SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
(Mark One)

    [X]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934

           For the fiscal year ended JULY 31, 2000

                                       OR

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

           For the transition period from ____________ to ____________


                          Commission file No. 000-23399

                      FLEMINGTON PHARMACEUTICAL CORPORATION
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

            Delaware                                     22-2407152
  -------------------------------           ------------------------------------
  (State or other jurisdiction of           (I.R.S. Employer Identification No.)
   incorporation or organization)

31 State Highway 12 Flemington, New Jersey                  08822
------------------------------------------                ----------
 (Address of principal executive offices)                 (Zip Code)


Registrant's telephone number, including area code: (908) 782-3431


Securities registered pursuant to Section 12(b) of the Act:  NONE


Securities registered pursuant to Section 12(g) of the Act:
                     COMMON STOCK, PAR VALUE $.001 PER SHARE
                     REDEEMABLE CLASS A COMMON STOCK PURCHASE WARRANTS EXPIRING
                      NOVEMBER 18, 2002.

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the 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 there is no disclosure of delinquent filings pursuant to Item
405 of Regulation S-K contained herein, 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. [X].

         State the issuer's revenues for its most recent fiscal year: $326,000.

         The aggregate market value of the voting and non-voting common equity
of the registrant held by non-affiliates of the registrant at October 27, 2000
was approximately $6,420,837 based upon the closing sale price of $1.50 for the
Registrant's Common Stock, $.001 par value, as reported by the National
Association of Securities Dealers OTC Bulletin Board on October 27, 2000.

         As of October 27, 2000 the Registrant had 5,881,237 shares of Common
Stock, $.001 par value, outstanding.

<PAGE>

                      FLEMINGTON PHARMACEUTICAL CORPORATION

                          ANNUAL REPORT ON FORM 10-KSB
                     FOR THE FISCAL YEAR ENDED JULY 31, 2000

                                TABLE OF CONTENTS

                                                                          Page
                                                                          ----
                                     PART I
Item 1.    Business                                                         4
Item 2.    Properties                                                      27
Item 3.    Legal Proceedings                                               27
Item 4.    Submission of Matters to a Vote of Security Holders             28
Item 4A.   Non-director Executive Officers                                 28

                                     PART II

Item 5.    Market for the Registrant's Common Stock and Related
           Security Holder Matters                                         29
Item 6.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations                                       30
Item 7.    Financial Statements                                            33
Item 8.    Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure                                        33

                                    PART III

Item 9.    Directors and Executive Officers of the Registrant              33
Item 10.   Executive Compensation                                          33
Item 11.   Security Ownership of Certain Beneficial Owners and Management  34
Item 12.   Certain Relationships and Related Transactions                  34

                                     PART IV

Item 13.   Exhibit List and Reports on Form 8-K                            34

                              FINANCIAL STATEMENTS

           Report of Independent Auditors                                  F-1
           Balance Sheet                                                   F-2
           Statements of Operations                                        F-3
           Statements of Changes in Stockholders' Equity                   F-4
           Statements of Cash Flows                                        F-5
           Notes to Financial Statements                                   F-6

                                                                               2
<PAGE>

                                     PART I

ITEM 1.  BUSINESS.

GENERAL

         Flemington Pharmaceutical Corporation, a Delaware corporation (the
"Company" or the "Registrant"), is engaged in consulting activities and the
development of novel application drug delivery systems for presently marketed
prescription and over-the-counter ("OTC") drugs. The Company's (both patented
and patent-pending) delivery systems are lingual sprays and soft gelatin bite
capsules, enabling drug absorption through the oral mucosa and more rapid
absorption into the bloodstream than presently available oral delivery systems.
The Company's proprietary oral dosage delivery systems enhance and greatly
accelerate the onset of the therapeutic benefits which the drugs are intended to
produce. The Company refers to its delivery systems as Immediate-Immediate
Release (I2RTM) because its delivery systems are designed to provide therapeutic
benefits within minutes of administration. The Company's development efforts for
its novel drug delivery systems are concentrated on drugs which are already
available and proven in the marketplace. In addition to increasing
bioavailability by avoiding metabolism by the liver before entry into the
bloodstream, the Company believes that its proprietary delivery systems offer
the following significant advantages: (i) improved drug safety profile by
reducing the required dosage, including possible reduction of side-effects; (ii)
improved dosage reliability; (iii) allowing medication to be taken without
water; and (iv) improved patient convenience and compliance.

         In light of the material expense and delays associated with
independently developing and obtaining approval of pharmaceutical products, the
Company will continue to seek to develop such products through collaborative
arrangements with major pharmaceutical companies, which will fund that
development. The Company is presently a party to one such development agreement
with a pharmaceutical company. Due to the Company's small revenue base, low
level of working capital and inability to increase the number of development
agreements with pharmaceutical companies, the Company has been unable to
aggressively pursue its product development strategy. The Company will require
significant additional financing and/or a strategic alliance with a well-funded
development partner to undertake its business plan. See "Management Discussion
and Analysis."

         Since its inception in 1982, the Company has been a consultant to the
pharmaceutical industry, focusing on product development activities of various
European pharmaceutical companies, and since 1992 has used its consulting
revenues to fund its own product development activities. The Company's recent
focus on developing its own products evolved naturally out of its consulting
experience for other pharmaceutical companies. Substantially all of the
Company's revenues have been derived from its consulting activities. In 1998,
the Company changed the name under which it performs its consulting activities
from Pharmaconsult to FPC Consulting. The Company's principal business address
is 31 State Highway 12, Flemington, New Jersey, 08822, and its telephone number
is (908) 782-3431.

                                                                               3
<PAGE>

FORWARD LOOKING STATEMENTS

         When used in this report, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend" and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 regarding events, conditions and financial
trends that may affect the Company's future plans of operations, business
strategy, operating results and financial position. Current stockholders and
prospective investors are cautioned that any forward-looking statements are not
guarantees of future performance and are subject to risks and uncertainties and
that actual results may differ materially from those included within the
forward-looking statements as a result of various factors. Such factors are
described under the headings "Business-Certain Considerations", "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and Notes thereto.

RECENT DEVELOPMENTS


PRIVATE PLACEMENT.

         In April 2000, the company successfully closed a placement of 2,000,000
shares of its common stock, par value $.001 per share, at a per share price of
$.50. The Company received net proceeds of approximately $984,000.

FILING OF TWO ESTRADIOL INDS AND INITIATION OF PHASE II STUDIES

         In mid-1999, as part of its joint development agreement with Nace
Resources, (see Development Agreements, below), the Company completed its open
label clinical pilot study of its Estradiol lingual spray product. In the
opinion of the Company, the results of the study were favorable. The Company
believes that the product would be appropriate for premenstrual migraine, for
treatment of hot flashes in post- and perimenopausal women and as a long-term,
low-dose, low side-effect treatment of post-menopausal symptoms. . A Pre-IND
meeting with FDA was held in the third quarter of 2000 and, based on the results
of that meeting, a plan for further development was prepared. Two INDs were
subsequently filed -- one for vasomotor symptoms and a second for treatment of
menstrual migraines. Both INDs were approved in 2000. Under the vasomotor IND a
pilot study was started to see if rapid relief of hot flushes could be obtained
with the lingual spray. The study results are expected in the fourth quarter
2000. A pilot study under the second IND is planned to start in the forth
quarter 2000 and to complete in the first quarter of 2001. The Company is
presently engaged in discussions with potential partners which would fund the
further development of the product and the necessary regulatory filings.

PROGESTERONE LINGUAL SPRAY

         This product is being developed as part of the agreement with CLL and
is intended to treat the symptoms of progesterone deficiency. The formulation
work was completed, which was carried out by the Company and CLL, and stability
and clinical supplies were manufactured in fourth quarter 1999. The pilot

                                                                               4
<PAGE>

clinical study was carried out in early 2000. The results of this pilot clinical
study supported the concept of fast and efficient relief of the symptoms
associated with progesterone deficiency. A Pre-IND meeting with FDA was held in
the third quarter of 2000 and based on the results of that meeting a plan for
further development was prepared. CLL and the Company are seeking development
partners to finance the further work associate with filing an NDA and bringing
this product to market.

DOXYLAMINE SUCCINATE LINGUAL SPRAY

         The Company has developed a formulation and performed stability studies
for doxylamine succinate as a sleep-inducing agent. The Company is conducting a
pilot clinical study. If the results of the study support the use of the product
as a fast-onset OTC sleep inducer, a IND will be filed, and several
pharmaceutical companies will be approached to assist in further development.
The earliest time that the Company could reasonably expect to have a
commercially salable product in this category is early 2002

LORATADINE LINGUAL SPRAY

         A loratadine lingual spray formulation has been developed and
successfully undergone stability testing. A Pre-IND meeting with FDA was held in
the third quarter of 2000 and based on the results of that meeting a plan for
further development was prepared. An IND is planned for the fourth quarter of
2000 with pharmacokinetic studies to start in the first quarter of 2001.

CLEMASTINE LINGUAL SPRAY

         The formulation of clemastine lingual spray that was terminated by
Novartis in 1998 was revised and a Pre-IND meeting with FDA was held in the
third quarter of 2000. Based on the results of that meeting a plan for further
development was prepared and an IND was filed. A pilot nasal challenge efficacy
study was initiated in the second quarter of 2000 and will be completed in the
fourth quarter of 2000. This study tests the relative response of subjects
challenged with allergy producing substances to an OTC tablet (1.34 mg) and a
lingual spray dose of 0.68 mg. The antihistamine was administered 15 minutes
prior to the challenge.

INSULIN LINGUAL SPRAY

         Subsequent to an agreement with PolyMASC, a subsidiary of Valintis (see
Agreements below), formulation development was started in the third quarter of
2000 to formulate their proprietary modified insulin molecule into the Company's
lingual spray. The modified insulin has a polyethylene glycol molecule attached
in a way that the insulin activity is maintained but the product should be more
slowly degraded by enzymes in the blood.

REPLACEMENT LINGUAL SPRAY

         Subsequent to an agreement with Innovex, a partner of Novartis (see
Agreements below), formulation development was started in the third quarter of
2000 to formulate a replacement lingual spray for one of their products.
Formulation work has been completed and the samples for the planned
pharmacokinetic study are undergoing stability testing.

                                                                               5
<PAGE>

LOAN TO CHIEF EXECUTIVE OFFICER

         In April 1998, the Company made a $60,000 loan to its president and CEO
in exchange for a 7% demand promissory note (the "Executive Note"). Accrued
interest (which totaled $4,200 for fiscal 2000) is to be paid quarterly. As of
September 1, 2000, all interest payments on the Executive Note were current.

DEVELOPMENT AGREEMENTS

         In November 1996, the Company entered into an Agreement with Altana
Inc. ("Altana"), a U.S. subsidiary of Altana GmbH, under which the Company
agreed to prepare for Altana an Abbreviated New Drug Application ("ANDA") for
the Company's patent-pending lingual spray for treatment of angina. Under the
terms of the Agreement, Altana will, upon approval of the product by the FDA,
market the product in the U.S., and source all of its related product
requirements from the Company. The Company was paid a consulting fee for
preparation of the ANDA. In March 1998, the FDA refused to accept the ANDA for
filing. Subsequently, the Company and Altana met with representatives of FDA and
agreed upon a plan for the Company to file an NDA under Section 505(1)(b)(2) of
the Act, together with two agreed-upon small clinical trials. Altana has agreed
to fund those trials and to pay the Company a consulting fee in connection with
its preparation of the NDA and its oversight of the trials.

         In February 1998, the Company entered into two joint development
agreements with CLL Pharmaceuticals, of Nice, France ("CLL") and Nace Resources,
Inc. (now Nace Pharma) of Highland Park, Illinois ("Nace") for the development
of various products using the Company's delivery technologies. Under the terms
of such agreements, the Company, CLL and Nace, respectively, will conduct a
series of pilot studies (at the parties' joint expense) to validate the efficacy
of the various products being tested. If the Company and its partners are
satisfied with the results of a particular pilot study, the parties will seek a
license to fund further trials to support applications with the FDA and foreign
regulatory agencies. Under such agreements, the Company will conduct the
clinical trials and file all approval applications, and the Company and its
partners will share equally in the expenses and profits (if any) arising from
such arrangements. The first products identified for development studies are
progesterone and estradiol for CLL and Nace, respectively. During 1999 the
estradiol clinical study was completed to the satisfaction of the Company and
Nace. During 2000, laboratory development of the clinical supplies for the
progesterone product and the pilot clinical study were completed with results
satisfactory to the Company and CLL.

         In February 2000, the Company entered into a joint development
agreements with PolyMASC, a subsidiary of Valentis, to formulate their
proprietary modified insulin molecule into the Company's lingual spray. The
modified insulin has a polyethyleneglycol molecule attached in a way that the
insulin activity is maintained but enzymes in the blood more slowly degrade the
product. Formulation development was started in the third quarter of 2000.

                                                                               6
<PAGE>

         In 2000, the company entered into a joint development agreement with
Innovex who is marketing certain of the Novartis products to develop a lingual
spray formulation of one of those products. Formulation work has been completed
and the samples for the initial pilot pharmacokinetic study are presently
undergoing stability testing,

2000 ANNUAL MEETING OF STOCKHOLDERS

         The Company will hold the 2000 Annual Meeting of Stockholders ("Annual
Meeting") on Thursday January 4, 2001 for the following purposes: (i) to elect
four (4) Directors to the Board of Directors to serve until the 2001 Annual
Meeting of Shareholders or until their successors have been duly elected or
appointed and qualified; (ii) to ratify the appointment of Wiss & Company, LLP
as the Company's independent certified public accountants for the fiscal year
ending July 31, 2000; and (iii) to consider and take action upon such other
business as may properly come before the Annual Meeting. The Board of Directors
fixed the close of business on November 16, 2000, as the record date for
determining the shareholders entitled to notice of, and to vote at, the Annual
Meeting.

BUSINESS STRATEGY

         The Company's strategy is to concentrate its product development
activities primarily on those pharmaceuticals for which there already are
significant prescription and OTC sales, where the use of the Company's
innovative delivery systems will greatly enhance speed of onset of therapeutic
effect, reduce side effects through a reduction of the amount of active drug
substance required to produce a given therapeutic effect, and improve patient
convenience or compliance.

         In light of the material expense and delays associated with
independently developing and obtaining approval of pharmaceutical products, the
Company will continue to seek to develop such products through collaborative
arrangements with major pharmaceutical companies, which will fund that
development. The Company is presently a party to such a development agreement
with Altana. The Company's lack of working capital has impaired its ability to
pursue its strategy. See "Management Discussion and Analysis."

                                                                               7
<PAGE>

PATENTED AND PATENT PENDING DELIVERY SYSTEMS

         The Company has patent applications pending for two oral dosage
delivery systems, the Lingual (Oral) Spray and the Soft Gelatin Bite Capsule,
for which FDA approval is not a prerequisite for patent approval. The expected
year of marketability will vary depending upon the specific drug product with
which the delivery system will be utilized. Each individual use of the delivery
system will require registration and/or approval with the FDA prior to
marketability, and the amount of regulatory oversight required by the FDA will
also depend on the specific type of drug product for which the delivery system
is implemented. The following are descriptions of the two oral dosage delivery
systems for which patent applications are either granted or pending:

         LINGUAL (ORAL) SPRAY. The Company's aerosol and pump spray formulations
release the drug in the form of a fine mist into the mouth for immediate
absorption into the bloodstream via the mucosal membranes. The Company believes
that this delivery system offers certain advantages, including improving the
safety profile of certain drugs by lowering the required dosage, improving dose
reliability, and allowing medication to be taken without water. Drug absorption
through the mucosal membranes of the mouth is rapid and minimizes the first-pass
metabolism effect (i.e., total or partial inactivation of a drug as it passes
through the gastrointestinal tract and liver).

         SOFT GELATIN BITE CAPSULE. The Company's soft gelatin bite capsule
formulation consists of a seamless gelatin shell surrounding a core substance
(usually a liquid solution). When crushed or chewed, the soft gelatin bite
capsule releases medication into the mouth, thereby allowing absorption through
the oral mucosa. The portion of the dose that is eventually swallowed is
introduced to the stomach in a solution ready for immediate absorption, thereby
maximizing absorption from the gastrointestinal tract into the bloodstream. The
result is rapid onset of the desired therapeutic effect.

PROPOSED PRODUCTS

         The Company's proposed products described below are subjected to
laboratory testing and stability studies and tested for therapeutic comparison
to the originators' products by qualified laboratories and clinics. To the
extent that two drug products with the same active ingredients are substantially
identical in terms of their rate and extent of absorption in the human body
(bioavailability), they are considered bioequivalent. If the accumulated data
demonstrates bioequivalency, submission is then made to the FDA (through the
filing of an ANDA) for its review and approval to manufacture and market. If the
accumulated data demonstrates that there are differences in the two drugs' rate
and extent of absorption into the human body, or if it is intended to make
additional or different claims regarding therapeutic effect for the newly
developed product, submission is made to the FDA via a NDA for its review and
approval under Section 505(1)(b)(2) or Section 505(b)(2) of the FDC Act. An NDA
submitted under these sections of the FDC Act are generally less complex than an
ordinary NDA and are usually acted upon by FDA in a shorter period of time. It
is the Company's expectation that the majority of its products in development
will require the filing of these shorter versions of an NDA because the products
are known chemical entities, but the Company or its licensees will be making new
claims as to therapeutic effects or lessened side effects, or both.

                                                                               8
<PAGE>

         The Company estimates that development of new formulations of
pharmaceutical products, including formulation, testing and obtaining FDA
approval, generally takes three to five years for the ANDA process. Development
of products requiring additional clinical studies under Section 505(b)(2) NDAs,
may take four to seven years. There can be no assurance that the Company's
determinations will prove to be accurate or that pre-marketing approval relating
to its proposed products will be obtained on a timely basis, or at all. See
"Government Regulation."

         The Company's initial proposed products fall into the following
therapeutic classes:

o    ESTRADIOL LINGUAL SPRAY

         Several new "non-estrogen" products have recently been introduced to
treat osteoporosis without the associated side effects of estrogens. Due to the
non-estrogen nature of these products, the Company believes that patients often
experience "hot-flashes" and find it difficult to maintain the required dosage
regimen. The lingual spray is intended to relieve the "hot-flashes" within
minutes, which, the Company believes, will allow such patients to maintain the
required dosage regimen more easily. The Company has completed preformulation
development of this product, and has manufactured and packaged supplies for
stability and clinical studies. The pilot clinical study was completed in
mid-1999 and the Company considers the results of that study to be favorable. A
Pre-IND meeting with FDA was held in the third quarter of 2000 and based on the
results of that meeting a plan for further development was prepared. Two INDs
were subsequently filed -- one for vasomotor symptoms and a second for treatment
of menstrual migraines. Both INDs were approved in 2000. Under the vasomotor IND
a pilot study was started to see if rapid relief of hot flushes could be
obtained with the lingual spray. The study results are expected in the fourth
quarter 2000. A pilot study under the second IND is planned to start in the
forth quarter 2000 and to complete in the first quarter of 2001.

o    PROGESTERONE LINGUAL SPRAY

         This product is being developed as part of the agreement with CLL and
is intended to treat the symptoms of progesterone deficiency. The formulation
work was completed, which was carried out by the Company and CLL, and stability
and clinical supplies were manufactured in second quarter 1999. The pilot
clinical study was carried out in early 2000. The results of this pilot clinical
study supported the concept of fast relief of the symptoms associated with
progesterone deficiency. A Pre-IND meeting with FDA was held in the third
quarter of 2000 and based on the results of that meeting a plan for further
development was prepared. CLL and the Company are seeking development partners
to finance the further work associated with filing an NDA and bringing this
product to market.

o    (DOXYLAMINE SUCCINATE LINGUAL SPRAY

         The Company has developed a formulation and performed stability studies
for doxylamine succinate as a sleep-inducing agent. The Company is conducting a
pilot clinical study. If the results of that study support the use of the
product as a fast-onset OTC sleep inducer a IND will be filed, and several
pharmaceutical companies will be approached to assist in the further
development. The earliest time that the Company could reasonably expect to have
a commercially salable product in this category is early 2002.

                                                                               9
<PAGE>

o    CARDIOVASCULAR (NITROGLYCERIN)

         The Company's Nitroglycerin product has been formulated and stability
testing has been completed. A United States patent was issued in 1999. This
product is subject to a license agreement with Altana. See " -- Recent
Developments." A pre-IND meeting has been held with the FDA and a program for
clinical trials has been tentatively agreed upon with the FDA. The company is
presently manufacturing clinical samples to be used in the two studies required.
After stability studies an IND is planned for the first quarter of 2001 and an
NDA by the end of 2001.

o    Loratadine Lingual Spray

         A loratadine lingual spray formulation has been developed and
successfully undergone stability testing. A Pre-IND meeting with FDA was held in
the third quarter of 2000 and based on the results of that meeting a plan for
further development was prepared. An IND is planned of the fourth quarter of
2000 with pharmacokinetic studies to start in the first quarter of 2001.

o    Clemastine Lingual Spray

         The formulation of clemastine lingual spray that was terminated by
Novartis in 1998 was revised and a Pre-IND meeting with FDA was held in the
third quarter of 2000. Based on the results of that meeting a plan for further
development was prepared and an IND was filed. A pilot nasal challenge efficacy
study was initiated in the second quarter of 2000 and will be completed in the
fourth quarter of 2000. This study tested the relative response of subjects
challenged with allergy producing substances to an OTC tablet (1.34 mg) and a
lingual spray dose of 0.68 mg. The antihistamine was administered 15 minutes
prior to the challenge.

o    Insulin Lingual Spray

         Subsequent to an agreement with PolyMASC, a subsidiary of Valintis,
formulation development was started in the third quarter of 2000 to formulate
their proprietary modified insulin molecule into the Companies lingual spray.
The modified insulin has a polyethylene glycol molecule attached in a way that
the insulin activity is maintained but the product is more slowly degraded by
enzymes in the blood.


MARKETING AND DISTRIBUTION

         The Company intends, generally, to license products developed with its
technology to drug companies already selling such drug substances under their
own brand names, or to market its products to pharmaceutical wholesalers, drug
distributors, drugstore chains, hospitals, United States governmental agencies,
health maintenance organizations and other drug companies. It is anticipated
that promotion of the Company's proposed products will be characterized by an

                                                                              10
<PAGE>

emphasis on their distinguishing characteristics, such as dosage form and
packaging, as well as possible therapeutic advantages of such products. The
Company will seek to position its proposed products as alternatives or as line
extensions to brand-name products. The Company believes that to the extent that
the Company's formulated products are patent-protected, such formulations may
offer brand-name manufacturers the opportunity to expand their product lines.
Alternatively, products which are not patented may be offered to brand-name
manufacturers as substitute products after patent protection on existing
products expire.

         Inasmuch as the Company does not have the financial or other resources
to undertake extensive marketing activities, the Company generally intends to
seek to enter into marketing arrangements, including possible joint ventures or
license or distribution arrangements, with third parties. The Company believes
that such third-party arrangements will permit the Company to maximize the
promotion and distribution of its products while minimizing the Company's direct
marketing and distribution costs. Other than the Company's aforementioned
agreements for the Company's proposed lingual spray products for angina, the
Company has not entered into any agreements or arrangements with respect to the
marketing of its proposed products and there can be no assurance that it will do
so in the future. There can be no assurance that the Company's proposed products
can be successfully marketed.

         Strategies relating to marketing of the Company's other proposed
formulated products have not yet been determined; these will be formulated in
advance of anticipated completion of development activities relating to the
particular formulated product. The Company has no experience in marketing or
distribution of its proposed proprietary products, and the Company's ability to
fund such marketing activities will require the Company to raise additional
funds and/or consummate a strategic alliance or combination with a well-funded
business partner.

MANUFACTURING

         The Company has entered into agreements with various European
pharmaceutical manufacturers, regarding the manufacture of certain of the
Company's products in spray and gelatin bite capsule dosage forms. The Company
will purchase all of its clinical and commercial requirements for its proposed
products from such manufacturers, at a price to be negotiated by the parties.

         It is anticipated that the Company will arrange with third-party
suppliers for supplies of active and inactive pharmaceutical ingredients and
packaging materials used in the manufacture of the Company's proposed products.
It is the Company's present intent to seek to enter into similar manufacturing
arrangements for other products to be developed by it in the future.

         The manufacture of the Company's pharmaceutical products will be
subject to current Good Manufacturing Processes ("cGMP") prescribed by the FDA,
and pre-approval inspections by the FDA and foreign authorities prior to the
commercial manufacture of any such products. See "Government Regulation" and
"Raw Materials and Suppliers."

                                                                              11
<PAGE>

         In addition, the raw materials necessary for the manufacture of the
Company's products will, in all likelihood, be purchased by the Company from
suppliers in the United States, Europe and Japan and delivered to its
manufacturers' facilities by such suppliers. Accordingly, the Company and its
manufacturers may be subject to various import duties applicable to both
finished products and raw materials and may be affected by various other import
and export restrictions as well as other developments impacting upon
international trade. These international trade factors will, under certain
circumstances, have an impact both on the manufacturing cost (which will, in
turn, have an impact on the cost to the Company of the manufactured product) and
the wholesale and retail prices of the products to be manufactured abroad. To
the extent that transactions relating to the foreign manufacture of the
Company's proposed products and purchase of raw materials involve currencies
other than United States dollars (e.g., Swiss francs and German marks), the
operating results of the Company will be affected by fluctuations in foreign
currency exchange rates.

RAW MATERIALS AND SUPPLIERS

         The Company believes that the active ingredients used in the
manufacture of its proposed pharmaceutical products are presently available from
numerous suppliers located in the United States, Europe and Japan. Generally,
certain raw materials, including inactive ingredients, are available from a
limited number of suppliers and certain packaging materials intended for use in
connection with the Company's lingual spray products may be only available from
sole source suppliers. Although the Company believes that it will not encounter
difficulties in obtaining the inactive ingredients or packaging materials
necessary for the manufacture of its products, there can be no assurance that
the Company or its manufacturers will be able to enter into satisfactory
agreements or arrangements for the purchase of commercial quantities of such
materials. The failure to enter into agreements or otherwise arrange for
adequate or timely supplies of principal raw materials and the possible
inability to secure alternative sources of raw material supplies could have a
material adverse effect on the ability to manufacture formulated products.

         Development and regulatory approval of the Company's pharmaceutical
products are dependent upon the Company's ability to procure active ingredients
and certain packaging materials from FDA-approved sources. Since the FDA
approval process requires manufacturers to specify their proposed suppliers of
active ingredients and certain packaging materials in their applications, FDA
approval of a supplemental application to use a new supplier would be required
if active ingredients or such packaging materials were no longer available from
the specified supplier, which could result in manufacturing delays. Accordingly,
the Company will seek to locate alternative FDA approved suppliers.

                                                                              12
<PAGE>

RESEARCH AND DEVELOPMENT

         During fiscal 2000, 1999 and 1998, respectively, the Company spent
$400,000, $268,000, and $290,000 on product research and development. Such
figures include salary and associated payroll expenses. In future periods,
assuming the Company raises additional funds and/or consummates a strategic
alliance or combination with a well-funded business partner, the Company intends
to continue to spend significant and greatly increasing amounts, to develop its
products.

GOVERNMENT REGULATION

         The development, manufacture and commercialization of pharmaceutical
products are generally subject to extensive regulation by various federal and
state governmental entities. The FDA, which is the principal United States
regulatory authority, has the power to seize adulterated or misbranded products
and unapproved new drugs, to request their recall from the market, to enjoin
further manufacture or sale, to publicize certain facts concerning a product and
to initiate criminal proceedings. As a result of federal statutes and FDA
regulations, pursuant to which new pharmaceuticals are required to undergo
extensive and rigorous testing, obtaining pre-market regulatory approval
requires extensive time and expenditures.

         Under the FDC Act, a new drug may not be commercialized or otherwise
distributed in the United States without the prior approval of the FDA. The FDA
approval process relating to a new drug differs, depending on the nature of the
particular drug for which approval is sought. With respect to any drug product
with active ingredients not previously approved by the FDA, a prospective drug
manufacturer is required to submit a NDA, including complete reports of
pre-clinical, clinical and laboratory studies to prove such product's safety and
efficacy. The NDA process generally requires, before the submission of the NDA,
submission of an IND pursuant to which permission is sought to begin preliminary
clinical testing of the new drug. An NDA based on published safety and efficacy
studies conducted by others may also be required to be submitted for a drug
product with a previously approved active ingredient, if the method of delivery,
strength or dosage is changed. Alternatively, a drug having the same active
ingredients as a drug previously approved by the FDA may be eligible to be
submitted under an ANDA, which is significantly less stringent than the NDA
approval process.

         While the ANDA process requires a manufacturer to establish
bioequivalence to the previously approved drug, it permits the manufacturer to
rely on the safety and efficacy studies contained in the NDA for the previously
approved drug.

         The NDA approval process generally requires between four to seven years
from NDA submission to pre-marketing approval, although in the case of an NDA
submitted pursuant to Section 505(1)(b)(2) of the Act this time frame may be
significantly shorter. By contrast, the ANDA process permits an expedited FDA
review pursuant to which pre-marketing regulatory approval can generally be
obtained in three to five years. The ANDA process is available for drugs with
the same active ingredients, dosage form, strength and method of delivery as a
product which has previously received FDA approval pursuant to the NDA process.
Manufacturing information, including a review of chemical and physical data,
stability data, facilities and processes, must also be evaluated by FDA before
approval.

                                                                              13
<PAGE>

         The Company believes that products developed in lingual spray and soft
gelatin bite capsule delivery systems (dosage forms) usually will require
submission of an NDA.

         The Company estimates that the development of new formulations of
pharmaceutical products, including formulation, testing and obtaining FDA
approval, generally takes three to five years for the ANDA process and four to
seven years for the NDA process, although NDAs submitted under Section
505(1)(b)(2) or Section 505(b)(2) are generally less complex than an ordinary
NDA and are usually acted upon by the FDA in a shorter period of time. There can
be no assurance that the Company's determinations will prove to be accurate or
that pre-marketing approval relating to its proposed products will be obtained
on a timely basis, or at all. The FDA application procedure has become more
rigorous and costly and the FDA currently performs pre-approval and periodic
inspections of each finished dosage form and each active ingredient.

         The manufacture of the Company's pharmaceutical products will be
subject to cGMP prescribed by the FDA, pre-approval inspection by the FDA and
foreign authorities prior to the commercial manufacture of such products and
periodic cGMP compliance inspection by the FDA. The Company's European
manufacturers will be required to be in compliance with cGMP with respect to the
manufacture of the Company's products. There can be no assurance that the
Company's manufacturers will be deemed to be in compliance with cGMP with
respect to any particular product. To the extent that the Company's
manufacturers are deemed not to be in compliance with cGMP, there can be no
assurance that the Company will be able to enter into other suitable
manufacturing arrangements with third parties which are in compliance with cGMP.

COMPETITION

         The markets which the Company intends to enter are characterized by
intense competition. The Company will be competing against established
pharmaceutical companies which currently market products which are equivalent or
functionally similar to those the Company intends to market. Prices of drug
products are significantly affected by competitive factors and tend to decline
as competition increases. In addition, numerous companies are developing or may,
in the future, engage in the development of products competitive with the
Company's proposed products. The Company expects that technological developments
will occur at a rapid rate and that competition is likely to intensify as
enhanced delivery system technologies gain greater acceptance. Additionally, the
markets for formulated products which the Company has targeted for development
are intensely competitive, involving numerous competitors and products. The
Company will seek to enhance its competitive position by focusing its efforts on
its novel dosage forms.

PATENTS AND PROTECTION OF PROPRIETARY INFORMATION

         The Company has applied for United States and foreign patent protection
for the delivery systems which are the primary focus of its development
activities as well as the delayed contact allergy topical formulations. Three
United States patents have been issued and other applications are pending. There

                                                                              14
<PAGE>

can be no assurance, however, that any additional patent applications will be
granted, or, if granted, will provide any adequate protection to the Company.
The Company also intends to rely on whatever protection the law affords to trade
secrets, including unpatented know-how. Other companies, however, may
independently develop equivalent or superior technologies or processes and may
obtain patent or similar rights with respect thereto.

         Although the Company believes that its technology has been developed
independently and does not infringe on the patents of others, there can be no
assurance that the technology does not and will not infringe on the patents of
others. In the event of infringement, the Company or its European manufacturers
could, under certain circumstances, be required to modify the infringing process
or obtain a license. There can be no assurance that the Company or its European
manufacturers would be able to do either of those things in a timely manner or
at all, and failure to do so could have a material adverse effect on the Company
and its business. In addition, there can be no assurance that the Company will
have the financial or other resources necessary to enforce or defend a patent
infringement or proprietary rights violation action. If any of the products
developed by the Company infringe upon the patent or proprietary rights of
others, the Company could, under certain circumstances, be enjoined or become
liable for damages, which would have a material adverse effect on the Company.

         The Company also relies on confidentiality and nondisclosure
arrangements with its licensees and potential development candidates. There can
be no assurance that other companies will not acquire information which the
Company considers to be proprietary. Moreover, there can be no assurance that
other companies will not independently develop know-how comparable to or
superior to that of the Company.

         BUCCAL NONPOLAR SPRAY OR CAPSULE. On April 12, 1996 the Company filed
an application with the United States Patent and Trademark Office ("PTO") for
protection of this subject matter. On September 1, 1998 the PTO allowed the
claims directed to sprays, but rejected the claims directed to the capsules. In
October 1998 the Company dropped the capsule claims from this application, to
pursue allowance and issuance of a patent directed to the spray claims. On
October 21, 1999 the PTO issued a patent to the Company on the spray claims. The
Company is considering either abandoning or re-filing the claims directed to the
capsule in a continuing application. In October 1998, the Company filed a patent
application in Canada for the buccal nonpolar spray claims.

         On February 21, 1997, the Company filed an application under the Patent
Cooperation Treaty ("PCT") for the above-subject matter. The International
Preliminary Examination Authority has issued an opinion in which the PCT
examiner determined that the subject matter of the invention while novel, is not
inventive for obviousness. This opinion, with which the Company disagrees, is
not dispositive, however, it may be highly persuasive in subsequent proceedings
in the European and individual national patent offices should the Company decide
to proceed in these jurisdictions. The Company's right to pursue this claim with
the PCT expired on October 12, 1998. The Company has made individual filings for
patent protection in Canada and Europe and recently received an office action
from the European Patent Office. In light of this recent action, the Company is
not confident that this patent application will ultimately be granted.

                                                                              15
<PAGE>

         BUCCAL POLAR SPRAY OR CAPSULE. On November 25, 1998, the Company filed
an application in the PTO directed to the buccal polar spray or capsule. The PTO
has allowed the claims directed to sprays, but rejected the claims directed to
the capsules. The Company dropped the capsule claims from this application, to
pursue allowance and issuance of a patent directed to the spray claims and
subsequently the PTO issued a patent to the Company on the spray claims. The
Company is considering either abandoning or re-filing the claims directed to the
capsule in a continuing application. In October 1998, the Company filed a patent
application in Canada for the buccal nonpolar spray claims.

         On February 21, 1997 the Company filed a PCT application directed to
the foregoing subject matter. The situation with respect to this subject matter
is the same as that of the counterpart PCT application directed to buccal
nonpolar spray or capsule discussed above. The Company has made individual
filings for patent protection in Canada and Europe.

         BUCCAL NONPOLAR SPRAY FOR NITROGLYCERIN. On April 12, 1996, the Company
filed an application in the PTO directed to the above subject matter. On August
5, 1998 the PTO allowed claims to the above subject matter, and a patent was
issued in February 1999. On February 21, 1997 the Company filed a PCT
application directed to the above subject matter. The situation with respect to
this application is the same as that for the PCT application directed to buccal
nonpolar sprays and capsules. European counterpart applications have been filed.

         GENERAL COMMENT WITH RESPECT TO THE FOREGOING PCT APPLICATIONS. The
Company is interested in obtaining patent protection in Europe and Canada. It is
to be expected that the same examiner who examined these applications as a PCT
examiner will be the examiner who will handle these applications in the European
"National" Phase. Hence, the Company anticipates that in the case of the
European applications, it may be necessary to appeal to the Board of Appeals in
Munich. At the present time, it is not possible to accurately predict the
expenses involved in pursuing the foregoing applications. However, expenses may
exceed $100,000 (in the aggregate for all three applications) before a final
disposition is obtained. The Company expects this process to take between two
and four years.

         BUCCAL/POLAR/NONPOLAR SPRAYS OR CAPSULE (DIFFERENT MEDICAMENTS AS
ABOVE). An application was filed with the PCT on October 1, 1997 designating a
large number of possible countries including the United States. This application
differs from the first two applications above in that it utilizes different
ingredients. The search phase has been initiated and a partial search report has
been received. The situation with respect to this subject matter is the same as
that of the counterpart PCT application directed to buccal nonpolar spray or
capsule discussed above. The Company has made individual filings for patent
protection in USA, Japan, Canada, and Europe.

         ANTIHISTAMINE SYRUP AND OINTMENT. On November 10, 1997 the Company
filed an application with the U.S. PTO for protection of its antihistamine syrup
and ointments. A technology to be utilized in the company's proposed poison ivy
product. In October 1998, the PTO rejected the application for this product, and
the Company is currently evaluating whether to further pursue this claim. A
response has been filed to the patent examiner's comments, and the Company is
awaiting a reply.

                                                                              16
<PAGE>

PRODUCT LIABILITY

         The Company may be exposed to potential product liability claims by
consumers. The Company does not presently maintain product liability insurance
coverage. Although the Company will seek to obtain product liability insurance
prior to the commercialization of any products, there can be no assurance that
the Company will obtain such insurance or, if obtained, that any such insurance
will be sufficient to cover all possible liabilities. In the event of a
successful suit against the Company, insufficiency of insurance coverage could
have a material adverse effect on the Company. In addition, certain food and
drug retailers require minimum product liability insurance coverage as a
condition precedent to purchasing or accepting products for retail distribution.
Failure to satisfy such insurance requirements could impede the ability of the
Company or its distributors to achieve broad retail distribution of its proposed
products, which would have a material adverse effect upon the business and
financial condition of the Company.

CUSTOMER DEPENDENCE

         Since inception, substantially all of the Company's revenues have been
derived from consulting activities primarily in connection with product
development for various pharmaceutical companies. Among other things, the
Company works with its European clients to obtain regulatory approvals for new
drug formulations in the United States. For the year ended July 31, 2000,
consulting activities relating to the Company's three (3) largest clients
accounted for approximately 27%, 18% and 9% respectively, of the Company's
revenue. For the year ended July 31, 1999, consulting activities relating to the
Company's three largest clients accounted for approximately19%, 14% and 10%
respectively, of the Company's revenue. For the year ended July 31, 1998
consulting activities relating to the Company's two largest clients accounted
for approximately 25%, 21% and 21% respectively, of the Company's revenue.

EMPLOYEES

         The Company currently has eight (8) full-time employees, five (5) of
whom are executive officers of the Company, and one (1) of whom is engaged in
administrative functions. The success of the Company will be dependent in part,
upon its ability to hire and retain additional qualified sales and distribution
personnel, however, there can be no assurance that the Company will be able to
hire or retain such necessary personnel.

CERTAIN CONSIDERATIONS

         This Form 10-KSB, other documents of the Company and statements made by
members of management of the Company, in each case, may contain forward-looking
statements which involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in such forward-looking
statements. Factors that might cause such a difference include the following:

                                                                              17
<PAGE>

         ACCUMULATED DEFICIT AND OPERATING LOSSES; ANTICIPATED CONTINUING
LOSSES; LIMITED WORKING CAPITAL. The Company had an accumulated deficit at July
31, 2000 of approximately $4,414,000. The Company incurred operating losses in
five of the last six fiscal, years ended July 31 including a net loss of
approximately $1,179,000 for the year ended July 31, 2000. Because the Company
increased its product development activities, the Company anticipates that it
will incur substantial operating expenses in connection with continued
development, testing and approval of its proposed products, and expects these
expenses will result in continuing and, perhaps, significant operating losses
until such time, if ever, that the Company is able to achieve adequate product
sales levels.

         DEPENDENCE ON PRINCIPAL CLIENTS. To date, substantially all of the
Company's revenues have been derived from consulting services rendered to a
limited number of clients, the loss of certain of which would have an adverse
effect on the Company. For the year ended July 31, 2000, consulting activities
relating to the Company's two (2) largest clients, with which the Company has
written agreements, accounted for approximately 27%, and 18% respectively, of
the Company's revenues. There can be no assurance that the Company's clients
will continue to seek consulting services from the Company or that the Company
will continue to provide consulting services to the industry. See "-- - Customer
Dependence."

         EVOLVING NATURE OF BUSINESS; ENTRY INTO PRODUCT-BASED BUSINESS.
Although the Company has received revenue from its own product development
activities, these revenues are insignificant as compared to the Company's
revenues from product development consultation work done for its clients. The
nature of the Company's revenue received from its own product development
consists of payments by pharmaceutical companies for research and
bioavailability studies, pilot clinical trials, and similar milestone-related
payments. Subject to additional funding, the Company expects to continue its
consulting activities despite increasing its product development activities. The
future growth and profitability of the Company will be dependent upon the
Company's ability to successfully raise additional funds to complete the
development of, obtain regulatory approvals for, and license out or market, its
own proposed products. Accordingly, the Company's prospects must be considered
in light of the risks, expenses and difficulties frequently encountered in
connection with the establishment of a new business in a highly competitive
industry, characterized by frequent new product introductions. The Company
anticipates that it will incur substantial operating expenses in connection with
the development, testing and approval of its proposed products and expects these
expenses to result in continuing and, perhaps, significant operating losses
until such time, if ever, that the Company is able to achieve adequate levels of
sales or license revenues. There can be no assurance that the Company will be
able to raise additional financing, increase revenues significantly, or achieve
profitable operations.

                                                                              18
<PAGE>

         SIGNIFICANT CAPITAL REQUIREMENTS FOR PRODUCT DEVELOPMENT AND
COMMERCIALIZATION. The Company has a significant capital requirement necessary
to fund planned expenditures in connection with the research, development,
testing and approval of its proposed products. The Company anticipates, based on
its current proposed plans and assumptions relating to its operations (including
the timetable of, and costs associated with, new product development), that the
proceeds of the November 1997 public offering ("Public Offering"), its 2000
Private Placement and projected cash flow from operations will be sufficient to
satisfy its contemplated cash requirements for approximately 2 months from the
date hereof. Due to the Company's small revenue base, low level of working
capital and inability to increase the number of development agreements with
pharmaceutical companies, the Company has been unable to pursue its product
development strategy. The Company will require significant additional financing
and/or a strategic alliance with a well-funded development partner to undertake
its business plan. The Company has no current arrangements with respect to, or
sources of, additional financing, and there can be no assurance that additional
financing will be available to the Company on acceptable terms, if at all.
Pursuant to the Underwriting Agreement, until November 2000 (thirty-six months
from the closing of the Public Offering), the Company may not offer, sell, issue
or transfer its capital stock without the prior written consent of the
Representative. There exist certain exceptions to this prohibition. The Company
reserves the right to challenge certain contractual obligations with the
Representative due to the Representative's current status. In view of the
Company's very limited resources, its anticipated expenses and the competitive
environment in which the Company operates, any inability to obtain additional
financing could severely limit the Company's ability to complete development and
commercialization of its proposed products. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."

         NO COMMERCIALLY AVAILABLE PRODUCTS. The Company's principal efforts are
the development of, and obtaining regulatory approvals for, its proposed
products. The Company anticipates that marketing activities for its proprietary
products, whether by the Company or one or more licensees will not begin until
2002 at the earliest. Accordingly, it is not anticipated that the Company will
generate any revenues from royalties or sales of proprietary products until
regulatory approvals are obtained and marketing activities begin. There can be
no assurance that any of the Company's proposed proprietary products will prove
to be commercially viable, or if viable, that they will reach the marketplace on
the timetables desired by the Company. The failure or the delay of these
products to achieve commercial viability would have a material adverse effect on
the Company. See "- - Proposed Products" and " - Government Regulation."

         PRODUCT DEVELOPMENT AND ACCEPTANCE RISKS. The development of the
Company's proposed products has not been completed and the Company will be
required to devote considerable effort and expenditures to complete such
development. In addition to obtaining adequate financing, satisfactory
completion of development, testing, government approval and sufficient
production levels of such products must be obtained before the proposed products
will become available for commercial sale. The Company does not anticipate
generating material revenue from product sales until perhaps 2002 or thereafter.
Other potential products remain in the conceptual or very early development
stage and remain subject to all the risks inherent in the development of
pharmaceutical products, including unanticipated development problems, and
possible lack of funds to undertake or continue development. These factors could
result in abandonment or substantial change in the development of a specific
formulated product. There can be no assurance that any of the Company's proposed
products will be successfully developed, be developed on a timely basis or be

                                                                              19
<PAGE>

commercially accepted once developed. The inability to successfully complete
development, or a determination by the Company, for financial or other reasons,
not to undertake to complete development of any product, particularly in
instances in which the Company has made significant capital expenditures, could
have a material adverse effect on the Company. See "- - Proposed Products."

         LACK OF DIRECT CONSUMER MARKETING EXPERIENCE; DEPENDENCE ON JOINT
MARKETING ARRANGEMENTS. The Company has no experience in marketing or
distribution at the consumer level of its proposed proprietary products.
Moreover, the Company does not have the financial or other resources to
undertake extensive marketing and advertising activities. Accordingly, the
Company intends generally to rely on marketing arrangements, including possible
joint ventures or license or distribution arrangements with third parties. The
Company has not entered into any significant agreements or arrangements with
respect to the marketing of its proposed products, and there can be no assurance
that it will do so in the future or that any such products can be successfully
marketed. The Company's strategy to rely on third party marketing arrangements
could adversely affect its profit margins. See " - Marketing and Distribution."

         DEPENDENCE ON CONTRACT MANUFACTURING. The Company has agreements with
respect to the manufacture of its initially proposed products with its European
contract manufacturers. Under these agreements the Company is responsible to
obtain required regulatory approvals, begin commercialization within three
months after FDA marketing approval, pay royalties under certain circumstances,
and satisfy certain minimum purchase requirements. Additionally, these
agreements provide for negotiation and annual re-negotiation of terms relating
to per item cost. There can be no assurance that such terms can be negotiated on
terms satisfactory to the Company or that failure to negotiate such terms will
not result in the termination of any such agreement. The failure of the Company
to satisfy its obligations under any of these agreements could result in
modification or termination of such agreement. There can be no assurance that
the Company will have the ability to satisfy all of its obligations under these
agreements, and failure to do so could require the Company to obtain alternative
manufacturing arrangements, which could have an material adverse effect on the
Company. The Company's dependence upon third parties for the manufacture of its
products could have an adverse effect on the Company's profit margins and its
ability to deliver its products on a timely and competitive basis.

         COMPLIANCE WITH GOOD MANUFACTURING PRACTICES. The Company currently
intends to rely on third-party arrangements for the manufacture of its proposed
products. The manufacture of the Company's pharmaceutical products will be
subject to current Good Manufacturing Practices ("cGMP") prescribed by the FDA,
pre-approval inspections by the FDA or foreign authorities, or both, before
commercial manufacture of any such products and periodic cGMP compliance
inspections thereafter by the FDA. There can be no assurance that the Company's
European manufacturers will be able to comply with cGMP or satisfy pre- or
post-approval inspections in connection with the manufacture of the Company's
proposed products. Failure or delay by any such manufacturer to comply with cGMP
or satisfy pre- or post-approval inspections would have a material adverse
effect on the Company. See "-- Manufacturing."

                                                                              20
<PAGE>

         FOREIGN MANUFACTURING AND RELATED RISKS. The Company anticipates that
its initially proposed products will be manufactured by manufacturers at
facilities in the United States, Germany, France and Switzerland. The Company
intends to where necessary to import completed manufactured products into the
United States. In addition, the raw materials necessary for the manufacture of
the Company's products will, in all likelihood, be purchased by the Company from
suppliers in the United States or Europe and delivered to its manufacturers'
facilities by such suppliers. Accordingly, the Company and its manufacturers may
be subject to various import duties applicable to both finished products and raw
materials and may be affected by various other import and export restrictions as
well as other developments impacting upon international trade. These
international trade factors will, under certain circumstances, have an impact
both on the manufacturing cost (which will, in turn, have an impact on the cost
to the Company of the manufactured product) and the wholesale and retail prices
of the products to be manufactured abroad. To the extent that transactions
relating to the foreign manufacture of the Company's proposed products and
purchase of raw materials involve currencies other than United States dollars,
the operating results of the Company will be affected by fluctuations in foreign
currency exchange rates. See "- - Manufacturing."

         SUPPLIER DEPENDENCE. The Company believes that the active ingredients
used in the manufacture of its proposed pharmaceutical products are presently
available from numerous suppliers located in the United States, Europe India and
Japan. The Company believes that certain raw materials, including inactive
ingredients, are available from a limited number of suppliers and that certain
packaging materials intended for use in connection with its spray products
currently are available only from sole source suppliers. Although the Company
does not believe it will encounter difficulties in obtaining the inactive
ingredients or packaging materials necessary for the manufacture of its
products, there can be no assurance that the Company will be able to enter into
satisfactory agreements or arrangements for the purchase of commercial
quantities of such materials. The Company has written supply agreements with
Dynamit Nobel for certain raw materials and with Accra Pac, Inc. (AGP) located
in Elkhart, Indiana for packaging the nitroglycerin lingual spray product. With
respect to other suppliers, the Company operates primarily on a purchase order
basis beyond which there is no contract memorializing the Company's purchasing
arrangements. The failure to enter into agreements or otherwise arrange for
adequate or timely supplies of principal raw materials and the possible
inability to secure alternative sources of raw material supplies could have a
material adverse effect on the Company's ability to arrange for the manufacture
of formulated products. In addition, development and regulatory approval of the
Company's products are dependent upon the Company's ability to procure active
ingredients and certain packaging materials from FDA-approved sources. Since the
FDA approval process requires manufacturers to specify their proposed suppliers
of active ingredients and certain packaging materials in their applications, FDA
approval of a supplemental application to use a new supplier would be required
if active ingredients or such packaging materials were no longer available from
the originally specified supplier, which could result in manufacturing delays.
See "- - Raw Materials and Suppliers."

         COMPETITION. The markets which the Company intends to enter are
characterized by intense competition. The Company or its licensees may be
competing against established pharmaceutical companies which currently market
products which are equivalent or functionally similar to those the Company
intends to market. Prices of drug products are significantly affected by
competitive factors and tend to decline as competition increases. In addition,
numerous companies are developing or may, in the future, engage in the
development of products competitive with the Company's proposed products. The

                                                                              21
<PAGE>

Company expects that technological developments will occur at a rapid rate and
that competition is likely to intensify as enhanced dosage from technologies
gain greater acceptance. Additionally, the markets for formulated products which
the Company has targeted for development are intensely competitive, involving
numerous competitors and products. Most of the Company's prospective competitors
possess substantially greater financial, technical and other resources than the
Company. Moreover, many of these companies possess greater marketing
capabilities than the Company, including the resources necessary to enable them
to implement extensive advertising campaigns. There can be no assurance that the
Company will have the ability to compete successfully. See "- - Competition."

         ABSENCE OF PRODUCT LIABILITY INSURANCE COVERAGE. The Company may be
exposed to potential product liability claims by consumers. The Company
presently maintains no product liability insurance coverage. Although the
Company will seek to obtain product liability insurance before the
commercialization of any proprietary products, there can be no assurance that
the Company will be able to obtain such insurance or, if obtained, that any such
insurance will be sufficient to cover all possible liabilities to which the
Company may be exposed. In the event of a successful suit against the Company,
insufficiency of insurance coverage could have a material adverse effect on the
Company. In addition, certain food and drug retailers require minimum product
liability insurance coverage as a condition precedent to purchasing or accepting
products for retail distribution. Failure to satisfy such insurance requirements
could impede the ability of the Company or its distributors to achieve broad
retail distribution of its proposed products, which could have a material
adverse effect on the Company. None of the Company's European manufacturers have
made any representations as to the safety or efficacy of the products covered by
their agreements or as to any products which may be marketed or used under
rights granted under any such agreements, other than compliance with cGMP and
product specifications. See "- - Product Liability."

         EXTENSIVE GOVERNMENT REGULATION. The development, manufacture and
commercialization of pharmaceutical products is generally subject to extensive
regulation by various federal and state governmental entities. The FDA, which is
the principal United States regulatory authority, has the power to seize
adulterated or misbranded products and unapproved new drugs, to request their
recall from the market, to enjoin further manufacture or sale, to publicize
certain facts concerning a product and to initiate criminal proceedings. As a
result of federal statutes and FDA regulations, pursuant to which new
pharmaceuticals are required to undergo extensive and rigorous testing,
obtaining pre-market regulatory approval requires extensive time and
expenditures. Under the Federal Food, Drug and Cosmetic Act (the "FDC Act"), a
new drug may not be commercialized or otherwise distributed in the United States
without the prior approval of the FDA. The FDA approval processes relating to
new drugs differ, depending on the nature of the particular drug for which
approval is sought. With respect to any drug product with active ingredients not
previously approved by the FDA, a prospective drug manufacturer is required to
submit a new drug application ("NDA"), including complete reports of
pre-clinical, clinical and laboratory studies to prove such product's safety and
efficacy. The NDA process generally requires, before the submission of the NDA,
submission of an IND pursuant to which permission is sought to begin preliminary
clinical testing of the new drug. An NDA, based on published safety and efficacy
studies conducted by others, may also be required to be submitted for a drug

                                                                              22
<PAGE>

product with a previously approved active ingredient if the method of delivery,
strength or dosage form is changed. Alternatively, a drug having the same active
ingredient as a drug previously approved by the FDA may be eligible to be
submitted under an ANDA, which is significantly less stringent than the NDA
approval process. While the ANDA process requires a manufacturer to establish
bioequivalence to the previously approved drug, it permits the manufacturer to
rely on the safety and efficacy studies contained in the DNA for the previously
approved drug. The Company believes that some of its drug products developed in
capsule form will be substantially similar to products which have previously
obtained FDA approval and, accordingly, that approvals for such products can be
obtained by submitting an ANDA. The Company, however, may be required, before
submitting an ANDA, to submit a suitability petition, the purpose of which is to
permit the FDA to evaluate whether a change in strength, dosage form or method
of delivery is significant enough to require clinical trials and, therefore, an
NDA filing. There can be no assurance that the FDA will not require the Company
to conduct clinical trials for such products and otherwise comply with the NDA
approval process. The Company believes that products developed in spray dosage
form will require submission of an NDA. The Company estimates that the
development of new formulations of pharmaceutical products, including
formulation, testing and obtaining FDA approval, generally takes three to five
years for the ANDA process and four to seven years for the NDA process. There
can be no assurance that the Company's determinations will prove to be accurate
or that pre-marketing approval relating to its proposed products will be
obtained on a timely basis, or at all. The failure by the Company to obtain
necessary regulatory approvals, whether on a timely basis, or at all, would have
a material adverse effect on the Company.

         PATENTS AND PROTECTION OF PROPRIETARY INFORMATION. The Company holds a
United States patent covering its formulation for Nifedipine gelatin capsules,
which the Company believes is not material to its operations. The Company has
received three United States patents for its proposed lingual sprays and soft
gelatin drug delivery processes and is pursuing foreign patent protection for
such products. To the extent possible, the Company intends to seek formulation
patent protection or other proprietary rights for those products utilizing the
Company's oral dosage formulations. There can be no assurance, however, that
patents relating to such formulated products or processes will in fact be
granted or, if granted, will provide any proprietary rights adequately
protecting the Company. Other companies may independently develop equivalent or
superior technologies or processes and may obtain patent or similar rights with
respect thereto. Although the Company believes that its technology has been
independently developed and does not infringe on the patents of others, there
can be no assurance that the technology does not and will not infringe on the
patents of others. If a process covered by a United States patent is utilized in
the manufacture of a product in a foreign country, the further manufacture, use
or sale of such products in the United States may constitute an infringement of
the United States patent. In the event of infringement, the Company or its
European manufacturers could, under certain circumstances, be required to modify
the infringing process or obtain a license. There can be no assurance that the
Company or the European manufacturers will be able to do so in a timely manner
or upon acceptable terms and conditions or at all. The failure to do any of the
foregoing could have a material adverse effect on the Company. In addition,
there can be no assurance that the Company will have the financial or other
resources necessary to enforce or defend a patent infringement or proprietary
rights violation action. If any of the products developed by the Company
infringes upon the patent or proprietary rights of others, the Company could,
under certain circumstances, be enjoined or become liable for damages, which
would have a material adverse effect on the Company. See "- - Patents and
Protection of Proprietary Information."

                                                                              23
<PAGE>

         DEPENDENCE ON EXISTING MANAGEMENT. The success of the Company is
substantially dependent on the efforts and abilities of its founder, President
and Chief Executive Officer, Harry A. Dugger, III, Ph.D., the Company's
Chairman, John J. Moroney, Vice Presidents Kenneth E. Cleaver, Ph.D. and Donald
P. Cox, Ph.D., and the Company's Chief Financial Officer, Donald Deitman. Mr.
Moroney is not required to devote full time to the Company. Decisions concerning
the Company's business and its management are and will continue to be made or
significantly influenced by these individuals. The Company has entered into
employment agreements with Mr. Moroney and Drs. Dugger, Cox and Cleaver. See
"MANAGEMENT - Employment Agreements." The loss or interruption of their
continued services would have a materially adverse effect on the Company's
business operations and prospects. See "- Marketing and Distribution" and
"DIRECTORS AND OFFICERS."

         CONTROL BY CURRENT STOCKHOLDERS, OFFICERS AND DIRECTORS. Management and
affiliates of the Company currently beneficially own (including shares they have
the right to acquire) approximately 44.79% of the outstanding Common Stock.
These persons are and will continue to be able to exercise control over the
election of the Company's directors and the appointment of officers, increase
the authorized capital, dissolve, merge or engage the Company in other
fundamental corporate transactions.

         DIVIDEND POLICY. The Company has never declared or paid a dividend on
its Common Stock, and management expects that a substantial portion of the
Company's future earnings will be retained for expansion or development of the
Company's business. The decision to pay dividends, if any, in the future is
within the discretion of the Board of Directors and will depend upon the
Company's earnings, capital requirements, financial condition and other relevant
factors such as contractual obligations. Management, therefore, does not
contemplate that the Company will pay dividends on the Common Stock in the
foreseeable future.

         LIMITED PUBLIC MARKET. There has been a very limited public market for
the Units, the Common Stock and Warrants. Although the Units, Common Stock and
Warrants have been approved for inclusion on the OTC Bulletin Board, the
securities have been thinly traded, and there can be no assurance that a more
fluid trading market for the securities will develop or that, if developed, it
will be sustained. The OTC Bulletin Board is an unorganized, inter-dealer,
over-the-counter market which provides significantly less liquidity than the
Nasdaq Stock market, and quotes for stocks included on the OTC Bulletin Board
are not listed in the financial sections of newspapers as are those for the
Nasdaq Stock Market. Therefore, prices for securities traded solely on the OTC
Bulletin Board may be difficult to obtain and purchasers of the Units may be
unable to resell the securities offered hereby at or near their original
offering price or at any price. See "Possible Adverse Effect of "Penny Stock"
Rules in Liquidity for the Company's Securities."

                                                                              24
<PAGE>

         OUTSTANDING OPTIONS AND WARRANTS. The Company has reserved up to
3,268,000 shares of its Common Stock for issuance upon exercise of stock options
and warrants. Of the reserved shares, a total of 1,500,000 shares have been
reserved and evenly divided among each of the Company's 1992, 1997 and 1998
Stock Option Plans, of which options to purchase an aggregate of 500,000,
500,000 and 500,000 shares have been issued under the respective Plans. Another
800,000 shares are reserved for issuance and available for the options granted
pursuant to the terms of the employment agreements of Mr. Moroney, and Drs.
Dugger, Cox and Cleaver. Further, shares of Common Stock are reserved for
issuance to cover warrants to purchase an aggregate of 100,000 shares of Common
Stock issued to Creative Technologies, Inc. in December 1996. In connection with
the Public Offering, the Company issued 680,000 Class A common stock purchase
warrants (the "Class A Warrants"). Also in connection with the Public Offering,
the Company issued to the Underwriters an option to purchase 68,000 Units
exercisable at $9.74 (165% of the respective public offering price of the Units)
which expire in November, 2001 (the "Underwriters' Options"). In early 2000, the
Company, in connection with the renewal of its financial consulting services
contract with Saggi Capital granted it Warrants to purchase up to 200,000 shares
of the Company's common stock at an exercise price of $1.00 per share.

         The Company agreed with the Underwriters, under certain circumstances,
to register the Shares and the Warrants subject to the Underwriters' Options for
distribution to the public. Exercise of these registration rights could involve
a substantial expense to the Company and could prove a hindrance to future
financings. Exercise of the Underwriters' Options, the Class A Warrants, the
outstanding warrants and stock options, and those which may be granted under the
Stock Option Plans (collectively, the "Convertible Securities"), will reduce the
percentage of Common Stock held by the public stockholders. Further, the terms
on which the Company could obtain additional capital during the life of the
Convertible Securities may be adversely affected, and it should be expected that
the holders of the Convertible Securities would exercise them at a time when the
Company would be able to obtain equity capital on terms more favorable than
those provided for by such Convertible Securities.

         POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. The Warrants issued
in connection with the Company's Public Offering may be redeemed by the Company
commencing May 1999 (eighteen months from the date of the Public Offering), or
earlier with the consent of the Representative, at a redemption price of $.10
per Warrant upon not less then thirty days prior written notice provided the
last sale price of the Common Stock on the NASD OTC Bulletin Board, Nasdaq (or
another national securities exchange) for twenty consecutive trading days ending
within three days of the notice of redemption, equals or exceeds 200% of the
current Warrant exercise price, subject to adjustment. Redemption of the
Warrants could force the holders thereof to exercise the Warrants and pay the
exercise price at a time when it may be disadvantageous for the holders to do
so, to sell the Warrants at the then current market price when they might
otherwise wish to hold the Warrants, or to accept the redemption price, which is
likely to be substantially less than the market value of the Warrants at the
time of redemption.

         POSSIBLE RESALES UNDER RULE 144. Of the 5,881,237 shares of Common
Stock held by the Company's present stockholders, 5,197,300 shares of Common
Stock have not been registered under the Securities Act of 1933, as amended (the
"Act"). Under certain circumstances, the unregistered shares may be available
for public sale by means of ordinary brokerage transactions in the open market
pursuant to Rule 144, promulgated under the Act, subject to certain limitations.

                                                                              25
<PAGE>

In general, under Rule 144, a person (or persons whose shares are aggregated)
who has satisfied a one-year holding period may, under certain circumstances,
sell within any three-month period a number of securities which does not exceed
the greater of 1% of the then outstanding shares of Common Stock or the average
weekly trading volume of the class during the four calendar weeks prior to such
sale. Rule 144 also permits, under certain circumstances, the sale of
securities, without any limitation, by a person who is not an affiliate of the
Company and who has satisfied a two-year holding period. Of the unregistered
shares, 3,197,003 shares have been held by present stockholders for more than
two years.

         The Company has reserved up to 3,268,000 shares of its Common Stock for
issuance upon exercise of various stock options and warrants, of which 1,600,000
shares were registered under a Registration Statement on Form S-8 under the Act.
Although certain of the Company's principal stockholders, as well as all of its
officers and directors have executed lock-up agreements in which they agreed not
to publicly offer, sell or otherwise dispose of directly or indirectly, any of
the Company's securities owned by them, until November 2000 without the prior
written consent of the Representative, any substantial sale of Common Stock
pursuant to Rule 144 may have an adverse effect on the market price of the
Shares or the component securities. Notwithstanding the foregoing, the Company
reserves the right to contest the validity of any release of a lock-up agreement
by the Representative.


         FUTURE UNSPECIFIED ACQUISITIONS. Although there are no such
transactions contemplated at this time, the Company may, in the future, expand
its business, in part, through the acquisition of compatible products or
businesses. In attempting to locate and consummate such acquisitions, the
Company may compete with other prospective purchasers of the acquisition
candidate, some of which may have greater resources than the Company. There can
be no assurance that suitable acquisition candidates could be identified and
acquired on terms favorable to the Company, or that the acquired product lines
or operations could be profitably operated or integrated into the Company's
operations. In addition, any internally generated growth experienced by the
Company could place significant demands on the Company's management, thereby
restricting or limiting its available time and opportunity to identify and
evaluate potential acquisition candidates. The target entity of any such
acquisition will not be subject to shareholder review and the Company's decision
to pursue such transactions is not subject to shareholder approval.

         LIMITATION ON DIRECTORS' LIABILITIES UNDER DELAWARE LAW. Pursuant to
the Company's Certificate of Incorporation and under Delaware law, directors of
the Company are not liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty, except for liability in connection with a
breach of duty of loyalty, for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, for dividend
payments or stock repurchases illegal under Delaware law or any transaction in
which a director has derived an improper personal benefit.

         INDEMNIFICATION OF DIRECTORS UNDER DELAWARE LAW. Pursuant to both the
Company's Certificate of Incorporation and Delaware law, the Company's officers
and directors are indemnified by the Company for monetary damages for breach of
fiduciary duty, except for liability which arises in connection with (i) a
breach of duty or loyalty, (ii) acts or omissions not made in good faith or

                                                                              26
<PAGE>

which involve intentional misconduct or a knowing violation of law, (iii) for
dividend payments or stock repurchases illegal under Delaware law, or (iv) any
transaction in which the officer or director derived an improper personal
benefit. The Company's Certificate of Incorporation does not have any effect on
the availability of equitable remedies (such as an injunction or rescissions)
for breach of fiduciary duty. However, as a practical matter, equitable remedies
may not be available in particular circumstances. The Company maintains director
and officer liability coverage.

         AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED STOCK. The
Company's Certificate of Incorporation authorizes the issuance of "blank check"
preferred stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without stockholder approval, to issue preferred
stock with dividends, liquidation, conversion, voting or other rights which
could adversely affect the relative voting power or other rights of the holders
of the Company's Common Stock. In the event of issuance, the preferred stock
could be used, under certain circumstances, as a method of discouraging,
delaying or preventing a change in control of the Company, which could have the
effect of discouraging bids for the Company and thereby prevent stockholders
from receiving the maximum value for their shares. Although the Company has no
present intention to issue any shares of its preferred stock, there can be no
assurance that the Company will not do so in the future. In the event the
Company relocates under the Laws of the State of Delaware (as it proposes to do
upon approval of the Company's shareholders) the rights, preferences and
designations of the preferred stock will be substantially identical to those of
the present.


ITEM 2.  PROPERTIES

         The Company's executive offices are located at 31 State Highway 12,
Flemington, New Jersey. The facility, constituting approximately 4,500 square
feet is occupied under a five-year lease. Should this tenancy be terminated for
any reason, there is ample comparable space available in the area for the
Company to occupy. Since the manufacture of the Company's products are conducted
by outside vendors, the Company does not own or lease any production or
manufacturing facilities. The Company believes the current Flemington facilities
will adequately serve its needs for the foreseeable future.


ITEM 3.  LEGAL PROCEEDINGS

SHAREHOLDER LAWSUIT

         On December 23, 1998, one of the Company's shareholders filed a lawsuit
commenced in Federal District Court, District of New Jersey, styled as a class
action on behalf of all purchasers of the Company's securities from November 19,
1997 (the date of the Company's initial public offering) to December 29, 1997,
against the Company and its officers alleging violations of the federal
securities laws arising out of alleged omissions in the Company's initial public
offering Prospectus.

                                                                              27
<PAGE>

         The complaint alleges violations of Sections 11, 12 and 15 of the
Securities Act of 1933 against the Company, two of its officers, Mr. Dugger and
Mr. Moroney (with the Company, the "Flemington Defendants"), Monroe Parker
Securities and two of its principals, Alan Lipsky and Bryan Herman
(collectively, the "Monroe Parker Defendants"). The complaint also alleges
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
against the Monroe Parker Defendants. All allegations in the complaint arise out
of the initial public offering of the Company's securities pursuant to a
Registration Statement dated November 19, 1997. The complaint alleges that the
Flemington Defendants committed securities laws violations by omitting material
facts from the Prospectus; specifically that: (1) the cessation of market-making
activities by Monroe Parker would result in an immediate substantial drop in the
market price of the Company's securities; (2) Monroe Parker would be unable to
maintain market maker activities for the Company's securities because Monroe
Parker had been violating the securities laws and therefore the NASD or law
enforcement officials were likely to take action to put Monroe Parker out of
business; (3) Monroe Parker had been violating the federal securities laws by
controlling the market for securities for which it was a market maker, running
up the price of securities through various illegal tactics, and after amassing
illegal profits, allowing the market price to collapse by declining to purchase
the securities except at an extremely low price; and (4) defendants Lipsky and
Herman had been principals of Biltmore Securities until they started Monroe
Parker. The complaint further alleges a violation of Section 12(2) of the
Securities Act by alleging that the Flemington Defendants were "sellers" of the
Company's securities purchased by the plaintiff.

         By Notice of Motion dated March 25, 1999, the Company, Mr. Dugger and
Mr. Moroney moved the Court to dismiss the complaint in its entirety against
these defendants pursuant to Rule 12(b)(6) of the Federal Rules of Civil
Procedure, arguing that the complaint failed to state a claim for relief under
federal law.

         In a Memorandum and Order filed on October 12, 1999, the Court granted
the motion made by the Flemington Defendants in part and denied it in part. The
Court ruled that the only potential material omission in the Prospectus was that
the Prospectus may have failed to disclose that the Monroe Parker Defendants had
been violating the federal securities laws by controlling the markets for
securities for which it was a market maker and after amassing illegal profits,
allowing the market prices to collapse. The Court dismissed the allegations
relating to the other alleged omissions, ruling they were not material as a
matter of law. The Court further ruled that the plaintiff would be allowed an
opportunity to state a claim under Section 12(2) of the Securities Act.

         Discovery, as to the remaining issues in the lawsuit, was completed
during the summer of 2000. On November 9, 2000, the Court denied plaintiff's
Motion to be certified as a representative of the alleged class. A Motion for
Summary Judgment by the Company against the plaintiff as the remaining claims in
the litigation is presently in the briefing phase and should be submitted to the
Court before the end of 2000.

         In connection with this lawsuit, the Company has incurred professional
fees of approximately $218,000 through July31, 2000.

                                                                              28
<PAGE>

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         During the fourth quarter of the fiscal year covered by this report, no
matters were submitted to a vote of security holders, though the solicitation of
proxies or otherwise.

ITEM 4A. NON-DIRECTOR EXECUTIVE OFFICERS

         The non-director executive officers of the Company and their positions
with the Company are as follows:

DONALD DEITMAN, Chief Financial Officer. Mr. Deitman joined the Company in 1998.
From 1988 until joining the Company, Mr. Deitman was employed as a business
consultant implementing multi-module MRP II software systems. From 1982 to 1988,
Mr. Deitman was corporate controller for FCS Industries, Inc. of Flemington, New
Jersey. From 1975 to 1982, he was manager of materials and systems for the
Walworth Company operations located in Linden and Elizabeth, NJ and from 1966 to
1975, he was employed by Ortho Pharmaceuticals, Inc. and Ortho Diagnostics, Inc.
Mr. Deitman received a BS in Accounting from Rutgers University in 1972.

KENNETH E. CLEAVER, Ph.D., Vice President, Regulatory Affairs. Dr. Cleaver
joined the Company in 1998. From 1992 until joining the Company, Dr. Cleaver
founded and served as the President of Medical Development Quality Associates of
Flemington, New Jersey, a consulting firm which assisted various members of the
pharmaceutical industry in the development, marketing and maintenance of medical
products. From 1984 to 1992, Dr. Cleaver held various positions in which he
consulted in the areas of clinical research, quality assurance and regulatory
affairs. From 1976 to 1984, he was employed by Janssen Pharmaceutical, Inc. of
Piscataway, New Jersey. Dr. Cleaver received a BS in Chemistry from Albright
College in 1968, and an MA in Organic Chemistry and a Ph.D. in Pharmaceutics
from Temple University in 1975 and 1984, respectively.

DONALD P. COX, PH. D., Vice President, Product Development. Dr. Cox joined the
Company in 1998. In 1989, Dr. Cox founded D.P. Cox Associates, a biotechnology
consulting firm, and Goldmark Biologicals, a distributor of colloidal gold
reagents. From 1979 to 1989, Dr. Cox was a Director of Technical
Services/Operations with Janssen Pharmaceutical, Inc. of Piscataway, New Jersey.
Dr. Cox received a BS in Biology from Eureka College in 1964, an MS and Ph.D. in
Bacteriology from the University of Wisconsin in 1967 and 1970, respectively, an
MBA from Temple University in 1989, and conducted a Postdoctoral Fellowship at
Cornell University from 1970 to 1973.

                                                                              29
<PAGE>

                                     PART II

ITEM 5.  MARKET FOR COMMON STOCK AND RELATED SECURITYHOLDER MATTERS

                  (a) MARKET INFORMATION. Since the November 1997 closing of the
Public Offering, the Company's Common Stock has traded in the over-the-counter
market on the National Association of Securities Dealers, Inc. OTC Bulletin
Board System ("OTCBB") under the symbol "FLEM". The following table sets forth
the range of high and low closing bid quotations of the Common Stock as reported
by the OTCBB for each fiscal quarter for the past two fiscal years or such
shorter period that there has been a public trading market. High and low bid
quotations represent prices between dealers without adjustment for retail
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.

                                                                  Bid Prices
                                                                --------------
                                                                High       Low
                                                                ----       ---
    FISCAL 1999

    First Quarter (August 1, 199 through October 31, 1998)      3.375      1.375

    Second Quarter (November 1, 1998 through January 31, 1999)  2.125      1.125

    Third Quarter (February 1, 1999 through April 30, 1999)     2.125      1.125

    Fourth Quarter (May 1, 1999 through July 31, 1999)          1.438      1.063

    FISCAL  1999

    First Quarter (August 1, 1999 through October 25, 1999)     1.687      0.875

    Second Quarter (November 1, 1999 through January 31, 2000)  2.25        .875

    Third Quarter (February 1, 2000 through April 30, 2000)     3.375      1.00

    Fourth Quarter (May 1, 2000 through July 31, 2000)          1.406       .750

The closing bid price of the Company's Common Stock as reported by the OTCBB was
$1.50 on October 27, 2000.

                  (b) HOLDERS. As of October 27, 2000 there were approximately
84 record holders of the Company's Common Stock.

                  (c) DIVIDENDS. The Company has never declared or paid a
dividend on its Common Stock, and management expects that all or a substantial
portion of the Company's future earnings will be retained for expansion or
development of the Company's business. The decision to pay dividends, if any, in
the future is within the discretion of the Board of Directors and will depend
upon the Company's earnings, capital requirements, financial condition and other
relevant factors such as contractual obligations. Management does not anticipate
that the Company will pay dividends on the Common Stock in the foreseeable
future. Moreover, there can be no assurance that dividends can or will ever be
paid.

                                                                              30
<PAGE>

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

GENERAL

         Since its inception, substantially all of the Company's revenues have
been derived from consulting activities, primarily in connection with product
development for various pharmaceutical companies. The Company has had a history
of recurring losses from operations, giving rise to an accumulated deficit at
July 31, 2000 of approximately $4,414,000. Although substantially all of the
Company's revenues to date have been derived from its consulting business, the
future growth and profitability of the Company will be principally dependent
upon its ability to successfully develop its products and to enter into license
agreements with drug companies who will market and distribute the final
products. The Company's revenues from consulting declined during the two years
ended July 31, 2000 and may continue to decline in the future as the Company
shifts its emphasis away from product development consulting for its clients and
towards development of its own products.

         The Company's financial statements have been presented on the basis
that it is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company
incurred losses during the fiscal years ended July 31, 2000 (fiscal 2000) and
1999 (fiscal 1999) and had an accumulated deficit at July 31, 2000 of
approximately $4,414,000.

         The Company's continued existence is dependent upon its ability to
achieve profitable operations or obtain additional financing. The Company is
currently seeking collaborative arrangements with pharmaceutical companies for
joint development of delivery systems and the successful marketing of these
delivery systems. In order to pursue this strategy, the Company will be required
to obtain financing and/or consummate a strategic alliance with a well-funded
business partner in the near future. In view of the Company's very limited
resources, its anticipated expenses and the competitive environment in which the
Company operates, there can be no assurance that the Company's operations will
be sustained for the duration of its next fiscal year.

RESULTS OF OPERATIONS

FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999

         Revenues, including interest income, for fiscal 2000 decreased
approximately $251,000 or 44% to $326,000 from $577,000 for the fiscal year
ended July 31, 1999 ("fiscal 1999"). The revenue decrease in fiscal 2000 was
primarily attributable to the Company's increased product development activities
of its proposed products and decreased consulting activities for clients'
products.

         Total costs and expenses for fiscal 2000 decreased approximately
$439,000 or 23% to approximately $1,505,000 from approximately $1,944,000 for
fiscal 1999. This decrease includes an approximate $246,000 decrease in legal &
professional fees; an approximate $45,000 decrease in travel expenses; an
approximate $18,000 decrease in office expenses; an approximate $16,000 decrease
in public company expenses; an approximate $12,000 decrease in telephone
expenses and an approximate $11,000 decrease in clinical study costs. Product
development costs increased an approximate $27,000

                                                                              31
<PAGE>

FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998

         Revenues, including interest income, for fiscal 1999 decreased
approximately $294,000 or 34% to $577,000 (Includes $78,000 interest income)
from $871,000 (Includes $97,000 interest income) for fiscal 1998. The revenue
decrease in fiscal 1999 was primarily attributable to a significant reduction in
the size and number of client clinical studies during the year.

         Total costs and expenses for fiscal 1999 increased approximately
$365,000 or 23% to approximately $1,944,000 from $1,579,000 for fiscal 1998.
This increase includes an approximate $316,000 increase in payroll costs and an
approximate $239,000 increase in legal & professional fees. In addition, the
Company had an approximate $40,000 increase in insurance costs offset with an
approximate $240,000 decrease in the costs of clinical studies.

LIQUIDITY AND CAPITAL RESOURCES

         From its inception, the Company's principal sources of capital have
been provided by consulting revenues, private placements and a public offering
of its securities, as well as loans and capital contributions from the Company's
principal stockholders. At July 31, 2000 the Company had working capital of
approximately $747,000 as compared to working capital of $918,000 at July 31,
1999 representing a net decrease in working capital of approximately $171,000.
In April 2000, the Company successfully closed an offering of its securities
("Private Placement"). The Private Placement provided for the sale of 2,000,000
shares of common stock, par value $.001 per share. The Company received
proceeds, net of offering costs, of approximately $984,000.

         Net cash used in operating activities was approximately $1,139,000 for
fiscal 2000 compared to net cash used in operating activities of approximately
$1,271,000 for fiscal 1999. Net cash used in operating activities for fiscal
2000 was primarily attributable to the net loss of $1,179,000. For fiscal 2000,
$9,000 was used for investing activities. Therefore, notwithstanding a
$1,179,000 net loss and $1,367,000 net loss for fiscal 2000 and 1999,
respectively, total cash flow for fiscal 2000 increased approximately $1,015,000
as compared to a $90,000 increase for fiscal 1999.

         The Company believes that its current cash levels together with
revenues from operations, will be sufficient to satisfy its cash requirements
for the next two (2) months and has substantial doubt about its ability to
continue operations beyond such period without obtaining additional financing
and/or consummating a strategic alliance with a well-funded business partner. No
assurance can be given that future unforeseen events will not adversely affect
the Company's ability to continue operations or to successfully obtain
additional financing, which may not be available on terms acceptable to the
Company, if at all.

                                                                              32
<PAGE>

INFLATION

         The Company does not believe that inflation has had a material effect
on its results of operations during the past three fiscal years. There can be no
assurance that the Company's business will not be affected by inflation in the
future.

NEW ACCOUNTING PRONOUNCEMENTS

         See Note 1 to the Financial Statements for a discussion of New
Accounting Pronouncements affecting the Company.

ITEM 7.  FINANCIAL STATEMENTS

         The response to this item is included as a separate section of this
report commencing on page F-1.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         Not Applicable.

                                    PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The name and age of each of the four (4) nominees, his position with
the Company, his principal occupation, and the period during which such person
has served as a Director are set out below.
<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------
Name of Nominee                Age    Position with the Company     Principal Occupation    Director Since
----------------------------------------------------------------------------------------------------------
<S>                            <C>    <C>                           <C>                          <C>
Harry A. Dugger, III, Ph.D.    64     President and Chief           President and Chief          1991
                                      Executive Officer             Executive Officer
                                                                    of the Company
----------------------------------------------------------------------------------------------------------
John J. Moroney                46     Chairman                      President, Landmark          1991
                                                                    Financial Corp.
----------------------------------------------------------------------------------------------------------
Robert F. Schaul, Esq.         61     Secretary and Director        Attorney                     1991
----------------------------------------------------------------------------------------------------------
Jack J. Kornreich              61     Director                      Retired                      1996
----------------------------------------------------------------------------------------------------------
</TABLE>

HARRY A. DUGGER, III, PH.D., President and Director. Dr. Dugger is a founder of
the Company and has been President and a director of the Company since its
inception in May 1982. Prior to founding the Company, from June 1980 to November
1982, Dr. Dugger was employed as Vice President of Research and Development by
Bauers-Kray Associates, a company engaged in the development of pharmaceutical
products. From 1964 to 1980, Dr. Dugger was Associate Section Head for Research
and Development at Sandoz Pharmaceuticals Corporation. Dr. Dugger received an MS
in Chemistry from the University of Michigan in 1960 and received a Ph.D. in
Chemistry from the University of Michigan in 1962.

                                                                              33
<PAGE>

JOHN J. MORONEY, Chairman of the Board. Mr. Moroney has been Chairman of the
Company since May 1992. From May 1992 to November 1994, Mr. Moroney was also the
Company's Chief Executive Officer. Mr. Moroney currently is President of
Landmark Financial Corp., Harrington Park, New Jersey, a private financial
consulting company. From 1985 to 1992, Mr. Moroney was a Managing Director of
Corporate Finance for the investment banking firm of Ladenburg, Thalmann & Co.,
Inc., specializing in the pharmaceutical and health care industries. Mr. Moroney
received a BS in 1975 and an MBA in 1997, both from Fordham University.

ROBERT F. SCHAUL, ESQ., Secretary and Director. Mr. Schaul has been a Director
of the Company since November 1991 and was Vice President, Secretary and General
Counsel of the Company from November 1991 to February 1995. He has advised the
Company since its formation. From 1995 to 1998, Mr. Schaul was Vice President
and General Counsel of Landmark Financial Corp. From 1989 to 1991, Mr. Schaul
was a partner with the law firm of Glynn, Byrnes and Schaul, and for twenty
years prior thereto was an attorney and partner with the law firm Kerby, Cooper,
English, Schaul & Garvin, specializing in business law and business related
litigation. Mr. Schaul received a BA from New York University in 1961 and a JD
from Harvard University in 1964.

JACK J. KORNREICH, Director. Mr. Kornreich has been a director of the Company
since 1996. He presently acts as an independent consultant. From 1989 to 1993,
Mr. Kornreich was Executive Vice President and General Counsel of Bolar
(formerly Circa Pharmaceuticals Corp. and now known as Watson Pharmaceutical
Corp.). From 1984 to 1989, Mr. Kornreich practiced law as a partner in the firm
of Baum & Kornreich (from 1980 to 1984 the firm was named Baum, Skigen &
Kornreich). From 1975 to 1984, Mr. Kornreich was in private practice. Mr.
Kornreich received a JD from Brooklyn Law School in 1963 and an LLM in Corporate
Law from New York University in 1975.

Board members are elected annually by the shareholders and the officers are
appointed annually by the Board of Directors.


ITEM 10. EXECUTIVE COMPENSATION

                             EXECUTIVE COMPENSATION

         The following table sets forth a summary for the fiscal years ended
July 31, 2000, 1999 and 1998, respectively, of the cash and non-cash
compensation awarded, paid or accrued by the Company to the Company's Chief
Executive Officer ("CEO") and its four most highly compensated officers other
than the CEO, who served in such capacities at the end of fiscal 1999
(collectively, the "Named Executive Officers"). No other executive officer of
the Company earned in excess of $100,000 in total annual salary and bonus for,
1998, 1999 and 2000 in all capacities in which such person served the Company.
There were no restricted stock awards, long-term incentive plan payouts or other
compensation paid during fiscal 1998, 1999 and 2000 to the Named Executive
Officers, except as set forth below:

                                                                              34
<PAGE>
<TABLE>
<CAPTION>

                           SUMMARY COMPENSATION TABLE
------------------------------------------------------------------------------------------------------------------------
                                               Annual Compensation             Long-term Compensation
                                           ---------------------------   --------------------------------
                                                                                 Awards           Payouts
                                                                         ----------------------   -------
                                                               Other                 Securities
                                                               Annual    Restricted  Underlying
                                                               Compen-     Stock      Options/     LTIP      All Other
        Name and                Fiscal      Salary     Bonus   sation     Awards      SAR (1)     Payouts   Compensation
   Principal Position            Year         ($)       ($)      ($)        ($)         (#)         ($)          ($)
------------------------------------------------------------------------------------------------------------------------
<S>                              <C>        <C>          <C>      <C>        <C>       <C>           <C>          <C>
Harry A. Dugger, III, Ph.D.      2000       226,000      0        0          0         95,000        0            0
President and CEO
                               -----------------------------------------------------------------------------------------
                                 1999       210,000      0        0          0              0        0            0
                               -----------------------------------------------------------------------------------------
                                 1998       183,333      0        0          0         50,000        0            0
------------------------------------------------------------------------------------------------------------------------
John J. Moroney                  2000       169,000                                    95,000
Chairman
                               -----------------------------------------------------------------------------------------
                                 1999       157,500      0        0          0              0        0            0
                               -----------------------------------------------------------------------------------------
                                 1998       100,000      0        0          0         50,000        0            0
------------------------------------------------------------------------------------------------------------------------
Donald Deitman (2)               2000        68,000
Chief Financial Officer
                               -----------------------------------------------------------------------------------------
                                 1999        67,500      0        0          0              0        0            0
                               -----------------------------------------------------------------------------------------
                                 1998        30,000      0        0          0              0        0            0
------------------------------------------------------------------------------------------------------------------------
Donald P. Cox, Ph.D. (2)         2000       137,000
Vice President,
Product Development
                               -----------------------------------------------------------------------------------------
                                 1999       128,900      0        0          0              0        0            0
                               -----------------------------------------------------------------------------------------
                                 1998        31,000      0        0          0        200,000        0            0
------------------------------------------------------------------------------------------------------------------------
Kenneth E. Cleaver, Ph.D. (2)    2000       110,000
Vice President, Regulatory
Affairs
                               -----------------------------------------------------------------------------------------
                                 1999       101,900      0        0          0              0        0            0
                               -----------------------------------------------------------------------------------------
                                 1998        25,000      0        0          0        100,000        0            0
------------------------------------------------------------------------------------------------------------------------
</TABLE>

   (1)  No Stock Appreciation Rights have been issued.
   (2)  Messrs. Cox, Cleaver and Deitman were not employed prior to fiscal 1998.


                        OPTION GRANTS IN LAST FISCAL YEAR
                               (INDIVIDUAL GRANTS)

         The following table sets forth information with respect to individual
grants of stock options to the Named Executive Officers during fiscal 2000
<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------
                                 Number of      Percent of Total
                                 Securities    Options Granted to
                                 Underlying       Employees in       Exercise or Base
   Name of Officer             Options Granted    Fiscal Year         Price ($/Share)     Expiration Date
---------------------------------------------------------------------------------------------------------
<S>                                 <C>               <C>                  <C>               <C>
Harry A. Dugger, III, Ph.D.        -95,000            50%                 -0.9625            1/11/2010
---------------------------------------------------------------------------------------------------------
John J. Moroney                    -95,000            50%                 -0.9625            1/11/2010
---------------------------------------------------------------------------------------------------------
Donald Deitman                          --            --                       --                   --
---------------------------------------------------------------------------------------------------------
Kenneth E. Cleaver, Ph.D.               --            --                       --                   --
---------------------------------------------------------------------------------------------------------
Donald P. Cox, Ph.D.                    --            --                       --                   --
---------------------------------------------------------------------------------------------------------
</TABLE>

                                                                              35
<PAGE>

                 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                        AND FISCAL YEAR-END OPTION VALUES

         The following table sets forth information with respect to the Named
Executive Officers concerning the exercises of options during fiscal 1999 and
the number and value of unexercised options held as of the end of fiscal 1999.
<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------
                                                             Number of Securities          Value of
                                                            Underlying Unexercised    Unexercised In-the-
                                                              Options At Fiscal        Money Options at
                                  Number of        Value         Year End;            Fiscal Year End ($)
       Name of                 Shares Acquired    Realized     (Exercisable/             (Exercisable/
   Executive Officer            on Exercise         ($)        Unexercisable)            Unexercisable)
---------------------------------------------------------------------------------------------------------
<S>                                   <C>            <C>       <C>                         <C>
Harry A. Dugger, III, Ph.D.           0              --        645,000 / 0                 4,750 / 0
---------------------------------------------------------------------------------------------------------
John J. Moroney                       0              --        645,000 / 0                 4,750 / 0
---------------------------------------------------------------------------------------------------------
Donald Deitman                        0              --             --                        --
---------------------------------------------------------------------------------------------------------
Kenneth E. Cleaver, Ph.D.             0              --         66,000 / 34,000                0 / 0
---------------------------------------------------------------------------------------------------------
Donald P. Cox, Ph.D.                  0              --        166,000 / 34,000                0 / 0
---------------------------------------------------------------------------------------------------------
</TABLE>


COMPENSATION OF DIRECTORS

         The Directors of the Company are elected annually and serve until the
next annual meeting of stockholders and until a successor shall have been duly
elected and qualified. Effective January 1999, Directors of the Company, who are
not employees or consultants receive for each meeting attended directors fees of
$500 for their services as members of the Board of Directors. Such Directors are
also reimbursed for expenses incurred in connection with their attendance at
meetings of the Board of Directors. Directors may be removed with or without
cause by a vote of the majority of the stockholders then entitled to vote. There
were no other arrangements pursuant to which any Director was compensated during
fiscal 2000 for any services provided as a Director.

STOCK OPTION PLANS

         The Company has three stock option plans, adopted in 1992, 1997 and
1998, respectively (collectively referred to as the "Plans"). Each Plan provides
for the issuance of options to purchase 500,000 shares of Common Stock, for a
total of 1,500,000 shares. The 1997 Stock Option Plan is administered by Harry
A. Dugger, III, Ph.D. and John J. Moroney, who constitute the Compensation
Committee of the Board of Directors ("Committee"), and the 1992 Stock Option
Plan and 1998 Stock Option Plan are administered by the entire Board of
Directors. For purposes of the following discussion, the term "Committee" will
be used to reference the Committee with respect to the 1997 Stock Option Plan
and the entire Board of Directors with respect to the 1992 Stock Option Plan and
1998 Stock Option Plan, as applicable. The Committee has sole discretion and
authority, consistent with the provisions of the Plans, to select the Eligible
Participants to whom options will be granted under the Plans, the number of
shares which will be covered by each option and the form and terms of the
agreement to be used. All employees and officers of the Company (except for
members of the Committee) are eligible to participate in the 1997 Plan.

                                                                              36
<PAGE>

         At September 30, 2000, eight (8) persons were eligible to receive
Incentive Stock Options ("ISOs") under the 1992 and 1998 Plans.

         OPTIONS. The Committee is empowered to determine the exercise price of
options granted under the Plans, but the exercise price of ISOs must be equal to
or greater than the fair market value of a share of Common Stock on the date the
option is granted (110% with respect to optionees who own at least 10% of the
outstanding Common Stock). The Committee has the authority to determine the time
or times at which options granted under the Plans become exercisable, but
options expire no later than ten years from the date of grant (five years with
respect to Optionees who own at least 10% of the outstanding Common Stock of the
Company). Options are nontransferable, other than by will and the laws of
descent, and generally may be exercised only by an employee while employed by
the Company or within 90 days after termination of employment (one year from
termination resulting from death or disability).

         No ISO may be granted to an employee if, as the result of such grant,
the aggregate fair market value (determined at the time each option was granted)
of the shares with respect to which ISOs are exercisable for the first time by
such Employee during any calendar year (under all such plans of the Company and
any parent and subsidiary) exceeds $100,000. The Plans do not confer upon any
employee any right with respect to the continuation of employment by the
Company, nor do the Plans interfere in any way with the employee's right or the
Company's right to terminate the employee's employment at any time.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         Harry A. Dugger, III and John J. Moroney serve as the members of the
Company's Compensation Committee, which reviews and makes recommendations with
respect to compensation of officers, employees and consultants, including the
granting of options under the Company's 1997 Stock Option Plan. The 1992 and
1998 Stock Option Plans are administered by the entire Board.

         Mr. Moroney is also a Director and President of Landmark Financial
Corp. ("Landmark"), serving as a member of Landmark's compensation committee.
Robert F. Schaul, a Director and Secretary of the Company, earned legal fees
from the Company during fiscal 2000 in the approximate amount of $66,000. See
"Certain Transactions--Legal Fees," below.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

         Compensation of the Company's executives is intended to attract, retain
and award persons who are essential to the enterprise. The fundamental policy of
the Company's executive compensation program is to offer competitive
compensation to executives that appropriately rewards the individual executive's
contribution to corporate performance. The Board of Directors utilizes
subjective criteria for evaluation of individual performance. The Board focuses
on two primary components of the Company's executive compensation program, each
of which is intended to reflect individual and corporate performance: base
salary compensation and long-term incentive compensation. The Company has not
paid cash incentive bonuses during fiscal 1999.

                                                                              37
<PAGE>

         Except as set forth herein, the Company does not have any annuity,
retirement, pension, deferred or incentive compensation plan or arrangement
under which any executive officer is entitled to benefits, nor does the Company
have any long-term incentive plan pursuant to which performance units or other
forms of compensation are paid. Executive officers who qualify will be permitted
to participate in the Company's 1992, 1997 and 1998 Stock Option Plans which
were adopted in May 1992, February 1997 and June 1998, respectively. In
September 1998 the Board of Directors adopted an investment retirement account
plan in which all employees of the Company are eligible to participate.
Executive officers may participate in group life, health and hospitalization
plans, if and when such plans are available generally to all employees. The
Compensation Committee is satisfied that the compensation and stock option plans
provided to the officers of the Company are structured and operated to create
strong alignment with the long-term best interests of the Company and its
stockholders.

         The compensation of the Company's Chief Executive Officer, Dr. Dugger,
for fiscal 2000 consisted of base salary of $226,000. No bonuses or stock grants
were awarded to Dr. Dugger during fiscal 2000. An option grant of 95,000 was
awarded in fiscal 2000. The determination by the Compensation Committee of Dr.
Dugger's remuneration is based upon methods consistent with those used for other
senior executives. The committee considers certain quantitative factors,
including the Company's financial, strategic and operating performance for the
year. The qualitative criteria include Dr. Dugger's leadership qualities and
management skills, as exhibited by his innovations, time and effort devoted to
the Company, and other general considerations. The Compensation Committee also
takes note of comparable remuneration of other CEOs at similar companies. Based
on the performance of the Company, the Compensation Committee believes that Mr.
Dugger's compensation was appropriate.

                             COMPENSATION COMMITTEE:

                           Harry A. Dugger, III, Ph.D
                                 John J. Moroney

EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS

         DR. DUGGER AND MR. MORONEY. Effective as of November 19, 1997, the
Company entered into employment agreements with each of Harry A. Dugger, III,
for his services as President, and John J. Moroney, for his services as Chairman
(the "Dugger and Moroney Agreements"). Each agreement is for a base term of
three (3) years and is thereafter renewable for additional periods of one (1)
year, unless the Company gives notice to the contrary. The Dugger and Moroney
Agreements provide for a base salary of $200,000 and $150,000, respectively, and
annual cost of living adjustments equal to the greater of the increase in the
Consumer Price Index or 7.5%, with additional increases and bonuses as shall be
approved by the Board. Dr. Dugger will also receive an additional cash bonus of
$10,000 for each New Drug Application relating to the Company's products that is
accepted for filing by the U.S. Food and Drug Administration, as well as the use
of a Company-owned or leased and insured automobile chosen by the Company.

                                                                              38
<PAGE>

         The Dugger and Moroney Agreements also provide, respectively, for the
payment of certain additional severance compensation in the event that, at any
time during the term thereof, the agreement is terminated by the executive (i)
with "good reason" (as defined therein). or (ii) due to a "change in control"
(as defined therein). The "change in control" provisions in the Dugger and
Moroney Agreements were deleted in April 2000.

         Pursuant to the Dugger and Moroney Agreements, upon the completion of
the Company's IPO, Dr. Dugger and Mr. Moroney were each granted stock options
(outside of the Plans) to purchase 300,000 shares of Common Stock, at an
exercise price of $1.84 per share exercisable until November 2007.

         DRS. COX AND CLEAVER. Effective May 1, 1998, the Company entered into
employment agreements with each of Donald P. Cox, Ph.D., for his services as
Vice President, Regulatory Affairs, and Kenneth E. Cleaver, Ph.D., for his
services as Vice President, Product Development (the "Cox and Cleaver
Agreements"). Each agreement is for a base term of three (3) years. The Cox and
Cleaver Agreements provide for base salaries of $125,000 and $100,000,
respectively, and annual cost of living adjustments not less than the increase
of the Consumer Price Index. In connection with the Cox and Cleaver Agreements,
the Company granted to each of Drs. Cox and Cleaver ten-year non-plan options to
purchase 100,000 shares of Common Stock at an exercise price of $1.75 per share.
One-third of such options vest in each of the first three (3) years of the
agreement. The Cox and Cleaver Agreements provide each of Drs. Cox and Cleaver
with the use of a Company-owned or leased and insured automobile chosen by the
Company. Dr. Cox's agreement provides for the payment of one month's severance
compensation for each full year of service under the agreement, in the event
that, at any time during the term thereof, the agreement is terminated by the
executive with good reason (as defined).

         Each of the foregoing agreements also provides for certain
non-competition and non-disclosure covenants on the part of the executive.
However, with respect to the non-competition covenants, a court may determine
not to enforce such provisions or only partially enforce such provisions.
Additionally, each of the foregoing agreements provides for certain Company-paid
fringe benefits, such as disability insurance and inclusion in pension, profit
sharing, stock option, savings, hospitalization and other benefit plans at such
times as the Company shall adopt them.

STOCKHOLDER LOANS

         In fiscal 1998, the Company lent the principal amount of $60,000 to Dr.
Dugger in exchange for a 7% promissory note. The note is due on demand, with
interest due quarterly. Interest approximated $4,200 for fiscal 2000, all of
which was paid timely by Dr. Dugger. This note remains outstanding.

                                                                              39
<PAGE>

                   STOCKHOLDER RETURN PERFORMANCE PRESENTATION

         The comparative stock performance graph below compares the cumulative
stockholder return on the Common Stock of the Company for the period from
November 20, 1997 through the fiscal year ended July 31, 2000, with the
cumulative total return on (i) the Total Return Index for the Nasdaq Stock
market (U.S. Companies) (the "Nasdaq Composite Index"), and (ii) the American
Stock Exchange, Inc. ("AMEX") Pharmaceutical Index (assuming the investment of
$100 in the Company's Common Stock, the Nasdaq Composite Index and the AMEX
Pharmaceutical Index on November 20, 1997 and reinvestment of all dividends).
Measurement points are on the first full trading day after the Company's
registration statement was declared effective by the SEC and the last trading
day of the Company's fiscal year ended July 31. The Company cautions that the
stock price performance shown in the graph below should not be considered
indicative of potential future stock performance. Companies included in the
Nasdaq Composite Index and AMEX Pharmaceutical Index are generally larger and
have greater capitalization than the Company.

[The following table represents a graphic chart which has been omitted]


                                 ---------------------------------------------
                                   11/20/97    7/31/98    7/31/99    7/31/00
                                 ---------------------------------------------
Flemington Pharmaceutical           $100.00    $ 24.00    $ 15.57     13.25
Corporation (FLEM)
------------------------------------------------------------------------------
Nasdaq Composite Index              $100.00    $118.75    $162.25    231.59
------------------------------------------------------------------------------
AMEX Pharmaceutical Index (DRG)     $100.00    $135.00    $136.58    153.78
------------------------------------------------------------------------------

                                                                              40
<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                        SECURITY OWNERSHIP OF MANAGEMENT
                          AND CERTAIN BENEFICIAL OWNERS

         As of October 27, 2000, there were 5,881,237 shares of Common Stock
outstanding and entitled to vote at the Annual Meeting. Each share is entitled
to one vote on each of the matters to be voted on at the Annual Meeting. The
following table sets forth, as of October 27, 2000, certain information
regarding the ownership of the Common Stock by (i) each person known by the
Company to be the beneficial owner of more than 5% of the Common Stock, (ii)
each of the Company's Directors and Named Executive Officers, as such term is
defined under Item 402(a)(3) of Securities and Exchange Commission ("SEC")
Regulation S-K, and (iii) all of the Company's Executive Officers and Directors
as a group. Beneficial ownership has been determined in accordance with Rule
13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Under Rule 13d-3 certain shares may be deemed to be beneficially owned by
more than one person (such as where persons share voting power or investment
power). In addition, shares are deemed to be beneficially owned by a person if
the person has the right to acquire the shares (for example, upon the exercise
of an option) within sixty (60) days of the date as of which the information is
provided. In computing the ownership percentage of any person, the amount of
shares outstanding is deemed to include the amount of shares beneficially owned
by such person (and only such person) by reason of these acquisition rights. As
a result, the percentage of outstanding shares of any person as shown in the
following table does not necessarily reflect the person's actual ownership or
voting power at any particular date.
<TABLE>
<CAPTION>

 Title of            Name and Address or                Amount and Nature of        Percentage of
  Class               Number in Group(1)                Beneficial Ownership (2)        Class
  -----               ------------------                ------------------------        -----
<S>              <C>                                         <C>                        <C>
Common Stock     Harry A. Dugger, III, Ph.D.                 1,824,003(3)               27.9

Common Stock     John J. Moroney                             1,018,080(4)               15.6

Common Stock     Donald Deitman                                      0                     0

Common Stock     Donald P. Cox, Ph.D.                          200,000(5)                3.3

Common Stock     Kenneth E. Cleaver, Ph.D.                     100,000(6)                1.7

Common Stock     Robert F. Schaul, Esq.                        189,286(7)                3.0

Common Stock     Jack J. Kornreich                             169,310(7)                2.6

Common Stock     Watson Pharmaceutical Corporation             389,350                   6.5
                 311 Bonnie Circle
                 Corona, California 91720

Common Stock     Saggi Capital Corp.                           340,000(8)                5.5
                 575 Lexington Avenue
                 New York, New York 10022

Common Stock     All Executive  Officers and Directors       3,480,679                  44.79
                 as a group (9 persons)                      (3)(4)(5)(6)(7)
</TABLE>
                                                                              41
<PAGE>

(1)  With the exception of Watson Pharmaceutical Corporation and Saggi Capital
Corp. the address of all holders listed herein is c/o Flemington Pharmaceutical
Corporation, 31 State Highway 12, Flemington, New Jersey 08822.

(2)  Except as otherwise indicated, each named holder has, to the Company's
knowledge, sole voting and investment power with respect to the shares
indicated.

(3)  Includes options to purchase 200,000 shares of Common Stock issued under
the 1992 Stock Option Plan; options to purchase 50,000 shares of Common Stock
under the 1997 Stock Option Plan; options to purchase 95,000 shares of Common
Stock issued under the 1998 Stock Option Plan, options to purchase 300,000
shares of Common Stock issued outside of the Plans; 108,000 shares owned by his
daughter Christina Dugger Sommers; and 108,000 shares owned by his son Andrew
Dugger. Dr. Dugger may be deemed to be a "parent" of the Company as such term is
defined under the Federal securities laws.

(4)  Includes options to purchase 200,000 shares of Common Stock issued under
the 1992 Stock Option Plan; options to purchase 50,000 shares of Common Stock
under the 1997 Stock Option Plan; options to purchase 95,000 shares of Common
Stock issued under the 1998 Stock Option Plan, options to purchase 300,000
shares of Common Stock issued outside of the Plans; 208,080 shares owned jointly
with his wife, and 55,000 shares owned by each of his three sons, Matthew,
Timothy and Sean Moroney.

(5)  Includes non-plan options to purchase 100,000 shares of Common Stock issued
in May 1998 pursuant to an employment agreement and 100,000 options issued under
the 1998 Stock Option Plan for services to be provided in connection with future
services.

(6)  Includes non-plan options to purchase 100,000 shares of Common Stock issued
pursuant to an employment agreement.

(7)  Includes options to purchase 20,000 shares of Common Stock issued under the
1992 Stock Option Plan and options to purchase 25,000 shares of Commons Stock
issued under the 1997 Stock Option Plan, options to purchase 105,000 shares of
Common Stock issued under the 1998 Stock Option Plan.

(8)  Includes options to purchase an aggregate of 320,000 shares issued under
the 1992 and 1997 Stock Option Plans.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

         Section 16(a) of the Exchange Act requires officers, directors and
persons who own more than ten (10) percent of a class of equity securities
registered pursuant to Section 12 of the Exchange Act to file reports of
ownership and changes in ownership with both the SEC and the principal exchange
upon which such securities are traded or quoted. Officers, directors and persons
holding greater than ten (10) percent of the outstanding shares of a class of
Section 12-registered equity securities ("Reporting Persons") are also required

                                                                              42
<PAGE>

to furnish copies of any such reports filed pursuant to Section 16(a) of the
Exchange Act with the Company. Based solely on a review of the copies of such
forms furnished to the Company, the Company believes that from August 1, 1998 to
September 30, 1999 all Section 16(a) filing requirements applicable to its
Reporting Persons were complied with.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                              CERTAIN TRANSACTIONS

CONSULTING AGREEMENT

         On May 1, 1997, the Company entered into a consulting agreement with
Saggi Capital Corp., a public relations consultant (the "Consultant") pursuant
to which the Consultant received a Nonqualified Stock Option under the 1997
Stock Option Plan to purchase an aggregate of 200,000 shares of Common Stock. On
March 25, 1998, the Company amended its consulting agreement pursuant to which
the Consultant agreed to expand the scope and duration of the services provided.
As a consequence, the Nonqualified Stock Option was restated and amended and the
Consultant surrendered 200,000 unexercised stock options having an exercise
price of $5.80 per share in exchange for receiving 200,000 stock options having
an exercise price of $1.00 per share plus 120,000 stock options having an
exercise price of $2.00 per share. These options are exercisable for a period of
five (5) years following the date of the grant. Effective January 1, 2000 the
Company entered into a new consulting agreement with Saggi Capital Corp., a
public relations consultant (the "Consultant") pursuant to which the Consultant
received Warrants to purchase an aggregate of 200,000 shares of Common Stock at
an exercise price of $1.00 per share.

LEGAL FEES

         During fiscal 2000 the Company paid Mr. Schaul approximately $66,000
for legal services rendered to the Company.

                                     PART IV

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K

         List of Exhibits

         The exhibits that are filed with this report or that are incorporated
herein by reference are set forth in the Exhibit Index appearing on page E-1
hereof.

    (b)  Reports on Form 8-K

         No reports on Form 8-K were filed during the last quarter of fiscal
2000.

                                                                              43
<PAGE>

                          INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Stockholders of
  Flemington Pharmaceutical Corporation


We have audited the balance sheet of Flemington Pharmaceutical Corporation as of
July 31, 2000 and the related statements of operations, changes in stockholders'
equity and cash flows for each of the two years in the period then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Flemington Pharmaceutical
Corporation at July 31, 2000, and the results of its operations and its cash
flows for each of the two years in the period then ended in conformity with
generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has had a recent history of recurring losses
from operations, giving rise to an accumulated deficit through July 31, 2000
and is currently developing pharmaceutical products which will require
substantial financing to fund anticipated product development costs. Resulting
operating losses and negative cash flows from operations are likely to occur
until, if ever, profitability can be achieved through successful marketing of
newly developed products. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.


                                                 WISS & COMPANY, LLP


Livingston, New Jersey
Sept. 25, 2000

                                      F-1
<PAGE>
<TABLE>
<CAPTION>
                      FLEMINGTON PHARMACEUTICAL CORPORATION

                                  BALANCE SHEET
                                  JULY 31, 2000

                                     ASSETS
<S>                                                                                         <C>            <C>
CURRENT ASSETS:
  Cash and cash equivalents .............................................................   $   700,000
  Accounts receivable - trade, less allowance for doubtful accounts
    of  $15,000 .........................................................................        46,000
  Due from D&O Insurance Carrier ........................................................        86,000
  Prepaid expenses and other current assets .............................................        52,000
                                                                                            -----------
      Total Current Assets ..............................................................                  $   884,000

FURNITURE, FIXTURES, AND EQUIPMENT, LESS
ACCUMULATED DEPRECIATION OF $71,000 .....................................................                       25,000

DEMAND NOTE RECEIVABLE, SHAREHOLDER .....................................................                       60,000

DUE FROM JOINT VENTURE PARTNER FOR REIMBURSABLE EXPENSES ................................                       80,000

OTHER ASSETS ............................................................................                       10,000
                                                                                                           -----------
                                                                                                           $ 1,059,000
                                                                                                           ===========
                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable-trade ................................................................   $    68,000
  Billings in excess of costs and estimated earnings on uncompleted
    contracts ...........................................................................        49,000
  Accrued expenses and other current liabilities ........................................       100,000
                                                                                            -----------
      Total Current Liabilities .........................................................                  $   217,000


COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
  Preferred stock, $.01 per value:
    Authorized 1,000,000 shares, none issued                                                         --
  Common stock $.001 par value:
    Authorized - 50,000,000 shares
      Issued and outstanding - 5,877,300 shares .........................................         6,000
    Additional paid-in capital ..........................................................     5,250,000
    Accumulated Deficit .................................................................    (4,414,000)
                                                                                            -----------
      Total Stockholders' Equity ........................................................                      842,000
                                                                                                           -----------
                                                                                                           $ 1,059,000
                                                                                                           ===========
</TABLE>


See accompanying notes to financial statements.

                                      F-2
<PAGE>

                      FLEMINGTON PHARMACEUTICAL CORPORATION

                            STATEMENTS OF OPERATIONS


                                                   Year Ended
                                                    July 31,
                                           --------------------------
                                               2000           1999
                                           -----------    -----------

REVENUES:
  Operating revenues ...................   $   282,000    $   499,000
  Interest Income ......................        44,000         78,000
                                           -----------    -----------
                                               326,000        577,000
                                           -----------    -----------
COST AND EXPENSES:
  Operating expenses ...................       166,000        411,000
  Product development ..................       400,000        268,000
  Selling, general and
    administrative expenses ............       939,000      1,260,000
  Interest expense .....................            --          5,000
                                           -----------    -----------
                                             1,505,000      1,944,000
                                           -----------    -----------
NET LOSS ...............................   $(1,179,000)   $(1,367,000)
                                           ===========    ===========


WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING ............................     4,447,163      3,877,300
                                           ===========    ===========

BASIC AND DILUTED LOSS
PER COMMON SHARE:
  Net Loss .............................   $      (.27)   $      (.35)
                                           ===========    ===========


See accompanying notes to financial statements.

                                      F-3
<PAGE>
<TABLE>
<CAPTION>
                      FLEMINGTON PHARMACEUTICAL CORPORATION

                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY


                                                 Common Stock
                                          -------------------------
                                                                       Additional
                                                            Par          Paid-in     Accumulated    Stockholders'
                                            Shares         Value         Capital       Deficit         Equity
                                          -----------   -----------    -----------   -----------    -----------
<S>                                         <C>         <C>            <C>           <C>            <C>
BALANCE, JULY 31, 1998                      3,877,300   $    39,000    $ 4,233,000   $(1,868,000)   $ 2,404,000
                                          -----------   -----------    -----------   -----------    -----------


YEAR ENDED JULY 31, 1999
  Par Value Decrease
  from $.01 to $.001                               --       (35,000)        35,000            --             --
  Net Loss                                         --            --             --    (1,367,000)    (1,367,000)
                                          -----------   -----------    -----------   -----------    -----------
BALANCE,  JULY 31, 1999                     3,877,300         4,000      4,268,000    (3,235,000)     1,037,000
                                          -----------   -----------    -----------   -----------    -----------


YEAR ENDED JULY 31, 2000
  In connection with private placement,
  net of costs                              2,000,000         2,000        982,000            --        984,000
  Net Loss                                         --            --             --    (1,179,000)    (1,179,000)
                                          -----------   -----------    -----------   -----------    -----------
BALANCE, JULY 31, 2000                      5,877,300   $     6,000    $ 5,250,000   $(4,414,000)   $   842,000
                                          ===========   ===========    ===========   ===========    ===========
</TABLE>


See accompanying notes to financial statements.

                                      F-4

<PAGE>

<TABLE>
<CAPTION>
                      FLEMINGTON PHARMACEUTICAL CORPORATION

                            STATEMENTS OF CASH FLOWS

                                                                       Year Ended
                                                                        July 31,
                                                               --------------------------
                                                                  2000           1999
                                                               -----------    -----------
<S>                                                            <C>            <C>
CASH FLOW FROM OPERATING ACTIVITIES:
  Net  loss                                                    $(1,179,000)   $(1,367,000)
  Adjustments to reconcile net loss to net cash
    flows from operating activities:
    Provision (credit) for losses on accounts receivable                --        (24,000)
    Options issued for services                                     10,000         19,000
    Depreciation and amortization                                   14,000         12,000
    Loss on sale of assets                                              --         14,000
    Changes in operating assets and liabilities:
    Accounts receivable                                             76,000         49,000
    Due from D&O Insurance Carrier                                 (86,000)            --

    Prepaid expenses and other current assets                        6,000        (22,000)
    Due from Joint Venture partner for reimbursable expenses       (80,000)            --
    Other Assets                                                     9,000         24,000
    Accounts payable - trade                                        20,000        (31,000)
    Billings in excess of costs and estimated earnings
      on uncompleted contracts                                      49,000             --
    Accrued expenses and other current liabilities                  22,000         55,000
                                                               -----------    -----------
      Net cash flows from operating activities                  (1,139,000)    (1,271,000)
                                                               -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES -
  Purchase of property and equipment                                (9,000)        (6,000)
                                                               -----------    -----------
    Net cash flows from investing activities                        (9,000)        (6,000)
                                                               -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES -
  Private placement                                                984,000             --
                                                               -----------    -----------
    Net cash flows from financing activities                       984,000             --
                                                               -----------    -----------
NET CHANGE IN CASH)                                               (164,000)    (1,277,000)
CASH, AND CASH EQUIVALENTS, BEGINNING OF YEAR                      864,000      2,141,000
                                                               -----------    -----------
CASH, AND CASH EQUIVALENTS, END OF YEAR                        $   700,000    $   864,000
                                                               ===========    ===========

SUPPLEMENTAL CASH FLOW INFORMATION:
  Interest paid                                                $        --    $     5,000
                                                               ===========    ===========
  Income taxes paid                                            $        --    $        --
                                                               ===========    ===========
</TABLE>


See accompanying notes to financial statements.

                                      F-5
<PAGE>

                      FLEMINGTON PHARMACEUTICAL CORPORATION

                          NOTES TO FINANCIAL STATEMENTS


NOTE 1 - NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

         NATURE OF THE BUSINESS - Flemington Pharmaceutical Corporation (the
         "Company"), which was formerly incorporated under the laws of New
         Jersey was reincorporated in the State of Delaware in November 1998.
         The Company is engaged in domestic and international consulting
         activities and the development of novel pharmaceutical products
         combining presently marketed drugs with innovative patent-pending oral
         dosage delivery systems of the Company, designed to enhance and
         accelerate the onset of the therapeutic benefits which the drugs are
         intended to produce. Management intends to develop the products in
         collaboration with pharmaceutical companies having significant existing
         sales of the pharmaceutical compounds being incorporated into the
         Company's dosage delivery systems, thereby creating a more effective,
         and more attractive product.

         The Company has not materially commercialized any of its proposed
         products and, accordingly, has not generated any material revenue from
         product sales. Since inception, substantially all of the Company's
         revenue has been derived from providing consulting services to the
         pharmaceutical industry. To date, the Company's drug development
         activities have been largely funded through cash flow generated by the
         initial public offering of its securities in November 1997 and its
         consulting services.

         REVENUES AND COSTS - Revenues from contract clinical research are
         recognized on the percentage-of-completion method. Completion is
         measured by the relationship of total contract costs incurred to total
         estimated contract costs for each study. Provisions for estimated
         losses on uncompleted contracts are made in the period in which such
         losses are determined.

         Contract costs normally consist of fees paid to outside clinics for
         studies and an allocable portion of the Company's operating expenses.
         General and administrative costs pertaining to contracts are charged to
         expense as incurred.

         CASH EQUIVALENTS - Cash equivalents include certificates of deposit and
         money market instruments purchased with original maturities of three
         months or less.

         FINANCIAL INSTRUMENTS - Financial instruments include cash and cash
         equivalents, accounts receivable, amounts due from joint venture
         partner and insurance carrier, loans to stockholders, accounts payable,
         and accrued expenses. The amounts reported for financial instruments
         are considered to be reasonable approximations of their fair values,
         based on market information available to management.

         FURNITURE, FIXTURES AND EQUIPMENT - Furniture, fixtures and equipment
         are stated at cost. The Company provides for depreciation using
         accelerated methods, based upon estimated useful lives of 5 to 7 years
         for furniture, fixtures and equipment.

         INCOME TAXES - Temporary differences between financial statement and
         income tax reporting result primarily from net operating losses and
         reporting on the cash basis of accounting for tax reporting purposes.
         As a result of these temporary differences, the Company has recorded a
         deferred tax asset with an offsetting valuation allowance for the same
         amount.

                                      F-6

<PAGE>

                      FLEMINGTON PHARMACEUTICAL CORPORATION

                          NOTES TO FINANCIAL STATEMENTS


         DEFINED CONTRIBUTION RETIREMENT PLANS - The Company had a 401(k)
         retirement plan covering substantially all employees. Company
         contributions were at the discretion of the Board of Directors. The
         Company made no contributions for the year ended July 31, 1998 ("fiscal
         1998") and the plan was terminated during fiscal 1998. In September
         1998, the Company adopted a new retirement plan providing for
         contributions at management's discretion. During the years ended July
         1999 and July 2000, the Company made contributions to the new
         retirement plan of approximately $4,000 and approximately $5,000,
         respectively.

         STOCK COMPENSATION - Statement of Financial Accounting Standards
         ("SFAS") No. 123, "Accounting" for Stock-Based Compensation," requires
         companies to measure employee stock compensation plans using the
         intrinsic value method of accounting.

         RISK CONCENTRATIONS:

         (a)      MAJOR CUSTOMERS - During fiscal 2000, the Company had revenue
                  from two customers located in the United States approximating
                  27% and 18%, respectively, of the Company's total revenue.

                  During fiscal 1999, the Company had revenue from one customer
                  located in Germany and two customers located in USA
                  approximating 19%, 14% and 10%, respectively, of the Company's
                  total revenue.


         (b)      ACCOUNTS RECEIVABLE - At July 31, 2000, the Company had
                  unsecured accounts receivable from one customer located in
                  USA, one customer located in France and one customer located
                  in the United Arab Emirates, approximating 33%, 20% and 15%,
                  respectively, of the Company's total accounts receivable. At
                  July 31, 1999, the Company had unsecured accounts receivable
                  from one customer located in USA, and two customers located in
                  Germany, approximating 34%, 16% and 8%, respectively, of the
                  Company's total accounts receivable. The Company has
                  long-standing relationships with its principal customers and
                  feels that credit risk associated with these customers is
                  limited. With regard to new customers, the Company receives
                  customer referrals through long standing relationships.

         (c)      SUPPLIER DEPENDENCE - The Company believes that certain raw
                  materials, including inactive ingredients, are available only
                  from a limited number of suppliers internationally and that
                  certain packaging materials intended for use in connection
                  with its spray products currently are available from limited
                  supply sources. The Company does not believe it will encounter
                  difficulties in obtaining inactive ingredients or packaging
                  materials necessary for the manufacture of its products.
                  However, there can be no assurance that the Company will be
                  able to enter into satisfactory purchasing agreements or
                  arrangements, thereby, causing a potential significant adverse
                  effect on the Company's ability to arrange for the manufacture
                  of formulated products.


         USE OF ESTIMATES - The preparation of financial statements in
         conformity with generally accepted accounting principles requires
         management to make estimates and assumptions that affect the reported
         amounts of assets and liabilities and disclosures of contingent assets
         and liabilities at the date of the financial statements and the
         reported amounts of revenues and expenses during the reporting period.
         Actual results could differ from those estimates.

         NET INCOME OR (LOSS) PER SHARE - The Company uses the weighted-average
         number of common shares outstanding during each period to compute basic
         loss per common share. Diluted loss per share is the same as basic loss
         per share, as losses have been incurred for all periods reports.

                                      F-7
<PAGE>

                      FLEMINGTON PHARMACEUTICAL CORPORATION

                          NOTES TO FINANCIAL STATEMENTS


         NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting
         Standards Board issued SFAS No. 133 Accounting for Derivative
         Instruments and Hedging Activities which, as amended, will be effective
         for its fiscal year ending July 31, 2001.

         The Company does not expect any significant impact to its financial
         statements from SFAS No. 133..

NOTE 2 - MANAGEMENT'S PLANS TO OVERCOME OPERATING AND LIQUIDITY DIFFICULTIES

         The Company's financial statements have been presented on the basis
         that it is a going concern, which contemplates the realization of
         assets and the satisfaction of liabilities in the normal course of
         business.

         The Company's continued existence is dependent upon its ability to
         achieve profitable operations or obtain additional financing. The
         Company is currently seeking collaborative arrangements with
         pharmaceutical companies for the joint development of delivery systems
         and the successful marketing of these delivery systems. The Company is
         exploring merger opportunities or other strategic alternatives to fund
         future operations.

         In view of the Company's very limited resources, its anticipated
         expenses and the competitive environment in which the Company operates,
         there can be no assurance that its operations will be sustained for the
         duration of its next fiscal year.

NOTE 3 - STOCKHOLDERS' EQUITY:

         PREFERRED STOCK - The Company's Certificate of Incorporation authorizes
         the issuance of up to 1,000,000 shares of Preferred Stock. None of such
         Preferred Stock has been designated or issued to date. The Board is
         authorized to issue shares of Preferred Stock from time to time in one
         or more series and to establish and designate any such series and to
         fix the number of shares and the relative conversion rights, voting,
         terms of redemption and liquidation.


NOTE 4 - RELATED PARTY TRANSACTIONS:

         LEGAL FEES - The Company has incurred legal fees with an officer and
         director of the Company. These fees approximated $66,000 and $93,000
         for the years ended July 31, 2000 and 1999, respectively.

         STOCKHOLDER'S NOTE RECEIVABLE - In April 1998, the Company loaned
         $60,000 to its President. The note is due on demand with interest at 7%
         due quarterly. Interest approximated $4,200 for each of the two years
         ended July 31, 2000.

NOTE 5 - COMMITMENTS AND CONTINGENCIES:

         SHAREHOLDER LAWSUIT - Monroe Parker Securities, Inc., the
         representative of several underwriters involved in underwriting the
         Company's Public Offering ceased market making activities in the
         Company's securities in late December 1997, and on January 5, 1998 was
         the subject of a complaint issued by the NASD for alleged violations of
         the NASD's rules in 1994 and 1995. In October 1998, the New York
         attorney general's office announced the indictment of Monroe Parker

                                      F-8
<PAGE>

                      FLEMINGTON PHARMACEUTICAL CORPORATION

                          NOTES TO FINANCIAL STATEMENTS


         Securities, Inc. and twelve (12) principals and brokers from the firm
         on charges that they have defrauded investors in the sale and trading
         of securities. These alleged violations have no connection with the
         Company's securities. See Note 5 regarding shareholder lawsuit.

         One of the Company's shareholders has filed a class action lawsuit on
         behalf of all purchasers of the Company's securities from November 1997
         to December 1997, against the Company and its officers alleging
         violations of federal securities laws arising in its initial public
         offering.

         A motion was filed by the Company and its officers to dismiss the
         complaint in its entirety in March 1999. In a memorandum and order
         filed October 12, 1999, the court ruled to allow the plaintiff to state
         a claim against the Company and its officers alleging the Company's
         Prospectus may have failed to disclose that the Underwriter had been
         violating federal securities laws by controlling markets for securities
         in which it acted as a market maker. All other allegations were
         dismissed by the court.

         Extensive discovery has been conducted, including depositions of
         plaintiff, the Company's officers and former corporate counsel. By
         Notice of Motion dated July 12, 2000, plaintiff moved the court to
         certify the matter as a class action pursuant to Rule 23 of the Federal
         Rules of Civil Procedure and the defendants have filed opposition
         papers and requested oral argument. Class certification was denied by
         the Court in a ruling made on November 8, 2000.

         In connection with this lawsuit, the Company has incurred professional
         fees of approximately $186,000 as of July 31, 2000. This lawsuit is
         covered under the Directors and Officers Insurance policy that the
         Company has in effect. The face amount of the insurance policy is
         $1,000,000 with a deductible of $100,000. The Company's defense costs
         in excess of $100,000 are now being reimbursed by the carrier. Counsel
         has not formed a professional conclusion that in the action described
         above an adverse outcome is either probable or remote. Although the
         Company feels that any additional costs above and beyond the deductible
         amount will be covered by insurance, there can be no guarantee that the
         Company will not incur additional liability in connection with this
         matter.

         EMPLOYMENT AGREEMENTS - The Company entered into separate employment
         agreements with its President and Chairman of the Board of Directors
         for a base annual salary of $200,000 and $150,000, respectively. These
         agreements provide for annual cost of living adjustments equal to the
         greater of the increase in the Consumer Price Index or 7.5% with
         additional increases and bonuses as shall be approved by the Board.
         Each agreement has a base term of three years, which became effective
         in November 1997 upon the completion of the public offering. The
         agreements are thereafter renewable for additional one-year periods,
         unless the Company gives notice to the contrary.

         In May 1998, the Company entered into 3-year employment contracts with
         a Vice President for Research and Development and a Vice President for
         Product Development at annual salaries of $125,000 and $100,000,
         respectively.

         CONSULTING AGREEMENT - In December 1996, the Company entered into
         agreement with a consulting company, (the "Consultant"), for assistance
         in finding suitable business opportunities. The agreement provides for
         the Company to pay a fee to the Consultant of 10% of the consideration
         received by the Company from projects identified in the agreement, net
         of expenses. The agreement also provides for the Company to pay a 5%
         fee for equity transactions arranged by the Consultant. In addition to
         the above, the Company issued a warrant to the Consultant to purchase
         up to 100,000 shares of the Company's common stock at $2.50 per share,
         with vesting of 20,000 shares upon completion of each successful
         project. No warrants were earned through July 31, 2000 pursuant to this
         agreement.

                                      F-9
<PAGE>

                      FLEMINGTON PHARMACEUTICAL CORPORATION

                          NOTES TO FINANCIAL STATEMENTS


         PUBLIC RELATIONS CONSULTANT - In March 1998, the Company granted a
         public relations consultant options to purchase 200,000 shares with
         exercise prices of $1.00 and 120,000 shares with an exercise price of
         $2.00, all expiring five years from the date of grant.

         JOINT VENTURE - In December 1997, the Company entered into a joint
         venture agreement with a business development corporation for the
         purposes of developing products. For the year ended July 31, 2000,
         approximately $245,000 total costs had been recorded for this venture
         and approximately $122,000 had been invoiced to the joint venture
         partner. At July 31, 2000, approximately $80,000 was due from the joint
         venture partner.

         LEASES - In August 2000, the Company entered into a 5-year lease
         agreement, effective October 2000, for approximately 4,500 square feet
         of office, laboratory and manufacturing space. Annual rent is
         approximately $63,000 plus real estate taxes, currently estimated to be
         approximately $11,000 annually. Previously, the Company rented office
         space on a month to month basis. Rent expense for the Company totaled
         approximately $26,000 and $33,000 for the years ended July 31, 2000 and
         1999, respectively.

         GOVERNMENT REGULATION - The development, manufacture and
         commercialization of pharmaceuticals are subject to extensive
         regulation by various federal and state government entities. The
         Company cannot determine the impact of government regulations on the
         development of its delivery systems.

NOTE 6 - INCOME TAXES:

         No provision for current and deferred income taxes is required for the
         years ended July 31, 2000 and 1999.

         The significant components of the Company's net deferred tax asset are
         summarized as follows:

<TABLE>
<CAPTION>
                                                                        July 31
                                                               ------------------------
                                                                  2000          1999
                                                               ----------    ----------
<S>                                                            <C>           <C>
           Differences between the cash basis of accounting
           for income tax reporting and the accrual basis
           for financial reporting purposes ...............    $  (19,000)   $  (38,000)
             Net operating loss carryforwards .............     1,610,000     1,298,000
                                                               ----------    ----------

                                                                1,591,000     1,260,000

           Valuation allowance ............................     1,591,000     1,260,000
                                                               ----------    ----------
           Net deferred tax asset .........................    $       --    $       --
                                                               ==========    ==========
</TABLE>

         A valuation allowance is provided when it is more likely than not that
         some portion of the deferred tax asset will not be realized. The
         Company has determined, based on the Company's prior history of
         recurring losses, that a full valuation allowance is appropriate at
         July 31, 2000 and 1999.

         At July 31, 2000, the Company has federal and state net operating loss
         carryforwards for financial reporting and income tax purposes of
         approximately $4,419,000 and $1,797,000, respectively, which can be
         used to offset current and future taxable income through the year 2020.

                                      F-10
<PAGE>

                      FLEMINGTON PHARMACEUTICAL CORPORATION

                          NOTES TO FINANCIAL STATEMENTS


NOTE 7 - STOCK OPTIONS:

         At July 31, 2000, The Company has three stock option plans, the 1992
         Stock Option Plan (the "1992 Plan"), the 1997 Stock Option Plan (the
         "1997 Plan") and the 1998 Stock Option Plan (the "1998 Plan").

         THE 1992 PLAN - In May 1992, the Company adopted the 1992 Plan under
         which 500,000 shares of common stock were reserved for issuance either
         as incentive stock options ("ISO's") under the Internal Revenue Code or
         as non-qualified options. ISOs may be granted to employees and officers
         of the Company and non-qualified may be granted to consultants,
         directors, employees and officers of the Company. Options to purchase
         Company's common stock could not be granted at a price less than the
         fair market value of the common stock at the date of grant and will
         expire not more than ten years from the date of grant. ISOs granted to
         a 10% or more stockholder could not be for less than 110% of fair
         market value or for a term of more than 5 years.

         Information on option activity for the 1992 Plan for fiscal 2000 and
         1999 is as follows: (All grants were at an average exercise price of
         $1.78 per share.)

                                                          July 31,
                                               -----------------------------
                                                       2000      1999
                                                       ----      ----
           Balance - beginning of year .....         500,000   500,000
             Options granted:
             To 10% or more shareholders ...              --        --
             To others .....................              --        --
           Options cancelled ...............              --        --
                                               -----------------------------
           Balance - end of year ...........         500,000   500,000
                                               =============================
           Options exercisable - end of year         500,000   500,000
                                               =============================


         1997 PLAN - In January 1997, the Company's Board of Directors adopted
         the 1997 Plan, providing for the issuance of options to employees,
         officers and under certain circumstances, directors of and consultants
         to the Company. Options granted under the plan may be either incentive
         stock options as defined in the Internal Revenue Code or non-qualified
         stock options. The total number of shares of common stock reserved for
         issuance under the plan is 500,000 shares.


         Information on option activity of the 1997 Plan for fiscal 2000 and
         1999 is as follows: (All grants were at an average exercise price of
         $1.22 per share)


                                                          July 31,
                                               -----------------------------
                                                       2000      1999
                                                       ----      ----
           Balance - beginning of year .....         500,000   500,000
             Options granted:
             To 10% or more shareholders (b)              --        --
             To others .....................              --        --
           Options cancelled ...............              --        --
                                               -----------------------------
           Balance - end of year ...........         500,000   500,000
                                               =============================
           Options exercisable - end of year         500,000   500,000
                                               =============================

                                      F-11
<PAGE>

                      FLEMINGTON PHARMACEUTICAL CORPORATION

                          NOTES TO FINANCIAL STATEMENTS


         1998 PLAN - In June 1998, the Company's Board of Directors adopted the
         1998 Plan, providing for the issuance of options to employees, officers
         and under certain circumstances, directors of and consultants to the
         Company. Options granted under the plan may be either incentive stock
         options as defined in the Internal Revenue Code or non-qualified stock
         options. The total number of shares of common stock reserved for
         issuance under the plan is 500,000 shares.

         Information on option activity of the 1998 Plan for fiscal 2000 and
         1999 is as follows (all grants were at an average exercise price of
         $1.12 per share):

                                                          July 31,
                                               -----------------------------
                                                       2000      1999
                                                     -------   --------
           Balance - beginning of year .....         100,000        --
             Options granted:
             To 10% or more shareholders ...          95,000        --
             To others (a) .................         305,000   100,000
           Options cancelled ...............              --        --
                                               -----------------------------
           Balance - end of year ...........         500,000   100,000
                                               =============================
           Options exercisable - end of year         500,000   100,000
                                               =============================


         The Company uses the intrinsic value method of accounting to measure
         compensation expense. If the fair value method had been used to measure
         compensation expense, net loss would have increased by $361,000 or $.08
         per share to $1,540,000 or $.35 per share for fiscal 2000 and
         approximately $250,000 or $.06 per share to $1,617,000 or $.41 per
         share for fiscal 1999.

         The fair value of options granted in fiscal 2000 and 1999 were
         estimated at the date of grant using a Black-Scholes option model with
         the following weighted-average assumptions, respectively: risk-free
         interest rates of 5.5%, yield of 0.0%, volatility factors of the
         expected market price of the Company's Common Stock of 10% to 174% and
         a weighted-average expected life of the options of five (5) to ten (10)
         years.

         The Black-Scholes option valuation model was developed for use in
         estimating the fair value of traded options, which have no vesting
         restrictions and are fully transferable. In addition, option valuation
         models require input of highly subjective assumptions including the
         expected stock price volatility. When the Company shares were not
         traded publicly, the employee stock options had characteristics
         significantly different from those of publicly traded options. Because
         changes in the subjective input assumptions can materially affect fair
         value estimate, in management's opinion, the existing models do not
         necessarily provide a reliable single estimate of the fair value of its
         employee stock options.

         OTHER NON-PLAN OPTIONS AND WARRANTS - At July 31, 2000 there were
         outstanding the following classes and numbers of instruments
         exercisable for Common Stock:

         A.   680,000 Class A Warrants, issued in connection with the Public
         Offering, exercisable until November 2002, to purchase a like number of
         shares of Common Stock at an exercise price of $5.80 per share.

         B.   68,000 units, issued to the Underwriter in connection with the
         Public Offering, exercisable until November 2002, to purchase 68,000
         units, each consisting of one share of Common Stock and one Class A
         Warrant at an exercise price of $9.74 per unit. Each Class A Warrant
         included in the units is exercisable on the same terms as is described
         above in paragraph A.

                                      F-12
<PAGE>

                      FLEMINGTON PHARMACEUTICAL CORPORATION

                          NOTES TO FINANCIAL STATEMENTS


         C.   800,000 stock options, not issued under any of the plans, as
         follows (See also Note 4 -Commitments and Contingencies):

         o 300,000 options each issued to the Company's President and
         Chairman of the Board of Directors, for a total of 600,000, having an
         exercise price of $1.84 per share, issued in connection with their
         respective employment agreements in June 1997, exercisable until
         November 2007.

         o 100,000 options each issued to the Company's Vice President for
         Research and Development and Vice President for Product Development in
         May 1998, for a total of 200,000, in connection with their respective
         employment agreements, having an exercise price of $1.75 per share,
         exercisable until May 2008.

         D.   100,000 warrants issued to a consulting company as disclosed under
         the "Consulting Agreements" section of "Commitments and Contingencies".

         E.   200,000 warrants issued to a consulting company as disclosed under
         the "Outstanding Warrants and Options" section of "Business".

                                      F-13
<PAGE>

                                   SIGNATURES

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

                                                 FLEMINGTON PHARMACEUTICAL
                                                 CORPORATION


Date:                                  By: /S/ HARRY A. DUGGER, III
                                           ------------------------------------
                                               Harry A. Dugger, III, President


         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report is signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.


              SIGNATURES                    TITLE                          DATE
              ----------                    -----                          ----

/s/ HARRY A. DUGGER, III     President and Chief Executive Officer
------------------------     (Principal Executive Officer)
Harry A. Dugger, III


/s/ DONALD DEITMAN           Chief Financial Officer
------------------           (Principal Financial Officer)
Donald Deitman


/s/ JOHN J. MORONEY          Chairman of the Board and Director
-------------------
John J. Moroney


/s/ ROBERT F. SCHAUL         Secretary and Director
--------------------
Robert F. Schaul

/s/ JACK J. KORNREICH        Director
---------------------
Jack J. Kornreich

                                                                              44

<PAGE>

              INCORPORATED DOCUMENTS                  SEC EXHIBIT REFERENCE
              ----------------------                  ---------------------

2.1      Agreement of Merger dated as of         As filed with the Registrant's
         October 29, 1998                        Preliminary Proxy Statement on
                                                 October 20, 1998, File No.
                                                 000-23399

3.1      Certificate of Incorporation of         As filed with the Registrant's
         the Registrant, as amended              Form SB-2, on August 8, 1997,
                                                 File No. 333-33201

3.2      Bylaws of the Registrant, as amended    As filed with the Registrant's
                                                 Form SB-2, on August 8, 1997,
                                                 File No. 333-33201

4.1      Form of Warrant Agreement               As filed with the Registrant's
                                                 Form SB-2, on October 31, 1997,
                                                 File No. 333-33201

4.3      Form of Class A Warrant Certificate     As filed with the Registrant's
                                                 Form SB-2, on October 31, 1997,
                                                 File No. 333-33201

4.4      Form of Underwriters' Option            As filed with the Registrant's
         Agreement                               Form SB-2, on October 31, 1997,
                                                 File No. 333-33201

10.1     Employment Agreement with Harry A.      As filed with the Registrant's
         Dugger, III, Ph.D.                      Form SB-2, on August 8, 1997,
                                                 File No. 333-33201

10.2     Employment Agreement with John J.       As filed with the Registrant's
         Moroney                                 Form SB-2, on October 3, 1997,
                                                 File No. 333-33201

10.3     Agreement dated December 7, 1996        As filed with the Registrant's
         between the Registrant and Altana,      Form SB-2, on August 8, 1997,
         Inc.                                    File No. 333-33201

10.4     Registrant's 1992 Stock Option Plan     As filed with the Registrant's
                                                 Form SB-2, on August 8, 1997,
                                                 File No. 333-33201

10.5     Form of Option Agreement under the      As filed with the Registrant's
         1992 Stock Option Plan                  Form SB-2, on October 3, 1997,
                                                 File No. 333-33201

10.6     Registrant's 1997 Stock Option Plan     As filed with the Registrant's
                                                 Form SB-2, on August 8, 1997,
                                                 File No. 333-33201

10.7     Form of Option Agreement under the      As filed with the Registrant's
         1997 Stock Option Plan                  Form SB-2, on October 3, 1997,
                                                 File No. 333-33201

10.8     Agreement with Rapid Spray              As filed with the Registrant's
         (Clemastine) dated June 2, 1992         Form SB-2, on August 8, 1997,
                                                 File No. 333-33201

10.9     Agreement with Rapid Spray              As filed with the Registrant's
         (Nitroglycerin) dated June 2, 1992      Form SB-2, on August 8, 1997,
                                                 File No. 333-33201

<PAGE>

              INCORPORATED DOCUMENTS                  SEC EXHIBIT REFERENCE
              ----------------------                  ---------------------

10.10    Agreement with Creative Technologies,   As filed with the Registrant's
         Inc. dated December 26, 1996            Form SB-2, on October 3, 1997,
                                                 File No. 333-33201

10.11    Registrant's 1998 Stock Option Plan     As filed with the Registrant's
                                                 Preliminary  Proxy Statement on
                                                 October 20, 1998, File No.
                                                 000-23399

10.12    Employment Agreement with Donald P.     As filed with the Registrant's
         Cox, Ph.D.                              Form 10-KSB on October 28,
                                                 1999, File No. 000-23399

10.13    Employment Agreement with Kenneth       As filed with the Registrant's
         Cleaver, Ph.D.                          Form 10-KSB on October 28,
                                                 1999, File No. 000-23399

10.14    Amendment to Consulting Agreement       As filed with the Registrant's
         with Saggi Capital Corp. dated          Form 10-KSB on October 28,
         March 25, 1998                          1999, File No. 000-23399

         FILED HEREWITH

11.1     Computation of earnings per share

27.1     Financial Data Schedule for fiscal
         year ended July 31, 2000