U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

                                   (Mark One)

       [X] Annual report pursuant to Section 13 or 15(d) of the Securities
       Exchange Act of 1934 for the fiscal year ended: December 31, 2001

                    [ ] Transition report pursuant to Section
                     13 or 15(d) of the Securities Exchange
                   Act of 1934, for the transition period from
                              ________ to ________

                         Commission file number: 0-24736

                   BioProgress Technology International, Inc.

                 (Name of small business issuer in its charter)


               Nevada                                           88-0361701
    (State or other jurisdiction                             (I.R.S. employer
  of incorporation or organization)                       identification number)

9055 Huntcliff Trace, Atlanta, Georgia                          30350-1735
(Address of principal executive offices)                        (Zip code)

                   Issuer's telephone number: (770) 649-1133;
        Securities registered pursuant to Section 12(b) of the Act: None
           Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, $.001 Par Value
                                (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 of 1934 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 |_|

Check if there is no disclosure of delinquent  filers in response to item 405 of
Regulation  S-B 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. |X|

State issuer's revenues for its most recent fiscal year: $ 966,738

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant  computed by reference to the price at which
the common  equity was sold,  or the average bid and asked prices of such common
equity,  as of a specified  date within 60 days prior to December 31,  2001:  On
December  31,  2001,  the low  trading  price for the shares of common  stock of
registrant,  which is the sole voting  stock  outstanding,  of  registrant,  was
$0.64, as reported on IDD Information Services. On December 31, 2001, there were
approximately 47,631,527 shares of common stock outstanding, and affiliates held
16,722,425  shares of this stock. The aggregate market value of the voting stock
held by non-affiliates approximated $19,781,825.

State the number of shares outstanding of each of the issuer's classes of common
equity  as of  the  latest  practicable  date:  As of May 8,  2002,  there  were
48,439,277 shares of common stock outstanding.

Documents Incorporated By Reference: None.

Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|

<PAGE>

                                     PART I

Item 1. Description of Business

Business Overview

BioProgress Technology  International,  Inc. ("BioProgress",  "we", "our", "us",
"the  Company")  is  engaged  in  the  research,   development,   manufacturing,
marketing,  sales  and  distribution  of  products  that use water  soluble  and
biodegradable films for the dietary supplement, pharmaceutical, recreational and
cosmetic  industries  and other  applications,  and flushable and  biodegradable
products for the medical and hygiene  industries.  BioProgress  operates through
four  wholly  owned  subsidiaries,  BioProgress  Technology,  Inc.,  BioProgress
Technology  Limited (UK),  ProDesign  Technology  Limited (UK) and DHA Nutrition
Limited  (UK),  and one  partially  owned  subsidiary,  The  Healthy  Forum Ltd.
(collectively  with  BioProgress,  the  "Company").  Our principal  research and
development  operations are in the United Kingdom and our executive  offices are
in Atlanta, Georgia.

Our primary focus is on the development and  commercialization of our unique and
proprietary  process,  the  XGel(TM)  Film  System  ("XGel(TM)  FS").  The first
commercial  version of the XGel(TM) FS is used to produce soft capsules that are
free from  gelatin and other  animal  by-products.  Soft  capsules  are commonly
recognized  as products  that  contain a wide  variety of  non-aqueous  fillings
either in ingestible form, such as vitamin,  herbal and mineral  supplements and
as  oral  delivery  systems  for  drugs,  or in  non-ingestible  form,  such  as
paintballs and toiletries (such as bath and  aromatherapy  oils). Two additional
versions of the XGel(TM) FS are in development  and available in prototype form.
The first additional  version aims to replace coating processes  employed in the
production of tablets. The second additional version,  known as NRobe(TM),  aims
to encapsulate  powders in a continuous process thereby eliminating the need for
two piece hard shell capsules.  Collectively, the three versions of the XGel(TM)
FS aim to provide a cost  effective and  animal-free  encapsulation  process for
liquids,  tablets and powders, thereby addressing the needs of the entire market
for oral dosage forms while  providing  novel  delivery  mechanisms not possible
with traditional processes.

We believe there is an increasing demand for our non-gelatin  capsules.  Gelatin
is a protein which is predominantly derived from animal renderings.  A number of
industry  and  consumer  trends are  driving  the need to replace  gelatin as an
encapsulation material. Among them are:

      o     Health and safety concerns,

      o     Religious, ethnic and moral beliefs,

      o     Efficacy of the material and process, and

      o     New product development.


Our current business model envisions the following elements:

      o     Sell  licenses  to  use  our  intellectual  property  vested  in the
            XGel(TM)FS,

      o     Sell XGel(TM)Film Systems,

      o     Sell XGel(TM)Film for use with XGel(TM)FS,

      o     Offer research and development  services to assist licensees to gain
            maximum benefit from the license and,

      o     Offer  research and  development  services to customers  seeking new
            product innovations.


We anticipate that the resultant business model will benefit our business in the
following ways:

      o     Licensing  will  eliminate  the  requirement  for us to make a large
            capital  investment to establish  Company-owned  Good  Manufacturing
            Practices ("GMP") facilities,

      o     Licensing  will  eliminate  the  need  for  us  to  recruit  skilled
            personnel to staff GMP facilities,

      o     Licensing will facilitate the rapid  introduction of the XGel(TM) FS
            on a global basis by a large group of companies  who already have in
            place the  infrastructure  and  resources  to  produce  and  deliver
            products to consumers,

<PAGE>

      o     The  ability  for  a  rapid  rollout  will  reduce  the  risk  of  a
            competitive response by industry peers,

      o     Licensing  the  manufacture  of its  technologies  and  focusing  on
            research  and  development  will allow us to employ  our  innovative
            technological and engineering skills to maximum advantage, and

      o     Licensing  the  manufacture  of its  technologies  will enable us to
            maintain a low cost base.

During 2001, we took several major steps toward commercializing the XGel(TM) FS.
We  demonstrated  the first  ingestible  product  version  of the  XGel(TM)  FS,
code-named  "Swallow 1",  through batch trials of a wide range of XGel(TM) films
and  active  ingredients.  We  designed  Swallow 1 and it is  subject of various
patent applications and was manufactured by specialist  sub-contractors.  Having
the ability to  demonstrate  Swallow 1 in operation to potential  customers  has
generated  interest from more than 40 international  corporations  interested in
purchasing licenses and the XGel(TM) FS.

On June 4, 2001 we opened our purpose built research and development facility at
Hostmoor,  in March,  Cambridgeshire,  England.  The 27,000 square feet facility
houses  special  cubicles,  termed  "pods",  in  which  development  work can be
conducted  in  isolation,  thereby  enabling  us to  progress  development  work
simultaneously with several customers, and on our own account, while maintaining
strict confidentiality.

During June 2001, we commenced  user trials of our  flushable and  biodegradable
ostomy  pouch.  We  believe  that  initial  feedback  from  users  is  extremely
encouraging. As a result of the feedback received during Q3 of 2001, we produced
a large  batch of ostomy  pouches in order to expand the number of trials with a
view to  collecting  sufficient  data to  determine  the efficacy of the current
design.  Subsequent to the period covered by this report,  and following receipt
and study of the data  collected  from trials  during Q4 of 2001,  we determined
that  our  ostomy  pouch  has  sound  commercial  potential.  We  are  currently
investigating  various commercial prospects for the ostomy pouch including,  but
not limited to the sale of a distribution  license to one of the world's leading
companies in the ostomy product market.

During  July,  2001 we  demonstrated  laboratory  produced  samples to potential
customers  for  our  NRobe(TM)  and  Septum(TM)   technologies  currently  under
development.  NRobe(TM) and Septum(TM) technologies are the subject of filed but
unpublished patent applications.

On July 6, 2001 we announced  the  completion  of the  acquisition  of ProDesign
Technology Limited ("PTL").  PTL is a specialist design house skilled in the use
of Pro-E computer aided design techniques.  We intend to expand the resources of
PTL to meet the growing needs of our research and development program.

On July 10, 2001 we  completed  four  agreements  with a Spanish  pharmaceutical
company, Farmasierra, S. L., for: the sale of a full scale XGel(TM) FS; the sale
of a license  to use our  patents in respect  of the  XGel(TM)  technology;  the
future supply of additional XGel(TM) FS; and, the future supply of XGel(TM) Film
for use with the XGel(TM) FS. We believe  that the  technology  covered by these
agreements may revolutionize the  pharmaceutical  industry.  The  pharmaceutical
industry currently uses three types of gelatin-based  dosage forms: gelatin soft
capsules for liquids,  coated  tablets and two-piece  hard gelatin  capsules for
powders.  Two of these  processes  exist  because  the soft  capsule  process is
essentially  wet, and  therefore  not suitable  for use with  powders.  With the
development  of a  powder  fill  version  of  the  XGel(TM)  FS,  pharmaceutical
companies will be able to employ just the one process to deliver both liquid and
powder products.  Further,  our Septum(TM)  technology  enables both liquids and
powders to be combined in a single capsule and to be released at different times
and or sites in the digestive  system. We have recognized no revenues to date in
respect of the Farmasierra agreements.

During August, 2001 we successfully completed our development agreement with the
Procter & Gamble  Company  ("P&G").  We, as well as P&G,  are  considering  what
steps, if any, will be taken to commercialize the development.  We are no longer
subject to an exclusive  arrangement with P&G regarding  certain versions of its
non-ingestible  technologies  and these are currently the subject of discussions
with several major manufacturers of fast moving consumer goods.

On November 28, 2001,  we announced  that we had reached a commercial  agreement
with The Boots  Company plc (LSE:  BOOT) whereby The Boots Company would use our
XGel(TM)  Film System to produce  samples for consumer  trials of an  innovative
oral dosage form.

On December 6, 2001 we announced that engineering tests conducted by Peter Black
Healthcare Limited on its XGel(TM) Film System under order had proved successful
and that stability trials of capsules  produced on the system had commenced.  We
announced that the XGel(TM) Film System had successfully  produced 10 minim size
capsules at a rate of 80,000 per hour.

On  December  13, 2001 we  announced  that we had  entered  into a common  stock
purchase agreement with Fusion Capital LLC., a Chicago  institutional  investor,
whereby Fusion Capital has agreed to buy up to $6.0 million of our common stock.
The commencement of the funding is subject to certain  conditions  including the
effectiveness of a registration statement. The proceeds from the funding will be
used for working capital and general corporate purposes.

<PAGE>

On March 26, 2002  subsequent  to the period of this report,  we announced  that
Peter Black  Healthcare  Limited had  accepted  the  XGel(TM)  Film System under
contract.  Further,  that such  acceptance had triggered a contract for a second
system.  In  addition,  we  announced  that Peter Black  Healthcare  Limited had
executed an option to acquire 5 NRobe(TM)  versions of the XGel(TM) Film System.
Subsequent  to this  announcement  and prior to the date of this  report,  Peter
Black Healthcare  increased to 10 the number of NRobe(TM)  XGel(TM) Film Systems
under option.

On March 28, 2002 following  eighteen months of development  work and evaluation
studies, we executed an agreement with Worldwide Consumer Medicines,  a division
of  Bristol-Myers  Squibb  Company,  in  respect of a novel  application  of the
XGel(TM) FS. For  commercial  reasons the specific  products and  categories are
confidential.

On April 2, 2002 we announced  that we executed stage three of our first Product
Development  Agreement with The Boots Company plc following  successful consumer
acceptability  trials of the newly developed  products.  The Product Development
Agreement  was first  executed in October 2000 and proceeded to stage two during
November of 2001. The aim of the Product  Development  Agreement is to develop a
range of innovative  new consumer  products  utilizing our unique  XGel(TM) Film
System  encapsulation  technology.  For commercial reasons the specific products
and categories are confidential.

We  continued  to  pursue  certain  avenues  for  expanding  our  flushable  and
biodegradable   products   business   through  license  and  joint   development
agreements,   primarily   through   research   with   Consolidated   EcoProgress
Technologies  ("EcoProgress")  and our  investment  in The Healthy Forum Limited
("The Healthy  Forum").  We have  determined that we will not primarily focus on
such products in the near term, although we will pursue and meet our commitments
to  assist in the  development  of such  product  lines in  compliance  with the
EcoProgress license agreement.

During May, 2001 The Healthy Forum commenced shipments of the Flushaway sanitary
napkins  to major  retail  customers  in the  U.K.,  including  Sainsbury's  and
Waitrose.  By year's end, retail  distribution had expanded to include Superdrug
and during the first  quarter of 2002 The Healthy  Forum  secured  listing  with
Tescos  and  Boots,  bringing  combined  retail  penetration  to more than 1,800
stores.  At the time of this report The Healthy Forum has developed and launched
more than 15 food product lines that are scheduled to begin shipment  during the
second quarter of 2002.

History

BioProgress was  incorporated in California on March 5, 1990,  under the name of
U.S.  Flywheel,  Inc.,  as a subsidiary  of Sunbird  Technologies,  Inc., a Utah
corporation ("Sunbird Technologies"). In June 1991, U.S. Flywheel, Inc. acquired
three  patents  and a license  relating  to  flywheel  technology  from  Sunbird
Technologies  and its affiliates in exchange for common shares,  par value $.001
per share, of U.S. Flywheel,  Inc. "Common Stock".  These shares of Common Stock
were subsequently  distributed to the shareholders of Sunbird Technologies after
registration with the U.S.  Securities and Exchange  Commission  ("Commission").
U.S.  Flywheel,  Inc.  subsequently  transferred  its flywheel  technology  to a
partnership  in  exchange  for a  minority  interest  in  the  partnership.  The
partnership  interest of U.S. Flywheel,  Inc. was subsequently sold, after which
U.S.  Flywheel,  Inc.  began its search for a business in which to engage.  U.S.
Flywheel,  Inc.  changed  its name to Famous  Sam's  Group Inc. in July 1996 and
briefly was a restaurateur.

On November 17, 1997,  Famous  Sam's Group Inc.  entered into an agreement  (the
"Reorganization  Agreement")  with  BioProgress  Technology,  Inc.,  a  Colorado
corporation   ("BioProgress   Technology").   Pursuant  to  the   Reorganization
Agreement, Famous Sam's Group Inc. acquired all of the outstanding capital stock
of BioProgress  Technology in exchange for 4,000,000 post-split shares of Common
Stock, after giving effect to a reverse one for five stock split approved by the
then  majority  shareholder  of Famous  Sam's Group Inc.  on October  21,  1997.
BioProgress  Technology  principally engages in the distribution of our products
to the U.S. market.

In conjunction with the execution and delivery of the Reorganization  Agreement,
Famous Sam's Group Inc.  entered into an agreement (the "BTL Option  Agreement")
with certain of the shareholders of BioProgress  Technology  Limited,  an entity
incorporated in the United Kingdom ("BTL").  BioProgress acquired  approximately
62% of BTL on November 11, 1998, and the remaining  approximately  38% of BTL on
December 31, 1998,  issuing an aggregate of 22,818,446 shares of Common Stock as
the sole  consideration  for the acquisition.  BTL is the original  research and
development arm of the Company and has developed our product lines.

In addition,  in November 1997,  BioProgress  Technology and BTL entered into an
exclusive distribution agreement pursuant to which BioProgress Technology became
the  exclusive  distributor  in the United  States  and  Canada of any  products
created by BTL. Currently, these products are XGel(TM) FS and XGel(TM) Film. The
exclusive  distribution agreement terminates upon the later of 20 years from the
first  commercial  sale of BTL's  products or the  expiration  of the last valid
utilized patent.

In  December  1997,  Famous  Sam's Group Inc.  changed  its name to  BioProgress
Technology International, Inc.

On August 12, 1998,  BioProgress  acquired DHA Nutrition Limited (UK), an entity
organized  in the  United  Kingdom  ("DNL"),  as a wholly  owned  subsidiary  in
exchange solely for 400,000 shares of Common Stock. The agreement  provided that
the number of shares which BioProgress issued in the acquisition of DNL could be
increased by an aggregate of 600,000 shares based upon cumulative

<PAGE>

gross revenue  targets in respect of DNL's feed and food supply sales,  but such
targets  were not met. The sole asset of DNL on the date of  acquisition  was an
agreement  with  Martek  Biosciences  Corporation,   a  U.S.  corporation  whose
securities  trade on the  Nasdaq  National  Market  System,  which is  currently
inactive.  However,  we gained direct access to several leading retailers in the
United Kingdom by acquiring DNL, which, we believe,  will offer the potential to
expand the customer base for a proposed line of vegetarian  soft-capsule dietary
supplements by BTL.

On February 15, 1999, BioProgress acquired from TruTona  International,  Inc., a
privately-held  Atlanta-based  corporation  ("TruTona"),  patents,  licenses and
trademarks  relating to a broad range of products,  including  an award  winning
range of flushable and biodegradable disposable products designed by TruTona. We
paid TruTona $1,500,000 in the acquisition, half in the form of 1,875,000 shares
of Common Stock and half in cash.

On April 5, 1999, we entered into a license with EcoProgress, a Canadian company
with securities traded on the Vancouver Stock Exchange.  The license was granted
for  the sum of  $1,500,000,  and  gives  EcoProgress  the  exclusive  right  to
manufacture,  sell and distribute  anywhere in the world a line of flushable and
biodegradable  disposable  products employing the intellectual  property that we
acquired from TruTona.  The transaction also included the sale to EcoProgress of
assets  acquired  from  TruTona,  including  trademarks  and  certain  products.
EcoProgress paid $380,000 cash at closing and the remaining  $1,120,000 was paid
through  the  issuance  of  1,066,667  shares  of  registered  common  stock  in
EcoProgress.  In addition to the consideration paid at closing,  we are entitled
to  receive up to a maximum of  $3,500,000  by way of royalty on gross  revenues
achieved by  EcoProgress.  Nominal  accruals of royalties  have been received to
date.

We purchased 5,843,750 shares of common stock, representing  approximately 46.6%
of the  outstanding  equity of The Healthy Forum for $100,000  during April 2000
and April 2001. The Healthy Forum is designing a range of food products, dietary
supplements and mineral beverages,  and promoting selected supplemental products
not  necessarily  designed by The Healthy Forum, to be marketed under the Health
Matters l(TM) brand and targeted at the well-being  segment of the mass food and
beverage market.  We have agreed to grant The Healthy Forum an exclusive license
to employ a version of the XGel(TM) FS Septum(TM)  technology to produce some of
The Healthy Forum's unique formulations.

Description of Products

Our primary focus is to commercialize its XGel(TM) FS. Other products  currently
in development include flushable and biodegradable products.

                                   XGel(TM) FS

The  gelatin  capsule  market is  divided  into two  sectors:  "hard" or "soft,"
according  to  the  nature  of  the  capsule   shell.   We  have  developed  and
commercialized  a  version  of the  XGel(TM)  FS for  the  manufacture  of  soft
capsules.  Soft capsules are formed and filled  simultaneously and predominantly
carry liquid fills which  enables  their use in a far wider  variety of products
than hard  capsules,  including  pharmaceutical,  vitamin,  herbal and  mineral,
toiletries and paintballs.

The  soft  capsule  consists  of shell  and  contents.  The  shell is a means of
transporting  the contents  from the  manufacturer  to the  consumer.  Some soft
capsule  manufacturers  produce  the  contents as well as the shell and sell the
finished product under their own brand or for use in private label brands. Other
manufacturers  simply act as sub-contract or "toll" suppliers to the proprietors
of main brands.

Over the past several years, we have increased our knowledge base of natural and
water-soluble  materials and the means of processing them to form soft capsules,
to  enrobe  or  coat  tablets  and to  produce  and  encapsulate  powder  forms.
Initially, one base material and one means of processing were developed to serve
the needs of the market.  From our own research and from discussions with actual
and  potential  customers,  we have  developed an extensive  library of material
solutions  and three  specific  constructions  of the  XGel(TM)  FS  designed to
maximize the  efficacy of the  production  process.  Versions of the XGel(TM) FS
are:

      o     NIMl(TM)1:  For  production  of  soft  capsules  for  non-ingestible
            applications.

      o     Swallowl(TM)1: For production of ingestible capsules.

      o     NRobel(TM)1:  For  coating and  enrobement  of solid dose and powder
            forms.

Our soft capsule technology can be considered as two separate technologies:  the
XGel(TM) FS for  non-ingestible  soft capsules,  which is fully developed and in
use, and the XGel(TM) FS for ingestible soft capsules,  which is fully developed
and  available in one form and in the middle stages of its  development  program
for the NRobe form. We believe that our XGel(TM) FS has  significant  advantages
over traditional gelatin-based soft capsule production machinery.

XGel(TM) FS - Non-Ingestible  Products:  XGel(TM) Film, the raw material used in
the process, is made from a water-soluble and

<PAGE>

biodegradable  polymer,  which is naturally  resistant to oils.  This version of
XGel(TM) Film exhibits good  elasticity and forms a very strong bond when sealed
during the  encapsulation  process.  The first products to be produced using the
XGel(TM) FS comprise a range of moisturizing bath oils. There are four different
soft capsules in the range,  each containing a different  fragrance  designed to
deliver a relaxing,  refreshing or invigorating ambience to the bathroom. We are
also developing paintballs for recreational use using XGel(TM) FS.

XGel(TM)  FS -  Ingestible  Products:  XGel(TM)  FS also can be made  from  drug
regulatory  body-approved  natural and sustainable resource materials,  and are,
therefore,  ingestible.  These  materials are processed to form XGel(TM)  films.
XGel(TM) films are produced in a format that enables them to be processed  using
similar machinery as used for  non-ingestible  soft capsules.  Using proprietary
techniques,  XGel(TM)  films  may be  formulated  and/or  coated to  produce  an
encapsulation medium with broad ranging characteristics that facilitate the oral
delivery  of oils,  pastes and powders by time or at site within the human body.
XGel(TM)  films  are  processed  using the  XGel(TM)  FS.  We have  developed  a
comprehensive   range  of  films  suitable  for  vitamin,   herbal  and  mineral
supplements as well as pharmaceutical products.

Gelatin is a protein which is predominantly derived from animal renderings.  For
many  years,   gelatin  has  proven  to  be  an  acceptable  and  cost-effective
encapsulation  medium  for soft  capsules.  However,  a number of  industry  and
consumer  trends are  driving  the need to replace  gelatin as an  encapsulation
material. Among them are:

      o     Health and safety  concerns - The  outbreak of "mad cow" disease has
            caused  worldwide  concern  over animal  products,  particularly  in
            Europe.

      o     Religious, ethnic and moral beliefs - Many groups, because of belief
            or culture,  refuse to consume gelatin derived from cows or pigs, or
            in some cases, from any animal source.

      o     Efficacy  of the  material  and  process - XGel(TM) FS has lower raw
            material  costs,   reduced  capital   investment  and  manpower,   a
            multi-task  encapsulating  head,  improved  speed of processing  and
            reduced drying time as compared to gelatin encapsulation technology.

      o     New product development.


Following the outbreak in Europe of Bovine  Spongiform  Encephalopathy  ("BSE"),
commonly known as "mad cow" disease,  all  animal-derived  food and  by-products
have come under the scrutiny of the  scientific  community and  legislators  for
fear that BSE may have  entered the human food chain.  The reason for concern is
that BSE may be linked to Creutzfeldt  Jakob Disease ("CJD"),  which is fatal to
humans. Since the first recorded deaths in 1995, about 100 people have succumbed
to CJD, the vast  majority in the United  Kingdom,  where 15 died in 1999 and 27
died in 2000, according to the U.K. Department of Health. A further six cases in
living  persons have been recently  identified.  During 2000,  cases of BSE were
recorded in France, Germany, Poland and Spain, and during 2001 the first case of
BSE was recorded in Japan.  Australia  and New Zealand  have refused  imports of
bovine-derived materials and by-products.

We  believe  that our  XGel(TM)  FS is  currently  the only  viable  full-market
alternative  for  consumers  who wish to switch to  animal-free  products in the
global  market for soft  capsules.  Market  research  carried  out in the United
States and in Europe has  indicated  that in excess of 30% of all  families  are
making efforts, on a regular basis, to remove animal products from their diet.

The XGel(TM) FS not only provides  consumers  with the choice of an  animal-free
soft capsule,  but we believe its unique and novel design  delivers  significant
advantages  in  the   manufacturing   process  when   compared  to   traditional
encapsulation processes. These advantages are:

      o     Lower Raw Material  Costs:  The raw material for XGel(TM) FS is in a
            film format ("XGel(TM)  Film"). The cost of XGel(TM) Film per ton is
            currently  marginally  less than that of  gelatin  in powder  forms.
            There are no additional  costs incurred to deliver  XGel(TM) Film to
            the  encapsulating  head,  whereas  gelatin  has  to be  mixed  with
            glycerin to form a liquid film.

      o     Reduced  Capital  Investment  and  Manpower:   The  availability  of
            XGel(TM) Film  eliminates  the need for mixing  containers  and vats
            currently used to prepare gelatin for the encapsulation  machine. In
            addition, expensive machinery is needed to maintain the viscosity of
            gelatin during its transportation to the encapsulation  machine.  We
            believe  that the  resultant  savings to our  customers  in terms of
            capital  investment  and human  resources  compared to the  products
            offered by our competitors are significant.

      o     Multi-Task  Engine:  A modular design of the filling,  sealing,  and
            cutting head,  collectively the engine, makes it possible to produce
            capsules having a range of shapes and sizes with a rapid  changeover
            time.. Traditional machinery cannot deliver this flexibility.

<PAGE>

      o     Improved Speed of Processing:  To achieve the correct  viscosity for
            processing,  gelatin  requires wide changes in temperature  prior to
            its  being  fed to the  encapsulation  machine.  The  time  taken to
            achieve this change in temperature is one of the controlling factors
            that  determine  the speed at which the  encapsulation  machine  can
            operate.  XGel(TM) Film requires no such temperature variation,  and
            its use  significantly  increases  potential  processing speeds to a
            level  controlled  by the rate of  injection  of the  material to be
            encapsulated.

      o     Reduced Drying Time: Gelatin soft capsules require up to 48 hours in
            which to dry after  being  made.  This  lengthy  process  requires a
            substantial  resource in terms of material  handling  equipment  and
            storage  facilities.  XGel(TM) soft  capsules  require less than one
            hour to dry.

We believe our XGel(TM) FS to be the first revolutionary  development within the
encapsulation industry since it was first established in 1935.

                      Flushable and Biodegradable Products

The  products  acquired  from  TruTona  include  an ultra  thin,  flushable  and
biodegradable  line of  feminine  sanitary  napkins  which were  selected  for a
"Millennium  Product" award under a program initiated by the British  Government
to promote innovative technological achievements.

The agreement with  EcoProgress  provides for  EcoProgress to acquire our patent
entitled A Water Dispersible  Bodily Liquid Absorbent  Composite for the payment
of $1.00,  provided that a minimum of  $2,500,000  has been paid to us by way of
royalty or cash. The Water Dispersible Bodily Liquid Absorbent  Composite patent
is  employed in the  manufacture  of  sanitary  napkins.  We do not rely on this
patent in any other  aspect  of its  business.  Further,  following  receipt  of
$2,500,000 by way of royalty or cash and by payment of an additional  $1,000,000
by way of  royalty  or cash,  EcoProgress  has the right to  acquire  our patent
entitled A Water  Dispersible  Disposable  Enclosure.  This patent  relates to a
flushable and biodegradable colostomy pouch. In the event that CES exercises its
option, the agreement provides for us to retain exclusive rights to the European
market, which accounts for approximately 50% of the global market by sales value
and for  approximately  75% of the  global  market for unit sales of the type of
ostomy  product  subject  of  the  agreement.   Nominal  accruals  of  royalties
receivable have been made to date on the sanitary napkins.

We hold two patents  for ostomy  products.  We believe  that our  flushable  and
biodegradable   colostomy  pouch  offers   colostomists  a  safe,  hygienic  and
convenient  product,  which equals or exceeds the in-use performance of existing
products.  We  commenced  user trials of our  colostomy  pouch  during the third
quarter of 2001.  We  believe  that  initial  feedback  from users is  extremely
encouraging. As a result of the feedback received during Q3 of 2001, we produced
a large  batch of ostomy  pouches in order to expand the number of trials with a
view toward collecting  sufficient data to determine the efficacy of the current
design.  Subsequent to the period covered by this report,  and following receipt
and study of the data  collected  from trials  during Q4 of 2001,  we determined
that  our  ostomy  pouch  has  sound  commercial  potential.  We  are  currently
investigating  various commercial prospects for the ostomy pouch including,  but
not limited to the sale of a distribution  license to one of the world's leading
companies in the ostomy product market.

Markets

                                   XGel(TM) FS

Our broad range of  technologies  is  currently  targeted  at high value  global
markets.  We have  targeted our XGel(TM) FS  technology  primarily at the global
encapsulation and delivery markets for pharmaceutical, vitamins, herbs, minerals
and OTC  medicine  products.  In  addition,  a variation  of the  XGel(TM) FS is
capable of producing  novel  delivery  solutions for a wide range of fast moving
consumer goods, such as laundry products and cosmetics.  Our immediate  customer
target is the manufacturer of such products.

Based upon informal surveys within the industry, we believe that the U.S. retail
market for vitamins  and  supplements  to be in excess of $10 billion  annually.
Current  52-week  trends  ended  August  2001,  however,  shows a flat market in
vitamins/supplements  while showing a decline of approximately 8% for herbs. The
market for dietary  supplements in the United Kingdom was approximately  (pound)
345 million  (Sterling) in 2001. The leading producer of dietary  supplements in
the United Kingdom is Peter Black,  which accounts for  approximately 34% of the
entire  market.  Whilst  the  other  markets  are  materially  smaller  than for
vitamins,  minerals and supplements and  pharmaceuticals  in terms of size, they
are still significant.  We estimate that the annual market for paintballs in the
United  States  alone is in  excess  of 2.5  billion  pellets.  The  market  for
household  products  other than cosmetics is currently  less  developed,  but we
believe it has enormous  potential and we have various novel  applications under
development.  The market for cosmetic  applications is more mature, but smaller,
than the other markets, with an estimated market size in the region of 2 billion
capsules annually for items such as bath beads.

We believe that the market for vitamins and other  nutritional  supplements will
continue to grow as the world's  demographics  continue to shift  towards a more
senior-aged  population,  which  has a greater  tendency  to use  vitamins  on a
regular basis.  According to the U.S. Census, the segment of the U.S. population
aged 45 and above will  continue to grow,  increasing  42% by the year 2030.  We
believe that as consumers grow older,  chronic health  problems will become more
of a  concern.  Most  significant  among  these  are  cancer,  lack  of  energy,
cardiovascular problems,  joint pain and high cholesterol.  We believe that more
senior-aged  consumers  will  seek  alternative   treatments  for  these  health
problems, as well as invest in preventative measures.  Likewise, we believe that
the pharmaceutical and OTC medicinal  sectors will continue to grow for the same

<PAGE>

reasons as the vitamin supplement market as well as new product development.

Upon entering the capsule  market,  we believe that our XGel(TM) FS gelatin-free
soft capsule will be extremely  attractive to vegetarians and certain ethnic and
religious  groups,  such as Muslims,  Hindus,  Jews and Seventh Day  Adventists.
These  groups  represent  large  potential  markets.  For  example,  the  Muslim
population now stands globally at 935 million.  There are an estimated 2 million
vegetarians  in the  United  States,  and  250,000  in the  United  Kingdom.  In
addition,  market research has indicated that in excess of 29 million households
in the United States  qualify as "meat  reducers" by making a regular  effort to
remove animal products from their diet.

Certain  formulations  of XGel(TM)  Film will enable its use as a drug  delivery
system.  We have executed  agreements  with some,  and are in  discussions  with
several  leading  pharmaceutical  companies  regarding  the sale of  XGel(TM) FS
licenses.  It is too early in our  development  to comment in more detail on the
possibilities  within this market sector and no assurances  can be made that any
such  discussions will result in additional  formal  agreements with any of such
pharmaceutical companies.

                      Flushable and Biodegradable Products

The market for flushable and biodegradable medical products is relatively small,
but growing,  and is  restricted  largely to laundry  disposal  bags,  operating
theater and  medical  caps and gowns and other  medical  devices.  We  currently
estimate the global market for these items at $150 million. The market is likely
to grow as customer  acceptance and awareness  grows and the products  available
become more sophisticated with cheaper and reliable disposal methods.

The global  market for  feminine  hygiene  products  is  estimated  at almost $5
billion in 2001 and can be largely divided into two markets:  disposable tampons
(applicator  and   non-applicator)   and  sanitary   napkins.   All  females  of
menstruating   age  (which  excludes   pre-pubescent   adolescent   females  and
post-menstrual  women) require these products.  Most consider their purchases on
price and efficacy, though approximately 4% of women are prepared to pay a small
premium for a product that is both  flushable and  biodegradable  in the form of
sanitary napkins. Our license with EcoProgress and our investment in The Healthy
Forum will assist us in reaching these consumers globally.

Other products for possible future  development  include adult  incontinence and
other  products.  Market  research that we have conducted  shows that the global
market for disposable  ostomy  products  exceeds $1 billion  annually.  The vast
majority of sales of ostomy  products are  generated  within  North  America and
Europe.

Competition

In each of our markets,  we face  significant  competition  from other companies
that are better capitalized, have greater name recognition, have more background
and experience in the industry, have greater financial, technical, marketing and
other resources, and have better facilities.

                                   XGel(TM) FS

The gelatin soft capsule market is currently dominated by two companies,  namely
R. P.  Scherer  Inc.,  a  subsidiary  of Cardinal  Healthcare  Inc.,  and Banner
Pharmacaps  Inc.,  a  subsidiary  of Sobel NV. The  softgel  machines  have been
manufactured  by R. P.  Scherer,  Pharmagel  (Italy) and many  (because of their
lower cost) from Korea. All other customers for soft capsule  machines  purchase
from a small,  globally  diverse list of producers.  Companies such as Pharmagel
are recognized as being providers of high speed and high quality  machines.  Any
or all of these  companies  may be developing  alternative  processes to compete
with the XGel(TM) FS. We are aware of two competitors that have made attempts to
modify  traditional  soft  capsule  machines  and  materials in order to produce
animal-free or non-gelatin soft capsules, but we believe that such attempts have
not worked to satisfactory standards.

                      Flushable and Biodegradable Products

There are currently no known  competitors  in the flushable  sector for sanitary
napkins.  In addition  to being  flushable,  our  sanitary  napkin has  Canadian
EcoLogo status. In the  non-flushable  sector, we compete with Proctor & Gamble,
Kimberly Clark, Libresse, Johnson & Johnson and private label products.

Major international corporations,  including Hollister, Inc., Convatek, Inc. and
Colorplast  Limited,  dominate the ostomy market.  We believe our ostomy product
equals or exceeds the in-use performance of existing products.

<PAGE>

Distribution Methods

                                   XGel(TM) FS

Soft capsules reach consumers via a multitude of distribution  channels.  In the
United  States,   dietary  supplements  and  pharmaceuticals  are  sold  through
traditional  over-the-counter  outlets, as well as "in-store" locations at large
food retailers.  In general terms, the sales and  distribution  channels that we
shall use will be through licensed  manufacturers,  are mature and can be easily
identified.

                      Flushable and Biodegradable Products

We distribute our sanitary napkins via licensees,  EcoProgress (Harmonies Brand)
and  The  Healthy  Forum  (Health  Matters  Flushaway  Brand).  These  licensees
distribute the products in Canada and in the United States in retail stores and,
since  May  2001,  in the  United  Kingdom  in drug and  retail  stores  such as
Sainsburys, Superdrug and Waitrose.  Commercialization of our ostomy products is
under consideration,  and we have not finalized our distribution program at this
time.

Marketing and Sales

                                   XGel(TM) FS

Our marketing and sales strategy is focused on providing  engineering  processes
and proprietary  materials to enable cost efficient,  flexible and high capacity
novel dosage  forms to  manufacturers  of  pharmaceuticals,  vitamins  herbs and
minerals,  and fast moving consumer  goods. In addition,  we anticipate that new
markets for our products will be developed as future versions of our XGel(TM) FS
are proven.

We currently depend on a small number of manufacturers as customers.  One of the
manufacturers  in the  non-ingestible  market accounted for 43.1% of our overall
revenues in 2001.  Our  revenues  are  derived  predominantly  from  license and
development   fees  with  the   customers  set  forth  under   "--Research   and
Development."

We also have certain  revenues from machine sales.  On July 24, 2000, we entered
into several  arrangements with Peter Black Healthcare  Limited ("Peter Black"),
the United  Kingdom's  leading  supplier of private label  vitamin,  mineral and
herbal supplements, as follows:

      o     Under an  agreement  for the supply of  prototype  machine,  we have
            agreed  to sell to Peter  Black a form  fill and seal  encapsulation
            machine and have agreed to provide  services as necessary to upgrade
            such machine  according to certain  specifications.  Peter Black has
            agreed to pay $1,000,000 for such machine and services in four equal
            installments,  $250,000  of which  has  been  paid,  with the  three
            remaining  installments  tied  to  acceptance  of the  machine,  its
            delivery and first  commercial use of products  manufactured  by the
            machine.

      o     Under a film supply agreement, we have agreed to sell to Peter Black
            ingestible  films  compatible  with the form  fill and seal  machine
            described  above  within  certain  specifications.   This  agreement
            terminates  upon the  termination of the patent  license  agreement,
            described below.

      o     Under a machine supply agreement, we have agreed to supply form fill
            and seal machines subject to certain  specifications to Peter Black.
            Peter  Black has agreed to pay us for such  machines  based upon the
            number of machines  ordered by Peter Black in decreasing  prices per
            machine as the number of  machines  ordered  increases.  The machine
            supply  agreement  terminates upon termination of the patent license
            agreement, described below.

      o     Under a patent  license  agreement,  we have granted  Peter Black an
            exclusive license to manufacture,  sell or otherwise deal in dietary
            supplements  and   non-prescription   medicines   using   XGel(TM)FS
            compatible with the machine and manufactured  under the license,  in
            the United Kingdom and The Republic of Ireland,  and a non-exclusive
            license to the same elsewhere in the European Union and Switzerland,
            with the  provision for this to be extended to the rest of the world
            with written  consent.  We have agreed to use reasonable  efforts to
            cause Peter  Black to be the  contract  manufacturer  outside of the
            United  Kingdom  and The  Republic of Ireland to any third party who
            expresses an interest in dietary  supplements  and  non-prescription
            medicines  using  XGel(TM)FS.  Peter Black may sublicense its rights
            under the  license.  Peter  Black  shall pay a fee for such  license
            based  upon the  number of form fill and seal  machines  ordered  by
            Peter Black, payable annually in decreasing  increments.  The patent
            license agreement shall terminate on the latter of the expiration of
            the last of the  licensed  patents  in the  United  Kingdom  and The
            Republic   of  Ireland   and  ten  years  from  the  date   products
            manufactured by the form fill and seal machines are first put on the
            market anywhere in the European Union.

                      Flushable and Biodegradable Products

The marketing and sales strategy for our flushable and biodegradable products is
to market  through our  licensees,  and receive  royalties on sales made by such
licensees.  For sanitary napkins, such licensees are EcoProgress and The Healthy
Forum. We are considering options to  commercialize  our ostomy products and may

<PAGE>

license the technology to one or more licensees.

Manufacturing

                                   XGel(TM) FS

During 1999, we relocated both our  manufacturing  facility and our research and
development facility to March, Cambridgeshire, England from St. Johns Innovation
Centre in Cambridge, England.

During 2000, we entered into an agreement to lease new manufacturing  facilities
being   purpose   built  at  a  site  known  as   Hostmoor   located  in  March,
Cambridgeshire,  United Kingdom.  The unit comprises  27,000 square feet and was
completed in June 2001.  We relocated  our  engineering  team to these  premises
where they are  responsible  for the  assembly,  commissioning  and packaging of
XGel(TM) FS. In  addition,  the  engineering  team will  continue our  extensive
research and  development  program,  as well as support our customers with their
engineering requirements.

We employ third party sub-contractors to produce the parts and sub-assemblies of
its XGel(TM) FS. Prior to their shipment to us, our sub-contractors assemble the
system to ensure it properly  meets the customer's  specification.  We will then
conduct full-scale trials of the system to ensure it is functioning  efficiently
and to its maximum level of performance.  Our customers will attend these trials
and,  upon  completion,  will accept the  system.  Following  acceptance  by the
customer,  our  technical  staff will provide two weeks'  training of two people
nominated  by the  customer.  Following  training  the system will be packed and
shipped for installation at the customer's premises.

The  facility  at  Hostmoor  has the  capacity  to produce 50  XGel(TM) FS on an
annualized  basis.  We have an  option on a further  50,000  square  feet of new
facility at the same site, should we require additional capacity.

We work closely  with a number of suppliers in the United  States and the United
Kingdom,  including Chris Craft, Nippon Goshei/British  Traders and Shippers and
Polymer  Films Inc.  for film,  and Dow  Chemicals,  Hercules,  Harco and Nippon
Goshei/ British Traders and Shippers for resin. We are not reliant on any single
supplier for any particular component needed in the manufacturing process.

                      Flushable and Biodegradable Products

We  have  no  manufacturing  facilities  for  our  flushable  and  biodegradable
products.  We currently have two alternative suppliers for our sanitary napkins:
Dambi in Wales,  United Kingdom and Hospeco in the United States. We believe the
risk of loss of supply is insignificant,  since such products can be made on any
standard napkin production line.

Research and Development

                                   XGel(TM) FS

We are committed to a research and development  program  intended to produce new
products for licensees and new variations of, and  improvements  to the XGel(TM)
FS. We seek to explore the use of alternative  materials and formulations and to
test their suitability to form capsules suitable for ingestion and drug delivery
by time and at site. In parallel with the formulation work, we aim to expand the
processing  abilities  of the  XGel(TM)  FS.  We spent  $3,580,845  in 2001,  as
compared to $2,522,000 in 2000 on research and development.  The majority of the
research and  development  undertaken in the United  Kingdom is not borne by our
customers.  Research and development  under the EcoProgress  license and certain
other product development agreements,  where specifically so stated, is borne by
the  licensees  and/or  manufacturers  who are our  customers.  There  can be no
guarantee that our research and development  work will produce products that are
saleable to our targeted customers.

During February 2000, we executed an Exclusive  Evaluation Agreement with P&G in
respect of a specific  application of the XGel(TM) FS. The Exclusive  Evaluation
Agreement provides for ourselves and this customer to work together to develop a
novel delivery  system for a new mass market  consumer  product.  During October
2000, we announced that the Exclusive Evaluation Agreement executed earlier that
year had been  completed and a new Joint  Development  Agreement was  effective.
Fees paid during 2000 under this agreement  represented  67.5% of our revenue in
2000. We completed work on the Joint Development  Agreement during August,  2001
and are communicating ongoingly with P&G to consider what steps, if any, will be
taken to commercialize the work.

On March 7, 2000,  we announced an agreement  with JT USA, LP ("JT USA") and Dye
Precision,  Inc.,  whereby we will  develop a unique range of  paintballs  using
XGel(TM) FS technology for exclusive  worldwide  distribution  by JT USA for six
years,  subject to certain  minimum  orders.  The term of the  agreement  is six
months and we have received  fees of $15,000 to date,  with  additional  monthly
payments of $5,000 to be made to us during the term, in addition to payments for
orders  placed  by JT USA.  The  agreement  has been  extended  by  mutual  oral

<PAGE>

agreement.  We have not  received  payments  and have not billed or recorded any
revenue from the JT USA agreement during 2001.

On October 20, 2000, BTL executed an exclusive  agreement with The Boots Company
plc  ("Boots") in respect of an  application  of its  XGel(TM) FS  encapsulation
technology.  Boots is funding research on this  technology.  On July 9, 2001, we
extended our product development agreement with The Boots Company PLC ("Boots ")
and negotiated  ongoing commercial terms to enable new product concepts to enter
consumer trials. The Product Development  Agreement was executed in October 2000
to develop a range of  innovative  new consumer  products  utilizing  our unique
XGel(TM) FS  encapsulation  technology.  For  commercial  reasons,  the specific
products and  categories  are  confidential.  On April 2, 2001 we announced that
Boots had executed stage three of the product  development  agreement  which, in
line with our business model,  includes a technology  licensing  agreement,  the
design  and  supply  of  production  machines  and the  on-going  supply  of the
proprietary  film  materials  necessary to manufacture  the new products.  Boots
Healthcare  International's existing brands have leading positions in France and
Germany,  a strong profile in Australia,  and have recently become  available in
China and Latin  America.  Boots  Contract  Manufacturing  is  Europe's  largest
healthcare, cosmetics and toiletry manufacturer.

On July 27, 2001, we announced  that Dr. Carey Bottom had accepted an invitation
to join its Board of Directors with immediate effect.  Dr. Carey Bottom has been
President and Chief  Executive  Officer of PharmaCore,  Inc. since October 2000.
Prior to this  appointment,  Dr.  Bottom  was  Chief  Operating  Officer  of LDS
Technologies,  Inc., a drug delivery  company holding a significant  proprietary
position in  microemulsion  technology  for  enhancing  the oral  absorption  of
water-soluble drugs with low gastrointestinal  permeability.  The technology was
particularly  beneficial  for enhancing the oral  absorption of peptide  actives
such as desmopressin. A major drug delivery company acquired LDS Technologies in
August 2000.  From 1994 to 1999, Dr. Bottom was Senior Vice President of R&D for
Banner Pharmacaps, Inc., a company engaged in the development and manufacture of
soft  gelatin   capsules   for  the  drug  and   nutritional   industries.   His
responsibilities  at Banner included  establishing and directing a comprehensive
research  operation for soft gelatin capsules as well as developing new business
for  us.  He has  also  held  executive  positions  covering  diverse  areas  of
responsibilities including quality control,  regulatory affairs,  compliance and
analytical chemistry for Schering-Plough,  Chase Pharmaceutical  Company, Marion
Laboratories and the Drackett Company, a division of Bristol-Myers.

Dr.   Bottom   obtained  his  Ph.D.   in  Chemistry   from  the   University  of
Missouri-Rolla,  having  also  earned his M.S.  and B.S.  degrees  from the same
institution.  He has authored or co-authored numerous scientific papers and book
chapters  covering  diverse  areas  such  as  natural  products,  carbohydrates,
analytical   chemistry,   dissolution   technology,   transdermal  delivery  and
pharmacokinetics.   In  addition,   he  also  holds  several  patents   covering
pharmaceutical preparations and household products. In 1998, Dr. Bottom received
the FDA  Commissioner's  Special  Citation for his cooperative  research efforts
with  the  Agency  on  gelatin  capsule  dissolution.   This  work  led  to  the
implementation  of a  compendial  two-tier  dissolution  testing  procedure  for
gelatin capsules.

                      Flushable and Biodegradable Products

Contemporaneous  to the completion of the license to EcoProgress,  we executed a
research and  development  agreement  with  EcoProgress  that provides for us to
exclusively develop products subject to the terms of the EcoProgress license for
a minimum term ending on March 23, 2001. The research and development program is
still continuing under a verbal agreement between the parties.  During the first
quarter of 2001,  we accepted  853,177  shares of common  stock in  EcoProgress,
restricted from sale in Canada until July 30, 2001, as payment for arrears up to
and including  February 2001,  valued at $238,889 and  representing in excess of
10% of EcoProgress' outstanding capital stock.

During February 2001, we executed an agreement with Brunel University Design for
Life Centre,  Adventure  Designs in London, to develop a new type of field human
waste  disposal  system.  The project will utilize our unique  knowledge base of
biodegradable  environmentally  friendly materials gained during the development
of biodegradable diapers, feminine napkins and flushable biodegradable colostomy
pouches.  The Design  Department at Brunel  University,  of which the Design for
Life Centre is a key part, has a 5A star research rating, the highest rating for
design research possible in the United Kingdom.

Intellectual Property

We value highly our  intellectual  property and all  precautions  have been, and
will be taken to ensure its security.  No discussions have, or will be held with
third parties without the protection of a confidential disclosure agreement. Our
future sales revenues are heavily  dependent upon our procuring and  maintaining
broad  protection of our intellectual  property.  There can be no guarantee that
such protection will be afforded to any or all of our processes and materials.

At the date of this report, we have 37 patent application in progress, of which,
15 have been granted,  33 have been  published  under PCT, and 4 have been filed
but not yet published.

<PAGE>

                                   XGel(TM) FS

Application  has  been  made  to  have  our  trademark  XGel(TM)  and  NRobe(TM)
registered in the major markets in which we intend to operate.  The process used
for  creating  XGel(TM)  FS  non-ingestible   products  is  the  subject  of  an
international  patent  application.  The technology  used to create  XGel(TM) FS
ingestible  products is the  subject of 39  international  patent  applications.
Furthermore,  we  are  in  the  process  of  preparing  four  additional  patent
applications  relating to its XGel(TM) FS process and the soft capsules produced
thereon.

We have  licensed our XGel(TM) FS processes to several  customers,  as discussed
above.

                      Flushable and Biodegradable Products

Our  disposable  and water  dispersible  products  are the subject of one UK and
three  international  (one of which  also  covers  the  United  Kingdom)  patent
applications.

During 2000, we were granted within the United Kingdom two patents in respect of
flushable  and  biodegradable  colostomy  pouches.  During 2001, we were granted
within the United  States of America  two  patents in respect of  flushable  and
biodegradable colostomy pouches.

Upon receipt of $1,000,000 of royalties and other conditions precedent under the
EcoProgress license,  EcoProgress may include ostomy products under the terms of
that license agreement.

Government Regulation

Research and  development  activities  and the  manufacturing  and  marketing of
products  using our  ingestible  XGel(TM) FS technology are subject to the laws,
regulations, guidelines and, in some cases, regulatory approvals of governmental
authorities in the United States and other  countries in which the products will
be  marketed.   Specifically,   in  the  United   States,   the  Food  and  Drug
Administration  ("FDA"), among other areas, regulates new drug product approvals
to establish the safety and efficacy of these  products.  FDA also regulates the
formulation,  manufacture  and labeling of foods,  dietary  supplements  and OTC
drugs.  FDA regulations  require  companies to meet relevant GMP regulations for
the  preparation,  packing and storage of foods and OTC drugs.  GMPs for dietary
supplements  have  yet  to be  promulgated  but  are  expected  to be  proposed.
Governments  in other  countries  have  similar  requirements  for  testing  and
marketing of drug products,  foods and dietary supplements.  Although we are not
directly  regulated,  it makes  efforts  to cause its  products  to comply  with
regulations in the various jurisdictions in which its customers are located.

In the United  States,  the  processing,  formulation,  packaging,  labeling and
advertising of the ingestible products used in conjunction with our technologies
are subject to regulation by one or more federal agencies, including the FDA, by
the Federal Trade Commission,  the Consumer Product Safety Commission,  the U.S.
Department of Agriculture and the U.S.  Environmental  Protection Agency.  These
activities are also regulated by various agencies of the states, localities, and
countries in which ingestible products are sold.

                             U.S. Regulatory Process

New Drugs. The duration of the  governmental  approval process for marketing new
pharmaceutical  substances,  from the commencement of preclinical testing to the
receipt  of a  governmental  final  letter  of  approval  for  marketing  a  new
substance,  varies  with the nature of the product and with the country in which
such approval is sought. For entirely new drugs, the approval process could take
eight to ten years or more;  however,  for reformulations of existing drugs, the
process is typically shorter.  In either case, the procedures required to obtain
governmental approval to market new drug products are costly and time-consuming,
requiring  rigorous  testing of the new drug product.  There can be no assurance
that even after such time and expenditures, regulatory approval will be obtained
for any products  that are  developed by other  companies  using our  ingestible
XGel(TM) FS  technology.  While we are actively  seeking  development  partners,
there are currently no ongoing clinical trials of new drugs using our ingestible
XGel(TM) FS technology.

The steps required before a new human pharmaceutical  product can be marketed or
shipped commercially in the United States include, in part, preclinical testing,
the filing of an IND, the conduct of clinical trials and the filing with the FDA
of  either a New Drug  Application,  or NDA,  for  drugs  or a  Product  License
Application,   or  ("PLA"),  for  biologics.  These  steps  are  cumbersome  and
time-consuming.

The  facilities  of each  company  involved  in the  manufacturing,  processing,
testing,  control and labeling must be registered  with and approved by the FDA.
Continued  registration  requires  compliance  with  GMP  regulations.  The  FDA
conducts periodic establishment inspections to confirm continued compliance with
its regulations.

We and/or our  subcontractors  are also  subject to various  federal,  state and
local  laws,  regulations  and  recommendations  relating  to  such  matters  as
laboratory  and  manufacturing  practices and the use,  handling and disposal of
hazardous  or  potentially  hazardous  substances  used in  connection  with its
research and  development  work.  Although we believe we are in compliance  with
these laws and regulations in all material  respects,  there can be no assurance
that we or our subcontractors will not be required to incur significant costs to
comply with environmental and other laws or regulations in the future.

<PAGE>

Dietary  Supplements.  The 1994  Dietary  Supplement  Health and  Education  Act
("DSHEA")  revised the  provisions  of the Federal  Food,  Drug and Cosmetic Act
("FFDCA")  concerning the composition and labeling of dietary  supplements.  The
legislation  creates a new statutory  class of "dietary  supplements."  This new
class  includes  vitamins,  minerals,  herbs,  amino  acids  and  other  dietary
substances  for  human  use  to  supplement   the  diet,  and  the   legislation
grandfathers, with some limitations, dietary ingredients that were on the market
before October 15, 1994. A dietary supplement that contains a dietary ingredient
that was not on the market  before  October 15, 1994 will require  evidence of a
history of use or other  evidence of safety  establishing  that it is reasonably
expected to be safe.  Manufacturers  of dietary  supplements that make specified
types of statements on dietary  supplements,  including some product performance
claims,  must have  substantiation  that the  statements  are  truthful  and not
misleading.  Our  ingestible  XGel(TM)  FS  technology  is being  used (or is in
development for use) in formulating dietary supplements.

The  adoption  of  new  regulations  in  the  United  States  or in  any  of our
international markets, or changes in the interpretation of existing regulations,
could have a material  adverse effect on the business of our customers.  In some
markets,  including  the  United  States,  claims  made with  respect to dietary
supplements  may change the  regulatory  status of the  products.  In the United
States,  for example,  it is possible  that the FDA could take the position that
claims made for some of the dietary  supplements  incorporating  our  ingestible
XGel(TM) FS technology places those products within the scope of an FDA OTC drug
monograph.  OTC monographs  prescribe  permissible  ingredients  and appropriate
labeling  language,  and  require the  marketer  or supplier of the  products to
register  and file annual drug  listing  information  with the FDA. In the event
that the FDA asserted that product claims for other products caused them to fall
within the scope of OTC  monographs,  we would be required either to comply with
the  applicable  monographs or to change the claims made in connection  with the
products. We cannot be sure that we could do so effectively, or that any changes
would not adversely affect sales and marketing of an affected product.

There can be no  assurance  that the FDA will accept the  evidence of safety for
any new dietary  ingredient  that we or our customers may decide to use, and the
FDA's  refusal to accept such  evidence  could  result in FDA  requiring  costly
safety  testing.   Also,  while  DSHEA  authorizes  the  use  of  statements  of
nutritional support in the labeling of dietary supplements,  the FDA is required
to be notified of such  statements,  and there can be no assurance  that the FDA
will not consider  particular  labeling  statements  used by our customers to be
drug  claims  rather  than   acceptable   statements  of  nutritional   support,
necessitating  approval  of a costly new drug  application,  or  re-labeling  to
delete such statements.

Regardless of how products  incorporating our ingestible  XGel(TM) FS technology
are  regulated,  the Federal  Food,  Drug,  and Cosmetic  Act and other  federal
statutes and regulations govern or influence the research, testing, manufacture,
safety,  labeling,  storage,  record  keeping,  approval,   distribution,   use,
reporting,  advertising  and  promotion  of such  products.  Noncompliance  with
applicable   requirements  by  any  company   involved  in  the   manufacturing,
processing,  testing,  control,  labeling,  promotion or advertising,  etc., can
result in civil penalties, recall, injunction or seizure of products, refusal of
the  government to approve or clear product  approval  applications  or to allow
such company to enter into government supply contracts, withdrawal of previously
approved applications and criminal prosecution.

Our customers must also comply with product  labeling and packaging  regulations
that vary from country to country.  Failure to comply with these regulations can
result in a product  being  removed  from sale in a  particular  market,  either
temporarily or permanently,  which would  indirectly  have a materially  adverse
effect on our business.

The FTC, which in the United States exercises  jurisdiction over the advertising
of the products used in conjunction with our technology, has in the past several
years  instituted   enforcement   actions  against  several  dietary  supplement
companies for false and misleading advertising of some of their products.  These
enforcement  actions have resulted in consent  decrees and monetary  payments by
the companies involved.  In addition,  the FTC has increased its scrutiny of the
use of  testimonials.  Although  we have not been the target of FTC  enforcement
action for the advertising of our products,  we cannot be sure that the FTC will
not question our  advertising  or other  operations  in the future.  In November
1998, the FTC issued a guide for the dietary supplement industry, describing how
the FTC  applies  the law that it  administers  to  advertisements  for  dietary
supplements.  It is unclear whether the FTC will subject  advertisements of this
kind to increased  surveillance  to ensure  compliance  with the  principles set
forth in the guide.

In addition,  we cannot predict whether new legislation or regulations governing
our activities will be enacted by legislative  bodies or promulgated by agencies
regulating  our  activities,  or what  the  effect  of any such  legislation  or
regulations on our business would be.

Regulation of Foreign Sales

Laws and  regulations  imposed in the United States and in other countries where
we plan to commence or expand our  business may prevent or delay us from selling
or shipping  its  products  into or doing  business in a  particular  country or
countries.  We intend to comply with all relevant  laws and  regulations  in the
United States and in other countries where we do business.

Employees

As of December  31,  2001,  we had 29  full-time  employees  and two  part-time,
including  thirteen  primarily  engaged in research and  development and four in
sales and  marketing.  During the first quarter of 2002, the number of full time
employees  decreased  to 25 as a result of continued  restructuring  of business
operations which began in the third quarter of 2001, and more  specifically as a
result of reduced  headcount for our ProDesign  Technology  division acquired in
June, 2001.

<PAGE>

Our future success depends in significant part upon the continued service of its
key technical and senior  management  personnel  and its  continuing  ability to
attract  and  retain  highly  qualified  technical  and  managerial   personnel.
Competition  for such personnel is intense and there can be no assurance that we
can retain its key  managerial  and technical  employees or that it can attract,
assimilate or retain other highly qualified  technical and managerial  personnel
in the future.  Collective bargaining units represent none of our employees and,
to date, we have not  experienced a work stoppage.  We believe that its employee
relations are good.

Item 2. Description of Properties.

Our  executive  offices are being  provided  free of charge on a  month-to-month
basis by The Jade Partnership, a significant shareholder of our Company owned by
several of our executive  officers and  directors.  These offices are located at
9055 Huntcliff Trace, Atlanta, Georgia 30350-1735.  The telephone number at this
address is (770) 649-1133.

In June 2000,  we  purchased  approximately  15,000  square feet of  laboratory,
executive  office,   manufacturing  and  storage  facilities  which  BioProgress
Technology,  BTL and DNL were  previously  leasing at market  rates from a third
party.   These   facilities  are  located  at  Unit  1,  Norwood  Road,   March,
Cambridgeshire,  United  Kingdom  PE15 8QD.  On March 28,  2002 we  executed  an
agreement  to sell this  property to an  affiliate  for an amount  approximating
market  value in return  for cash and  interest  bearing  note  receivable.  All
employees  previously  based at this  location  have  been  transitioned  to our
Hostmoor location as of March 31, 2002.

In November 2000, BTL entered into a lease agreement in respect of 25,000 square
feet of new purpose built  manufacturing  facility  located at Hostmoor,  March,
Cambridgeshire,  United Kingdom. The new building has been custom built to serve
as the final  assembly,  test and commission  base for its range of XGel(TM) FS.
The main area of the facility  houses five cubicles  called  `pods',  which have
been  designed  to  allow  our  customers  to  carry  out  commission  work in a
confidential  manner.  We anticipate  being able to commission fifty XGel(TM) FS
annually from  existing  resources and space is available to double that rate if
and when required. Two different versions of the XGel(TM) FS are already on site
and three more are expected.  The building was occupied on June 4, 2001, and all
BioProgress employees have now relocated to the Hostmoor facility.

During May 2001,  we  executed  a lease on office  facilities  comprising  1,211
square  feet in London,  England.  This was a short term lease and in  September
2001, we decided not to continue  with it as a result of business  restructuring
and cost reduction initiatives launched in the second half of 2001.

During 2001, we executed a lease on warehouse and office  facilities  comprising
7,547 square feet in Greensboro,  North  Carolina,  USA. This property is leased
for five years and will be used as a sales and product  demonstration  facility.
The  facility  is not  currently  occupied  but we  intend  to  begin  strategic
operation of this location during 2002.

Item 3. Legal Proceedings.

No material  legal  proceedings to which we are a party or to which our property
is subject (including any material  proceedings to which any officer or director
of the Company, or any affiliate or owner of record or beneficially of more than
five percent of the Common Stock is a party or has a material  interest  adverse
to the Company,  to  management's  knowledge)  is pending,  and no such material
proceeding is known by management of the Company to be contemplated.

Item 4. Submission of Matters to a Vote of Security Holders.

There were no matters  submitted to a vote of security holders during our fourth
quarter of fiscal year 2001.
<PAGE>

                                     PART II

Item 5. Market for Common Equity and Related Shareholder Matters.

(a) The Common Stock is currently  quoted on the Over The Counter Bulletin Board
maintained by the National  Association of Securities  Dealers,  Inc., under the
symbol "BPRG.OB." There was no trading in the Common Stock prior to August 1996.
The following  table sets forth the range of high ask and low bid quotations per
share of the Common  Stock as  reported  by IDD  Information  Services,  for the
quarterly period indicated during the last two fiscal years.

                    Fiscal Quarters Ended               High ($)    Low ($)
                    ---------------------               --------    -------
March 31, 2000..................................        6           1
June 30, 2000...................................        4.75        2.03125
September 30, 2000..............................        3.625       1.5
December 31, 2000...............................        3.046875    1.4375
March 31, 2001..................................        2.88        1.5
June 30, 2001...................................        1.69        1.04
September 30, 2001..............................        1.85        0.33
December 31, 2001...............................        0.82        0.33

The above prices  represent  inter-dealer  quotations  without  retail  mark-up,
mark-down or commission, and may not necessarily represent actual transactions.

(b) As of April 5, 2002, there were 2,650 holders of record for Common Stock.

(c) We have paid no  dividends on the Common  Stock since  inception  and do not
expect to pay such dividends in the foreseeable future.

In 1999, we issued approximately 1,215,335 shares of Series A Preferred Stock to
approximately 70 accredited  investors at a price of $1.00 per share. Each share
of Series A  Preferred  Stock  may be  converted  into such  number of shares of
Common Stock on the following schedule:  on or before December 31, 1999, two and
one half shares of Common Stock;  from January 1, 2000 to on or before  December
31, 2000,  one share of Common  Stock;  and from January 1, 2001 to on or before
December 31, 2001, one half of one share of Common Stock. All conversion  rights
of the Series A Preferred Stock have expired as of December 31, 2001.

In 2000, we issued approximately 3,802,818 shares of Series B Preferred Stock to
approximately 231 accredited investors at a price of $2.50 per share. Each share
of Series B  Preferred  Stock  may be  converted  into such  number of shares of
Common Stock on the following schedule:  on or before December 31, 2000, two and
one half shares of Common Stock; from December 31, 2000 to on or before December
31, 2001, one share of Common Stock;  and from December 31, 2001 to on or before
December  31,  2002,  one half of one share of  Common  Stock.  Thereafter,  all
conversion rights of the Series B Preferred Stock expire.

In 2001, we issued  approximately  422,720 shares of Series B Preferred Stock to
approximately 20 accredited  investors at a price of $2.50 per share. Each share
of Series B Preferred Stock issued during 2001 may be converted into such number
of shares of Common Stock on the following  schedule:  on or before December 31,
2001,  two and one half shares of Common Stock;  from December 31, 2002 to on or
before December 31, 2002, one share of Common Stock;  and from December 31, 2002
to on or before  December  31,  2003,  one half of one  share of  Common  Stock.
Thereafter, all conversion rights of the Series B Preferred Stock expire.

Item 6. Management's Discussion and Analysis or Plan of Operations.

The following  discussion  should be read in conjunction  with the  consolidated
financial statements and related notes thereto included elsewhere in this Annual
Report on Form 10-KSB.

FORWARD-LOOKING STATEMENTS

Certain  of the  statements  contained  in this  Annual  Report on Form  10-KSB,
including certain statements in this section, are forward-looking.  In addition,
from time to time, we may publish  forward looking  statements  relating to such
matters as anticipated financial performance, business prospects,  technological
developments,  new products,  research and  development  activities  and similar
matters.  These statements involve known and unknown risks,  uncertainties,  and
other factors that may cause our or our  industry's  actual  results,  levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things, those
listed under the Risk Factors section of this Annual Report.  In some cases, you
can  identify  forward-looking  statements  by  terminology  such as may,  will,
should,  expect, plan,  anticipate,  believe,  estimate,  predict,  potential or
continue  or the  negative  of  such  terms  or  other  comparable  terminology.
Forward-looking  statements are only  predictions.  Actual events or results may
differ  materially.  In evaluating  these  statements,  you should  specifically
consider  various  factors,  including  the risks  outlined  under Risk Factors.
Although  we believe  that the  expectations  reflected  in the  forward-looking
statements  are  reasonable,  we  cannot  guarantee  future  results,  levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of such statements.

<PAGE>

Overview

As used in this Item 6, "the Company",  "we",  "us" and "our" means  BioProgress
Technology International,  Inc. (BioProgress) and its consolidated subsidiaries.
We  are  a  development   stage  company  engaged  primarily  in  the  research,
development,  manufacturing,  marketing, sales and distribution of products that
use  water  soluble  and  biodegradable   films  for  the  dietary   supplement,
pharmaceutical, recreational and cosmetic industries and other applications. Our
research and development  operations are located in the United  Kingdom.  During
2000  and  2001,   our   primary   focus   remained  on  the   development   and
commercialization  of our unique and  proprietary  process,  the  XGel(TM)  Film
System (XGel(TM) FS).

Since  inception,  we have incurred  substantial  operating losses and we expect
operating  losses  to  continue  in the near  term as we  continue  our  product
development efforts, conduct trials and undertake marketing and sales activities
for the XGel(TM) FS. Our ability to achieve  profitability is dependent upon our
ability to successfully execute our marketing and sales plan for the XGel(TM) FS
and various  versions  of XGel(TM)  Film,  and to complete in an  efficient  and
timely manner development work on other versions of the XGel(TM) FS.

During the third quarter of 2001, we opened new  manufacturing  facility located
at Hostmoor,  March,  England.  The new facility of approximately  27,000 square
feet has been custom built to serve as the final  assembly,  test and commission
base for our range of  XGel(TM)  FS. The main area of the  facility  houses five
cubicles called `pods', which have been designed to allow our customers to carry
out  commission  work in a  confidential  manner.  We  anticipate  being able to
commission  50  XGel(TM)  FS  annually  from  existing  resources,  and space is
available to double that rate if and when  required.  Two different  versions of
the XGel(TM) FS are already on site and three more are expected  shortly.  As of
December 31, 2001 most  employees had  relocated to the new facility,  including
the entire  engineering  design and support team. As of the date of this report,
all employees have relocated,  including our research and development  functions
that have transferred into upgraded, purpose-built and equipped laboratories.

During the third quarter of 2001, we completed four  agreements  with a European
pharmaceutical company, Farmasierra, S. L. ("Farmasierra"). These agreements are
for the sale of a full  scale  XGel(TM)  FS;  the sale of a  license  to use our
patents  in  respect  of the  XGel(TM)  FS  technology;  the  future  supply  of
additional  XGel(TM) FS; and, the future supply of XGel(TM) FS Film for use with
the XGel(TM) FS. We believe that the technology  covered by the agreements  with
Farmasierra are innovative with respect to the  pharmaceutical  industry,  which
currently uses two types of  gelatin-based  dosage forms:  gelatin soft capsules
for  liquids,  and  two-piece  hard  gelatin  capsules  for  powders.  These two
processes  exist  because  the soft  capsule  process is  essentially  wet,  and
therefore not suitable for use with powders.  With the  development  of a powder
fill version of the XGel(TM) FS, pharmaceutical companies will be able to employ
just the one process to deliver both liquid and powder  products.  Further,  our
Septum  technology  enables  both liquids and powders to be combined in a single
capsule and to be released at  different  times  and/or  sites in the  digestive
system.

During our recent third quarter, we extended our product  development  agreement
with The Boots Company PLC ("Boots ") and negotiated ongoing commercial terms to
enable new product  concepts to enter consumer trials.  The Product  Development
Agreement  was  executed in October  2000 to develop a range of  innovative  new
consumer  products  utilizing  BioProgress'  unique  XGel(TM)  FS  encapsulation
technology.  For commercial  reasons,  the specific  products and categories are
confidential.  We  are in  negotiations  with  Boots  to  agree  the  terms  for
commercialization  of the  products on a global  basis  which,  in line with our
business model, will include a technology  licensing  agreement,  the design and
supply of production  machines and the on-going supply of the  proprietary  film
materials necessary to manufacture the new products.

During  2001,  The  Healthy  Forum  Limited  ("THF"),  in  which we have a 46.6%
investment,  has released the first section of its unique "body maps" at its web
site,  which can be  viewed at  www.thehealthyforum.com.  THF's  first  range of
products  were  launched in March 2001 and are now  available in excess of 1,000
retail stores in the United Kingdom, including Sainsbury's, Waitrose, Superdrug,
Boots and Robert Sayle.

During the  second  six months of 2001,  we had  conducted  an  operational  and
corporate  review in light of current market  conditions and in consideration of
our low share price.  As a result of the review,  we had postponed any corporate
activity  that  might have  arisen as a result of our work with  Close  Brothers
Corporate  Finance  (CBCF) for a period of at least six months.  Any  valuations
that may have been achieved in the various  scenarios under  consideration  with
CBCF would have resulted in a valuation  falling well short of our  expectations
and, we believe,  the shareholders of the Company. The work undertaken with CBCF
and the  related  accountancy  and legal fees have cost us in excess of $500,000
during 2001 and these fees have been taken as a charge to our 2001 operations.

In addition,  we have reviewed our  operations- in particular,  the projects and
products under development  being undertaken  together with a full review of our
overheads with regard to cash burn,  financial resources and the amount of funds
required until cash flow  break-even.  As a result of this review,  projects and
product  development  have been  re-prioritized  with a view to  bringing  those
projects to market more quickly which will have a positive cash flow impact.  As
an indication of the depth and quality of our  intellectual  property rights and
products in various  stages of  development,  we did not feel that any  projects
should be shelved completely,  as all the projects could earn significant future
revenues  for our  business.  We have  decided to seek third party  investors or
joint venture  partners for certain  projects to mitigate  current cash outflows
and to bring these projects to commercialization more quickly.

In addition,  we arranged a bank  overdraft  with  Barclays Bank PLC for (pound)
250,000  (Sterling),  secured by a personal  guarantee given by Barry Muncaster,
our Chief  Executive  Officer.  During the fourth quarter of 2001,  Consolidated
EcoProgress Technologies,  Inc., our Canadian licensee for the TruTona products,
had  paid  their  overdue  receivable  amounting  to nine  months  research  and
development contributions. We also expect to receive clearance from the Internal
Revenue  Service before the year-end in respect of U.S.  withholding  tax on our

<PAGE>

licenses,  which will  enable the  receivable  due from Peter  Black  Healthcare
Limited (Peter Black), one of our licensees, to be collected and which will be a
blanket clearance for all licenses written of a similar nature.

Our Company's  directors and the directors of all of our operating  subsidiaries
have taken a 66.6% pay cut for the twelve month period  commencing July 1, 2001,
after which period the salaries will be reviewed.  The London office,  opened in
early 2001,  has been closed and the Norwood Road  premises  leased,  then sold,
subsequent  to year end, to The Healthy  Forum  Limited.  Stronger  and improved
internal  financial  controls  have  been  implemented  to  ensure  there are no
unnecessary  expense  commitments  and expenditure has been cut back severely on
all except projects of the highest priority. We have gradually reduced cash burn
from operations throughout the final six months of 2001 and we intend to closely
control and plan our cash outlay moving forward.  We believe that we continue to
manage our working capital effectively.

In December,  2001 we entered into a common stock purchase agreement with Fusion
Capital Fund II, LLC a Chicago  based  institutional  investor,  whereby  Fusion
Capital  has  agreed  to  buy  up to  $6.0  million  of our  common  stock.  The
commencement  of the  funding is subject to  certain  conditions  including  the
effectiveness of a registration statement. The proceeds from the funding will be
used for working capital and general corporate purposes.

As a result of the foregoing,  together with our revised financial  projections,
we have sought to raise an additional  maximum of $3 million by way of the issue
of  series C  preferred  shares  to  enable  us to reach  operational  cash flow
break-even,  estimated  at between 9 to 12 months from now. We believe that this
amount  may  prove  conservative  and that,  barring  any  protracted  delays in
commissioning  further  deliveries  of our  XGel(TM)  FS,  such  funds  will  be
sufficient  for  current  and near term future  plans.  Based on  interest  from
prospective investors, management believes that it will be able to raise all the
necessary funds.

During   the  year,   we   announced   the   launch  of  our  new   website   at
www.bioprogress.com.  The website,  which  replaced an earlier  version,  better
describes  the  gains we have made and will  enable  customers,  the  investment
community  and  other  interested  parties  to gain  access  to our very  latest
information.

Results of Operations

                                     Summary

The results for the year ended  December 31, 2001 show that we received  certain
license fees and other income derived from  agreements  signed in respect of its
XGel(TM) FS. Material payments from the same sources which were recorded in 2000
have generated  recognized revenue during 2001. Other sources of income for 2001
and 2000 were fees for research and  development  work and accrued  royalties in
respect of the license sold to EcoProgress  (VSE:CES).  The increased  operating
loss of  $6,549,490  in 2001,  as  compared  to  $4,346,962  in 2000,  primarily
consists of research  and  development  expenditures,  administration  costs and
certain non-cash items, such as depreciation, amortization of goodwill and costs
associated  with the  occupancy of the  Hostmoor  location  and  acquisition  of
ProDesign Technology Limited. The expenditures incurred by the U.K. research and
development  operations  has  increased to  $3,580,845  in 2001,  as compared to
$2,522,000 in 2000, as a direct result of a substantial  increase in engineering
manpower  and  resources   required  to  meet  our  obligations  under  executed
agreements.  Our net  overdraft  of  $326,887  is the  result  of cash burn from
operations,  and reflective of substantially  increased business  activity.  The
results reflect our continuing efforts to commercialize its XGel(TM) FS, both in
North America and Europe.

Our finances remain on budget  notwithstanding  the reversal from a cash balance
to a net overdraft of $326,887,  which is secured by a personal  guarantee given
by Barry Muncaster. We believe that during the course of the next twelve months,
our plans and the business  model,  together  with the planned issue of up to $3
million of series C preferred  shares with a warrant attached and sale of common
stock  to  Fusion  Capital,  will  ensure  that we will be able to  continue  to
commercialize  our XGel(TM) FS and that our  financial  health will  strengthen.
Funds  generated  are  expected to arise from  agreements  already  signed,  the
signing of further agreements, cash from receivables, receipt of funds from Jade
Partnership  International,  Inc.  (Jade) and The Healthy Forum, in repayment of
their respective loans from us, and our sale of series C preferred shares with a
warrant  attached  and sale of stock to Fusion  capital  during the  forthcoming
periods.

Consolidated Statement of Operations

Our  operations  were  expanded  during 2001 and are not expected to require any
further materially increased resources in terms of manpower and premises for the
time being.  This has resulted in overall  increases  in all  material  headline
figures in the profit and loss account.

<PAGE>

                                    Revenues

We generate revenues from licensing the rights to use our intellectual  property
in the XGel(TM)  FS, the sale of the  XGel(TM) FS, and research and  development
services  to assist  customers  in gaining  maximum  benefit  from the  license.
Revenues from license  arrangements  and the sale of XGel(TM) FS are  recognized
when  there  is   persuasive   evidence  of  an   agreement   with  a  customer,
collectibility  is probable and the fee is fixed or determinable.  Revenues from
research and  development  contracts are  recognized  ratably over the period to
which the contract relates,  unless  significant  acceptance  criteria exist. If
acceptance criteria exist,  revenues are recognized upon the earlier of customer
acceptance or the expiration of the acceptance period.


Our total  revenues  increased 4.5% from $925,351 in 2000 to $966,738 in 2001 as
compared to revenue growth of 215%, or $631,739,  from 1999 to 2000. A number of
factors  contributed  to the increase in total  revenues in 2000  including  new
product development agreements and the first sales of licenses in respect of the
XGel(TM) FS.  Revenues  generated in relation to an  evaluation  agreement and a
product  development  agreement with Proctor and Gamble contributed 67.5% of the
total  revenues in 2000 and 43.1% for 2001,  and is the main  contributor to the
increased  revenues for 2000 as compared to 1999.  The  remaining  revenues were
generated from research and development collaboration agreements and the receipt
of ongoing  license  fees from its Canadian  licensee for the TruTona  products,
EcoProgress.  The  levels of these  other  revenues  in 2001 have  increased  as
compared  with  2000 and 1999 as a result of  consulting  revenue  generated  by
ProDesign Technologies Limited, which we acquired in July, 2001.

The  following  is a summary of major  contracts  signed that have not yet had a
major  impact on our  revenues  but are  expected to lead to the  generation  of
material revenues in the second six months of 2002.

On July 25,  2000,  we  announced  that we had licensed our XGel(TM) FS to Peter
Black.  Peter Black is a wholly owned  subsidiary of Peter Black  Holdings (LSE:
BKP).  Peter  Black  is  the  United  Kingdom's  leading  supplier  and  largest
manufacturer  of private  label  vitamin,  mineral  and herbal  supplements.  In
addition, it owns several leading supplement brands and the United Kingdom's No.
2 Direct  Marketing  Brand.  The license grants Peter Black exclusive use of the
XGel(TM)  FS to  produce  and  sell  dietary  supplements  and  non-prescription
medicines within the United Kingdom and Republic of Ireland. In addition,  Peter
Black has conditional exclusivity to serve as a contract manufacturer of dietary
supplements and non-prescription  medicines within member states of the European
Economic  Community and the European Free Trade  Association.  The license is in
respect of one XGel(TM) FS. Additional XGel(TM) FS, if and when ordered by Peter
Black, will require the purchase of additional licenses.  Consideration paid for
the license remains  confidential  at this time. In addition,  an annual license
fee is payable in respect of the license for the period of ten years or the life
of the patent,  whichever is the longer term. We have  recognized no revenues to
date in respect of the Peter Black  agreements,  as certain revenue  recognition
criteria have not yet been met. All cash received to date is included within the
deferred  income  balance at December 31, 2001. On March 26, 2002  subsequent to
the period of this report, we announced that Peter Black Healthcare  Limited had
accepted the XGel(TM) Film System under contract.  Further, that such acceptance
had triggered a contract for a second  system.  In addition,  we announced  that
Peter Black  Healthcare  Limited  had  executed an option to acquire 5 NRobe(TM)
versions of the XGel(TM) Film System.  Subsequent to this announcement and prior
to the date of this report, Peter Black Healthcare increased to 10 the number of
NRobe(TM) XGel(TM) Film Systems under option.

During June 2001, we commenced  user trials of our  flushable and  biodegradable
ostomy  pouch.  We  believe  that  initial  feedback  from  users  is  extremely
encouraging. As a result of the feedback received during Q3 of 2001, we produced
a large  batch of ostomy  pouches in order to expand the number of trials with a
view toward collecting  sufficient data to determine the efficacy of the current
design.  Subsequent to the period covered by this report,  and following receipt
and study of the data  collected  from trials  during Q4 of 2001,  we determined
that  our  ostomy  pouch  has  sound  commercial  potential.  We  are  currently
investigating  various commercial prospects for the ostomy pouch including,  but
not limited to the sale of a distribution  license to one of the world's leading
companies in the ostomy product market.

On July 10, 2001 we  completed  four  agreements  with a Spanish  pharmaceutical
company, Farmasierra, S. L., for: the sale of a full scale XGel(TM) FS; the sale
of a license  to use our  patents in respect  of the  XGel(TM)  technology;  the
future supply of additional XGel(TM) FS; and, the future supply of XGel(TM) Film
for use with the XGel(TM) FS. We believe  that the  technology  covered by these
agreements may revolutionize the  pharmaceutical  industry.  The  pharmaceutical
industry  currently uses two types of gelatin-based  dosage forms:  gelatin soft
capsules for liquids and two-piece hard gelatin capsules for powders.  These two
processes  exist  because  the soft  capsule  process is  essentially  wet,  and
therefore not suitable for use with powders.  With the  development  of a powder
fill version of the XGel(TM) FS, pharmaceutical companies will be able to employ
just the one process to deliver both liquid and powder  products.  Further,  our
Septum  technology  enables  both liquids and powders to be combined in a single
capsule  and to be  released at  different  times and or sites in the  digestive
system.  We have  recognized  no revenues to date in respect of the  Farmasierra
agreements.

On July 9, 2001, we extended our product  development  agreement  with The Boots
Company  PLC  (Boots)  and  negotiated  ongoing  commercial  terms to enable new
product concepts to enter consumer trials. The Product Development Agreement was
executed in October 2000 to develop a range of innovative new consumer  products
utilizing BioProgress' unique XGel(TM) FS encapsulation  technology. On November
28, 2001, we announced that we had reached a commercial agreement with The Boots
Company plc (LSE:  BOOT)  whereby The Boots  Company would use our XGel(TM) Film
System to produce samples for consumer trials of an innovative oral dosage form.
On April 2, 2002 we announced  that we executed stage three of our first Product
Development  Agreement with The Boots Company plc following  successful consumer
acceptability  trials of the newly developed  products.  The Product Development
Agreement  was first  executed in October 2000 and proceeded to stage two during
November  of last  year.  The aim of the  Product  Development  Agreement  is to
develop  a range of  innovative  new  consumer  products  utilizing  our  unique

<PAGE>

XGel(TM)  Film  System  encapsulation  technology.  For  commercial  reasons the
specific products and categories are confidential.

During August, 2001 we successfully completed our development agreement with the
Procter & Gamble  Company  ("P&G").  We, as well as P&G,  are  considering  what
steps, if any, will be taken to commercialize the development.  We are no longer
subject to an exclusive  arrangement with P&G regarding  certain versions of its
non-ingestible  technologies  and these are currently the subject of discussions
with several major manufacturers of fast moving consumer goods.

On March 28, 2002 following 18 months  development work and evaluation  studies,
we  executed an  agreement  with  Worldwide  Consumer  Medicines,  a division of
Bristol-Myers  Squibb Company, in respect of a novel application of the XGel(TM)
FS.  For   commercial   reasons  the  specific   products  and   categories  are
confidential.

We are  continuing  to work with  major  international  corporations  engaged in
pharmaceuticals,  consumer durables and confectionery  products to determine the
suitability of the XGel(TM) FS to replace  traditional  encapsulation  processes
and, in some cases,  to  facilitate  new product  development  not possible with
competitive technologies.

                                Cost of Revenues

Our cost of revenues  increased  from  $20,902 in 2000 to $208,585 in 2001,  and
were at similar levels in 2000 compared to $21,458 in 1999. The increase in 2001
over 2000 was  primarily due to costs  incurred by our newly  acquired (in 2001)
ProDesign  Technologies Limited division,  including direct labor of $39,518 and
the remainder being hardware purchased in satisfaction of a consulting  contract
with their largest customer (VAX).

                      Research and Development Expenditure

Research and development  expenditure in 2001 increased by 134% from $522,875 in
2000 to $1,225,299  in 2001.The  majority of the increase in 2001 is a result of
the increased  research and  development  effort in developing new variations of
the XGel(TM) FS- specifically, the ingestible products prototype machine. During
2001, we took several major steps toward commercializing the XGel(TM) FS. During
2000 and 2001, we have expensed as operating costs most continuing  research and
development  expenditures and intend to capture, as cost of revenues, only those
expenses  directly  related to  inventory  of  equipment  and sale  thereof  and
identifiable costs of consulting engagements.

                       General and Administrative Expenses

General and  administrative  expenses  (including the management fee of Jade for
2000 of $150,000) have increased from  $3,932,402 in 2000 to $4,454,924 in 2001,
an  increase  of 13%.  The  material  balances  classified  within  general  and
administrative expenses are discussed below:

Directors and senior management costs

For 2001,  directors and senior  management costs were $1,500,708  compared with
$1,533,528 in 2000. The latter included the $150,000  management charge referred
to in the paragraph  below and bonus amounts  totaling  approximately  $350,000,
which were not  expenses in 2001.  From July 1, 2001,  the salaries of directors
were cut by two thirds and all bonus provisions  reversed for a period of twelve
months, at which time the salaries will be reviewed again.

     Management  charges- Management charges payable to Jade ceased on March 31,
     2000. During the first quarter of 2000, management charges of $150,000 were
     paid but none were paid in the second quarter of 2000 and thereafter.

Amortization and depreciation

The charge for 2001 was $1,093,133 compared to $953,203 in 2000. The increase is
entirely due to increased depreciation on fixed asset expenditure.  The majority
of the charge in both years relates to the  amortization  of goodwill  generated
following the reverse acquisition of BioProgress Technology Limited in 1998.

Staff related costs

Staff  related  costs,  which  consist  primarily  of salary  costs  (other than
directors and senior management),  recruitment,  and traveling have increased to
$848,670 in 2001 from  $563,434 in 2000.  This increase is a result of increases
in the  headcount as we develop  different  variations  of the XGel(TM) FS and a
significant increase in traveling costs.

<PAGE>

Other general and administrative costs

Other  costs  within the  general  and  administrative  area have  increased  to
$1,012,413  in 2001 from  $882,237 in 2000.  The following are the major reasons
for the movement:

     Foreign  exchanges  losses during 2001 were $134,266  compared to losses of
     $357,073 in 2000. As cash balances have been reducing,  we have not been as
     adversely affected by adverse foreign currency fluctuations.

     Warrant  accounting  charges  of  $311,535  have been  incurred  in 2001 in
     relation to new warrants issued during the year.

     Decreases in warrant  accounting charges for warrants issued in prior years
     and losses on sale of fixed assets of approximately  $110,000 and $100,000,
     respectively  have been offset by  increases in  entertainment  and rent of
     approximately  $85,000 and $237,000,  respectively.  The decreased  warrant
     accounting  charges result from the decreased  market price of our stock in
     2001 and are more fully explained in other sections of this document, while
     increased  rent and  entertainment  expenses  in 2001 result from our newly
     leased  location at Hostmoor  and  increased  travel,  investor  relations,
     recruitment and marketing activities by senior management during 2001.

     Other  expenses  within this  category  which include such things as office
     overheads  (rent,  stationery,  maintenance and similar items) increased in
     line with expectations due to our increased levels of activity.

     General administration charges are likely to stabilize or slightly decrease
     during the forthcoming year as a result of management  review of operations
     and cost  reduction  measures and  controls  implemented  in late 2001.  We
     continue to make  efforts to minimize  day-to-day  overheads  and  periodic
     reviews of overhead costs continue to be undertaken internally.

Realized and unrealized (profit) loss on marketable securities

A loss of $422,784 was incurred  during 2001 as compared to a gain of $46,369 in
2000.  We have now  disposed  of the  majority  of our  holdings  in  marketable
securities,  with  EcoProgress  comprising  the only remaining  investment.  The
holdings  in 2001  were  sold  to  provide  working  capital  and the  downwards
movements in the capital markets meant that significant losses were realized.

Professional fees

Professional  fees increased by 43% to $1,204,636 in 2001 from $842,293 in 2000.
The amount  during 2001 is caused  largely by  increased  corporate  advice fees
related  to  leverage  of our  capital  structure  and  other  potential  equity
transactions.  No  further  corporate  finance  advisory  and  related  fees are
expected to be incurred for the foreseeable future.

                              Loss from Operations

The  result  of the  above is that a loss  from  operations  of  $6,549,490  was
generated in 2001 compared to a loss of $4,346,962 in 2000,  which represents an
increase of 51%. We expect that costs will stabilize or slightly decrease during
the  forthcoming  year as a result of management  review of operations  and cost
reduction measures and controls implemented in late 2001 and as the frequency in
delivery of machines increases. There is currently $1,326,900 of deferred income
that is expected to be  released  during 2002 and beyond as revenue  recognition
criteria are met.

                       Share of Loss of Equity Investment

During 2000, we invested an initial $50,000 in The Healthy Forum. We continue to
offer  financial  support by way of loan.  The Healthy  Forum has been formed to
build a global well-being brand in the complimentary  medical and specialty food
sectors.  The  principal  products of The Healthy  Forum are  feminine  hygiene,
beneficial foods and vitamins,  minerals and supplements.  During the 2001 year,
we have  taken a charge to profit and loss in respect of our share of the losses
of The Healthy Forum of $441,017, as compared to $29,517 in 2000. In April 2001,
we  invested  an  additional   $75,000  in  The  Healthy  Forum  increasing  our
shareholding  from 29.9% to 46.6%.  Additionally,  we provided The Healthy Forum
with loans of $706,400 and $198,000 during 2001 and 2000.

                           Provision for Income Taxes

No provision has been made for income taxes in 1999, 2000 or 2001 as a result of
the losses we have incurred. We have provided a 100% valuation allowance against
the  deferred  tax  asset  arising  on  the  net  operating  losses  due  to the
uncertainty of their ultimate realization.

                 Dividends Payable and Accretion of Common Stock

During 2001 a decreased  charge of $691,471,  as compared to $2,563,872 in 2000,
for  accretion  of preferred  stock was taken to increase the loss  available to
common shareholders. This is explained in more detail below, but is incurred due
to a substantially  decreased  issuance of Series B Preferred Stock during 2001,
with the difference  that arises between the  subscription  price and redemption
value being charged to equity.

<PAGE>

Consolidated Balance Sheet

                            Cash and Cash Equivalents

Since its inception,  we have financed our operations primarily through the sale
of preferred  stock to  accredited  investors.  As at December 31, 2001, we have
cash and cash  equivalents  of $5,851  compared with  $3,818,717 at December 31,
2000.

During  2001,  we  received  $1,424,300  from the  sale of  shares  of  series B
preferred  shares at par value as compared to $9,089,546  in 2000.  All sales in
2001 and 2000 were of series B preferred shares.  The funds raised from the sale
of series B preferred  shares have been  applied to funding the net cash used in
operating  activities.  The net cash used in operating  activities has decreased
from  $1,612,131  in the first  quarter  of 2001,  to  $1,226,221  in the second
quarter of 2001,  to $1,107,093 in the third quarter of 2001 and to an inflow of
$123,389 in the fourth  quarter of 2001.  Total cash used by  operations  during
2001 was $3,822,056, and we expect this figure to stabilize during 2002. We have
invested  $741,648 in property,  plant and  equipment in 2001, a decrease of 10%
from $825,787 in 2000.

                              Marketable Securities

During 2001, we received a further  853,177  shares of EcoProgress in settlement
of the  outstanding  debt owed to us by them. We have sold all other  marketable
securities  throughout 2001 to fund working capital  requirements  such that our
EcoProgress shares represent 100% of our marketable  securities.  The marketable
securities  were sold at a loss due to the  downwards  movement  in the  capital
markets.

                               Accounts Receivable

Our balance at December  31, 2001 of  $193,388  is  comprised  of  approximately
$52,500 from EcoProgress for billed (in 2001) royalties, and other 2001 customer
billings none of which are beyond our normal trade terms or otherwise  deemed to
be  uncollectible.  The  decrease  from  2000 is the  result of  collections  of
contract billings during 2000 (most of which are deferred at 2000 and 2001 years
end)  that  have  been  collected  in 2001.  No  portion  of the  2001  accounts
receivable balance is represented in deferred revenue.

                     Amounts Due from and to Related Parties

The balance due from related parties at December 31, 2001 was $484,085  compared
to $365,705  owed to us in 2000.  An account  balance  receivable  from The Jade
Partnership  International,  Inc. increased by $279,380 to $390,703 in 2001 as a
result of funds  transferred to Jade having  exceeded  monies received from Jade
throughout  2001. In the past, we have received short term funds from Jade as to
meet bridge  financing  needs,  and  advanced  similar  funding to Jade in 2001.
Remaining  amounts owed to us by related  parties at 2001 include $35,000 from a
shareholder  and $58,382 from  TruTona  International,  Inc. for unpaid  license
fees,  a balance that has  remained  unchanged  from that which was due in 2000.
Note 9 of the financial statements includes more detail of these balances.

Amounts owed to our  directors on December 31, 2001  comprise the entire  amount
owed to related  parties,  a result of  compensation  accrued but not paid since
August, 2001.

                    Prepaid Expenses and Other Current Assets

The balance of  $1,356,187  in 2001 is mainly  comprised  of $630,728  for costs
associated with a transaction executed in December, 2001 in which Fusion Capital
Partners,  LLC has agreed to purchase up to $6,000,000  of our common stock.  We
expect to register common stock in connection with this transaction, and reverse
this  prepaid  balance to equity upon notice from the  Securities  and  Exchange
Commission that such registration is deemed effective. A further $362,899 of the
balance  relates to a rent  deposit  which has also been  recorded  as a current
liability and $263,607 relates to a prepaid expense for warrants issued in 2001.
The rent deposit is due in respect of the  Hostmoor  lease and is required to be
paid to the landlord. At the end of the lease term this amount will be repaid to
us. Other amounts  included within prepaid  expenses and other current assets in
2001 are not significant.

The balance in 2000 of $1,739,172 represents a prepaid expense of $1,273,000 for
warrants  issued on December 1, 2000 to third parties in Muslim states in return
for sales and  consultancy  services to be provided in 2001 and 2002. This value
was arrived at using the value of the warrants as at the year-end and amortizing
the amount over a period of two years.  Due to  movements in our share price the
value  of the  warrants  has  fallen  to nil and the  prepaid  expense  has been
reversed in 2001. Additionally,  an amount of $367,500 was due to us in relation
to sales of Series B Preferred Stock immediately before the year-end. The monies
in  respect  of this item were  received  in the first two weeks of 2001.  Other
amounts  included  within prepaid  expenses and other current assets in 2000 are
not significant.

<PAGE>

                          Property, Plant and Equipment

Property,  plant and equipment has increased to $1,383,673 in 2001 from $881,463
in  2000.  Our  customization  of and  move of  essentially  all  personnel  and
operations into leased property at Hostmoor has generated leasehold  improvement
assets  totaling  $230,610  during  2001 and  increased  the  levels of  office,
laboratory  and  machinery  equipment as detailed in Note 3 of the  accompanying
financial statements.  We also acquired ProDesign  Technologies Limited in July,
2001 which added significantly to our capitalized office equipment.

                                    Goodwill

The decrease in the balance during 2001 to $4,914,919 from $5,425,389 in 2000 is
caused by the amortization  charge during the year totaling $678,176,  partially
offset by  goodwill  of  $167,706  generated  by our  acquisition  of  ProDesign
Technologies   Limited  ("PTL").   The  goodwill  which  arose  on  the  reverse
acquisition of BTL in 1998 is being  amortized  over a period of ten years,  and
goodwill resulting from the PTL acquisition in July, 2001 has not been amortized
pursuant to our adoption of SFAS 142 for acquisitions on or after June 30, 2001.

                                Intangible Assets

Intangible  assets have  decreased  during 2001 to $958,200  from  $1,094,506 in
2000. The most significant item included within intangible assets is the license
purchased from TruTona  International,  Inc and the decrease during 2001 relates
to amortization  recorded,  as more fully detailed in Note 5 to the accompanying
financial statements.

                                Deferred Revenue

The deferred  revenue  balance has decreased by nearly 25% in 2001 to $1,326,900
from  $1,763,305 in 2000.  The  reduction is the result of revenues  deferred in
2000,  a portion of which have met the criteria for  recognition  in 2001.  Such
recognition  of previously  deferred  revenue has not been offset in 2001 by new
agreements for which additional  deferred revenue would have been recorded,  but
we expect  deferred  revenue to  increase  significantly  in 2002 as a result of
increased shipment and licensing of our products.

                                Accounts Payable

The accounts  payable  balance has  substantially  increased to $749,594 in 2001
from $173,185 in 2000.  This increase is  attributable to our management of cash
outlay  during the second six months of 2001 and leverage of trade  credit.  Our
stock value has decreased  reflective of general market malaise and performance,
and we have  attempted to reduce  stock sales in the best  interests of existing
shareholders  given such market  conditions.  As a result, we have not generated
cash from such stock sales which ordinarily would be used to pay trade creditors
more quickly.  We believe  conditions  for stock  issuance at  reasonable  price
levels will improve during the first six months of 2002, enabling us to generate
cash needed to reduce current accounts payable levels.

                              Accrued Rent Deposit

A lease  deposit of $362,899  is required to be paid in respect of the  Hostmoor
lease.  This amount is due and hence has been  recorded as a current  liability.
This is expected to be paid shortly once our cash flow improves.

                                Accrued Expenses

Accrued  expenses have  increased to $517,651 in 2001 from $422,230 in 2000. Our
increased activity and growth is the reason for the year to year increase.

                      Series A and Series B Preferred Stock

The  balance of  $606,870 in 2001  represents  an  increase of 108%  compared to
$291,160 in 2000.  There has been further  activity in 2001 mainly in respect of
Series B Preferred  Stock.  During  2001,  422,720  shares of Series B Preferred
Stock were issued,  while 363,720  shares were  converted to Common Stock during
the year.  This activity  generated  cash  proceeds of  $1,424,300  for us. This
consists of  $1,056,800  in respect of the shares issued during 2001 in addition
to $367,500 in respect of shares issued in 2000. Due to timing differences these
amounts  were not  received  until the first two weeks of 2001.  The majority of
Series B Preferred Stock outstanding at December 31 2001 remains  outstanding as
of the date of this report due to reduced  market prices  suffered by our common
stock.  The accreted  portion of the outstanding  preferred stock is credited to
additional paid-in capital when converted to Common Stock.

<PAGE>

                   Common Stock and Additional Paid-In Capital

The  number of shares  of Common  Stock  issued  and  outstanding  increased  to
47,631,527  in  2001  from  45,611,541  in  2000.  The  increase  was  partially
attributable  (909,300 shares) to the conversion Series B Preferred Stock during
the year. A total of 970,350 shares were issued to Fusion Capital Partners,  LLC
in December 2001 as inducement  to enter into an agreement  whereby  Fusion will
purchase up to  $6,000,000 of our common stock.  Additional  paid-in  capital of
$24,724,050  in 2001  is the  result  of  total  additions  during  the  year of
$2,281,623  and net  reductions  of  $752,858,  in  relation  to the  charge for
warrants  issued in 2001 and reversal of the charge for warrants issued in 2000,
to the 2000 balance of  $23,195,285.  The  conversion  of the Series B Preferred
shares  represents  62% of total  additions  during 2001.  The entire  reduction
during 2001 is attributable to a loss of value of warrants issued in 2000.

Liquidity and Capital Resources

Since its inception,  we have financed our operations primarily through the sale
of preferred  stock to accredited  investors.  As at December 31, 2001, we had a
net bank overdraft which totals $326,887  compared to cash and cash  equivalents
of $3,818,717 in 2000.

During 2001, we received  $1,424,300  from the sale of Series B Preferred  Stock
shares at par value as compared to $9,089,546 in 2000.  These proceeds have been
used for general working capital purposes,  including research & development and
the  building,  design and upgrade of further  plant and  machinery  for our new
Hostmoor location and for expansion of the business during the year.

The funds raised from the sale of Series B Preferred  Stock have been applied to
funding  the net  cash  used in  operating  activities.  The  net  cash  used in
operating  activities  has  decreased  from  $4,277,348 in 2000 to $3,822,056 in
2001,  a decrease  of 11%. We have  invested  $741,648  in  property,  plant and
equipment, a decrease of 10% from $825,787 in 2000.

During 2001,  we executed a number of  different  agreements,  the  principle of
which was an  agreement  with a Spanish  pharmaceutical  company  for a license,
machine and film supply.  Other services were contracted for and rendered during
2001, but the most significant (in terms of revenue potential) agreement was the
foregoing.

During 2000,  we executed a number of  different  agreements,  the  principle of
which were an  agreement  with a Fortune 500 company for a license and  machine,
agreements  with  Peter  Black for a license,  machinery  and film  supply,  and
research and  development  collaboration  agreements  with Boots and Nestec York
Limited  (part of Nestle).  Other sales were made,  but the material  agreements
were the foregoing.

In December,  2001 we entered into a common stock purchase agreement with Fusion
Capital Fund II, LLC a Chicago  based  institutional  investor,  whereby  Fusion
Capital  has  agreed  to  buy  up to  $6.0  million  of our  common  stock.  The
commencement  of the  funding is subject to  certain  conditions  including  the
effectiveness of a registration statement. The proceeds from the funding will be
used for working capital and general  corporate  purposes.  We have the right to
control the timing and the amount of stock sold to Fusion Capital.  The purchase
price of the shares to be sold to Fusion  Capital  will be based upon the market
price of our  common  stock  at the time of sale  without  any  fixed  discount.
BioProgress  intends to periodically  evaluate market conditions and its capital
needs in order to  determine  the timing and the amount of stock it will sell to
Fusion  Capital.  We intend to sell  shares  of common  stock to Fusion  Capital
opportunistically only under favorable market conditions.

Subsequent  to 2001 and through  May 8th,  2002,  the  Company has entered  into
agreements  with various  accredited  investors for the issue of 807,750  shares
common stock and 1,615,500 warrants, exercisable at various prices for a term of
five  years,  for cash  consideration  totaling  $538,500.  The  agreements  are
pursuant  to an  offering  by the  Company for the sale up to 600 "units" of its
equity at a price of $5,000 per unit.  Each unit is comprised of 7,500 shares of
unregistered  common  stock and 6 warrants,  all of which expire on December 31,
2006 and each exercisable for 2,500 common shares at purchase prices which range
from $1.00 up to $10.00. The Company has committed to have declared  "effective"
the  registration  of the common shares issued in this offering by September 30,
2002,  or otherwise  issue an  additional  1/10th unit (to a maximum of 90%) for
each  full  month  beyond  such  date  through  such  time  as   declaration  of
effectiveness has been achieved.

Management  believes  that  the  aforementioned   actions,   and  activities  by
themselves  will  generate  sufficient  cash to fully meet its  working  capital
requirements for the 12 months following the date of this report.  However,  any
material  delay in  completing  the  production  of the  various  XGel(TM) FS or
ability  to bring a  registration  statement  effective  could  have a  material
adverse effect on our cash flow and may require us to seek additional financing.

We are in discussion  with several parties  regarding  joint  ventures,  license
agreements and distribution agreements for its XGel(TM) FS and derived products.
We also continue to investigate a number of other  long-term  funding  scenarios
and  opportunities.  No guarantee can be given that any additional  financing we
may require would be available on terms acceptable to us, or at all.

RISK FACTORS

References  herein to "we," "us" or "our"  refer to the  BioProgress  Technology
International, Inc. and its consolidated subsidiaries. Statements in this report
concerning  the future  results  of  operations,  our  financial  condition  and
business are  "forward-looking"  statements as defined in the  Securities Act of
1933 and the  Securities  Exchange Act of 1934.  Investors  are  cautioned  that
information  contained  in  these   forward-looking   statements  is  inherently
uncertain,  and that actual performance and results may differ materially due to
numerous risk factors, including but not limited to the following:

<PAGE>

Our limited operating history makes evaluating our business difficult.

We began  demonstrations  of the  XGel(TM)  FS during the early part of 2000 and
executed  the first  sale of a license  and  XGel(TM)  FS  during  August  2000.
Accordingly,  we have only a limited  operating history in order to evaluate our
business.  The risks, expenses and difficulties that an early-stage company like
ours faces must be considered. These risks include our ability to:

      o     successfully  complete the production  engineering,  manufacture and
            commissioning  of each of the three  XGel(TM)FS  that currently form
            our product offering;

      o     successfully respond to competitive developments;

      o     continue to upgrade our products and service offerings;

      o     continue to attract, retain and motivate qualified personnel; and

      o     continue to attract  financing to support the planned  growth of our
            business.

Our quarterly  operating results may fluctuate  significantly and you should not
rely on them to predict our future performance.

Our quarterly  revenues,  expenses and operating results may vary  significantly
from quarter to quarter due to a number of factors. Therefore,  period-to-period
comparisons of results of operations should not be relied on as an indication of
future  performance.   Moreover,  our  operating  results  may  fall  below  our
expectations in some future quarters.  This could cause the trading price of our
common stock to decline.

Our business may suffer if new customers do not accept our product offerings.

We  currently  derive the  majority  of our  revenues  from our  XGel(TM) FS and
associated  services.  We anticipate that these sources will continue to account
for a majority of our  revenues for the  foreseeable  future.  As a result,  our
business will suffer if the market does not accept our product offerings and our
future  enhancements  of these  product  offerings.  If demand  for our  product
offerings  drops as a  result  of  competition,  technological  change  or other
factors, our business could be substantially harmed.

The market for gelatin  replacement  materials  and means of processing is still
emerging  and it may not  continue  to  grow.  Even  if the  market  does  grow,
businesses may not adopt our product offerings.  We have expended, and intend to
continue to expend,  considerable  resources educating potential customers about
the  XGel(TM)  FS and our  services  in general  and about the  features  of the
XGel(TM)  FS  and  new  product  development  opportunities  afforded  by  it in
particular. However, our product offerings may not achieve any additional degree
of market  acceptance.  If the market for our product offerings fails to grow or
grows more slowly than we currently anticipate, our business would be materially
harmed.

We  depend  on a few  industries  for  most  of our  sales,  and  we may  not be
successful in expanding beyond those limited markets.

A  substantial   portion  of  our  revenues  has  been  derived  from  sales  to
manufacturers  of fast moving  consumer  goods,  vitamins herbs and minerals and
confectionery  products.  We may not continue to be successful in these markets.
In addition, we may not be successful in achieving significant market acceptance
in other markets that we target.

The loss of one of our  largest  customers  could  cause  our  revenues  to drop
quickly and unexpectedly.

In fiscal 2000,  our top three  customers  accounted for 96% of total  revenues,
with Proctor and Gamble accounting for 67.5% of total revenues and the remaining
28.5%  attributable  to Boots  and  EcoProgress.  In fiscal  2001,  our top five
customers  accounted  for  93%  of  total  revenues,  with  Proctor  and  Gamble
accounting for 43% and the four other customers (Boots, EcoProgress, Peter Black
and VAX)  contributed  the remaining  50%. We cannot be certain that our current
customers  will  continue to do business  with us, that  business  from existing
customers  will continue at the levels of previous  periods,  or that we will be
able to do a significant  amount of business with new customers.  If we lose one
of our  customers,  our  revenues  could drop more  quickly than we could reduce
expenses. This could substantially harm our financial results.

We depend upon licenses with manufacturers for revenues.

Revenues from our technologies will be dependent upon the production and sale of
products utilizing such technologies. We do not currently possess the ability or
resources necessary to complete on our own the development,  testing, regulatory
approval process and  commercialization  for products utilizing our technologies
and we do not currently intend  independently  to market products  incorporating
our technologies in the foreseeable  future. It is our strategy to seek to enter
into agreements with manufacturers  which will assist us in developing,  testing
and obtaining governmental approval for, and the marketing and commercialization
of, the various formulations of our technologies. There can be no assurance that
we will be able to enter into additional collaborative arrangements with respect
to product development  utilizing our technologies,  that any existing or future
collaborative   arrangements  will  be  successful,   that  milestones  in  such
agreements  will be met or that the terms of any future  development  agreements
entered  into will be  favorable  to us. If we are unable to obtain  development
assistance  and  funds  from  manufacturers  to fund a  portion  of our  product
development  costs and to commercialize  products,  we may have to delay,  scale
back or curtail one or more of our activities.

<PAGE>

We have no control over the resources and attention devoted by our collaborative
partners to the development of a product  candidate and, to the extent resources
devoted are limited, we may be adversely  affected.  If any of our collaborators
breaches or terminates its agreement  with us or otherwise  fails to conduct its
collaborative    activities   in   a   timely   manner,   the   development   or
commercialization  of the  product  candidate  or  research  program  under such
collaborative  agreement  may be  delayed,  and we may  be  required  to  devote
unforeseen    additional    resources   to   continue   such    development   or
commercialization,  or terminate such programs. The termination of collaborative
arrangements  could have a material  adverse  effect on our business,  financial
condition  and results of  operations.  There can be no assurance  that disputes
will not arise in the  future  with  respect to the  ownership  of rights to any
technology developed with third parties.  These and other possible disagreements
between  collaborators and the Company could lead to delays in the collaborative
research,  development or  commercialization  of certain product candidates,  or
could  require  or result in  litigation  or  arbitration,  which  would be time
consuming  and  expensive  and  would  have a  material  adverse  effect  on our
business, financial condition and results of operations.

We need  additional  cash to operate our business  and our  viability as a going
concern is uncertain.

Since our inception,  we have incurred significant losses and negative cash flow
from operations,  and as of December 31, 2001, we had an accumulated  deficit of
approximately  $18.8 million.  Based on our present operating  expenses,  taking
into account available cash reserves, we will not be able to continue as a going
concern without an increase in cash flow from operations  and/or the infusion of
addition capital to fund  operations.  During fiscal 2002, we expect to meet our
working capital  obligations and other cash  requirements with cash derived from
operations and from placement of additional  equity by issuance of either common
or preferred stock.

There can be no  assurance  however  that we will be able to continue as a going
concern, that cash from operations and the other sources described above will be
achieved or will be sufficient  for the our  operating  needs or that we will be
able to achieve  profitability  on a consistent  basis,  if at all. In the event
that cash flow from  operations  is less than  anticipated  and we are unable to
secure  additional  funding,  in order to preserve cash, we would be required to
further  reduce  expenditures  and effect  further  reductions  in our corporate
infrastructure,  either of which  could  have a material  adverse  effect on our
ability to continue our operations. Even if we obtain additional working capital
in the near future, the need for additional funding may be accelerated and there
can be no assurances that any such  additional  funding can be obtained on terms
acceptable to us, if at all.

Our stock price or our business  could be adversely  affected if we are not able
to efficiently integrate  acquisitions.  During June, 2001 we acquired ProDesign
Technology Ltd.

We have consummated and we may continue to pursue  acquisitions that provide new
technologies,  products  or service  offerings.  Future  acquisitions  by us may
involve potentially  dilutive issuances of equity securities.  We also may incur
substantial  additional  liabilities and expenses,  such as debt or amortization
expenses related to goodwill and other intangible assets. If any of these occur,
the market price of our common stock and our financial results could suffer.

Acquisitions also involve numerous risks, including:

      o     difficulties in the assimilation of the operations, technologies,

      o     products and personnel of the acquired company;

      o     the  diversion  of   management's   attention  from  other  business
            concerns;

      o     risks of  entering  markets  in which  we have no or  limited  prior
            experience; and

      o     the potential loss of key employees of the acquired company.

Competition could reduce our market share and harm our business.

Our  competitors  may be able to develop  products  and  services  that are more
attractive to businesses than our products and services. Most of our competitors
have longer operating  histories,  significantly  greater financial,  technical,
marketing and other  resources,  greater name  recognition  and larger  customer
bases.  As a result,  they may be able to adapt more  quickly to new or emerging
technologies  and  changes in  customer  requirements.  They also may be able to
devote  greater  resources  to the  promotion  and  sale of their  products  and
services  than us. If these  companies  introduce  products  and  services  that
effectively competed with our products and services, they could be in a position
to charge lower prices. This could give them a competitive advantage over us.

In order to be  successful in the future,  we must continue to respond  promptly
and  effectively  to the  challenges of  technological  change and  competitors'
innovations. If we cannot compete successfully with existing or new competitors,
we may have to reduce  prices  on our  products,  which  could  lead to  reduced
profits.  We could also lose market share,  which would materially and adversely
affect our business.

<PAGE>

We  need  to  continually   develop  new  products  or  we  risk   technological
obsolescence.

Vitamin, mineral,  supplement and drug delivery,  biotechnology,  pharmaceutical
science and manufacturing are evolving fields in which developments are expected
to continue at a rapid pace. Our success  depends,  in part, upon  maintaining a
competitive  position in the  development  of products and  technologies  in its
areas of focus. Our competitors may succeed in developing competing technologies
or  obtaining  regulatory  approval  for  products  more  rapidly than we or our
customers are able.  There can be no assurance that  developments by others will
not render our products or the compounds used in  combination  with our products
uncompetitive or obsolete.

We have a limited ability to protect our intellectual property rights and others
could infringe on or misappropriate our proprietary rights.

Our success and ability to compete are substantially dependent on our internally
developed technologies and trademarks, which we protect through a combination of
patent, copyright,  trademark and trade secret laws,  confidentiality procedures
and contractual provisions.

We may not have protected all of our intellectual property rights as part of our
arrangements  agreed to with customers and suppliers.  In addition,  despite our
efforts to protect our proprietary rights,  unauthorized  parties may attempt to
copy aspects of our products or to obtain and use information  that we regard as
proprietary.  Policing  unauthorized  use  of  our  products  is  difficult.  In
addition,  the laws of some  foreign  countries  do not protect our  proprietary
rights  to the  same  extent  as the  laws  of the  United  States  and  Europe.
Furthermore,  our competitors may independently  develop  technology  similar to
ours.

The  number of  intellectual  property  claims  may  increase  as the  number of
competing products grows and the functionality of products in different industry
segments  overlaps.  Although we are not aware that any of our products infringe
upon the  proprietary  rights of third  parties,  there can be no assurance that
third  parties  will not claim  infringement  by us with  respect  to current or
future  products.  Any  of  these  claims,  with  or  without  merit,  could  be
time-consuming to address,  result in costly litigation,  cause product shipment
delays or require  us to enter  into  royalty  or  licensing  agreements.  These
royalty or licensing  agreements,  if required,  might not be available on terms
acceptable to us or at all, which could have a material  adverse effect upon our
business.

We depend on key personnel for our success.

Our success depends upon the continued  contributions of our executive  officers
and scientific and technical personnel.  During our operating history,  many key
responsibilities have been assigned to a relatively small number of individuals.
The competition for qualified personnel is intense,  and the loss of services of
certain key personnel  could adversely  affect the business.  We have employment
agreements  with  each of our  senior  management  and  certain  key  scientific
personnel.

Our founders,  officers and principal stockholders have substantial control over
our voting  stock and have the ability to make  decisions  that could  adversely
affect our stock price.

As of  April  5,  2002,  affiliates  held  16,722,425  shares,  or  35.1% of our
outstanding Common Stock.  Consequently,  this group will be able to control the
outcome of all matters submitted for stockholder action,  including the election
of members to our Board of Directors and the approval of  significant  change in
control  transactions,  which may have the effect of  delaying or  preventing  a
change in control.  Representatives of the existing stockholders  constitute all
six directors and will  therefore  have  significant  influence in directing the
actions of the Board of Directors.

We may be subject to future product liability claims.

While our license  agreements with our customers  typically  contain  provisions
designed to limit our  exposure to potential  product  liability  claims,  it is
possible that these  provisions  may not be effective  under the laws of certain
jurisdictions.  Although we have not experienced any product liability claims to
date, we may be subject to claims in the future. A successful  product liability
claim brought  against us could have a material  adverse effect on our business.
Moreover,  defending these claims, regardless of merit, could entail substantial
expense and require the time and attention of key management personnel.

Our common stock price is likely to be volatile and could drop unexpectedly.

<PAGE>

The market for  securities  of most high  technology  companies,  including  our
common stock,  has been highly  volatile.  It is likely that the market price of
the common  stock will  continue  to  fluctuate  widely in the  future.  Factors
affecting the trading price of our common stock include:

      o     responses  to  quarter-to-quarter   variations  in  our  results  of
            operations;

      o     the  announcement  of new products or product  enhancements by us or
            our competitors;

      o     technological innovation by us or our competitors; and

      o     general  market   conditions  or  market   conditions   specific  to
            particular industries.

If we fail to  maintain  our  OTC  Bulletin  Board  listing,  liquidity  of your
investment will be adversely affected.

The OTC  Bulletin  Board in which we trade  our  common  stock  has  established
certain maintenance  listing  requirements that must be satisfied in order for a
company's shares to continue to be listed.  We cannot assure that we will always
be able to meet the OTC  Bulletin  Board  listing  requirements  in the  future.
Failure to meet the OTC Bulletin Board maintenance  listing  requirements  could
result in the delisting of our common stock from the OTC Bulletin  Board,  which
may  adversely  affect the  liquidity  of our shares.  In  addition,  on the OTC
Bulletin Board, our stock is currently traded with limited volume.

Under  certain  circumstances,  our common stock may be considered a penny stock
which could negatively impact the market for our common stock.

The  Securities  Enforcement  and  Penny  Stock  Reform  Act  of  1999  requires
additional  disclosure,  relating 4to the market for penny stock,  in connection
with trades in any stock defined as a penny stock.  The  Securities and Exchange
Commission has adopted  regulations that generally define a penny stock to be an
equity security that has a market price of less than $5.00 per share; subject to
certain  exceptions.  Such  exceptions  include any equity security that has net
tangible assets of at least  $2,000,000.  We currently meet such exception,  but
cannot  assure that we will always meet such  exception.  Unless an exception is
available, the regulations require the broker provide any customer with:

      o     a risk disclosure document;

      o     disclosure of market quotations;

      o     disclosure of the compensation of the broker-dealer and its salesman
            in the transaction; and

      o     monthly  account   statements  showing  the  market  values  of  our
            securities held in the customer's account.

The market  quotation  and  compensation  information  must be  provided  before
effecting the transaction and must be contained on the customers'  confirmation.
These  requirements  may make brokers less willing to engage in  transactions of
our  securities.  This may make it more difficult for our  stockholders  to sell
their securities.

Item 7. Financial Statements and Supplementary Data.

Our financial  statements for the 2001 fiscal year are attached hereto and begin
on page F-1.

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; Compliance
with Section 16(a) of the Exchange Act.

The  following  sets  forth  certain  information  with  respect  to each of the
directors, executive officers and certain key employees of the Company.

Barry J.  Muncaster,  56, has served as Chairman of the Board of  Directors  and
Chief  Executive  Officer of  BioProgress  Technology  International,  Inc.  and
BioProgress  Technology  Limited since November 1997. Mr.  Muncaster also served
BioProgress  Technology  as  President  since its  inception  in 1996  until the
engagement of Mr. Bowers in 1999.  He has served in similar  positions  with DNL
since the  acquisition  of that entity as a wholly  owned  subsidiary  in August
1998.  Mr.  Muncaster  trained as a  telecommunications  engineer  with  British
Telecom, and obtained a diploma in  Telecommunications  Engineering in 1970 from
the Cambridge College of Arts and Technology. Since 1970, Mr. Muncaster has been
involved at the executive and senior  executive level with companies  engaged in
the development and commercialization of high technology products, which include
laser-based systems employed in high energy physics experiments, electronic taxi
meters,  personal computer systems and home banking systems. He is a co-founder,
and served as Chief Executive Officer, of Oric Products  International,  Limited
which,  within three years of its start-up,  manufactured  and sold in excess of
300,000  personal  computers,  achieving  annual  sales  revenues  in  excess of
$45,000,000  prior to its sale in 1983 to an  investment  company  quoted on the

<PAGE>

London Stock Exchange.  Since 1987, Mr.  Muncaster has been a Managing  Director
and shareholder in Jade  Partnership  International,  Inc.  ("Jade"),  a firm of
management  consultants which specializes in assisting  developmental  companies
engaged  in high  technology  activities.  Jade  was  the  sole  shareholder  of
BioProgress   Technology   Limited  prior  to  its  acquisition  by  BioProgress
Technology  International,  Inc.  and  now  owns a  substantial  portion  of the
outstanding shares of Common Stock.

Carey B.  Bottom,  Ph.D.  has served as a  non-employee  Director of the Company
since July 2001.  Dr. Bottom is a consultant to the  pharmaceutical  industry on
matters of drug delivery, analytical methods development and regulatory affairs.
Prior to his consulting  practice and from October 2000 to July 2001, Dr. Bottom
was employed as the President and Chief Executive Officer of PharmaCore, Inc., a
start-up  company  engaged in the synthesis and  distribution of unique chemical
building blocks for the drug discovery industry.  From May, 1999 to August 2000,
Dr. Bottom served as the Chief Operating  Officer of LDS  Technologies,  Inc., a
drug delivery company engaged in the development of  microemulsion-based  liquid
formulations  useful for  enhancing  the  absorption  of  water-soluble,  poorly
permeable  drugs (BCS Class 3). He was  instrumental  in negotiating the sale of
LDS Technologies to a large multi-national drug delivery company in August 2000.
From March 1994 to March 1999, Dr. Bottom was employed as senior  vice-president
of Research and Development with the Banner Pharmacaps Division of Sobel, NV. He
was  responsible  for all product  development  and  scientific  activities  for
pharmaceutical,  nutritional,  gelatin,  and  gelatin-alternative  technologies.
During the period  March 1992 to March 1994,  Dr.  Bottom was employed as senior
vice-president and Chief Scientific Officer for Chase Pharmaceutical  Company, a
predecessor company to Banner Pharmacaps.  In this position,  he was responsible
for  quality  control,   quality  assurance,   regulatory  affairs  and  product
development  for all lines of  products  including  soft  gelatin  capsules  and
immediate/sustained release solid dosage forms. Prior to 1992, Dr. Bottom served
in  management   and   scientific   positions   with   Schering-Plough,   Marion
Laboratories, Inc. and the Drackett division of Bristol-Myers. He is a member of
the American Chemical Society, American Association of Pharmaceutical Scientists
and the Controlled Release Society. In 1998, Dr. Bottom was distinguished by the
FDA  and  received  the  FDA  Commissioner's   Special  Citation  for  sustained
outstanding regulatory research efforts in resolving significant product quality
issues related to dissolution  failures for gelatin  capsule drug products.  Dr.
Bottom received his BS, MS and Ph.D. degrees in Chemistry from the University of
Missouri at Rolla. He is the author of numerous scientific publications,  a book
chapter and holds several patents covering  pharmaceutical and household product
applications.

Gregory L. Bowers,  49, has served as a Director of the Company and as President
of BioProgress  Technology  since April 1999. From April 1996 to April 1999, Mr.
Bowers was  employed  as the senior  vice-president  of sales and  marketing  in
Health and Nutrition with the Banner Pharmacap Division of Sobel  International.
In this  capacity,  Mr.  Bowers  was  responsible  for all sales  and  marketing
activities of a $120 million  domestic and  international  nutrition and generic
drug  business.  From April 1994 until April 1996,  Mr.  Bowers was  employed by
Chase  Pharmaceutical,  a  predecessor  in interest to Sobel  International,  as
executive  vice  president  and  general  manager.  In  this  capacity,  he  was
responsible  for  all  business  operations  of  a  $55  million,  350  employee
pharmaceutical and nutritional products  manufacturer,  reported directly to the
chief  executive  officer of a parent  company  and  directed  the  senior  vice
president  technical  affairs,   vice  president  of  finance,   vice  president
operations  and vice  president  sales and  marketing.  From April 1990 to April
1994,  Mr. Bowers served as executive  vice president of sales and marketing for
Chase  Pharmaceutical.  In this  capacity,  he  reported  directly  to the chief
executive  officer  and was  responsible  for  sales  and  marketing  for  Chase
Laboratories  (generic drug division),  Chase  Pharmaceutical  (prescription and
over-the-counter  contract manufacturing) and Encapsulations,  Inc. (nutritional
products).  Mr. Bowers  developed and directed  long- and  short-term  sales and
marketing strategies,  including  establishing operating budgets and negotiating
licenses and royalty agreements domestically and internationally. Prior to being
engaged  by Chase  Pharmaceutical,  Mr.  Bowers  worked  in  various  sales  and
marketing positions in the pharmaceutical and other industries.  Mr. Bowers is a
member  of the  American  Association  of  Pharmaceutical  Scientists,  National
Association of Chain Drugstores,  National Wholesale Drug Association,  National
Association  of  Pharmaceutical  Manufacturers,   and  Council  for  Responsible
Nutrition.  He received a Bachelor of Arts in Biology at the University of Texas
and  also  attended  Columbia  University,   participating  in  their  executive
marketing program.

Malcolm D. Brown,  42, has served as a Director and Executive  Vice President of
Research and Development of the Company since November 1997, and for BioProgress
Technology  and BTL from  each of their  inception  in 1996.  He has  served  in
similar  positions  with DNL since the  acquisition  of that  entity as a wholly
owned  subsidiary  in August  1998.  He is  responsible  for the  direction  and
implementation  of the research and  development  program of BTL, the production
engineering  of its  products,  and the  environmental,  safety and  performance
compliance  of all raw  materials  used by such  entity.  Mr.  Brown  received a
Bachelor of Science Degree  (Honors) in Applied  Biology from  Northeast  London
University in 1984 and a Masters of Science Degree in  Microbiology  from London
University in 1986.  Prior to his affiliation  with  BioProgress  Technology and
BTL, Mr. Brown held senior  research  positions with Gestetner  Corporation  and
Ferrisgate  Limited,  where he worked on the  formulation of specialist inks and
coating used in industrial processes. Mr. Brown is also a director,  officer and
shareholder of The Jade Partnership.

Robert  Graham Mason Hind,  51, has served as a Director  and Vice  President of
Sales and  Marketing  of the  Company  since  1998.  He has  served as  Managing
Director of DNL since 1997 and  Managing  Director of BTL since 2000.  From 1994
until 1997, Mr. Hind served as Managing Director of Functional Nutrition Ltd.

James T.C.  Longley,  41, has served as a  Director,  Chief  Financial  Officer,
Treasurer and Secretary of the Company since  November  1997, and of BioProgress
Technology and BTL since  inception in 1996. He has served in similar  positions
with DNL since the  acquisition  of that entity as a wholly owned  subsidiary in
August  1998.  He received a Bachelor of Arts degree in  accounting  with honors

<PAGE>

from Leeds  University  in 1980,  was  admitted to the  Institute  of  Chartered
Accountants  in  England  in July  1983  and was  admitted  as a  fellow  to the
Institute of Chartered  Accountants  in England and Wales in 1993. In 1983,  Mr.
Longley  joined  Arthur  Andersen,  where he  worked  for two  years  as  Senior
Accountant,  Auditing  Division.  He then served for three years as a manager in
the Merchant Banking Division of Creditanstalt-Bankverein before leaving to join
Touche  Ross and Co.,  another  accounting  firm,  as a  senior  manager  in its
corporate  finance  division.  In 1991,  Mr.  Longley  founded  Dearden  Chapman
Chartered  Accountants  and Registered  Auditors in the United Kingdom where, in
addition to providing services to a range of clients until 1997, he participated
as part of a management team which successfully  completed a (pound)10.5 million
(Sterling)  management buy-out within the trailer  manufacturing  industry,  and
served as the finance director of The Fleet Management Group Limited,  which had
annual revenues of (pound)18  million  (Sterling)  during such time. Mr. Longley
has ended his  employment  with the Company as of the filing date of this report
to pursue other  opportunities,  and we are actively recruiting an individual to
accept the vacated position and roles.

Edward Z. Nowak,  47, has served as the Director of Research and  Development of
BTL since 1997.  He received a Bachelor of Science  Degree in Applied  Chemistry
from  Stockport  University in the United Kingdom in 1978. Mr. Nowak then joined
Ciba Geigy agrochemical and industrial chemical  divisions,  where he worked for
12  years.  He  headed  up  formulations  groups  and  pioneered  technology  in
micro-emulsions,  granulation  and polymer  seed  coatings.  In 1989,  Mr. Nowak
joined Jeyes Group,  where he was research  and  development  manager.  In 1992,
until 1997, Mr. Nowak joined Bush Boake Allen's  fragrance  division as European
technical  manager.  He developed a number of new products for launch within the
personal  care and  household  sectors for both Jeyes and Bush Boake Allen.  Mr.
Nowak has been  responsible  for much of the product and process  development of
encapsulation technology at BTL.

Larry C.  Shattles:  Mr.  Shattles  was  appointed a Director of the Company and
Executive Vice President of BioProgress Technology,  Inc. in July 1999. Prior to
that date he was President of TruTona International, Inc., which sold its assets
to us in 1999. Mr.  Shattles has been active in arranging  funding for us during
our R&D  phase in  addition  to  sales  responsibilities  in the  nutraceuticals
market,  oversight of Investor Relations,  and Media Relations in the US. He has
over 30 years experience in sales and marketing including Presidency of Shattles
& Associates,  a publishers'  representative  firm, and 12 years with Time, Inc.
(now AOL/Time  Warner).  Mr. Shattles is a co-founder and member of the Board of
Directors of FundraisingINFO.com,  an internet based fundraising consulting firm
serving non-profit  organizations  worldwide. He holds a Bachelor of Arts degree
from Oglethorpe University.

Dr.  Stephen  Kessel,  45,  has served as Project  Manager  of  XGel(TM)  FS for
ingestible  products  since July  2000.  Dr.  Kessel has a BSc (Hons)  degree in
aeronautical  engineering  and a PhD in  mechanical  engineering.  He began  his
career  in 1977  working  for  Lucas  CAV  Ltd of  Gillingham  as a  development
engineer,  where he had  hands-on  involvement  in the  development  of new fuel
injection  systems for small diesel cars. In 1981, he joined Thames  Polytechnic
School of  Engineering as a research  fellow and then as a lecturer.  During his
time there, Dr. Kessel undertook research,  undergraduate teaching,  consultancy
and teaching of  specialist  courses for industry.  In January 1988,  Dr. Kessel
joined  Cryovac  Company in St.  Neots as a sales  engineer,  where he  provided
technical  support  to the U.K.  sales  force in the  application  of  packaging
machines and design of packaging systems. In 1989, Dr. Kessel moved to Cryovac's
packaging and  technical  center in Milan,  Italy,  as European  safety  manager
where,  among other  things,  he was  responsible  for ensuring that all current
Cryovac machines complied with Machinery Safety Directive, which came into force
in 1995. In 1997,  Dr. Kessel moved to Cryovac's  customer  equipment  center in
Kriens,  Switzerland  as the  safety and  technical  documentation  manager.  In
January 1999, he became  Cryovac's  safety and special  project  manager,  still
based in  Switzerland.  Dr.  Kessel is a member of the  Institute of  Mechanical
Engineers.

Dr. Louise Mulroy,  28, has served as Project Manager in charge of research into
specialist  films for use in disposable  medical  products  since July 2000. Dr.
Mulroy  has a PhD in  physical  chemistry  and a BSc  (Hons),  joint  honors  in
chemistry and geology.  She began her career working as a postdoctoral  research
assistant in the chemistry department of Keele University,  Staffordshire, where
she worked on a project that investigated the development of age related macular
degeneration, which was funded by Wellcome Trust. She worked there from May 1997
until March 1998, when she became a CIMIT Research Fellow at the Wellman Labs of
Photomedicine,  at  Massachusetts  General  Hospital,  Harvard  Medical  School,
Boston,  Massachusetts.  There,  Dr. Mulroy managed a project that  investigated
photochemical  tissue bonding and its  application in corneal  surgery.  She was
awarded a fellowship from the Center for Innovative  Minimally  Invasive Therapy
and a patent has been submitted for the technique developed.

Section 16(a) Beneficial Ownership Reporting Compliance

Section  16(a) of the  Securities  Act of 1934,  as  amended  ("Exchange  Act"),
requires the executive  officers and  directors of the Company,  and persons who
beneficially  own more than 10% of the Common Stock,  to file initial reports of
ownership  and  reports of  changes  in  ownership  with the  Commission.  These
officers,  directors and  shareholders  are also required to furnish the Company
with copies of certain of these  reports.  Based solely on a review of copies of
reports  furnished to us during our fiscal year ended  December  31,  2001,  and
thereafter,  or  written  representations,  if any,  received  by us from  these
persons that no other reports were required,  we believe that,  during 2001, all
applicable  Section 16(a) filing  requirements  were  satisfied by our reporting
persons.

<PAGE>

Item 10. Executive Compensation.

The following summary compensation table sets forth the compensation of Barry J.
Muncaster,   our  Chief  Executive  Officer  and  our  other  four  most  highly
compensated  executive  officers (the "Named  Executive  Officers") for our last
three completed fiscal years.

<TABLE>
<CAPTION>
                                            SUMMARY COMPENSATION TABLE
                                   Annual Compensation             Long-Term Compensation
                                   -------------------             ----------------------
                                                                             Awards
                                                                   Restricted  Securities
                                                                     Stock     Underlying     All Other
Name and Principal                                                  Award(s)     Stock       Compensation
     Position           Fiscal Year      Salary($)   Bonus($)(1)       ($)      Options(#)       ($)
--------------------------------------------------------------------------------------------------------
<S>                        <C>           <C>         <C>             <C>      <C>               <C>
Barry J. Muncaster         2001          284,901(7)     --                        --          1,896(5)
  Chief Executive          2000          149,162     76,338                   100,000(3)        692(5)
  Officer and Chairman     1999           24,000(2)     --           --       500,000(4)        --

James T.C. Longley         2001          222,563(7)     --           --           --          1,760(5)
  Chief Financial          2000          112,039     76,338          --       100,000(3)        513(5)
  Officer,                 1999           24,000(2)     --           --       500,000(4)        --
  Treasurer,
  Secretary, and
  Director

Malcolm D. Brown           2001          215,798(7)     --           --           --          1,178(5)
  Executive Vice           2000          111,556     76,338          --       100,000(3)      1,205(5)
  President,               1999           24,000(2)     --           --       500,000(4)        --
  Research and
  Development, and
  Director

Greg L. Bowers             2001          157,917(7)     --           --           --          4,442(5)
  President of             2000          125,000     37,500          --       100,000(3)     14,553(6)
  BioProgress              1999           25,000(2)     --           --       500,000(4)        --
  Technology and
  Director

Graham R.M. Hind           2001          165,166(7)     --           --           --          2,438(5)
  Vice President           2000          111,556     76,338          --       100,000(3)      1,731(5)
  of Sales and             1999           24,000(2)     --           --       500,000(4)        --
  Marketing and
  Director
</TABLE>

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

(1)  The  figures  reported in the bonus  column  represent  amounts  earned and
     accrued  for each year and do not include  amounts  paid in each year which
     were earned and accrued in the prior year.

(2)  Consists of directors' remuneration.

(3)  Consists  of an option  granted on November  27,  2000 to purchase  100,000
     shares of Common Stock at an exercise price of $1.50 per share  exercisable
     prior to December 31, 2005.

(4)  Consists of an option  granted on January 25, 1999  exercisable at any time
     before  December  31,  2003 for up to 100,000  shares of Common  Stock at a
     price of $0.35 per share,  up to 100,000  shares of Common Stock at a price
     of $0.75 per  share,  up to  100,000  shares of Common  Stock at a price of
     $1.25 per share,  up to 100,000 shares at a price of $1.75 per share and up
     to 100,000 shares of Common Stock at a price of $2.25 per share.

(5)  Consists of health insurance and membership fees.

(6)  Consists of a $9,000 automobile  allowance,  $881.40 for life insurance and
     $4,671.60 for health insurance.

(7)  Approximately $375,000 of compensation listed above was accrued at 12/31/01
     and remains unpaid as of the date of this document.

<PAGE>

          OPTION GRANTS IN LAST FISCAL YEAR TO NAMED EXECUTIVE OFFICERS

<TABLE>
<CAPTION>
                                                Individual Grants(1)
                          Number of        Percent of
                         Securities      Total Options
                         Underlying        Granted to      Exercise or
                           Options        Employees in      Base Price
Name                     Granted (#)      Fiscal Year         ($/sh)       Expiration Date
----                     -----------      -----------         ------       ---------------
<S>                         <C>              <C>                <C>               <C>
Barry J. Muncaster          --               --                 --                --
James T.C. Longley          --               --                 --                --
Malcolm D. Brown            --               --                 --                --
Greg L. Bowers              --               --                 --                --
Graham R.M. Hind            --               --                 --                --
</TABLE>

(1) There were no options granted to the named officers during 2001.

                 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
          AND FISCAL YEAR-END OPTION VALUES TO NAMED EXECUTIVE OFFICERS

None of the our Named Executive  Officers  exercised any options during the last
fiscal year.

Employment  Agreements  and  Termination  of  Employment  and  Change-in-Control
Arrangements

We have employment  agreements with each of our Named  Executive  Officers.  The
following  summary of certain  provisions of the employment  agreements does not
purport to be complete  and is subject to and is  qualified  in its  entirety by
reference to the actual text of the employment  agreements,  copies of which are
exhibits to our SEC filings.  Each of such executive  officers waived the salary
due to him in 1999 by virtue of his respective employment agreement.

Employment Agreements with Barry J. Muncaster,  James T. C. Longley,  Malcolm D.
Brown, Edward D. Nowak and Graham R.M. Hind

On January 25, 1999, we entered into an employment  agreement with each of Barry
J. Muncaster,  James T. C. Longley, Malcolm D. Brown, Edward D. Nowak and Graham
R.M. Hind. All of the terms of such employment  agreements are the same,  except
for the positions held by such executive officers,  as follows: Mr. Muncaster is
to serve as our Chief  Executive  Officer;  Mr. Longley is to serve as our Chief
Financial  Officer;  Mr. Brown is to serve as our  Executive  Vice  President of
Research and Development;  Mr. Nowak is to serve as our Director of Research and
Development; and Mr. Hind is to serve as our Vice President. Each such executive
officer serves in a similar capacity with BioProgress  Technology,  BTL and DNL,
for which he receives no additional compensation.

Each  employment  agreement  is for a term of five (5)  years.  Pursuant  to the
employment  agreement,  the  executive  officer  is  entitled  to  receive  cash
compensation  of $2,000 per month,  subject to upward  revision  by the Board of
Directors  every six months  during the term of the  employment  agreement.  The
employment  agreement  also provides for a grant to the executive  officer of an
option which is exercisable on or before  December 31, 2003.  This option grants
the executive officer the right to purchase up to 500,000 shares Common Stock in
100,000 share increments at prices per share of $0.35,  $0.75,  $1.25, $1.75 and
$2.25, respectively. The executive officer must be an employee of the Company at
the time  that the  options  are  exercised.  In  addition,  under  Mr.  Nowak's
employment  agreement,  these  shares  are  to be  registered  under  applicable
securities laws before issuance.

Employment Agreements with Greg L. Bowers

On January 25, 1999 and June 1, 1999, Mr. Bowers and the Company entered into an
employment and option agreement and employment agreement, respectively. The term
of his employment,  pursuant to which he is to serve as President of BioProgress
Technology,  commenced  on June 1,  1999 and ends on May 31,  2004 and  shall be
automatically  renewed for an additional five years unless either the Company or
Mr. Bowers notifies the other no later than 12 months prior to the expiration of
the initial term. Pursuant to such employment agreement,  Mr. Bowers is entitled
to receive cash compensation of $125,000 per year,  subject to upward adjustment
by an annual  review  of the  Board of  Directors.  Pursuant  to his  employment
agreement, Mr. Bowers is also entitled to base salary and incentive compensation
program upward  adjustment in accordance  with certain  projected  gross revenue

<PAGE>

targets. Mr. Bowers' employment agreement also provides for a grant to him of an
option which is exercisable on or before  December 31, 2003.  This option grants
Mr.  Bowers the right to purchase up to 500,000  shares  Common Stock in 100,000
share increments at prices per share of $0.35,  $0.75,  $1.25,  $1.75 and $2.25,
respectively.  The shares are to be registered under applicable  securities laws
before issuance. The executive officer must be an employee of the Company at the
time that the options are exercised.  During the term of Mr. Bowers'  employment
agreement,  Mr. Bowers is prohibited from  interfering  with any of our existing
relationships,  our  subsidiaries  or  affiliates  or  any of  their  customers,
suppliers,  employees  or other  persons  with  whom  they do  business  or from
competing  with  us.  In  addition,  pursuant  to the  terms  of his  employment
agreement, Mr. Bowers may not divulge any of our confidential information.

Further,  under the terms of Mr. Bowers' employment agreement,  we can terminate
Mr. Bowers for Cause (as defined in his employment agreement), in which event we
shall pay to Mr. Bowers any  compensation,  expenses and fringe  benefits earned
through the date of  termination.  If we  terminate  Mr.  Bowers  other than for
Cause,  then we shall pay Mr.  Bowers  all  compensation,  expenses  and  fringe
benefits earned through the date of the termination plus a severance payment for
the greater of $125,000 or 12 months of base salary at the monthly  rate then in
effect.  In addition,  in such event,  Mr.  Bowers has the right to exercise any
stock option for one year after termination and shall be entitled to receive for
one year any insurance benefits and/or allowances substantially similar to those
which he had received immediately prior to such termination.

In the event of a "sale of the Company," as defined in his employment agreement,
or in the event Mr.  Bowers is  terminated  by us other than for Cause or death,
then we shall pay Mr.  Bowers all  compensation,  expenses  and fringe  benefits
earned  through  the date of  termination  and a  severance  amount in the total
amount of the  greater of  $250,000  or 24 months of base  salary at the monthly
rate then in effect.  In addition,  Mr.  Bowers shall have the right to exercise
any  stock  options  for a period  of one year  after  termination  and shall be
entitled  to receive  for two years the  insurance  benefits  and/or  allowances
substantially  similar to those which he had received  immediately prior to such
termination.  This severance  payment pursuant to a sale of the Company shall be
in lieu of the severance  payment upon a termination  by us not for Cause unless
the latter is  greater,  in which  event Mr.  Bowers  shall  receive the greater
amount.

Item 11. Security Ownership of Certain Beneficial Owners and Management.

The  following  table  sets  forth  certain  information  concerning  beneficial
ownership  of our Common  Stock and Series B Preferred  Stock by the  directors,
Named Executive  Officers,  all directors and executive officers as a group, and
each  person  known by us to own more than 5% of our  Common  Stock and Series B
Preferred  Stock as of March 31, 2001.  Beneficial  ownership is  determined  in
accordance  with the  rules  and  regulations  of the  Securities  and  Exchange
Commission.

<TABLE>
<CAPTION>
                              Name and Address of            Amount and Nature of
Title of Class                Beneficial Owner               Beneficial Owner         Percent of Class(1)
--------------                ----------------               ----------------         -------------------
<S>                           <C>                             <C>                          <C>
Common Stock                  The Jade Partnership            3,125,000                     6.1%
                              International Inc.(2)

Common Stock                  Barry J. Muncaster              8,398,109(2,3,4,5)           16.4%

Common Stock                  Malcolm D. Brown                4,564,277(4,5)                8.9%

Common Stock                  James T.C. Longley                600,000(4,5)                1.2%

Common Stock                  Graham R.M. Hind                  937,773(4,5)                1.8%

Common Stock                  Edward D. Nowak                   947,773(4,5)                1.8%

Common Stock                  Greg L. Bowers                    620,000(4,5)                1.2%
Series B Preferred                                               20,000                    12.0%

Common Stock                  Larry C. Shattles                 654,493(5)                  1.3%

Common Stock                  Directors and Executive        16,722,425(2,3,4,5)           32.6%
Series B Preferred Stock      Officers as a Group                20,000                    12.0%
</TABLE>


(1) With respect to Common  Stock,  based on  47,631,527  shares of Common Stock
issued and  outstanding on December 31, 2002, and including all of the 3,700,000
shares issuable under those options  described in footnotes 4 and 5 below.  With
respect  to  Series B  Preferred  Stock,  based on  167,000  shares  of Series B
Preferred Stock outstanding on December 31, 2001.

(2) The Jade  Partnership  is a Delaware  corporation,  the equity  ownership of
which  is as  follows:  (i)  42.49%  - Barry  J.  Muncaster;  (ii)  21.22% - Joe
Muncaster,  the son of Barry J. Muncaster;  (iii) 7.06% - Linda Zangus, the wife
of Barry J. Muncaster;  and (iv) 29.23% - Malcolm D. Brown. All 3,125,000 shares
of Common Stock owned by Jade are attributed to Mr. Muncaster for this table.

<PAGE>

(3) These shares include  3,808,634  shares owned directly by Mr.  Muncaster and
864,475  shares held by his wife,  as well as the  3,125,000  shares held by the
Jade Partnership since Mr. Muncaster controls these entities.

(4) These  shares  include an option to  acquire up to 500,000  shares of Common
Stock. This option is currently exercisable in whole or in part at any time. The
option was  granted  on  January  25,  1999,  and allows the holder to  purchase
500,000 shares of Common Stock on or before December 31, 2003.

(5) These shares  include an option  granted on November 27, 2000,  which allows
the holder to acquire up to 100,000 shares of Common Stock on or before November
27, 2005.

Item 12. Certain Relationships and Related Transactions.

The Jade Partnership International, Inc.

Jade is an  affiliate  of the  Company  because  at the time of the  transaction
discussed  below,  Messrs.  Muncaster  and  Brown  were,  and  continue  to  be,
controlling  shareholders,  directors  and  officers in Jade,  and Jade was, and
continues to be, a major shareholder in our common stock.

On April 1, 1998, we entered into a consulting  and option  agreement with Jade.
According  to the  agreement,  Jade  assisted  us in  obtaining  equity and debt
financing,  and provided general business management,  administration  services,
international licensing and sales and marketing strategies.  In our opinion, all
transactions  were at arms length.  This agreement  provided that we were to pay
$50,000 per month as a fee to Jade which, at the option of Jade, was convertible
into our Common Stock at a price of $0.28 per share.  On December 16, 1999, Jade
elected  to  convert  $356,595  of fees  outstanding  under the  agreement  into
1,273,556 shares of the Common Stock. We incurred management charges of $150,000
during 2000 and $600,000 in 1999 with respect to the agreement.  The balance due
from Jade to us at  December  31,  2001 was  $390,703  which  mostly  represents
amounts  advanced by us to Jade,  with  $111,323  due from Jade at December  31,
2000.  This agreement was canceled on March 31, 2000 and no further amounts will
be paid by us to Jade under the agreement.

In addition, our executive offices are provided free by Jade on a month-to-month
basis.

TruTona International, Inc.

TruTona is an  affiliate of the Company  since  Messrs.  Muncaster,  Longley and
Brown  were at the  time of the  transaction,  and  continue  to be,  directors,
officers and significant shareholders of TruTona and of the Company.

On February 15, 1999, we acquired from TruTona patents,  licenses and trademarks
relating  to a broad  range  of  products.  We paid  TruTona  $1,500,000  in the
acquisition,  half in the form of 1,875,000 shares of Common Stock and half paid
on or before December 31, 1999 in cash.

In connection with the acquisition of such patents,  licenses and trademarks, we
have  recognized  license  fee  revenues  of  approximately  $2,000  in 2001 and
$133,600 in 2000,  relating to a previous license  agreement between TruTona and
EcoProgress  that has been  assigned to us. We had a balance of $58,382 due from
TruTona at December 31, 2001, and $56,382 due to it in 2000.

<PAGE>

BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
TOGETHER WITH AUDITORS' REPORT

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To BioProgress Technology International, Inc:

We have audited the  accompanying  consolidated  balance  sheets of  BioProgress
Technology  International,  Inc. (a Nevada  corporation)  and subsidiaries as of
December  31,  2001  and  2000,  and  the  related  consolidated  statements  of
operations,  changes in  stockholders'  equity and cash flows for the years then
ended.  These  financial  statements  are the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of  material  misstatements.  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  consolidated  financial  position of  BioProgress
Technology  International,  Inc.  and  subsidiaries  as of December 31, 2001 and
2000,  and the  results of their  operations  and their cash flows for the years
then ended in conformity with accounting  principles  generally  accepted in the
United States.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated  financial  statements,  the Company has suffered  recurring losses
from operations that raise  substantial doubt about its ability to continue as a
going concern. Management's plans in regard to this matter are also described in
Note 2. The  consolidated  financial  statements do not include any  adjustments
that might result from the outcome of this uncertainty.

ARTHUR ANDERSEN LLP

New York, New York
May 9, 2002

                                       F-1

<PAGE>

BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                                 ASSETS                                 2001            2000
                                                 ------                             ------------    ------------
<S>                                                                                 <C>             <C>
CURRENT ASSETS:
    Cash and cash equivalents                                                       $      5,851    $  3,818,717
    Marketable securities (Note 4)                                                       210,630         362,423
    Accounts receivable                                                                  193,388         826,251
    Amounts due from related parties (Note 9)                                            484,085         365,705
    Prepaid expenses and other current assets (Note 6)                                 1,356,187       1,739,172
                                                                                    ------------    ------------
              Total current assets                                                     2,250,141       7,112,268

PROPERTY, PLANT AND EQUIPMENT, net (Note 3)                                            1,383,673         881,463

EQUITY INVESTMENTS, net                                                                  559,377          20,482

GOODWILL, net  (Note 2)                                                                4,914,919       5,425,389

INTANGIBLE ASSETS, net (Note 5)                                                          958,200       1,094,506
                                                                                    ------------    ------------
              Total assets                                                          $ 10,066,310    $ 14,534,108
                                                                                    ============    ============

<CAPTION>
                                       LIABILITIES AND STOCKHOLDERS' EQUITY
                                       ------------------------------------
<S>                                                                                 <C>             <C>
CURRENT LIABILITIES:
    Bank overdraft                                                                  $    332,738    $       --
    Accounts payable                                                                     749,594         173,185
    Amounts owed to related parties (Note 9)                                             377,219            --
    Accrued rent deposit                                                                 362,899            --
    Accrued expenses and other current liabilities                                       517,651         422,230
    Deferred revenue                                                                   1,326,900       1,763,305
                                                                                    ------------    ------------
              Total current liabilities                                                3,667,001       2,358,720
                                                                                    ------------    ------------
              Total liabilities                                                        3,667,001       2,358,720
                                                                                    ------------    ------------

Redeemable convertible preferred stock, Series A, par value $1.00 (Note 10)                3,900           3,120
Redeemable convertible preferred stock, Series B, par value $2.50 (Note 10)              602,970         288,040
                                                                                    ------------    ------------
                                                                                         606,870         291,160
                                                                                    ------------    ------------
STOCKHOLDERS' EQUITY:
    Common stock, $0.001 par value-
    75,000,000 shares authorized; 47,631,527 (2000: 45,611,541) shares
    issued and outstanding                                                                47,632          45,612
    Additional paid-in capital                                                        24,724,050      23,195,285
    Accumulated deficit                                                              (19,103,570)    (11,421,592)
    Accumulated other comprehensive income                                               124,327          64,923
                                                                                    ------------    ------------
              Total stockholders' equity                                               5,792,439      11,884,228
                                                                                    ------------    ------------
              Total liabilities and stockholders' equity                            $ 10,066,310    $ 14,534,108
                                                                                    ============    ============
</TABLE>

 The accompanying notes to the consolidated financial statements are an integral
                   part of these consolidated balance sheets.


                                                                             F-2

<PAGE>

BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                                                          2001             2000
                                                                      ------------    ------------
<S>                                                                 <C>              <C>
NET REVENUE                                                         $     966,738    $    925,351
COST AND EXPENSES:
    Cost of revenues                                                      208,585          20,902
    Research and development costs                                      1,225,299         522,875
    General and administrative expenses                                 4,454,924       3,782,402
    Realized and unrealized loss (profit)
      on marketable securities                                            422,784         (46,369)
    Professional fees                                                   1,204,636         842,293
    Management fee                                                           --           150,000
                                                                     ------------    ------------
              Total cost and expenses                                   7,516,228       5,272,313
                                                                     ------------    ------------
LOSS FROM OPERATIONS                                                   (6,549,490)     (4,346,962)

    Share of loss from equity investment                                 (441,017)        (29,517)
                                                                     ------------    ------------
NET Loss                                                               (6,990,507)     (4,376,479)

    Dividends payable and accretion of preferred stock                   (691,471)     (2,563,872)
                                                                     ------------    ------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS                             (7,681,978)     (6,940,351)
                                                                     ============    ============

NET LOSS PER COMMON SHARE - BASIC AND DILUTED                        $      (0.17)   $      (0.17)
                                                                     ============    ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING                   45,730,823      40,401,395
                                                                     ============    ============
</TABLE>

 The accompanying notes to the consolidated financial statements are an integral
                     part of these consolidated statements.


                                                                             F-3

<PAGE>

BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
DECEMBER 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                                                Common              Additional
                                                    ----------------------------     Paid-in
                                                        Shares            Amount     Capital
                                                    ------------   ------------   ------------
<S>                 <C> <C>                           <C>                <C>      <C>
BALANCE at December 31, 1999                          36,002,800   $     36,002   $  9,861,562

    Net loss                                                --             --             --
    Currency translation adjustment                         --             --             --

       Comprehensive loss                                   --             --             --

    Dividends payable                                       --             --             --
    Conversion of Series A preferred stock                97,950             98         58,166
    Conversion of Series B preferred stock             9,297,046          9,298     11,630,604
    Accretion of Series A and Series B preferred
    stock to redemption rate at December 31, 2000           --             --             --
    Issuance of options                                     --             --          105,000
    Issuance of common shares                            213,745            214        211,953
    Issuance of warrants                                    --             --        1,328,000
                                                    ------------   ------------   ------------

BALANCE at December 31, 2000                          45,611,541         45,612     23,195,285

Net loss                                                    --             --             --
    Currency translation adjustment                         --             --             --

       Comprehensive loss                                   --             --             --

    Dividends payable                                       --             --             --
    Conversion of Series B preferred stock               909,300            909     1,421,235
    Accretion of Series A and Series B preferred
    stock to redemption rate at December 31, 2001           --             --
    Issuance of common shares                          1,110,686          1,111       860,388
    Reversal of charge for warrants                         --             --      (1,328,000)
    Issuance of warrants                                    --             --         575,142
                                                    ------------   ------------   ------------

BALANCE at December 31, 2001                          47,631,527   $     47,632   $24,724,050
                                                    ============   ============   ============
</TABLE>


 The accompanying notes to the consolidated financial statements are an integral
                     part of these consolidated statements.

                                                                             F-4

<PAGE>

BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Con't)
DECEMBER 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                                                     Accumulated        Total
                                                                        Other       Stockholders'
                                                     Accumulated    Comprehensive      Equity
                                                       Deficit      (Loss) Income     (Deficit)
                                                    ------------    ------------    ------------
<S>                 <C> <C>                         <C>             <C>             <C>
BALANCE at December 31, 1999                        $ (4,481,241)   $      2,095    $  5,418,418

    Net loss                                          (4,376,479)           --        (4,376,479)
    Currency translation adjustment                         --            62,828          62,828
                                                                                    ------------
       Comprehensive loss                                   --              --        (4,313,651)
                                                                                    ------------
    Dividends payable                                   (158,425)           --          (158,425)
    Conversion of Series A preferred stock                  --              --            58,264
    Conversion of Series B preferred stock                  --              --        11,639,902
    Accretion of Series A and Series B preferred
    stock to redemption rate at December 31, 2000     (2,405,447)           --        (2,405,447)
    Issuance of options                                     --              --           105,000
    Issuance of common shares                               --              --           212,167
    Issuance of warrants                                    --              --         1,328,000
                                                    ------------    ------------    ------------

BALANCE at December 31, 2000                         (11,421,592)         64,923      11,884,228

    Net loss                                          (6,990,507)           --        (6,990,507)
    Currency translation adjustment                         --            59,404          59,404
                                                                                    ------------
       Comprehensive loss                                   --              --        (6,931,103)
                                                                                    ------------
    Dividends payable                                    (10,415)           --           (10,415)
    Conversion of Series B preferred stock                  --              --         1,422,144
    Accretion of Series A and Series B preferred
      stock to redemption rate at December 31, 2001     (681,056)                       (681,056)
    Issuance of common shares                               --              --           861,499
    Reversal of charge for warrants                         --              --        (1,328,000)
    Issuance of warrants                                    --              --           575,142
                                                    ------------    ------------    ------------

BALANCE at December 31, 2001                        $(19,103,570)   $    124,327    $  5,792,439
                                                    ============    ============    ============
</TABLE>

 The accompanying notes to the consolidated financial statements are an integral
                     part of these consolidated statements.

                                                                     F-4 (Con't)

<PAGE>

BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                                                                      2001           2000
                                                                                  -----------    -----------
<S>                                                                               <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss before taxation                                                      $(6,990,507)   $(4,376,479)
    Adjustments to reconcile net loss to net cash used in operating activities-
       Changes in operating assets and liabilities-
       Depreciation and amortization                                                1,093,133        950,079
       Loss on disposal of fixed assets                                               140,607        113,042
       Share of loss of equity investment                                             441,017         29,517
       Realized and unrealized loss on marketable securities                          422,784         49,928
       Compensation charge for stock options                                             --          105,000
       Accretion of warrants                                                          256,535         55,000
       Bank overdraft                                                                 332,738           --
       Decrease (increase) in accounts receivable                                     428,372       (624,448)
       Increase in net amounts receivable from related parties                       (314,380)      (948,555)
       Increase in prepaid expenses and other current assets                         (354,337)       (37,498)
       (Decrease) increase in deferred revenue                                       (436,405)       541,351
       Increase (decrease) in accounts payable                                        541,233       (184,750)
       Increase in accrued expenses and other current liabilities                     617,154         50,465
                                                                                  -----------    -----------
       Net cash used in operating activities                                       (3,822,056)    (4,277,348)
                                                                                  -----------    -----------
CASH FROM INVESTING ACTIVITIES:
       Purchases of property, plant and equipment                                    (741,648)      (825,787)
       Purchase of investments                                                        (75,000)       (95,045)
       Advances to The Healthy Forum                                                 (706,400)      (198,000)
       Net sale of marketable securities                                               48,116           --
       Cash acquired from acquisition                                                  14,907           --
                                                                                  -----------    -----------
       Net cash used in investing activities                                       (1,460,025)    (1,118,832)
                                                                                  -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
       Proceeds from sale of preferred stock                                        1,424,300      9,089,546
                                                                                  -----------    -----------
       Net cash provided by financing activities                                    1,424,300      9,089,546
                                                                                  -----------    -----------
       Effects of exchange rate changes on cash and cash equivalents                   44,915        119,533
                                                                                  -----------    -----------
       Net (decrease) increase in cash and cash equivalents                        (3,812,866)     3,812,899

CASH AND CASH EQUIVALENTS, beginning of year                                        3,818,717          5,818
                                                                                  -----------    -----------
CASH AND CASH EQUIVALENTS, end of year                                            $     5,851   $  3,818,717
                                                                                  ===========   ============
</TABLE>

Supplemental disclosure of cash flow information

Acquisition of ProDesign Technology Limited                           2001
                                                                        $
                                                                   ----------
Fair value of equity issued                                           166,250
Assets acquired                                                      (235,943)
Liabilities assumed                                                   237,399
Net non-cash investment                                               167,706
                                                                   ----------

Cash acquired                                                          14,907
                                                                   ==========
Net cash acquired from acquisition                                     14,907
                                                                   ==========

 The accompanying notes to the consolidated financial statements are an integral
                     part of these consolidated statements.

                                                                             F-5

<PAGE>

BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Con't)
DECEMBER 31, 2001 AND 2000

NON CASH TRANSACTIONS

During the 2001 fiscal year 363,720 of Series B preferred  stock were  converted
to 909,300 common shares in accordance  with the  subscription  agreements.  See
note 10 to the financial statements.

During the 2001 fiscal year 15,336 shares of common stock were issued in lieu of
dividends on the Series B preferred shares.

On  January  18,2001  the  company   received  853,177  shares  in  Consolidated
EcoProgress Technology, Inc. in settlement of outstanding debt of $238,889.

On July 6, 2001 the company  completed the  acquisition of ProDesign  Technology
Limited.  The initial  consideration  payable in respect of the  acquisition was
125,000 shares of common stock. See note 2 for further details.

On December 12, 2001 the Company entered into a common stock purchase  agreement
with Fusion  Capital  Fund II LLC. In  connection  with this  agreement  970,350
shares of common  stock  were  issued,  although  these  shares  cannot be sold,
transferred  or assigned  until an  effective  registration  statement  has been
filed.

The  Company  issued  equity for debt of $29,977 in 2000 in relation to services
provided by Mark Pierce in his role as the Company's attorney in 2000. The total
number of common shares allocated was 32,703.


 The accompanying notes to the consolidated financial statements are an integral
                     part of these consolidated statements.

                                                                      F-5(Con't)

<PAGE>

BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000

1. BACKGROUND AND ORGANIZATION

History

BioProgress Technology International,  Inc. (the "Company"), was incorporated in
California  on March  5,  1990,  under  the name of U.S.  Flywheel,  Inc.,  as a
subsidiary  of  Sunbird   Technologies,   Inc.,  a  Utah  corporation  ("Sunbird
Technologies").  In June, 1991, the Company acquired three patents and a license
relating to flywheel technology from Sunbird  Technologies and its affiliates in
exchange for common shares of the Company "Common Stock". These shares of Common
Stock were subsequently  distributed to the stockholders of Sunbird Technologies
after   registration   with  the  U.S.   Securities   and  Exchange   Commission
("Commission").  The Company subsequently transferred its flywheel technology to
a partnership  (the  "Partnership")  in exchange for a minority  interest in the
Partnership.  The  Partnership  interest of the Company was  subsequently  sold,
after which the Company began its search for a business in which to engage.

The Company  changed its name to Famous Sam's Group Inc and briefly  traded as a
restaurateur under the name of Famous Sam's. The business subsequently ceased to
trade and in 1997 the Company  acquired its interest in  BioProgress  Technology
Inc, as described in note 3.

Operations

The Company has a limited  operating  history  and is engaged  primarily  in the
research,  development,  manufacturing,  marketing,  sales and  distribution  of
products  that  use  water  soluble  and  biodegradable  films  for the  dietary
supplement,  pharmaceutical,  recreational  and  cosmetic  industries  and other
applications.  The  Company's  research and  development  operations  are in the
United Kingdom. The Company operates in one market segment.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The  accompanying   consolidated  financial  statements  include  the  financial
statements  of the  Company  and  its  wholly  owned  subsidiaries:  BioProgress
Technology,  Inc., BioProgress Technology Limited ("BTL"), DHA Nutrition Limited
and ProDesign Technology Limited. All significant intercompany  transactions and
balances have been eliminated.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year
classifications.

Use of Estimates

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

Liquidity

The Company's consolidated financial statements have been prepared assuming that
it  will  continue  as a going  concern.  The  Company  has  incurred  recurring
operating losses and negative  operating cash flows since its inception and will
require additional financing within the next 12 months. In addition, the Company
will need to increase  cash flows from  operations  and/or  obtain  financing in
order to fund its  working  capital  requirements  for fiscal  year 2002.  These
factors raise  substantial  doubt about the  Company's  ability to continue as a
going  concern.  Management  is actively  pursuing  increases  to cash flows and
additional  sources of financing and believes that such increases and additional
financing will generate  sufficient  cash flow to fund the Company's  operations
through fiscal year 2002. Management's plan to increase the Company's cash flows
from operations relies  significantly on increases in revenue generated from its
license  agreements and research and development  services  provided to existing
clients,  sale of  equipment  and related  supplies,  containment  of  operating
expenses and opportunistic  leverage of capital markets.  However,  there are no
assurances that such matters will be successfully consummated.

                                                                             F-6
<PAGE>

BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 2001 AND 2000

Property, Plant and Equipment

Property, plant and equipment is stated at cost. Depreciation of property, plant
and equipment is provided for using the straight-line  method over the estimated
useful lives of the respective assets,  ranging from 4 to 20 years (see Note 3).
Amortization  of leasehold  improvements  is provided for over the lesser of the
useful life or the related lease term.

Cash and Cash Equivalents

Cash  and  cash  equivalents   represent  all  highly  liquid  investments  with
maturities of three months or less when purchased.

Revenue Recognition

The Company generates revenues from licensing the rights to use its intellectual
property in the XGel(TM) Film System,  the sale of XGel(TM)  Film  Systems,  and
research and development services to assist customers in gaining maximum benefit
from the license.  Revenues from license  arrangements  and the sale of XGel(TM)
Film Systems are  recognized  when there is persuasive  evidence of an agreement
with  a  customer,   collectibility   is  probable  and  the  fee  is  fixed  or
determinable.  Revenues from research and  development  contracts are recognized
ratably over the period to which the contract relates unless specific acceptance
criteria exist. If acceptance  criteria exist,  revenues are recognized upon the
earlier of customer acceptance or the expiration of the acceptance period.

Deferred revenue represents cash which has been received by the Company, but has
not been recorded as revenue as it has not met the revenue recognition criteria.
At December 31, 2001, 72% relates to one customer (see Note 9).

Marketable Securities

Marketable  securities represent the Company's investment in the common stock of
Consolidated  EcoProgress Technology Inc, and UK quoted investments as described
in Note 4. Management  considers  these  securities as trading  securities.  The
value of these investments is marked to market value at each period end with any
unrealized gain or loss included in the statement of operations in the period to
which it relates.

Intangibles

Licenses are included at cost and depreciated in equal annual  installments over
a period of 10 years which is their estimated  useful economic life.  Provisions
are made for any known impairments.

Goodwill

Goodwill  of  $6,781,739  resulted  from  the  acquisition  of BTL in  1998  and
represents the excess of the fair value of the consideration given over the fair
value of the identifiable assets and liabilities acquired. It is being amortized
on a straight-line  basis over its useful economic life,  which is considered to
be 10  years.  The  amortization  charge  for 2001 and  2000  was  $678,176  and
$678,176, respectively.

On July 6, 2001 the Company  completed the  acquisition of ProDesign  Technology
Limited  ("PTL").  Completion of the  acquisition,  which has been accounted for
under the purchase method in accordance  with Statement of Financial  Accounting
Standard  ("SFAS") 141, follows the execution of a letter of intent announced on
March 16, 2001 and, accordingly, the results of operations have been included in
the accompanying  financial  statements  since the date of acquisition.  Initial
consideration  payable in respect of the acquisition is 125,000 shares of common
stock in the Company ("Consideration Shares"). Goodwill of $167,706 arose on the
acquisition.  Under SFAS 142, no  amortization  is required and this goodwill is
subject to impairment review.  Consideration Shares are restricted from sale for
a period of one year from the date of issue. Additional consideration ("Deferred
Consideration") shall be payable by the Company in accordance with the following
and any future  payments will be reflected as an increase in the purchase  price
as they fall due:

1.    If at any time on or  before  December  31,  2001,  the  cumulative  sales
      revenues of PTL derived from third parties  exceed  $500,000,  the Company
      shall issue the number of ordinary  shares of common  stock in the Company
      determined in accordance  with the following  provisions,  price being the
      closing price of the Company's common stock on the relevant date:

      (i)   if the price is $2.50 or more - 100,000 shares

      (ii)  if the price is $1.66 or less - 150,000 shares

      (iii) if the price is  between  $1.66  and  $2.50 - a figure  equal to the
            result of dividing 250,000 by the price

                                                                             F-7

<PAGE>

BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 2001 AND 2000

2.    If at any time on or  before  December  31,  2002,  the  cumulative  sales
      revenues of PTL derived from third parties exceed $1,000,000,  the Company
      shall issue the number of ordinary  shares of common  stock in the Company
      determined in accordance  with the following  provisions,  price being the
      closing price of the Company's common stock on the relevant date:

      (i)   if the price is $2.50 or more - 100,000 shares

      (ii)  if the price is $1.66 or less - 150,000 shares

      (iii) if the price is  between  $1.66  and  $2.50 - a figure  equal to the
            result of dividing 250,000 by the price

As of December 31, 2001,  these targets have not been met and no purchase  price
adjustments have been made.

Equity method of accounting

The Company's  investment  in the Healthy Forum Limited  (`HF') is accounted for
under the equity method of accounting  whereby the  investment is carried at the
cost of acquisition  adjusted for the Company's share of undistributed  earnings
or losses since  acquisition.  Advances to HF amounted to $904,400 and have been
included in Equity Investments in the accompanying  balance sheet as of December
31, 2001.

Subsequent to the reorganization of the share capital of HF on April 1, 2001 the
Company  exercised  its option to purchase  additional  shares of common  stock,
increasing its shareholding to 46.6% from 29.9%. The net cash investment related
to this option was $75,000.

Long-Lived Assets

The  provisions  of SFAS No. 121  "Accounting  for the  Impairment of Long-Lived
Assets and for  Long-Lived  Assets to be  Disposed  of"  requires,  among  other
things,  that an  entity  review  its long  lived  assets  and  certain  related
intangibles for impairment  whenever changes in circumstances  indicate that the
carrying  amount of an asset may not be fully  recoverable.  Management does not
believe that any such change in circumstances has occurred.

Income Taxes

The Company  applies the deferred  method of accounting for income taxes whereby
deferred taxes are recognized for tax  consequences of temporary  differences by
applying enacted statutory tax rates to differences between financial statements
carrying amounts and the tax bases of existing assets and liabilities.

Stock-based Compensation

The Company has adopted the  disclosure  provisions  of  Statement  of Financial
Accounting  Standards (SFAS) No. 123 "Accounting for Stock-Based  Compensation."
As permitted by the provisions of SFAS No. 123, the Company  applies  Accounting
Principles  Board Opinion 25 and related  interpretations  in accounting for its
employee  share  option  plans.  As a result,  compensation  expense  related to
options  granted is  measured  based on the  intrinsic  value of the  underlying
common stock. See Note 11 for a summary of the pro-forma effects on reported net
loss per share for the years ended  December 31, 2001 and 2000 based on the fair
value of options and shares granted as prescribed by SFAS No. 123.

Earnings Per Share

The Company applies SFAS No. 128 "Earnings Per Share".  The adoption of SFAS No.
128 requires the  presentation of basic earnings per share and diluted  earnings
per share.  Basic and diluted loss per common share were  calculated  based upon
the net loss available to common  stockholders  divided by the weighted  average
number of shares  of common  stock  outstanding  during  the  period.  There are
3,700,000 stock options outstanding at December 31, 2001 (2000: 3,700,000) which
are not  included  in the  earnings  per  share  calculation  as they  would  be
anti-dilutive.

Foreign Currency Translation

The  functional  currency  of  foreign  operations  is the local  currency.  The
financial  statements  of the  foreign  subsidiaries  are  translated  into U.S.
dollars using the exchange rate in effect at year end for balance sheet accounts
and the average  exchange rate in effect during the year for revenue and expense
accounts with currency translation  adjustments reflected in other comprehensive
loss  in   stockholders'   equity.   Gains  and  losses  from  foreign  currency
transactions, such as those resulting from the settlement of foreign receivables
or payables,  are included in the  consolidated  statement  of  operations.  The
foreign currency loss was $134,266 and $387,073 in 2001 and 2000, respectively.


                                                                             F-8

<PAGE>

BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 2001 AND 2000

Concentration of Credit Risk

Financial  instruments,  which potentially subject the Company to concentrations
of credit risk, consist primarily of cash investments and trade receivables. The
Company has cash investment  policies that limit investments to investment grade
securities  and  marketable  securities.  The Company  performs  ongoing  credit
evaluations of its customers' financial positions.

In 2001,  our top five  customers  accounted  for 93% of  total  revenues,  with
Proctor  and  Gamble  accounting  for 43% and the four other  customers  (Boots,
EcoProgress, Peter Black and VAX) contributed the remaining 50%.

In 2000, our top three  customers  (Proctor and Gamble,  Boots and  EcoProgress)
accounted for 96% of total revenues.

Research and Development

Research and development costs are expensed as incurred.

Fair values of financial instruments

The fair values of  financial  instruments  are deemed to be  equivalent  to the
carrying  amounts  as cash  and cash  equivalents,  bank  overdraft,  marketable
securities,  accounts  payable and accounts  receivable are short term items and
readily convertible into cash.

New Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 141, "Business  Combinations"  ("SFAS No.
141"). SFAS No. 141 changes the accounting for business combinations,  requiring
that all business  combinations  be accounted for using the purchase  method and
that intangible assets be recognized as assets apart from goodwill if they arise
from  contractual or other legal rights,  or if they are separable or capable of
being separated from the acquired entity and sold, transferred, licensed, rented
or exchanged.  SFAS No. 141 is effective for all business combinations initiated
after June 30, 2001. The adoption of SFAS No. 141 did not have a material impact
on our financial statements.

In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangibles"  ("SFAS
No.  142").  SFAS No. 142  specifies  financial  accounting  and  reporting  for
acquired  goodwill and other intangible  assets.  Goodwill and intangible assets
with indefinite  useful lives will not be amortized but rather will be tested at
least  annually  for  impairment.  SFAS No. 142 is  effective  for fiscal  years
beginning  after December 15, 2001.  SFAS No. 142 requires that the useful lives
of intangible  assets acquired on or before June 30, 2001 be reassessed and that
the remaining  amortization periods be adjusted  accordingly.  SFAS No. 142 also
requires that previously  recognized intangible assets deemed to have indefinite
lives are to be tested for impairment. Goodwill recognized on or before June 30,
2001, is to be assigned to one or more  reporting  units and is to be tested for
impairment  as of the  beginning  of the  fiscal  year in which  SFAS No. 142 is
initially  applied in its entirety.  The Company is finalizing its evaluation of
the effect that  adoption of the  provisions  of SFAS No. 142 that are effective
for  January  1, 2002 will  have on its  results  of  operations  and  financial
position.

In August 2001, the FASB issued SFAS No. 143,  "Accounting for Asset  Retirement
Obligations"  ("SFAS No. 143"), which is effective October 1, 2003. SFAS No. 143
requires,  among other things, the accounting and reporting of legal obligations
associated  with the  retirement  of  long-lived  assets  that  result  from the
acquisition,  construction,  development,  or normal  operation  of a long-lived
asset.  The Company is  currently  assessing,  and has not yet  determined,  the
effect of SFAS No. 143 on its financial position and results of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived  Assets," ("SFAS No. 144"). SFAS 144 is effective October
1,  2002,  but may be early  adopted.  SFAS No.  144  addresses  accounting  and
reporting of all long-lived  assets,  except goodwill,  that are either held and
used or  disposed  of through  sale or other  means.  The  Company is  currently
assessing  the  impact of SFAS 144 on its  financial  position  and  results  of
operations,  but believes its  adoption  will not have a material  impact on its
results of operation or financial position.

3. PROPERTY, PLANT AND EQUIPMENT

Property,  plant and  equipment  are stated at cost,  net of  depreciation,  and
consist of the following:


                                                                             F-9
<PAGE>

BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 2001 AND 2000

                                    Estimated
                                      2001         2000     Useful Lives
                                  -----------  -----------  ------------

Freehold property                 $   547,500  $   547,500    20 years
Leasehold improvements                230,610         --         7
Plant and machinery                   385,350      272,732       4
Office equipment                      638,886      222,743       4
Laboratory equipment                  106,974       60,448       6
                                  -----------  -----------
                                    1,909,320    1,103,423
                                  -----------  -----------
Less-Accumulated depreciation        (525,647)    (221,960)
                                  -----------  -----------
          Total                   $ 1,383,673  $   881,463
                                  ===========  ===========


The  depreciation   expense  was  $278,651  and  $134,120  for  2001  and  2000,
respectively.

4. MARKETABLE SECURITIES

Marketable securities consist of the following:

                                                       2001            2000
                                                     -------          -------
       Consolidated EcoProgress Technologies Inc.   $210,630         $168,269
       Quoted UK investments                            --            194,134
                                                     -------          -------
                                                    $210,630         $362,423
                                                     =======          =======

The above investments are classified as trading  securities and marked to market
value at each  period  end,  and any gain or loss is taken to the  Statement  of
Operations.

5. INTANGIBLE ASSETS

                                               2001         2000
                                           -----------  -----------
Trademarks, licenses, patents              $ 1,368,569  $ 1,368,569
Less accumulated amortization                 (410,369)    (274,063)
                                           -----------  -----------
Net intangible assets                      $   958,200  $ 1,094,506
                                           ===========  ===========

The licenses were purchased from TruTona International, Inc., a related party as
disclosed in Note 9 and are being depreciated in equal annual  installments over
a  period  of 10 years  which  is their  estimated  useful  economic  life.  The
amortization  expense for the year was  $136,306 and $137,783 for 2001 and 2000,
respectively.

                                                                            F-10

<PAGE>
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000

6. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following:

                                                            2001          2000

Fusion prepaid deal costs                               $  630,728    $     --
Rent deposit                                               362,899          --
Warrants issued to third parties (see Note 12)             263,607     1,273,000
Series B preferred shares subscriptions due                   --         367,500
Prepaid expenses and other current assets                   98,953        98,672
                                                        ------------------------
                                                        $1,356,187    $1,739,172
                                                        ========================

7.  COMMITMENTS AND CONTINGENCIES

a)   OPERATING LEASE OBLIGATIONS

     On January 31, 2001 the Company signed a new lease  agreement to lease new
     purpose  built  manufacturing  facilities  at a site  known  as  Hostmoor,
     located in March,  Cambridge,  UK. Minimum future lease payments under the
     non-cancelable  operating  lease  entered into for Hostmoor  subsequent to
     December 31, 2001 are summarized as follows:

                                                                2001
                                                            -----------
                 2002                                       $   178,867
                 2003                                           178,867
                 2004                                           178,867
                 2005                                           178,867
                 2006                                           178,867
                 Thereafter                                   3,398,473
                                                            -----------
                                                            $ 4,292,808
                                                            ===========

Rental  expenses under  operating  leases  totaled  $291,890 and $33,600 for the
years ended December 31, 2001 and 2000, respectively.

b)   EMPLOYEE AGREEMENTS

     The Company has a number of agreements with directors and senior management
     which result in the following committed payments subsequent to December 31,
     2001:

                                                                2001
                                                            -----------
                 2002                                       $   245,000
                 2003                                           245,000
                 2004                                            62,000
                                                            -----------
                                                            $   552,000
                                                            ===========

c)   BANK OVERDRAFT

     During 2001,  the Company  arranged a bank  overdraft  facility of $362,500
     ((pound)250,000)  with a UK bank  which  has  been  secured  by a  personal
     guarantee from one of the Company's executives.


                                                                            F-11

<PAGE>

BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 2001 AND 2000

8. INCOME TAXES

The Company does not have any income taxes payable in 2001 or 2000.  The Company
has net operating loss carry forwards of approximately  $10,000,000 available in
the  U.S.  and  approximately  $100,000  in the UK for 2001  available  to carry
forward against  taxable profits in each country,  subject to agreement with the
relevant tax  authorities.  These net  operating  loss carry  forwards  begin to
expire in the fiscal year ending 2015. The Company has provided a 100% valuation
allowance against the deferred tax asset arising on the net operating losses due
to the uncertainty of their ultimate realization.

9. RELATED PARTIES

The following table provides a breakdown of amounts due from and owed to related
parties. A summary of the transactions is shown after the table:


                                           Amounts due from     Amounts owed to
                                            related parties     related parties
                                                 $                    $

Jade Partnership International, Inc.          390,703                   --
TruTona International, Inc.                    58,382                   --
Cavan Bickell (CEO of Healthy Forum)           35,000                   --
Directors                                          --              377,219
                                              -------              -------
                                              484,085              377,219
                                              -------              -------

The  balance of  $904,400  due from The  Healthy  Forum  Limited  (see below) is
included within equity investments.

The  amounts  due to  directors  relates  to unpaid  compensation  for  services
provided  during 2001. Due to cash flow  constraints  these amounts could not be
paid to the  directors,  but have been  accrued for  payment  once the cash flow
position improves.

The Jade Partnership International, Inc

     On  April 1,  1998,  the  Company  entered  into a  consulting  and  option
     agreement  with  The  Jade  Partnership  International,  Inc.  ("Jade"),  a
     Delaware Corporation.  This agreement was canceled on March 31, 2000 and no
     further  amounts will be paid by the Company to Jade. The Company  received
     short term funding from Jade to meet bridge  financing  needs, and advances
     similar funding to Jade. Funds transferred to Jade exceeded monies received
     from Jade during 2001.

     Certain directors of the Company are controlling  shareholders in Jade. The
     Company  incurred  management  charges of nil (2000:  $150,000)  during the
     year.  The balance  due from Jade to the  Company at December  31, 2001 was
     $390,703 (2000: $111,323).

TruTona International, Inc

     Certain   directors   of  the  Company  are  also   directors   of  TruTona
     International,   Inc.   ("TruTona"),   a  privately   held  Atlanta   based
     corporation.

     On February 15, 1999, the Company acquired from TruTona  patents,  licenses
     and trademarks relating to a broad range of products,  including a range of
     flushable and biodegradable  disposable  products designed by TruTona.  The
     consideration  payable to  TruTona by the  Company  was  $1,500,000  in the
     acquisition,  of which  $750,000 was paid through the delivery of 1,875,000
     shares of Common Stock at an agreed price of $0.40, with the remainder paid
     in cash.

     In  connection  with the  acquisition  of the above  patents,  licenses and
     trademarks,  the Company has  recognized  license fee  revenues of $133,600
     (2000:  $133,600)  in the year  relating  to a previous  license  agreement
     between TruTona and Consolidated  EcoProgress Technology Inc. that has been
     assigned to the Company.

     The Company has a balance of $58,382 (2000: $56,382) due to it from TruTona
     at December 31, 2001.

Consolidated EcoProgress Technologies, Inc

     Consolidated EcoProgress Technologies,  Inc, ("EcoProgress"),  is a related
     party by virtue of its shareholding in the Company.

     On  April  5,  1999,  the  Company  completed  the  sale  of a  license  to
     EcoProgress,  a Canadian  company with  securities  traded on the Vancouver
     Stock Exchange.  The license was sold for the sum of $1,500,000 and granted
     EcoProgress the exclusive right to manufacture,  sell and distribute in the
     US a line of flushable and biodegradable  disposable products utilizing the
     intellectual  property  that the Company  recently  acquired  from  TruTona
     International  Inc (see above).  EcoProgress  paid $380,000 in cash and the
     remaining  $1,120,000 was paid through the issuance of 1,066,666  shares of
     free trading  common stock in  EcoProgress at the market value of $1.05 per
     share.  The value of the license is  included  within the  deferred  income
     balance and is being amortized to revenue over a period of ten years.


                                                                            F-12

<PAGE>

BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 2001 AND 2000

The Healthy Forum Limited

     The Healthy Forum aims to build a world leading and world-friendly brand in
     the  complimentary   medical  and  specialty  food  sectors.   The  product
     categories of the company will be feminine  hygiene,  beneficial  foods and
     vitamins,  minerals and supplements.  During the year the Company increased
     its investment to 46.6% from its original holding of 29.9%.

     In  addition  to the equity  investment  the Company has loaned The Healthy
     Forum  $706,400  in 2001 and  $198,000  during  2000 to help  fund  working
     capital  requirements.  At December 31, 2001 the amount owed by The Healthy
     Forum to the group was $904,400 which is included in Equity  Investments in
     the accompanying balance sheet.


                                                                            F-13
<PAGE>

BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999

10.  REDEEMABLE CONVERTIBLE PREFERRED STOCK

The Series A and B redeemable  convertible  preferred  stock are recorded in the
accompanying balance sheet outside the stockholders' equity section due to their
mandatory redemption feature.

<TABLE>
<CAPTION>
                                                                         Series A                   Series B
                                                                       redeemable                 redeemable
                                                            convertible preferred      convertible preferred
                                                                            stock                      stock
                                                            --------------------- --------------------------
<S>                                                         <C>                       <C>
Number of shares authorized                                      1,250,000                         3,750,000
                                                            ================================================

Shares outstanding at December 31, 2000                              2,000                           108,000

Number of shares issued during year                                   --                             422,720
Number of shares converted during year                                --                            (363,720)

                                                           -------------------------------------------------
Shares outstanding at December 31, 2001                              2,000                           167,000
                                                           =================================================

Subscription price per share                                $         1.00            $                 2.50

Value based on redemption rate
at December 31, 2001                                        $        3,900            $              602,970


Proceeds from issuance                                      $         --              $            1,424,300

Conversion date and rate to common shares

From January 1, 2001 to December 31, 2001                            1:0.5           1:1.0 (issued in 2000)
                                                                                     1:2.5 (issued in 2001)

From January 1, 2002 to December 31, 2002                             --             1:0.5 (issued in 2000)
                                                                                     1:1.0 (issued in 2001)

From January 1, 2003 to December 31, 2003                             --             1:0.5 (issued in 2001)


Expiry of conversion rights                                     12/31/2001      12/31/2002 (issued in 2000)
                                                                                12/31/2003 (issued in 2001)
Conversion at discretion of                                         Holder          Holder

Redemption date and amount per share
From January 1, 2001 to December 31, 2001                   $        1.95                    $         3.91
From January 1, 2002 to December 31, 2002                   $         --                     $         4.88
From January 1, 2003 to December 31, 2003                   $         --                     $         5.19

Redemption at discretion of                                       Company                           Company
Mandatory redemption date                            After March 31, 2002              After March 31, 2003
Mandatory redemption price                                $          2.07                   $          5.19
Dividend rate                                             4% per annum of                   4% per annum of
                                                      subscription amount               subscription amount
                                                    computed quarterly in             computed quarterly in
                                                     arrears March, June,              arrears March, June,
                                                   September and December            September and December

Voting rights                                                        None                              None
Preferential liquidation rights                                      None                              None
</TABLE>

A charge has been accreted to  accumulated  deficit to reflect the $0.95 premium
on Series A redeemable  convertible  preferred  shares and the $1.41  premium on
Series B redeemable convertible preferred shares.


                                                                            F-14

<PAGE>

BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000

11.  STOCK OPTION PLAN

The Company  granted  3,000,000  stock options to executives on January 25, 1999
and a further  700,000 on November 27, 2000.  The options vest  immediately  and
have a life of three years and five years respectively.

The following table summarizes  information  about stock options  outstanding at
December 31, 2001.

                                                 Number            Weighted
                                        outstanding and             average
                                      exercisable as of           remaining
      Date of grant   Exercise price  December 31, 2001    contractual life
     --------------   --------------     ---------------   ----------------
   January 25, 1999         $    0.35           600,000             25 Days

   January 25, 1999         $    0.75           600,000             25 Days

   January 25, 1999         $    1.25           600,000             25 Days

   November 27, 2000        $     1.5           700,000             4 years

   January 25, 1999         $    1.75           600,000             25 Days

   January 25, 1999         $    2.25           600,000             25 Days
                                            ----------
                                              3,700,000
                                             ==========

As permitted under SFAS No. 123 "Accounting for Stock Based  Compensation",  the
Company  has  elected  to follow  Accounting  Principles  Board  Opinion  No. 25
"Accounting  for Stock Issued to  Employees"  ("APB No. 25") in  accounting  for
share-based awards to employees,  for options granted.  There is no compensation
charge  arising on the  options  issued  during 1999 as these  options  were not
granted at less than fair market value.  However, the options issued on November
27, 2000 were issued at below fair market value and  resulted in a  compensation
charge of $105,000.

Pro-forma  information  regarding net loss and net loss per share is required by
SFAS No. 123 and has been  determined  as if the Company had  accounted  for its
employee share options and the options  granted by  shareholders  under the fair
value method consistent with the method  prescribed by that Statement.  The fair
value  of  these   options  was  estimated  at  the  date  of  grant  using  the
Black-Scholes   option-pricing   model  with  the  following   weighted  average
assumptions for 2001:

         - risk-free interest rate of 7%;

         - dividend yield of 0%;

         - volatility factor of 100%; and

         - an expected life of the option of three years and five years for 1999
           and 2000 grants respectively.

                                                                            F-15

<PAGE>

BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999


Had the  Company's  option plan and the  options  granted to  stockholders  been
accounted for under SFAS No. 123, the Company's  charge to income for 2001 would
have been $nil  (2000:  $773,903).  Net loss and loss per share  would have been
increased to the following pro-forma amounts.

<TABLE>
<CAPTION>
                                                                                       Year ended          Year ended
                                                                                      December 31,        December 31,
                                                                                          2001                2000
                                                                                      -----------         -----------
<S>                                                                                   <C>                 <C>
       Pro-forma net loss applicable to common shareholders                           ($7,681,978)        ($7,714,254)
       Pro-forma net loss per share applicable to common stockholders
          - basic and diluted                                                              ($0.17)             ($0.19)
                                                                                      ===========         ===========
</TABLE>

12.  WARRANTS

On December 1, 2000 the company  issued  5,311,158  warrants to a third party to
acquire  shares of common  stock at any point  after the date of  issuance at an
exercise price of $1.50. The consideration for these warrants was an undertaking
from the third parties to provide sales and consultancy services with particular
focus on retail and distribution in the Muslim states.  The warrants were valued
in accordance with the guidance in EITF 96-18 "Accounting for Equity Instruments
That Are Issued to Other Than  Employees for Acquiring,  or in Conjunction  with
Selling, Goods or Services" at a value of $1.3 million and recorded as a prepaid
expense in the balance sheet. However, due to changes in the market value of the
shares the value of the warrants has fallen to nil. As a result the $1.3 million
credited to additional  paid-in capital and the remaining  prepaid expenses have
been  reversed in 2001.  The $138,000 that had been expensed to the Statement of
Operations,  $55,000 of which was  recorded in 2000,  has also been  reversed in
2001.

On  December  1,  2001 the  Company  cancelled  the  above  agreement  and a new
agreement  was  executed.  This  agreement  related to the issuance of 2,522,800
warrants to the same third party to acquire  shares of common stock at any point
after the date of issuance at an exercise price of $0.50.  These warrants have a
value of $575,142  of which  $311,535  has been  expensed  in the  Statement  of
Operations in 2001. The balance of $263,607 is recorded as a prepaid expense and
will be released  during  2002.  The value of these new warrants is being spread
over the same period as the  cancelled  options  since these  warrants have been
issued as a  replacement  for the originals due to movements in the market price
of the Company's common stock.

13.  SUBSEQUENT EVENTS

On March 28, 2002,  the Company sold its Norwood Road  Property to Healthy Forum
for  [POUND]295,000,  including  chattel.  The Company has  recorded an interest
bearing  Promissory Note issued by THF for the entire purchase amount, the terms
of which  provided  for  monthly  payments  beginning  in May,  2003 and, at the
issuer's option, payments in the form of shares of THF common stock.


                                                                            F-16

<PAGE>

Item 13. Exhibits and Reports on Form 8-K.

(a)  Exhibits:

3.1 (c)  Articles of Incorporation and Amendments. (4)
3.1 (d)  Articles of Incorporation and Amendments. (5)
3.2 (b)  Bylaws. (2)
4.1      Specimen stock certificate. (1)
10.1     Partnership Agreement dated October 20, 1993, among the Company,
         Costner Industries, Inc., a California corporation, Jack Bitterly
         and Steve Bitterly. (1)
10.2     Asset Purchase Agreement dated October 20, 1993, among the Company,
         the Partnership, Jack Bitterly, Steve Bitterly, Bruce Swartout, U.S.
         Flywheel, Inc., a California corporation and Sunbird
         Technologies, Inc. (1)
10.3     U.S. Flywheel Systems Unit Purchase Agreement dated July 16, 1994,
         between the Company and Costner Industries, Inc. (1)
10.4     Straight Note dated October 21, 1993, between the Company and
         Sunbird. (1)
10.5     Consulting Agreement dated October 20, 1993, between the Partnership
         and Bruce Swartout. (1)
10.6     Asset Purchase Agreement dated May 31, 1996, changing name and
         domicile to Nevada and reverse splitting outstanding capitalization
         and increasing authorized capital. (2)
10.7     Reorganization Agreement between the Company and Famous Sam's. (2)
10.8     Liquidating Trust. (2)
10.9     Recision Agreement. (4)
10.10    Reorganization Agreement between the Company and BioProgress
         Technology. (4)
10.11    Acquisition Agreement - DHA Nutrition (5)
10.12(a) Acquisition Agreement - BioProgress Limited (UK) (5)
10.12(b) Amendment to Acquisition Agreement - BioProgess Limited (UK) (5)
10.13    Employment Agreement - Barry J. Muncaster (5)
10.14    Employment Agreement - James T. C. Longley (5)
10.15    Employment Agreement - Malcolm D. Brown (5)
10.16    Employment Agreement - Edward I. Nowak (5)
10.17    Employment Agreement - Graham Hind (5)
10.18    Professional Services Agreement - The Jade Partnership
         International, Inc. (5)
10.19    Professional Services Agreement - Company and Ormiston-Gore Securities
         Limited (5)
10.20    Professional Services Agreement - BTL and Ormiston-Gore Securities
         Limited (5)
10.21    TruTona Purchase Agreement (5)
10.22    EcoProgress License (5)
10.23    Employment Agreement - Gregory L. Bowers (6)
10.24    Exclusive Evaluation Agreement, dated February 18, 2000 between
         the Company  and the  Fortune  500  company  (6) 10.25  Technology
         Collaboration   Agreement  for  the   Development  of  Non-Gelatin
         Paintballs, dated March 7, 2000 between the Company and JT USA (6)

                                  48

<PAGE>

10.26    Agreement for Supply of Prototype Machine, dated July 24, 2000 between
         the Company and Peter Black (7)
10.27    Machine Supply Agreement, dated July 24, 2000 between the Company
         and Peter Black (7)
10.28    Patent License Agreement, dated July 24, 2000 between the Company
         and Peter Black (7)
10.29    Guarantee by BTL in favor of Peter Black, dated July 24, 2000 (7)
10.30    Option Agreement - Barry J. Muncaster (7)
10.31    Option Agreement - Edward Nowak (7)
10.32    Option Agreement - Gregory L. Bowers (7)
10.33    Option Agreement - Graham R.M. Hind (7)
10.34    Option Agreement - James T.C. Longley (7)
10.35    Option Agreement - Larry C. Shattles (7)
10.36    Option Agreement - Malcolm D. Brown (7)
10.37    Stock Purchase Agreement - Fusion Capital (7)
10.38    Premises lease - Hostmoor property (8)
10.39    Agreement to lease - Hostmoor property (8)
10.40    Agreement for Supply of Prototype Machine, dated July 10th, 2001
         between the Company and Farmasierra, S.A. (8)
10.41    Machine Supply Agreement, dated July 10th, 2001 between the Company and
         Farmasierra, S.A. (8)
10.42    Patent License Agreement, dated July 10th, 2001 between the Company and
         Farmasierra, S.A. (8)
10.43    Film Supply Agreement, dated July 10th, 2001 between the Company and
         Farmasierra, S.A. (8)
10.44    Consultant Supply Agreement, dated July 10th, 2001 between the Company
         and Farmasierra, S.A. (8)
10.45    2002 Common Stock Offering of up to 600 units, including warrants (8)
99.1     Letter to commission pursuant to temporary Note 3T

(1)   Filed as an exhibit to the Company's  Registration Statement on Form 10-SB
      dated August 23,1994, or October 21, 1994 (Registration No. 0-24736).
(2)   Filed as an  exhibit  to the  Company's  Form  10-KSB  for the year  ended
      December 31, 1995.
(3)   Filed as an  exhibit  to the  Company's  Form  10-KSB  for the year  ended
      December 31, 1996.
(4)   Filed as an  exhibit  to the  Company's  Form  10-KSB  for the year  ended
      December 31, 1997.
(5)   Filed as an  exhibit  to the  Company's  Form  10-KSB  for the year  ended
      December 31, 1998.
(6)   Filed as an  exhibit  to the  Company's  Form  10-KSB  for the year  ended
      December 31, 1999.
(7)   Filed as an  exhibit  to the  Company's  Form  10-KSB  for the year  ended
      December 31, 2000.
(8)   Filed herewith.

(b)   Forms 8-KSB: None.

                                       49

<PAGE>

                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned,  thereunto duly authorized, in the City of Cambridge,
United Kingdom as of the 16th day of April, 2002.

BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
(Registrant)


                                /s/ Barry J. Muncaster
                                -----------------------------------------------
                                Barry J. Muncaster, Chief Executive Officer
                                and Chairman

                                /s/ James T.C. Longley
                                -----------------------------------------------
                                James T.C. Longley, Chief Financial
                                and Accounting Officer, Secretary and Treasurer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the  following  persons on behalf of the  registrant in
the capacities indicated as of the 16th day of April, 2002.


                                /s/ Barry J. Muncaster
                                ------------------------------------------------
                                Barry J. Muncaster, Director

                                /s/ James T.C. Longley
                                ------------------------------------------------
                                James T.C. Longley, Director

                                /s/ Malcolm Brown
                                ------------------------------------------------
                                Malcolm Brown, Director

                                /s/ Robert G.M. Hind
                                ------------------------------------------------
                                Robert G.M. Hind, Director

                                /s/ Gregory L. Bowers
                                ------------------------------------------------
                                Gregory L. Bowers, Director

                                /s/ Larry C. Shattles
                                ------------------------------------------------
                                Larry C. Shattles, Director