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 [FEE REQUIRED]
     For the fiscal  year  ended:  December  31, 1998
     OR
[ ]  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

Commission file number: 0-24736

                   BioProgress Technology International, Inc.
             (Exact name of registrant as specified 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)

Registrant's  telephone number,  including area code: (770) 641-0264;
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)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements  for the  past 90 days:  Yes X No ____

Indicate by check mark if disclosure of delinquent  filers  pursuant to Rule 405
of Regulation S-K is not contained herein and will not 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-K or any amendment to this
Form 10-K. [ ]

State the aggregate market value of the voting stock held by  non-affiliates  of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold,  or the average bid and asked  prices of such
stock,  as of a specified  date  within 60 days prior to the date of filing:  On
June 7, 1999,  the closing  inside bid and asked prices for the shares of common
stock of registrant,  which is the sole voting stock  outstanding of registrant,
were  $1.28 and $1.43,  respectively.  On that  date,  there were  approximately
33,052,137 shares of common stock outstanding. Affiliates held 16,484,066 shares
of this stock;  thus,  the  aggregate  market  value of the voting stock held by
non-affiliates   approximated   $22,335,910.   Indicate  the  number  of  shares
outstanding of each of the registrant's classes of common stock as of the latest
practicable date: As of June 7, 1999, there were approximately 33,052,137 shares
outstanding.

Registrant had nominal revenues during fiscal 1998.

                       DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the documents incorporated by reference and the Part of this Form
10-KSB into which the document is incorporated: None.

<PAGE>

                                     PART I.

Item 1. Description of Business:

History:  BioProgress  International,  Inc. (the "Company"), was incorporated in
California  on March 5, 1990.  Subsequently,  shares of the common  stock of the
Company  ("Common  Stock") were  distributed to the  shareholders  of the parent
corporation then owning the Company after registration with the U.S.  Securities
and  Exchange  Commission  ("Commission").  The Company  changes its domicile to
Nevada in 1997.

Subsidiary Acquisitions:

     Acquisition  of  BioProgress  Technology,  Inc.:  On October 30, 1997,  the
Company  entered into a letter of intent with  BioProgress  Technology,  Inc., a
Colorado corporation ("BioProgress Technology"),  which was followed on November
17, 1997, by a formal agreement (the  "Reorganization  Agreement").  Pursuant to
the  Reorganization  Agreement,  the  Company  agreed  to  acquire  all  of  the
outstanding  capital stock of  BioProgress  Technology in exchange for 4,000,000
post-split shares of Common Stock.

     Distributorship  and  Acquisition  Agreement  with  BioProgress  Technology
Limited   (UK):  In   conjunction   with  the  execution  and  delivery  of  the
Reorganization Agreement, the Company 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"), which gave the Company the
option of  acquiring  all or any part,  on a pro rata  basis,  of the issued and
outstanding  proprietary interest of BTL on or before June 30, 1998. The Company
was  required  under the BTL  Option  Agreement  to issue one and 1/2  shares of
Common Stock for each share outstanding of BTL, which then had 10,100,000 shares
outstanding;  thus,  if the option had been  exercised in full and in accordance
with the  original  terms of this  agreement,  the  Company  would  have  issued
15,150,000  shares of Common  Stock.  BTL was  required to have had no more than
10,100,000 shares outstanding,  and the Company was required to have had no more
than  5,000,000  shares of  Common  Stock  issued  and  outstanding  and to have
completed  or be in a  position  to have  completed  the sale of such  number of
shares  of  Common  Stock at a price of no less  than  $5.00  per share so as to
generate no less than  $4,000,000 net of all costs.  The terms and conditions of
the BTL Option  Agreement  were not met,  however,  and the Company and original
signators  elected to amend the agreement and go forward with the acquisition of
BTL by the Company.

On June 30, 1998, the Company and BTL amended the BTL Option  Agreement.  First,
the maximum number of shares BTL was allowed to have  outstanding at the closing
date was raised from 10,100,000 to 16,000,000.  Second, the requirement that the
Company  have  no  more  than  5,000,000  shares  of  Common  Stock  issued  and
outstanding and to have completed or be in a position to have completed the sale
of such  number of shares of Common  Stock at a price of no less than  $5.00 per
share so as to  generate  no less than  $4,000,000  net of all costs was waived.
Third,  the  Company  undertook  to  assume  up to a maximum  of  $1,000,000  in
liabilities,  satisfying  such  through the  issuance of shares of Common  Stock
valued at the inside bid price on the closing date. The closing date was changed
from June 30,  1998,  to no later  than March 31,  1999.  The  Company  acquired
approximately 62% of BTL on November 11, 1998, and acquired the remaining 38% of
BTL on December 31, 1998,  issuing 22,818,446 shares of Common Stock as the sole
consideration for the acquisition.

     Acquisition  of DHA Nutrition  Limited (UK): On July 31, 1998,  the Company
agreed to acquire 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.  (These shares were restricted from sale,  assignment or
disposal  for 18 months  beginning  July 31,  1998.) The  acquisition  closed on
August  12,  1998.  The  number  of  shares  which  the  Company  issued  in the
acquisition  of DNL may be  increased in the event that DNL's  cumulative  gross
revenues in respect of its feed supply  sales exceed  L1,500,000  (STERLING)  in
the period to  September  30,  1999,  and exceed  L5,000,000  (STERLING)  in the
period  beginning  October 1, 1999,  and ending  September  30,  2000.  In these
events,  the Company  will issue to the former DNL  shareholders  an  additional
200,000  and  400,000  shares  of Common  Stock,  respectively.  Further  and in
addition to the foregoing  shares, if DNL's cumulative gross revenues in respect
of its food supply sales exceed  L150,000  (STERLING) in the period to September
30, 1999,  and exceed  L500,000  (STERLING) in the period  beginning  October 1,
1999,  and ending  September  30,  2000,  the Company  will issue an  additional
100,000 and 200,000 shares of Common Stock, respectively.

The sole asset of DNL on the date of  acquisition  was an agreement  with Martek
Biosciences Corporation ("Martek"), a publicly-held corporation organized in the
United  States whose  securities  trade on the NASDAQ  System  maintained by the
National  Association of Securities Dealers,  Inc. DNL is working with Martek to
develop the market in the United  Kingdom  for the use of  Martek's  nutritional
oils in infant  formula,  vegetarian  foods,  dietary  supplements and agro feed
markets. Martek has identified and patented DHA (docosahexaenoic acid) producing
varieties of micro algae (sea  plankton),  and has developed  techniques for the
production  of both a powder  form and an oil form of DHA.  The oil form of DHA,
management  feels, is an excellent  candidate for delivery using the film system
developed by BTL.

<PAGE>


On closing of the acquisition of DNL by the Company, Mesrrs. Muncaster,  Longley
and  Brown  were  named to the  board of DNL and  assumed  analogous  officerial
positions  with DNL as they maintain with the Company and BTL.  Correspondingly,
the principal shareholder of DNL, Mr. Graham Hind, was named to the board of the
Company and was appointed  Vice-President  of Sales and Marketing of the Company
and BTL.

Martek has granted DNL exclusive DHA nutrition rights to develop a meat concept,
and on July 23, 1998,  DNL entered into a development  agreement  with ABN Foods
Limited,  which is one of  Europe's  largest  feed  companies,  to develop  this
opportunity with the support of several U.K retailers.

The  Company  horizontally  expanded  its  product  line as a result  of the DNL
acquisition,  and gained direct access to several leading retailers in the U.K.,
which,  management feels, will offer potential to expand the customer base for a
proposed line of vegetarian soft-capsule dietary supplements by BTL.

Product Acquisition and License Agreements:

     Product  Acquisiton from Trutona  International:  On February 15, 1999, the
Company   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. The Company paid Trutona
$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 $.40 per share,  with
the  remainder  payable  on or before  December  31,  1999,  through  either the
delivery  of cash or of  additional  shares of Common  Stock  valued at $.40 per
share, or any combination of the two at the option of the Company.  The products
acquired  include an ultra thin,  flushable and  biodegradable  line of feminine
sanitary napkins which were recently  selected for a "Millennium  Product" award
under a program  initiated  by the  British  Government  to  promote  innovative
technological achievements. Trutona is an affiliate of the Company since Messrs.
Muncaster,   Longley  and  Brown  are   directors,   officers  and   significant
shareholders of each entity.

     License to Consolidated  EcoProgress  Technologies:  On March 23, 1999, the
Company completed the sale of a license to Consolidated EcoProgress Technologies
("EcoProgress"),  a Canadian  company with  securities  traded on the  Vancouver
Stock  Exchange.  The license was sold for the sum of U.S.  $1,500,000 and gives
EcoProgress the exclusive right to manufacture,  sell and distribute in the U.S.
a  line  of  flushable  and  biodegradable  disposable  products  employing  the
intellectual  property that the Company acquired from Trutona.  EcoProgress paid
$380,000  cash at closing  and the  remaining  $1,120,000  was paid  through the
issuance of 1,400,000  shares of free trading  common stock in EcoProgress at an
agreed  price of $.80 per  share.  The sale  allowed  the  Company to recoup the
entire price paid by the Company to Trutona for the  technology.  In addition to
the  consideration  paid at closing  the  Company is entitled to receive up to a
maximum  of  $3,500,000  by  way  of  royalty  on  gross  revenues  achieved  by
EcoProgress.  Contemporaneous  to the completion of the sale to EcoProgress  the
Company and  EcoProgress  executed a research  and  development  agreement  that
provides for the Company to exclusively  develop products subject of the license
for a minimum term of two years.

Consulting Agreements:

     Jade Partnership  International Consulting Agreement. On April 1, 1998, the
Company entered into a consulting and option agreement with The Jade Partnership
International,  Inc., a Delaware corporation ("Jade") owned by affiliates of the
Company. Under this contract,  Jade assisted the Company in obtaining equity and
debt  financing,  and  provided  general  business  management,   administration
services,  international  licensing  and sales and  marketing  strategies.  This
agreement  provided that the Company was to have paid $50,000 per month as a fee
to Jade which, at the option of Jade, was  convertible  into common stock of the
Company at a price of $.28 per share,  the then market price.  The agreement was
terminated during the latter part of 1998, with the Company agreeing to pay Jade
the sum of $356,595.68 in fees.  Jade elected to convert this amount into shares
of Common Stock,  agreeing to receive 1,273,556 shares on December 21, 1998. The
stock will be issued when the Company is again  current in its reports  with the
Commission.

     Ormiston-Gore Securities Consulting Agreement with the Company. On April 1,
1998,  the  Company   entered  into  a  financial   consulting   agreement  with
Ormiston-Gore  Securities Limited ("OGSL"),  a Bahamian investment and financial
services company. Under this contract, OGSL provided services for the Company in
obtaining  equity and debt  financing.  All  services  had been  rendered  as of
November 12, 1998.  The Company  agreed to pay OGSL a minimum fee of $10,000 per
month which,  at the option of OGSL,  was  convertible  into common stock of the
Company at a price of $.28 per share,  the then market price. The Company agreed
to pay OGSL the sum of $171,023.40 in fees.  OGSL elected to convert this amount
into shares of Common Stock,  agreeing to receive 610,798 shares on December 21,
1998.  The stock will be issued when the Company is again current in its reports
with the Commission.

<PAGE>


     Ormiston-Gore  Securities  Consulting Agreement with BTL. On April 1, 1998,
BTL  entered  into a  financial  consulting  agreement  with  OGSL.  Under  this
contract,  OGSL provided services for BTL in obtaining equity and debt financing
and also loaned BTL  $230,746.36.  All services had been rendered as of November
12, 1998. The Company agreed to pay OGSL the sum of $230,746.36 in settlement of
the loan made by OGSL to BTL. OGSL elected to convert this amount into shares of
Common Stock at a price of $.28 per share,  the then market  price,  agreeing to
receive  824,094  shares on December 21, 1998. The stock will be issued when the
Company is again current in its reports with the Commission.

Business  Conducted  by the  Company  and its  Subsidiaries:  The  Company  is a
development stage company engaged in the research,  development,  manufacturing,
marketing,  sales  and  distribution  of  products  that use water  soluble  and
biodegradable  films.  During 1998, the Company  focussed on the development and
commercialization  of its unique and  proprietary  process,  the  XGel(TM)  Film
System  ("XGel(TM)  FS").  The XGel(TM) FS is used to produce soft capsules that
are  free-from  animal  by-products;  gelatin in  particular.  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 (bath and aromatherapy oils).

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, the Company is of the opinion
that this  position  is  changing.  Following  the  outbreak in Europe of Bovine
Spongiform Encephalopathy ("BSE"), or "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.  During 1997,  twelve deaths from CJD were reported in
Great Britain.

The Company  believes  that its XGel(TM) FS is the only viable  alternative  for
consumers who are anxious to switch to animal-free products in the global market
for soft capsules. In addition,  the XGel(TM) FS opens up a substantial untapped
market  for  animal-free  soft  capsules  that  exists  amongst  vegetarian  and
religious groups. These groups, because of belief or culture,  refuse to consume
gelatin  derived  from  cows or pigs,  or in some  cases,  from any  source.  In
addition,  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 its unique and  revolutionary  design  delivers  significant
advantages  in  the   manufacturing   process  when   compared  to   traditional
encapsulation  processes.  One such  advantage  is the  elimination  of  capital
intensive  equipment  employed to mix and heat gelatin  prior to its delivery to
the  encapsulating  machine.  A further  example of the XGel(TM) FS's efficiency
lies in its ability to produce soft capsules  that do not require  drying before
being packed.  Using traditional methods of manufacture,  soft capsules may take
up to 48 hours to dry, thereby  requiring a substantial  investment in inventory
financing and  resources.  The Company  believes its XGel(TM) FS to be the first
revolutionary  development within the encapsulation  industry since it was first
established  in 1935.  The Company has  identified  several new and  substantial
market  opportunities  that can benefit  from the  XGel(TM) FS and which are not
available to traditional soft capsule  manufacturers  because of the limitations
imposed by the use of gelatin. The Company's strength lies in innovation and the
ability to  commercialize  innovative  products.  The Company is  committed to a
research  and  development  program  targeted to introduce  enhancements  to the
XGel(TM) FS on a regular  basis,  which will expand the  opportunities  for both
horizontal and vertical penetration of the Company's target markets.

During 1998 the Company made two acquisitions.  The first acquisition,  effected
July 31, 1998,  was the purchase of the entire  issued share  capital of DNL, as
discussed above. DNL is a U.K. based company having certain  exclusive rights to
distribute  and develop the market for certain  products of Martek  Biosciences,
Inc.  (NASDAQ:  MATK).  Two such products are Biomass and DHA  (Docosahexaenoic)
oil.  These  products  have the benefit of  substantial  clinical  evidence that
supports their critical  importance as additives to the diet of vegetarians  and
pregnant  mothers.  For  example,  in over  fifty  countries  around  the globe,
Biomeal, a derivative of Biomass,  is a mandatory additive to baby formula.  The
strategy  behind the acquisition of DNL is to provide the Company with access to
unique  and  important  ingredients,  which,  when  encapsulated  in  ingestible
XGel(TM) Film, will  facilitate the world's first full range of vitamin,  herbal
and mineral  supplement  products for  vegetarians.  During  October  1998,  the
Company  executed a  technology  collaboration  agreement  with United  Biscuits
Frozen & Chilled Foods ("UBFCF"),  a division of United Biscuits, a $3.6 billion
food  producer  based in the U.K.  UBFCF is the  owner of the  leading  brand of
vegetarian  prepared foods within the U.K.,  generating  brand sales revenues in
excess of $75 million.  The agreement provides for the Company to develop a full
line of vegetarian dietary  supplements to be sold in the U.K. under the UBFCF's
brand name. The Company is exploring the possibility of introducing the proposed
branded range of vitamin,  herbal and mineral supplement  products to the market
in North  America.  In late 1998 the  Company  effected  its second  acquisition
within the year by completing the  acquisition of BTL, also as discussed  above.
BTL was and is responsible for all research and development  activities  related
to the XGel(TM) FS.

On February 15, 1999, the Company  completed the purchase of certain patents and
intellectual  property  rights relating to water  dispersible and  biodegradable
products from Trutona, as discussed above. The patents and intellectual property
purchased from Tutrona have a symbiotic  relationship to the Company's  patents,
intellectual property and knowledge base and, together,  position the Company as
a leading technologist in the field of water soluble and biodegradable composite

<PAGE>


products.  Subsequently,  on March 23, 1999, the Company completed the sale of a
license to EcoProgress  which permits  EcoProgress to use certain of the patents
and  intellectual  property  purchased from Trutona in a broad range of products
including,  but not limited to,  flushable and  biodegradable  feminine  hygiene
pads,  biodegradable  diapers for infants,  flushable and biodegradable pads for
incontinent  adults,  and water  soluble  gowns and  utensils for use in medical
applications.  The  EcoProgress  license  expressly  excludes  all rights to the
Company's  XGel(TM) FS and  resultant  products.  EcoProgress  has several major
Canadian  retailers as its  customers,  including  Overwaitea,  London Drugs and
Safeway.

This year has been one of  foundation  for the  Company.  Many  major  companies
operating in the world's largest markets have approached the Company for details
of the  XGel(TM) FS and for the  purpose of  exploring  possibilities  for joint
ventures,  licenses,  purchase of XGel(TM) FS equipment,  or  co-development  of
products for sale through their  existing  channels.  The  Company's  management
intends to explore all such  opportunities  in the search for maximum  value for
its shareholders.

During the year, the Company  acquired many of the physical and human  resources
it  needs to  commercialize  the  XGel(TM)  FS,  and to  prepare  the  necessary
administration,  manufacturing,  marketing, sales and distribution resources and
systems needed to reliably  deliver high quality and cost effective  products to
its targeted  customers.  Part of the preparation  program  included  delivering
sample products of the Company's  non-ingestible range to large and medium sized
target  customers.  Each potential  customer  subjected the Company's samples to
stability  and  performance  testing.  The  results of each such test showed the
Company's  samples to either meet or exceed the performance  characteristics  of
comparable  gelatin  based  products.  The Company has  commenced the rollout of
non-ingestible soft capsules and anticipates having its range of ingestible soft
capsules completed during the final quarter of 1999.

Description of Products:  The Company's  primary focus is to  commercialize  its
XGel(TM)  FS.  Products  currently  in  development  that are not related to the
XGel(TM) FS include flushable and biodegradable pouches for colostomists.  These
and other products, which are subjects of the Company's research and development
programs,  are not expected to  contribute  to the  Company's  planned  revenues
during the current year.

     XGel(TM) FS: The Company's 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 in the final stages of its development program.

The Company  believes  that its  XGel(TM)  FS has  significant  advantages  over
traditional  gelatin based soft capsule production  machinery.  These advantages
are: Lower Raw Material Costs:  The cost of XGel(TM) Film per tonne 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.  Reduced  Capital
Investment  and  Manpower:  The  availability  of XGel(TM) Film in a film format
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. The resultant savings to the Company in terms of capital
investment  and  human  resources  compared  to  those  of its  competitors  are
significant.  Multi-Task  Encapsulating  Head: A modular  design of the filling,
sealing,  and cutting head makes it possible to produce  capsules having a range
of shapes and sizes with differing  fills during the same  encapsulation  cycle.
Traditional  machinery  cannot  deliver  this  flexibility.  Improved  Speed  of
Processing:  To achieve the correct  viscosity for processing,  gelatin requires
wide changes in temperature prior to it 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.  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 1 hour to dry.

     XGel(TM) FS - Non-Ingestible  Products:  This unique process is the subject
of an international patent application.  The raw material used in the process is
supplied in a film format  (XGel(TM)  Film) and is made from a water soluble and
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 sensual,  relaxing,
refreshing or invigorating ambience to the bathroom.

The Company is working with a leading  producer of enzymes and bacteria,  with a
view to developing a novel delivery system for use in composting,  agro-chemical
and fat removal environments.

<PAGE>


The Company has  identified  soft  capsules  produced  using the  XGel(TM) FS as
potentially superior performing paintballs,  as used in the fast growing leisure
pursuit.  The Company is conducting  research to determine how the advantages of
the XGel(TM) FS can be best applied to the paintball industry.

     XGel(TM)  Film  System  -  Ingestible   Products:   The  Company's   second
technology,  which is the subject of a patent application,  relates to materials
that  utilize all of the benefits of XGel(TM) FS, but which can be made from FDA
approved  natural  and  sustainable  resource  materials,   and  are,  therefore
ingestible.  These materials are code named ProTex. ProTex is produced in a film
format that  enables it to be  processed  using  similar  machinery  as used for
non-ingestible soft capsules. Using proprietary techniques,  ProTex 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.  ProTex  film is  processed  using the
XGel(TM) FS.

The Company has under development a comprehensive  range of vitamin,  herbal and
mineral supplements.  The Company does not intend to release for sale any of its
ingestible  products  until such time as they can be produced  in  manufacturing
premises built to GMP (Good Manufacturing Practice) standards. The Company is in
discussions  with U.K.  based  property  developers  with a view to having a GMP
facility  constructed to its specifications for subsequent occupancy under lease
during the final quarter of this year

Markets:  The gelatin  capsule  market is divided  into two  sectors:  "hard" or
"soft,"  according  to the  nature  of the  capsule  shell.  Hard  capsules  are
manufactured  in two pieces and then filled with  either,  a powdered  dose or a
liquid dose "washed" with  nitrogen.  These  processes  are  expensive,  and the
resultant  capsules  are  used   predominantly  to  carry  orally   administered
medications and drugs.  Soft capsules are formed and filled  simultaneously  and
predominantly  carry liquid fills which enables their use in a far wider variety
of products,  including pharmaceutical,  vitamin, herbal and mineral, toiletries
and paintballs.

The gelatin soft capsule market is currently dominated by two companies,  namely
R. P.  Scherer  Inc.,  (a  subsidiary  of  Cardinal  Health,  Inc.),  and Banner
Pharmacaps Inc. (a subsidiary of Sobel NV) Recently, R. P. Scherer Inc. ("RPS"),
was acquired by Cardinal Healthcare, Inc, for $2.4 billion. RPS has headquarters
in  Troy,  Michigan,  and  24  operating  subsidiaries.  Sobel  NV  is  a  Dutch
organization with a number of subsidiaries,  including Banner Pharmacaps,  Ltd.,
Banner Pharmacaps Inc., and Sobel Pharma BV.

The Company  believes  that its  XGel(TM) FS  gelatin-free  soft capsule will be
extremely  attractive to vegetarians  and certain  ethnic and religious  groups,
such as Hindus and Muslims.  These groups represent large potential markets. 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.

The value of a soft capsule rests in its  contents.  The shell is simply 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  suppliers to the proprietors of main
brands.

Soft capsules reach consumers via a multitude of distribution  channels.  In the
United  States  dietary   supplements  and   pharmaceuticals  are  sold  through
traditional  OTC  outlets,  as  well  as  "in-store"  locations  at  large  food
retailers.  The Natural Food and Healthcare  market,  which in the United States
grew by 23% to $13 billion  during  1997,  is serviced by around 8,000 small and
medium sized stores that tend to purchase  from national  distributors,  such as
Tree of Life,  Cornucopia and Lotus Light.  Direct mail suppliers  account for a
small  but  important  part of the  market.  In  general  terms,  the  sales and
distribution  channels  to be used by the  Company  are mature and can be easily
identified.

The market for dietary  supplements in the United Kingdom was approximately $500
million in 1997.  The  leading  producer  in the United  Kingdom is Peter  Black
Healthcare Limited, which accounts for approximately 30% of the entire market.

The market for soft  capsules in the  pharmaceutical  market is vast and global.
The Company intends to seek strategic alliances with pharmaceutical companies to
enter this high risk and high cost of entry market.

Marketing and Sales:

     Marketing:  The Company's initial marketing and sales strategy is to create
market expansion by facilitating  animal free soft capsules for consumers within
the vegetarian and religious groups referred to earlier. The second phase to the
Company's  plan is to offer animal free soft  capsules to existing  consumers of
gelatin  based soft  capsules.  In addition,  the Company  anticipates  that new
markets for its products will be developed as future versions of its XGel(TM) FS
are proven.

<PAGE>


The Company has adopted a dual approach to commence sales of non-ingestible soft
capsules.  First,  the  Company  will  sell a  range  of  branded  toiletry  and
aromatherapy  products to the Natural Food and  Healthcare  market in the United
States and  Western  Europe.  The  Company is in  discussions  with  established
distributors  who  currently  service in excess of 6,000 retail  outlets  within
these territories. The second approach is to produce a similar range of products
for some of the world's  leading  retailers  for resale  under  their  own-brand
labels.  The  Company is  currently  in  discussions  with major  retailers  who
collectively have in excess of 3,500 outlets around the globe.

     Sales: The Non-Ingestible  Range: The Company is in discussion with several
major  retail  organizations  and each has  expressed  an interest in a range of
private label  gelatin-free soft capsules for toiletries.  Under a private label
scenario,  the Company will produce soft capsules containing oils and fragrances
specified by the customer. Many opportunities exist for expansion of the private
label market; particularly in the rapidly expanding Natural Foods and Healthcare
market evident in the USA and Western Europe.

     Sales:  The  Ingestible  Range:  The  Company  has  executed  a  Technology
Collaboration  Agreement  with UBFCF,  a part of the United  Biscuits plc group,
which enjoys annual revenues of $3.6 billion.  UBFCF is the owner of the leading
brand of vegetarian  prepared foods for the U.K.  market,  where it is the brand
leader by a large  margin.  The  Company  approached  UBFCF  with the idea that,
because of its dominant market position,  the brand would be the perfect vehicle
through  which to launch  the first full line of  dietary  supplements  designed
specifically for vegetarians.  The Company, because of its unique technology, is
the only company  capable of making such a  proposition.  Under the terms of the
Technology  Collaboration  Agreement the Company has with UBFCF, the Company has
been asked to compile a range of dietary  supplements  that  deliver the perfect
cocktail to address the  shortfall  of nutrition  evident in a vegetarian  diet.
This task will be carried out by the Company's subsidiary, DNL.

Certain  formulations  of XGel(TM)  Film will enable its use as a drug  delivery
system. The inherent difficulty of entering the pharmaceutical industry, and its
complex  nature,  behoves  the  Company  to seek  allegiances  with  established
organizations.  The Company has appointed a patent  strategist to ensure maximum
protection is achieved  with regard to this  particular  sector,  and intends to
employ consultants with specialist  knowledge of the industry who have access to
decision makers.  It is too early in the Compan s development to comment in more
detail on the possibilities within this market sector.

Manufacturing:  During the year, the Company  commissioned  its XGel(TM) FS at a
temporary manufacturing facility.  Commissioning is now complete and the Company
has occupied a plant in March,  Cambridgeshire,  England,  where it will produce
its non-ingestible range of products.

The Company's  prime costs in producing soft capsules are comparable to those of
gelatin capsule manufacturers; however, the capital investment required per line
of  XGel(TM)  FS is  significantly  less  than  gelatin  systems  (approximately
one-fifth).  In addition,  operational costs are dramatically  reduced using the
XGel(TM)  FS  by  reason  of  the  elimination  of  the  need  to  dry  capsules
post-production.

Research and Development: The XGel(TM) FS has potential for exploitation in many
new markets.  The Company is committed  to a research  and  development  program
intended to produce new products for  self-exploitation  and, in some cases, for
third parties that have the resources  needed to penetrate  specialized and high
entry cost markets.

The research and  development  program  seeks 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 formulatory work, the Company aims to expand the processing
abilities of the XGel(TM) FS.

Throughout the research and development program specialist centers of excellence
are deployed and their expertise used to optimize materials and processes.

 Y2K Disclosure: The Company has conducted a review of its systems and processes
to  determine  what affect,  if any,  the Y2K  computer  problem may have on its
operations.  The Company is reasonably assured that no material  disruption will
occur to its internal  systems and  procedures.  The  Company's  suppliers  have
provided  the  Company  with  written  comfort  that no material  disruption  is
envisioned to their  operations.  The Company has made no effort to validate any
of the  statements  made by its  suppliers  in this  regard,  therefore,  it can
provide no assurance that disruption will not occur.  Furthermore,  in the event
that disruption does occur the Company is unable to predict the materiality that
such disruption may have on its operations.

Item 2.  Description  of Property:  The Company,  as of the date of this report,
owned no real or  personal  property,  tangible  or  intangible,  other than the
shares of its wholly-owned  subsidiaries.  The executive  offices of the Company
are being  provided by The Jade  Partnership,  a significant  shareholder of the
Company owned by several of the executive officers and directors of the Company,
free of charge on a  month-to-month  basis.  These  offices  are located at 9055
Huntcliff  Trace,  Atlanta,  Georgia,  30350-1735.  The telephone number at this

<PAGE>


address is (770) 641-0264.  BioProgress  Technology,  BTL and DNL are leasing at
market rates from a third party approximately  15,000 square feet of laboratory,
executive office,  manufacturing and storage facilities at Unit 1, Norwood Road,
March,  Cambridgeshire,  United  Kingdom PE15 8QD. The telephone  number at this
address is 011-44-1354-655-674.

Item 3. Legal  Proceedings:  No material legal  proceedings to which the Company
(or 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, to management's
knowledge)  is a party or to which the  property  of the  Company  is subject 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
meetings of security holders during the period covered by this report.

Item 5. Market for Common Equity and Related Shareholder  Matters: As of June 8,
1999,  there were  approximately  33,052,137  shares of Common  Stock issued and
outstanding,  which were held of record by approximately 308  shareholders.  The
Common  Stock is  currently  quoted  on the  Bulletin  Board  maintained  by the
National Association of Securities Dealers, Inc., under the symbol "BPRG." There
was no trading in the Common Stock prior to August,  1996.  The following  table
sets forth the range of high,  low and closing bid and asked prices per share of
the Common  Stock as  reported  by  National  Quotation  Bureau,  Inc.,  for the
quarterly period indicated.

                                        Closing
Calendar Quarter     High Bid  Low Bid    Bid     High Ask  Low Ask  Closing Ask
----------------     --------  -------    ---     --------  -------  -----------

September 30, 1996   $ 4.50    $ 1.00   $ 4.375   $ 5.50    $ 2.00    $ 5.375
December 31, 1996      1.875      .75     1.75      2.25      1.25      2.25
March 31, 1997          .75       .75      .75      1.25      1.25      1.25
June 30, 1997          1.00      0.125    0.1875    1.25      0.375     0.4375
September 30, 1997     0.21875   0.125    0.1875    0.46875   0.25      0.4375
December 31, 1997      1.375     0.125    1.25      2.00      0.375     1.375
March 31, 1998         1.375     0.8125   1.125     1.75      0.90625   1.25
June 30, 1998          0.96875   0.25     0.5       1.125     0.46875   0.53125
September 30, 1998     0.65625   0.375    0.375     0.6875    0.46875   0.46875
December 31, 1998      0.4063    0.22     0.27      0.4688    0.25      0.31
March 31, 1999         0.8438    0.26     0.78      0.92      0.30      0.83

The above prices  represent  inter-dealer  quotations  without  retail  mark-up,
mark-down or commission,  and may not necessarily represent actual transactions.
Further,  the above prices have been  adjusted to reflect two  previous  reverse
share splits.  On June 7, 1999,  the closing inside bid and asked prices for the
Common Stock were $1.28 and $1.43, respectively.  On that date there were eleven
market makers publishing quotes.

The Company has paid no dividends on the Common Stock since  inception  and does
not expect to pay dividends in the foreseeable  future.  There are, however,  no
restrictions on the payment of dividends.

Item 6. Management's  Discussion and Analysis of Financial Condition and Results
of Operations:

Results of Operations: The Company had no operations,  revenues or income during
1996 and 1997,  and only nominal  revenues or income  during  1998.  BioProgress
Technology  was organized in late 1997 and was in the  development  stage during
1997 and 1998. BTL and DNL were also in the development  stage during the period
covered by this report.  A full  description of the  development  efforts of the
Company,  BioProgress  Technology,  BTL and DNL is set forth above under Item 1.
The Company's expenses on a consolidated basis with its subsidiaries  during the
period covered by this report were  administrative and organizational in nature.
Due to the foregoing, no meaningful comparison may be made between fiscal years.

Liquidity and Capital Resources: During the first six months of 1999, Management
enacted a string of  measures  to improve the  Company's  liquidity  and capital
resources and prepare it for a switch in focus from  research &  development  to
production, marketing & sales.

Relocation of facilities:  Upon completion of the initial  commissioning  of its
XGel(TM) Film System the Company vacated its temporary  factory and relocated to
premises in March,  Cambridgeshire,  England, a low cost zone. At the same time,
the Company  relocated  its  research &  development  laboratories  from the St.
John's  Innovation  Centre,  Cambridge,  thereby  consolidating  all operational
activities in the one facility.  This  consolidation  of operations has produced
significant   savings  in  fixed   costs,   reduced  the  costs  of  travel  and
communication, and generally increased the efficiency of operations.

<PAGE>


Sale of license:  The sale of the license to Ecoprogress  produced $100,000 cash
and a cash  receivable of $346,000 due for payment  before the end of July 1999.
Additional  consideration  in the form of 1,066,666  shares of  Ecoprogress  was
received in respect of the license.  Within each  calendar  month the Company is
permitted to sell Ecoprogress shares to realize $100,000, without the consent of
Ecoprogress. Subject to serving 30 days prior notice on Ecoprogress, the Company
may sell such number of Ecoprogress  shares it deems  necessary to meet its cash
requirements.  In  addition,  during the third  quarter of this year the Company
expects  Ecoprogress to commence  paying  royalties to the Company in respect of
sales made by it of the Trutona products under license.

Sale of Preference Shares: The Company has made significant  improvements to its
liquidity and capital  resources by the sale of Preference  Shares to accredited
investors. In the first six months of this year the Company received proceeds of
$1,074,475 from the sale of Preference Shares.  These proceeds have been used to
reduce  trade and short  term  liabilities  to a nominal  value and for  general
working capital purposes,  including research & development and the construction
of plant and  machinery.  Management is confident that the sale of the Company's
Preference  Shares to  accredited  investors  will continue at times and in such
amounts as Management  deems necessary to finance the Company's  working capital
requirement for the next twelve months.

Conversion of debt to equity: As soon as is practicable,  the Company intends to
complete  the  agreements  it  has  secured  with  the  Jade   Partnership   and
Ormiston-Gore  Securities  Limited  to  convert  accrued  debt to  equity in the
Company.

The Company is in discussion  with several  parties  regarding  joint  ventures,
license agreements and distribution  agreements for its XGel(TM) Film System and
derived  products.  In  addition,  the  Company is engaged in  discussions  with
institutional  investors and with industry peers  regarding an investment in the
Company.

Management  believes  and is  confident  that  the  aforementioned  actions  and
activities by themselves will generate sufficient cash to fully meet its working
capital requirement for the twelve months following the date of this report.

Compliance  with  Beneficial  Ownership  Reporting  Rules:  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 the
Company  during its fiscal year ended  December 31,  1998,  and  thereafter,  or
written representations, if any, received by the Company from these persons that
no other reports were required,  the Company believes that, during 1998, not all
applicable  Section 16(a) filing  requirements were satisfied;  however,  it has
been assured that the reporting  persons are  endeavoring  to  immediately  file
these reports.

Item 7. Financial Statements:

Report Of Independent Public Accountants

<PAGE>


Arthur Andersen & Company


To the Board of Directors and Stockholders
of BioProgress Technology International, Inc:

We have  audited the  accompanying  consolidated  balance  sheet of  BioProgress
Technology  International,  Inc. (a Nevada  corporation)  and subsidiaries as of
December  31,  1998,  and the related  consolidated  statements  of  operations,
changes in  stockholders'  equity  (deficit)  and cash flows for each of the two
years in the period ended December 31, 1998. These financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
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  financial  position  of  BioProgress  Technology
International, Inc. and subsidiaries as of December 31, 1998, and the results of
their  operations  and their  cash flows for each of the two years in the period
ended  December  31,  1998 in  conformity  with  generally  accepted  accounting
principles.


New York, New York
July 7, 1999


<PAGE>
<TABLE>
<CAPTION>


                   BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 1998


                                     ASSETS
                                     ------
CURRENT ASSETS:
<S>                                                                    <C>
   Cash and cash equivalents                                           $    82,119
   Accounts receivable                                                      12,675
   Prepaid expenses and other current assets                                52,357
                                                                       -----------

            Total current assets                                           147,151

PROPERTY AND EQUIPMENT, net (Notes 1 and 4)                                156,792

GOODWILL, net                                                            5,666,159

OTHER ASSETS                                                                32,569
                                                                       -----------

       Total assets                                                    $ 6,002,671
                                                                       ===========

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
                 ----------------------------------------------

CURRENT LIABILITIES:
   Deferred revenue                                                    $   114,456
   Accounts payable                                                        287,315
   Amounts owed to related parties (Note 8)                                758,365
   Accrued expenses and other current liabilities                           53,716
                                                                       -----------

                Total current liabilities                                1,213,852

         LONG-TERM DEBT (Note 6)                                             1,914
                                                                       -----------

                Total liabilities                                      $ 1,215,766
                                                                       ===========

STOCKHOLDERS' EQUITY (DEFICIT):
   Common stock, $0.008 par value-
     50,000,000 shares authorized; 38,214,403 shares issued
       and outstanding (Note 3)                                        $    66,694
   Additional paid-in capital (Note 3)                                   6,132,870
   Accumulated deficit                                                  (1,404,297)
   Accumulated other comprehensive loss                                     (8,362)
                                                                       -----------

                Total stockholders' equity (deficit)                     4,786,905
                                                                       -----------

                Total liabilities and stockholders' equity (deficit)   $ 6,002,671
                                                                       ===========



                     The accompanying notes to consolidated
                      financial statements are an integral
                           part of this balance sheet.

</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                         BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
                            CONSOLIDATED STATEMENTS OF OPERATIONS
                                 DECEMBER 31, 1998 AND 1997

                                                                       1998            1997
                                                                       ----            ----

<S>                                                               <C>              <C>
NET REVENUE                                                       $     28,118     $      --


COST AND EXPENSES:
   Cost of revenues                                                    (42,287)           --
   General and administrative expenses                                (318,545)       (499,011)
   Professional fees                                                  (258,195)           --
   Management fee                                                     (314,377)           --
                                                                  ------------    ------------


                Total cost and expenses                               (933,404)       (499,011)
                                                                  ------------    ------------

                Loss from operations and net loss applicable to
                  common stockholders                             ($   905,286)   ($   499,011)
                                                                  ============    ============

NET LOSS PER COMMON SHARE - BASIC AND DILUTED                     ($      0.07)   ($      0.05)
                                                                  ============    ============

WEIGHTED AVERAGE NUMBER OF COMMON SHARES                            12,921,392      10,500,000
                                                                  ============    ============



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

</TABLE>

<PAGE>
<TABLE>
<CAPTION>


                                           BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
                             CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
                                                  DECEMBER 31, 1998 AND 1997

                                                                                                       Accumulated       Total
                                                                           Additional                     Other       Stockholders'
                                                       Common               Paid-in     Accumulated   Comprehensive      Equity
                                               Shares          Amount       Capital       Deficit         Loss         (Deficit)
                                               ------          ------       -------       -------         ----         ---------

<S>                                          <C>            <C>           <C>           <C>            <C>            <C>
BALANCE at December 31, 1996                        --      $      --     $      --     $      --      $      --      $      --


   Net loss                                         --             --            --        (499,011)          --         (499,011)
   Currency translation adjustment
     comprehensive loss                             --             --            --            --           (2,226)        (2,226)
                                                                                                                      -----------
     Comprehensive loss                             --             --            --            --             --         (501,237)
                                                                                                                      -----------
   Issuance of common shares                  10,500,000            380       327,791          --             --          328,171
                                             -----------    -----------   -----------   -----------    -----------    -----------

BALANCE at December 31, 1997                  10,500,000            380       327,791      (499,011)        (2,226)   ($  173,066)
                                                                                                                      ===========

   Net loss                                         --             --            --        (905,286)          --      ($  905,286)
   Currency translation adjustment                  --             --            --            --           (6,136)        (6,136)
                                                                                                                      -----------
     Comprehensive loss                                                                                                  (911,422)
                                                                                                                      -----------
   Issuance of common shares for
      BTL acquisition                         22,818,446         22,818     1,723,430          --             --        1,746,248
   Issuance of common shares                   4,895,957         43,496     4,081,649          --             --        4,125,145
                                             -----------    -----------   -----------   -----------    -----------    -----------

BALANCE at December 31, 1998                  38,214,403    $    66,694   $ 6,132,870   ($1,404,297)   ($    8,362)   $ 4,786,905
                                             ===========    ===========   ===========   ===========    ===========    ===========



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


</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                       BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
                          CONSOLIDATED STATEMENTS OF CASH FLOWS
                     FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

                                                                        1998         1997
                                                                        ----         ----

CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                  <C>          <C>
   Net loss                                                          ($905,286)   ($499,011)
   Adjustments to reconcile net loss to net cash used in operating
     activities-
       Changes in operating assets and liabilities-
       Depreciation and amortization                                    40,742        8,823
       Increase in accounts receivable                                 (12,675)        --
       (Increase) in prepaid expenses and other current assets         (51,704)      (5,928)
       Increase in deferred revenue                                     79,343       35,112
       Increase in accounts payable                                    261,864       25,451
       Increase in accrued expenses and other current liabilities      568,349      191,171
                                                                     ---------    ---------

                Net cash used in operating activities                  (19,367)    (244,382)
                                                                     ---------    ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from sale of stock                                            --        245,868
   Proceeds from sale of preferred stock                               100,000         --
                                                                     ---------    ---------

                Net cash provided by financing activities              100,000      245,868
                                                                     ---------    ---------

                Net increase in cash and cash equivalents               80,633        1,486

CASH AND CASH EQUIVALENTS, beginning of year                             1,486         --
                                                                     ---------    ---------

CASH AND CASH EQUIVALENTS, end of year                               $  82,119    $   1,486
                                                                     =========    =========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION-
   Cash paid during the year for interest                            $   1,995    $     329
                                                                     =========    =========



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

</TABLE>
<PAGE>

                   BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(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 shareholders 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.

     Operations-
     -----------

     The group's  primary  operations are in the United  Kingdom.  The principal
     activities  of the  group  are the  development,  manufacture,  and sale of
     non-gelatin   encapsulation   materials   for   the   dietary   supplement,
     pharmaceutical  and  recreational  industries,  cosmetics and other related
     applications.

(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, and DHA Nutrition Limited.
     All   significant   intercompany   transactions   and  balances  have  been
     eliminated.

     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.

     Cash and Cash Equivalents-
     --------------------------

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

     Revenue Recognition-
     --------------------

     Revenue is recognized as products are shipped or services are performed.

<PAGE>


     Property and Equipment-
     -----------------------

     Property  and  equipment  is stated at cost.  Depreciation  of property and
     equipment is provided for using the straight-line method over the estimated
     useful  lives  of  the  respective  assets,  ranging  from  4 to  7  years.
     Amortization  of  leasehold  improvements  is provided for over the related
     lease term.

     Long-Lived Assets-
     ------------------

     The provisions of Statement of Financial  Accounting  Standards  (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.

     Earnings Per Share-
     -------------------

     Effective for the year ended December 31, 1998 the Company adopted 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  loss  per  common  share  was  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.

     Foreign Currency Translation-
     -----------------------------

     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 functional  currency of foreign
     operations is the local currency.

     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.

<PAGE>


     Comprehensive Income-
     ---------------------

     Effective  January 1, 1998,  the Company  adopted  Statement  of  Financial
     Accounting Standards (SFAS) No.130 - "Reporting Comprehensive Income". This
     standard increases financial reporting disclosures and has no impact on the
     Company's   financial   position   or   results  of   operations.   Certain
     reclassifications  have been made to the  December  31,  1997  consolidated
     financial  statements to conform with financial  reporting  requirements of
     SFAS No. 130 and to reflect the  acquisition of BTL which was accounted for
     as a reverse acquisition (Note 3).

(3)  ACQUISITIONS:

     On October  30,  1997,  the  Company  entered  into a letter of intent with
     BioProgress   Technology,   Inc.,  a  Colorado  corporation   ("BioProgress
     Technology"),  which  was  followed  on  November  17,  1997,  by a  formal
     agreement (the "Reorganization Agreement").  Pursuant to the Reorganization
     Agreement,  the Company  agreed to acquire all of the  outstanding  capital
     stock of BioProgress Technology in exchange for 4,000,000 post split shares
     of Common Stock.  Immediately prior to closing,  the Company effected a one
     for five (1:5) reverse stock split.

     In  conjunction  with the  execution  and  delivery  of the  Reorganization
     Agreement,   the  Company  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"),  which gave
     the Company the option of acquiring all or any part,  on a pro-rata  basis,
     of the issued and  outstanding  common  shares of BTL on or before June 30,
     1998.  The Company was required  under the BTL Option  Agreement to issue 1
     1/2 shares of Common Stock for each  outstanding  share of BTL,  which then
     had 10,100,000 shares  outstanding;  thus, if the option had been exercised
     in full and in accordance  with the original terms of this  agreement,  the
     Company  would  have  issued  15,150,000  shares of Common  Stock.  BTL was
     required  to have no  more  than  10,100,000  shares  outstanding,  and the
     Company was required to have no more than 5,000,000  shares of Common Stock
     issued  and  outstanding  and to  have  completed  or be in a  position  to
     complete the sale of such number of shares of Common Stock at a price of no
     less than $5.00 per share so as to generate no less than  $4,000,000 net of
     all costs.  The terms and  conditions of the BTL Option  Agreement were not
     met,  however,  the Company  and  original  signators  elected to amend the
     agreement and go forward with the acquisition of BTL.

     On June 30,  1998,  the Company  and BTL amended the BTL Option  Agreement.
     First,  the maximum number of shares BTL was allowed to have outstanding at
     the closing date was raised from  10,100,000  to  16,000,000.  Second,  the
     requirement  that the Company have no more than 5,000,000  shares of Common
     Stock issued and  outstanding  and to have completed or be in a position to
     complete the sale of such number of shares of Common Stock at a price of no
     less than $5.00 per share so as to generate no less than  $4,000,000 net of
     all costs was waived.  Third, the Company  undertook to assume debt up to a
     maximum of  $1,000,000,  satisfying  such through the issuance of shares of
     Common Stock valued at the average  market price on the closing  date.  The
     closing date was changed from June 30, 1998, to March 31, 1999. The Company
     acquired  approximately  62% of BTL on November 11, 1998,  and acquired the
     remaining  38% of BTL on December 31, 1998,  issuing a total of  22,818,446
     shares of Common Stock as sole consideration for the acquisition.

<PAGE>


     The acquisition of BTL was treated as a reverse  acquisition of the Company
     by BTL. In a reverse  acquisition  the  shareholders  of a Company own less
     than 50% of the post acquisition  shares.  The shareholders of BTL received
     approximately  81% of the  post  acquisition  shares  of  the  Company  and
     therefore,  BTL is  the  accounting  acquirer.  The  financial  information
     presented is therefore  that of BTL for 1997.  Common stock and  additional
     paid-in  capital  have been  restated  such that the total  dollar value of
     common stock and  additional  paid-in  capital for 1997 is split to reflect
     the same ratio as the Company's common stock and additional paid-in capital
     at  that  time.  The  Company's  financial  results  are  included  in  the
     consolidated  financial  statements  for a period of two weeks during 1998.
     Goodwill  generated in the acquisition of $5,666,159 will be amortized on a
     straight-line basis over a period of 10 years.

     On July 31, 1998, the Company agreed to acquire DHA Nutrition Limited (UK),
     an entity  organized  in the  United  Kingdom  ("DNL"),  as a  wholly-owned
     subsidiary in exchange for sole  consideration  of 400,000 shares of Common
     Stock.  These shares will be restricted  from sale,  assignment or disposal
     for 18 months beginning July 31, 1998. The acquisition closed on August 12,
     1998. The number of shares which the Company  issued in the  acquisition of
     DNL may be increased in the event that DNL's  cumulative  gross revenues in
     respect of its Feed  Supply  sales  exceed  $2,495,700  in the period  from
     August 12, 1998 to September 30, 1999, and exceed  $8,319,000 in the period
     from October 1, 1999 to September 30, 2000. In this event, the Company will
     issue to the former DNL  shareholders  an  additional  200,000  and 400,000
     shares of Common  Stock,  respectively.  Further,  and in  addition  to the
     foregoing shares, if DNL's cumulative gross revenues in respect of its Food
     Supply  sales  exceed  $249,570  in the  period  from  August  17,  1998 to
     September 30, 1999,  and exceed  $831,900 in the period  October 1, 1999 to
     September  30,  2000,  the  Company  will issue an  additional  100,000 and
     200,000 shares of Common Stock, respectively.

     The  acquisition  of DNL was accounted for as a purchase.  DNL's  financial
     results of operations are included in the consolidated financial statements
     for a period of five months in 1998.

     The following  unaudited pro forma  consolidated  results of operations are
     presented as if the BTL and DNL acquisitions had been made at the beginning
     of the periods presented-

                                                       1998             1997
                                                       ----             ----

Net revenue                                        $    42,731      $      --

Loss from operations and net loss
  applicable to common stockholders                ($1,557,426)     ($  622,184)
                                                   ===========      ===========

Basic and diluted loss per common share            ($     0.12)     ($     0.07)
                                                   ===========      ===========

<PAGE>


(4)  PROPERTY AND EQUIPMENT:

     Property  and  equipment  are stated at cost and consist of the  following-

                                                                     Estimated
                                            1998          1997      Useful Lives
                                            ----          ----      ------------

     Plant and machinery                 $ 155,188      $  19,548         4
     Equipment under capital leases          4,021           --           4
     Office equipment                       18,189           --           4
     Laboratory equipment                   26,353         29,620         6
                                         ---------      ---------

     Less- Accumulated depreciation        (46,959)        (8,823)
                                         ---------      ---------

      Total                              $ 156,792      $  40,345
                                         =========      =========

     Accumulated depreciation related to equipment acquired under capital leases
     amounted  to  approximately  $1,248 and $0 at  December  31, 1998 and 1997,
     respectively.

(5)  LONG-TERM DEBT:

     Long-term debt consists of capital lease  obligations.  The equipment lease
     obligations are payable in monthly  installments of $210, through May 2000.
     The debt is  collateralized by the related  equipment.  The Company's lease
     obligations are due as follows-

              1999                                            $2,520

              2000                                            $1,914
                                                              ======

(6)  INCOME TAXES:

     The  Company  has  net  operating  loss  carry  forwards  of  approximately
     $4,652,269  which expire in various  years  through  2013.  The Company had
     deferred tax assets (DTA's) at December 31, 1998 and 1997 of  approximately
     $1,861,000 and $498,012,  respectively,  representing the tax effect of the
     net  operating  loss  carry  forwards.  Due to  uncertainty  regarding  the
     ultimate amount of income tax benefits to be derived from the net operating
     loss carry forwards,  the company has recorded valuation allowances against
     the entire DTAs.

(7)  AMOUNTS OWED TO RELATED PARTIES:

     On  April 1,  1998,  the  Company  entered  into a  consulting  and  option
     agreement  with  The  Jade  Partnership  International,  Inc.  ("Jade"),  a
     Delaware Corporation.

     Certain directors of the Company, are controlling shareholders in Jade. The
     Company had a contract with Jade,  under which Jade assisted the Company in
     obtaining  equity  and  debt  financing,   and  provided  general  business
     management,  administration services, international licensing and sales and
     marketing strategies. In the opinion of management all transactions were at

<PAGE>


     arms length.  This  agreement  provided that the Company was to pay $50,000
     per month as a fee to Jade which,  at the option of Jade,  was  convertible
     into  Common  Stock  of the  Company  at a price of $0.28  per  share.  The
     agreement was terminated  during the latter part of 1998,  with the Company
     agreeing to pay Jade the sum of $356,595 in fees.  Jade  elected to convert
     this amount into 1,273,556 shares of the Common Stock of the Company.  This
     conversion  has yet to  take  place,  but  was  approved  by the  board  of
     directors of the Company prior to December 31, 1998.

     Certain   directors   of  the  Company  are  also   directors   of  Trutona
     International,   Inc.,   a  privately   held  Atlanta   based   corporation
     ("Trutona").  Details of a  transaction  entered  into by the Company  with
     Trutona are described in Note 8.

(8)  SUBSEQUENT EVENTS:

     On January 25, 1999, the Company granted 2.5m stock options to executives.

     These  stock  options  are for  ordinary  shares  of  common  stock and are
     exercisable on the following terms-

                                              Exercise
      Options Expiring                         Price           Number
      ----------------                         -----           ------

         12/31/2003                            $0.35           500,000
         12/31/2003                            $0.75           500,000
         12/31/2003                            $1.25           500,000
         12/31/2003                            $1.75           500,000
         12/31/2003                            $2.25           500,000
                                                             ---------

                 Total                                       2,500,000
                                                             =========

     Trutona International, Inc.-
     ----------------------------

     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
     payable on or before December 31, 1999, through either the delivery of cash
     or of additional  shares of Common Stock valued at $0.40 per share,  or any
     combination of the two at the option of the Company.

     On  March  23,  1999,  the  Company  completed  the  sale of a  license  to
     Consolidated EcoProgress  Technologies,  Inc.  ("EcoProgress"),  a Canadian
     company with securities traded on the Vancouver Stock Exchange. The license
     was sold for the sum of  $1,500,000  and gives  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. EcoProgress is to

<PAGE>


     pay $380,000 in cash and the remaining  $1,120,000 will be paid through the
     issuance of 1,066,666 shares of free trading common stock in EcoProgress at
     an agreed price of $1.05 per share.  The sale allowed the Company to recoup
     the entire price paid by the Company to Trutona for the  technology.  As of
     the date of signing of these financial  statements  approximately  $100,000
     had been received.

     On April 1, 1998, the Company entered into a financial consulting agreement
     with Ormiston-Gore  Securities Limited ("OGSL"),  a Bahamian investment and
     financial services company.

     OGSL,  under this contract,  provided  services for BTL in obtaining equity
     and debt  financing and also loaned  $230,746 to the Company.  All services
     had been rendered as of November 12, 1998. The Company agreed to pay OGSL a
     fee of $10,000 per month which, at the option of OGSL, was convertible into
     common  stock of the  Company  at a price of $0.28 per share.  The  Company
     agreed to pay OGSL the sum of $171,023  for fees.  OGSL  elected to convert
     this amount into 610,798  shares of the common  stock of the Company.  This
     conversion  has not yet  taken  place  but was  approved  by the  board  of
     directors of the Company prior to December 31, 1998.

     OGSL elected to convert the outstanding loan of $230,746 into shares of the
     Common  Stock  of the  Company  at a price of $0.28  per  share,  receiving
     824,094 shares. This conversion has not yet taken place but was approved by
     the board of directors prior to December 31, 1998.

     Through  June 1999,  1,074,475  preferred  shares were issued in return for
     $1,074,475 in cash.

Item  8.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure: On March 8, 1999, the Company informed Halliburton, Hunter
&  Associates  that it would not retain them as the  independent  accountant  to
audit the  financial  statements  of the  Company  as of and for the year  ended
December  31,  1998,  because it had  retained  Arthur  Andersen & Company.  The
Company  had no  disagreement  with  its  former  accountant  on any  matter  of
accounting  principal or practice,  financial  statement  disclosure or auditing
scope or procedure  which would have caused the  accountant to make reference in
its report  upon the subject  matter of the  disagreement.  Further,  the former
principal  accountant's  report on the financial  statements  did not contain an
adverse opinion or a disclaimer of opinion or qualification as to audit scope or
accounting  principle.  The decision to change  accountants  was approved by the
full Board of Directors, which at that time had no audit or similar committee.


<PAGE>

                                    PART III

Item 9.  Directors and Executive  Officers of the Company:  The following  table
sets forth all current directors,  executive officers and significant  employees
of the Company, BioProgress Technology, BTL and/or DNL, as well as their ages:

      Name           Age      Position with Company
     -----           ---      -----------------------------

Barry J. Muncaster    53      Chairman of the Board of Directors and Chief
                              Executive Officer of the Company, BioProgress
                              Technology, BTL and DNL; President of the Company,
                              BTL and DNL

Malcolm D. Brown      40      Director and Executive Vice-President of Research
                              and Development of the Company, BioProgress
                              Technology, BTL and DNL

James T.C. Longley    39      Director, Chief Financial and Accounting Officer,
                              and Treasurer and Secretary of the Company,
                              BioProgress Technology, BTL and DNL

Robert G.M. Hind      49      Director and Vice-President of Sales and Marketing
                              of the Company BioProgress Technology, BTL and DNL

Edward Z. Nowak       45      Director of Research and Development for BTL

Gregg Bowers          47      Director of the Company and President of
                              Bioprogress Technology.

No current director has any arrangement or  understanding  whereby he is or will
be  selected  as a  director  or  nominee,  other  than  those  gentlemen  under
employment agreements, as discussed below. Directors and executive officers will
hold  office  until the next  annual  meeting of  shareholders  and until  their
respective successors have been duly elected and qualified or until they earlier
resign.  Officers are generally  elected by the Board of Directors at its annual
meeting immediately  following the shareholders'  annual meeting and hold office
until their death or until they earlier  resign or are removed from office.  The
Company does not have any standing audit, nominating or compensation committees,
or any committees performing similar functions.

Profiles of  Directors  and  Executive  Officers of the Company and  BioProgress
Technology:

Barry J.  Muncaster:  Chairman,  Chief  Executive  Officer  and  President.  Mr.
Muncaster is Chairman of the Board of Directors and Chief  Executive  Officer of
the Company,  BioProgress  Technology and BTL, having served in these capacities
since  November  17,  1997,  for  the  Company  and  inception  for  BioProgress
Technology  and BTL. He has also served the Company and BTL as  President  since
November  17, 1997,  and  inception,  respectively.  Mr.  Muncaster  also served
BioProgress  Technology as President from inception  until the engagement of Mr.
Bowers.  He has served in similar  positions  with DNL since the  acquisition of
that entity as a wholly-owned subsidiary.

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 was a
cofounder,   and  served  as  Chief   Executive   Officer,   of  Oric   Products
International,  Limited which, within three years of 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 London Stock Exchange.

Since 1987 Mr. Muncaster has been a partner in the Jade  Partnership,  a firm of
management  consultants which specializes in assisting  developmental  companies
engaged  in high  technology  activities.  The  Jade  Partnership  was the  sole
shareholder of BioProgress  Technology and now owns a substantial portion of the
outstanding  shares of Common Stock.  Mr.  Muncaster  entered into an employment
agreement with the Company on January 25, 1999, as discussed further below.

Malcolm  D.  Brown:  Director  and  Executive  Vice-President  of  Research  and
Development. Mr. Brown has served the Company as a director and as the Executive
Vice-President  of Research and  Development  since  November 17, 1997,  and for
BioProgress  Technology  and  BTL  from  inception.  He has  served  in  similar
positions  with DNL  since the  acquisition  of that  entity  as a  wholly-owned

<PAGE>


subsidiary.  He is  responsible  for the  direction  and  implementation  of the
research and  development  program of  BioProgress  Technology,  the  production
engineering of its products,  and for the environmental,  safety and performance
compliance of all raw materials  used.  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  with  Ferrisgate
Limited, where he worked on the formulation of specialist inks and coatings used
in industrial processes. Mr. Brown entered into an employment agreement with the
Company on January 25, 1999, as discussed further below.

Mr. Brown is also a director, officer and shareholder of The Jade Partnership.

James T.C.  Longley:  Director and Chief  Financial and  Accounting  Officer and
Treasurer.  Mr.  Longley  has  been a  director  and  the  Chief  Financial  and
Accounting Officer, Treasurer and Secretary the Company since November 17, 1997,
and of BioProgress Technology and BTL since inception.  He has served in similar
positions  with DNL  since the  acquisition  of that  entity  as a  wholly-owned
subsidiary. He received a Bachelor of Arts degree in accounting with honors from
Leeds  University  in 1980,  and 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. Mr. Longley in
1983 joined Arthur Andersen & Co., where he worked for two years,  attaining the
position of 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  financial  division.  In 1991,  Mr.  Longley  founded
Chapman  Longley  Chartered  Accountants  and Registered  Auditors in the United
Kingdom  where,  in addition  to  providing  services to a range of clients,  he
participated as part of a management team which  successfully  completed a L10.5
million  (Sterling)  management  buy-in within the manufacturing  industry,  and
served as the finance  director of The Fleet  Management Group Limited which had
annual revenues of L18 million  (Sterling) during this time. Mr. Longley entered
into an employment  agreement with the Company on January 25, 1999, as discussed
further below.

Mr. Longley is also a director, officer and shareholder of The Jade Partnership.

Robert Graham Mason Hind:  Director and  Vice-President  of Sales and Marketing.
Mr. Hind has been an executive officer and director of the Company and BTL since
the  acquisition by the Company of DNL, prior to which he served as a consultant
to BioProgress Technology and BTL from June 30, 1998. Mr. Hind has served DNL as
a director  and  executive  officer  since  inception.  Mr. Hind entered into an
employment agreement with the Company after its acquisition of DNL, as discussed
further below.

Edward Z. Nowak:  Vice-President of Research.  Mr. Nowak has been with BTL since
March,  1997. He received a Bachelor of Science Degree in Applied Chemistry from
Stockport  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 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. Mr.
Nowak entered into an employment agreement with the Company on January 25, 1999,
as discussed further below.

Gregory L.  Bowers:  Mr.  Bowers was engaged as a director of the Company and as
President of BioProgress  Technology earlier this year. Prior to the Company, he
was employed as the Senior  Vice-President  of Sales and Marketing in Health and
Nutrition with the Banner Pharmacap Division of Sobel  International from April,
1996. 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  as Executive Vice President and General  Manager.  (Chase
Pharmaceutical  was  purchased  by Sobel  International  in March 1994.) In this
capacity,  he was responsible for all business operations of a $55 million,  350
employee  pharmaceutical  and  nutritional  products  manufacturer.  Mr.  Bowers
reported  directly to the CEO of the parent  company and directing the Senior VP
Technical Affairs,  VP Finance,  VP Operations and VP 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 CEO and was  responsible  for  sales  and  marketing  for Chase
Laboratories (generic drug division),  Chase  Pharmaceuticals  (prescription and
OTC contract manufacturing) and Encapsulations, Inc. (nutritional products). Mr.
Bowers   developed  and  directed  long  and  short-term   sales  and  marketing
strategies,  including establishing operating budgets,  negotiating licenses and
royalty   agreements   domestically   and   internationally.   Prior   to  Chase
Pharamaceutical,  Mr. Bowers worked in various sales and marketing  positions in
the pharmaceutical and other industries.

<PAGE>


Mr.  Bowers  is a  member  of the (1)  American  Association  of  Pharmaceutical
Scientists, (2) National Association of Chain Drugstores, (3) National Wholesale
Drug Association, (4) National Association of Pharmaceutical Manufacturers,  and
(4) Council for  Responsible  Nutrition.  He attended the University of Texas in
Austin,  Texas,  receiving  a  Bachelors  of Arts in Biology  and also  attended
Columbia University, participating in their executive marketing program

Consultants to BioProgress Technology:

Dawn M. Franklin. Ms. Franklin served for 21 years as Marketing Property Manager
for Mars, Inc.,  where she was responsible for the management,  registration and
prosecution  of  intellectual  property  and  trademarks.  She  has a very  high
standing  in the  international  trademark  community  and holds  the  following
positions:   (i)  Member  of  Board  of  Directors  of  International  Trademark
Association;  (ii) Chairman of Membership  Committee of International  Trademark
Association;  (iii) Vice-Chairman of Public Relations Committee of International
Trademark Association; (iv) Vice-Chairman of British Brands Group; (v) Member of
Trademark   Committee   of  AIM   (European   Association   of   Branded   Goods
Manufacturers);  (vi) Delegate  representing AIM at World Intellectual  Property
Organization ("WIPO"); (vii) Member of Committee of Experts on Subject of Famous
Marks at WIPO;  (viii)  Consultant to WIPO and Member of Committee of Experts at
WIPO on Subject of International Trademark Licensing; and (ix) Member of MARQUES
(Association of European Trademark Proprietors).

Item 10. Executive  Compensation:  No compensation was paid during 1998 directly
to the  Board  of  Directors  or  executive  officers  of the  Company  in their
capacities as such; however, Jade received the compensation set forth under Item
1, above,  and Item 13,  below,  in exchange for providing  management  services
under a contract  between the  Company and Jade.  These  services  included  the
services of Messrs. Muncaster, Brown and Longley.

Employment  Agreements:  Barry J. Muncaster.  On January 25, 1999, Mr. Muncaster
and the Company  entered into an agreement for a term of five years  pursuant to
which Mr.  Muncaster is to serve the Company as a director  and chief  executive
officer.  He serves in a similar capacity with BioProgress  Technology,  BTL and
DNL. Mr. Muncaster is entitled to receive cash  compensation of $2,000 per month
from the Company,  subject to upward revision per board review every six months.
Mr.  Muncaster  also  received an option from the Company  under this  agreement
which is  exercisable  on or before  December 31, 2003.  This option  grants Mr.
Muncaster  the right to purchase up to 500,000  shares  Common  Stock in 100,000
share increments at prices per share of $.35, $.75,  $1.25,  $1.75 and $2.25 per
share. These shares are to be registered under applicable securities laws before
issuance.  James T.C. Longley.  On January 25, 1999, Mr. Longley and the Company
entered into an agreement for a term of five years pursuant to which Mr. Longley
is to serve the Company as a director and as Chief Financial Officer,  Treasurer
and Secretary. He serves in a similar capacity with BioProgress Technology,  BTL
and DNL.  Mr.  Longley is entitled to receive  cash  compensation  of $2,000 per
month from the  Company,  subject to upward  revision per board review every six
months.  Mr.  Longley  also  received  from the  Company  an option  under  this
agreement  which is  exercisable  on or before  December 31,  2003.  This option
grants Mr.  Longley the right to purchase up to 500,000  shares  Common Stock in
100,000 share  increments at prices per share of $.35,  $.75,  $1.25,  $1.75 and
$2.25 per share.  These shares are to be registered under applicable  securities
laws before  issuance.  Malcolm D. Brown: On January 25, 1999, Mr. Brown and the
Company entered into an agreement for a term of five years pursuant to which Mr.
Brown is to serve the  Company as a director  and as  Executive  Vice  President
Research  and  Development.  He serves in a similar  capacity  with  BioProgress
Technology,  BTL and DNL. He is entitled to receive cash  compensation of $2,000
per month from the  Company,  subject to upward  revision per board review every
six  months.  Mr.  Brown also  received  from the  Company an option  under this
agreement  which is  exercisable  on or before  December 31,  2003.  This option
grants Mr.  Brown the right to purchase up to 500,000  shares of Common Stock in
100,000 share  increments at prices per share of $.35,  $.75,  $1.25,  $1.75 and
$2.25 per share.  These shares are to be registered under applicable  securities
laws before  issuance.  Edward Z. Nowak.  On January 25, 1999, Mr. Nowak and the
Company entered into an agreement for a term of five years pursuant to which Mr.
Nowak is to serve the Company in  connection  with the business of the Company's
wholly owned  subsidiary,  BTL. Mr. Nowak serves BTL as Director of Research and
Development.  In this capacity he receives  $8,000 per month from BTL. Mr. Nowak
has  received  from  the  Company  an  option  under  this  agreement  which  is
exercisable  on or before  December 31, 2003.  This option  grants Mr. Nowak the
right to  purchase  up to  500,000  shares  of  Common  Stock in  100,000  share
increments  at prices per share of  $0.35,$0.75,$1.25,  $1.75 and  $2.25.  These
shares are to be registered under applicable securities laws before issuance.

<PAGE>


Item  11.  Security  Ownership  of  Management  and  Certain  Others:  Based  on
information  which has been made  available to the Company by its stock transfer
agent and the  individual  officers and directors of the Company,  the following
table sets forth,  as of June 7, 1999,  the shares of Common Stock owned by each
current  director,  by directors and  executive  officers as a group and by each
person known by the Company to own more than 5% of the outstanding Common Stock:

Title of Class  Name of Beneficial Owner  Number of Shares  Percent of Class (1)
--------------  ------------------------  ----------------  --------------------

Common Stock    The Jade Partnership (2)               (2)            (2)

Common Stock    Trutona International (3)              (3)            (3)

Common Stock    Barry J. Muncaster (2,3,4,5)   10,261,949          29.70%

Common Stock    Malcolm D. Brown (5)            3,947,117         11.424%

Common Stock    James T.C. Longley (5)            575,000          1.664%

Common Stock    Robert G. M. Hinds (5)            820,000          2.373%

Common Stock    Edward Nowak                      880,000          2.547%

Directors and Executive Officers as a Group:   16,484,066         47.708%

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

(1)  Based on  approximately  33,052,137  shares  of  common  stock  issued  and
outstanding  on June 7, 1999,  and including  1,500,000 of the 2,500,000  shares
under those options described in footnote five below, an aggregate of 34,552,137
shares.

(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) 7.067% - Linda Zangus, the wife
of Barry J. Muncaster;  and (iv) 29.23% - Malcolm D. Brown. All 4,000,000 shares
of Common Stock owned by Jade are  attributed  to Mr.  Muncaster for purposes of
this table.

(3)  Trutona  International  is  a  privately-held  Delaware  corporation  whose
officers and  directors  are roughly  similar to those of the Company.  Further,
Messrs.  Muncaster  and  Brown  own  a  significant  number  of  shares  of  the
outstanding  stock of Trutona.  All  1,875,000  shares of Common  Stock owned by
Trutona are attributed to Mr. Muncaster for purposes of this table.

(4) These shares include  3,491,857  shares owned directly by Mr.  Muncaster and
595,092  shares held by his wife,  as well as the  4,000,000  shares held by The
Jade  Partnership  and  1,875,000  shares  held by Trutona  since Mr.  Muncaster
controls these entities.

(5) 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 and
from time to time.  The option was granted on January 25,  1999,  and allows the
holder to purchase  500,000 shares Common Stock on or before  December 31, 2003.
The option is  exercisable  in 100,000  share  increments at prices per share of
$.35, $.75,  $1.25,  $1.75 and $2.25 per share. The number of shares included in
this figure is 300,000 since the market price for the Common Stock  exceeded the
option  price  for the  100,000  shares  acquirable  at $.35,  $.75  and  $1.25,
respectively,  1999. Messrs. Muncaster,  Brown, Longley, Nowak and Hind each had
an option to acquire  500,000  shares at the date of this report  under  similar
terms and  conditions,  for an  aggregate  of  2,500,000  shares;  thus,  shares
aggregating  1,500,000  in number  under  these  options  were  included  in the
outstanding  figure  since the strike  price for these  shares was less than the
market price at June 7, 1999.

<PAGE>


Item 12. Certain Transactions:

     Product  Acquisiton from Trutona  International:  On February 15, 1999, the
Company  acquired from 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. The Company paid Trutona
$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 $.40 per share,  with
the  remainder  payable  on or before  December  31,  1999,  through  either the
delivery  of cash or of  additional  shares of Common  Stock  valued at $.40 per
share, or any combination of the two at the option of the Company.  The products
acquired  include an ultra thin,  flushable and  biodegradable  line of feminine
sanitary napkins which were recently  selected for a "Millennium  Product" award
under a program  initiated  by the  British  Government  to  promote  innovative
technological achievements. Trutona is an affiliate of the Company since Messrs.
Muncaster,   Longley  and  Brown  are   directors,   officers  and   significant
shareholders of each entity.

     Jade Partnership  International Consulting Agreement. On April 1, 1998, the
Company entered into a consulting and option agreement with Jade, which is owned
by affiliates of the Company. Under this contract,  Jade assisted the Company in
obtaining equity and debt financing,  and provided general business  management,
administration  services,   international  licensing  and  sales  and  marketing
strategies.  This  agreement  provided that the Company was to have paid $50,000
per month as a fee to Jade which,  at the option of Jade, was  convertible  into
common stock of the Company at a price of $.28 per share, the then market price.
The agreement was  terminated  during the latter part of 1998,  with the Company
agreeing to pay Jade the sum of  $356,595.68  in fees.  Jade  elected to convert
this amount into shares of Common Stock,  receiving 1,273,556 shares on December
21, 1998.

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

(a)  Exhibits:

3.1 (a)   Articles of Incorporation and Amendments (California). (1)
3.1 (b)   Articles of Incorporation and Amendments (Nevada). (2)
3.1 (c)   Articles of Incorporation and Amendments (Nevada). (4)
3.1 (d)   Articles of Incorporation and Amendments (Nevada). (5)
3.2 (a)   Bylaws (California). (1)
3.2 (b)   Bylaws (Nevada). (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)

<PAGE>


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)

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

(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 herewith.

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

(b)  Forms 8-KSB: None.


                                   SIGNATURES

In accordance with the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, 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 on the 12th day of July, 1999.

BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
(Registrant)

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

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following person on behalf of the registrant in the
capacity on this 8th day of July, 1999.

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

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

<PAGE>

                                    EXHIBITS

                                TABLE OF CONTENTS


3.1 (d)   Articles of Incorporation and Amendments (Nevada).

10.11     Acquisition Agreement - DHA Nutrition

10.12(a)  Acquisition Agreement - BioProgress Limited (UK)

10.12(b)  Amendment to Acquisition Agreement - BioProgress Limited (UK)

10.13     Employment Agreement - Barry J. Muncaster

10.14     Employment Agreement - James T. C. Longley

10.15     Employment Agreement - Malcolm D. Brown

10.16     Employment Agreement - Edward I. Nowak

10.17     Employment Agreement - Graham Hind

10.18     Professional Services Agreement - The Jade Partnership  International,
          Inc.

10.19     Professional Services Agreement - Company and Ormiston-Gore Securities
          Limited

10.20     Professional  Services  Agreement - BTL and  Ormiston-Gore  Securities
          Limited

10.21     Trutona Purchase Agreement

10.22     EcoProgress License