195)    $        -
     Capitalized expenses (tax
         basis only)                         15,648        15,648             -              -              -
     Net operating loss deduction         1,189,853             -     1,189,853              -              -
                                       ------------   -----------    ----------   ------------     ----------
                                          1,301,284       114,626     1,189,853         (3,195)             -
     Valuation allowance                 (1,301,284)     (111,431)   (1,189,853)             -     $        -
                                       ------------   -----------    ----------   ------------     ----------

                                       $          -   $     3,195    $        -   $     (3,195)    $        -
                                       ============   ===========    ==========   ============     ==========
</TABLE>

<PAGE>

                BIORELEASE CORP. AND SUBSIDIARY D/B/A BIORELEASE
                        (A Development Stage Enterprise)

                   Notes to Consolidated Financial Statements

                             June 30, 1998 and 1997


6.   Income Taxes (Concluded)

                                                                      Valuation
                                                                      Allowance
                                                                      ---------

     Balance, June 30, 1997                                         $ 1,301,284
       Net decrease                                                    (177,584)
                                                                    -----------

     Balance, June 30, 1998                                         $ 1,123,700
                                                                    ===========

     A valuation allowance equivalent to 100% of the deferred tax asset has been
     established since it is more probable than not that the Company will not be
     able to recognize a tax benefit for the asset.

7.   Equity

     Effective  June 30, 1992,  the Company  acquired  substantially  all of the
     outstanding  common and preferred stock of FLS Acquisition  Corp. (FLSA) in
     exchange for common stock of OIA. This  reorganization was accounted for as
     a  reverse  acquisition  of  OIA by  FLSA  under  the  purchase  method  of
     accounting,  as the shareholders of FLSA controlled the consolidated entity
     immediately  following the  reorganization.  Subsequent to the transaction,
     the Company changed its name to Biorelease  Corp. and FLSA changed its name
     to Biorelease Technologies, Inc.

     The terms of the  reorganization  agreement  between  the  Company  and the
     Subsidiary  called for the issuance of 2,845,436 shares of OIA, Inc. common
     stock in exchange for 5,014,780  shares of FLSA common stock,  representing
     all of  FLSA  common  stock  issued  and  outstanding  at the  date  of the
     reorganization.  Currently,  all  but  433,105  shares  of FLSA  have  been
     acquired. The reorganization agreement also calls for the issuance of up to
     1,022,130  additional  shares of the Company's  common stock subject to the
     achievement of certain  operating results in future years. The Company does
     not expect to meet the  requirements  which will result in the  issuance of
     these  shares.  The  issuance  of these  shares  will be  accounted  for as
     additional  consideration for the acquisition of FLSA and, if issued, to be
     accounted for as the purchase of undeveloped technology and, therefore, the
     value of such shares expensed. No accounting  recognition has been given to
     the minority ownership interest in the subsidiary because the subsidiary is
     a deficit  corporation and the minority  shareholders have no obligation to
     fund their share of such deficit.

<PAGE>


                BIORELEASE CORP. AND SUBSIDIARY D/B/A BIORELEASE
                        (A Development Stage Enterprise)

                   Notes to Consolidated Financial Statements

                             June 30, 1998 and 1997


7.  Equity (Continued)

     Effective  September  1,  1992,  the Board of  Directors  adopted  the 1992
     Directors'  Stock Option Plan  (Directors'  Plan) and the 1992 Stock Option
     Plan (Option Plan).  Under the Directors' Plan, a maximum of 100,000 shares
     are  reserved  for option  grants.  The option  price per share will be its
     market price at the date of grant,  provided however,  that at no time will
     the option price be less than $6.00 per share.  Options  granted under this
     Plan vest  immediately and expire 10 years from the date of grant. The Plan
     was  modified by a proxy vote  during  1994.  The maximum  number of shares
     issuable  pursuant to this Plan has been increased to 250,000  shares,  and
     the requirement that the minimum exercise price be $6.00 per share has been
     removed.

     Under the Option  Plan,  a maximum  500,000  shares are reserved for option
     grants.  The option price per share will be its market value at the date of
     grant, provided however, that at no time will the option price be less than
     $6.00  per  share.  Vesting  and  expiration  dates  will vary  based  upon
     individual  agreements  with the option holder.  The Plan was modified by a
     proxy vote during 1994. The maximum number of shares  issuable  pursuant to
     this Plan has been increased to 10% of the issued and outstanding shares of
     the Company,  not to exceed 1,000,000 shares,  and the requirement that the
     minimum exercise price be $6.00 per share has been removed. Under the Plan,
     an incentive  stock option plan  benefiting  its President  provides for an
     option to purchase up to 200,000  shares of common stock at $1.40  exercise
     price if certain operational criteria are met.

     A summary of the Company's  stock option plans as of June 30, 1998 and 1997
     and changes during the year are presented below:

<TABLE>
<CAPTION>
                                                                                          Options Granted to
                                                Director Plan        Option Plan          Service Providers
                                             ------------------  -------------------     ---------------------
                                                       Weighted             Weighted                  Weighted
                                              Number    Average  Number      Average     Number        Average
                                               of      Exercise    of       Exercise       of         Exercise
                                             Options    Price    Options      Price      Options        Price
                                             -------   --------  -------    --------     -------      --------

<S>                             <C> <C>      <C>          <C>    <C>           <C>      <C>              <C> 
      Options outstanding, June 30, 1996     137,500      3.11   200,000       4.14     2,919,320        0.69
        Granted                               30,000      0.17         -          -       375,000        0.09
        Expired                              (10,000)        -  (200,000)         -       (50,000)          -
                                             -------  --------   -------      -----     ---------        ----
      Options outstanding, June 30, 1997     157,500      2.75         -          -     3,244,320        0.69
      Options outstanding, June 30, 1998     157,500      2.75         -          -     3,244,320        0.69
                                             =======  ========   =======      =====     =========        ====

      Currently exercisable                  157,500      2.75         -          -     3,244,320        0.69
                                             =======  ========   =======      =====     =========        ====
</TABLE>


     The range of exercise prices is $.06 to $7.50 as of June 30, 1998 and 1997,
     respectively.


<PAGE>

                BIORELEASE CORP. AND SUBSIDIARY D/B/A BIORELEASE
                        (A Development Stage Enterprise)

                   Notes to Consolidated Financial Statements

                             June 30, 1998 and 1997


7.  Equity (Concluded)

     The  weighted  average fair value of the options  granted  during the years
     ended June 30, 1998 and 1998 is presented below:

                                                     1998               1997
                                                     ----               ----
     Director Plan                                Non Granted              $.10
     Option Plan                                  Non Granted       Non Granted
     Options granted to service providers         Non Granted              $.11

     The  Company  applies  APB  Opinion  25  and  related   interpretations  in
     accounting for certain options granted.  Accordingly,  no compensation cost
     has been  recognized  for  those  options.  Had  compensation  cost for the
     Company  plans been  determined  based on the fair value at the grant dates
     consistent  with the method of FASB  Statement  123, the Company's net loss
     would not have been  affected  for the years  ended June 30, 1998 and 1997,
     and there would have been no impact on the loss per share for those years.

     The fair value of each option is  estimated  on the date of grant using the
     Black-Scholes  option-pricing  model using the  following  weighted-average
     assumptions:

                                                   1998             1997
                                                   ----             ----

     Weighted risk-free interest rate               N/A             6.55%
     Weighted expected life                         N/A          8.21 years
     Weighted expected volatility                   N/A             135%

8.   Investment

     The Company acquired 150,000 shares of 6% cumulative, convertible preferred
     stock of Genesis Farms,  Inc.  (Genesis) on March 31, 1994 in consideration
     for issuing  1,500,000  shares of the Company's common stock. The preferred
     stock can be converted  into common stock at a ratio of 10 shares of common
     stock for each share of the  preferred.  On March 31, 1994,  the  Company's
     stock had a fair market value of $1. In accordance with generally  accepted
     accounting  principles  (the cost method of accounting  for  non-marketable
     investments), the Company recorded the investment in Genesis at $1,500,000.

<PAGE>

                BIORELEASE CORP. AND SUBSIDIARY D/B/A BIORELEASE
                        (A Development Stage Enterprise)

                   Notes to Consolidated Financial Statements

                             June 30, 1998 and 1997


8.   Investment (Concluded)

     Management  believes  the  value of  Genesis  stock  has  been  permanently
     impaired and has reduced its investment in the Genesis  preferred  stock to
     $-0- as of June 30, 1998 and 1997.

     If the  Genesis  stock  becomes  publicly  traded,  as intended by Genesis'
     management,  the  value of the stock by the  Company  would be based on its
     market  price,  as  required  by SFAS  No.  115,  and may  differ  from its
     historical cost value.

9.   Cash Flow Information

                                                                     Period From
                                                     For the Year   Inception to
                                                    Ended June 30,    June 30,
                                                    1998      1997      1998
                                                    ----      ----   ---------

     Cash paid for interest                     $     525  $      -  $   7,752

     Non-cash investing and financing
        activities were as follows:
              Liabilities repaid through issuance
                  of common stock                  33,441     5,784    616,214
              Issuance of common stock for
                  subscription receivable               -         -     50,000
              Non-marketable security acquired
                  through the issuance of common
                  stock                                 -         -  1,500,000

10.    Related Party Transactions

       On October 4, 1996, R. Bruce Reeves  resigned as a member of the Board of
       Directors,  President,  and  Chief  Executive  Officer  of  the  Company.
       Effective  April  1,  1996,  the  Company  engaged  a  consulting   firm,
       controlled by a Reeves' family member, to perform the executive duties of
       the Company. In fiscal year end June 30, 1998, the Company paid $1,500 in
       contractual fees for these services as compared to fiscal year ended June
       30,  1997,  wherein  the Company  paid  $35,000  for these  services.  In
       February 1998, the Company's  Board of Directors  appointed Mr. Reeves as
       acting President to manage ongoing business activities of the Company.

<PAGE>

                BIORELEASE CORP. AND SUBSIDIARY D/B/A BIORELEASE
                        (A Development Stage Enterprise)

                   Notes to Consolidated Financial Statements

                             June 30, 1998 and 1997


10.  Related Party Transactions (Concluded)

     As of June 30,  1998 and 1997,  the Company  was  indebted  $87,734 to this
     related  party.  Effective  October 18, 1996,  this  indebtedness  bears no
     interest and has been deferred for a period of three years.

     In  addition,  the Company had $16,827 of accrued  expenses  payable to the
     related party as of June 30, 1998 and 1997.

11.  Disclosure About Fair Value of Financial Instruments

     The  Company's  financial  instruments  consist of cash,  short-term  trade
     receivables  and payables,  and long-term  debt.  The carrying value of all
     instruments approximate their fair value.