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                       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 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002

                         COMMISSION FILE NUMBER 0-25353

                                  DEMEGEN, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

          COLORADO                                         84-1065575
(State or Other Jurisdiction of                          (IRS Employer
 Incorporation or Organization)                        Identification No.)

1051 BRINTON ROAD, PITTSBURGH, PA                             15221
(Address of Principal Executive Office)                    (Zip Code)

                                 (412) 241-2150
                           (Issuer's Telephone Number)

          Securities to be Registered under Section 12 (b) of the Act:

                                      NONE

          Securities to be Registered under Section 12 (g) of the Act:

                         Common Stock, $0.001 par value
                                (Title of Class)

Check whether the issuer (1) filed all reports 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 (2) has been subject to such filing requirements for the past 90 days.

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

Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will 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. [ ]

The Registrant's total revenue for the fiscal year ended September 30, 2002 was
$1,442,295.

The aggregate market value of the voting stock held by non-affiliates of the
registrant was $1,410,533 as of December 10, 2002, computed on the basis of the
average of the bid and asked prices on such date.

As of December 10, 2002 there were 47,017,778 shares of the registrant's Common
Stock outstanding.


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                                     PART I

ITEM 1 - BUSINESS

THE COMPANY

The Company is a public clinical stage biopharmaceutical company which develops
natural and novel peptides. The primary drugs under development target
significant markets for which there are few, if any, satisfactory alternatives.
These include treatment for oral candidiasis, a disease prevalent in HIV
patients, a treatment for mucositis, a disease that affects many patients
receiving chemotherapy and radiation therapy for head and neck cancers, and a
treatment for Pseudomonas infections in Cystic Fibrosis patients, a disease that
can be fatal to children. A number of additional applications for preventing or
treating infectious disease are also in the development pipeline.

As a result of the Company's cash position during the past fiscal year, the
majority of the employees have resigned or been terminated. The lease for its
Watertown facility has been terminated, thereby eliminating future obligations.
The Company plans to sublease its current Pittsburgh office location. The
Company's remaining employees, including the Company's President and Chief
Executive Officer, were terminated effective December 31, 2002. These employees
have agreed to work as needed on a consulting basis to effect the sale or
license of the Company's technology or achieve new funding.

The Company is exploring the sale to or merger with another company with
suitable financial and human resources, concurrently it is seeking to achieve
partnerships with pharmaceutical or biotechnology companies to co-develop
product applications and the Company is continuing to seek additional capital.

The Company's business strategy is to develop the cystic fibrosis application
through Phase II proof of concept and then effect a partnership with a large
partner. The Company expects to receive financial support from the Cystic
Fibrosis Foundation. Other molecules and applications will be licensed at their
current stage of development and negotiations are already underway for some
applications. Because of the Company's financial condition and the loss of its
operating personnel, the ability to execute this strategy is uncertain.

The Company has licensed or been assigned twenty issued United States patent and
seventeen international patents. These include composition of matter claims for
over sixty new molecules. These technologies covered by these patents are a
platform for a number of product applications.

The Company was formed after the July 27, 1992 acquisition of the assets of The
Demeter Corporation by Excelsior Capital Corporation ("Excelsior"). Excelsior
was incorporated in Colorado on September 16, 1987. Excelsior acquired all of
the assets of The Demeter Corporation in exchange for 6,625,821 shares of
Excelsior's $0.001 par value common stock. The Demeter Corporation's assets
consisted of intangible assets related to various biotechnology applications in
the fields of human and animal health care, agricultural and commercial
chemicals. Subsequent to the acquisition, Excelsior changed its name to Demeter
BioTechnologies, Ltd. On September 18, 1998, the shareholders approved the
recommendation of the Company's Board of Directors to change the Company's name
to Demegen, Inc.

The Company acquired substantially all the assets of Periodontix, Inc.
("Periodontix") in July 2001. The Periodontix acquisition broadened the
Company's peptide technology platform.

Peptide drugs account for worldwide sales of some $3.4 billion, which represents
only about 4% of the overall pharmaceutical market, and are estimated to be
growing at the rate of 10-15% per year. Examples include Copaxone, Zoladex,
Vancomycin, and Bacitracin. Over four hundred naturally occurring peptides have
been identified. The Company's peptides D2A21 and D4E1, however, are novel
products not found in nature, and include a variety of structural forms. The
P113 compounds are derived from histatins, which are compounds found naturally
in human saliva.

Business Strategy

The Company's business strategy is to develop the preclinical, Phase 1 and Phase
2 clinical evaluations for the Cystic Fibrosis application with P113D. The
Company has also been awarded a $1.5 million matching grant from the Cystic
Fibrosis Foundation that will offset a significant portion of the cost. Because
of the Company's financial condition and the loss of its operating personnel,
the ability to execute this strategy is uncertain. The Company is also seeking a
partnership with large biotechnology companies that have an interest in
respiratory therapies.


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Such partners would be the source of funding for subsequent clinical trials
through regulatory approval. Preliminary interest has been expressed by such
companies.

The Company has been awarded Orphan Drug status for P113D. This will allow the
Company to seek government grants to assist with development costs and tax
credits are available to offset clinical trial costs.

For other molecules and applications, the Company plans to effect licenses or
partnerships that will fund and develop specific applications. As an example,
three other molecules, P113L, D2A21, and D4E1 have been shown to have properties
that indicate they are attractive new drug candidates.

Because the Company also holds unique patents with regard to the transgenic use
of antimicrobial peptides for the control of plant diseases, the Company will
also continue to effect research and commercial licenses to extend the use and
expand the potential future royalty stream. Over a dozen crops are currently
under development at universities and USDA sites. Field proofs of concept have
already been demonstrated in some crops, including pears and apples. Minimal
funding is required to support these agricultural opportunities. The research
partners provide all the funding.

The Company's core assets are represented by its intellectual property, which
includes more than thirty five issued patents and the developments accomplished
to date for its three leading product applications. These include:

      -     a drug to treat cystic fibrosis infections. An Orphan Drug
            designation has been achieved and there is funding support from the
            Cystic Fibrosis Foundation.

      -     a second drug to treat oral infections that afflict HIV and many
            cancer patients; there is an approved IND (Investigational New Drug
            Application); and a Phase I/II clinical trial is ready to begin.

      -     a third drug for infected wounds and burns.

      -     A fourth drug for fungal and viral infection

In addition, a number of collaborations are continuing on agricultural
applications without cost to the Company. These collaborators provide the
necessary funding and resources to introduce the Company's technologies into a
variety of crops. The Company could ultimately receive royalties if any of these
applications are commercialized.

The Company believes its creditors will continue to cooperate until the Company
is able to receive new funding or form partnerships, but there is no assurance
that this will continue to be the case.

Should these plans not be successful, there is substantial doubt as to the
Company's ability to continue as a going concern through the year ending
September 30, 2003. It is extremely uncertain that new sources of cash will be
identified and will be received during the remainder of fiscal 2003.

OPERATIONS

The Company's corporate headquarters is located in Pittsburgh, Pennsylvania and
it comprises approximately 2,400 square feet with about one-third devoted to
laboratory space. The Company has also developed close working relationships
with several universities. This strategy has enabled the Company to accomplish
more with less and significant major laboratory infrastructure has been avoided.

Due to the curtailment of operations, the Company only utilizes a portion of its
office space and plans to sub-lease its office and laboratory space in
Pittsburgh.

TREATMENT FOR CYSTIC FIBROSIS INFECTIONS

A major problem, which strongly encourages the development of new class of
antibiotics agents, is that many common pathogens are becoming resistant to the
therapeutics that have treated patients for the last fifty years. Each year in
the United States, about two million cases of infection


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are contracted by people while they are in the hospital. Infection remains the
principal cause of death of hospitalized patients in the United States, and one
of the leading causes of all deaths throughout the world. Treatment of infection
is a rapidly increasing concern because of the exponential rate of emergence of
antibiotic-resistant bacteria, compounded by the lack of new antibiotic options
effective against these organisms. The total worldwide anti-infective market is
estimated to be over $25 billion. The topical anti-infective market is estimated
to be $2 billion worldwide.

Cystic Fibrosis (CF) is a genetic disease that affects approximately 30,000
individuals in the United States and another 40,000 worldwide. The gene defect
in CF results in altered secretions in a number of organs, including the lung.
The thickened mucous in the lungs creates an ideal environment for bacterial
infections, particularly of Pseudomonas aeruginosa, to take hold. It is these
lung infections which lead to mortality in CF patients.

Prior to the employee departures, the Company was developing a novel, synthetic
antimicrobial peptide for delivery via inhalation for the treatment and
prevention of lung infections in CF patients. Currently, there are a limited
number of products approved for the treatment of lung infections in CF patients.
Pulmozyme(R) was approved in 1993 to help reduce the viscosity of the mucous in
the lungs of CF patients. In 1997, TOBI(TM), tobramycin for inhalation, was
approved in the US as the first inhaled antibiotic to treat CF lung infections.
TOBI(TM) is given on a one-month on/one month off cycle, primarily to minimize
the development of resistant organisms. This dosing regimen and the development
of strains resistant to tobramycin presents a clear need for additional inhaled
antimicrobials to treat the lung infections associated with CF.

The product which was under development by the Company, prior to the employee
departures, is a novel 12 amino-acid antimicrobial peptide, P113D that can be
delivered directly to the lung by aerosolization, using a standard nebulizer.
P113D is based on naturally occurring antimicrobial proteins found in human
saliva called "histatins," which play an important role in the body's natural
defense against disease in the oral cavity. This peptide has demonstrated a high
level of in vitro activity against P. aeruginosa, including drug-resistant
patient isolates. Because of its unique mechanism of action, this product is not
expected to contribute to drug resistance like classical antibiotics.

Based on the feedback from the FDA to a pre-IND submission, a series of
inhalation and toxicology evaluations need to be completed before beginning
human trials. P113D is protected with composition of matter and use patents in
the USA and abroad.

SAFETY

The amino acid sequence of P113D is derived from histatins, which are compounds
found naturally in human saliva. This peptide has been modified by the
incorporation of amino acids in the "D" configuration. Toxicology studies
performed to date as well as experience in the clinic with P113L, which is
composed of amino acids in the natural "L" configuration, have shown P113L to be
safe and well tolerated.

EFFICACY

P113 was determined to be the smallest histatin fragment which retained
antimicrobial activity equivalent to that of the parent compound. Interestingly,
synthesizing P113 with D-amino acids gave rise to P113D, a compound that was
impervious to enzymatic degradation and maintained the antimicrobial activity of
the parent compound. P113D also has very potent in vitro activity against a
variety of Gram (-) and (+) bacteria including P. aeruginosa, S. aureus, H.
influenzae, S. typhimurium, E. coli, S. epidermidis, S. mutans and S. sobrinus.
In the case of P. aeruginosa and S. aureus, antibacterial activity has been
demonstrated against a variety of CF patient clinical isolates which are
resistant to traditional antibiotics. P. aeruginosa isolates that produce thick
alginate secretions (mucoid phenotype) are also susceptible to killing by P113D.
For both bacteria and fungi such as Candida albicans, P113D has been shown to
kill cells as opposed to simply inhibiting their growth. It has been
demonstrated that P113D acts by binding to the cell surface and increasing the
permeability of both the outer and inner membranes of the cells of Gram (-)
bacteria, killing them within seconds.

For a compound to be effective in treating lung infections associated with CF,
it must be stable and maintain activity in the altered mucous environment of the
CF lung. P113D has been shown to be stable for days in sputum from CF patients
and is able to significantly reduce the number of bacteria in sputum from CF
patients. P113D has been shown to work in concert with Pulmozyme(R), an approved
drug used by ~70% of CF patients, which helps reduce the viscosity of the
mucous.

MARKET OPPORTUNITY


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Cystic fibrosis is a genetic disease that affects approximately 70,000 children
and young adults worldwide, with about 30,000 in the United States and another
40,000 in Europe. It is estimated that 60% of these individuals are infected
with P. aeruginosa. Tobramycin(TM) has annual reported sales of $120 million in
the USA. Based on excellent activity against Pseudomonas, another large market
opportunity for P113D is the nosocomial pneumonia and the ventilator associated
pneumonia market.

LICENSING OPPORTUNITIES FOR OTHER COMPOUNDS

P113L
      -     Oral fungal infections
      -     Vaginal fungal infections
      -     Dermatological infections
D2A21
      -     Infected burns & wounds
      -     Vaginal microbicide
D4E1
      -     B. cepacia infections
      -     Fungal infections
      -     Viral infections

P113L  ORAL CANDIDIASIS

Candida species are fungi that are part of the normal flora of humans and the
environment. C. albicans, the most commonly identified human pathogen, usually
lives in balance with the other microorganisms in the body. When this balance is
disturbed by immune system changes (AIDS, immunosuppressants, broad-spectrum
antibiotics, or mucous barrier disrupters), endogenous C. albicans can become
pathogenic and cause disease. Candidiasis has emerged as the most common
opportunistic fungal disease.

Oral candidiasis, also known as thrush, is an AIDS-defining opportunistic
illness that is highly prevalent in HIV-infected individuals. Up to 40% of AIDS
patients experience symptoms of oral candidiasis. Other immunocompromised
individuals, including cancer patients receiving chemotherapy, are also
susceptible to oral fungal infections. The disease causes pain, inability to
eat, and increased risk of additional infection. If the infection becomes
systemic, it can be life threatening. Resistance to current therapies is
increasing. Oral candidiasis outbreaks often recur and maintenance therapy may
be needed.

The product under development by the Company is an alcohol-free mouthrinse that
can be swallowed to help protect the esophagus from infection. The rinse
contains a novel active ingredient, P113L, which is a 12 amino-acid
antimicrobial peptide that has demonstrated a high level of in vitro activity
against Candida albicans, including drug-resistant HIV patient isolates. The
benefits of this product over current treatments are its demonstrated safety in
humans, which is related to its natural origin, and the reduced risk of drug
resistance due to P113L's unique mechanism of action. P113L is based on
naturally occurring antimicrobial proteins found in human saliva called
"histatins," which play an important role in the body's natural defense against
disease.

An active IND for this product is in place, with a Phase 1/2 clinical trial
ready to begin in HIV patients with oral candidiasis. P113L is protected with
composition of matter and use patents in the USA and abroad.

SAFETY

The amino acid sequence of P113L is derived from histatins, which are compounds
found naturally in human saliva. Toxicology studies performed to date as well as
experience in the clinic with a P113L mouthrinse being developed for the
treatment of gingivitis have shown P113L to be safe and well tolerated. The
gingivitis product has progressed through Phase 2 clinical studies and has been
tested in over 300 subjects. (When the Company acquired this technology,
priorities were changed to oral candidiasis and mucositis because these would
have a shorter clinical path with generally easier to measure clinical outcomes
and would address more urgent medical needs.)

EFFICACY

The antimicrobial activity of histatins was initially demonstrated using Candida
albicans. Activity against this organism was used in a screen of histatin
peptide fragments which led to the discovery of P113L as being the smallest
histatin fragment which retained antimicrobial


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activity equivalent to that of the parent compound. Additional in vitro testing
has shown that P113L has very potent activity against a variety of isolates of
C. albicans, C. glabrata, C. parapsilosis and C. tropicalis, all with MIC values
of 3.1 mug/mL or less. Resistance to fluconazole had no bearing on the
sensitivity of these organisms to P113L.

P113L has also been shown to have very potent antibacterial activity against a
variety of organisms. In vitro testing has shown P113L to be effective against
both Gram (-) and (+) species including E. coli, H. influenzae, P. aeruginosa,
S. typhimurium, S. aureus, S. epidermidis, S. mutans and S. sobrinus. In the
case of P aeruginosa and S. aureus, antibacterial activity has been demonstrated
against a variety of clinical isolates, many of which were resistant to
traditional antibiotics. For both bacteria and fungi, P113L has been shown to
kill cells as opposed to simply inhibiting their growth. Experiments conducted
using P. aeruginosa have shown that P113L acts by binding to the cell surface,
kills very quickly (within minutes), and acts by permeablizing both the outer
and inner membranes of the cell.

MARKET OPPORTUNITY

Up to 40% of AIDS patients experience symptoms of oral candidiasis. The disease
causes pain, inability to eat, and increased risk of additional infection.
Resistance to current therapies is increasing. Oral candidiasis outbreaks often
recur and maintenance therapy may be needed. It has been recommended that all
AIDS patients receive prophylactic treatment for oral candidiasis.

P113L  MUCOSITIS ASSOCIATED INFECTIONS

P113L is also a candidate for the treatment and prevention of infections
associated with oral mucositis. This condition is a common side effect of
chemotherapy or radiation therapy in patients with head and neck cancer as well
as patients undergoing bone marrow transplantation. These treatments can cause
lesions to form in the oral cavity as a result of damage to the oral mucosa,
which can then become infected. Oral mucositis is often mentioned as one of the
single worst side effects of chemotherapy and radiation therapy due to the
severe pain and difficulty in eating that result from this condition. The
symptoms can become so severe that they can interfere with the completion of
cancer treatments. There is currently no efficacious standard of care for this
debilitating condition.

P113L is active against a broad spectrum of infectious agents, including the
Gram (-) bacteria Pseudomonas aeruginosa, Streptococcus mutans and Streptococcus
sobrinus. Also, potent antifungal activity has been demonstrated against Candida
albicans and related Candida species, including isolates resistant to
fluconazole.

In addition to their antimicrobial activity, histatins, including P113L, exhibit
other biological activities that could have an impact on oral mucositis. For
example, P113L has been shown to inhibit bacterial hemagglutination, which could
interfere with bacterial colonization of sites where blood is present, and to
neutralize lipopolysaccharide (LPS), a potent stimulator of the immune system.
P113L also binds to tissues in the oral cavity. In a clinical study, it was
shown that approximately 30% of the peptide administered in a mouthrinse was
retained in the oral cavity following rinsing.

Oral mucositis occurs in 15- 40% of patients receiving standard chemotherapy and
70% to 100% of patients receiving chemotherapy for bone marrow transplant.
Furthermore, 100% of patients receiving radiation therapy for head and neck
cancers are afflicted with oral mucositis. These cancer treatments damage the
oral mucosa, which then becomes infected. The resulting ulceration of the mouth
and tongue is extremely painful, in many cases preventing the patient from
eating, drinking or sleeping and requiring morphine to relieve the pain. Oral
mucositis is often identified by cancer patients as the single worst side effect
of chemotherapy and radiation therapy. In addition, the oral lesions can allow
bacteria to enter the blood stream causing life-threatening systemic infections.

Currently, the worldwide population of patients with mucositis is estimated at
400,000 to 600,000 patients receiving chemotherapy or radiation, with an
additional 48,000 experiencing severe mucositis associated with hematopoietic
stem cell transplantation. Approximately 350,000 to 400,000 patients in the USA
experience mucositis resulting from these conditions. Mucositis is expected to
increase in frequency and severity as oncologists utilize increasingly
aggressive cancer treatments in hope of achieving a cure.

Severe mucositis necessitates a delay in the chemotherapy schedule or reduction
of the dose, as well as treatment of complications such as pain, dehydration,
malnutrition, and infection. There are currently no pharmaceutical agents on the
market to effectively prevent or treat oral


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mucositis. Thus, infections of the damaged oral mucosa will continue to be a
significant medical problem for cancer patients.

P113L  TREATMENT FOR YEAST INFECTIONS

A logical opportunity for another partnership or extension of the P113L
technology would be a treatment for yeast infections. There are approximately 40
million cases of yeast infections, or vaginal candidiasis (VC) each year. The
incidence increases with the number of people that become immunocompromised due
to cancer treatment, AIDS/HIV, transplants, antibiotic therapy, or even common
ailments such as arthritis. VC can often be treated successfully with current
azole treatments. However, current treatments are often ineffective. Some have
significant side effects and drug interactions, and their use has been
attributed to the development of resistance to all existing azole treatments.
Many infections are difficult to treat and/or recur. There are approximately 16
million recurrent infections each year that do not respond sufficiently to
current azole treatments.

VC is caused by a species of the fungus Candida. C. albicans causes 70% of VC
infections, and responds well in many cases to existing therapies. Non-albicans
species collectively cause 30% of VC infections, and are generally resistant to
existing treatments.

Safety of azole treatments is of particular concern during pregnancy and
nursing. Current treatments should not be used during pregnancy because
potential risks to the developing fetus are not fully known. Several azole
treatments have already been proven unsafe for use during pregnancy or by
nursing mothers. An estimated 6 million cases of recurrent VC occur annually in
pregnant women.

While there are a number of products already on the market to treat yeast
infections, the side effects and the emergence of resistant stains indicate
there is an opportunity for a new drug, especially if it is already approved for
another indication.

D2A21  INFECTED BURN/WOUNDS

The Company has developed D2A21 in a gel formulation to treat infected burns and
wounds. These wounds are typically colonized with highly infectious pathogens
that are often resistant to antibiotics. Demegel(TM) is a better treatment for
these wounds, or at least as good as the current standards of care, as indicated
by in vitro and in vivo results obtained by Demegen and its collaborators.
Demegel(TM) contains a very low concentration of the active ingredient, D2A21,
which is a 23 amino-acid amphipathic peptide. D2A21 is active against many
infectious agents, including multidrug-resistant strains of Pseudomonas
aeruginosa and Staphylococcus aureus. Also, anti-fungal activity has been
demonstrated against Candida albicans, Aspergillus niger, Mucor sp, and
Trichophyton mentagrophytes.

SAFETY

The initial safety profile of D2A21 has been established. The peptide does not
inhibit wound healing and is not cytotoxic to cultured keratinocyte skin cells.
It is not a dermal irritant, nor does it induce contact sensitization. The
peptide is not a mammalian or bacterial mutagen. Acute and chronic systemic
toxicity studies have established a safe dose, which is a multiple of the
efficacious dose for Demegel.

EFFICACY

In vitro data have shown that Pseudomonas aeruginosa cells are killed within 30
minutes by 1 to 5 MUM D2A21, and Staphylococcus aureus cells are killed
within 2 hours by 5 MUM D2A21. Furthermore, no growth of either species was
detected at 24 hours after incubation with the peptides. These results have been
confirmed in two animal infectivity models. In a standard infected in vivo
rodent burn model, D2A21 demonstrated significant antibacterial activity against
Pseudomonas aeruginosa, sterilizing burn eschar and decreasing sub-eschar
bacterial load, allowing for a markedly significant improvement in survival in
this infected burn wound model. The model was employed to evaluate the effects
of D2A21 on eschar and subeschar muscle quantitative cultures against
Pseudomonas aeruginosa. By day 3 (three) there was a four-fold decrease in
subeschar bacterial growth and zero eschar bacterial growth in the D2A21 treated
group versus the control group, which had 9.5 x 107 eschar colony forming units.
In this same model, D2A21 demonstrated significant improvement in percent
survival (85% versus 0% in the control group, p < 0.001).

A second model was employed to demonstrate the in vivo efficacy of Demegel(TM)
in a standard infected wound model. In this study Demegel(TM) was compared to
the standards of care; silver


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sulfadiazine (SSD) and Sulfamylon. Forty-eight (48) rodents with full thickness
dorsum defects were treated with either Demegel(TM), SSD, Sulfamylon, or control
gel daily for 20 days. Percent survival was 100% for the Demegel group, 83% for
the Sulfamylon group, 50% for control and 33% for SSD treated animals. These
results demonstrate that Demegel(TM) is better than or equal to the current
standards of care for the treatment of infected wounds.

MARKET OPPORTUNITY

The use of topical antimicrobial agents has been an important adjunct in the
prevention and treatment of burn/wound infections. However, there are several
disadvantages to the use of the most common agents, silver sulfadiazine (SSD)
and mafenide acetate (the active ingredient in Sulfamylon), including their
substantial ability to inhibit wound healing when applied at clinically
effective antimicrobial dosages. In addition, both of these agents are
particularly cytotoxic to cultured keratinocyte skin grafts, a procedure used
commonly in severely burned patients. Furthermore, the development of multi-drug
resistant pathogens in the hospital setting has become an increasingly important
problem in the management of major surgical infections, including those due to
burn wounds. Burn wound sepsis remains the most common and serious complication
of major burn injury, accounting for over 60% of deaths in burn patients today.
Therefore, there is an unmet medical need for novel agents to provide local
control of infection, in particular for drug resistant organisms, without
inhibiting normal tissue repair processes. Such agents could have widespread
applicability in the management of burn and wound patients in both hospital and
outpatient settings. Hospital-related infected burns and wounds affect over 2
million people per year in the USA alone. D2A21 is protected with composition
and use patents in the USA and abroad.

D2A21  VAGINAL MICROBICIDE

The Company is also developing D2A21 in a gel formulation for the prevention of
sexually transmitted infections (STIs). The product is tentatively called
ProVena(TM) . In both developed and developing countries, there is a compelling
need for a female-controlled, over-the-counter method for the prevention of
STIs. Condoms are currently the only proven method available to prevent the
spread of STIs, but people are either unwilling to use them or unable to
negotiate their use. Almost all funding for this project has been supplied
either directly or indirectly by the National Institutes of Health. The Company
believes that funding will continue to be available for clinical trials,
clinical materials and project management support but there can be no assurance
that the Company will have access to such funds considering the financial and
operating condition of the Company.

ProVena(TM) contains a low concentration of the active ingredient, D2A21, which
is a 23 amino-acid amphipathic peptide. D2A21 is active against many infectious
agents, and kills Chlamydia, Gonorrhea, herpes, and HIV. Furthermore, D2A21
spares beneficial lactobacillus organisms and is safe and nonirritating to
vaginal tissue. The gel is water-soluble, odorless and colorless. These
characteristics make the Company's gel an ideal vaginal microbicide for the
prevention of sexually transmitted infections (STI).

SAFETY

The initial safety profile of D2A21 has been established. It is not a dermal
irritant, nor does it induce contact sensitization at the recommended dose. The
peptide is not a mammalian or bacterial mutagen. Acute and chronic systemic
toxicity studies have established a safe dose, which is a multiple of the
efficacious dose for ProVena(TM). D2A21 does not harm the natural lactobacillus
flora found in the vaginal mucosa, and the gel formulation has been proven safe
and non-irritating in rabbits and primates.

EFFICACY

D2A21 is effective in killing Chlamydia, Gonorrhea, Trichomonas, herpes virus
strains, and HIV. The microbicidal activity in a gel formulation is maintained
at varying pH and in the presence of human blood, two conditions expected to be
found in the urogenital tracts of humans.

MARKET OPPORTUNITY

One out of every five Americans carries a sexually transmitted disease. The USA
spends approximately $8.4 billion each year to treat STIs, with approximately
$4.5 billion of that on HIV/AIDS. Today, an estimated 800,000-900,000 people in
the U.S. are living with HIV, the virus that causes AIDS, and about one-third
are unaware of their infections. AIDS is currently the leading cause of death in
men between the ages of 25 and 44 in the United States and fourth leading cause
of death in women in this age group.


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Each year in the USA, 4 million cases of Chlamydia infection are reported.
However, 75% of women and 50% of men are asymptomatic and unwitting carriers of
the disease. If left untreated, Chlamydia infection in women leads to pelvic
inflammatory disease, which in turn leads to infertility, ectopic pregnancies,
and a 3-5 times greater risk of acquiring HIV. There are about 1 million cases
of Gonorrhea infections in the USA each year, and approximately half of those
infected have no symptoms. A woman infected with Gonorrhea is at increased risk
of acquiring HIV. Diagnosed Chlamydia and Gonorrhea infections are treated with
antibiotics at an annual health care cost of over $2 billion.

Trichomonas is a common STI, attacking 2 to 3 million Americans every year.
There are 1 million new cases each year of genital warts caused by HPV, another
sexually transmitted infection. And genital herpes is a chronic, lifelong viral
infection, spreading at a rate of 500,000 new cases per year. There are even
more people infected who have no symptoms, and remain undiagnosed.

Women worldwide have asserted their willingness to buy and use a vaginal
microbicide. There is currently no safe and effective product on the market to
prevent STIs, other than condoms. The annual market for Demegen's ProVena(TM) in
the USA alone is estimated to be $1.5 billion.

D4E1  OPPORTUNITY

D4E1 is the least developed of the compounds, but the in vitro work to date
indicates it has properties very different from the other molecules. In a study
funded by the Cystic Fibrosis Foundation, the Company demonstrated that its
patented D4E1 compound is a candidate as a treatment for Burkholderia cepacia.
This is another CF infection. It afflicts only a small number of patients, hence
the market is also small. However, the disease is almost always fatal and there
is currently no drug to treat this disease. Working with researchers from North
Carolina State University, it was discovered and patented that D4E1 also blocked
virus replication FIV, a virus similar to HIV. Other screening showed that D4E1
had significant anti-fungal properties.

AGRICULTURAL PRODUCTS

Through extensive collaborations with universities and the United States
Department of Agriculture, the Company's peptides have been shown to be an
attractive platform from which to derive genes to confer important new plant
characteristics. The application of biotechnology to agricultural crops is
directed to the creation of differentiated, value-added plants and products that
improve production, extend shelf life, prevent pathogenic disease, and reduce
the negative environmental impact of potentially hazardous chemicals.
Genetically engineering crops accelerates the traditional, time consuming
process of cross breeding of crops.

Perhaps the most fundamental driving force for these new crops is the basic
recognition that the world's population is growing by over 50,000,000 people per
year. At the same time, as economies improve in developing countries, the demand
for food increases faster than the population, or its ability to produce it. The
President of a large agricultural biotechnology company has stated that the
output per acre will need to double in the next 30 years, just to maintain the
current levels of hunger and malnutrition.

Recently there has been considerable consolidation by the large agricultural
biotechnology and chemical companies and much public attention to the issues
surrounding genetically modified crops. This has caused a slowdown in the
development of new products. But despite all these events, the amount of acreage
for genetically modified corn and soybeans in the United States has continued to
grow and now exceeds 50%.

Disease Resistant Crops

The importance of the Company's technology is illustrated in the examples that
follow. For many diseases, chemical fungicides are the only alternative and can
add five to ten percent to the cost of a crop. For other crops, there are no
sprayable treatments available and genetic engineering may be the only
alternative. Current efforts are underway with licensees or collaborators
include cotton, grapes, apples, pears, and potatoes.

One such example is Pierce's disease. Pierce's disease is caused by Xylella
fastidiosa, a bacterium that kills grapevines by blocking their water transport
tissue. A vine infected with Pierce's disease usually dies within two years and
produces no crop. Pierce's disease ranges


                                                                          Page 9
<PAGE>
from North America through Central America and parts of South America. It is
present in some California vineyards every year. Pierce's disease has cost the
California wine and grape industries millions of dollars in lost revenues since
it began destroying grapevines in Napa and Sonoma counties several years ago, at
a cost of some $20,000 per acre. During severe epidemics, losses due to Pierce's
disease may require major replanting. In Florida and other southeastern states,
the disease is considered to be the single most formidable obstacle to the
growing of European varieties. Other strains of Xylella fastidiosa have been
discovered, and almost all of these cause leaf scorching of woody perennials
such as American elm, maple, mulberry, or plum. In some plants, such as peach
and alfalfa, the bacterium slows and stunts plant's growth.

Most transgenic development for crop protection is targeted at replacing
insecticides or increasing herbicide resistance. The Company's gene products
primarily target bactericides and fungicides. The Company believes its success
and patent position in controlling bacterial and fungal diseases is unique. The
market for these disease resistant technology is estimated to exceed $6 billion.

The Company's technologies fill a significant niche in the market for preventing
bacterial and fungal diseases. Its strategy, using very limited resources, is to
effect research collaborations with experts in individual crops at university
and government research centers, thereby preserving its position and advancing
the technology using third party funding and expertise. As successes occur,
interest will grow, and commercial licenses will become not only desirable but a
requirement for growers of many, if not most, crops.

GOVERNMENT REGULATION

Drug Approval Process

Regulation by governmental authorities in the United States and other countries
is a significant factor in the development, production and marketing of the
Company's proposed products. All of the Company's products will require
regulatory approval by governmental agencies prior to commercialization. In
particular, human therapeutic products are subject to rigorous preclinical and
clinical testing and other approval procedures in the United States by the FDA
and similar health authorities in foreign countries. Various federal statutes
and regulations also govern or influence the testing, manufacturing, quality
control, safety, labeling, storage, record-keeping and marketing of such
products. The process of obtaining these approvals and the subsequent compliance
with appropriate federal and foreign statutes and regulations require the
expenditure of substantial resources. Any failure by the Company or its
collaborators or licensees to obtain, or any delay in obtaining, regulatory
approval could adversely affect the marketing of any of the Company's products
and its ability to receive revenues therefrom. The Company has neither applied
for nor received regulatory approval to market any products.

The steps required before a pharmaceutical agent may be marketed in the United
States include (i) preclinical laboratory, in vivo and formulation studies, (ii)
the submission to the United States Food and Drug Administration ("FDA") of an
IND, which must become effective before human clinical trials may commence,
(iii) adequate and well controlled human clinical trials to establish safety and
efficiency of the proposed drug in its intended indication, (iv) the submission
of a New Drug Application ("NDA") to the FDA, and (v) the FDA approval of the
NDA.

In order to clinically test, produce and market products for diagnostic or
therapeutic use, a company must comply with mandatory procedures and safety
standards established by the FDA and comparable agencies in foreign countries.
Before beginning human clinical testing of a potential new drug, a company must
file an IND and receive clearance from the FDA. The IND is a summary of the
preclinical studies which were carried out to characterize the drug, including
toxicity and safety studies, as well as an in-depth discussion of the human
clinical studies which are being proposed. Approval of a local institution
review board ("IRB") and informed consent of trial subjects is also required.

Human clinical trials are typically conducted in three sequential phases which
may overlap. Phase I involves the initial introduction of the drug into human
subjects or patients where the product is tested for safety, dosage, tolerance,
absorption, metabolism, distribution and excretion. Phase II involves studies in
a limited patient population to (i) identify possible adverse effects and safety
risks, (ii) determine the efficiency of the product for specific, targeted
indications, and (iii) determine dosage tolerance and optimal dosage. When Phase
II evaluation demonstrates that the product may be effective and has an
acceptable safety profile, Phase III trials are undertaken to further evaluate
dosage and clinical efficacy and to further test for safety in an expanded
patient population at multiple clinical study sites. A pivotal Phase III


                                                                         Page 10
<PAGE>
trial is an adequate and well-controlled study which provides the primary basis
for determining whether there is "substantial evidence" to support the claims of
effectiveness for new drugs and forms the basis for an NDA. The regulatory
authority or the sponsor may suspend clinical trials at any point in this
process if either entity concludes that clinical subjects are being exposed to
an unacceptable health risk, that the trials are not being conducted in
compliance with applicable regulatory requirements, or for other reasons.

The results of product development, preclinical studies and clinical studies are
submitted to the FDA as part of an NDA for approval of the marketing and
commercial shipment of the product. The FDA may deny approval of an NDA if
applicable regulatory criteria are not satisfied, or may require additional
data. Even if such data is submitted, the FDA may ultimately decide that the NDA
does not satisfy its criteria for approval. Once issued, a product approval may
be withdrawn if compliance with regulatory standards is not maintained or if
problems occur after the product reaches the market. In addition, the FDA may
require testing and surveillance programs to monitor the effect of approved
products which have been commercialized, and it has the power to prevent or
limit further marketing of a product based upon the results of these
post-marketing programs.

Satisfaction of these FDA requirements, or similar requirements by foreign
regulatory agencies, typically takes several years and the time needed to
satisfy them may vary substantially, based upon the type, complexity and novelty
of the drug product. The effect of government regulation may be to delay or to
prevent marketing of potential products for a considerable period of time and to
impose costly procedures upon the Company's activities. There can be no
assurance that the FDA or any other regulatory agency will grant approval for
any products being developed by the Company on a timely basis, or at all.
Success in preclinical or early stage clinical trials does not assure success in
later stage clinical trials. Data obtained from preclinical and clinical
activities are susceptible to varying interpretations which could delay, limit
or prevent regulatory approval. If regulatory approval of a product is granted,
such approval may impose limitations on the indicated uses for which a product
may be marketed. Further, even if regulatory approval is obtained, later
discovery of previously unknown problems with a product may result in
restrictions on the product, including withdrawal of the product from the
market. Delay in obtaining or failure to obtain regulatory approvals would have
a material adverse affect on the Company's business. Marketing the Company's
products abroad will require similar regulatory approvals and is subject to
similar risks. In addition, the Company is unable to predict the extent of
adverse government regulation that might arise from future United States or
foreign governmental action.

Before the Company's products can be marketed outside of the United States, they
are subject to regulatory approval similar to that required in the United
States, although the requirements governing the conduct of clinical trials,
product licensing, pricing and reimbursement vary widely from country to
country. No action can be taken to market any product in a country until an
appropriate application has been approved by the regulatory authorities in that
country. The current approval process varies from country to country, and the
time spent in gaining approval varies from that required for FDA approval. In
certain countries, the sales price of a product must also be approved. The
pricing review period often begins after market approval is granted. No
assurance can be given that, even if a product is approved by a regulatory
authority, satisfactory prices will be approved for the Company's products.

No assurance can be provided that the Company's INDs or NDAs will be
successfully reviewed by the FDA, or that similar applications will be
successfully reviewed by foreign regulatory authorities. Further, the FDA and
foreign authorities may at any time take legal or regulatory action against a
product or the Company if it concludes that a product has not complied with
applicable laws and regulations or that earlier evaluations of a product's
safety or effectiveness may not have been adequate or appropriate. Such action
may include, but is not limited to, restrictions on manufacture and shipment of
products, seizure of products, injunctions and civil and criminal penalties. The
FDA's policies may change and additional government regulations may be
promulgated which could prevent or delay regulatory approval of the Company's
potential products. Moreover, increased attention to the containment of health
care costs in the United States and in foreign markets could result in new
government regulations which could have a material adverse effect on the
Company's business. The Company is unable to predict the likelihood of adverse
governmental regulation which might arise from future legislative or
administrative action, either in the United States or abroad.

New genetically enhanced crops are subject to extensive regulatory approval
process that could include the FDA, the USDA, and the EPA and similar
governmental agencies in other countries, not dissimilar to that faced by the
pharmaceutical process.


                                                                         Page 11
<PAGE>
There has been an increased resistance in Europe to genetically modified
organisms ("GMO"). Some foreign governments have or are expected to mandate the
disclosure on consumer products of the inclusion of GMOs. This has resulted in
certain food processors requesting that their suppliers only provide them with
non-genetically modified agricultural products. While there is an awareness of
GMOs in the United States, it has not progressed to the point of other
countries.

In 2001, over 130 million acres globally were planted with transgenic crops in
some 13 countries by over 5 million farmers. Despite this wide acceptance of
these products, there is much negative emotion, especially in Europe. However,
offsetting this emotion, the developing countries are starting to speak in favor
of such crops because they see such crops as absolutely necessary methods to
produce enough food to feed their people. Further, the Company believes that
when crops that directly benefit people are demonstrated there will be more
acceptance compared to crops that permit greater use of chemical herbicides.
Nonetheless, there is no assurance that the Company, its licensee, or any other
partners will be successful in achieving regulatory approval.

ENVIRONMENTAL REGULATION

The Company does not incur significant costs in complying with federal or state
environmental regulations due to the nature of its activities.

TECHNOLOGY BASE

Peptides with lytic properties occur in nature and are part of the natural
immune systems of many animals, insects and plants. Over 300 natural peptides
have been identified. The Company's compounds range in length from 10 to 40
amino acids. In its discovery process, the Company has identified and filed
patents on a number of peptides and applications. These were invented using
design "rules" that include parameters for charge density, length, amphipathy,
hydrophobicity and spatial orientation.

The Company has identified several thousand different molecules that comprise
several classes of molecules. This relatively small number represents the
spectrum of molecules with the most desirable features and benefits compared to
the hundreds of millions of potential combinations and permutations that could
theoretically be created. As a result, the Company has a library of compounds
that can be developed for future product applications.

Through the acquisition of Periodontix, the Company acquired a number of
Histatin based molecules. Histatins are small, cationic, histidine-rich peptides
secreted by humanpartoid and submandibular-sublingual glands. These histatins
are part of the defense system for controlling the growth of pathogenic bacteria
and fungi in the oral cavity. P113 is a 12 amino acid peptide whose sequence is
derived from histatin 5. The Company's patents include composition of matter
protection for P113 and other molecules.

PRODUCTION

The peptides for preclinical and initial clinical development activities have
been manufactured by Multiple Peptide Systems (MPS) of San Diego, California,
using a manufacturing method based on currently available solid phase peptide
synthesis technology. The development of specifications and establishment of
analytical methods is being carried out jointly by MPS and the Company.

Based on discussions with suppliers, the Company anticipates that adequate
supplies of clinical materials will be available from suppliers at acceptable
costs using solid or solution phase synthesis. The Company has also examined the
longer range cost and supply issues. Substantial progress has been made in
recent years in driving peptide costs to low levels and the Company anticipates
it will be able to contract for manufacturing the active compounds at price
levels that would produce excellent profit margins.

COMPETITION

There are some forty other biotechnology companies who are developing peptide
compounds for antimicrobial or anti-cancer applications. Through Internet
searches, the Company regularly monitors patents, press announcements, and
publications in order to be informed about the Company's fields of technology
and the actions of competitors. In addition to companies developing
antimicrobial peptides, other non-peptide companies are developing products to
treat the same diseases that Demegen is targeting, and in some cases there are
already products on the


                                                                         Page 12
<PAGE>
market to treat Demegen's target diseases. Many of the existing anti-infective
drugs, however, are either losing effectiveness because of the increase in
resistance, or have safety profiles that are not ideal. As a result, the Company
believes its products offer competitive advantages to these anti-bacterial and
anti-fungal products. Many of these companies are also actively seeking new drug
candidates to add to their pipelines and are therefore potential partners.

Other current or potential competitors/licensees in Demegen's therapeutic target
areas include: Cubist Pharmaceuticals, Intrabiotics, Micrologix, Bristol-Myers
Squibb, Access Pharmaceuticals, Chiron, Bertek Pharmaceuticals, Genzyme,
Genentech, Intermune, MedImmune, Nabi Biopharmaceuticals, Altus, Basilea Pharma,
BioSyn, Ortho Biotech, Pfizer, Shire, Maxim, and Orapharma.

PATENTS

The Company has licenses or been assigned twenty (20) United States patents. The
Company has also filed a number of United States patent applications, as well as
corresponding applications in the patent convention treaty countries and other
countries. The Company's patent strategy is to strive for broad coverage for a
class of molecules for a wide range of diseases in humans, animals, and plants.

For its agricultural applications, the Company has acquired the right to three
(3) U.S. and three (3) international patents from Louisiana State University
("LSU"). These patents include broad claims for conferring bacterial and fungal
resistance in plants. These patents also carry early filing dates, thereby
giving the Company a very strong patent position in the disease resistant plant
area. One of the patents also licensed to the Company provides broad coverage
for nutrition enhancement technology and was issued in September 1998.

                                 DEMEGEN PATENTS

<TABLE>
<CAPTION>
  PATENT NO.          ISSUE DATE                                PATENT TITLE
-----------------------------------------------------------------------------------------------------------
<S>                   <C>          <C>
 US 6,191,110          2-20-01     Method of Enhancing Wound Healing by Stimulating Fibroblast and
                                   Keratinocyte Growth in vivo, Utilizing Amphipatic Peptides (expires
                                   April 20, 2014)

 US 6,153,210          11-28-00    Use of Locally Delivered Metal Ions for Treatment of Periodontal
                                   Disease (expires November 28, 2017)

 US 6,084,156           7-4-00     Plants Producing Lytic Peptides (expires June 17, 2011)

 US 6,018,102          1-25-00     Ubiquitin-Lytic Peptide Fusion Gene Constructs, Protein Products
                                   Deriving Therefrom, and Methods of Making and Using Same (expires
                                   October 8, 2013)

 US 6,001,805          12-14-99    Method of Enhancing Wound Healing by Stimulating Fibroblast and
                                   Keratinocyte Growth in Vivo Utilizing Amphipathic Peptides (expires
                                   March 17, 2015)

 US 5,968,904          10-19-99    Modified Arginine containing Lytic Peptides and Method of Making the
                                   Same by Glycoxylation (expires November 8, 2013)

 US 5,955,573          9-21-99     Ubiquitin-Lytic Peptide Fusion Gene Constructs, Protein Products
                                   Deriving Therefrom, and Methods of Making and Using Same (expires
                                   July 22, 2014)

 US 5,912,230          6-15-99     Anti-fungal and Anti-bacterial Histatin-based Peptides (expires March
                                   11, 2018)
</TABLE>


                                                                         Page 13
<PAGE>
<TABLE>
<CAPTION>
  PATENT NO.          ISSUE DATE                                PATENT TITLE
-----------------------------------------------------------------------------------------------------------
<S>                   <C>          <C>
 US 5,885,965          3-23-99     Anti-fungal D-amino Acid Histatin-based Peptides (expires December 5,
                                   2017)

US 5,811,654*          9-22-98     Plants Genetically Enhanced for Nutritional Quality (expires July 25,
                                   2006)

 US 5,773,414          6-30-98     Method of combating Mammalian Neoplasias, and Lytic Peptides Therefor
                                   (expires February 10, 2015)

 US 5,744,445          4-28-98     Method of Treating Pulmonary Disease States with Non-Naturally
                                   Occurring Amphipathic Peptides (expires April 28, 2015)

 US 5,717,064          2-10-98     Method of Treating Pulmonary Disease States with Non-Naturally
                                   Occurring Amphipathic Peptides (expires April 28, 2015)

 US 5,696,078          12-9-97     Method for Treating Fungal Infections Using Histatin-Based Peptides
                                   (expires December 9, 2014)

 US 5,646,119           7-8-97     D-amino Acid Histatin-based Peptides as Anti-fungal and
                                   Anti-bacterial agents (expires July 8, 2014)

 US 5,631,228         5-20-97      Anti-fungal and Anti-bacterial Histatin-based Peptides (expires May
                                   20, 2014)

US 5,597,946*          1-28-97     Method for Introduction of Disease and Pest Resistance Into Plants
                                   and Novel Genes Incorporated Into Plants Which Code Therefor (expires
                                   January 28, 2014)

US 5,597,945*          1-28-97     Plants Genetically Enhanced for Disease Resistance (expires January
                                   28, 2014)

 US 5,561,107          10-1-96     Method of Enhancing Wound Healing by Stimulating Fibroblast and
                                   Keratinocyte Growth in Vivo Utilizing Amphipathic Peptides (expires
                                   October 1, 2013)

 US 5,486,503          1-23-96     Anti-Fungal Histatin Based Peptides (expires January 23, 2013)
</TABLE>

* Patents in-licensed from Louisiana State University

EMPLOYEES

The Company currently has three employees but also collaborates with researchers
at academic and other research institutions. These academic and other research
institutions are performing pre-clinical research and/or assisting the Company
in developing product applications.

The Company's remaining employees, including the Company's President and Chief
Executive Officer, Richard Ekstrom, were terminated effective December 31, 2002.
Mr. Ekstrom and the other employees have agreed to work as needed on a
consulting basis to effect the sale or license of the Company's technology or
achieve new funding.

COMPANY HISTORY AND GENERAL INFORMATION

                                                                         Page 14
<PAGE>
The Company was formed after the July 27, 1992 acquisition of the assets of The
Demeter Corporation by Excelsior Capital Corporation ("Excelsior"). Excelsior
was incorporated in Colorado on September 16, 1987. Excelsior acquired all of
the assets of The Demeter Corporation in exchange for 6,625,821 shares of
Excelsior's $0.001 par value common stock. The Demeter Corporation's assets
consisted of intangible assets related to various biotechnology applications in
the fields of human and animal health care, agricultural and commercial
chemicals. Subsequent to the acquisition, Excelsior changed its name to Demeter
BioTechnologies, Ltd. On September 18, 1998, the shareholders approved the
recommendation of the Company's Board of Directors to change the Company's name
to Demegen, Inc.

The Company is a "Development Stage Company" in the clinical trial stage. The
primary drugs under development target significant markets for which there are
few, if any, satisfactory alternatives. These include treatment for oral
candidiasis, a disease prevalent in HIV patients and a treatment for Pseudomonas
in CF patients, a disease that can be fatal to children. During Fiscal 2001 the
Company acquired Periodontix, Inc., another peptide therapeutic company, thereby
nearly doubling its technology assets and product pipeline. A number of
additional applications for preventing or treating infectious disease are also
in the development pipeline. In addition to pharmaceutical products, the
Company's technology is being applied to the development of enhanced
agricultural products.

RISK FACTORS

THE COMPANY HAS A HISTORY OF LOSSES, ACCUMULATED DEFICIT AND ANTICIPATES FUTURE
LOSSES AND CAPITAL REQUIREMENTS.

To date, the Company has been engaged primarily in research and development
activities. With the exception of license fees and research and development
funding received under collaboration agreements and research grants with the
Company has not derived any revenues from ongoing operations.

At September 30, 2002, the Company had an accumulated deficit of approximately
$28,366,000 and significant losses are expected to continue for the foreseeable
future.

As a result of the Company's cash position, during the past fiscal year, the
majority of the employees have resigned or been terminated as a result, product
development efforts will be minimal until partners or new financing occurs. The
lease for its Watertown facility has been terminated, thereby eliminating future
obligations. The Pittsburgh facility is on a month-to-month rental agreement and
the Company plans to sublease its current location. The Company's remaining
employees, including the Company's President and Chief Executive Officer,
Richard Ekstrom, were terminated effective December 31, 2002. Mr. Ekstrom and
the other employees have agreed to work as needed on a consulting basis to
effect the sale or license of the Company's technology or achieve new funding.

Should the Company receive the funding necessary to commence clinical procedures
it will be required to conduct substantial clinical testing activities prior to
commercialization of any of its proposed products. No assurance can be given
that the Company will be successful in such activities. To the extent the
Company relies upon others for development and commercialization activities, the
Company's ability to achieve profitability will be dependent upon the success of
such third parties.

The Company is seeking additional financing on both a short-term and long-term
basis. There is no assurance that sufficient funding will be forthcoming or that
the funding will be on terms acceptable to the Company

THE COMPANY'S PRODUCTS ARE EARLY STAGE AND THERE IS UNCERTAINTY AS TO WHETHER OR
NOT ITS PRODUCTS WILL BE DEVELOPED.

The Company's proposed products and research programs are in the development
stage and require significant time-consuming and costly research and
development, testing, regulatory clearances and product development and
marketing. Delays, cost overruns, unexpected developments such as adverse side
effects during clinical trials, insufficient therapeutic efficacy or competitive
or technological developments would prevent or substantially deter development
efforts and ultimately could have a material adverse effect on the Company. The
Company's existing pharmaceutical products under development, and any potential
additional pharmaceutical products


                                                                         Page 15
<PAGE>
that may be developed, require significant additional research and development,
including toxicology and clinical testing, regulatory approval and commitments
of resources prior to commercialization. There can be no assurance that any such
potential pharmaceutical products will be successfully developed or that any
pharmaceutical product will prove to be safe and effective in clinical trials or
otherwise, or meet applicable regulatory standards. Accordingly, the Company
does not expect any of its product candidates to be commercially available for
several years, if ever. The successful development of any product is subject to
the risks of failure inherent in the development of products or therapeutic
procedures based on innovative technologies.

The Company does not intend to conduct late-stage clinical trials, or
manufacture or market any of its product candidates in the foreseeable future.
The Company hopes to enter into corporate alliances for later stage clinical
testing, development and commercialization of its pharmaceutical applications
and any other related technologies that may be acquired or developed by the
Company.

THERE IS UNCERTAINTY RELATING TO GOVERNMENT REGULATORY REQUIREMENTS, INCLUDING
THE LENGTHY APPROVAL PROCESS.

The Company's research, development, pre-clinical and clinical trials,
manufacturing and marketing of most of its product candidates are subject to an
extensive regulatory approval process by the United States Food and Drug
Administration (the "FDA") and other regulatory agencies in the United States
and abroad. In order to obtain approval from the FDA, the Company must
demonstrate through toxicology testing and clinical trials that its
pharmaceutical products for which the FDA has allowed clinical trials, are safe
and effective for use in its target indication. Many companies have suffered
significant setbacks in advanced clinical trials, even after promising results
in earlier trials. The rate of completion of the Company's clinical trials may
be delayed by many factors. During the course of clinical trials, patients can
die or suffer other adverse medical effects for reasons that may not be related
to the drug being tested, but which can nonetheless affect clinical trial
results. There can be no assurance that the Company will be permitted by
regulatory authorities to undertake clinical trials of any drug candidates, or
that any clinical trials undertaken by the Company will be completed
successfully within a particular time period, if at all. Any delays in or
termination of the Company's clinical trial efforts could have a material
adverse effect on the business, financial condition and results of operations of
the Company. There can also be no assurance that any drug candidate will be safe
or effective in clinical trials, or that any clinical trials undertaken by the
Company will result in marketable products. Even if regulatory clearance is
obtained, a marketed product is subject to continual review, and later discovery
of previously unknown defects.

THERE CAN BE NO ASSURANCE OF MARKET ACCEPTANCE OF THE COMPANY'S PRODUCTS.

Although the Company believes there is a significant market for its proposed
pharmaceutical products, the Company's success will depend significantly on
acceptance by consumers and the medical community of the efficacy of such
products. While the Company believes that its technology will enable it to
produce pharmaceutical products that address the concerns that physicians and
patients may have, there can be no assurance that the Company's products will
gain any significant degree of market acceptance.

THE COMPANY FACES SIGNIFICANT COMPETITION AND THE RISK OF ITS PRODUCTS BEING
TECHNOLOGICALLY OBSOLETE.

The pharmaceutical, biotechnology and bio- pharmaceutical industries are
intensely competitive and competition from other companies and other research
and academic institutions is expected to increase. Many of these companies have
substantially greater financial and other resources and research and development
capabilities than the Company and have substantially greater experience in
undertaking pre-clinical and clinical testing of products, obtaining regulatory
approvals and manufacturing and marketing pharmaceutical products. The
pharmaceutical, biotechnology and biopharmaceutical industries are rapidly
evolving fields in which developments are expected to continue at a rapid pace

THE COMPANY IS DEPENDENT ON PATENTS AND OTHER PROPRIETARY RIGHTS AND THERE IS
UNCERTAINTY AS TO ITS ABILITY TO PROTECT ITS PATENT POSITION AND PROPRIETARY
RIGHTS.

To a large degree, the Company's success will depend on its ability to obtain
and maintain patent protection for its technologies and pharmaceutical products,
preserve its trade secrets, and operate without infringing on the proprietary
rights of third parties. The Company has or licensed 37 patents. The Company's
success depends in part upon its ability to obtain future


                                                                         Page 16
<PAGE>
patent protection that is broad enough to prevent competitors from making
similar claims. The Company intends to file additional patent applications as it
develops additional products or enhances its technologies. If the Company is not
successful in obtaining and maintaining adequate patent protection, it will not
be able to protect its pharmaceutical products and its ability to compete
successfully in the pharmaceutical market will be impaired. There can be no
assurance that the Company will obtain any patents covering the Company's
technology or the products the Company plans to market, or that any patents that
may be issued to the Company will provide substantial protection or be of
commercial benefit to the Company.

THE COMPANY IS DEPENDENT UPON KEY PERSONNEL

The Company is dependent on certain of its executive officers and scientific
personnel, including Richard D. Ekstrom, the Company's Chairman, President and
Chief Executive Officer. As a result of the Company's cash position during the
past fiscal year, the majority of the employees, including its scientists, have
resigned or been terminated. The Company's remaining employees, including the
Company's President and Chief Executive Officer, were terminated effective
December 31, 2002. Mr. Ekstrom and the other employees have agreed to work as
needed on a consulting basis to effect the sale or license of the Company's
technology or achieve new funding. Competition for qualified employees among
pharmaceutical and biotechnology companies is intense and a significant effort
would be required to reconstitute the Company should significant funding be
forthcoming.

THE COMPANY FACES THE RISK OF PRODUCT LIABILITY.

The testing, marketing and sale of health care products entail an inherent risk
of product liability. There can be no assurance that product liability claims,
relating to the pharmaceutical products developed by the Company, will not be
asserted against the Company, its collaborators or its licensees. As clinical
trials commence with respect to the Company's products, the Company expects to
obtain product liability insurance covering such clinical trials and products.
There is no assurance that the Company will be able to maintain such product
liability insurance or obtain additional insurance, during clinical trials or
upon commercialization of any product, on acceptable terms, if at all, or that
such insurance will provide adequate coverage against any potential product
liability claims. A product liability claim or product recall could have a
material adverse effect on the business, financial condition or results of
operations of the Company.

THERE IS UNCERTAINTY RELATED TO HEALTH CARE REIMBURSEMENT.

In both the United States and foreign markets, sales of the Company's products
will depend in part on the availability of third party reimbursements for health
care products. The levels of revenues and profitability of pharmaceutical
companies generally may be adversely affected by the continuing efforts of
governments and other third party payors to contain or reduce the costs of
health care. Over the past decade, the cost of health care has risen
significantly, and there have been numerous proposals by legislators, regulators
and third-party health care payors to curb these costs. Some of these proposals
have involved limitations on the amount of reimbursement for certain products.
There can be no assurance that similar Federal or state, or foreign, health care
legislation will not be adopted in the future, that any products sought to be
commercialized by the Company or its collaborators will be considered
cost-effective, or that adequate third-party insurance coverage will be
available for the Company to establish and maintain price levels sufficient for
realization of an appropriate return on its investment in product development.
Moreover, the existence or threat of cost control measures could have an adverse
effect on the willingness or ability of licensees to pursue research and
development programs related to the Company's proposed products. The Company
cannot predict the effect that private sector or governmental health care
reforms may have on its business, and there can be no assurance that any such
reforms will not have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, in both the United
States and elsewhere, sales of prescription drugs are dependent in part on the
availability of reimbursement to the consumer from third-party payors, such as
government and private insurance plans. Third-party payors are increasingly
challenging the price and cost effectiveness of medical products and services.
Significant uncertainty exists as to the reimbursement status of newly approved
health care products. There can be no assurance that the Company's proposed
products will be considered cost-effective or that adequate third-party
reimbursement will be available to enable the Company to maintain price levels
sufficient to realize an appropriate return on its investment in product
development. Legislation and regulations affecting the pricing of
pharmaceuticals may change. Adoption of such legislation could further limit
reimbursement for medical products and services.


                                                                         Page 17
<PAGE>
THE COMPANY HAS NO MANUFACTURING OR MARKETING CAPACITY.

The Company does not generally expect to engage directly in manufacturing or
marketing of products in the near term, but may elect to do so in certain cases.
The Company does not currently have the capacity to manufacture or market
products or any experience in such activities.

THE COMPANY'S STOCK PRICE IS VOLATILE

The Company's common stock is thinly traded and the Company is in an industry
that has experienced extreme stock price volatility. The future of the Company's
stock price performance can be expected to experience continued volatility,
impacted by many developments, including the following:

-     Quarterly variations in our results of operations;

-     Announcement of new innovations or products by the Company or by its
      competitors;

-     The stock price performance of other companies that investors may deem to
      be comparable to the Company;

-     Increased accumulation of debt

-     Litigation

-     News related to trends in the marketplace

-     Inability to comply with future reporting requirements as the Company may
      not be able to afford to incur the costs associated with future filings

-     The downgrading of the Company from the Over-the-Counter Bulletin Board to
      the Pink Sheets due to prospective non-compliance with the reporting
      requirements of the Over-the-Counter Bulletin Board and new costs
      requirements for Bulletin Board listing.

The stock market in general, and the market prices for biotechnology companies
in particular, have experienced extreme volatility that often has been unrelated
to the operating performance of these companies. These broad market and industry
fluctuations may adversely affect the price of the Company's common stock,
regardless of the Company's operating performance.

THE EQUITY HOLDINGS OF SHAREHOLDERS MAY BE MATERIALLY DILUTED DUE TO OUTSTANDING
OPTIONS AND WARRANTS AND CONVERTIBLE REDEEMABLE PREFERRED STOCK

Dilution will be increased to the extent that holders of outstanding convertible
preferred stock convert those shares, at no cost, into Common Stock and
outstanding options and/or warrants to purchase Common Stock are converted or
exercised, as the case may be.

The Company has outstanding options and warrants for, in the aggregate,
25,899,000 shares of Common Stock. Holders of such options and warrants are
likely to exercise them only in event that the exercise or conversion price; as
the case may be, is less than the fair market value of the Common Stock.

Additionally, the holder of the redeemable convertible preferred stock can
convert its shares into 4,444,444 shares of common stock at no cost to the
holder.

THE OUTSTANDING CONVERTIBLE REDEEMABLE PREFERRED STOCK HAS SIGNIFICANT DIVIDEND
AND LIQUIDATION RIGHTS.

The holders of the Company's redeemable convertible preferred stock are entitled
to receive, when and if declared by the Board of directors dividends at a rate
of $0.036 per share ($160,000 annually). Such dividends have priority over any
dividends paid on common stock. Dividends on the preferred stock are cumulative
and the right to the dividends accrue until declared by the Board of Directors.
In the event of the liquidation of the Company, preferred stockholders have
liquidation rights in priority to common shareholders.

THE COMPANY HAS NOT DECLARED DIVIDENDS.

The Company has never paid any cash dividends on its Common Stock and does not
intend to pay cash dividends in the foreseeable future. The Company currently
intends to retain all earnings, if any, for the development of its business.

THE COMPANY HAS LIMITED CASH RESERVES.

As of September 30, 2002, the Company's cash balance was $400,371. If sources of
additional funds are not obtained, the majority of the Company's operations will
cease.


                                                                         Page 18
<PAGE>
THE COMPANY MAY NOT BE ABLE TO CONTINUE AS A "GOING CONCERN".

The Company's Report of Independent Auditor for the year ended September 30,
2002 contains cautionary wording where the auditors express substantial doubt
concerning the Company's ability to continue as a going concern.

ITEM 2 - DESCRIPTION OF PROPERTY

The Company's Pittsburgh office and laboratory are located at 1051 Brinton Road,
Pittsburgh, PA 15221. The Company occupies 2,400 square feet of leased space.
The lease is a month-to-month rental at a gross monthly rental, including
utilities, of $3,948.

Due to the curtailment of operations, the Company only utilizes a portion of its
office space and plans to sub-lease its office and laboratory space in
Pittsburgh.

The Company believes that these facilities are adequate for its current needs.

ITEM 3 - LEGAL PROCEEDINGS

On June 17, 2002 Dow AgroSciences, LLC ("Dow AgroSciences") and the Company
entered into an agreement which settled certain claims by both parties relating
to the license agreements the Company had with Dow AgroSciences.

As part of the agreement, Dow AgroSciences paid the Company $650,000 as final
research payments and partial reimbursement of legal expenses, reimbursed the
arbitrator's fees, paid the Company's attorneys' fees in this matter and paid
the remaining unreimbursed patent legal costs under the license agreement.
Additionally, the Company issued 550,000 shares of the Company's restricted
common stock to the Company's attorneys in this matter. This settlement resulted
in income, net of related arbitration expenses, of $617,000 to the Company.

On October 31, 2001 Dow AgroSciences had notified the Company that it was
exercising its right to terminate the license agreements it has with the
Company. In December 2001, the Company commenced an arbitration proceeding
against Dow AgroSciences for damages the Company's management alleged that it
sustained as a result of Dow AgroSciences' alleged failure to perform certain
contractual obligations under one of the license agreement that was terminated
by Dow AgroSciences on October 31, 2001. The above settlement agreement
concluded the arbitration.

ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

None


                                                                         Page 19
<PAGE>
                                     PART II

ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock has been quoted on the Over-the-Counter Bulletin
Board since 1994 under the symbol "DBOT". The following table sets forth, based
upon information received from the National Quotation Bureau, the high and low
bid/ask prices for the Common Stock for the quarters indicated. The quotations
represent bid between dealers and do not include retail mark-up, mark-down or
commissions, and do not represent actual transactions.

<TABLE>
<CAPTION>
                                              FISCAL QUARTERS ENDED
                  ---------------------------------------------------------------------------
Fiscal            December 31               March 31           June 30           September 30
------            -----------               --------           -------           ------------
<S>               <C>                       <C>                <C>               <C>
2002

High                  $0.45                   $0.36             $0.15               $0.06
Low                   $0.23                   $0.13             $0.03               $0.02
</TABLE>

<TABLE>
<CAPTION>
Fiscal            December 31               March 31           June 30           September 30
------            -----------               --------           -------           ------------
<S>               <C>                       <C>                <C>               <C>
2001

High                  $1.01                   $1.00             $0.67               $0.52
Low                   $0.42                   $0.56             $0.47               $0.34
</TABLE>

At December 2, 2002, there were 503 holders of record of 47,017,778 shares of
Common Stock, exclusive of holders which maintain their ownership in
"Street-Name" at brokerage houses, and one holder of record of 4,444,444 shares
of Preferred Stock. There are approximately 2,050 stockholders which hold their
ownership in street name.

The Company has not paid any cash dividends in respect to its Common Stock and
has no present intention to pay any such dividends in the foreseeable future.
The Company intends to retain any earnings for use in the business operations.
In addition, in the Shareholders' Agreement, dated June 15, 1998, by and among
the Company and the persons named therein, the Company agreed, with certain
limited exceptions, not to pay any dividend on its shares without the written
consent of the holders of at least a majority of the then outstanding shares of
preferred stock of the Company.

In February 2002, the Company issued 295,000 shares of restricted stock to
certain employees for services rendered to the Company.

During March 2002, in conjunction with the exercise of options, the Company sold
1,700,000 shares of common stock to Mr. Ekstrom at purchase prices of $0.05 to
$0.15 per share. Recourse (to the general assets of the borrower) promissory
notes in the amount of $145,000 were to be issued in conjunction with this sale,
however this has not occurred. The amount of $51,000 in the financial statements
represents the fair value of the shares as of September 30, 2002. The difference
between the $145,000 due and the current carrying value, has been treated as
additional compensation. The notes were to include a repayment provision due one
year after the sale of the related shares at an interest rate of 6%. If the
shares are donated to charity, the Company will waive repayment of that portion
of the notes and interest which relate to the donated shares. This transaction
has been accorded variable accounting treatment.

During March 2002, in conjunction with the exercise of options, the Company sold
450,000 shares of common stock to a former executive of the Company at purchase
price of $.05 per share. In the fiscal quarter ending June 30, 2002, the former
executive of the Company paid $10,000 against his liability with $12,500
remaining payable to the Company as of September 30, 2002,

In June 2002, the Company issued 550,000 shares of restricted stock to the
Company's attorneys which handled the Dow AgroSciences arbitration for the
Company.


                                                                         Page 20
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION


SELECTED FINANCIAL DATA

The following table sets forth certain financial data for, and as of the end of,
the years ended September 30, 2002, 2001, 2000, 1999 and 1998 and for the period
December 6, 1991 (inception) to September 30, 2002:

<TABLE>
<CAPTION>
                                                                                                                  December 6
                                                                 Year Ended September 30,                      1991 (Inception)
                                    ------------------------------------------------------------------------   to September 30,
                                        2002           2001           2000           1999           1998             2002
                                    ------------   ------------   ------------   ------------   ------------   ----------------
<S>                                 <C>            <C>            <C>            <C>            <C>            <C>
STATEMENT OF OPERATIONS DATA:

Grant and Other Income              $  1,442,295   $  1,111,004   $    763,765   $  1,118,576   $  1,376,918     $  7,133,561

License amortization and purchased
   research & development related
   to Periodontix acquisition                 --      7,667,739             --             --             --        7,667,739

Total Expenses                         2,714,386     11,614,079      2,419,247      2,456,318      3,370,671       33,339,476

Net Loss                              (1,272,091)   (10,503,075)    (1,655,482)    (1,337,742)    (1,993,753)     (26,205,915)

Net Loss per Share (dilutive)       $      (0.03)  $      (0.29)  $      (0.06)  $      (0.06)  $      (0.13)

Dividends per Share                 $       0.00   $       0.00   $       0.00   $       0.00   $       0.00

Weighted Average Number
   of Common Shares
   Outstanding                        45,713,641     37,163,279     29,759,153     26,255,104     23,867,091

BALANCE SHEET DATA:


Cash & Cash Equivalents             $    400,371   $    537,478   $  1,825,352   $    583,585   $  1,686,658

Working Capital (deficiency)            (987,492)      (304,245)     1,413,408          6,849      1,329,541

Total Assets                             438,806        837,500      2,311,592      1,084,505      2,114,750

Long-term obligations                    154,192        354,286        360,180        203,147            -0-
Deficit accumulated during
   development stage                 (28,366,452)   (26,814,911)   (16,039,877)   (14,119,462)   (12,523,358)

Redeemable convertible preferred
   Stock                               2,585,198      2,305,748      2,033,787      1,768,846      1,510,487

Shareholders' Equity
   (Deficit)                          (3,688,447)    (2,717,067)      (633,989)    (1,555,934)      (122,130)
</TABLE>

RESULTS OF OPERATIONS

GENERAL

Since commencement of operations in 1992, the Company has been engaged in
research and development activities, including conducting preclinical studies
and clinical trials, and recruiting its scientific and management personnel,
establishing laboratory facilities and raising capital. The Company has not
received any revenue from the direct sale of its products to the general public
but has received grant monies and license payments from other corporations from
the license of the Company's technology.

As a result of the Company's cash position, during fiscal 2002, the majority of
the employees have resigned or been terminated. The lease for its Watertown
facility has been terminated, thereby eliminating future obligations. The
Company expects that by December 31, 2002, all remaining employees will have
terminated. As needed, these employees will work on a part-time basis to manage
the affairs of the Company.

The Company is exploring the sale to or merger with another company with
suitable financial and human resources, and is concurrently seeking to achieve
partnerships with pharmaceutical or biotechnology companies to co-develop
product applications. The Company is also continuing to seek additional capital.
However, there can be no assurance that such a transaction will occur.

The Company is a "Development Stage Company" in the clinical trial stage. The
primary drugs under development target significant markets for which there are
few, if any, satisfactory alternatives. These include treatment for oral
candidiasis, a disease prevalent in HIV patients, a treatment for Pseudomonas in
CF patients, a disease that can be fatal to children, and a treatment for
mucositis, a common side effect of chemotherapy or radiation therapy.

RESULTS OF OPERATION

SEPTEMBER 30, 2002 VS 2001

In the year ended September 30, 2002 (Fiscal 2002), grants and other income
increased to $1.4 million from $1.1 million in the year ended September 30, 2001
(Fiscal 2001). The Fiscal 2002 amount included a $0.62 million from an
arbitration settlement with Dow AgroSciences. Additionally, the Company received
the final royalty payment of $0.26 million and the final research payment of
$0.225 million from Dow AgroSciences and $0.21 million of revenue from licenses
with third parties. As a result of the termination of the Dow AgroSciences
agreements as reported in the prior year, the Company will no longer receive
revenue from Dow AgroSciences. Since execution in fiscal 1998 the Dow
AgroSciences agreements have represented a significant portion of the Company's
income in each of the subsequent years. In Fiscal 2001 the Company received a
$0.4 million grant from a foundation and recorded $0.64 million in licensing
fees and research funding received from Dow AgroSciences as part of a license
entered into during Fiscal 1998.


                                                                         Page 21
<PAGE>
Total expenses decreased to $2.71 million in the current fiscal year from $11.6
million in the prior fiscal year. The current fiscal year expenses included the
following non-cash charges; a $0.11 million write-down of subscription
receivable from the Chief Executive Officer and a former executive of the
Company, a $0.09 million charge to reduce property and equipment to net
realizable value, a $0.03 million provision to write-off patents, $0.38 million
of stock issued for services rendered to the Company and $0.09 million of stock
based compensation. Prior fiscal year expenses included $7.7 million of non-cash
expenses consisting of a $0.18 million charge related to the termination of the
Dow AgroSciences agreement, $4.85 million of amortization of the Periodontix
license and $2.64 million for the write off of purchased research associated
with the Periodontix acquisition.

Exclusive of the aforementioned non-cash expenses, expenses would have been
$2.01 million and $3.95 million in fiscal 2002 and 2001, respectively. The
decrease from the aforementioned level was due to the cessation of preclinical
development activities in the current fiscal year and the termination of
substantially all personnel.

Research and development expenses decreased by $1.0 million due to the cessation
of preclinical development activities in the current fiscal year and the
termination of research personnel.

General and administrative expenses decreased to $1.0 million in Fiscal 2002
from $1.2 million in Fiscal 2002 due to the aforementioned termination of
substantially all personnel in the current fiscal year and the closing of the
Watertown location.

The Company did not have a federal or state income tax provision in either
Fiscal 2002 or 2001 due to the loss recorded in each period and cumulative from
inception.

The amounts described above resulted in a net loss of $1.3 million for Fiscal
2002 compared to a net loss for Fiscal 2001 of $10.5 million.

SEPTEMBER 30, 2001 VS 2000

In the year ended September 30, 2001 (Fiscal 2001), grants and other income
increased to $1.1 million from $0.8 million in the year ended September 30, 2000
(Fiscal 2000). In Fiscal 2001 this amount included a $0.4 million grant from a
foundation. In Fiscal 2000, the Company received a $0.15 million program related
loan from a local charity. Had this been a grant, revenues between the two years
would have been more comparable. The most significant component of revenue in
both fiscal years was from licensing fees and research funding received from Dow
AgroSciences as part of a license entered into during Fiscal 1998. On October
31, 2001 the Company received notice of termination from Dow AgroSciences of its
agreement. As a result of the termination, the Company took a $0.18 million
charge for patent costs that had been capitalized with respect to the agreement.

Total expenses increased to $11.6 million in the current fiscal year from $2.4
million in the prior fiscal year. Fiscal 2001 expenses included $7.7 million of
non-cash expenses consisting of the aforementioned $0.18 million charge related
to the termination of the Dow AgroSciences agreement, $4.85 million of
amortization of the Periodontix license and $2.64 million for the write off of
purchased research associated with the Periodontix acquisition.

Exclusive of the aforementioned non-cash expenses, expenses would have been
$3.95 million as compared with $2.4 million for the prior fiscal year. The $1.55
million increase was due to the expenses associated with the Watertown office
which the Company began operating on January 1, 2001 under the license agreement
with Periodontix prior to the acquisition of the majority of the Periodontix
assets in July 2001.

Research and development expenses increased by $1.0 million due to the
aforementioned addition of the Watertown office on January 1, 2001.

General and administrative expenses increased to $1.2 million in Fiscal 2001
from $0.7 million in Fiscal 2000 due to the aforementioned addition of the
Watertown office on January 1, 2001. Depreciation and amortization remained
relatively constant in the two fiscal years.

The Company did not have a federal or state income tax provision in either
Fiscal 2001 or 2000 due to the loss recorded in each period and cumulative from
inception.


                                                                         Page 22
<PAGE>
The amounts described above resulted in a net loss of $10.5 million for Fiscal
2001. The net loss would have been $2.8 million if the aforementioned non-cash
charges were excluded. The net loss for Fiscal 2000 was $1.7 million.

LIQUIDITY AND CAPITAL RESOURCES

FISCAL 2002

During the year ended September 30, 2002, the Company's cash and cash
equivalents decreased by $0.14 million to $0.4 million. Net cash utilized by
operating activities of $0.21 million was partially offset by net cash provided
by financing activities of $0.07 million.

Specifically, the $0.21 million of cash utilized by operating activities
consisted of the net loss of $1.3 million and the $0.05 million decrease in
unearned revenue which were partially offset by $0.16 million of depreciation
and amortization, a $0.11 million write-down of subscription receivable, a $0.05
million decrease in accounts receivable, an increase of $0.30 million in
accounts payable and other liabilities, $0.38 million of stock issued for
services and $0.09 million of stock based compensation.

Investing activities netted to zero, resulting from $0.04 million for the
purchases of property, plant and equipment offset by $0.04 million of cash
received on the disposal of equipment.

Cash inflows from financing activities included $0.15 million increase in the
payable to employees consisting of severance due terminated employees and
deferred compensation for existing employees, $0.4 million of proceeds from a
note payable and $0.01 million from the exercise of stock options. These cash
inflows were partially offset by $0.13 million of payments on notes payable.

FISCAL 2001

During the year ended September 30, 2001, the Company's cash and cash
equivalents decreased by $1.3 million to $0.5 million. Net cash utilized by
operating activities of $1.95 million and $0.3 million of net cash utilized by
investing activities was partially offset by net cash provided by financing
activities of $0.96 million.

Specifically, the $1.95 million of cash utilized by operating activities
consisted of the net loss of $10.5 million which was partially offset by $0.16
million of depreciation and amortization, $7.7 million of amortization of the
Periodontix license, purchased research and development that was written-off and
intangibles written off due to the termination of the Dow AgroSciences
agreement, an increase of $0.22 million in accounts payable and other
liabilities, $0.05 million increase in unearned revenue $0.39 million of stock
issued for services and $0.09 million of stock based compensation.

The Company expected that the Periodontix acquisition would provide access to
new and additional future funding opportunities. However, the significant
adverse changes in the capital markets combined with the termination of the Dow
AgroSciences agreement has resulted in the Company not being able to access
significant funding which has resulted in the aforementioned intangible asset
realization writedowns.

The $0.31 million of cash utilized by investing activities relates to $0.23
million expended for the Periodontix license and acquisition, $0.03 million for
the purchases of property, plant and equipment and $0.05 million of patent costs
capitalized as intangible assets in the current year.

Cash inflows from financing activities included the $1.0 million net proceeds
from the private placement of securities. This source of funds was partially
offset by $0.08 million of payments on notes payable.

FISCAL 2000

During the year ended September 30, 2000, the Company's cash increased by $1.2
million. Net cash provided by financing activities of $2.5 million was partially
offset by a $1.1 million of net cash utilized by operating activities and $0.1
million of net cash utilized by investing activities.


                                                                         Page 23
<PAGE>
Cash from financing activities was generated from $2.4 million of net proceeds
from the private placement of securities and $0.15 million received from a local
foundation in the form of a note payable. The loan matures on February 28, 2005
with interest at 5%. The loan is to fund program related research.

Cash utilized in operating activities was caused by the net loss of $1.66
million and a $0.09 million decrease in unearned revenue. This was partially
offset by $0.13 million of depreciation and amortization, $0.16 million of stock
issued for services, $0.04 million for the amortization of the deferred
compensation component of shareholders' equity, the $0.26 million non-cash
charge for the compensation package to retain the Company's new Chief Operating
Officer - Pharmaceutical Products and a $0.04 million of stock issued for
compensation.

Cash utilized by investing activities was primarily due to a $0.11 million
increase in intangible assets due to the capitalization of patent related
expenses.

PROSPECTIVE/FORWARD-LOOKING INFORMATION

This Annual Report on Form 10-KSB contains forward-looking statements within the
meaning of The Private Securities Litigation Reform Act of 1995 (the "Act"). In
particular, when used herein, the words "plan," "estimates," "confident that,"
"will," "believe," "expect," "anticipates," or "intend to," and similar
expressions are intended to identify forward-looking statements within the
meaning of the Act and are subject to the safe harbor created by the Act. Such
statements are subject to certain risks and uncertainties and actual results
could differ materially from those expressed in any of the forward-looking
statements. Such risks and uncertainties include, but are not limited to, the
ability to retain and attract key personnel, such as scientists and executives
to manage and develop the Company's products, market conditions, general
acceptance of the Company's products and technologies, possible delays or
failures to develop and/or commercialize any technology, possible risks related
to adverse clinical results, impact of alternative technology advances, inherent
risks in early stage development of such technology, competitive factors, the
ability to successfully complete additional financings, the ability to continue
as a "going concern," and other risks described in the Company's reports and
filings with the Securities and Exchange Commission.

In addition, information regarding market and industry statistics and other
numbers contained in this Annual Report are included based upon information
available to us that we believe is accurate. It is generally based on academic
and other publications. We have not independently verified all data and cannot
assure you of the accuracy of the data we have included.

The Company is subject to the risks associated with emerging technology-oriented
companies. Primary among these risks are the ability to retain and attract
skilled personnel, to obtain sufficient financing, competition from substitute
products and the ability to successfully develop and market its products. As of
September 30, 2002, the Company has an accumulated deficit of $28,366,000. In
addition, the Company has a working capital deficiency of approximately $987,000
as of September 30, 2002.

For the year ended on September 30, 2002, the Company incurred a loss of
$1,272,000 and used $210,000 of cash for operations during fiscal 2002.

The Company historically has obtained its working capital requirements through
equity issuances to shareholders, royalty payments and from certain borrowing
arrangements. Management has plans in Fiscal 2003 to explore the sale to or
merger with another company with suitable financial and human resources and
concurrently is seeking to achieve partnerships with pharmaceutical or
biotechnology companies to co-develop product applications. The Company is also
continuing to seek additional capital. There can be no assurance that such
transactions will transpire considering the Company's financial and operating
condition of the Company.

Should these plans not be successful, there is substantial doubt as to the
Company's ability to continue as a going concern through the year ending
September 30, 2003. The Company's current cash resources are close to being
exhausted and it is extremely uncertain that new sources of cash will be
identified and will be received during fiscal 2003. Since its July 2001
fundraising, the Company has not been able to obtain additional capital to
advance the Company's product development efforts. As of September 30, 2002, the
Company is delinquent in $118,000 of payments due under employment contracts,
had deferred $34,000 of salary due the remaining three employees, was unable to
meet its remaining monthly obligations, is overdue on payments to creditors who
are owed in excess of $900,000 and has deferred a $7,500 interest payment to the
holder of a $150,000 note. The holder, at their option, may demand the immediate
payment of all


                                                                         Page 24
<PAGE>
principal and interest and/or raise the interest rate on the note from 5% to 6%.
To date, the holder of the note has not notified the Company of its intent to
pursue either option.

As a result of the Company's cash position, during the past fiscal year, the
majority of the employees have resigned or been terminated as a result, product
development efforts will be minimal until partners or new financing occurs. The
lease for its Watertown facility has been terminated, thereby eliminating future
obligations. The Pittsburgh facility is on a month-to-month rental agreement.
The Company plans to sublease its current office location by December 31, 2002.
The Company's remaining employees, including the Company's President and Chief
Executive Officer were terminated effective December 31, 2002. These employees
have agreed to work as needed on a consulting basis.

The Company is exploring the sale to or merger with another company with
suitable financial and human resources and concurrently is seeking to achieve
partnerships with pharmaceutical or biotechnology companies to co-develop
product applications. The Company is also continuing to seek additional capital.
There can be no assurance that such a transaction will transpire considering the
financial and operational condition of the Company.

The Company's core assets are represented by its intellectual property, which
includes more than thirty five issued patents and the developments accomplished
to date for its three leading product applications. These include:

      -     a drug to treat cystic fibrosis infections. An Orphan Drug
            designation has been achieved and there is funding support from the
            Cystic Fibrosis Foundation.

      -     a second drug to treat oral infections that afflict HIV and many
            cancer patients; there is an approved IND (Investigational New Drug
            Application); and a Phase I/II clinical trial is ready to begin.

      -     a third drug for infected wounds and burns.

      -     A fourth drug for fungal and viral infection

In addition, a number of collaborations are continuing on agricultural
applications without cost to the Company. These collaborators provide the
necessary funding and resources to introduce the Company's technologies into a
variety of crops.

The Company believes its creditors will continue to cooperate until the Company
is able to receive new funding or form partnerships, but there is no assurance
that this will continue to be the case.

Should these plans not be successful, there is uncertainty as to the Company's
ability to continue as a going concern through the year ending September 30,
2003. It is extremely uncertain that new sources of cash will be identified and
will be received during the remainder of fiscal 2003.

The financial statements do not include any adjustments relating to the
recoverability and classification of assets or the amount and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern. The Company's continued existence is dependent upon its ability
to generate sufficient cash flows from equity financing and successfully
concluding additional license agreements.

The Company may not be able to continue to maintain compliance with the
reporting requirements of the Securities & Exchange Commission considering the
lack of liquidity.

ITEM 7 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements of the registrant and the report of Ernst & Young LLP
are submitted under Item 13 of this report beginning on page F-1.

ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL MATTERS

Not applicable


                                                                         Page 25
<PAGE>
                                    PART III

ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT; COMPLIANCE WITH SECTION
16 (a) OF THE EXCHANGE ACT

The following table lists, as of December 14, 2002, the following information
concerning each director: his principal occupation or employment; age; the year
in which he first became a director of the Company; and any directorships in
public companies.

DIRECTORS

                                    Name,
                         Principal Occupation, And Age           Director
                                                                   Since

RICHARD D. EKSTROM                                                 1996

Richard D. Ekstrom has served as Chairman of the Board of Directors and
President of the Company since January 1996. Mr. Ekstrom also serves as the
Company's Chief Financial Officer and Secretary since December 1994 and December
2001, respectively. Mr. Ekstrom holds a B.A. from Cornell University and an
M.B.A. from Boston University. From 1990 through 1991, Mr. Ekstrom was President
of Cost Containment Corporation and from 1993 through 1994, he was Chief
Operating Officer of Preferred Solutions Inc., both of which were start-up
pharmacy benefit management companies. Age, 58.


JOSEPH F. LOVETT                                                            2001

Joseph Lovett is partner of Saturn Life Sciences, a Boston and Pittsburgh based
venture capital fund. Mr. Lovett is also a General Partner of Medical Science
Partners, a venture capital fund. Mr. Lovett previously was a member of the
Board of Directors of Periodontix, Inc. which was acquired by the Company in
July 2001. Mr. Lovett previously held senior management positions with MDS
Capital, Damon Biotech, Inc., C.R. Bard and Mallinckrodt, Inc. Age, 54

In October, 2002, Messrs. Robert E. Hannan and Robert Hook resigned their
positions on the Company's Board of Directors. In November, 2002, Messrs. James
Colker and Konrad Weis resigned their positions on the Company's Board of
Directors.

EXECUTIVE OFFICER

<TABLE>
<CAPTION>
Name                                Age              Position Held
----                                ---              -------------
<S>                                 <C>     <C>
Richard D. Ekstrom                  58      Chairman, President, Chief Financial Officer
                                                     and Secretary
</TABLE>

                                                                         Page 26
<PAGE>
Item 10 EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth information with respect to the named executive
concerning his compensation for the last three years.

<TABLE>
<CAPTION>
                     Annual Compensation                       Awards Payouts
              --------------------------------        -------------------------------
(a)           (b)       (c)       (d)      (e)        (f)        (g)      (h)     (i)
Name                                       Other                                  All
and                                        Annual  Restricted             LTIP   Other
Principal                                 Compen-    Stock     Options/   Pay-   Compen-
Position      Year     Salary     Bonus    sation    Awards      SARS     outs   sation
              (a)       ($)        ($)      ($)       ($)         (#)      ($)     ($)
<S>          <C>      <C>        <C>      <C>      <C>         <C>        <C>    <C>
Richard D.   2002(b)  $180,000         -    -         -               -      -      -
  Ekstrom    2001     $180,000   $40,000    -         -               -      -      -
President    2000(c)  $140,000   $25,000    -         -         600,000      -      -
</TABLE>

(A)   Represents fiscal years ended September 30.

(B)   Mr. Ekstrom's salary for fiscal 2002 was $180,000 but $25,000 was deferred
      due the financial condition of the Company.

(C)   Of the 600,000 option grant to Mr. Ekstrom in Fiscal 2000, 450,000 have
      vested with the remaining shares vesting on May 1, 2003. The exercise
      price of these options is $0.75 per share and the options expire in Fiscal
      2010.

During March 2002, in conjunction with the exercise of options, the Company sold
1,700,000 shares of common stock to Mr. Ekstrom at purchase prices of $0.05 to
$0.15 per share. Recourse (to the general assets of the borrower) promissory
notes in the amount of $145,000 were to be issued in conjunction with this sale,
however this has not occurred. The amount of $51,000 in the financial statements
represents the fair value of the shares as of September 30, 2002. The difference
between the $145,000 due and the current carrying value, has been treated as
additional compensation. The notes were to include a repayment provision due one
year after the sale of the related shares at an interest rate of 6%. If the
shares are donated to charity, the Company will waive repayment of that portion
of the notes and interest which relate to the donated shares. This transaction
has been accorded variable accounting treatment.

Mr. Ekstrom has an employment agreement with the Company. Mr. Ekstrom's
agreement, dated June 15, 1998, is for one year and automatically renews each
June 1 unless either Mr. Ekstrom or the Company elects not to renew.

In order to further reduce costs, Mr. Ekstrom's employment agreement was
terminated effective December 31, 2002. The severance payments due Mr. Ekstrom
will be deferred. See Exhibit 10.9 to the Form 10-KSB.

                                                                         Page 27
<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values

The following table sets forth information with respect to the named executive
concerning the exercise of options during the last fiscal year and unexercised
options held as of the end of the fiscal year.

Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values

<TABLE>
<CAPTION>
(a)                   (b)                             (c)                  (d)                        (e)
                                                                          Number of                Value of
                                                                      Securities Underlying       Unexercised
                                                                         Unexercised              In-the-Money
                                                                        Options/SARs              Options/SARs
                           Shares                                         at FY-End(#)           at FY-End($)(A)
                         Acquired on                                       Exercisable/           Exercisable/
Name                     Exercise (#)            Value Realized($)       Unexercisable            Unexercisable
<S>                       <C>                    <C>                    <C>                       <C>
Richard D. Ekstrom        1,700,000                      $76,000        450,000/150,000                $0/0
</TABLE>

(A)   Market value of Common Stock at year-end bid price per share minus the
      exercise price.

COMPENSATION OF DIRECTORS

The non-employee directors of the Company are reimbursed for expenses that they
incur in performing Board duties.

ITEM  11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
      RELATED STOCKHOLDER MATTERS

The following table sets forth information regarding beneficial ownership of the
Company's Common Stock by (i) all persons (including any "group as that term is
defined in Section 13 (d)(3) of the Securities Exchange Act of 1934, as
amended), who were known by the Company to be the beneficial owners of more that
5% of the outstanding Common Stock (ii) each director of the Company, (iii) each
executive officer of the Company named in the Summary Compensation Table set
forth above under "Executive Compensation" and (iv) all directors and executive
officers of the Company as a group. Except as other wise indicated in the
footnotes to the table, all beneficial ownership information set forth below is
as of November 30, 2002.

<TABLE>
<CAPTION>
                                                            Beneficial Ownership
                                                            --------------------
                                       Title of    Number of
Name and Address                        Class      Shares (1)        % (1)
----------------                        -----      ----------        -----
<S>                                     <C>        <C>              <C>
Richard D. Ekstrom (2)                  Common     2,988,250        5.76%
1051 Brinton Road
Pittsburgh, PA 15221

Joseph F. Lovett (3)                    Common        25,000           *
1051 Brinton Road
Pittsburgh, PA 15221

All Directors and Officers              Common     3,013,250        5.80%
as a group (2 persons)

Periodontix, Inc. (4)                   Common    17,685,000       29.25%
29 Babe Ruth Drive
Sudbury, MA 01406

CEO Venture Fund III (5)                Common    10,685,000       18.70%
One North Shore Center
Suite 201
12 Federal Street
Pittsburgh, PA 15212
</TABLE>

* Less than 1%

(1) Beneficial ownership is determined in accordance with the rules of the
Securities & Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of Common Stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of November 30, 2002, are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person. Except as
otherwise indicated in the footnotes to this table and pursuant to applicable
community property laws, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock beneficially owned.

                                                                         Page 28
<PAGE>
(2) Includes 450,000 shares of Common Stock issuable upon the exercise of
options that are currently exercisable.

(3) Represents 25,000 shares of Common Stock issuable upon the exercise of
options that are currently exercisable.


(4) Includes warrants to purchase 9,000,000 shares of the Company's Common Stock
at an exercise price of $1.25 per share. The warrants expire in 2006.

(5) On June 15, 1998, CEO Venture Fund III ("CEO") purchased from the Company
4,444,444 shares of Convertible Preferred Stock which are convertible into
4,444,444 shares of the Company's Common Stock and a Warrant to purchase
4,965,556 shares of the Company's Common Stock at an exercise price of $0.45 per
share. The Warrant expires on June 14, 2008. On April 5, 2000, CEO purchased
400,000 units from the Company. Each unit consisted on one (1) share of Common
Stock and a warrant to purchase one (1) share of the Company's Common Stock at
$0.75 per share. That warrant expires on March 31, 2005. On September 26, 2001,
CEO purchased 200,000 units from the Company. Each unit consisted on one (1)
share of Common Stock and a warrant to purchase one (1) share of the Company's
Common Stock at $0.75 per share. That warrant expires on May 31, 2006.

Equity Compensation Plan Information

The following table is as of the end of the most recent fiscal year (September
30, 2002) and reflects all compensation plans under which equity securities of
the Company are authorized for issuance.

Equity Compensation Plan Information

<TABLE>
<CAPTION>
                                                      (a)                        (b)                      (c)
Plan Category                         Number of Securities           Weighted average            Number of Securities
                                       to be issued upon          Exercise price of            remaining available
                                     exercise of outstanding      Outstanding options,         for future issuances under
                                     options, warrants and       warrants and rights         equity compensation plans
                                             rights              ---------------------       (excluding securities reflected
                                             ------                                                   in column (A))
                                                                                             --------------------------------
<S>                                   <C>                        <C>                         <C>
Equity compensation plans
approved by security holders                  -                            -                               -
Equity compensation plans not
approved by security holders          3,810,000                        $0.33                               -
                                      ---------                        -----                            --------
Total                                 3,810,000                        $0.33                               -
                                      ---------                        -----                            --------
</TABLE>

The material features of the Plan are fully described in Footnote 7 (Stock
Options and Warrants) of the Company's financial statements included in Item 13.

ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Mr. Lovett previously served as a directors of Periodontix, Inc. when it was
acquired on July 16, 2001 by the Company.

During March 2002, in conjunction with the exercise of options, the Company sold
1,700,000 shares of common stock to Mr. Ekstrom at purchase prices of $0.05 to
$0.15 per share. Recourse (to the general assets of the borrower) promissory
notes in the amount of $145,000 were to be issued in conjunction with this sale,
however this has not occurred. The amount of $51,000 in the financial statements
represents the fair value of the shares as of September 30, 2002. The difference
between the $145,000 due and the current carrying value, has been treated as
additional compensation. The notes were to include a repayment option due one
year after the sale of the related shares at an interest rate of 6%. If the
shares are donated to charity, the Company will waive repayment of that portion
of the notes and interest which relate to the donated shares. This transaction
has been accorded variable accounting treatment.

                                                                         Page 29
<PAGE>
ITEM  13 - FINANCIAL STATEMENTS, EXHIBITS AND REPORTS ON FORM 8-K

a. Each of the following items are contained in the Company's financial
statements and are set forth herein beginning on page F-1.

         (i)      Report of Ernst & Young LLP, Independent Auditors

         (ii)     Balance Sheets as of September 30, 2002 and 2001

         (iii)    Statements of Operations for the Years Ended September 30,
                  2002, 2001 and 2000 and for the period December 6, 1991
                  (inception) to September 30, 2002

         (iv)     Statements of Shareholders' Deficit for the Years Ended
                  September 30, 2002, 2001 and 2000 and for the period December
                  6, 1991 (inception) to September 30, 2002

         (v)      Statements of Cash Flows for the Years Ended September 30,
                  2002, 2001 and 2000 and for the period December 6, 1991
                  (inception) to September 30, 2002

         (vi)     Notes to Financial Statements

                  No schedules for Demegen, Inc. for which provision is made in
                  the applicable accounting regulations of the Securities and
                  Exchange Commission are required under the related
                  instructions, not applicable, or the required information is
                  shown in the financial statements or notes thereto

b.  Exhibits

2.1   Asset Purchase Agreement, dated as of July 16, 2001 between Demegen, Inc.
      and Periodontix, Inc. filed as Exhibit to the registrant's Form 8-K dated
      July 31, 2001, is incorporated herein by reference

2.1.1 Option Agreement between Demegen, Inc. and Periodontix, Inc., dated
      February 16, 2001 filed as Exhibit to the registrant's Form 8-K dated
      February 20, 2001, is incorporated herein by reference

2.1.2 License Agreement between Demegen, Inc. and Periodontix, Inc., dated
      February 8, 2001 filed as Exhibit to the registrant's Form 8-K dated
      February 20, 2001, is incorporated herein by reference

2.1.3 Form of Demegen Warrant filed as Exhibit to the registrant's Form 8-K
      dated February 20, 2001, is incorporated herein by reference

3.1   Articles of Incorporation of the Company, as amended filed as Exhibit to
      the registrant's Form 10, is incorporated herein by reference

3.2   Amended and Restated By-laws of the Company filed as Exhibit to the
      registrant's Form 10-QSB for the quarter ending June 30, 2001 dated August
      13, 2001, is incorporated herein by reference

4.1   Specimen of Common Stock Certificate filed as Exhibit to the registrant's
      Form 10, is incorporated herein by reference

4.2   Stock Purchase Agreement, dated June 15, 1998, between the Registrant and
      the Principal Shareholders of the Registrant and the CEO Venture Fund III
      filed as Exhibit to the registrant's Form 10, is incorporated herein by
      reference

4.2.1 Terms of Convertible Preferred Stock filed as Exhibit to the registrant's
      Form 10, is incorporated herein by reference

4.3   Warrant to Purchase Common Stock, dated June 15, 1998, between the
      Registrant and the Registrant and the CEO Venture Fund III filed as
      Exhibit to the registrant's Form 10, is incorporated herein by reference

                                                                         Page 30
<PAGE>
4.4   Shareholders' Agreement, dated June 15, 1998, by and among the Company,
      Richard Ekstrom, Jesse Jaynes and the CEO Venture Fund III filed as
      Exhibit to the registrant's Form 10, is incorporated herein by Reference

4.5   Supplemental Agreement between Demegen, Inc. and CEO Venture Fund III,
      dated February 8, 2000 concerning Warrant No. 1 held by CEO Venture Fund,
      filed as Exhibit 4 to the registrant's Quarterly Report on Form 10-QSB,
      for the quarter ended March 31, 2000 is incorporated herein by reference

4.6   Subscription Agreement to Purchase Units of Demegen, Inc. filed as Exhibit
      4 a. to the registrant's Current Report on Form 8-K, dated April 5, 2000,
      is incorporated herein by reference

4.7   Warrant for the Purchase of Shares Common Shares of Demegen, Inc. filed as
      Exhibit 4 b. to the registrant's Current Report on Form 8-K, dated April
      5, 2000, is incorporated herein by reference

4.8   Subscription Agreement to Purchase Units of Demegen, Inc. filed as Exhibit
      4 a. to the registrant's Current Report on Form 8-K, dated July 18, 2001,,
      is incorporated herein by reference

4.9   Warrant for the Purchase of Shares Common Shares of Demegen, Inc. filed as
      Exhibit 4 b. to the registrant's Current Report on Form 8-K, dated July
      18, 2001,, is incorporated herein by reference

10.1  License and Royalty Agreement, effective May 1, 1997, between the
      Registrant and Louisiana State University filed as Exhibit to the
      registrant's Form 10, is incorporated herein by reference*

10.2  Addendum to Restated Demeter-Mycogen License and Royalty Agreement,
      effective November 13, 1998, between the Registrant and Mycogen
      Corporation filed as Exhibit to the registrant's Form 10, is incorporated
      herein by reference*

10.3  Employment Agreement, dated June 15, 1998, between the Registrant and
      Richard D. Ekstrom filed as Exhibit to the registrant's Form 10, is
      incorporated herein by reference

10.4  Technology Transfer, Support and Royalty Assignment Agreement dated
      February 19, 1992, between the Company and Dr. Jesse M. Jaynes filed as
      Exhibit to the registrant's Form 10, is incorporated herein by reference

10.5  1998 Stock Option Plan filed as Exhibit to the registrant's Form 10, is
      incorporated herein by reference

10.7  James E. Thornton Termination Agreement dated August 23, 1999 file as
      Exhibit to the registrant's Form 10-KSB for the year ended September 30,
      1999, is incorporated herein by reference

10.8  Agreement and Release between Demeter Biotechnologies, Ltd. and/or
      Demegen, Inc. and Mycogen Corporation and/or Dow Agrosciences LLC filed as
      Exhibit to the registrant's Quarterly Report on Form 10-QSB, for the
      quarter ended June 30, 2002 is incorporated herein by reference

10.9  Termination and Consulting Agreement dated December 20, 2002 between
      Demegen, Inc. and Richard D. Ekstrom

99    Letter dated June 28, 2001 from CEO Venture Fund III to consent to the
      increase in the number of Directors and Amend the Amended and Restated
      By-Laws of the Company filed as Exhibit 99 to the registrant's Quarterly
      Report on Form 10-QSB for the quarter ended June 30, 2001 is incorporated
      herein by reference

99.1  Certification Pursuant To 18 U.S.C. Section 1350, As Amended Pursuant To
      Section 906 Of The Sarbanes-Oxley Act of 2002


* Certain portions of this exhibit have been omitted based upon a request for
Confidential Treatment. The non-public information has been filed with the
Commission.

                                                                         Page 31
<PAGE>
c.  Reports on Form 8-K

   The registrant did not file any Current Reports on Form 8-K during the three
months ended September 30, 2002

ITEM 14 - CONTROLS AND PROCEDURES

As of September 30, 2002, an evaluation was performed under the supervision and
with the participation of the Company's management, including the Chief
Executive Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on that evaluation, the
Company's management, including the Chief Executive Officer, concluded that the
Company's disclosure controls and procedures were effective as of September 30,
2002. There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to September 30, 2002.

                                                                         Page 32
<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.

                                       Demegen, Inc.

Date: December 30, 2002

                                       By: /s/ Richard D. Ekstrom
                                       ---------------------------------
                                       Richard D. Ekstrom
                                       Chairman of the Board of Directors,
                                       President and Chief Executive Officer

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

Date: December 30, 2002                By: /s/ Richard D. Ekstrom
                                       -----------------------
                                       Richard D. Ekstrom
                                       Chairman of the Board of Directors,
                                       President and Chief Executive Officer
                                       (Principal Executive Officer, Principal
                                       Financial    Officer and
                                       Principal Accounting Officer)

Date: December 18, 2002                By: /s/ Joseph F. Lovett
                                       ---------------------------
                                       Joseph F. Lovett
                                       Director

                                                                         Page 33
<PAGE>
                                  CERTIFICATION

I, Richard D. Ekstrom, certify that:

1.    I have reviewed this Annual Report on Form 10-KSB of Demegen, Inc.;

2.    Based on my knowledge, this annual report does not contain any untrue
      statement of a material fact or omit to state a material fact necessary to
      make the statements made, in light of the circumstances under which such
      statements were made, not misleading with respect to the period covered by
      this annual report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this annual report, fairly present in all material
      respects the financial condition, results of operations and cash flows of
      the registrant as of, and for, the periods presented in this annual
      report.

4.    I am responsible for establishing and maintaining disclosure controls and
      procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
      Demegen, Inc. and have:

      (i)   Designed such disclosure controls and procedures to ensure that
            material information relating to Demegen, Inc. is made known to me
            by others within the Company, particularly during the period in
            which this annual report is being prepared;

     (ii)   Evaluated the effectiveness of Demegen, Inc's. disclosure controls
            and procedures as of a date within 90 days prior to the filing date
            of this annual report (the "Evaluation Date"); and

     (iii)  Presented in this annual report my conclusions about the
            effectiveness of the disclosure controls and procedures based on my
            evaluation as of the Evaluation Date;

5.    I have disclosed, based upon my most recent evaluation, to Demegen Inc's.
      auditors and the audit committee of the Company's Board of Directors (or
      persons performing the equivalent functions):

      (i)   All significant deficiencies in the design or operation of internal
            controls which could adversely affect Demegen Inc's. ability to
            record, process, summarize and report financial data and have
            identified for Demegen Inc's. auditors any material weaknesses in
            internal control, and

      (ii)  Any fraud, whether or not material, that involves management or
            other employees who have a significant role in Demegen Inc's.
            internal controls, and

6.    I have indicated in this annual report whether there were significant
      changes in internal controls or in other factors that could significantly
      affect internal controls subsequent to the date of my most recent
      evaluation, including any corrective actions with regard to significant
      deficiencies and material weaknesses.

                                       By   /s/Richard D. Ekstrom
                                            ------------------------------------
                                               Richard D. Ekstrom
                                               Chief Executive Officer and
                                               Chief Financial Officer


Date:  December 30, 2002

                                                                         Page 34
<PAGE>
                         Report of Independent Auditors

Board of Directors
Demegen, Inc.

We have audited the accompanying balance sheets of Demegen, Inc. (a development
stage company) as of September 30, 2002 and 2001, and the related statements of
operations, shareholders' deficit, and cash flows for each of the three years in
the period ended September 30, 2002 and for the period from December 6, 1991
(inception) through September 30, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

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

In our opinion the financial statements referred to above present fairly, in all
material respects, the financial position of Demegen, Inc. (a development stage
company) at September 30, 2002 and 2001, and the results of its operations and
its cash flows for each of the three years in the period ended September 30,
2002 and for the period from December 6, 1991 (inception) through September 30,
2002, in conformity with accounting principles generally accepted in the United
States.

The accompanying financial statements have been prepared assuming that Demegen,
Inc. will continue as a going concern. As more fully described in Note 1, the
Company has experienced significant losses and has an accumulated deficit of
$28.4 million and a working capital deficiency of $987,000. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets, or
the amounts and classification of liabilities, that may result from the outcome
of this uncertainty.

                                       /s/ ERNST & YOUNG LLP


Pittsburgh, PA
November 22, 2002

                                       F-1


                                                                         Page 35
<PAGE>
                                  Demegen, Inc.
                          (A Development Stage Company)
                                 Balance Sheets

<TABLE>
<CAPTION>
                                                             SEPTEMBER 30
                                                          2002          2001
                                                         ---------    ---------
<S>                                                      <C>          <C>
ASSETS
Current assets:
   Cash and cash equivalents                             $ 400,371    $ 537,478
   Accounts receivable                                          --       46,310
   Prepaid expenses and other current assets                    --        6,500
                                                         ---------    ---------
Total current assets                                       400,371      590,288

Property and equipment:                                    168,756      475,749
   Less accumulated depreciation and amortization         (133,819)    (280,116)
                                                         ---------    ---------
                                                            34,937      195,633
Intangible assets:
   Patents                                                      --       31,162
                                                         ---------    ---------
                                                                --       31,162
Less accumulated amortization                                   --           --
                                                         ---------    ---------
                                                                --       31,162
Other assets                                                 3,498       20,417
                                                         ---------    ---------
Total assets                                             $ 438,806    $ 837,500
                                                         =========    =========
</TABLE>

<TABLE>
<CAPTION>
                                                             SEPTEMBER 30
                                                         2002             2001
                                                      ------------    ------------
<S>                                                   <C>             <C>
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
   Accounts Payable                                   $  1,016,263    $    725,552
   Accrued payroll                                         151,176              --
   Unearned revenue                                             --          50,000
   Current portion of notes payable                        187,196          97,130
   Other liabilities                                        33,228          21,851
                                                      ------------    ------------
Total current liabilities                                1,387,863         894,533

Notes payable                                              154,192         354,286
                                                      ------------    ------------
Total liabilities                                        1,542,055       1,248,819

Commitments and contingency

Redeemable convertible preferred stock,
  $.001 par value-- 40,000,000 shares
   authorized; 4,444,444 shares issued and
   outstanding                                           2,585,198       2,305,748

Shareholders' deficit:
   Common stock, $.001 par value--100,000,000
     shares authorized; 47,017,778 and
     44,022,778 shares issued and outstanding
     at September 30, 2002 and September 30,
     2001, respectively                                     47,018          44,023
   Warrants                                              4,362,301       4,362,301
   Deferred Compensation                                    (3,586)       (332,344)
   Subscription receivable                                 (59,700)       (291,150)
   Additional paid-in capital                           20,331,972      20,315,014
   Deficit accumulated during the development stage    (28,366,452)    (26,814,911)
                                                      ------------    ------------
Total shareholders' deficit                             (3,688,447)     (2,717,067)
                                                      ------------    ------------
Total liabilities and shareholders' deficit           $    438,806    $    837,500
                                                      ============    ============
</TABLE>

See accompanying notes.

                                            F-2


                                                                         Page 36
<PAGE>
                                  Demegen, Inc.
                          (A Development Stage Company)
                            Statements of Operations

<TABLE>
<CAPTION>
                                                                                       PERIOD FROM
                                                                                      DECEMBER 6, 1991
                                                                                        (INCEPTION) TO
                                                        YEAR ENDED SEPTEMBER 30          SEPTEMBER 30,
                                          2002            2001             2000              2002
                                        ------------    ------------    ------------    ------------
<S>                                     <C>             <C>             <C>             <C>
Income:
   License                              $    211,000    $    190,000    $    220,000    $  1,977,651

   Grant and other                           599,379         860,033         472,432       4,286,720

   Arbitration settlement                    617,000            --              --           617,000
   Interest                                   14,916          60,971          71,333         252,190
                                        ------------    ------------    ------------    ------------

Total income                               1,442,295       1,111,004         763,765       7,133,561

Expenses:
   Research and development                1,510,384       2,551,968       1,560,981      11,116,551

   General and administrative                982,620       1,211,160         709,533      12,575,599

   Interest                                   28,695          20,034          14,207       1,045,660

   License amortization and purchased
      research & development related
      to the Periodontix acquisition            --         7,667,739            --         7,667,739
   Write-off of patents                       30,382            --              --            30,382
   Depreciation and amortization             162,305         163,178         134,526         903,545
                                        ------------    ------------    ------------    ------------

Total expenses                             2,714,386      11,614,079       2,419,247      33,339,476
                                        ------------    ------------    ------------    ------------
Net loss                                  (1,272,091)    (10,503,075)     (1,655,482)    (26,205,915)

Preferred dividend and accretion
    amounts                                 (279,450)       (271,959)       (264,933)     (2,160,537)
                                        ------------    ------------    ------------    ------------


Net loss applicable to common stock     $ (1,551,541)   $(10,775,034)   $ (1,920,415)   $(28,366,452)
                                        ============    ============    ============    ============


Net loss per common share, basic and
   diluted                              $      (0.03)   $      (0.29)   $      (0.06)
                                        ============    ============    ============    ============


Weighted average common stock
   outstanding                            45,713,641      37,163,279      29,759,153
                                        ============    ============    ============    ============
</TABLE>

See accompanying notes.


                                       F-3
                                                                         Page 37

<PAGE>
                                  Demegen, Inc.
                          (A Development Stage Company)
                       Statements of Shareholders' Deficit

<TABLE>
<CAPTION>
                                                                                          COMMON STOCK
                                                                                          ------------
                                                                         AVERAGE
                                                                          PRICE                                           DEFERRED
                                                                        PER SHARE        SHARES    AMOUNT   WARRANTS    COMPENSATION
                                                                        ---------        ------    ------   --------    ------------
<S>                                                                     <C>       <C>           <C>         <C>         <C>
   Acquired in merger with Excelsior Capital Corporation                           10,743,571   $   10,744      $   --     $      --
   Loss from inception (December 6, 1991) to September 30, 1992                            --           --          --            --
   Capital contributed by a shareholder                                                    --           --          --            --
   Proceeds from the sale of unrestricted shares contributed by
     shareholders in exchange for restricted shares                         $.62      439,045          439          --            --
   Payment of debt with stock warrants                                                     --           --          --            --
   Payment of interest with stock warrants                                                 --           --          --            --
   Issuance of receivable from officer                                                     --           --          --            --
   Net loss for the year                                                                   --           --          --            --
                                                                                   ----------       ------   ---------      --------
Balance at September 30, 1993                                                      11,182,616       11,183          --            --
   Proceeds from the sale of unrestricted shares by shareholders
     in exchange for restricted shares                                       .75      691,738          692          --            --
   Issuance of stock for consulting services                                1.54       58,336           58          --            --
   Issuance of stock subscriptions for loan origination fee                 1.14      131,250          131          --            --
   Payment of interest with stock warrants                                                 --           --          --            --
   Net loss for the year                                                                   --           --          --            --
                                                                                   ----------       ------   ---------      --------
Balance at September 30, 1994                                                      12,063,940       12,064          --            --
   Proceeds from the sale of restricted common shares                       1.06      193,133          193          --            --
   Issuance of restricted shares in exchange for unrestricted
     shares contributed by shareholders                                               171,694          172          --            --
   Proceeds from the sale of unrestricted shares contributed by
     shareholders in exchange for restricted shares                         2.18           --           --          --            --
   Issuance of restricted shares for payment of services/compensation        .89      402,251          402          --            --
   Issuance of warrants                                                                    --           --          --            --
   Payment of interest with stock warrants                                                 --           --          --            --
   Net loss for the year                                                                   --           --          --            --
                                                                                   ----------       ------   ---------      --------
Balance September 30, 1995                                                         12,831,018       12,831          --            --
   Proceeds from the sale of common shares                                   .70      683,250          683          --            --
   Issuance of shares for payment of services/compensation                   .60      890,868          891          --            --
   Issuance of shares in settlement of outstanding debt
     and other obligations                                                   .47    4,468,285        4,468          --            --
   Payment of interest with warrants                                                       --           --          --            --
   Net loss for the year                                                                   --           --          --            --
                                                                                   ----------       ------   ---------      --------
Balance at September 30, 1996                                                      18,873,421       18,873          --            --
   Proceeds from the sale of restricted and unrestricted common shares       .36      340,000          340          --            --
   Issuance of shares for payment of services/compensation                   .41    1,178,258        1,178          --            --
   Issuance of shares in exchange for patent and technology license          .35      700,000          700          --            --
   Issuance of restricted shares in exchange for unrestricted
     shares contributed by shareholders                                               162,720          163          --            --
   Exchange of amounts due to related parties for restricted shares          .33      450,000          450          --            --
   Exchange of redemption right of related party for additional
     restricted shares                                                       .33      145,000          145          --            --
   Settlement of amounts due to related parties through debt
     forgiveness and issuance of shares                                                    --           --          --            --
   Net loss for the year                                                                   --           --          --            --
                                                                                   ----------       ------   ---------      --------
Balance at September 30, 1997                                                      21,849,399       21,849          --            --
   Proceeds from exercise of stock options                                  $.05    1,750,000        1,750          --            --
   Compensation expense from Stock option activity                                         --           --          --            --
   Issuance of warrants                                                                    --           --     497,000            --
   Allocation of conversion feature of redeemable convertible
     preferred stock                                                                       --           --          --            --
   Accretion of conversion feature of redeemable convertible
     preferred stock                                                                       --           --          --            --
   Dividends on redeemable convertible preferred stock                                     --           --          --            --
   Accretion of redeemable convertible preferred stock                                     --           --          --            --
   Issuance of shares for payment of collaborators                          $.47       20,000           20          --            --
   Settlement of employee litigation                                        $.36    1,975,000        1,975          --            --
   Issuance of shares for services                                          $.47      187,500          188          --            --
   Issuance of additional shares to venture capital funds and
     individual investors                                                              85,000           85          --            --
   Net loss for the year                                                                   --           --          --            --
                                                                                   ----------       ------   ---------      --------
Balance at September 30, 1998                                                      25,866,899       25,867     497,000


   Dividends on redeemable convertible preferred stock                                     --           --          --            --
   Accretion of redeemable convertible preferred stock                                     --           --          --            --
   Proceeds from exercise of Stock options                                  $.05      350,000          350          --            --
   Issuance of shares for services                                         $0.46      145,000          145
   Extension of expiration date of stock option                                            --           --          --            --
   Net loss for the year                                                                   --           --          --            --
                                                                                   ----------       ------   ---------      --------
Balance at September 30, 1999                                                      26,361,899       26,362     497,000            --


   Dividends on redeemable convertible preferred stock                                     --           --          --            --
   Accretion of redeemable convertible preferred stock                                     --           --          --            --
   Proceeds from sale of common stock and warrants, net of
      Issuance costs of $126,783                                           $0.50    5,566,004        5,566     779,241            --
   Issuance of shares and options for services/compensation                $0.88      376,875          377      10,763     (387,000)
   Amortization of stock based compensation                                                --           --          --        43,001
   Net loss for the year                                                                   --           --          --            --
                                                                                   ----------       ------   ---------      --------
Balance at September 30, 2000                                                      32,304,778       32,305   1,287,004     (343,999)


   Proceeds from exercise of Stock options                                $  .05      125,000          125          --            --
   Dividends on redeemable convertible preferred stock                                     --           --          --            --
   Accretion of redeemable convertible preferred stock                                     --           --          --            --
   Issuance of a warrant for services                                                      --           --      56,000            --
   Proceeds from sale of common stock and warrants, net of
      Issuance costs of $85,968                                           $0.50     2,543,000        2,543     890,050            --
   Issuance of shares and options for services/compensation               $0.38        50,000           50          --      (74,349)
   Amortization of stock based compensation                                                --           --          --        86,004
   License Agreement and Acquisition of Periodontix                       $0.55     9,000,000        9,000   2,129,247            --
   Net loss for the year                                                                   --           --          --            --
                                                                                   ----------       ------   ---------      --------
Balance at September 30, 2001                                                      44,022,778       44,023   4,362,301     (332,344)


   Proceeds from exercise of Stock options                                $ .08     2,150,000        2,150          --            --
   Dividends on redeemable convertible preferred stock                                     --           --          --            --
   Accretion of redeemable convertible preferred stock                                     --           --          --            --
   Issuance of shares for services/compensation                           $0.11       845,000          845          --            --
   Amortization of stock based compensation                                                --           --          --       328,758
   Write-off of former executive's subscription receivable                                 --           --          --            --
   Accrual of interest on subscription receivable                                          --           --          --            --
   Net loss for the year                                                                   --           --          --            --
                                                                                   ----------      -------  ----------     ---------
Balance at September 30, 2002                                                      47,017,778      $47,018  $4,362,301     $ (3,586)
                                                                                   ==========      =======  ==========     =========
</TABLE>

                                      F-4

See accompanying notes

                                                                         Page 38
<PAGE>
<TABLE>
<CAPTION>
                                                                                                          DEFICIT
                                                                                                        ACCUMULATED
                                                                       ADDITIONAL     RECEIVABLE         DURING THE
                                                                        PAID-IN           FROM          DEVELOPMENT
                                                                        CAPITAL       SHAREHOLDERS         STAGE          TOTAL
                                                                      -----------    -------------      ------------     ---------
<S>                                                                   <C>            <C>             <C>               <C>
   Acquired in merger with Excelsior Capital Corporation              $   312,681    $     --        $         --      $   323,425
   Loss from inception (December 6, 1991) to September 30, 1992                --          --            (244,100)        (244,100)
   Capital contributed by a shareholder                                   123,700          --                  --          123,700
   Proceeds from the sale of unrestricted shares contributed by
     shareholders in exchange for restricted shares                       272,461          --                  --          272,900
   Payment of debt with stock warrants                                     33,333          --                  --           33,333
   Payment of interest with stock warrants                                 17,774          --                  --           17,774
   Issuance of receivable from officer                                         --     (65,117)                 --          (65,117)
   Net loss for the year                                                       --          --          (1,044,154)      (1,044,154)
                                                                      -----------    --------        ------------     ------------
   Balance at September 30, 1993                                          759,949     (65,117)         (1,288,254)        (582,239)
   Proceeds from the sale of unrestricted shares by shareholders
     in exchange for restricted shares                                    517,708          --                  --          518,400
   Issuance of stock for consulting services                               89,942          --                  --           90,000
   Issuance of stock subscriptions for loan origination fee               149,869          --                  --          150,000
   Payment of interest with stock warrants                                 56,164          --                  --           56,164
   Net loss for the year                                                       --          --          (1,768,428)      (1,768,428)
                                                                      -----------    --------        ------------     ------------
   Balance at September 30, 1994                                        1,573,632     (65,117)         (3,056,682)      (1,536,103)
   Proceeds from the sale of restricted common shares                     204,807          --                  --          205,000
   Issuance of restricted shares in exchange for unrestricted
     shares contributed by shareholders                                      (172)         --                  --               --
   Proceeds from the sale of unrestricted shares contributed by
     shareholders in exchange for restricted shares                       349,304      65,117                  --          414,421
   Issuance of restricted shares for payment of services/compensation     357,681          --                  --          358,083
   Issuance of warrants                                                    11,625          --                  --           11,625
   Payment of interest with stock warrants                                127,500          --                  --          127,500
   Net loss for the year                                                       --          --          (2,873,839)      (2,873,839)
                                                                      -----------    --------        ------------     ------------
Balance September 30, 1995                                              2,624,377          --          (5,930,521)      (3,293,313)
   Proceeds from the sale of common shares                                479,817          --                  --          480,500
   Issuance of shares for payment of services/compensation                536,359          --                  --          537,250
   Issuance of shares in settlement of outstanding debt
     and other obligations                                              2,113,054          --                  --        2,117,522
   Payment of interest with warrants                                       84,996          --                  --           84,996
   Net loss for the year                                                       --          --          (2,569,478)      (2,569,478)
                                                                      -----------    --------        ------------     ------------
Balance at September 30, 1996                                           5,838,603          --          (8,499,999)      (2,642,523)
   Proceeds from the sale of restricted and unrestricted common shares    104,660          --                  --          105,000
   Issuance of shares for payment of services/compensation                477,629          --                  --          478,807
   Issuance of shares in exchange for patent and technology license       244,300          --                  --          245,000
   Issuance of restricted shares in exchange for unrestricted
     shares contributed by shareholders                                      (163)         --                  --               --
   Exchange of amounts due to related parties for restricted shares       149,550          --                  --          150,000
   Exchange of redemption right of related party for additional
     restricted shares                                                       (145)         --                  --               --
   Settlement of amounts due to related parties through debt
     forgiveness and issuance of shares                                 1,449,273          --                  --        1,449,273
   Net loss for the year                                                       --          --            (943,773)        (943,773)
                                                                      -----------    --------        ------------     ------------
Balance at September 30, 1997                                           8,263,707          --          (9,443,772)      (1,158,216)
   Proceeds from exercise of stock options                                 85,750          --                  --           87,500
   Compensation expense from stock option activity                      1,699,440          --                  --        1,699,440
   Issuance of warrants                                                        --          --                  --          497,000
   Allocation of conversion feature of redeemable
     convertible preferred stock                                        1,022,222          --                  --        1,022,222
   Accretion of conversion feature of redeemable
     convertible preferred stock                                               --          --          (1,022,222)      (1,022,222)
   Dividends on redeemable convertible preferred stock                         --          --             (40,000)         (40,000)
   Accretion of redeemable convertible preferred stock                         --          --             (23,611)         (23,611)
   Issuance of shares for payment of collaborators                          9,360          --                  --            9,380
   Settlement of employee litigation                                      710,217          --                  --          712,192
   Issuance of shares for services                                         87,750          --                  --           87,938
   Issuance of additional shares to venture capital funds and
     individual investors                                                     (85)         --                  --               --
   Net loss for the year                                                       --          --          (1,993,753)      (1,993,753)
                                                                      -----------    --------        ------------     ------------
Balance at September 30, 1998                                          11,878,361          --         (12,523,358)        (122,130)


   Dividends on redeemable convertible preferred stock                         --          --            (160,000)        (160,000)
   Accretion of redeemable convertible preferred stock                         --          --             (98,362)         (98,362)
   Proceeds from exercise of Stock options                                 17,150          --                  --           17,500
   Issuance of shares for services                                         66,655          --                  --           66,800
   Extension of expiration date of stock option                            78,000          --                  --           78,000
   Net loss for the year                                                       --          --          (1,337,742)      (1,337,742)
                                                                      -----------    --------        ------------     ------------
Balance at September 30, 1999                                          12,040,166          --         (14,119,462)      (1,555,934)

   Dividends on redeemable convertible preferred stock                         --          --            (160,000)        (160,000)
   Accretion of redeemable convertible preferred stock                         --          --            (104,933)        (104,933)
   Proceeds from sale of common stock and warrants                      1,871,412    (282,002)                 --        2,374,217
   Issuance of shares and options for services/compensation               707,511      93,491                  --          425,142
   Amortization of stock based compensation                                    --          --                  --           43,001
   Net loss for the year                                                       --          --          (1,655,482)      (1,655,482)
                                                                      -----------    --------        ------------     ------------
Balance at September 30, 2000                                          14,619,089    (188,511)        (16,039,877)        (633,989)

   Proceeds from exercise of Stock options                                  6,125          --                  --            6,250
   Dividends on redeemable convertible preferred stock                         --          --            (160,000)        (160,000)
   Accretion of redeemable convertible preferred stock                         --          --            (111,959)        (111,959)
   Issuance of a warrant for services                                          --          --                  --           56,000
   Proceeds from sale of common stock and warrants, net of
      Issuance costs of $85,968                                           472,425    (360,486)                 --        1,004,532
   Issuance of shares and options for services/compensation               249,875     257,847                  --          433,423
   Amortization of stock based compensation                                    --          --                  --           86,004
   License Agreement and Acquisition of Periodontix                     4,967,500          --                  --        7,105,747
   Net loss for the year                                                       --          --         (10,503,075)     (10,503,075)
                                                                      -----------    --------        ------------     ------------
Balance at September 30, 2001                                          20,315,014    (291,150)        (26,814,911)      (2,717,067)

   Proceeds from exercise of Stock options                                165,300    (157,500)                  --          10,000
   Dividends on redeemable convertible preferred stock                         --          --            (160,000)        (160,000)
   Accretion of redeemable convertible preferred stock                         --          --            (119,450)        (119,450)
   Issuance of shares for services/compensation                            88,205     291,150                  --          380,200
   Amortization of stock based compensation                              (236,597)         --                  --           92,161
   Write-off of subscription receivable                                        --     106,500                  --          106,500
   Accrual of interest on subscription receivable                              --      (8,700)                 --           (8,700)
   Net loss for the year                                                       --          --          (1,272,091)      (1,272,091)
                                                                      -----------    --------        ------------     ------------
Balance at September 30, 2002                                         $20,331,972    $(59,700)       $(28,366,452)    $ (3,688,447)
                                                                      ===========    ========        ============     ============
</TABLE>


                                      F-5


                                                                         Page 39
<PAGE>
                                  Demegen, Inc.
                          (A Development Stage Company)
                            Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                                           PERIOD FROM
                                                                                                        DECEMBER 6, 1991
                                                                                                          (INCEPTION)
                                                                  YEAR ENDED SEPTEMBER 30               TO SEPTEMBER 30
                                                            2002            2001            2000           2002
                                                        ------------    ------------    ------------    ------------
<S>                                                     <C>             <C>             <C>             <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss)                                       $ (1,272,091)   $(10,503,075)   $ (1,655,482)   $(26,205,915)
Adjustments to reconcile net loss to net cash
   used in operating activities:
Depreciation and amortization                                162,305         163,178         134,526         903,545
License amortization and purchased research
 & development related to the Periodontix acquisition             --       7,667,739              --        7,667,739
Stock issued for services                                    380,200         388,390         161,142       2,658,790
Stock based compensation                                      92,161          86,004          43,001         221,166
Issuance of stock options to employees and
   directors                                                      --          45,033         264,000       2,086,473
Warrants issued for interest                                      --              --              --         286,434
Provision for subscription receivable                        106,500              --              --         106,500
Write-off of patents                                          30,382              --              --          30,382
Notes payable issued for services                                 --              --              --          58,194
Other                                                        (14,781)        (31,379)          2,134         (19,678)

Changes in operating assets and liabilities:

Accounts receivable                                           46,310         (23,901)            137              --
Prepaid expenses and other current assets                      6,500          (6,500)          2,057              --
Unearned revenue                                             (50,000)         50,000         (91,667)             --
Accounts payable and other liabilities                       302,088         219,162          (3,607)      1,943,688
                                                        ------------    ------------    ------------    ------------
Net cash used in operating activities                       (210,426)     (1,945,349)     (1,143,759)    (10,262,682)

CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment                           (40,375)        (27,613)        (12,765)       (464,128)
Cash received on equipment disposals                          39,546            --                --          49,189
License with & acquisition of Periodontix                         --        (230,000)             --        (230,000)
Intangible assets                                                 --         (48,912)       (111,401        (408,280)
                                                        ------------    ------------    ------------    ------------
Net cash used in investing activities                           (829)       (306,525)       (124,166)     (1,053,219)

CASH FLOW FROM FINANCING ACTIVITIES
Net proceeds from issuance of equity
   Instruments, net of transaction costs                          --       1,017,415       2,374,217       7,701,132
Proceeds from exercise of stock options                       10,000           6,250              --         121,250
Proceeds from notes payable & capital leases                  40,375          18,673         150,000       1,357,657
(Decrease) increase in payable to employees
   and directors                                             151,176              --          14,550       2,839,138
Payments on notes payable                                   (127,403)        (78,338)        (29,075)       (302,905)
                                                        ------------    ------------    ------------    ------------
Net cash provided by financing activities                     74,148         964,000       2,509,692      11,716,272
                                                        ------------    ------------    ------------    ------------
Net increase (decrease) in cash and cash
   equivalents                                              (137,107)     (1,287,874)      1,241,767         400,371
Cash and cash equivalents at beginning of
   period                                                    537,478       1,825,352         583,585              --
                                                        ------------    ------------    ------------    ------------
Cash and cash equivalents at end of period              $    400,371    $    537,478    $  1,825,352    $    400,371
                                                        ===========     ============    ===========     ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
   INFORMATION

Cash paid for interest                                  $     16,210    $     20,034    $      8,582    $     66,468
                                                        ===========     ============    ===========     ============
NONCASH ACTIVITIES
Common stock issued in satisfaction of related
   party payable                                        $         --    $         --    $         --    $    778,992
                                                        ===========     ============    ===========     ============
Dividends on redeemable convertible preferred
   stock                                                $    160,000    $    160,000    $    160,000    $    680,000
                                                        ===========     ============    ===========     ============
Accretion of redeemable convertible preferred
   stock                                                $    119,450    $    111,959    $    104,947    $  1,480,537
                                                        ===========     ============    ===========     ============
Receivable due from stockholders                        $    166,200    $    181,000    $    282,002    $    626,002
                                                        ===========     ============    ===========     ============
Common stock issued for issuance costs                  $       --      $         --    $    100,000    $    100,000
                                                        ===========     ============    ===========     ============
Common stock and warrants issued as part
of the Periodontix transaction                          $       --      $  7,145,747    $         --    $  7,145,747
                                                        ===========     ============    ===========     ============
</TABLE>

See accompanying notes.

                                       F-6



                                                                         Page 40
<PAGE>

                                  Demegen, Inc.
                          (A Development Stage Company)

                          Notes to Financial Statements

                               September 30, 2002


1. HISTORY AND NATURE OF THE BUSINESS

Demeter BioTechnologies, Ltd. was formed after the July 27, 1992 acquisition of
the assets of The Demeter Corporation by Excelsior Capital Corporation
("Excelsior"). Excelsior was incorporated in Colorado on September 16, 1987.
Excelsior acquired all the assets of The Demeter Corporation in exchange for
6,625,821 shares of Excelsior's $.001 par value common stock. The Demeter
Corporation's assets consisted of intangible assets related to various
biotechnology applications in the fields of human and animal health care,
agriculture, and commercial chemicals.

For accounting purposes, the acquisition was treated as a reverse acquisition
whereby The Demeter Corporation acquired Excelsior Capital Corporation. The
historical financial statements prior to the acquisition are those of The
Demeter Corporation utilizing the capital structure of Excelsior. However, The
Demeter Corporation had no operating activities from the date of inception,
December 6, 1991 through July 27, 1992. Likewise, Excelsior had no operating
activities prior to December 6, 1991.

On September 18, 1998, the Board of Directors of the Company ratified the
shareholder vote changing the Company's name from Demeter BioTechnologies, Ltd.
to Demegen, Inc. (the "Company").

The Company is considered a development stage company for financial statement
disclosure purposes because the Company is devoting substantially all of its
efforts to establishing new products.

The Company is a biopharmaceutical company which develops natural and novel
peptides for the treatment of infectious diseases. The primary drugs under
development target significant markets for which there are few, if any,
satisfactory alternatives. These include treatment for oral candidiasis, a
disease prevalent in HIV patients, a treatment for Pseudomonas in CF Patients, a
disease that can be fatal to children, and a treatment for mucositis, a common
side effect of chemotherapy or radiation therapy. During Fiscal 2001 the Company
acquired substantially all the assets of Periodontix, Inc., another peptide
therapeutic company. For accounting purposes the acquisition was accounted under
the "purchase method" of accounting.

The Company is subject to the risks associated with emerging technology-oriented
companies. Primary among these risks are the ability to obtain sufficient
financing, competition from substitute products and the ability to successfully
develop and market its products. As of September 30, 2002, the Company has an
accumulated deficit of $28,366,000. In addition, the Company has a working
capital deficiency of $987,000 as of September 30, 2002 and has used $210,000 of
cash for operations during fiscal 2002.

For the year ended September 30, 2002, the Company incurred a loss of $1,272,000
and due to the lack of liquidity, substantially all of the employees are no
longer in the employ of the Company.

The Company historically has obtained its working capital through equity
issuances to shareholders, royalty payments and from certain borrowing
arrangements. Management has plans in Fiscal 2003 to issue additional equity to
shareholders and to obtain additional funding support from grants and product
development partners. Should these plans not be successful, there is substantial
doubt about the Company's ability to continue as a going concern through the
year ending September 30, 2003.

The financial statements do not include any adjustments relating to the
recoverability and classification of assets or the amount and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern. The Company's continued existence is dependent upon its ability
to generate sufficient cash flows from equity financing and successfully
concluding additional license agreements.

                                       F-7
                                                                         Page 41
<PAGE>
                                  Demegen, Inc.
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consists principally of currency on hand, demand
deposits at commercial banks, and liquid investment funds having a maturity of
three months or less at the time of purchase.

COMMON STOCK ISSUED FOR OTHER THAN CASH

Services purchased and other transactions settled in the Company's common stock
are recorded at the estimated fair value of the stock issued if that value is
more readily determinable than the fair value of the consideration received.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives (generally three to five
years) of the individual assets. Depreciation expense amounted to $68,498,
$71,178 and $64,134 during 2002, 2001 and 2000, respectively. Additionally, in
fiscal 2002 a $93,027 provision was made to reduce the value of property and
equipment to net realizable value.

INTANGIBLE ASSETS

In fiscal 2000 Intangible assets include patent costs and purchased license
agreements and were stated at cost, net of accumulated amortization. With the
unanticipated termination of the Dow AgroSciences agreement in October 2001, all
Intangible assets that were originally being recovered through the cash flow
associated with the agreement were adjusted to net realizable value with a
$177,785 charge against income for the year ended September 30, 2001. As of
September 30, 2002, the remaining net intangible assets of $30,382 were
written-off due to significant under performance relative to the expected
operating results. The write-off is presented separately within the Statement of
operations.

GRANT AND OTHER INCOME

Grant income is not recognized until received as the grants did not include any
penalties, successful outcomes clauses or refunding provisions.

During fiscal years 2001, the Company received grant proceeds of $400,000 to
expand efforts to develop therapeutics to treat cancer. The funds were
recognized as revenue upon receipt as the contracts do not contain any
penalties, successful outcomes clauses or refunding provisions. License revenue
is recognized as revenue upon receipt, except for those that contain contractual
provisions that require the Company to provide services or the attainment of
certain goals, in those cases, the revenues is deferred as unearned revenue
until these penalties, clauses or provisions are met.

The Company received $27,882 in fiscal 2000 under research agreements with the
National Institute of Health and the National Science Foundation. Revenue was
recognized as the research funds were expended.

                                       F-8
                                                                         Page 42
<PAGE>
                                  Demegen, Inc.
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

LICENSE AND SUPPORT

License fees are recognized at the time that the agreement is entered into as
the earning process is complete and the Company has no future performance
obligations. Support fees are recognized ratably over the contract period as the
related costs are incurred.

STOCK-BASED COMPENSATION

The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No.
123"). SFAS No. 123 permits the Company to continue accounting for stock-based
compensation as set forth in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB Opinion No. 25"), provided the
Company discloses the pro forma effect on net income and earnings per share of
adopting the full provisions of SFAS No. 123. Accordingly, the Company continues
to account for stock-based compensation under APB Opinion No. 25 and has
provided the required pro forma disclosures.

3. NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations," which eliminated the pooling of interest method of
accounting for all business combinations initialed after June 30, 2001 and
addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination. The Company adopted this
accounting standard for business combinations initiated after June 30, 2001.

The Company adopted SFAS 142, "Goodwill and Other Intangible Assets," effective
July 1, 2001 and the Periodontix transaction was accounted for under SFAS 141
and 142. SFAS 142 addresses the financial and accounting and reporting standards
for the acquisition of intangible assets outside of a business combination and
for goodwill (of which the Company has not recognized such intangible asset) and
other intangible assets subsequent to their acquisition. This accounting
standard requires that goodwill be separately disclosed from other intangible
assets in the statement of financial position, and no longer be amortized but
tested for impairment on a periodic basis. The provisions of this accounting
standard also require the completion of a transitional impairment test within
six months of adoption, with any impairments identified treated as a cumulative
effect of a change in accounting principle.

In August 2002, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which supersedes SFAS No. 121 and provides a
single accounting model for long-lived assets to be disposed of. The new rules
significantly change what would have to be met to classify an asset as held for
sale. In addition, more dispositions will qualify for discontinued operations
treatment in the income statement as the criteria for discontinued operation
presentation is changed to a component of the business rather than a segment of
the business. The Company will be required to apply SFAS No. 144 as of October
1, 2003.

SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," addresses financial accounting and reporting for costs associated
with exit or disposal activities and requires that a liability for a cost
associated with an exit or disposal activity be recognized at fair value when
the liability is incurred, rather than at the date of an entity's commitment to
an exit plan. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initialed after December 31, 2002, with early application
encouraged. The Company does not expect that the impact will be material.

4. INCOME TAXES

The Company accounts for income taxes using the liability method.

                                       F-9
                                                                         Page 43
<PAGE>
                                  Demegen, Inc.
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)

4. INCOME TAXES (CONTINUED)

Significant components of the Company's deferred tax asset at September 30, 2002
and 2001, are as follows:

<TABLE>
<CAPTION>
                                                2002              2001
                                            -----------       -----------
<S>                                         <C>               <C>
*  Compensation expense on unexercised
     stock options                          $   411,000       $   567,980
*  NOL carryforwards                          8,729,600         5,370,799
*  Excess book amortization/expense of
         Impaired assets                         59,400         2,802,828
*  Other                                          7,813             7,813
                                            -----------       -----------
        Total deferred tax asset              9,207,813         8,749,420

   Valuation allowance                       (9,207,813)       (8,749,420)
                                            -----------       -----------
   Net deferred tax assets                  $         0       $         0
                                            ===========       ===========
</TABLE>

Net operating losses totaling approximately $22,973,000 are currently available
and begin to expire in 2007.

A valuation allowance has been provided for the entire deferred tax asset amount
until such time that the Company demonstrates the ability to produce taxable
income.

5. PRIVATE PLACEMENT OF SECURITIES

During the third quarter of Fiscal 2001, the Company made a private placement of
its securities to institutional and other accredited investors raising $1.28
million of which $0.181 million was in the form of future services recognized in
equity as subscription receivable and are recognized over the life of the
respective agreements, with the remainder of $1.09 million in cash. The private
placement resulted in the sale of 2.543 million restricted shares of Common
Stock and warrants to purchase an additional 2.543 million shares of the
Company's Common Stock.

The investors were offered one unit at $0.50 per unit. Each unit consisted of
one share of restricted common stock and a warrant to purchase one share of the
Company's Common Stock for $0.75 per share. The warrant expires the earlier of
May 31, 2006 or 60 days after a call by the Company. The Company may call the
warrants at any time, provided that the price of the Company's common stock has
been in excess of $1.50 per share for each of the twenty consecutive trading
days immediately preceding the date of the call. Upon receipt of the call,
warrant holders shall have sixty days to elect to exercise all or a portion of
the warrants.

Pricing of the securities was determined based on several factors, including
reference to market price of the Company's Common Stock, the holding period
requirement of restricted stock, and the Company's need for additional funding
for development of pharmaceutical products.

During the second quarter of Fiscal 2000, the Company closed on a private
placement of its securities to institutional and other accredited investors
raising $2.65 million of which $0.28 million was in the form of future services,
which are presented in equity as "Subscription Receivable" and are recognized
over the life of the respective agreements, with the remainder of $2.4 million
in cash. The private placement resulted in the sale of 5.56 million restricted
shares of common stock and warrants to purchase an additional 5.56 million
shares of the Company's common stock.

The investors were offered one unit at $0.50 per unit. Each unit consisted of
one share of restricted common stock and a warrant to purchase one share of the
Company's common stock for $0.75 per share. The warrant expires the earlier of
March 31, 2005 or 60 days after a call by the

                                      F-10
                                                                         Page 44
<PAGE>
                                  Demegen, Inc.
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)

5. PRIVATE PLACEMENT OF SECURITIES (CONTINUED)

Company. The Company may call the warrants at any time after March 31, 2001,
provided that the price of the Company's common stock has been in excess of
$1.50 per share for each of the forty consecutive trading days immediately
preceding the date of the call. Upon receipt of the call, warrant holders shall
have sixty days to elect to exercise all or a portion of the warrants.

6. REDEEMABLE CONVERTIBLE PREFERRED STOCK

In June 1998, the Company issued 4,444,444 shares of redeemable convertible
preferred stock ("preferred stock") and warrants for net proceeds of $1,943,873
(net of $56,127 of expenses incurred in connection with the issuance). Of the
total proceeds $497,000 was allocated to warrants as the estimated fair value
and $1,022,222 was allocated to the conversion feature associated with the
preferred stock and classified as additional paid-in capital. In June 1998, the
entire discount was immediately accreted back to the preferred stock and treated
as a dividend as the preferred shares are immediately convertible into common
stock at the option of the preferred shareholder.

The holders of the preferred stock are entitled to receive, when, as and if
declared by the Board of Directors, out of funds legally available therefore,
dividends at the rate of $0.036 per share, semiannually, on each outstanding
share of convertible preferred stock. Such dividends have a priority over any
dividends paid on the common stock. Dividends on the preferred stock are
cumulative and the right to such dividends shall accrue to holders of
convertible preferred stock until declared by the Board of Directors. The
Company has accounted for the cumulative semiannual dividends through periodic
accretion to the preferred stock.

In the event of any liquidation, dissolution, or winding up of the Company, the
holders of preferred stock shall be entitled to receive the greater of $0.45 per
share, plus all unpaid and accrued dividends thereon, or the amount the holder
of the shares of the preferred stock would otherwise be entitled to receive had
each such share been converted into common stock immediately prior to such
liquidation, dissolution or wind-up.

Each share of preferred stock is convertible at any time, at the option of the
holder thereof, into an equal number of fully paid and nonassessable shares of
common stock. In addition, if at any time the Company shall effect a firm
commitment underwritten public offering of shares of common stock in which the
aggregate price paid for such shares by the public shall be at least $8,000,000,
then effective immediately before the closing of the sale of such shares by the
Company pursuant to such public offering, all outstanding shares of preferred
stock shall automatically convert to common stock.

The shares of preferred stock shall be redeemable at the election of the holder
upon at least ninety days notice to the Company. The Company shall redeem from
the holder on or at any time after May 31, 2003, 2004, and 2005, up to one-third
of the shares of preferred stock held by the holder, with the intent that,
should the holder elect, at any time after May 31, 2005, the total number of
shares held by the holder would be subject to redemption. The preferred stock to
be redeemed shall be paid for in cash at an amount equal to the greater of (i)
$0.45 per share plus, in the case of each share, an amount equal to all accruing
unpaid dividends (whether or not declared), or (ii) such amount per share as
would have been payable had each such share been converted to common stock
immediately prior to the actual date of redemption.

The shares of preferred stock vote on matters on an as-converted basis; i.e.,
each share of preferred stock has one vote, as do each owner of a share of
common stock.

The holder of the preferred stock has a warrant to purchase 4,965,556 shares of
common stock of the Company at $0.45 per share. The warrant shall be
exercisable, in whole or in part, through June 14, 2008. The Company may call
the warrant at any time after December 31, 1998, provided the Company's common
stock has been in excess of $1.50 per share for each of the forty consecutive
trading days immediately preceding the date of the call.

                                      F-11
                                                                         Page 45
<PAGE>
                                  Demegen, Inc.
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)

6. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)

Upon receipt of the call, the call holder shall have sixty days to elect to
exercise all or a portion of this warrant and up to two years to pay for such
shares. Upon such exercise, in addition to receiving the number of shares of
common stock to which the holder shall be entitled, the holder of the warrant
also shall receive a new warrant ("replacement warrant"). The replacement
warrant shall be exercisable for one share of common stock for every two shares
of common stock purchased in response to the aforementioned call. The exercise
price of the replacement warrant is $1.50 per share, and the term of the
replacement warrant shall be the longer of two years from the date of the
issuance or the balance of the original term of the warrant.

7. STOCK OPTIONS AND WARRANTS

The Company granted stock options to certain employees and directors during the
years ended September 30, 2001 and 2000 at exercise prices which approximated or
exceeded fair value at the date of grant. The majority of the stock options
issued in the year ended September 30, 2000 were issued in connection with the
retention of the Chief Operating Officer-Pharmaceutical Products. Exclusive of
the aforementioned stock options, the majority of the stock options issued in
the year ending September 30, 2000 vest over time (up to 3 years).

A summary of the Company's stock option activity is as follows:

<TABLE>
<CAPTION>
                                                          OPTIONS OUTSTANDING
                                           ----------------------------------------------------
                                                                    WEIGHTED         WEIGHTED
                                                                    AVERAGE          AVERAGE
                                           NUMBER OF SHARES      EXERCISE PRICE     FAIR VALUE
                                           ----------------      --------------     ----------
<S>                                        <C>                   <C>                <C>
Balance at September 30, 1999                  5,145,000             $0.15            $0.46
                                           ================      ==============     ==========
Options granted during year                    2,275,000             $0.63            $0.79
                                           ----------------      --------------     ----------
Balance at September 30, 2000                  7,420,000             $0.30            $0.56
                                           ================      ==============     ==========
Granted                                          992,500             $0.75            $0.83
Options exercised for common stock              (125,000)            $0.05            $0.75
                                           ----------------      --------------     ----------
Balance at September 30, 2001                  8,287,500             $0.36            $0.59
                                           ================      ==============     ==========
Forfeited                                     (2,327,500)            $0.66            $0.74
Options exercised for common stock            (2,150,000)            $0.08            $0.49
                                           ----------------      --------------     ----------
Balance at September 30, 2002                  3,810,000             $0.33            $0.55
                                           ================      ==============     ==========
</TABLE>

As of September 30, 2002 and 2001, 3,547,918 and 5,996,687, respectively, of the
options were vested and exercisable.

Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
options pricing model with the following weighted average assumptions for fiscal
2001, and 2000: risk-free interest rate of 6%; dividend yield of 0%; volatility
factors of the expected market price of the Company's common stock of 1.43 and
1.49 respectively, and a weighted average expected option life of five years. No
stock options were issued in fiscal 2002

Had the compensation cost of the Company's stock option plans been determined
based on the fair value at the date of grant for awards in 2002, 2001 and 2000
consistent with the provisions of SFAS No. 123, the Company's net loss would
have been increased to the pro forma amounts indicated below:

                                      F-12
                                                                         Page 46
<PAGE>
                                  Demegen, Inc.
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)

7. STOCK OPTIONS AND WARRANTS (CONTINUED)


<TABLE>
<CAPTION>
                                                           YEAR ENDED SEPTEMBER 30
                                                2002                2001                 2000
                                           --------------      --------------       --------------
<S>                                        <C>                 <C>                  <C>
Net loss available to common stock:
   As reported                             $   (1,551,541)     $  (10,775,034)      $   (1,920,415)
   Pro forma                               $   (1,551,541)     $  (11,340,598)      $   (2,058,313)

Basic and diluted earnings per share:
   As reported                             $        (0.03)     $        (0.29)      $        (0.06)
   Pro forma                               $        (0.03)     $        (0.31)      $        (0.07)
</TABLE>


At September 30, 2002 and 2001, there were outstanding warrants to purchase
8,185,879 shares of the Company's common stock at an exercise price of $0.75 per
warrant (refer to Note 5 for additional information). Those warrants which were
sold with the common shares in the private placements in fiscal 2001 and 2000
and were valued at $890,050 ($0.35 per warrant) and $790,004 ($0.14 per
warrant), respectively. Additionally, the holder of the preferred stock holds a
warrant to purchase common stock (refer to Note 6 for additional information),
Periodontix holds a warrant to purchase common stock at $1.25 per share. (refer
to Note 12 for additional information) and an unrelated party holds a warrant to
purchase 200,000 shares of the Company's common stock at an exercise price of
$1.00 per warrant.

8. NOTE PAYABLE

In December 1999, the Company received $150,000 from a local foundation to fund
program related research. The loan matures on February 28, 2005 with a balloon
payment due at that time. The loan is at an interest rate of 5% with interest
due February 28 of each year. The loan is currently in default due to the
non-payment of the annual interest payment due February 28, 2002. The entire
note payable has been classified as a current liability.

The Company has a note payable totaling $170,560 as of September 30, 2002 which
is payable at $3,500 monthly at an interest rate of 6%. Payments under this
agreement began in March 2000 and will extend until August 2007.

9. COMMITMENTS

The Company leases its office and laboratory facilities in Pittsburgh under a
month-to-month lease at a monthly rental of $3,948.

During 2002, 2001 and 2000, the Company incurred rent expense totaling $134,444,
$153,124 and $56,830, respectively.

During 1997, the Company entered into a license agreement with a university to
obtain certain patent rights. In exchange for the license of the patents, the
Company issued common stock. The value assigned to the patents was based upon
management's estimate of the fair value of the stock issued. In addition, the
Company is obligated to pay certain royalties under the terms of the agreement
for each licensed product. The agreement requires minimum royalty payments to
maintain the license of the patents. The Company paid $25,000 in royalty
payments pursuant to this agreement in 2001.

10. ARBITRATION SETTLEMENT

In December 1997, the Company entered into a license agreement with Mycogen
Corporation, which was subsequently acquired by Dow AgroSciences whereby the
Company licensed substantially all rights for disease prevention and treatment
for agricultural applications. The agreement was amended on October 11, 1998 to
provide Dow AgroSciences with an additional license for the Company's
agricultural nutrition technologies.

On October 31, 2001 Dow AgroSciences had notified the Company that it was
exercising its right to terminate the license agreements it has with the
Company. In December 2001, the Company commenced

                                      F-13
                                                                         Page 47
<PAGE>
                                  Demegen, Inc.
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)

10. ARBITRATION SETTLEMENT (CONTINUED)

an arbitration proceeding against Dow AgroSciences for damages the Company's
management alleged that it sustained as a result of Dow AgroSciences' alleged
failure to perform certain contractual obligations under one of the license
agreement that was terminated by Dow AgroSciences on October 31, 2001. The above
settlement agreement concluded the arbitration.

On June 17, 2002 Dow AgroSciences and the Company entered into an agreement
which settled certain claims by both parties relating to the license agreements
the Company had with Dow AgroSciences.

As part of the agreement, Dow AgroSciences paid the Company $650,000 as final
research payments and partial reimbursement of legal expenses, reimbursed the
arbitrator's fees, paid the Company's attorneys' fees in this matter and paid
the remaining unreimbursed patent legal costs under the license agreement.
Additionally, the Company issued 550,000 shares of the Company's restricted
common stock to the Company's attorneys in this matter. This settlement resulted
in income, net of related arbitration expenses, of $617,000 to the Company.

11. NET LOSS PER COMMON SHARE

The following table sets forth the computation of basic and diluted earnings per
share:

<TABLE>
<CAPTION>
                                                             YEAR ENDED SEPTEMBER 30
                                                     2002               2001               2000
                                                  ----------         ----------         ----------
<S>                                             <C>                <C>                <C>
Numerator:
   Net loss                                     $ (1,272,091)      $(10,503,075)      $ (1,655,482)
   Preferred stock dividends and accretion
     amounts                                        (279,450)          (271,959)          (264,933)
                                                ------------       ------------       ------------
   Numerator for basic loss per
     share--income available to common
     stockholders                                 (1,551,541)       (10,775,034)        (1,920,415)

Denominator:
   Denominator for basic and loss per
     share--weighted average shares               45,713,461         37,163,279         29,759,153
                                                ------------       ------------       ------------
Basic and diluted loss per share                $      (0.03)      $      (0.29)      $      (0.06)
                                                ============       ============       ============
</TABLE>


At September 30, 2002, the Company had 3,547,918 vested options (3,810,000
outstanding) for the purchase of the Company's Common Stock at exercise prices
ranging from $0.05 per share to $0.75 per share. Additionally, the 4,444,444
shares of Redeemable Convertible Preferred Stock are convertible into the
Company's Common Stock on a 1 for 1 basis. Furthermore, the holder of the
Redeemable Convertible Preferred Stock holds a warrant for 4,965,556 shares of
the Company's Common Stock at an exercise price of $0.45 per share. The
purchasers of Common Stock in the 2001 and 2000 Private Placements received
aggregate warrants for 8,185,879 shares of the Company's common Stock at an
exercise price of $0.75 per share. Periodontix received warrants for 9,000,000
shares of the Company's common Stock at an exercise price of $1.25 per share and
an unrelated third party holds a warrant for 200,000 shares of the Company's
common Stock at an exercise price of $1.00 per share. These potentially dilutive
securities were not included in the calculation of dilutive earnings per share
because the effect would be anti-dilutive.

12. ACQUISITION

Effective January 1, 2001 the Company entered into a definitive license
agreement with an option to purchase with Periodontix, Inc for all of their
technologies and rights in related clinical trials, except for Periodontix'
photodynamic technology. In evaluating Periodontix a number of attractive
attributes were identified that were not generally visible. Because of its name,
Periodontix appeared to be focused just on dental applications - gingivitis and
periodontitis.

                                      F-14

                                                                         Page 48
<PAGE>
                                  Demegen, Inc.
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)

12. ACQUISITION (CONTINUED)

The transaction was structured under a short-term license agreement to permit
the Company a period of time to evaluate Periodontix's technology and obtain the
necessary funds to support the additional research, prior to exercising the
purchase option. The terms of the agreement were as follows:

-        On December 15, 2000, the Company made a $50,000 good faith
         non-refundable payment to Periodontix.

-        During February 2001, the Company issued Periodontix 2.3 million
         restricted shares of the Company's Common Stock and warrants to
         purchase up to 2.3 million Common Shares of the Company's Common Stock
         at an exercise price of $1.25 per share. The Warrants have a five-year
         term and are callable by the Company if the price of the Company's
         Common Stock trades above $2.50 per share for twenty consecutive
         trading days.

-        On April 2, 2001, Periodontix received the second issuance under the
         license agreement of 2 million restricted shares of the Company's
         Common Stock and warrants to purchase up to 2 million Common Shares of
         the Company's Common Stock at an exercise price of $1.25 per share. The
         Warrants have a five year term and are callable by the Company if the
         price of the Company's Common Stock trades above $2.50 per share for
         twenty consecutive trading days.

-        On July 16, 2001, under the license agreement, the Company exercised
         its option to purchase the aforementioned technologies, free and clear
         of all liens and to terminate the license by the issuance of 4.7
         million restricted shares of the Company's Common Stock and warrants to
         purchase up to 4.7 million Common Shares of the Company's Common Stock
         at an exercise price of $1.25 per share. The Warrants have a five year
         term and are callable by the Company if the price of the Company's
         Common Stock trades above $2.50 per share for twenty consecutive
         trading days.

-        On January 1, 2001 the Company hired selected Periodontix employees to
         facilitate the clinical trials and other tasks related to the license
         period.

-        Beginning January 1, 2001 the Company agreed to pay Periodontix for
         rent and utilities at their office and other operating costs.

-        As part of the license fee, the Company paid $175,000 to Periodontix on
         April 2, 2001 and was obligated to make a second $175,000 payment to
         Periodontix on December 1, 2001. The payment has not been made and is
         included in Accounts Payable on the Balance Sheet.

The initial (February 2001) license payment of restricted common stock and
warrants issued to Periodontix was valued at $2.7 million and along with the
$0.05 million deposit made in December 2000 were classified as Deferred
Licensing Fees and were amortized over the seven month term of the license.

The second (April 2001) license payment of restricted common stock and warrants
issued to Periodontix was valued at $1.78 million and along with the two $0.175
million payments that the Company is obligated to make were classified as
Deferred Licensing Fees and were amortized over the remaining four month term of
the license.

The final (July 2001) license payment of restricted common stock and warrants
issued to Periodontix was valued at $2.66 million. Additionally, $0.09 million
of capital leases were assumed.

For accounting purposes the acquisition was accounted under the "purchase
method" of accounting. The purchase price was allocated as follows, based upon
an independent valuation:

<TABLE>
<S>                                         <C>
Fixed Assets                                $   82,386
In-Process Research and Development          2,641,953
Patents                                         31,162
</TABLE>


                                      F-15
                                                                         Page 49
<PAGE>
                                    Demegen, Inc.
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)

12. ACQUISITION (CONTINUED)

The In-Process research and development was written-off in the year ended
September 30, 2001 as technological feasibility of the in-process technologies
so acquired had not been achieved and no alternative future use had been
established.

The following unaudited pro forma condensed operating statements for the years
ended September 30, 2001 and 2000 assume that the acquisitions were consummated
on October 1, 2000 and 1999, respectively. Their results are not necessarily
indicative of those results that would have occurred had the acquisition
actually been made on October 1, 2000 or of the future operations of the
combined companies:

<TABLE>
<CAPTION>
                                                              Years ended September 30,
                                                               2001                2000
                                                           ------------       ------------
<S>                                                        <C>                <C>
Income                                                     $  1,156,004       $    948,765
Expenses                                                     12,163,578         12,944,915
                                                           ------------       ------------
Net Loss                                                    (11,007,574)       (11,996,150)

Preferred Dividend & Accretion Amount                          (271,959)          (264,933)
                                                           ------------       ------------
Net loss applicable to common shares                       $(11,279,533)      $(12,261,083)
                                                           ============       ============

Net loss per common shares                                 $      (0.27)      $      (0.32)
                                                           ============       ============
Weighted average shares outstanding                          42,454,245         38,759,153
                                                           ============       ============
</TABLE>

The pro forma results for the year ended September 30, 2001 and 2000, included
$4,848,000 of amortization of the license with Periodontix and $2,642,000 for
the write-off of acquired in-process research and development.

13. NOTES RECEIVABLE

During March 2002, in conjunction with the exercise of options, the Company sold
1,700,000 shares of common stock to Mr. Ekstrom at purchase prices of $0.05 to
$0.15 per share. Recourse (to the general assets of the borrower) promissory
notes in the amount of $145,000 were to be issued in conjunction with this sale,
however this has not occurred. The amount of $51,000 in the financial statements
represents the fair value of the shares as of September 30, 2002. The difference
between the $145,000 due and the current carrying value, has been treated as
additional compensation. The notes were to include a repayment option due one
year after the sale of the related shares at an interest rate of 6%. If the
shares are donated to charity, the Company will waive repayment of that portion
of the notes and interest which relate to the donated shares. This transaction
has been accorded variable accounting treatment.

Additionally, during March 2002, in conjunction with the exercise of options,
the Company sold 450,000 shares of common stock to a former executive of the
Company at a purchase price of $0.05 per share. In the fiscal quarter ending
June 30, 2002, the former executive of the Company paid $10,000 against his
liability with $12,500 remaining payable to the Company at September 30, 2002.

                                      F-16


                                                                         Page 50
<PAGE>
                                  Demegen, Inc.
                          (A Development Stage Company)

                    Notes to Financial Statements (continued)

14. SUBSEQUENT EVENT (UNAUDITED)

On December 20, 2002, the Company and the Chief Executive Officer entered into a
Termination and Consulting Agreement whereby the Chief Executive Officer was
terminated effective December 31, 2002 and entered into a consulting agreement
with the Company. Services related to the consulting agreement will be
reimbursed on an hourly basis plus normal expenses incurred. The Company will
expense $90,000 related to the Chief Executive Officer's employment agreement
for severance in the first fiscal quarter of 2003 but payment will be deferred
until the Company is sold or dissolved or otherwise has the ability to pay.

                                      F-17


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