<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

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

                                   FORM 10-KSB

 ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended SEPTEMBER 30, 1998

                          Commission file number 1-9431

                            ESCAGENETICS CORPORATION
-------------------------------------------------------------------------------
                 (Name of Small Business Issuer in Its Charter)

Delaware                                             94-3012230
-------------------------------------------------------------------------------
(State or Other Jurisdiction of         (I.R.S. Employer Identification No.)
Incorporation or Organization)

Suite 605, 1075 Bellevue Way NE, Bellevue, WA           98004
-------------------------------------------------------------------------------
(Address of Principal Executive Offices)              (Zip Code)

(206) 901-3595
-------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)

Securities registered under Section 12(b) of the Exchange Act:

         None

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

         Common Stock, $0.0001 par value per share.

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the 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 past 90 days.

Yes  X   No ____

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

Issuer's revenues for its most recent fiscal year were $-0-.

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. $7,343 as of October 31, 1998 (no 
such transactions occurred after October 31, 1998).


<PAGE>

Check whether the issuer has filed all documents and reports required to be 
filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution 
of securities under a plan confirmed by a court. Yes X  No ____

The number of shares outstanding of the issuer's common stock as of December 
15, 1998 was 73,402,516 shares.

Transitional Small Business Disclosure Format (check one): Yes ____  No  X


                                     PART I

ITEM 1 -- Business Description

Formed in 1986, ESCAgenetics Corporation ("the Company") was organized to
develop and commercialize high-value, plant derived products for the
agricultural and pharmaceutical markets. The Company actively conducted its
business between 1987 and the early part of 1995. In January 1995, the Company
scaled back its business activities and became largely a dormant business.
During 1995, the Company disposed of most of its technology rights including the
rights to its corn hybrids and synthetic taxol programs. In January 1996, the
Company filed a bankruptcy petition for protection under Chapter 11 of the U.S.
Bankruptcy Code. At the time of the bankruptcy filing, the Company retained
rights to certain plant extracts and related patents, its date palm inventory
and related technology and patents and its hybrid true potato seed inventory and
related technology and patents. The Company sold the plant extracts and related
patents and its date palm inventory as part of the bankruptcy reorganization.

The Company's amended plan of reorganization (the "Amended Plan of
Reorganization") was conditionally confirmed by the Bankruptcy Court on July 10,
1996 and became effective on August 22, 1996. Under the Amended Plan of
Reorganization, GFL Ultra Fund, Ltd. ("Ultra"), the Company's largest debt
holder, received 25% of the cash available to unsecured creditors and 90% of the
Company's common stock. The remaining cash was distributed proportionately to
the remaining unsecured creditors and the remaining 10% of the Company's common
stock remained owned by its previous shareholders. The bankruptcy proceeding was
officially closed effective March 31, 1997. In July, 1998 Genesee Holdings, Inc.
("Holdings") acquired by merger all the assets of Ultra.

On December 27, 1996, the Company sold 100% of the common stock outstanding of
its wholly owned subsidiary, Potato Products International, Ltd. (formerly known
as TPS Products Company) to an affiliate of Ultra for $175,000. Prior to the
sale, the Company transferred to Potato Products International, Ltd. title to
all of its tangible and intangible assets other than cash on hand and the stock
of PHYTOpharmaceuticals, Inc. (an inactive majority owned subsidiary), SRE
ESCAgenetics Corporation (an inactive wholly owned subsidiary) and Potato
Products International, Ltd. The Company used the proceeds from the sale to
repay amounts owed to Ultra for cash advances and to pay for the costs
associated with preparing the Company for a business combination or other
strategic transaction.

The Company has been dormant during the fiscal year ended September 30, 1998.
The Company has had no employees since November 1996. The Company does not plan
to continue the business activities that it conducted prior to its
reorganization. It plans to pursue a business combination or other strategic
transaction. No candidate for such a transaction has been identified. The
Company believes its status as a public company may be attractive to a private
company wishing to avoid an initial public offering but there is no guarantee
that a business combination or other strategic transaction will be consummated.

The Company applied "fresh start" reporting in connection with its bankruptcy
filing and Ultra's acquisition of 90% of the Company's outstanding shares of
common stock. Accordingly, the Company's balance sheet as of August 22, 1996,
the effective date of the Plan of Reorganization, was adjusted to 


                                       2
<PAGE>

reflect the current value of the Company as of that date. Fresh start 
reporting requires that purchase accounting principles be applied. This means 
that the operating statements of the "old" Company are not included in the 
financial statements of the "new" Company; that the "purchase price" (current 
value) must be allocated to the assets acquired and the liabilities assumed; 
and that retained earnings are fixed at zero.

The purchase price was determined based on the December 1997 sales price of
Potato Products International, Inc. less the expenses incurred by the Company on
behalf of that entity between the reorganization date and the date of sale. This
value, which amounted to $134,000, was assigned to the Company's investment in
Potato Products International, Inc. The Company's bankruptcy disclosure
statement placed a value of $150,000 on the inventory of true potato seed and
the related technology and patents but the Company was unable to find a buyer
for the inventory of true potato seed or the related technology and patents
during the bankruptcy proceeding at that or any other value.


ITEM 2 -- Description of Property

The Company leases approximately 200 square feet of storage space in Gilroy,
California.

ITEM 3 -- Legal Proceedings

None.

ITEM 4 -- Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of the shareholders during the fourth
quarter of fiscal 1998.

                                     PART II

ITEM 5 -- Market for Common Equity and Related Shareholder Matters

The Company's Common Stock trades under the symbol "ESNG" on the OTC Bulletin
Board. The market for the Company's Common Stock is limited, sporadic and highly
volatile. The following table sets forth the high and low bid prices per share
of the Company's Common Stock during its last two fiscal years as reported by
the OTC Bulletin Board. These prices reflect inter-dealer prices, without retail
mark-ups, mark-downs or commissions, and may not necessarily represent actual
transactions.

<TABLE>
<CAPTION>
                                                     High        Low
                                                   ---------- ----------
     <S>                                           <C>        <C>
     Fiscal 1997
         First Quarter                                0.6600     0.0010
         Second Quarter                               0.0050     0.0020
         Third Quarter                                0.0020     0.0020
         Fourth Quarter                               0.1000     0.0050
     Fiscal 1998
         First Quarter                                0.1000     0.0001
         Second Quarter                               0.0001     0.0001
         Third Quarter                                0.0050     0.0050
         Fourth Quarter                               0.0050     0.0010
</TABLE>

The number of shareholders of record as of December 16, 1998 was 468.


                                       3
<PAGE>

It is the present policy of the Company not to pay cash dividends. Any payment
of cash dividends in the future will depend upon the amount of funds legally
available for that purpose, the Company's earnings, financial condition, capital
requirements and other factors that the Board of Directors may deem relevant.


ITEM 6 -- Management's Discussion and Analysis of Financial Condition and
     Results of Operations

Since the August 22, 1996 reorganization date, the Company has adopted a
September 30 fiscal year.

The Company has had no revenues from operations since the reorganization date.
The Company does not plan to continue the business activities that it previously
conducted. It plans to pursue a business combination or other strategic
transaction. No candidate for such a transaction has been identified. The
Company believes its status as a public company may be attractive to a private
company wishing to avoid an initial public offering but there is no guarantee
that a business combination or other strategic transaction will be consummated.

The Company expects to fund its expenses during fiscal 1999 with advances from
its majority shareholder, Holdings. The Company expects Holdings to continue to
fund its expenses until a business combination or other strategic transaction is
consummated. There is no guarantee that the Company is a viable party for a
business combination or other strategic transaction. If a business combination
or other strategic transaction is not consummated in a timeframe suitable to
Holdings or cannot be consummated due to excessive cost or for any other reason,
Holdings will cease to advance funds to the Company.

The Company has no employees and no fixed assets. The Company does not
anticipate hiring any employees or purchasing any assets until such time as a
business combination or other strategic transaction is consummated or is
imminent.


ITEM 7 -- Financial Statements

The financial statements of the Company are included in this report commencing
on page F-1.


ITEM 8 -- Changes In and Disagreements with Accountants on Accounting and
     Financial Disclosure

On October 22, 1998, the Company engaged the firm of Bader Martin Ross & Smith,
P.S. as its independent auditors for all periods subsequent to the
reorganization date. The Company's Board of Directors has approved the
engagement.

The Company had engaged Deloitte & Touche LLP on November 29, 1996 as the
Company's independent auditors to report on the Company's financial statements
for the fiscal years ended March 31, 1995 and March 31, 1996. These fiscal years
ended prior to the August 22, 1996 bankruptcy reorganization date. The audits
were not completed due to excessive cost resulting primarily from the lack of
continuity of personnel and the fact that certain accounting records and
inventory were located in Chile.

Deloitte & Touche LLP was notified of the change of auditors on December 18,
1998. There have been no disagreements with Deloitte & Touche LLP.


                                       4
<PAGE>

                                    PART III


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

Executive Officers and Directors

The following table sets forth the name, age and position of each person who was
serving as an executive officer or director of the Company at December 15, 1998:

<TABLE>
<CAPTION>
              Name             Age                      Office
     ----------------------- -------- --------------------------------------------
     <S>                     <C>      <C>
     Michelle Kline            41     President, Treasurer, Secretary, Director
     Greg L. Key               33     Director
</TABLE>

Ms. Kline was appointed as an officer and director as of August 23, 1996 in
accordance with the Company's Amended Plan of Reorganization. The Amended Plan
of Reorganization required all directors and officers of the Company to resign
and to be replaced by persons designated by Ultra. Mr. Key was appointed as a
director on October 9, 1998. Ms. Kline and Mr. Key have been employees of
Genesee Services Corp., an affiliate of Holdings, since 1990.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities and Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who own more than ten percent
of a registered class of the Company's equity securities, to file reports of
ownership and changes of ownership with the Securities and Exchange Commission
(the "SEC"). Officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all such
reports they file.

Based solely on its review of the copies of such reports received by the 
Company, the Company believes that, during the fiscal year ended September 
30, 1998 and prior fiscal years, all filing requirements applicable to its 
officers and directors, and all of the persons known to the Company to own 
more than ten percent of its Common Stock, were complied with by such 
persons, except that (i) Holdings, Ms. Kline and Mr. Key filed late their 
initial reports of beneficial ownership on Form 3, (ii) Kristi J. La-Band, 
formerly a Director of the Company, and Ultra did not file such report, and 
(iii) none of such persons filed a Form 5 reporting the late filings.

ITEM 10 -- Executive Compensation

The Company has had no employees since November 1996 and did not compensate its
officer or directors during the fiscal year ended September 30, 1998. Their
employer compensates Ms. Kline and Mr. Key for services rendered to their
employer. No portion of their compensation is specifically attributable to their
service as officer or director of the Company.


ITEM 11 -- Security Ownership of Beneficial Owners and Management

The table below sets forth information as to the beneficial owner of record that
was known by the Company to own beneficially more than 5% of the 73,402,516
shares of issued and outstanding Common Stock of the Company as of December 15,
1998.


                                       5
<PAGE>

<TABLE>
<CAPTION>

                         Name and Address of            Amount and Nature of    Percent
Title of Class             Beneficial Owner             Beneficial Ownership     of Class
---------------- ------------------------------------- ------------------------ -----------
<S>              <C>                                   <C>                      <C>
 Common Stock    Genesee Holdings, Inc.                   66,060,000 shares        90%
                 c/o ESCAgenetics Corporation
                 Suite 605, 1075 Bellevue Way NE
                 Bellevue, WA  98004
</TABLE>

Neither Ms. Kline nor Mr. Key beneficially owns any shares of the Company or 
an interest in Holdings.


ITEM 12 -- Certain Relationships and Related Transactions

At September 30, 1998 the Company owed $54,000 to Holdings for loans provided 
to finance the Company's business activities. The loans are convertible into 
equity at the rate of 130 shares per dollar at Holding's option. Holdings has 
waived its right to receive interest on the loans through September 30, 1998.

During the fiscal year ended September 30, 1998, the Company paid $1,000 to an
affiliate of Holdings for general and administrative expenses consisting
primarily of accounting services.


ITEM 13 -- Exhibits, Lists and Reports on Form 8-K

(a)  The following exhibits are filed as part of this report

<TABLE>
<CAPTION>
      Exhibit #           Exhibit Title
      ---------           -------------
      <S>           <C>   <C>
      3.1           *     Articles of incorporation
      3.2           *     By-laws
      16            **    Letter on change in certifying accountant
      21                  Subsidiaries of registrant
      27.1                Financial Data Schedule
</TABLE>
          *    Incorporated by reference to the Company's Form 10-QSB for the
               quarter ended December 31, 1996.
          **   Incorporated by reference to the Company's Form 10-KSB for the
               year ended September 30, 1997.

(b) No reports on Form 8-K were filed during the fourth quarter of fiscal 1998.


                                       6
<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.

ESCAGENETICS CORPORATION


By  /s/ Michelle Kline
   -------------------------
Michelle Kline, President

Dated:  January 12, 1999
       ---------------------


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.

By  /s/ Michelle Kline
   -------------------------
Michelle Kline, Principal Executive, Financial
and Accounting Officer and Director

Date  January 12, 1999
     -----------------------


By  /s/ Greg L. Key
   -------------------------
Greg L. Key, Director

Date  January 12, 1999
     -----------------------


                                       7
<PAGE>

                          INDEPENDENT AUDITORS' REPORT


Board of Directors and Shareholders
ESCAgenetics Corporation and Subsidiaries
Bellevue, Washington

We have audited the accompanying consolidated balance sheet of ESCAgenetics
Corporation and Subsidiaries (the Company) as of September 30, 1998, and the
related consolidated statements of operations and cash flows for the years ended
September 30, 1998 and 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ESCAgenetics Corporation and
Subsidiaries as of September 30, 1998, and the results of their operations and
their cash flows for the years ended September 30, 1998 and 1997, in conformity
with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the continuation of the Company as a going concern is
dependent upon the establishment of profitable operations. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.




BADER MARTIN ROSS & SMITH, P.S.
Seattle, Washington

December 18, 1998


                                        F1
<PAGE>

                    ESCAGENETICS CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET

                               SEPTEMBER 30, 1998

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

<TABLE>
<S>                                                                        <C>
                                    ASSETS
Current assets:
    Cash                                                                   $   1,000
                                                                           ---------
          Total assets                                                     $   1,000
                                                                           ---------
                                                                           ---------

               LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)

Current liabilities:
    Accounts payable                                                       $   1,000
    Due to Genesee Holdings, Inc.                                             54,000
                                                                           ---------

       Total liabilities                                                      55,000
                                                                           ---------

Shareholders' equity (deficiency):
    Common stock                                                               7,000
    Additional paid-in capital                                               134,000
    Accumulated deficit                                                     (195,000)
                                                                           ---------

       Total shareholders' equity (deficiency)                               (54,000)
                                                                           ---------

          Total liabilities and shareholders' equity (deficiency)          $   1,000
                                                                           ---------
                                                                           ---------
</TABLE>

                 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                        F2
<PAGE>

                    ESCAGENETICS CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                         Years ended September 30,
                                                    -----------------------------------
                                                       1998                    1997
                                                    ------------           ------------
<S>                                                 <C>                    <C>
Revenues:
    Miscellaneous                                   $          0           $      3,000
                                                    ------------           ------------
Operating expenses:
    Accounting and legal                                   5,000                134,000
    General and administrative                             7,000                 37,000
                                                    ------------           ------------

       Total expenses                                     12,000                171,000
                                                    ------------           ------------

Net loss                                                 (12,000)              (168,000)

Accumulated deficit, beginning of year                  (183,000)               (15,000)
                                                    ------------           ------------

Accumulated deficit, end of year                    $   (195,000)          $   (183,000)
                                                    ------------           ------------
                                                    ------------           ------------


Net loss per share                                  $      (0.00)          $      (0.00)
                                                    ------------           ------------
                                                    ------------           ------------

Weighted average common shares outstanding            73,402,516             73,402,516
                                                    ------------           ------------
                                                    ------------           ------------
</TABLE>

                 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                        F3
<PAGE>

                    ESCAGENETICS CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

-------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                    Years ended September 30,
                                                                  -----------------------------
                                                                     1998                1997
                                                                  ---------           ---------
<S>                                                               <C>                 <C>
Cash flows from operating activities:
    Net loss                                                      $ (12,000)          $(168,000)
    Adjustments to reconcile net loss to net cash flows
      used in operating activities:
       Changes in operating assets and liabilities:
          Accounts payable                                           (2,000)              3,000
          Amounts due to pre-petition creditors                                        (216,000)
                                                                  ---------           ---------

              Net cash used in operating activities                 (14,000)           (381,000)
                                                                  ---------           ---------

Cash flows from investing activities:
    Additional investment in Potato Products
      International, Ltd. prior to sale                                                 (27,000)
    Proceeds from sale of Potato Products
      International, Ltd.                                                               175,000
                                                                  ---------           ---------

              Net cash provided by investing activities                   0             148,000
                                                                  ---------           ---------

Cash flows from financing activities:
    Advances from Genesee Holdings, Inc.                             15,000             144,000
    Repayments to Genesee Holdings, Inc.                                               (135,000)
                                                                  ---------           ---------

              Net cash provided by financing activities:             15,000               9,000
                                                                  ---------           ---------

Net increase (decrease) in cash                                       1,000            (224,000)

Cash at beginning of year                                                 0             224,000
                                                                  ---------           ---------

Cash at end of year                                               $   1,000           $       0
                                                                  ---------           ---------
                                                                  ---------           ---------
</TABLE>

                 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                        F4
<PAGE>

                    ESCAGENETICS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

1.   Summary of significant accounting policies

     PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

     The consolidated financial statements include the accounts of ESCAgenetics
     Corporation (the "Company") and its majority and wholly owned subsidiaries,
     PHYTOpharmaceuticals, Inc. and SRE ESCAgenetics Corporation, after
     elimination of all significant intercompany accounts and transactions. The
     Company's subsidiaries did not have any significant operating activities
     during the periods presented.

     OPERATIONS

     Formed in 1986, the Company was organized to develop and commercialize
     high-value, plant-derived products for the agricultural and pharmaceutical
     markets. In January 1995, the Company scaled back its business activities
     and became largely a dormant business. In January 1996, the Company filed a
     bankruptcy petition for protection under Chapter 11 of the U.S. Bankruptcy
     Code, and the Company's plan of reorganization became effective on August
     22, 1996. The bankruptcy proceeding was officially closed effective March
     31, 1997.

     Genesee Holdings, Inc. ("Holdings," a successor by merger to GFL Ultra
     Fund, Ltd.) owns ninety percent of the outstanding common stock of the
     Company. Currently, all operating expenses are being funded by Holdings
     through a line of credit (Note 3). During the years ended September 30,
     1998 and 1997, the Company paid $1,000 and $37,000, respectively, to an
     affiliate for general and administrative expenses consisting primarily of
     accounting services.

     The Company does not plan to continue the business activities that it
     conducted prior to its reorganization. It plans to pursue a business
     combination or other strategic transaction. No candidate for such a
     transaction has been identified. Ultimately, the continuation of the
     Company as a going concern is dependent upon the establishment of
     profitable operations. Management believes Holdings will continue to fund
     expenditures until such time as a business combination or other strategic
     transaction is consummated.

     Because the achievement of these plans is dependent upon future events,
     there can be no assurance that future profitable operations will occur as
     planned.

     USE OF ESTIMATES

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


                                        F5
<PAGE>

                    ESCAGENETICS CORPORATION AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

1.   Summary of significant accounting policies (continued)

     NET LOSS PER SHARE

     Net loss per share is calculated on the basis of weighted average number of
     common shares outstanding. Common stock equivalents are excluded from the
     computation, as their effect is antidilutive.


2.   Shareholders' equity

     COMMON AND PREFERRED STOCK

     The Company has authorized 101,000,000 shares of Common Stock with a par
     value of $.0001 per share and 1,000,000 shares of Preferred Stock with a
     par value of $.01 per share. There were 73,402,516 shares of Common Stock
     issued and outstanding at September 30, 1997 and 1998. No shares of
     Preferred Stock are outstanding.

     OPTIONS AND WARRANTS

     The Company had several employee and non-employee stock option plans. All
     of the plans were terminated prior to the effective date of the Amended
     Plan of Reorganization.

     At September 30, 1998, the Company had warrants for 280,000 shares
     outstanding. These warrants expire through July 1999 and have exercise
     prices ranging from $3.00 to $7.20 per share.


3.   Due to Holdings

     At September 30, 1998, the Company owed $54,000 to Holdings for loans
     provided to finance the Company's business activity. The loans are
     convertible into equity at the rate of 130 shares per dollar at Holdings'
     option. Holdings has waived its right to receive interest on the loans
     through September 30, 1998.


                                        F6
<PAGE>

                    ESCAGENETICS CORPORATION AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

4.   Income taxes

     The Company has accumulated significant net operating loss carryforwards.
     Subsequent to its August 22, 1996 reorganization date, the Company
     accumulated net operating loss carryforwards of approximately $58,000 that
     are available to offset future taxable income, if any, through 2013. Due to
     the change in the ownership of the Company and the nature of the Company's
     operations, realization of the net operating loss carryforwards is remote.
     Accordingly, management has recorded a valuation allowance to reduce
     deferred tax assets associated with net operating loss carryforwards to
     zero at September 30, 1998.


                                       F7