UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

  [X]    QUARTERLY REPORTS UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
         ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998.

                                       OR

  [ ]    QUARTERLY REPORTS UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
         ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO _____________


                           Commission File No. 0-19844


                                PARACELSIAN, INC.
        -----------------------------------------------------------------
        (Exact name of small business issuer as specified in its charter)


         Delaware                                             16-1399565
-------------------------------                            ----------------
(State or other jurisdiction of                            (I.R.S. Employer
incorporation or organization)                             Identification No.)


Langmuir Laboratories, Cornell Technology Park, Ithaca, New York           14850
--------------------------------------------------------------------------------
             (address of principal executive offices)                   Zip Code


                    Issuer's telephone number: (607) 257-4224
                                               --------------


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

                                 Yes [X] No  [ ]


There were 14,871,296 shares of Common Stock outstanding at August 10, 1998

<PAGE>

                        PARACELSIAN, INC. AND SUBSIDIARY

                                      Index



                                                                            Page
                                                                            ----

PART I. -  FINANCIAL INFORMATION

Item 1. -  Financial Statements

Consolidated Balance Sheets as of June 30, 1998 (Unaudited) and 
September 30, 1997 (Audited).                                                  3

Consolidated Statements of Operations for the three 
and nine months ended June 30, 1998 and 1997 and the period from 
inception (April 15, 1991) to June 30, 1998 (Unaudited).                       4

Consolidated Statements of Stockholders' Equity for the 
period from inception (April 15, 1991) to June 30, 1998 (Unaudited).           5

Consolidated Statements of Cash Flows for the nine months
ended June 30, 1998 and 1997 and the period from inception
(April 15, 1991) to June 30, 1998 (Unaudited).                                 8

Notes to Consolidated Financial Statements  (Unaudited)                       10

Item 2. - Management's Discussion and Analysis of Financial Condition and 
          Results of Operations.                                              14

PART II - OTHER INFORMATION

Item 1. - Legal Proceedings                                                   16
 
Item 6. - Exhibits and Reports on 8-K                                         16

Signatures                                                                    16


                                        2
<PAGE>
<TABLE>
<CAPTION>
                                 PARACELSIAN, INC. AND SUBSIDIARY
                                   (A Development Stage Company)
                                    Consolidated Balance Sheets


                                                                      June 30,      September 30,
                                                                        1998            1997
                                                                    ------------    ------------
                                                                     (Unaudited)      (Audited)
                                                                    ------------    ------------
<S>                                                                 <C>             <C>         
ASSETS
Current Assets:
      Cash and cash equivalents                                     $    137,857    $    886,249
      Accounts receivable                                                 15,240              --
      Inventory                                                          171,689         156,323
      Prepaid expenses and other current assets                           97,502          61,437
      Loan to East West Herbs, Ltd., - current portion                   170,000         170,000
                                                                    ------------    ------------
           Total current assets                                          592,288       1,274,009
                                                                    ------------    ------------

Equipment, net                                                           288,501         305,079

Other Assets:
      TCM extracts on-hand                                               350,154         466,839
      Licensing agreement, net                                           223,258         367,258
      Patents and trademarks, net                                        130,747         125,586
      Loan to East West Herbs, Ltd., - noncurrent portion                127,500         170,000
                                                                    ------------    ------------
           Total other assets                                            831,659       1,129,683
                                                                    ------------    ------------
                                                                    $  1,712,448    $  2,708,771
                                                                    ------------    ------------


LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
      Accounts payable                                              $    173,138    $    268,702
      Accrued expenses                                                   165,254         180,664
      Due to related party                                                 7,002          18,557
                                                                    ------------    ------------
           Total current liabilities                                     345,394         467,923
                                                                    ------------    ------------

Commitments and Contingency

Stockholders' Equity:
      Commonstock, $.01 par value;  35,000,000 shares authorized;
            14,871,296 shares outstanding June 1998
            and 12,004,867 September 1997                                148,710         120,045
      Additional paid-in capital                                      22,555,650      22,084,315
      Deficit accumulated during the development stage               (19,994,791)    (18,620,997)
      Treasury stock, at cost; 265,478 shares                         (1,342,515)     (1,342,515)
                                                                    ------------    ------------
           Total stockholders' equity                                  1,367,054       2,240,848
                                                                    ------------    ------------
                                                                    $  1,712,448    $  2,708,771
                                                                    ============    ============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                        3



<PAGE>
<TABLE>
<CAPTION>

                                              PARACELSIAN, INC. AND SUBSIDIARY
                                               (A Development Stage Company)
                                           Consolidated Statements of Operations
                            For the three months and nine months ended June 30, 1998 and 1997,
                                       And the period from inception to June 30, 1998
                                                        (Unaudited)

                                                                                                              Cumulative
                                                   Three Months Ended              Nine Months Ended          Period from
                                                        June 30,                        June 30,              Inception to
                                              ----------------------------    ----------------------------      June 30,
                                                   1998           1997            1998            1997            1998
                                              ------------    ------------    ------------    ------------    ------------
<S>                                                  <C>               <C>           <C>             <C>           <C>    
Revenues:
    Marketing rights                          $         --    $         --    $         --    $         --    $    254,995
    Products                                         1,425             475           3,100           3,525         165,813
    Product testing                                 15,240              --          49,210              --          49,210
    Product royalties                                   --              --              --           1,070           1,246
    Subscription revenue                                --              --              --              --          31,625
                                              ------------    ------------    ------------    ------------    ------------
                                                    16,665             475          52,310           4,595         502,889

Operating expenses:
    Research and product engineering               165,107         400,232         542,264       1,257,598       7,209,884
    Newsletter expenses                                 --              --              --              --         955,586
    General and administrative                     371,205         526,489         926,606       1,400,956       9,129,509
    Product launch costs                                --         220,060              --         297,507         300,544
    Cost of products sold                               --              --              --              --          95,023
    Officer stock compensation                          --              --              --              --       1,228,275
                                              ------------    ------------    ------------    ------------    ------------
                                                   536,312       1,146,781       1,468,870       2,956,061      18,918,821
                                              ------------    ------------    ------------    ------------    ------------
      Loss from operations during
      the development stage                       (519,647)     (1,146,306)     (1,416,560)     (2,951,466)    (18,415,932)

Interest income, net                                 9,096          52,169          35,798         113,596         510,653
Gain on sale of assets                                  --              --           6,968              --          38,488

                                              ------------    ------------    ------------    ------------    ------------
      Net loss during the development stage   $   (510,551)   $ (1,094,137)   $ (1,373,794)   $ (2,837,870)   $(17,866,791)
                                              ============    ============    ============    ============    ============

      Basic net loss per share                $      (0.03)   $      (0.09)   $      (0.09)   $      (0.24)
                                              ============    ============    ============    ============

      Weighted average number of
       common stock outstanding                 14,871,296      11,937,510      14,871,296      11,935,891
                                              ============    ============    ============    ============

                                See accompanying notes to consolidated financial statements.

                                                             4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                                 PARACELSIAN, INC. AND SUBSIDIARY
                                                   (A Development Stage Company)
                                          Consolidated Statements of Stockholders' Equity
                                          For the period from inception to June 30, 1998
                                                            (Unaudited)
                                                                                                  Deficit
                                                                                                Accumulated
                                                                                  Additional    During the
                                           Preferred Stock     Common Stock        Paid-in      Development  Treasury
                                            Shares Amount    Shares      Amount    Capital         Stage       Stock      Total
                                           ------- ------- ---------- ---------- ------------  -------------  -------  ----------

<S>                                                <C>       <C>        <C>       <C>           <C>      <C>  <C>         <C>
Issuance of Common Stock April - July 1991      -- $    --    806,250  $   8,063  $        --   $         --  $    --       8,063
Issuance of Common Stock for licensing,
   technology and consulting 
   services - July 1991                                       333,850      3,338                                            3,338
Private placement of Common Stock -
   August - September 1991, net of costs                      267,288      2,673      369,017                             371,690
Net loss (April 15, 1991 to
  September 30, 1991)                           --      --                                          (133,469)            (133,469)
                                           ------- ------- ---------- ---------- ------------  -------------  -------  ----------

BALANCE, September 30, 1991                     --      --  1,407,388     14,074      369,017       (133,469)      --     249,622

Redemption of Common Stock - November 1991                   (245,000)    (2,450)                                          (2,450)
Initial Public Offering of Common Stock -
    February 1992, net of costs                             1,150,000     11,500    5,103,451                           5,114,951
Issuance of Warrants - February 1992                                                    1,000                               1,000
Net loss (for the year ended 
    September 30, 1992)                                                                           (1,221,943)          (1,221,943)
                                           ------- ------- ---------- ---------- ------------  -------------  -------  ----------

BALANCE, September 30, 1992                     --      --  2,312,388     23,124    5,473,468     (1,355,412)      --   4,141,180

Warrant dividend - September 1993                                                     436,898       (500,000)             (63,102)
Net loss (for the year ended
    September 30, 1993)                                                                           (2,022,614)          (2,022,614)
                                           ------- ------- ---------- ---------- ------------  -------------  -------  ----------

BALANCE, September 30, 1993                     --      --  2,312,388     23,124    5,910,366     (3,878,026)      --   2,055,464

Net loss (for the year ended 
    September 30, 1994)                                                                           (1,940,262)          (1,940,262)
                                           ------- ------- ---------- ---------- ------------  -------------  -------  ----------

BALANCE, September 30, 1994                     --      --  2,312,388     23,124    5,910,366     (5,818,288)      --     115,202

Issuance of Common Stock for 
    acquisition of Pacific 
    Liaisons - October 1994                                 1,116,666     11,167    1,632,833                           1,644,000
Exercise of Warrants                                          221,200      2,212      716,644                             718,856
Common Stock purchased by Officer -
      January 1995                                            705,000      7,050    1,311,075                           1,318,125


                                   See accompanying notes to consolidated financial statements.

                                                                 5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                                 PARACELSIAN, INC. AND SUBSIDIARY
                                                   (A Development Stage Company)
                                          Consolidated Statements of Stockholders' Equity
                                          For the period from inception to June 30, 1998
                                                            (Unaudited)

Continued from the previous page
                                                                                                  Deficit
                                                                                                Accumulated
                                                                                  Additional    During the
                                           Preferred Stock     Common Stock        Paid-in      Development  Treasury
                                            Shares Amount    Shares      Amount    Capital         Stage       Stock     Total
                                           ------- ------- ---------- ---------- ------------  -------------  -------  ----------

<S>                                   <C>          <C>       <C>        <C>       <C>           <C>      <C>  <C>         <C>
Issuance of Common Stock for 
  services rendered -
      January 1995                                             33,330        333       21,167                              21,500
      April 1995                                              200,000      2,000      373,000                             375,000
Issuance of Common Stock for 
   conversion of short-term 
   liabilities - June 1995                                     13,000        130       48,849                              48,979
Issuance of Common Stock 
   - August 1995                                              300,000      3,000      749,625                             752,625
Issuance of Preferred Stock 
   - September 1995
   Series A, net of costs                   10,700     107                            361,018                             361,125
   Series B, net of costs                   10,000     100                            399,900                             400,000
   Series C, net of costs                    5,000      50                            218,422                             218,472
Net loss (for the year ended 
   September 30, 1995)                                                                            (3,031,196)          (3,031,196)
                                           ------- ------- ---------- ---------- ------------  -------------  -------  ----------

BALANCE, September 30, 1995                 25,700     257  4,901,584     49,016   11,742,899     (8,849,484)      --   2,942,688

Issuance of Series B Preferred 
   Stock, net of costs                      76,651     767                          3,999,233                           4,000,000
Exercise of Warrants                                           73,318        733      154,676                             155,409
Issuance of Common Stock for 
   services rendered -
      October 1995                                             33,336        331       42,669                              43,000
Purchase of Treasury Stock - 
   November 1995                                                                                           (1,342,515) (1,342,515)
Conversion of Preferred Stock             (102,351) (1,024) 5,371,010     53,710      (52,686)
Preferred dividends and beneficial
   conversion feature                                                               1,628,000     (1,628,000)
Issuance of Common Stock for 
   conversion of short-term 
   liabilities - January 1996                                   2,500         25        9,975                              10,000
Issuance of Common Stock for 
   services rendered - February 1996                           25,000        250       27,875                              28,125
Issuance of Warrants and 
   Options for services rendered
    - February 1996                                                                   132,500                             132,500
Issuance of Common Stock - June 1996                          733,334      7,333    1,965,663                           1,972,996


                                   See accompanying notes to consolidated financial statements.

                                                                 6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                 PARACELSIAN, INC. AND SUBSIDIARY
                                                   (A Development Stage Company)
                                          Consolidated Statements of Stockholders' Equity
                                          For the period from inception to June 30, 1998
                                                            (Unaudited)
Continued from the previous page
                                                                                                  Deficit
                                                                                                Accumulated
                                                                                  Additional    During the
                                           Preferred Stock     Common Stock        Paid-in      Development  Treasury
                                            Shares Amount    Shares      Amount    Capital         Stage       Stock        Total
                                           ------- ------- ---------- ---------- ------------  -------------  -------      -------

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

Sale of Warrants - June 1996                                                           35,000                                35,000
Issuance of Common Stock - July 1996                           91,667        917      250,075                               250,992
Issuance of Common Stock for 
      services rendered - July 1996                             5,000         50        4,950                                 5,000
Exercise of Options - September 1996                           15,000        150       37,350                                37,500
Issuance of Common Stock - September 1996                     683,333      6,833    1,997,826                             2,004,659
Net loss (for the year
      ended September 30, 1996)                                                                   (4,201,764)            (4,201,764)
                                           ------- ------- ---------- ---------- ------------    ----------- ----------  ----------
BALANCE, September 30, 1996                     --      -- 11,935,082    119,348   21,976,005    (14,679,248)(1,342,515)  6,073,590

Issuance of Common Stock for 
      services rendered -
      January 1997                                              7,285         72       22,835                                22,907
Termination of warrants - February 1997                                               (35,000)                              (35,000)
Repayment of officer stock 
      subscription receivable                                                          89,850                                89,850
Issuance of Common Stock for 
      services rendered -
      July 1997                                                62,500        625       30,625                                31,250
Net loss (for the year ended 
      September 30, 1997)                                                                         (3,941,749)            (3,941,749)
                                           ------- ------- ---------- ---------- ------------    ----------- ----------  ----------

BALANCE, September 30, 1997                     --      -- 12,004,867    120,045   22,084,315    (18,620,997)(1,342,515)  2,240,848
                                           ------- ------- ---------- ---------- ------------    ----------- ----------  ----------

Issuance of Common - January 1998                           3,571,429     35,715      464,285                               500,000
Surrender of shares - January 1998                           (705,000)    (7,050)       7,050                                    --
Net loss (for the nine 
      months ended June 30, 1998)               --      --         --         --           --     (1,373,794)        --  (1,373,794)
                                           ------- ------- ---------- ---------- ------------    ----------- ----------  ----------

BALANCE, June 30, 1998                          --      -- 14,871,296    148,710   22,555,650    (19,994,791)(1,342,515)  1,367,054
                                           ======= ======= ========== ========== ============    =========== ==========  ==========


                                    See accompanying notes to consolidated financial statements.

                                                                  7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                        PARACELSIAN, INC. AND SUBSIDIARY
                                         (A Development Stage Company)
                                        Consolidated Statements of Cash
                             Flows For the nine months ended June 30, 1998 and 1997
                                 And the period from inception to June 30, 1998
                                                  (Unaudited)

                                                                                                   Cumulative
                                                                       Nine Months Ended           Period from
                                                                            June 30,              Inception to
                                                                  ----------------------------      June 30,
                                                                      1998            1997             1998
                                                                  ------------    ------------    ------------
<S>                                                               <C>             <C>             <C>          
Cash flows from operating activities:
    Net loss                                                      $ (1,373,794)   $ (2,837,870)   $(17,866,791)
    Adjustments to reconcile net loss to net cash used in
    operating activities:
       Gain on the sale of assets                                       (6,968)             --         (38,488)
       Non-cash compensation expense                                        --              --       1,228,275
       Other non-cash expenses                                              --         209,551       1,510,203
       Depreciation and amortization                                   321,975         218,265       1,568,947
       Changes in assets and liabilities:
           (Increase) decrease in accounts receivable                  (15,240)             --         (15,240)
           (Increase) decrease in inventory                            (15,366)             --        (171,689)
           (Increase) decrease in prepaid expenses and
              other current assets                                     (36,065)        (49,869)        (68,082)
           (Decrease) increase in accounts payable                     (95,564)        (97,448)        527,661
           (Decrease) increase in due to related party                 (11,555)        (52,000)          7,002
           (Decrease) increase in deferred revenue                          --             583              --
           (Decrease) increase in accrued expenses                     (15,410)       (104,604)        165,254
                                                                  ------------    ------------    ------------
       Net cash used in operating activities                        (1,247,987)     (2,713,392)    (13,152,948)
                                                                  ------------    ------------    ------------
Cash flows from investing activities:
    Purchase of investments                                                 --              --      (6,719,089)
    Redemption of investments                                               --              --       6,719,089
    Purchase of equipment                                              (31,212)        (16,887)       (763,398)
    Proceeds from sale of equipment                                      6,968              --          58,488
    Acquisition of licensed technology                                      --          (3,656)        (53,656)
    Acquisition of patents and trademarks                              (18,661)        (55,318)       (371,614)
    Acquisition of New Century Nutrition newsletter                         --              --        (350,000)
    Acquisition of option for East West Herbs, Ltd. 
       and related acquisition costs                                        --              --         (92,866)
    (Loan) proceeds (to) from East West Herbs, Ltd.                     42,500              --        (297,500)
                                                                  ------------    ------------    ------------
       Net cash used in investing activities                              (405)        (75,861)     (1,870,546)
                                                                  ------------    ------------    ------------

Cash flows from financing activities:
    Sale of common stock, initial public offering, net of costs             --              --       5,124,014
    Sale of common and preferred stock, net of costs                   500,000         (15,000)     10,830,109
    Proceeds from the exercise (redemption) of warrants                     --         (35,000)        666,295
    Proceeds from the exercise of options                                   --              --          37,500
    Purchase of treasury stock                                              --              --      (1,342,515)
    Cost of warrant dividend                                                --              --         (63,102)
    Payment on equipment contract                                           --              --         (90,950)
                                                                  ------------    ------------    ------------
       Net cash (used in) provided by financing activities             500,000         (50,000)     15,161,351
                                                                  ------------    ------------    ------------

Net increase (decrease) in cash and cash equivalents                  (748,392)     (2,839,253)        137,857

Cash and cash equivalents, beginning of period                         886,249       4,171,402              --
                                                                  ------------    ------------    ------------

Cash and cash equivalents, end of period                          $    137,857    $  1,332,149    $    137,857
                                                                  ============    ============    ============


                          See accompanying notes to consolidated financial statements.

                                                       8
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                        PARACELSIAN, INC. AND SUBSIDIARY
                                          (A Development Stage Company)
                                         Consolidated Statements of Cash
                             Flows For the nine months ended June 30, 1998 and 1997
                                 And the period from inception to June 30, 1998
                                                   (Unaudited)

                                                                                                   Cumulative
                                                                         Nine Months Ended         Period from
                                                                              June 30,             Inception to
                                                                   -----------------------------     June 30,
                                                                        1998            1997           1998
                                                                   -------------   -------------   ----------
<S>                                                                <C>             <C>             <C>       
Supplemental disclosures:
    Cash paid during the period for interest                       $       3,433   $       3,694   $   22,717
                                                                   =============   =============   ==========

Supplemental disclosure of non-cash investing and
  financing activities:
    Fair value of assets acquired, net of cash acquired                       --              --    1,702,000
    Less - liabilities assumed                                                --              --       52,000
    Less - issuance of common stock                                           --              --    1,644,000
                                                                   -------------   -------------   ----------
       Net cash paid                                                          --              --        6,000
                                                                   =============   =============   ==========
    Warrant dividend                                                          --              --      500,000
    Issuance of common stock/warrants for services
       and to reduce short-term liabilities                                   --          22,907      550,456
    Purchase of equipment                                                     --              --       90,950
    Repayment of officer stock subscription receivable                        --              --       89,850
    Issuance of common stock for licensing and technology rights              --              --        3,338
                                                                   =============   =============   ==========


                          See accompanying notes to consolidated financial statements.

                                                        9
</TABLE>
<PAGE>

                        PARACELSIAN, INC. AND SUBSIDIARY
                          (A Development Stage Company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             JUNE 30, 1998 AND 1997


1.       MANAGEMENT REPRESENTATION

The  consolidated  financial  statements  included  herein have been prepared by
Paracelsian,  Inc. and subsidiary (the "Company") without audit, pursuant to the
rules and  regulations of the Securities and Exchange  Commission  applicable to
quarterly  reporting on Form 10-QSB and reflect,  in the opinion of the Company,
all  adjustments  necessary  to present  fairly the  financial  information  for
Paracelsian, Inc. and its consolidated subsidiary. All such adjustments are of a
normal and  recurring  nature.  Certain  information  and  footnote  disclosures
normally included in financial statements, prepared in accordance with generally
accepted accounting  principles,  have been condensed or omitted as permitted by
such  regulations.  These  consolidated  financial  statements and related notes
should be read in conjunction  with the  consolidated  financial  statements and
related  notes  included in the  Company's  Annual Report on Form 10-KSB for the
fiscal year ended September 30, 1997.

2.       ORGANIZATION, BUSINESS, AND RISK FACTORS:

Organization and Business
-------------------------
Paracelsian,  Inc., (the "Company") is a unique biotechnology based company that
utilizes both proprietary and non-proprietary  screening  technology to identify
novel  compounds of unique  therapeutic  benefit from herbal and other botanical
sources.  These  assays  also  provide  a  vehicle  through  which  the  Company
identifies  and/or confirms the mechanisms  through which  traditional herbs and
other  botanicals  provide the therapeutic or functional  benefits  suggested by
their  traditional  use.  The Company  has  developed  technologies  to identify
potential  products that inhibit the  biological  signals  generated by targeted
cells  that  result in  controlled  or  uncontrolled  growth and  division.  The
Company's  screening  technology  evaluates  the  effects  of  herbal  and other
botanical products on intracellular  signals referred to as "Signal Transduction
Technology."

Cell  division is one of the basic steps in biology  necessary for normal growth
of tissues to support life.  The Company's  technology  enables  researchers  to
observe signal  transduction  and measure the effects of chemicals  contained in
synthetic or natural compounds, and substances occurring in nature such as herbs
and  combinations  of herbal  extracts on cell division.  In the course of these
observations,  the Company can  distinguish  the effects of such  substances  on
targeted  cells,  thereby  screening  compounds to identify those with promising
favorable  therapeutic  effects or favorable effects on the body's structure and
function.  (This  proprietary  technology,  including the  components,  methods,
procedures  and  know-how  employed in this  screening  process,  is referred to
herein as the "Screening Technology".)

In  October  1994,  Pacific  Liaisons   (Pacific),   a  partnership  engaged  in
identifying and acquiring biologically active pharmaceutical compounds,  natural
products and foods from Eastern Asia,  merged with a wholly-owned  subsidiary of
the  Company  and the  Company  now  maintains  a library of over 2,700  natural
medicinal extracts.  The Company,  also has, by agreement,  access to over 5,000
additional  Tradition Chinese  Extracts.  The initial group of extracts has been
processed  with the Company's  screening  technology,  with many of the extracts
showing significant potential for development as either pharmaceutical compounds
or dietary  supplements.  As the Company develops new screening  technologies or
screening  protocols  focused on conditions  other than those  applicable to the
current  screens,  the  library  will be  screened  again to  further  determine
potential  candidates for drug or dietary  supplement  development.  The Company
also has access to the informational database related to the medicinal extracts,
which contains,  among other things, a history of the usage of each extract (see
Note 3).

In November 1995, the Company purchased  substantially all the assets related to
NEW  CENTURY  NUTRITION,  a  newsletter  promoting  disease  prevention  through
nutrition.  In December  1996, the Company  decided to cease  publication of the
newsletter.

                                       10
<PAGE>

Development Stage Company and Risk Factors
------------------------------------------
The  Company  is  considered  to be a  development  stage  company as defined in
Statement of Financial  Accounting Standards No. 7, "Accounting and Reporting by
Development Stage Enterprises." Since inception,  the Company has been primarily
engaged in research, product engineering and raising capital.

The Company, as a development stage enterprise,  has yet to generate significant
revenues and has no assurance of substantial future revenues.  Even if marketing
efforts are successful,  it may take several years before  significant  revenues
are  realized.  The  Company is subject to a number of risks that may affect its
ability to become an  operating  enterprise  or impact its  ability to remain in
existence,  including  risks related to successful  development and marketing of
its  products,   patent   protection  of  proprietary   technology,   government
regulation,  competition from substitute products  (including  technologies that
may not yet have been  developed),  dependence  on key employees and the need to
obtain additional funds that may not be available to it.

As shown in the accompanying  financial  statements,  the Company incurred a net
loss of approximately $1,374,000 for the nine months ended June 30, 1998 and has
working  capital  of  approximately  $247,000  at June  30,  1998.  The  Company
continues to expend funds on product  research and  development  and general and
administrative expenses and has not generated significant revenues subsequent to
year-end.  However,  in July 1998,  the Company  executed an agreement with R.P.
Scherer that is expected to generate  significant revenues on a recurring basis.
See related discussion in Management, Discussion and Analysis section.

3.       SIGNIFICANT ACCOUNTING POLICIES:

Consolidation
-------------
The  consolidated  financial  statements of the Company  include the accounts of
Paracelsian,  Inc. and its wholly owned subsidiary ParaComm, Inc. formerly known
as Para Acquisition  Corp. All intercompany  balances and transactions have been
eliminated.

Cash and Cash Equivalents
-------------------------
Cash and cash equivalents  consist of highly liquid investments with an original
maturity  of three  months or less.  Cash  equivalents  as of June 30,  1998 and
September 30, 1997 approximated $138,000 and $887,000, respectively.

Research and Product Engineering
--------------------------------
Company-sponsored  research  and  product  engineering  expenditures  have  been
charged to expense as  incurred.  These  costs  consist  primarily  of  employee
salaries and direct  laboratory costs. The cost of extracts used in research and
development activities is expensed as consumed.

Net Loss Per Share
------------------
Effective  December 31, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings Per Share", which replaced the
calculation  of  primary  and fully  diluted  earnings  per share with basic and
diluted earnings per share. Basic loss per share is computed by dividing the net
loss by the  weighted-average  number of common  shares  outstanding  during the
period.  Diluted loss per share is not  presented as the  inclusion of potential
common shares (stock options and warrants) would be antidilutive.

Patents and Trademarks
----------------------
The Company has  acquired or applied for certain  patent and  trademark  rights.
Costs associated with the acquisition and application for these rights have been
capitalized  and are  being  amortized  on the  straight-line  method  over  the
estimated legal life of the assets which range from 15 to 17 years.  Accumulated
amortization  of  the  patents  and  trademarks  totaled  $90,247  and  $76,747,
respectively, at June 30, 1998 and September 30, 1997. As of September 30, 1997,
management has determined a portion of these assets to be impaired  according to
FASB 121,  and as a result  $162,770  has been  expensed  during  the year ended
September 30, 1997.

                                       11
<PAGE>

Equipment and Depreciation
--------------------------
Equipment is stated at cost and is depreciated  over the estimated  useful lives
of  the  assets  using  the  straight-line  method.  Equipment  consists  of the
following:

                                                    June 30,      September 30,
                                    Useful Lives      1998            1997
                                    ------------  ------------    ------------

    Laboratory equipment              10 Years    $    542,903    $    480,171
    Office furniture and equipment    10 Years          86,345          86,345
    Computer equipment and software    5 Years         133,852         133,852
                                                  ------------    ------------
                                                       763,100         700,368
    Less - accumulated depreciation                    474,598         395,299
                                                  ------------    ------------
                                                  $    288,501    $    305,079
                                                  ============    ============

Use of Estimates
----------------
The  preparation of the  consolidated  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
the disclosure of contingent assets and liabilities at the date of the financial
statements.  Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

4.       STOCKHOLDERS' EQUITY:

In January,  1998 the Company  signed an  agreement  with Biomar  International,
Inc.("Biomar")  in which Biomar  agreed to purchase  3,571,429  shares of common
stock for  $500,000.  In  addition,  Biomar  received  warrants  to  purchase an
additional  2,971,429  shares of common stock at a price of $.175 per share or a
total of $520,000,  subject to an increase in the Company's  authorized  shares.
These warrants  expire 90 days after the shares and warrants are registered with
the  Securities  and  Exchange  Commission  ("SEC").  Biomar  became  the  major
shareholder  and obtained the right to name a new Board of Directors.  Biomar is
controlled by T. Colin Campbell a former director of the Company and his son, T.
Nelson Campbell a former Vice President of the Company.

The  Purchase  Agreement  also  provided  for the  resignation  of the  Board of
Directors  serving on January 14, 1998 and the appointment of Biomar's  nominees
to the Board of Directors of the Corporation  (the "Board").  Effective  January
14, 1998,  all of the Board  members other than the  Chairman,  Mr.  Theodore P.
Nikolis,  resigned immediately and T. Nelson Campbell, the Chairman of the board
of directors of Biomar,  was appointed to the Board.  Upon  satisfaction  of the
notification  requirements of the SEC on February 9, 1998, Mr. Nikolis  resigned
as a director of the  Corporation and  appointments of the new directors  became
effective.  All newly  appointed  directors  stood for  election  at the  annual
meeting of the shareholders on May 13, 1998, and were duly elected for staggered
terms ranging from one to three years.

On January 23,  1995,  the Company  approved a stock  purchase by the  Company's
President and then Chief  Executive  Officer to purchase an aggregate of 705,000
shares  of the  Company's  common  stock at a price of $.05 and $.56 per  common
share  for  245,000  and  460,000  shares  of  common  stock,  respectively.  In
connection with this transaction,  the Company  recognized a one-time,  non-cash
compensation expense of approximately $1,228,000 in the year ended September 30,
1995. In conjunction  with the purchase of these shares,  the Company extended a
note to the officer for $230,000, due December 31, 1995. Subsequently, this note
was extended  until December 31, 1997. In January 1998, the shares of stock were
returned  to the Company  and the note was  forgiven.  The shares of stock had a
fair market value that  approximated  the outstanding note balance of 180,000 at
September  30,  1997  which  has  been  reflected  as an  offset  to  additional
paid-in-capital.

                                       12
<PAGE>

The Company  entered into an employment  agreement  with Bernard M. Landes to be
President and Chief Executive Officer of the Corporation as of January 15, 1998.
The initial  employment term is for one year and  automatically  extended for an
additional  one year period  unless prior  written  notice is received  from the
Corporation or the Officer. Under the Agreement,  the Officer receives an annual
cash salary of $175,000,  with annual  adjustments and discretionary  bonuses of
$50,000 as determined by the Board.  The Officer was also granted 100,000 shares
of the Common Stock and granted options to acquire an additional  500,000 shares
provided certain performance criteria are satisfied.

                                       13

<PAGE>
ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

               Three Months Ended June 30, 1998 as compared to the
                        Three Months Ended June 30, 1997

RESULTS OF OPERATIONS

During the third  quarter of the  fiscal  year  ending  September  30,  1998 the
Company  generated  revenue  of $16,665  from  product  testing  and the sale of
products as compared  to $475 of royalty  and product  sale  revenue in the same
quarter of the prior  year.  This  represents  an increase of $16,190 in revenue
from last year.

A  significant  portion of the  Company's  strategy  is to expand its testing of
natural  products.  The Company believes that it has an opportunity to develop a
new area of quality assurance that will add value to the products it tests. As a
result, the Company has developed BioFit (TM) (Bio Functional Integrity Testing)
testing  program.  This  unique  testing  program is able to certify  consistent
bio-functionality of herbal and other dietary supplements. This new "functional"
approach to quality assurance will assist consumers in selecting herbs and other
botanical products based on their demonstrated biological activity,  rather than
relying  solely on  analytical  techniques  which  measure  only the presence or
absence of certain  marker  compounds.  This new  approach to quality  assurance
bridges the gap between purely  analytical  methods of validation and the use of
clinical trials to validate the  effectiveness of natural  products  relative to
the  structure  and  function  claims  being  made for them  under  the  Dietary
Supplement Health and Education Act of 1994.

Since the  Company's  inception  (April 15, 1991)  through June 30, 1998, it has
invested  $7,210,000 in product testing  research,  development and engineering.
The Company  expended  $165,000 in the third quarter of fiscal 1998, as compared
to $400,000 in the third quarter in fiscal 1997,  this  represents a decrease of
$235,000.  This  decrease  is  attributable  to lower  personnel  costs  and the
cancellation of the research agreement with the National Cancer Institute.

General and  administrative  expenses  were  $371,000  for the third  quarter of
fiscal 1998 as compared to $526,000 in the third  quarter of fiscal 1997.  These
expenses relate to the administration  and management of the Company,  including
personnel  costs,  legal,  accounting,  consulting,  investor  relations and the
administration of the research,  development and product engineering activities.
This decrease of $155,000 is attributable to lower personnel costs,  lower legal
and other  professional  and consulting costs and other general cost reductions.
The Company anticipates its general and administrative expenses will be lower in
the final quarter of fiscal 1998 than in the final quarter of fiscal 1997.

The  Company has  incurred  net losses of  $17,867,000  as a  development  stage
company from inception  (April 15, 1991) to June 30, 1998, of which $511,000 was
incurred in the third  quarter of fiscal 1998 and $  1,094,000  was  incurred in
third  quarter  of fiscal  1997.  The  basic net loss per share of common  stock
amounted to $.03 for the three months ended June 30, 1998 and $.09 for the three
months ended June 30, 1997.  The Company  anticipates  that losses will continue
throughout fiscal 1998, but at a significantly lower level than prior years.

Paracelsian, Inc. has entered into an agreement with R.P. Scherer North America,
a division of R.P.  Scherer  Corporation,  that  establishes  R.P. Scherer North
America as the exclusive  marketing  and  distribution  agent for  Paracelsian's
BioFIT (Bio Functional Integrity Testing)  Certification  program in the Dietary
Supplement and OTC market segments in North America. The agreement also provides
for  collaboration  between the two companies on the  development of new dietary
supplements and OTC products.

Under the terms of the North  American  agreement,  Paracelsian  will  initially
complete development of 10 BioFIT assay systems. R.P. Scherer North America will
pay Paracelsian initial fees, concurrent with the completion of the BioFIT assay
systems,  certification  of products,  and  completion of  agreements  with R.P.
Scherer customers.  The companies will market the program jointly.  The terms of
the agreement  further call for Paracelsian to receive  royalties on the sale of
all BioFIT certified products and the establishment of minimum royalty payments.

In addition to the initial  fees,  Paracelsian  Inc.  will  receive a minimum of
$400,000 in royalty payments in the initial period of the agreement. Paracelsian
must receive minimum  royalties of $700,000 in the subsequent  12-month  period.
The agreement will continue to renew  automatically  upon the receipt of minimum
prescribed  royalty  payments,  with Paracelsian  receiving  royalties  adjusted
upward  annually.  The  agreement  also  calls for  negotiation  of a  worldwide
agreement  within 90 days,  on terms and  conditions  essentially  equivalent to
those in the North American agreement.

                                       14
<PAGE>

The Company has also signed a collaborative research agreement with the Southern
Research Institute.  Under this agreement,  the Southern Research Institute will
invest in testing a series of the Company's  Traditional  Chinese Medicine (TCM)
herbal extracts for "in vivo" (live)  anti-tumor  activity  against human breast
cancer and prostate cancer.

NEW ACCOUNTING PRONOUNCEMENTS

In 1997, the Financial  Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting  Comprehensive  Income",  SFAS
No. 131, "Disclosures about Segments of an Enterprises and Related Information",
and  SFAS  No.  132,   "Employers'   Disclosures   about   Pensions   and  Other
Postretirement  Benefits".  SFAS No. 130 establishes standards for reporting and
display of  comprehensive  income and its  components.  SFAS No. 131 establishes
standards  for  reporting  information  about  operating  segments  and  related
disclosures  about products and services,  geographic areas and major customers.
SFAS No. 132 revises current disclosure  requirements for employers' pension and
other retiree benefits.  These standards are effective for years beginning after
December 15, 1997.  These standards  expand or modify current  disclosures  and,
accordingly,  will have no impact on the Company's reported financial  position,
results of operations and cash flows.

YEAR 2000 COMPLIANCE

The  Company  is  currently  analyzing  the  potential  of the Year  2000 on the
processing  of  date  sensitive   information  by  the  Company's   computerized
information  systems.  The Year 2000 problem is the result of computer  programs
being written using two digits (rather then four) to define an application year.
The Company is studying  the impact of the Year 2000  problem on its  accounting
systems  and other  aspects  of its  business  and as of June 30,  1998 does not
believe  that  there  will be any  significant  impact on the  future  financial
position, operating results, and cash flows of the Company.

LIQUIDITY & CAPITAL RESOURCES

As of June 30, 1998, the Company maintained  working capital of $247,000,  which
included cash and cash equivalents of $138,000.

The Company expects to continue its research and  development  efforts but focus
them in different areas than prior years.  The Company is in discussions  with a
number of companies and anticipates securing new sources of revenue as a results
of such  discussions.  As a  result  of the R.P.  Scherer  agreement  and  other
potential  sources  of  revenue,  the  Company  anticipates  emerging  from  the
development stage during fiscal 1999.

The Company has  significantly  reduced its personnel and other costs since June
1997 and  will  continue  to  operate  in a cost  effective  manner  in order to
maximize the productivity of its cash reserves.

In January,  1998 the Company  signed an  agreement  with Biomar  International,
Inc.("Biomar")  in which Biomar  agreed to purchase  3,571,429  shares of common
stock for  $500,000.  In  addition,  Biomar  received  warrants  to  purchase an
additional  2,971,429  shares of common stock at a price of $.175 per share or a
total of  $520,000.  The  warrants,  in the  aggregate  amount of $520,000  were
exercised on August 12, 1998.

This additional  financing will enable the Company's available cash and existing
sources of funding to satisfy  its  capital  requirements  for  several  months.
Furthermore,  on August  12,  1998 the  Board of  Directors  approved  a plan to
restructure the terms of certain warrant  agreements  currently  outstanding for
the purpose of raising  additional capital on a near to intermediate term basis.
Management  believes that it will be able to raise sufficient capital from these
sources to sustain its liquidity  needs until such time as revenues are adequate
to provide internally generated funds. The Company's future capital requirements
will depend on many  factors,  including  its  ability to  generate  significant
revenues,  and  continued  scientific  progress in its research and  development
programs,  and the  magnitude  of such  programs.  The  Company  intends to seek
additional funding sources as necessary;  however there can be no assurance that
additional financing will be available on acceptable terms or at all.

                                       15

<PAGE>
PART II  OTHER INFORMATION

Item 1.  Legal Proceedings
         -----------------

See Discussion in Form 10-QSB for the quarter ended March 31, 1998.

Item 6(a)    Exhibits
             --------

             None

Item 6(b)    Reports on Form 8-K.
             --------------------

             None

                                   SIGNATURES

         In accordance  with Section 13 or 15(d) of the  Securities and Exchange
Act,  the  registrant  caused  this  report to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.

Date     August 14, 1998
                                       PARACELSIAN, INC.

                                       By: /s/ Bernard M. Landes
                                          --------------------------------------
                                               Bernard M. Landes
                                               President and
                                               Chief Executive Officer


                                       16