SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-KSB

    [X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT
         OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998

    [ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
         ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _________


                           Commission File No. 0-19844
                                               -------

                                PARACELSIAN, INC.
             ------------------------------------------------------
                 (Name of small business issuer in its charter)


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


    222 Langmuir Laboratories, Cornel Technology Park, Ithaca, New York 14850
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                    (Address of principal executive offices)          Zip Code

                    Issuer's telephone number: (607) 257-4224
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           Securities registered under Section 12(b) of the Act: None

              Securities registered under Section 12(g) of the Act:

                          Common Stock, $.01 par value
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                                (Title of class)

                    Redeemable Common Stock Purchase Warrants
--------------------------------------------------------------------------------
                                (Title of class)

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

                                Yes [X] No [ ]

<PAGE>


Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

Issuer's revenues for its most recent fiscal year were $ 55,730.

The  aggregate  market value of the voting stock (based on the closing  price of
such stock on NASD OTC Electronic  Bulletin Board) held by non-affiliates of the
Registrant at December 22, 1998 was approximately $7,637,595.

There were  18,690,253  shares of Common Stock and 1,736,870  Redeemable  Common
Stock Purchase Warrants outstanding at December 22, 1998.

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

COMPANY HISTORY

Paracelsian,  Inc.  ("Paracelsian"  or the "Company") is a Delaware  corporation
that was incorporated in 1990. The Company's  initial strategy was to refine and
commercialize the Ah-IMMUNOASSAY(TM) for environmental applications.  Management
of the Company at that time believed that the refined  Ah-IMMUNOASSAY(TM)  would
be  effective  as an  inexpensive  and easy to use test  for the  screening  and
monitoring of polluted soil and water samples. The Company received a patent for
this   application   in  October  1993,  and  began  to  develop  a  program  to
commercialize  the  technology.  The  result of this  work is the  Toxicological
Screening Assay system.

In 1995,  other patented assays  developed as a result of the Company's  ongoing
research with the Ah-IMMUNOASSAY(TM) were used to screen potentially efficacious
herbal extracts of Traditional  Chinese  Medicines ("TCM") for natural compounds
which would be effective in treating different types of cancer. The 2,764 herbal
extracts used in the screening are owned by the Company and were acquired in the
purchase of Pacific Liaisons in 1994.

The screening work  identified  many promising  drug  candidates.  One compound,
Andrographalide,  was  identified  by the Company's  assay  technology as having
significant  potential to inhibit excessive  multiplication of cells involved in
serious   diseases   such  as  cancer  and  viral   infections.   In   addition,
Andrographalide  has been found to be more  effective  when used  together  with
several other compounds such as AZT.

In 1995,  the Company made the decision to  commercialize  Andrographalide  as a
dietary supplement.  A Phase I safety study to test for efficacy and toxicity of
the compound was successfully  conducted in January 1996 at Bastyr University in
Seattle,  Washington. Upon receiving positive results from the Bastyr study, the
Company  began  developing  two  Andrographalide  based retail  products for the
dietary supplement market. One product,  AndroVir(TM), was targeted as a dietary
supplement  that  enhanced  the  immune  system for those  suffering  from viral
infections. The other product, Androcar(TM), was to be marketed as enhancing the
immune system for those suffering from neoplastic  growth of tumors.  Management
planned to launch  these  products in May 1997.  In March 1997,  key  management
personnel  resigned  from the Company and the launch of the retail  products was
postponed until September 1997.

In June  1997,  the US Food  and  Drug  Administration  ("FDA")  ruled  that the
products  could not be sold as  dietary  supplements  with the  intended  market
positioning and were to be classified,  based on the marketing claims, as drugs.
The drug classification  meant the products would be subject to extensive animal
and human  clinical  trials before the FDA would approve the products for market
introduction.  The company  immediately  canceled  its launch of the two dietary
supplements.

                                       1
<PAGE>


In January 1998,  Biomar  International,  Inc., a Delaware  corporation with its
principal  office  in  Chapel  Hill,  North  Carolina  ("Biomar"),  purchased  a
significant  interest in the Company.  The stock purchase  agreement gave Biomar
the right to  appoint  a new Board of  Directors.  The new Board  named  Bernard
Landes,  Chairman  of the Board,  President  and Chief  Executive  Officer.  Mr.
Landes,  who  had no  prior  relationship  with  the  Company,  has  significant
experience in the natural food products industry.

COMPANY BUSINESS

Paracelsian  is a  development  stage  bioscience  and  technology  company that
utilizes its  proprietary  screening  technology to identify  novel  therapeutic
compounds from herbal sources and to define the  biological  mechanisms  through
which herbal medicines affect cellular  function.  The screening  technology has
been developed by the Company to identify  potential  products that regulate the
biological  signals  generated by targeted  cells that result in  controlled  or
uncontrolled  cell  growth and  division.  The  Company's  screening  technology
evaluates the effects of herbal products on intracellular signals referred to as
"signal transduction technology".

Cellular  signaling  is one of the basic steps in biology and is  necessary  for
normal  growth of tissues to support  life.  The  Company's  technology  enables
researchers to observe signal  transduction and measure the effects of chemicals
contained  in  synthetic  or  natural  compounds,  such as herbal  extracts,  on
cellular processes.  In the course of these studies, the Company can distinguish
the effects of such chemicals on targeted  cells,  thereby  screening  compounds
within herbs and herbal  extracts to identify those with  promising  therapeutic
effects.

The Company believes that the results of its research coincide with the need for
sound scientific  understanding of herbal  medicines.  The Company's  technology
provides  tools for the definition of solid and valid  scientific  bases for the
beneficial  health  effects of herbal  medicines  and  dietary  supplements.  In
addition,  the Company has utilized its technology to screen and identify active
substances contained within its library of traditional Chinese medicines.

The  Company  has  the  ability  to  develop  novel   procedures  for  detecting
biologically  relevant  activities of complex  mixtures of compounds (such as in
the herbal extracts) or of the active constituents thereof. These procedures are
generally referred to as bioassays.

The Company's  assay  technology  enables  researchers to measure the effects of
chemicals  contained in synthetic  and natural  compounds on normal and abnormal
cell division and other  biological  processes.  The ability to conduct in vitro
screening of  biological  activity,  quickly  without  lengthy and costly animal
testing,  is a significant  innovation for  researchers  in the  pharmaceutical,
agrochemical, herbal supplement and environmental testing industries.

Typically,  the Company will  investigate  the effect of a compound on a disease
(such as cancer) or symptom (such as depression). The Company scientists conduct
in depth  research  of the  scientific  literature  and  review  the  results of
successful  clinical  trials to establish the best science for  identifying  the
"mechanisms  of action"  associated  with the  disease or  symptom.  The Company
scientists  can then test new  compounds  for their effect on the  "mechanism of
action".  For example, in the Drug Screen Assay System, the Company developed an
assay that  measures  the  cellular  expression  of an enzyme,  CDK1.  Through a
literature  search and through  primary  research the Company has identified the
expression of CDK1 to be highly  correlated with many types of cancers in humans
and animals.

The  Company  designed  and  patented  an assay to  measure  the  amount of CDK1
expressed by a normal cell when it is exposed to a cancer-causing  compound.  In
addition, the Company uses the assay to examine the amount of expression of CDK1
in a cancerous cell when it is exposed to a potentially  efficacious compound or
drug.  The assumption  behind the second test is that a compound,  which lowered
the CDK1 over  expression  in  cancerous  cells,  may be  effective  in fighting
cancer.

Paracelsian  develops  bioassay-based  products  that  are  used  as  diagnostic
screening  tools in  markets  where  there is a need to  quantify,  quickly  and
easily, the effects of single compounds as well as complex mixtures of chemicals

                                       2
<PAGE>


on cellular and  biochemical  function.  Once the  bioassays are developed for a
specific  use,  the  Company  licenses  the  products  and  technology  to  well
positioned  commercialization  partners within each targeted market. The Company
expects to receive most of its future  revenues from the royalties and licensing
fees generated by the licensing agreements.

The Company's marketing and development program for bioassay products focuses on
large  commercial  markets where: (1) there is a well established need for tools
capable of  screening  complex  versus  simple  mixtures of  molecules;  (2) the
biotechnology-based  approach to screening  offers a significant cost or quality
improvement   versus  the  current   approach,   and  (3)  the   acceptance   of
biotechnology-based screening tools in that industry is at an early stage.

To date, the Company has developed  specific  need-driven  bioassay  systems for
three markets: (1) herbal supplements,  (2) environmental  testing, and (3) drug
discovery and development.

                              PARACELSIAN PRODUCTS,
                              WITH MARKET AND NEED

--------------------------------------------------------------------------------
        PRODUCT                     MARKET                      NEED
================================================================================
        BIOFIT(TM)                                      ESTABLISH A QUALITY
     QUALITY ASSURANCE                                 ASSURANCE PROGRAM THAT
       ASSAY SYSTEM            HERBAL SUPPLEMENTS         CONFIRMS PRODUCT
                                                             BIOACTIVITY

--------------------------------------------------------------------------------
     AH-IMMUNOASSAY(TM)                                 QUICK, INEXPENSIVE FIELD
  TOXICOLOGICAL SCREENING     ENVIRONMENTAL TESTING    TEST FOR DIOXIN POLLUTION
      ASSAY SYSTEM

--------------------------------------------------------------------------------
                                                      MORE EFFECTIVE METHOD FOR
DRUG SCREENING ASSAY SYSTEM   NATURAL PRODUCT DRUG   SCREENING NATURAL COMPOUNDS
                            DISCOVERY AND DEVELOPMENT FOR THERAPEUTIC BENEFITS
--------------------------------------------------------------------------------


The herbal supplement market presents the opportunity to commercialize a quality
assurance  program that identifies the bioactivity  present in herbal  products,
which are complex mixtures of substances.  This product is a significant advance
versus current practices for verifying the quality and the bioactivity of herbal
products.

The Company  entered into an agreement  with R.P.  Scherer North America in July
1998 that established  R.P. Scherer as the exclusive  marketing and distribution
agent  for  Paracelsian's  herbal  quality  assurance  product,  the  BioFIT(TM)
Certification  program in North  America.  R.P.  Scherer  was also  granted  the
worldwide rights to use the BioFIT(TM) program with its soft-gel products in the
dietary  supplement  and OTC markets.  R. P.  Scherer,  a subsidiary of Cardinal
Health of St. Louis,  MO, is the largest  manufacturer of soft-gel  capsules for
use in the pharmaceutical and dietary  supplement  industries.  The agreement is
expected to result in the payment of significant  development fees and licensing
revenues to the Company in 1999.

Within the environmental and toxicological  screening markets, the Company is in
final negotiations with a large Japanese industrial  conglomerate to license the
Ah-IMMUNOASSAY(TM)  technology  for  screening  dioxin  pollution in Japan.  The
Company anticipates  receiving  significant revenues from the agreement over the
next three years.

Within the drug discovery  market,  the Company has entered into a collaborative
research agreement with the Southern Research  Institute.  Under this agreement,
the Southern  Research  Institute will test a series of the 

                                       3
<PAGE>


Company's TCM herbal extracts for "in vivo"  anti-tumor  activity  against human
breast cancer and prostate cancer. The companies will jointly license and market
promising products identified in the clinical studies.

Until 1998,  the  Company's  strategy was to conduct  "in-house"  discovery  and
development of natural drug compounds.  The strategy culminated in an attempt to
launch a proprietary  herbal  supplement to enhance the immune  system.  In late
1997,  the FDA ruled that the  targeting of the product to those with cancer and
HIV made the product a potential drug subject to the testing  requirement of new
drug compounds.

The new management team that was appointed after the January 1998 Biomar capital
infusion  refocused  the  Company's  business  strategy.   Current  management's
priority  is  to  create  current  income  and  increase  shareholder  value  by
maximizing  the revenue  potential of the Company's  portfolio of patented assay
technologies through licensing  agreements and joint venture  opportunities with
outside  partners.  The Company will still devote  resources to the discovery of
herbal  compounds  that have the  potential  to become  patented  pharmaceutical
products.

In 1999,  the Company  will  continue to pursue the  following  strategies:  (i)
Identify  and develop  new markets in  industries  which will  benefit  from the
adoption of the bioassay  testing  technologies;  (ii) Form  co-development  and
licensing  partnerships  in these new markets with the industry  leaders;  (iii)
Structure  development  agreements that will provide up front licensing payments
and on-going royalties from partnership revenues;  and (iv) Promote the bioassay
technologies  as the "Industry  Benchmark"  within these new  industries.  These
strategies will be executed by focusing the Company's primary  activities on the
following three areas:

(1) Quality  Assurance.  The Company  researches  the  scientific  literature to
determine the mechanisms of action for herbal or botanical products and develops
assays to determine the range of activity for each of the  biological  functions
the product could affect.  The Company then uses its  proprietary  technology to
evaluate these products based on how they perform in a  scientifically  selected
battery of functional tests. If the product generates activity within the proper
range for each of the  activities  being  tested,  the product is  certified  as
BioFIT(TM),  or "Bio  Functional  Integrity  Tested," the Company's  trademarked
designation. BioFIT(TM) assays confirm consistent in vitro biological activities
within a carefully defined range,  closely associated with the benefit claims on
the product's label. The Company intends to market the BioFIT(TM) designation to
producers of herbal medicines and dietary supplements which the Company believes
will enable these producers to (i)  differentiate  their products from similarly
labeled  products based on their products'  consistent  delivery of the benefits
claimed by their  producers;  (ii) ensure  "batch to batch"  consistency  in the
production of their products;  (iii) eliminate  consumer  confusion as to "which
product to buy?"; and (iv) provide more "consistent" products and information in
the herbal and dietary  supplement  market.  The Company is  completing  initial
BioFIT(TM)  certifications  for  five  herbal  products.  Assays  to test  these
products  are in the final  stages of  development.  The Company is also working
with the trade  associations of the herbal and dietary supplement market to test
product functionality.

The Company  entered into an agreement  with R.P.  Scherer North America in July
1998 that established  R.P. Scherer as the exclusive  marketing and distribution
agent for the BioFIT(TM)  Certification  program in North America.  In a related
agreement,  R.P.  Scherer  was also  granted  the  worldwide  rights  to use the
BioFIT(TM)  program with its soft-gel products in the dietary supplement and OTC
markets.  The  agreements  allow R. P. Scherer  exclusive use of the  BioFIT(TM)
Quality Assurance  Certification  program for a line of herbal supplements to be
offered  in a  softgel  capsule  form.  R.  P.  Scherer,  acting  as a  contract
manufacturer, will market the product line to wholesale customers worldwide. The
initial roll out of five herbal products, along with the commencement of revenue
to the Company is anticipated to begin in the first quarter of 1999. The Company
anticipates  that the  agreement  will  result  in the  payment  of  significant
development fees and licensing revenues to the Company in 1999.

One of the herbal supplements being evaluated for the R. P. Scherer Agreement is
Echinacea.  In the  dietary  supplement  industry,  claims  have  been made that
Echinacea  acts  as  an  immune  system  enhancer.  R.  P.  Scherer  provided  5
commercially  available Echinacea products for the Company to evaluate using the
BioFIT(TM)   Certification   program.   The  results  of  the   evaluation   are
illustrative.

                                       4
<PAGE>


After conducting a literature search and performing direct research, the Company
scientists  identified  the  TNF-alpha  protein as the  "mechanism of action" or
biomarker for the stimulation induced in human immune cells.  Company scientists
then tested each  supplement  with the BioFIT(TM)  Echinacea  Assay to see which
product was more effective in stimulating the TNF-alpha  marker.  The results of
the test are summarized in Table 2.

Table 2 clearly  indicated  that Brand C has the greater effect on the TNF-alpha
marker.  The evaluation  also shows the wide range of  bioactivity  found in the
different  samples.  Ordinarily,  there  would be no way to test the effect of a
complex herbal  compound on the TNF-alpha  response.  Researchers  would have to
identify  the  compound  in the herb that they  thought  stimulated  the  immune
response in humans.  They would then test their product for the concentration of
that compound and compare it to a benchmark concentration.

In the case of Echinacea, some manufacturers standardize their product against a
phenolic acid that is found only in Echinacea  under the  assumption  that it is
the active  ingredient  which  results in the  benefits  claimed  for the herbal
supplement. Paracelsian scientists have found that it is possible to standardize
the product for its  concentration  of the phenolic acid and have no bioactivity
that would affect the human immune system.

The  BioFIT(TM)  Assay allows R. P.  Scherer to identify the herb samples  which
have an effect on human immune cells  without  having to conduct human or animal
clinical trials and offers an inexpensive way of accurately  identifying sources
of raw material which have high levels of the relevant bioactivity. In addition,
R.P.  Scherer  can  evaluate,   quickly  and  easily,   its  competitors  herbal
supplements.


                           Echinacea - Preliminary Testing

                       Immune Support Product-Induced Stimulation
                           Macrophages to Produce TNF

                                        Product
                      ----------------------------------------------
                      Brand     Brand     Brand     Brand     Brand
                        A         B         C         D         E
                      -----     -----     -----     -----     -----

TNF-alpha Response    0.249     0.145     1.054     0.057     0.717


This new BioFIT(TM)  Certification  Program which utilizes a unique "functional"
approach to quality  assurance will provide the natural products  consumers more
accurate  information  when  purchasing  herbs  and  other  botanical  products.
BioFIT(TM)  Certification  is based on demonstrated  biological  activity in the
product and goes beyond  current  analytical  techniques  that only  measure the
presence or absence of certain marker compounds.

BioFIT(TM)  Quality  Assurance  Certification  bridges the gap between  chemical
assay methods of validation  versus the use of animal and human clinical  trials
to validate the  effectiveness of natural products relative to the structure and
function claims being made.

         (2) Product  Discovery  and  Development.  The Company  owns an extract
library of approximately  2,764  Traditional  Chinese  Medicines and other plant
materials  which it has screened  using its  proprietary  screening  technology.
Through this  screening  process,  the Company has identified ten (10) potential
therapeutic compounds that the Company intends to target as drug candidates.

                                       5
<PAGE>


In July 1998, the Company entered into a collaborative  research  agreement with
the  Southern  Research  Institute  ("SRI") in  Birmingham,  Alabama.  Under the
Agreement,  the  scientists  from the two  companies  will work to identify  and
develop  compounds,  such as  Andrographalide,  from the  Company's  TCM extract
library, which have the potential to become anti-cancer pharmaceuticals. Several
of the most promising  extracts and  Andrographalide  are the subjects of animal
trials currently  underway at SRI.  Management  expects to obtain the results of
the animal tests in the Spring of 1999. If the results are positive, SRI and the
Company  intend to proceed with the next phase of clinical  trials.  The goal of
the  SRI/Paracelsian  collaboration  is to partner  with a major  pharmaceutical
partner to develop any potential drug  candidates in the shortest  possible time
period.

         (3) Environmental Screening. The Company's patented  Ah-IMMUNOASSAY(TM)
detects  potentially  toxic  dioxins  in the  environment  and  provides  quick,
accurate and inexpensive results compared to traditional  analytical techniques.
The potential applications for this assay include commercial  incinerators,  the
organic farming industry and the general field of environmental management.

The Company has decided to focus its marketing and distribution resources on the
use of the  Ah-IMMUNOASSAY(TM)  to detect dioxins in the Japanese market for the
following  reasons:  (1) Japan has a serious dioxin pollution  problem for which
the  government has only recently begun to enforce  emission  requirements;  (2)
incinerators  that do not meet government  emission  requirements are being shut
down,  causing  disruption  in many  industries;  (3) unlike the US and  Western
European  governments,  the Japanese  government  has not imposed  standards and
types of  tests to be used in  monitoring  pollution  discharge  and as a result
companies  are more open to new  technologies  which save money;  and (4) unlike
their  counterparts  in  the  US  and  Western  Europe,  industry  leaders  have
acknowledged that dioxin is a problem. The Company is in final negotiations with
a large  Japanese  industrial  conglomerate  to license  the  Ah-IMMUNOASSAY(TM)
technology  for screening  dioxin  pollution in Japan.  The Company  anticipates
receiving significant revenues from the agreement over the next three years.

Future  revenues  are  anticipated  to be derived  from  sales of the  Company's
products and services  that are  currently  under  development  and royalties in
connection with licensing of its technology.  There can be no assurance that the
Company will be able to attain such  revenues in  sufficient  amounts to achieve
profitable operations. Results of operations in the future will be influenced by
numerous factors, including the ability of the Company to develop and manage the
introduction of its new services,  market acceptance of the Company's  services,
competition and the ability to control costs.

INDUSTRY BACKGROUND

Paracelsian is a development stage  biotechnology  start-up  company.  The $17.4
billion  Biotechnology  Industry  grew 19% in 1997.  According to Ernst & Young,
public  companies  account for $14.0  billion in revenues.  Their  revenues were
derived from the following sources.

                         PUBLIC BIOTECHNOLOGY COMPANIES
                             REVENUE SOURCES IN 1997

                                     1997        % CHANGE    % OF TOTAL REVENUES
                                $ IN THOUSANDS   VS. 1996
--------------------------------------------------------------------------------
 PRODUCT SALES                      $10,635         20%              76%
--------------------------------------------------------------------------------
 CONTRACT/COLLABORATIVE RESEARCH    $ 1,550         58%              11%
--------------------------------------------------------------------------------
 ROYALTIES AND LICENSE FEES         $   815          9%               6%
--------------------------------------------------------------------------------
 INVESTMENT INCOME                  $   600         44%               4%
--------------------------------------------------------------------------------
 OTHER REVENUES                     $   432          1%               3%
--------------------------------------------------------------------------------
     TOTAL REVENUES                 $14,032         22%             100%

                                       6
<PAGE>


The industry has experienced significant revenue growth over the last few years,
especially in the Product  Sales  category and as a result the industry is close
to reaching the break-even  point. For public  companies,  the industry net loss
fell to $1.8 billion in 1997  compared to a $2.2 billion net loss on revenues of
$11.5 billion in the previous year.

Ernst & Young segments the Products  Sales  category  identified in Table 3 into
six markets.  They are: (1)  Diagnostic  tools,  which  includes blood and other
medical  diagnostic  tests;  (2)  Therapeutic,  which includes human health care
products such as drug products and vaccines;  (3)  Agricultural,  which includes
microbial crop protectants,  plant genetics,  food processing and animal health;
(4)  Supplier,  which  includes  instrumentation,  lab supplies and reagents and
other similar products; (5) Chemical, environmental and services category, which
includes fine chemicals, environmental diagnostics and bio-remediation;  and (6)
Break Away  companies,  which are engaged in the  transfer  and  application  of
biotechnological innovations to new markets.

"Break-away"   biotechnology   companies   such  as   Paracelsian   apply  their
biologically   based  tools  and  technologies  to  markets  where   traditional
technologies  such as  analytical  chemistry are industry  benchmarks.  The more
successful  "break-away"  company products provide  significant  advantages over
non-biotechnology  based  competitors.  The other  segments of the industry have
been  slow to  recognize  substantial  profits  because  of  higher  development
expenses and agencies. The federal approval process for biotechnology  medicines
is both  lengthy  and  expensive.  According  to a study by the U.S.  Office  of
Technology Assessment, it costs $200 million to $350 million and takes from 7 to
12 years for a product to move  through the drug  development  and FDA  approval
process, before the products can be sold.

COMPETITION

The major  competitors  for  BioFIT(TM)  are  laboratories  that have  expertise
working with biological  assays.  Two industries outside of the biotech industry
that could potentially compete are clinical testing labs and toxicology and food
safety  laboratories.  Major  laboratories  that provide  testing  services on a
national basis include Smith Klein, Quest Diagnostics,  Inc. and Laboratory Corp
of America.  These and other  toxicology  and food testing  laboratories  do not
provide biofunctional testing that can demonstrate bioactivity of the supplement
consistent  with the benefits  claimed.  Some  manufacturers  provide  "batch to
batch" testing to insure  manufacturing  consistency.  None of the manufacturers
test  to  see  if  the  supplement,   when  ingested  according  to  directions,
demonstrates   bioactivity   associated   with  the  benefits   claimed  by  the
manufacturer.

The  Company  is  aware  of  a  number  of  other  firms  that  have   developed
environmental  field tests, but attempts to develop an  antibody-based  test for
all dioxins have been unsuccessful.  The introduction of the  Ah-IMMUNOASSAY(TM)
provides the first receptor-based  environmental testing system.  Although there
is no single product  presently in the marketplace  that competes  directly with
the Ah-IMMUNOASSAY(TM),  organizations in the field of environmental testing are
potential  competitors.   Many  large  companies  with  extensive  research  and
development,  marketing, financial and other capabilities, as well as government
funded institutions and smaller research firms are engaged in the development of
diagnostic assays for environmental applications.  A significant majority of the
diagnostic tests developed for these companies, however, are designed for use in
laboratories that require sophisticated instrumentation and skilled technicians.
The  Company  has  designed  its  Ah-IMMUNOASSAY(TM)  as an  inexpensive,  quick
turnaround   methodology   for  use  by   minimally   skilled   personnel.   The
Ah-IMMUNOASSAY(TM)  method  does not  currently  compete  with  laboratory-based
systems.  Gas Chromatography  with Mass Spectrometry  ("GC/MS") is the "state of
the  art"  procedure   used  for   identifying   and  evaluating   volatile  and
semi-volatile  compounds in the environment.  The  instrumentation  required for
this analysis is extremely  expensive  and requires  highly  trained  personnel.
Pricing  for the GC/MS and other  comparable  tests  average  about  $4,500  per
sample.  The  Company  believes  that the costs of using the  Ah-IMMUNOASSAY(TM)
offer a significant  savings over those of testing with GC/MS.  It also believes
that the  AH-IMMUNOASSAY(TM)  is as sensitive  for  detecting  small  amounts of
contaminant as is the GC/MS method.

                                       7
<PAGE>


There  are a  number  of  small  biotechnology  companies  that  focus  on  drug
discovery.  The  Company  competes  on  the  basis  of  the  combination  of its
therapeutic focus on anti-proliferative diseases, its novel screening technology
and its large library of Chinese extracts with data on historical use.

DEPENDENCE ON A KEY DISTRIBUTOR AND CERTAIN INDUSTRIES

The Company's  initial  revenues are highly dependent upon the ability to market
the BioFIT(TM)  designation  in the herbal and dietary  supplement  market.  The
Company has entered into an agreement with a leading  manufacturer of herbal and
other dietary supplement  products to serve as the Company's exclusive agent for
the marketing and  distribution  of its BioFIT(TM)  Certification  Program.  The
Company  must  therefore  rely to a  substantial  degree on this company for the
successful  and  timely  launch of its  BioFIT(TM)  program.  Failure  to launch
BioFIT(TM)  in a timely  manner  or  failure  to secure  an  adequate  number of
customers  could have a material  adverse  effect on the Company.  The Company's
operations could also be materially and adversely affected by a general economic
decline in the herbal and dietary supplement industries.

PATENTS

Much of the  value of the  Company's  research  is  derived  from  the  bioassay
technologies  developed  and  applied to the work on herbal drug  discovery  and
cancer screening programs. Although the concept of using bioassays as a means of
identifying  important biological activities is a standard research procedure in
the biotech  industry and usually cannot be patented,  the Company has developed
significant experience and proprietary  "know-how".  Where possible, the Company
has applied for product and process patents. In the course of its research,  the
Company obtained 3 US and foreign patents prior to 1998 which cover a wide range
of  commercial   applications  for  the   Ah-IMMUNOASSAY(TM)   and  other  assay
technologies.  During 1998, the Company was granted two additional patents.  One
is for a novel method of treating HIV infection. The second relates to using the
CDK1 Assay to quantify cancer causing  activity of test  substances,  even those
that have been previously thought to be non-genotoxic and/or non-mutagenic.  The
Company's  scientists  have been  using the  Assay to test the TCM  library  for
cancer treatments. There are 2 additional patents filed and pending. The Company
is actively  seeking  partners to fully  develop the market  potential  of these
patents.

The  patents  for  the  Dioxin  Assay  Systems  are  held  by  Cornell  Research
Foundation, Inc. ("Cornell Foundation"),  which has granted an exclusive license
to the Company in return for 195,190 shares of Common Stock of the Company.  The
Company has the right to sub-license  under the license  agreement.  The license
agreement  also  provides  that the  Cornell  Foundation  intends to  maintain a
passive non-voting position in the Company.

The Company  believes  that patent  protection  of  materials  or  processes  it
develops  and any  products  that may result  from the  Company's  research  and
development  efforts are  important to the possible  commercialization  of these
products.  However,  there can be no assurance  that the Company's  patents will
afford adequate protection to the Company or its licensees.  Further,  there can
be no  assurance  that any patents  that have been or may be issued will provide
the Company with  significant  protection  from  competitors.  Other private and
public entities may file applications for patents and other  proprietary  rights
to technology  which could be harmful to the  commercialization  of the services
and  products  developed  by the  Company.  The  ultimate  scope and validity of
patents  which are now owned by or which may be granted to third  parties in the
future,  the  extent to which the  Company  may wish or be  required  to acquire
rights under such patents, and the cost or availability of such rights cannot be
determined by the Company at this time.

The Company also relies on unpatented  proprietary  technology  and no assurance
can be given that others will not independently develop substantially equivalent
proprietary  information or otherwise  gain access to the Company's  proprietary
technology  or that the  Company  can  meaningfully  protect  its rights in such
unpatented proprietary technology.

In  addition,   although  all  of  the   Company's   employees  are  parties  to
confidentiality   agreements   which  are  intended  to  protect  the  Company's
proprietary  technology,  there can be no assurance  that any of such  employees
will not compromise any of the Company's proprietary rights.

                                       8
<PAGE>


GOVERNMENT REGULATION

As a result of the passage of the Dietary Supplement Health and Education Act of
1994 ("DSHEA"),  the dietary supplement  industry enjoys substantial  regulatory
flexibility.   The  legislation  creates  a  new  statutory  class  of  "dietary
supplements"  which is a subset  of food.  This  new  class  includes  vitamins,
minerals, herbs, other botanicals, amino acids and other dietary substances used
to  supplement  the diet.  DSHEA allows herbs and  botanicals to be regulated as
dietary  supplements so long as no claims are made that such dietary supplements
are intended for the  diagnosis,  cure,  mitigation,  treatment or prevention of
disease in humans or other animals.  If manufacturers or retailers  characterize
their  product in a way which crosses over the line into claims that are allowed
for drugs, the FDA has acted swiftly to remove the supplements from the market.

In North America the herbal segment of the dietary  supplement  market has grown
from less than $1 Billion to more than $3  Billion  since the  passage of DSHEA.
Manufacturers and retailers of herbal and botanical  supplements have seized the
opportunity  to  avoid  significant   regulatory  costs  and  FDA  oversight  by
identifying their products as a supplement under DSHEA. Large food manufacturers
and pharmaceutical  companies are moving into this marketplace with products for
which they can make structure/function claims.

Most  manufacturers  who have launched new products  under the DSHEA  guidelines
have  avoided  making  claims  about the  efficacy of their  product,  but,  the
resulting lack of  information  with which to explain the safety and efficacy of
their  products has created a high level of confusion in the minds of consumers.
As a result of the general  confusion as to the efficacy of supplements  and the
tremendous  increase  in the  number of herbal  and  botanical  products  on the
market,   consumers  are  demanding  more  reliable   information.   Unlike  the
regulations  governing  the drug  manufacturing  industries,  herbal  supplement
manufacturers  are not subject to well  defined  manufacturing  guidelines.  The
dietary  supplement  industry has been slow to go beyond  identifying the active
ingredients in their products.

The BioFIT(TM) program is designed to: (a) differentiate  those products able to
consistently  demonstrate  bio-activity  associated with the benefits claimed by
the  manufacturer  or retailer,  (b) ensure "batch to batch"  consistency in the
production of dietary  products,  (c) eliminate  consumer  confusion as to which
product to purchase,  and (d) provide a benchmark for evaluating the consistency
of the product.

The  BioFIT(TM)  Assay allows  identification  of the herb samples which have an
effect on human immune cells without having to conduct human or animal  clinical
trials and offers an inexpensive  way of accurately  identifying  sources of raw
material which have high levels of the relevant bioactivity. In addition, herbal
manufacturers  can  evaluate,   quickly  and  easily,  its  competitors'  herbal
supplements.  BioFIT(TM) Quality Assurance Certification bridges the gap between
chemical assay methods of validation versus the use of animal and human clinical
trials to  validate  the  effectiveness  of  natural  products  relative  to the
structure and function claims being made.

The Company does not anticipate that its drug discovery program will be effected
by governmental  regulations since the Company intends to license drug compounds
to  established   pharmaceutical   companies  prior  to  extensive  testing  and
development.

The health care industry is the subject of significant proposed legislation. The
Company cannot predict what new legislation might be enacted or what regulations
might be adopted or  amended,  or if  enacted,  adopted or  amended,  the effect
thereof on the Company's operations.  Any change in applicable law or regulation
may have a material effect on the business of the Company.

FUNDING OF RESEARCH AND DEVELOPMENT

The Company  expended  $1,409,686  in 1997 and  $633,595 in 1998 on research and
development.

                                       9
<PAGE>


COSTS OF ENVIRONMENTAL COMPLIANCE

The Company believes it is in compliance with all applicable  environmental laws
and the cost of such compliance to the Company has been minimal.

EMPLOYEES

In addition to Mr. Landes,  the Company employs 10 full and 2 part-time  people.
None  of  the  Company's  employees  are  covered  by  a  collective  bargaining
agreement.  The Company  considers  its  relationship  with its  employees to be
excellent.  All  employees  of the Company are  signatories  to  confidentiality
agreements that restrict  proprietary  right in, and commercial  development of,
all technology developed by the employees.

The Company does not currently  have a complete  management  team. Key positions
not yet filled include Chief Financial Officer,  Chief Operations Officer,  Vice
President of Science,  and Vice  President of Business  Development.  Presently,
these functions are performed by Bernard Landes,  Ph.D., the Company's Chairman,
President  and Chief  Executive  Officer,  as well as by certain  members of the
Company's Board of Directors.  The loss of the services of Mr. Landes could have
a material adverse effect on the Company. In addition, the Company's performance
depends on its ability to attract and retain qualified management, professional,
scientific,  sales and technical operating staff. There can be no assurance that
the Company will be able to continue to attract and retain qualified personnel.

ITEM 2.  DESCRIPTION OF PROPERTIES

The Company's  executive offices and research facilities are located at Langmuir
Laboratories in Ithaca, New York, and occupy  approximately 6,000 square feet at
that  location.  The Company  occupies  this space  under a one-year  lease from
Cornell  University,  which  expires in April 1999,  and provides for  automatic
renewals.  At this time, the Company  believes that this space is sufficient for
its administrative offices as well as currently  contemplated  manufacturing and
research and development activities.  However,  current initiatives underway, if
successful,  could require  expansion of both office and laboratory  space.  The
Company believes that the cost of the space is competitive.

ITEM 3.  LEGAL PROCEEDINGS

In addition to routine  litigation  that is  incidental  to its  businsess,  the
Company is a party to the following litigation:

         PARACELSIAN,  INC. V. BABISH:  This case was filed in US District Court
for the Northern District of New York in April 1997 alleging breach of fiduciary
duty,  wrongful  competition,   conversation,  trademark  infringement,  insider
trading and related claims against John G. Babish, a former officer and director
of  the  Company.  Defendant  counterclaimed  for  alleged  breach  of  contract
regarding stock warrants issued to him by the Company. The case was dismissed by
the court  pursuant to a settlement  agreement  executed by the parties prior to
September  30,  1998.  The  settlement  agreement  ends any  reasonable  risk of
potential loss to the Company arising from the subject matter of the action.

         HADYK, ET AL. V. JOHN G. BABISH, ET AL.: This case was commenced in New
York State  Supreme  Court  (Onondaga  County) in June 1993 by certain  persons,
individually  and doing business as In Vitro  Bioanalytic  Systems,  against the
Company,  Dr. John G. Babish, a former officer and director of the Company,  and
Edward Heslop, a founding shareholder of the Company, primarily as an action for
money   damages  and   injunctive   relief   against  the  Company  for  alleged
misappropriation  of  proprietary   information  and  unfair  competition.   The
plaintiffs  allege,  among other  things,  that in 1990,  prior to the Company's
incorporation,  a partnership had been formed with Messrs.  Babish and Heslop to
commercialize  products that the Company was developing.  Damages, an accounting
and an  injunction  are being  sought  against the  Company.  By decision  dated
September  14,  1994,  the Court  dismissed  certain of the  plaintiffs'  claims
against the Company while  permitting a claim  alleging  unfair  competition  to
proceed.  Discovery has been temporarily  stayed pending  resolution of a motion
for summary  judgment  brought by certain of the Company's  co-defendants.  That
motion, if successful,  will fully resolve the case in favor of the Company. The
Company believes that the suit against it is without merit and intends to defend
the case vigorously.

                                       10
<PAGE>


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

None.

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The  Company's  Common  Stock,  par value $0.01 per share (the "Common  Stock"),
commenced  trading on February 11, 1992 on the  over-the-counter  market and was
quoted on the National  Association of Securities  Dealers' Automated  Quotation
System  ("NASDAQ")  under the symbol PRLN until October 7, 1998 when it moved to
the  over-the-counter  Bulletin  Board.  The Company's  Redeemable  Common Stock
Purchase  Warrants (the "Warrants")  commenced  trading on September 24, 1993 on
the over-the-counter market and are quoted under the symbol PRLNW.

The following  table sets forth the high and low bid prices for the Common Stock
and  Warrants  during the periods  indicated  as reported by NASDAQ.  The prices
reported reflect inter-dealer quotations,  may not represent actual transactions
and do not include retail mark-ups, markdowns or commissions.

                              Common Stock                       Warrant
                        ------------------------         -----------------------
                        High Bid         Low Bid         High Bid        Low Bid
                        --------         -------         --------        -------

FISCAL 1997
First Quarter            1-11/16          1-1/2             7/16            3/8
Second Quarter             1-3/8          1-1/4             7/16          11/32
Third Quarter                1/8            1/8              1/8            1/8
Fourth Quarter             15/32           7/16             1/16           1/16

FISCAL 1998
First Quarter              17/32           3/16             3/32           1/32
Second Quarter             17/32           3/32              1/8           1/32
Third Quarter              27/32          13/32              1/8           1/32
Fourth Quarter             1-1/4            1/2              1/4           1/32

As of December  22,  1998,  the Company had  18,690,253  shares of Common  Stock
outstanding  held by 306  record  holders.  As of such  date,  the  Company  had
1,736,870 Warrants outstanding and 63 record holders of Warrants.

The Company did not pay cash dividends on the Common Stock during the two fiscal
years ended  September  30,  1998.  It is the  present  policy of the Company to
retain earnings,  if any, to finance the development and growth of its business.
Accordingly,  the Company does not  anticipate  that cash dividends will be paid
until  earnings  of the  Company  warrant  such  dividends,  and there can be no
assurance that the Company can achieve such earnings or any earnings.

                                       11
<PAGE>


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

As a  development  stage  enterprise,  the Company,  since  inception,  has been
primarily engaged in research,  product engineering,  and capital formation.  As
such, the Company has not generated  significant revenues to date on a recurring
basis.

Since January 1998, a significant  portion of the new management team's strategy
has been focused on the development of its BioFIT(TM) (Bio Functional  Integrity
Tested)  quality  assurance  program.  This  unique  testing  program is able to
certify consistent  bio-functionality  of herbal and other dietary  supplements.
This new  "functional"  approach to quality  assurance will assist  consumers in
selecting  herbs  and  other  botanical  products  based on  their  demonstrated
biological activity,  rather than relying solely on analytical  techniques which
measure only the presence or absence of certain marker compounds.

The Company has entered into an agreement  with R.P.  Scherer North America that
establishes  them as the  exclusive  marketing  and  distribution  agent for the
BioFIT(TM)  certification  program  in the  dietary  supplement  and OTC  market
segments in North America. The agreement also provides for collaboration between
the  two  companies  on the  development  of new  dietary  supplements  and  OTC
products.  The  agreement,  among other  things,  provides  for  payments to the
Company for the  development of each bioassay,  payment for each  certification,
and payment of royalties on all sales of BioFIT(TM) certified products.

Although the BioFIT(TM) program will be introduced in the North American market,
the program will be expanded to a worldwide  basis on terms that are essentially
equivalent to the North American agreement.

Management  anticipates the commencement of revenues from the BioFIT(TM) program
in January 1999 with a gradual  ramp-up and expansion of the program  throughout
the year.  Consequently,  the Company is expected to emerge from the development
stage during the first half of 1999.

RESULTS OF OPERATIONS

The Company's fiscal '98 net loss of $2,008,000 is approximately $1,934,000 less
than the fiscal '97 loss of $3,942,000.  Although revenues increased from $6,100
in fiscal '97 to $55,700 in fiscal '98,  those  revenues are  incidental and not
representative of the Company's future plans and expectations.  The reduction in
the loss is primarily  attributable to reduced levels of  expenditures,  both in
research and development and general and administrative expenses.  Additionally,
fiscal '97 included  approximately  $300,000 of costs associated with an aborted
product  launch that were not  incurred in 1998.  In late 1997,  the Company had
begun to reduce  staff  levels and reduce  expenses to  conserve  cash after the
failed product  launch.  The successor  management team has continued to operate
throughout  1998 with  modest  staff  levels  and has  particularly  focused  on
resolving costly  litigation that had been a significant drain on both human and
financial  resources.  Management  views fiscal '98 as a  transitional  year, of
resolving  old  problems  and  redirecting  the  focus  of  the  Company  toward
generating a recurring and growing revenue stream.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 1998 the Company maintained working capital of approximately
$219,000 which  included  approximately  $250,000 of cash.  Subsequent to fiscal
year end,  in  December  1998,  the Company  raised  $250,000 in cash  through a
private  placement  of its  common  stock  at the  then  current  market  value.
Management  believes  that these  resources  are  adequate  to  provide  for its
operating  needs until such time as its  revenue  stream  commences.  Management
further believes that it can successfully  raise additional capital if necessary
to support its continued  operations  until such time as revenues are sufficient
to provide  internally  generated funds. The Company presently intends to pursue
additional  capital of $1 million to $1.5 million in the near term, if available
on  reasonable  terms,  to  provide  resources  for  the  hiring  of  additional
personnel,  expansion and/or relocation of lab facilities,  and the acceleration
of product  development  efforts.  Of  course,  there can be no  assurance  that
additional financing will be available on acceptable terms or at all.

                                       12
<PAGE>


YEAR 2000 COMPLIANCE

The Company continues to monitor its exposure to the year 2000 computer problem.
Management  believes that all of the Company's date sensitive computer equipment
and  software is Y2K  compliant,  and is not aware of any vendor or customer Y2K
problems  that could have a  significant  impact on the  financial  position  or
results of operations of the Company. To date, the  Company has not incurred any
significant  expense  with  respect  to this issue and does not  anticipate  any
significant related expense in the future.

Item 7.  FINANCIAL STATEMENTS

Independent Auditors' Report.

Consolidated Balance Sheet as of September 30, 1998.

Consolidated Statements of Operations for the years ended September 30, 1998 and
1997, and the  cumulative  period from April 15, 1991 inception to September 30,
1998.

Consolidated  Statements of  Stockholders'  Equity for the years ended September
30, 1998 and 1997 and the cumulative  period from April 15, 1991  (inception) to
September 30, 1998.

Consolidated Statements of Cash Flows for the years ended September 30, 1998 and
1997 and the cumulative  period from April 15, 1991 (inception) to September 30,
1998.

Notes to Consolidated Financial Statements.


                                       13
<PAGE>

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

                        Consolidated Financial Statements

                 For the years ended September 30, 1998 and 1997

                   (With Independent Auditors' Report Thereon)


Consolidated Balance Sheets ..................................................F2

Consolidated Statements of Operations ........................................F3

Consolidated Statements of Stockholders' Equity ..............................F4

Consolidated Statements of Cash Flows ........................................F5

Consolidated Statements of Cash Flows (Continued) ............................F6


<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Paracelsian, Inc.

We have audited the accompanying consolidated balance sheet of Paracelsian, Inc.
and  subsidiary (a development  stage  enterprise) as of September 30, 1998, and
the related  consolidated  statements of operations,  stockholders'  equity, and
cash flows for the years  ended  September  30, 1998 and 1997 and for the period
from April 15, 1991  (inception)  to  September  30,  1998.  These  consolidated
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements  based  on our  audits.  The  cumulative  statements  of  operations,
stockholders'  equity,  and cash flows for the period April 15, 1991 (inception)
to  September  30,  1998  include  amounts  for the period  from April 15,  1991
(inception)  to  September  30, 1991 and for each of the years in the  four-year
period ending  September 30, 1995,  which were audited by other  auditors  whose
report has been  furnished to us, and our opinion,  insofar as it relates to the
amounts included for the period April 15, 1991 (inception) through September 30,
1995 is based solely on the report of the other auditors.

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,  based on our audits and the report of the other  auditors,  the
consolidated  financial  statements  referred to above  present  fairly,  in all
material respects, the financial position of Paracelsian, Inc. and subsidiary (a
development stage enterprise) as of September 30, 1998, and the results of their
operations and their cash flows for the years ended  September 30, 1998 and 1997
and for the  period  April 15,  1991  (inception)  to  September  30,  1998,  in
conformity with generally accepted accounting principles.

Raleigh, NC                                                KPMG PEAT MARWICK LLP
January 11, 1999

                                         F1
<PAGE>

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

                              Consolidated Balance Sheet

                                  September 30, 1998

<TABLE>
<CAPTION>

                                        ASSETS

                                                                             1998
                                                                         ------------
Current Assets:
<S>                                                                      <C>         
    Cash and cash equivalents                                            $    250,542
    Inventory                                                                 171,689
    Prepaid expenses and other current assets                                  84,177
                                                                         ------------

               Total current assets                                           506,408
                                                                         ------------

Equipment, net                                                                264,724

Other Assets:
    TCM extracts on-hand                                                      311,259
    Licensing agreement, net                                                  175,257
    Patents and trademarks, net                                               183,703
    Note receivable                                                           148,750
                                                                         ------------

                                                                              818,969
                                                                         ------------

                                                                         $  1,590,101
                                                                         ============

                         LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
    Accounts payable                                                     $     69,635
    Accrued expenses                                                          162,338
    Current portion of capital lease obligation                                 9,799
    Current portion of notes payable                                           45,716
                                                                         ------------

               Total current liabilities                                      287,488

Long term portion of capital lease obligation                                  16,258
Long term portion of notes payable                                             19,721
                                                                         ------------

               Total current and long term liabilities                        323,467

Commitments and Contingency

Stockholders' Equity:
    Common stock, $.01 par value: 35,000,000 shares authorized
       and 17,942,725 shares outstanding September 30, 1998                   179,424
    Additional paid-in capital                                             23,058,936
    Deficit accumulated during the development stage                      (20,629,211)
    Treasury stock, at cost; 265,478 shares                                (1,342,515)
                                                                         ------------

               Total stockholders' equity                                   1,266,634
                                                                         ------------

                                                                         $  1,590,101
                                                                         ============

See accompanying notes to consolidated financial statements.
</TABLE>

                                       F2
<PAGE>
                                PARACELSIAN, INC. AND SUBSIDIARY
                                 (A Development Stage Company)

                             Consolidated Statements of Operations

                 For the years ended September 30, 1998 and 1997 and cumulative
                  period from April 15, 1991 (inception) to September 30, 1998
<TABLE>
<CAPTION>

                                                                                 CUMULATIVE
                                                                                 PERIOD FROM
                                                     YEAR ENDED SEPTEMBER 30,    INCEPTION TO
                                                   --------------------------    SEPTEMBER 30,
                                                       1998           1997          1998
                                                   -----------    -----------    -----------
<S>                                                      <C>             <C>          <C>    
Revenues:
    Marketing rights                                $        --             --        254,995
    Products                                             14,312          4,900        177,025
    Product testing                                      41,418             --         41,418
    Product royalties                                        --          1,246          1,246
    Subscription revenue                                     --             --         31,625
                                                    -----------    -----------    -----------

                                                         55,730          6,146        506,309

Operating expenses:
    Research and product engineering                    633,595      1,409,686      7,676,215
    General and administrative                        1,459,925      2,436,939     11,471,689
    Product launch costs                                     --        300,544        300,544
    Cost of product sold                                     --             --         95,023
                                                    -----------    -----------    -----------

                                                      2,093,520      4,147,169     19,543,471
                                                    -----------    -----------    -----------
            Loss from operations during the
               development stage                     (2,037,790)    (4,141,023)   (19,037,162)

Interest income, net                                     22,608        167,754        497,463
Gain on sale of assets                                    6,968         31,520         38,488
                                                    -----------    -----------    -----------

            Net loss during the development stage   $(2,008,214)    (3,941,749)   (18,501,211)
                                                    ===========    ===========    ===========

            Net loss per weighted average share
               of common stock - basic and diluted  $     (0.14)         (0.33)
                                                    ===========    ===========

Weighted average number of shares outstanding        14,724,927     11,956,171
                                                    ===========    ===========
</TABLE>


See accompanying notes to consolidated financial statements.

                                              F3

<PAGE>
<TABLE>
<CAPTION>

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

                                           Consolidated Statements of Stockholders' Equity

                             For the years ended September 30, 1998 and 1997, and the cumulative period
                                       from April 15, 1991 (inception) to September 30, 1998

                                                                                             DEFICIT
                                                                                             ACCUMULATED
                                       PREFERRED STOCK        COMMON STOCK        ADDITIONAL DURING THE
                                       ----------------  ----------------------    PAID-IN   DEVELOPMENT    TREASURY
                                       SHARES   AMOUNT     SHARES      AMOUNT      CAPITAL      STAGE        STOCK        TOTAL
                                       -------  -------  -----------  ---------  ----------- -----------  -----------  -----------
<S>                                  <C>        <C>        <C>          <C>       <C>          <C>            <C>       <C> 
Issuance of common stock                    --  $    --    5,349,554  $  53,493    8,804,599          --           --    8,858,092
Redemption of common stock                  --       --     (245,000)    (2,450)          --          --           --       (2,450)
Initial public offering of 
  common stock, net of costs                --       --    1,150,000     11,500    5,103,451          --           --    5,114,951
Issuance of warrants and options            --       --           --         --      168,500          --           --      168,500
Warrant dividend                            --       --           --         --      436,898    (500,000)          --      (63,102)
Issuance of preferred stock            102,351    1,024           --         --    4,978,573          --           --    4,979,597
Purchase of treasury stock                  --       --           --         --           --          --   (1,342,515)  (1,342,515)
Conversion of preferred stock         (102,351)  (1,024)   5,371,010     53,710      (52,686)         --           --           -- 
Preferred dividends and
      beneficial conversion feature         --       --           --         --    1,628,000  (1,628,000)          --           -- 
Exercise of warrants and options            --       --      309,518      3,095      908,670          --           --      911,765
Net loss                                    --       --           --         --           -- (12,551,248)          --  (12,551,248)
                                       -------  -------  -----------  ---------  ----------- -----------  -----------  -----------

Balance, September 30, 1996                 --       --   11,935,082    119,348   21,976,005 (14,679,248)  (1,342,515)   6,073,590

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

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

Issuance of Common Stock for
      services rendered - January 1998      --       --      100,000      1,000       13,000          --           --       14,000
Issuance of Common Stock - January 1998     --       --    3,571,429     35,715      464,285          --           --      500,000
Exercise of warrants                        --       --    2,971,429     29,714      490,286          --           --      520,000
Surrender of shares - March 1998            --       --     (705,000)    (7,050)       7,050          --           --           -- 
Net loss (for the year ended 
      September 30, 1998)                   --       --           --         --           --  (2,008,214)          --   (2,008,214)
                                       -------  -------  -----------  ---------  ----------- -----------  -----------  -----------

Balance, September 30, 1998                 --  $    --   17,942,725  $ 179,424   23,058,936 (20,629,211)  (1,342,515)   1,266,634
                                       =======  =======  ===========  =========  =========== ===========  ===========  ===========
</TABLE>

See accompanying notes to consolidated financial statements.

                                                                 F4
<PAGE>
<TABLE>
<CAPTION>

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

                                Consolidated Statements of Cash Flows

                           For the years ended September 30, 1998 and 1997
             and cumulative period from April 15, 1991 (inception) to September 30, 1998


                                                                                      CUMULATIVE
                                                                                      PERIOD FROM
                                                                                      INCEPTION TO
                                                                                      SEPTEMBER 30,
                                                            1998           1997           1998
                                                        -----------    -----------    -----------
<S>                                                     <C>             <C>           <C>         
Cash flows from operating activities:
    Net loss                                            $(2,008,214)    (3,941,749)   (18,501,211)
    Adjustments to reconcile net loss to net cash
    used in operating activities:
       Gain on sale of assets                                (6,968)            --         (6,968)
       Non-cash compensation expense                         14,000             --      1,242,275
       Other non-cash expenses                              232,551        369,545      1,742,754
       Depreciation and amortization                        439,872        469,368      1,686,845
       Changes in assets and liabilities:
          (Increase) decrease in inventory                  (15,366)      (156,323)      (171,689)
          (Increase) decrease in prepaid
             expenses and other current assets              (22,740)       216,930        (54,757)
          (Decrease) increase in accounts payable          (199,067)       (21,207)       424,157
          (Decrease) increase in due to related party       (18,557)       (59,040)            -- 
          (Decrease) increase in deferred revenue                --        (46,858)            -- 
          (Decrease) increase in accrued expenses           (18,326)       (12,126)       162,338
                                                        -----------    -----------    -----------

                           Net cash used in
                             operating activities        (1,602,815)    (3,181,460)   (13,476,256)
                                                        -----------    -----------    -----------

Cash flows from investing activities:
    Purchase of equipment                                    (1,215)       (16,887)      (733,401)
    Proceeds from sale of equipment                           6,968             --         26,968
    Acquisition of licensed technology                           --         (3,656)       (53,656)
    Acquisition of patents and trademarks                   (77,626)       (48,150)      (430,579)
    Acquisition of New Century Nutrition newsletter              --             --       (350,000)
    Acquisition of option for East West Herbs, Ltd.
       and related acquisition costs                             --             --        (92,866)
    Loan to East West Herbs, Ltd.                                --             --       (340,000)
    Payment from East West Herbs, Ltd.                       42,500             --         42,500
                                                        -----------    -----------    -----------
                           Net cash used in investing
                             activities                     (29,373)       (68,693)    (1,931,034)
                                                        -----------    -----------    -----------
</TABLE>

                                                                     (Continued)

                                       F5
<PAGE>
<TABLE>
<CAPTION>

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

                                        Consolidated Statements of Cash Flows

                                 For the years ended September 30, 1998 and 1997 and
                                  cumulative period from April 15, 1991 (inception)
                                               to September 30, 1998


                                                                                                        CUMULATIVE
                                                                                                        PERIOD FROM
                                                                                                        INCEPTION TO
                                                                                                        SEPTEMBER 30,
                                                                              1998          1997           1998
                                                                          -----------    -----------    -----------
<S>                                                                       <C>                <C>            <C>    
Cash flows from financing activities:
    Sale of common stock, initial public offering,
       net of costs                                                                --             --      5,124,014
    Sale of common and preferred stock, net of costs                          500,000             --     10,830,109
    Proceeds from the exercise of warrants                                    520,000             --      1,186,295
    Proceeds from the exercise of options                                          --             --         37,500
    Termination of warrants                                                        --        (35,000)            -- 
    Purchase of treasury stock                                                     --             --     (1,342,515)
    Cost of warrant dividend                                                       --             --        (63,102)
    Payment on equipment contract                                                  --             --        (90,950)
    Payment on capital lease obligations                                       (5,155)            --         (5,155)
    Payments on notes payable                                                 (18,364)            --        (18,364)
                                                                          -----------    -----------    -----------

                           Net cash provided by (used in)
                             financing activities                             996,481        (35,000)    15,657,832
                                                                          -----------    -----------    -----------

Net increase (decrease) in cash and cash equivalents                         (635,707)    (3,285,153)       250,542

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

Cash and cash equivalents, end of period                                  $   250,542        886,249        250,542
                                                                          ===========    ===========    ===========

Supplemental disclosures:
    Cash paid during the period for interest                              $     7,778          4,484         27,062
                                                                          ===========    ===========    ===========

Supplemental disclosure of non-cash investing and financing activities:
       Fair value of assets acquired, net of cash acquired                $    31,212             --      1,733,212
       Less - liabilities assumed                                              31,212             --         83,212
       Less - issuance of common stock                                             --             --      1,644,000
                                                                          -----------    -----------    -----------

                           Net cash paid                                  $        --             --          6,000
                                                                          ===========    ===========    ===========

       Warrant dividend                                                   $        --             --        500,000
       Issuance of common stock/warrants for services
          and to reduce short-term liabilities                            $    14,000         54,157        565,231
       Purchase of equipment                                              $        --             --         90,950
       Repayment of officer stock subscription receivable                 $        --         89,850         89,850
       Issuance of common stock for licensing and
          technology rights                                               $        --             --          3,338
</TABLE>


See accompanying notes to consolidated financial statements.


                                                        F6
<PAGE>

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

                   Notes to Consolidated Financial Statements

                           September 30, 1998 and 1997



(1)    ORGANIZATION, BUSINESS, AND RISK FACTORS

       (a)    ORGANIZATION AND BUSINESS

              Paracelsian, Inc., (the "Company") is a bio-science and technology
              company that  utilizes its  proprietary  screening  technology  to
              identify  novel  therapeutic   compounds  from  herbal  and  other
              botanical  sources and to define  and/or  confirm  the  biological
              mechanisms  through which  traditional  herbs and other botanicals
              provide the therapeutic or functional  benefits suggested by their
              traditional use. This technology has been developed by the Company
              to identify potential products that inhibit the biological signals
              generated  by  targeted   cells  that  result  in   controlled  or
              uncontrolled   growth  and  division.   The  Company's   screening
              technology  evaluates  the  effects of herbal and other  botanical
              products  on   intracellular   signals   referred  to  as  "Signal
              Transduction Technology."

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

              In October 1994, Pacific Liaisons (Pacific), a partnership engaged
              in identifying and acquiring  biologically  active drugs,  natural
              products and foods from Eastern Asia,  merged with a  wholly-owned
              subsidiary  of the Company  and the Company now  maintains a large
              library of natural  medicinal  extracts.  These extracts are being
              processed  with the  Company's  screening  technology  to identify
              potential  candidates for drug or dietary supplement  development.
              The Company also has access to the informational  database related
              to the medicinal extracts,  which contains,  among other things, a
              history of the usage of each extract.

       (b)    DEVELOPMENT STAGE COMPANY AND RISK FACTORS

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

                                      F7
                                                                     (Continued)

<PAGE>

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

                   Notes to Consolidated Financial Statements

                           September 30, 1998 and 1997



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

              As shown in the  accompanying  financial  statements,  the Company
              incurred a net loss of approximately $2,000,000 and $3,900,000 for
              the years ended September 30, 1998 and 1997, respectively, and has
              working  capital of  approximately  $219,000 as of  September  30,
              1998.  The Company  continues to expend funds on product  research
              and development and general and administrative expenses,  however,
              under the  direction  of a new  management  team and  Board  since
              January,  1998,  expenditures  have been  reduced  from prior year
              levels,  and efforts have been  focused on  developing a recurring
              revenue  stream.  Management  anticipates  that  revenues from its
              BioFIT(TM)  quality  assurance  program will  commence in January,
              1999, and that revenues  associated  with its  AhIMMUNOASSAY  will
              also  commence  during the  second  quarter  of fiscal  1999.  The
              Company  raised  $250,000 of capital in  December,  1998 through a
              private  placement of common stock.  Management  believes that the
              combination of that additional capital and its anticipated revenue
              stream  will enable the Company to  continue  its  operations  and
              emerge from the development stage in 1999.


(2)    SIGNIFICANT ACCOUNTING POLICIES

       (a)    CONSOLIDATION

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

       (b)    CASH AND CASH EQUIVALENTS

              Cash  equivalents  consist of highly  liquid  investments  with an
              original maturity of three months or less. The Company had no cash
              equivalents as of September 30, 1998.

                                       F8
                                                                     (Continued)

<PAGE>

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

                   Notes to Consolidated Financial Statements

                           September 30, 1998 and 1997

       (c)    RESEARCH AND PRODUCT ENGINEERING

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

       (d)    INVENTORY

              Inventory  represents tablets of Andrographis  paniculata held for
              resale at cost.

              In the opinion of management  the inventory held by the Company as
              of  September  30,  1998  will  be  recovered  by the  sale of the
              ANDROGRAPHIS  PANICULATA  tablets during the year ending September
              30, 1999.

       (e)    NET LOSS PER SHARE

              For the year ended  September 30, 1998,  the Company  adopted SFAS
              No. 128, "Earnings Per Share" ("SFAS No. 128"). In accordance with
              this statement, primary net loss per common share is replaced with
              basic loss per common  share which is  calculated  by dividing net
              loss by the  weighted-average  number of common shares outstanding
              for the  period.  Fully  diluted  net  loss  per  common  share is
              replaced  with  diluted net loss per common share  reflecting  the
              maximum  dilutive effect of common stock issuable upon exercise of
              stock options, stock warrants, stock subscriptions, and conversion
              of  preferred  stock.  Diluted  net loss per  common  share is not
              shown,  as common  equivalent  shares  from stock  options,  stock
              warrants,  stock  subscriptions,  and convertible  preferred stock
              would have an  antidilutive  effect.  The adoption of SFAS No. 128
              had no affect on prior period per share data.

              The computation of net loss per share is as follows:

                                                  YEAR ENDED SEPTEMBER 30, 
                                             --------------------------------
                                                   1998             1997     
                                             --------------     -------------

           Net loss to common
                stockholders                 $   (2,008,214)       (3,941,749) 
                                             ==============     =============

           Weighted average shares
                outstanding                      14,724,927        11,956,171   
                                             ==============     =============

           Net loss per share of
                common stock                 $       (0.14)             (0.33)
                                             =============      =============

                                       F9
                                                                     (Continued)

<PAGE>

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

                   Notes to Consolidated Financial Statements

                           September 30, 1998 and 1997



       (f)    PATENTS AND TRADEMARKS

              The  Company  has  acquired  or  applied  for  certain  patent and
              trademark  rights.  Costs  associated  with  the  acquisition  and
              application  for these rights have been  capitalized and are being
              amortized on the  straight-line  method over the  estimated  legal
              lives of the assets  which range from 15 to 17 years.  Accumulated
              amortization  of the patents  and  trademarks  totaled  $94,747 at
              September  30,  1998.  In 1997 the Company  wrote off the value of
              $162,770 related to patents and trademarks no longer being pursued
              by the Company.

       (g)    EQUIPMENT AND DEPRECIATION

              Equipment is stated at cost and is depreciated  over the estimated
              useful  lives  of  the  assets  using  the  straight-line  method.
              Equipment consists of the following at September 30, 1998:

                                             Useful Lives            1998       
                                             ------------       ----------------

                Laboratory equipment           10 Years           $  536,203
                Office furniture and
                    equipment                  10 Years               87,292
                Computer equipment             10 Years              133,852   
                                                                  -------------

                                                                     757,347
                Less - accumulated
                    depreciation                                     492,623   

                                                                  $  264,724   

              Depreciation  expense  of  $72,782  and  $96,598  was  charged  to
              operations  for the  years  ended  September  30,  1998 and  1997,
              respectively.

       (h)    INCOME TAXES

              Deferred tax assets and  liabilities are recognized for the future
              tax  consequences  attributable to differences  between  financial
              statement  carrying amounts of existing assets and liabilities and
              their  respective  tax bases  and  operating  loss and tax  credit
              carryforwards.  Deferred tax assets and  liabilities  are measured
              using enacted tax rates expected to apply to taxable income in the
              years in which  those  temporary  differences  are  expected to be
              recovered  or  settled.  The  effect on  deferred  tax  assets and
              liabilities  of a change in tax rates is  recognized  in income in
              the period that includes the enactment date.


                                      F10
                                                                     (Continued)

<PAGE>

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

                   Notes to Consolidated Financial Statements

                           September 30, 1998 and 1997



       (i)    USE OF ESTIMATES

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


(3)    PRODUCT LAUNCH

       During  1997,  the Company  intended  to launch the  dietary  supplements
       AndroVir  and AndroCar to persons  with HIV and cancer  respectively.  In
       April 1997,  the Company was advised by the Food and Drug  Administration
       that the marketing of these products to persons with these diseases would
       constitute  claims that the products  are intended to treat  persons with
       serious  diseases  and  thus  intended  for  drug  use  and  not  dietary
       supplement use. After careful consideration the Company decided to cancel
       the launch. The Company incurred  approximately $300,000 of related costs
       which were expensed in the year ended  September 30, 1997. The underlying
       compound,  along  with  three  others  from the  Company's  inventory  of
       traditional Chinese medicine ("TCM") extracts,  is presently being tested
       on human cancer  tumors grown in  laboratory  mice under a  collaborative
       research  agreement with the Southern  Research  Institute in Birmingham,
       Alabama.  Management  intends  to use the test  results to  determine  an
       appropriate course of action for the further development and marketing of
       the product.


                                      F11
                                                                     (Continued)
<PAGE>

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

                   Notes to Consolidated Financial Statements

                           September 30, 1998 and 1997

(4)    ACQUISITIONS

       (a)    EAST WEST HERBS, LTD.

              On April 9, 1996,  the  Company  signed an option to acquire  East
              West Herbs Ltd. of Kingham,  England. East West Herbs Ltd. markets
              and  distributes  traditional  Chinese  medicines  in  the  United
              Kingdom and  throughout  Europe.  Under  terms of the option,  the
              Company had the right to acquire all of the outstanding  shares of
              East West Herbs Ltd.  on or before  April 6, 1997 for  $780,000 in
              cash and  shares  of the  Company  with a value  of  approximately
              $2,400,000 for a total proposed acquisition price of $3.2 million.
              Consideration for the option was made in the form of an option fee
              of $20,000 and a working capital loan of $340,000. The loan was to
              be  used  by  East  West  Herbs  Ltd.  for  inventory   purchases,
              continuing research and development  including the clinical trials
              of two herbal products for cancer  patients and corporate  working
              capital.  In connection with the option and loan  agreements,  the
              Company also  incurred  other  direct costs of $92,866  which were
              written off in 1997  because  the Company  elected not to exercise
              its option.

              The  loan  originally   provided  for  repayment  in  eight  equal
              quarterly installments of $42,500 plus interest at the LIBOR rate.
              Since  making the first  installment  payment and related  accrued
              interest,  East West Herbs Ltd. has not made  additional  payments
              and is  currently  in default on the  obligation.  The parties are
              currently negotiating the terms of a work-out agreement that would
              provide  an  extension  of time (up to two  years)  for  principal
              repayment,  change the interest  rate to prime plus 2% and further
              collateralize the repayment obligation.  Management has determined
              that  this  note  is  impaired.   Accordingly,   the  Company  has
              classified  the entire  obligation  as  non-current,  deferred the
              recognition of related  interest income until  collected,  and has
              provided a reserve of $148,750 for collectibility.

              The  eventual  collectibility  of the loan will be subject to East
              West Herbs' ability to achieve profitable  operations and positive
              cash flow in the future and the financial  resources of the loan's
              guarantor.


                                      F12
                                                                     (Continued)

<PAGE>

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

                   Notes to Consolidated Financial Statements

                           September 30, 1998 and 1997



       (b)    PACIFIC LIAISONS

              During  October  1994, a  wholly-owned  subsidiary  of the Company
              acquired Pacific Liaisons for approximately $1.6 million in common
              stock.  The  acquisition has been accounted for using the purchase
              method and the accompanying  statement of operations  includes the
              results of operations  of Pacific  Liaisons from October 25, 1994.
              The  allocation of the purchase  price was based on an independent
              appraisal of certain  assets  acquired  which include TCM extracts
              and a licensing  agreement.  The approximately  2,800 TCM extracts
              can  be  sold  outright  or  utilized  in  various   research  and
              development applications using the Company's screening technology.
              It is the  Company's  intention  to  sell/license  the extracts to
              established pharmaceutical and biotechnology companies.  Effective
              October 1, 1995, the Company elected to begin  amortizing the cost
              of the TCM  extracts  on a straight  line  basis over a  five-year
              period,  which  represents  the  estimated  period  over which the
              extracts  will be used in the Company's  research and  development
              efforts.   Amortization  of  the  extracts  totaling  $155,600  is
              included  in  research  and  product  engineering  expense  in the
              accompanying consolidated statements of operations for each of the
              years ended September 30, 1998 and 1997.

              Through the  licensing  agreement  with the Institute of Nutrition
              and Food  Hygiene,  an  institute  within the  Chinese  Academy of
              Preventive  Medicine,  the  Company  has the  exclusive  right  to
              acquire up to 10,000 additional extracts.  The licensing agreement
              is being  amortized  over a period  of five  years  commencing  in
              October  1994.  Amortization  of the  license  agreement  totaling
              $192,000 is included in research and product  engineering  expense
              in the accompanying consolidated statements of operations for each
              of the years ended September 30, 1998 and 1997.


(5)    STOCKHOLDERS' EQUITY

       (a)    COMMON STOCK OFFERINGS

              In January 1998, the Company sold 3,571,429 shares of common stock
              for $500,000 to Biomar International, Inc. ("Biomar"). Biomar also
              received  warrants to purchase an additional  2,871,429  shares of
              common  stock at a price  of  $520,000.  In  August  1998,  Biomar
              exercised its warrants.  Biomar became the major  shareholder  and
              has three of its representatives  serving on the nine member Board
              of Directors. Biomar is controlled by T. Colin Campbell a director
              of the  Company and his son,  T.  Nelson  Campbell,  a former Vice
              President of the Company and current director.

              The Company used the proceeds for working capital and research and
              development.

                                      F13
                                                                     (Continued)
<PAGE>

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

                   Notes to Consolidated Financial Statements

                           September 30, 1998 and 1997



       (b)    OTHER TRANSACTIONS

              In June 1996,  the Company  sold an investor  350,000  warrants at
              $.10 per warrant to  purchase  350,000  shares of common  stock at
              $5.25 per share.  The warrants could be exercised at any time over
              a three-year period. The cash received for the warrants of $35,000
              was reflected as an addition to additional  paid-in capital in the
              accompanying  consolidated  statement of stockholders'  equity for
              the year ended  September 30, 1996.  During fiscal year 1997,  the
              Company redeemed these warrants at a cost of $35,000.

              During the years ended  September  30, 1998 and 1997,  the Company
              issued 100,000 and 62,500 shares of common stock, respectively, in
              exchange for services rendered and during the year ended September
              30, 1997 issued  7,285  shares for the  conversion  of  short-term
              liabilities.  The  transactions  have  been  valued  based  on the
              estimated fair value of the common stock on the date issued.

              On September 8, 1993, the Company granted a warrant dividend.  The
              Company  distributed  to each  stockholder,  excluding  one of the
              Company's  founders,  one redeemable common stock purchase warrant
              for each share of the Company's common stock owned,  entitling the
              holder to purchase an  additional  share of common stock for $3.25
              per share.  On October  12,  1994,  the  Company  granted  375,000
              warrants to one of the Company's  founders,  under similar  terms.
              The warrants were  originally  valued at $500,000.  These warrants
              originally  expired on September 7, 1998. During the current year,
              the Company  extended the  expiration of the warrants to September
              6, 1999. The exercise price will decrease to $2.50 from January 1,
              1999 to April 30, 1999 and then increase to $3.25 from May 1, 1999
              to  September  6, 1999.  The warrants are callable at a redemption
              price of $.05 per warrant, if the Company's common stock trades at
              $4.75 or higher for 15 consecutive days. As of September 30, 1998,
              294,518  redeemable  warrants  had been  exercised,  none had been
              redeemed and 1,736,870 remained outstanding.

              Additionally,   in  connection  with  certain  private   placement
              transactions  during  fiscal '96, the Company  issued common stock
              warrants  exercisable  for an  aggregate  of  1,883,333  shares of
              common  stock at prices  ranging from $3.25 to $4.50 per share and
              varying other terms and restrictions.


                                       F14
                                                                     (Continued)
<PAGE>

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

                   Notes to Consolidated Financial Statements

                           September 30, 1998 and 1997

(6)    COMMON STOCK OPTIONS

       In 1991,  the Company  adopted a Stock Option Plan (the Plan).  Under the
       Plan,  directors,  key  employees  and  consultants  of the  Company  are
       eligible to receive  grants of options  which are  intended to qualify as
       incentive  stock  options,  within  the  meaning  of  Section  422 of the
       Internal  Revenue  Code of 1986,  as  amended  (the  Code),  or which are
       non-qualified stock options. In addition,  non-employee  directors of the
       Company may receive  grants of options  according to a formula which upon
       the adoption of the Plan  provided  for an initial  grant of an option to
       purchase  5,000  shares of common  stock and annual  grants of options to
       purchase 2,500 shares of common stock for each person who is subsequently
       elected  or  re-elected  and for each  year of  service  thereafter  as a
       director.  An  aggregate  of  394,000  shares  of  common  stock has been
       reserved  for  issuance  under the Plan.  The Plan is  administered  by a
       committee  (the  Committee)  designated  by the Board of Directors of the
       Company.  The exercise price per share for the options  granted under the
       plan may not be less than the fair value of the Company's common stock on
       the date of  grant.  The  exercise  price  and the term are  fixed by the
       Committee, subject to the terms of the Plan.

       Changes  in the  status  of  options  under  the Plan are  summarized  as
       follows:
<TABLE>
<CAPTION>

                                                            YEAR ENDED SEPTEMBER 30, 
                                                       ---------------------------------
                                                             1998               1997    
                                                       --------------     --------------
<S>                                                           <C>                <C>    
           Options outstanding at beginning of period         170,000            135,650
           Granted                                            272,500             83,500
           Forfeited                                          (20,000)           (49,150)  
                                                       --------------     --------------
           Outstanding at end of period                       422,500            170,000   
                                                       ==============     ==============

           Number of options at end of period -
                Exercisable                                   150,000            153,750
                Available for grant                                --            224,000

           Average exercise price of
                options outstanding                    $          .90     $         1.98

           Average exercise price of
                options granted                        $          .38     $         1.75

           Average exercise price of
                options forfeited                      $         4.45     $           --

           Average exercise price of
                options exercisable                    $         1.84     $           --
</TABLE>


                                      F15
                                                                     (Continued)
<PAGE>


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

                   Notes to Consolidated Financial Statements

                           September 30, 1998 and 1997



       During fiscal 1996,  15,000 options were granted pursuant to the Plan and
       an  additional   200,000  (for  a  total  of  215,000)  were  granted  to
       consultants  providing  communications  services to the Company. The fair
       value of these options of $107,500 was being  amortized over the two year
       period ended September 30, 1997 during which the services were performed.
       The  amortization of the options issued to the consultants of $72,500 are
       included  in general  and  administrative  expenses  in the  accompanying
       consolidated  statements of operations  for the year ended  September 30,
       1997.

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

       Stock option grants are set at the closing price of the Company's  common
       stock on the date of grant and the related  number of shares  granted are
       fixed at that  point in time.  Therefore,  under  the  principles  of APB
       Opinion  No. 25, the  Company  does not  recognize  compensation  expense
       associated with the grant of stock options.  SFAS No. 123, Accounting for
       Stock-Based Compensation,  requires the use of option valuation models to
       provide  supplemental  information  regarding options granted after 1995.
       Pro forma  information  regarding net loss and loss per share shown below
       was  determined as if the Company had  accounted  for its employee  stock
       options  and  shares  sold under its stock  purchase  plan under the fair
       market value method of that statement.

       The fair value of the options was  estimated at the date of grant using a
       Black-Scholes  option  pricing model with the following  weighted-average
       assumptions for 1998 and 1997, respectively:  risk-free interest rates of
       5.25% and 5.8%;  dividend yields of 0% and 0%; volatility  factors of the
       expected  market price of the  Company's  common stock of 96% and 96% and
       expected  life of the options of 5 years and 5 years.  These  assumptions
       resulted in weighted-average  fair values of $.29 and $1.32 per share for
       stock options granted in 1998 and 1997, respectively.

       At September 30, 1998,  the Company has 72,500  options  outstanding  and
       exercisable  with a range of  exercise  prices  of $1.08  to  $2.50.  The
       weighted-average exercise price of these options is $1.64 and they have a
       weighted-average remaining contractual life of 2-7 years.

       At September 30, 1998,  the Company has 12,500  options  outstanding  and
       exercisable with an exercise price of $3.50. They have a weighted-average
       remaining life of 1. 5 years.

                                      F16
                                                                     (Continued)

<PAGE>

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

                   Notes to Consolidated Financial Statements

                           September 30, 1998 and 1997


       At September 30, 1998,  the Company has 65,000  options  outstanding  and
       exercisable with an exercise price of $1.75. They have a weighted-average
       remaining life of 8 years.

       At September 30, 1998, the Company has 272,500 options  outstanding  with
       an exercise price of $.38. They have a weighted-average remaining life of
       7 years.

       For purposes of pro forma  disclosures,  the estimated  fair value of the
       options is  amortized  over the options  vesting  periods.  The pro forma
       effect  on net loss for  1998 and 1997 is not  representative  of the pro
       forma  effect on net income  (loss) in future  years  because it does not
       take into consideration pro forma compensation  expense related to grants
       made prior to 1996. The Company's pro forma information is as follows:

                                                    SEPTEMBER 30,             
                                      ----------------------------------------
                                             1998                   1997       
                                      -----------------      -----------------

           Pro forma net loss         $   (2,087,239)        $   (4,051,969)
           Pro forma loss per share:
                Primary                        (0.14)                 (0.34)


(7)    INCOME TAXES

       The  income tax effect of  temporary  differences  that gives rise to the
       deferred tax  asset/(liability) as of September 30, 1998 is approximately
       as follows:

                                                                1998   
                                                           ------------
                      Net operating loss carryforward      $  5,699,000
                      Start-up costs                                 --
                      Patents and trademarks                    (30,000)
                      Inventory                                  50,000
                      Asset impairments                         149,000
                      Accelerated depreciation                  (70,000)   
                                                           ------------

                                                              5,798,000
                      Less - valuation allowance             (5,798,000)   
                                                           ------------

                           Net deferred tax asset          $         --
                                                           ============


                                      F17
                                                                     (Continued)

<PAGE>

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

                   Notes to Consolidated Financial Statements

                           September 30, 1998 and 1997



       A valuation allowance of $5,798,000 was recorded at September 30, 1998 to
       offset the  related  net  deferred  tax asset due to the  uncertainty  of
       realizing the related tax benefit.

       At September 30, 1998, the Company has net operating  loss  carryforwards
       for federal income tax purposes of  approximately  $17,800,000  which are
       available to offset future  federal  taxable  income,  if any, and expire
       2006 through 2013. The Company's net operating loss  carryforwards may be
       subject to certain annual limitations.


(8)    COMMITMENTS AND CONTINGENCY

       LEASE AND RENTAL COMMITMENTS

       The  Company  has  entered  into  noncancellable   operating  leases  for
       executive  offices  and  laboratory  facilities  from an entity  owned by
       Cornell University covering  approximately 6,000 square feet and expiring
       in April 1999. Such leases provide for automatic  renewals for a one year
       term.  Amounts  charged  to expense at  September  1998 and 1997  totaled
       approximately $79,000 and $101,800, respectively.

       CAPITAL LEASES

       The Company is obligated under a capital lease for equipment that expires
       in 2001.  At September  30, 1998 the gross  amount of equipment  recorded
       under the capital lease is as follows:

                      Equipment                            $     31,212
                      Less accumulated depreciation               1,561    
                                                           ------------

                                                           $     29,561
                                                           ============

                                      F18
                                                                     (Continued)
<PAGE>



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

                   Notes to Consolidated Financial Statements

                           September 30, 1998 and 1997



       Amortization  of  assets  held  under  capital  leases is  included  with
       depreciation  expense.  Future  minimum  capital  lease  payments  as  of
       September 30, 1998 are as follows:

           1999                                                 $       12,637
           2000                                                         12,637
           2001                                                          5,264
                                                                --------------
                                                                        30,538
           Less amount representing interest (at 13.1%
                per annum)                                               4,481
                                                                --------------
           Present value of net minimum capital lease
                payments                                                26,057
           Less current installments of obligations under
                capital leases                                           9,799
                                                                --------------

           Obligations under capital leases, excluding
                current installments                            $       16,258
                                                                ==============

       NOTE PAYABLE

       The Company has two notes  payable due in equal monthly  installments  of
       $4,395 and $991  bearing  interest  at rates of 7.4% and 8.96% per annum,
       the  notes  are due in May,  1999 and  August,  1999,  respectively.  The
       balance of the notes  payable  at  September  30,  1998 was  $30,021  and
       $11,196, respectively.

       COOPERATIVE RESEARCH AND DEVELOPMENT AGREEMENT

       The Company has  entered  into a  Cooperative  Research  and  Development
       Agreement  (CRADA)  with the  Laboratory  of Tumor  Cell  Biology  of the
       National  Cancer  Institute  (NCI).  The principal goals of this proposed
       CRADA involve the screening of a library of traditional Chinese medicines
       (TCMs) for their  affects on  reducing  HIV induced  cytotoxicity  and/or
       their ability to inhibit cell growth in various tumor cell lines.

       This  agreement  signed on December 18, 1996 calls for the Company to pay
       NCI $500,000 over a two year period.  The payment terms are $100,000 upon
       the execution of the agreement and the one year anniversary and quarterly
       payments of $50,000 during the year.  The Company is allowed  offsets for
       "in  kind"  contributions,  such  as  salaries  and  consultants  paid by
       directly by  Paracelsian.  In September  1997,  the Company  canceled the
       contract.  Due to the  cancellation  of the  contract,  the  Company  has
       fulfilled all obligations to NCI as of September 30, 1998.


                                      F19
                                                                     (Continued)

<PAGE>

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

                   Notes to Consolidated Financial Statements

                           September 30, 1998 and 1997



       CONTINGENCY

        (a)   During  1993,  an action was  commenced  against  the  Company,  a
              Company Vice  President and a shareholder  and former  employee of
              the Company. The complaint seeks money damages and alleges that in
              1990, prior to the Company's  incorporation,  certain  individuals
              became partners with the individual defendants in a venture formed
              to  commercialize   products  which  the  Company  had  originally
              intended  to  develop.  The case is in the  discovery  and  motion
              phase.   The  parties   exchanged   documents  and  conducted  the
              depositions  of certain key  witnesses.  Discovery has been stayed
              temporarily  pending  resolution of a motion for summary  judgment
              brought by certain of the Company's co-defendants. That motion, if
              successful,  will fully  resolve the case in favor of the Company.
              Management  believes  that the  action  is  without  merit  and is
              vigorously   opposing  the   allegations  and  that  the  ultimate
              resolution  of this  litigation  will not have a material  adverse
              effect  on  the  Company's   financial   position  or  results  of
              operations.

       (b)    A suit  filed by the  Company  in  April,  1997  against  a former
              officer and  director of the  Company and related  counter  claims
              were  dismissed by the court  pursuant to a  settlement  agreement
              between  the  parties  in  early  1998.  Under  the  terms  of the
              settlement, the Company canceled a $56,000 loan made to the former
              officer and further  agreed to pay him $26,000 over sixty  monthly
              installments, with interest at 8.5% per annum.

              Future minimum payments to the former officer are as follows:

                      1999              $       4,499
                      2000                      4,897
                      2001                      5,330
                      2002                      5,801
                      2003                      3,693
                                        -------------

                                        $      24,220
                                        =============

       (c)    On May 20, 1997, Dr. T. Colin  Campbell,  a former director of the
              Company,  filed a  petition  in the  Delaware  Court  of  Chancery
              pursuant to Section 211 of the Delaware  General  Corporation  Law
              ("DGCL").  The petition sought an order  compelling the Company to
              hold an annual meeting of  stockholders  and sought other forms of
              relief relating thereto, including requesting that the Court set a
              time and place for the meeting and  ordering  that  certain  board
              seats  be put up for  election.  On June  11,  1997,  the  Company
              announced  that the Board of Directors  had  scheduled  the annual
              meeting  for August 13, 1997 and had set a record date of July 10,
              1997 for stockholders entitled to attend and vote at the meeting.
              On the same day, the Company moved to dismiss the petition.

                                      F20
                                                                     (Continued)

<PAGE>

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

                   Notes to Consolidated Financial Statements

                           September 30, 1998 and 1997

              On June 20, 1997, petitioner filed a cross-motion in opposition to
              the Company's motion to dismiss,  and an application,  pursuant to
              Section  223(c) of the DGCL,  to  require  the  Company to hold an
              election  at the  annual  meeting to  replace  directors  recently
              appointed to the Board. Subsequently, petitioner moved to postpone
              the  scheduled  August 13th  meeting in order to have more time to
              conduct a proxy  contest.  The Court  scheduled a hearing for July
              28, 1997 to hear  argument on that motion.  Following the hearing,
              the Court ruled from the bench and denied petitioner's  request to
              postpone the meeting,  but granted the  petitioner  leave to amend
              his petition.

              Pursuant to the  agreement  entered into with Biomar (see note 5),
              Dr. T. Colin  Campbell has agreed not to pursue his claims and has
              given the  Company a full and final  release  of all  claims.  The
              Company  agreed to pay Dr.  Campbell's  legal  expenses of $67,156
              related to this matter and has included these costs as general and
              administrative   expenses  in  the   consolidated   statement   of
              operations in the year ended September 30, 1998.


(9)    SUBSEQUENT EVENTS

       In October 1998, the Company entered into an agreement with R.P.  Scherer
       North America, a division of R.P. Scherer  Corporation,  that establishes
       R.P.  Scherer North America as the exclusive  marketing and  distribution
       agent  for  Paracelsian's   BioFIT(TM)(Bio Functional Integrity  Testing)
       Certification  program in certain market  segments in North America.  The
       agreement  also provides for  collaboration  between the two companies on
       the  development of new products.  The agreement calls for the Company to
       receive  various  payments  as  certain  milestones  in the  distribution
       agreement are reached.

       In December  1998, the Company sold 666,666 shares of common stock at the
       then current market price for $250,000 through a private placement.


                                      F21
<PAGE>

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

None.

                                    PART III


ITEM 9.  DIRECTORS,   EXECUTIVE  OFFICERS,  PROMOTERS  AND  CONTROL  PERSONS  IN
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

                                       AND

ITEM 10. EXECUTIVE COMPENSATION

                                       AND

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                                       AND

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                                       AND

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

Omitted,  per General Instruction E. The information  required by Part III shall
be filed with the Commission by amendment.


<PAGE>


                                   SIGNATURES

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

         Date:  January 11, 1999

         PARACELSIAN, INC.

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

         In accordance  with the Exchange Act, this report has been signed below
by the following  persons on behalf of the  Registrant and in the capacities and
on the dates indicated.

<TABLE>
<CAPTION>

      Signature                               Title                                 Date

<S>                               <C>                                         <C> 
/s/ BERNARD M. LANDES             President, Chief Executive Officer and      January 11, 1999
--------------------------        Chairman of the Board, Director
    Bernard M. Landes

/s/ T. NELSON CAMPBELL            Director                                    January 11, 1999
--------------------------
    T. Nelson Campbell

                                  Director                                    January 11, 1999
--------------------------
    James J. Dunseith

/s/ HIRA GURTOO                   Director                                    January 11, 1999
--------------------------
    Hira Gurtoo

/s/ LIANPING HE                   Director                                    January 11, 1999
--------------------------
    Lianping He

/s/ ROBERT A. BUCHANAN, MD        Director                                    January 11, 1999
--------------------------
    Robert A. Buchanan, MD

/s/ THOMAS D. LIVINGSTON          Director                                    January 11, 1999
--------------------------
    Thomas D. Livingston

/s/ T. COLIN CAMPBELL             Director                                    January 11, 1999
--------------------------
    T. Colin Campbell
                                  Director                                    January 11, 1999
--------------------------
    Loren Israelsen

</TABLE>