BIOSEARCH MEDICAL PRODUCTS INC, 10KSB/A, 1999-09-24

BIOSEARCH MEDICAL PRODUCTS INC
10KSB/A, 1999-09-24
SURGICAL & MEDICAL INSTRUMENTS & APPARATUS

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FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K SB-A

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the fiscal year ended DECEMBER 31, 1998.

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from __________________ to
_________________.

Commission File Number 0-9860

BIOSEARCH MEDICAL PRODUCTS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)

NEW JERSEY 22-2090421
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

35 INDUSTRIAL PARKWAY, SOMERVILLE, NEW JERSEY 08876-1276
- ---------------------------------------- --------------
(Address of principal executive offices) (Zip Code + 4)

Registrant's telephone number, including area code: (908) 722-5000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of exchange on which registered
------------------- ------------------------------------
NONE NONE

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, WITHOUT 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. [X] YES [ ] No

Indicate by check mark if the disclosure of delinquent filers
pursuant to item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrants 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. [ ]

THE AGGREGATE MARKET VALUE ON MARCH 28, 1999 OF VOTING STOCK HELD BY
NON-AFFILIATE OF THE REGISTRANT IS ESTIMATED TO BE $250,000.

THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANTS COMMON STOCK, NO
PAR VALUE, AT MARCH 28, 1999 WAS 2,202,878.

List hereunder the documents, all or portions of which are
incorporated by reference herein, and the Part of the Form 10-K into which the
document is incorporated: Proxy Statement to be filed with respect to the 1998
Annual Meeting of the Shareholders, Form 8-K and Form 8 filed prior to this 10-K
- -- Part III.

<PAGE>

PART I

ITEM 1. BUSINESS

GENERAL

Biosearch Medical Products Inc. (the "Company") was incorporated in
the State of New Jersey on September 17, 1975. The Company's early business
emphasis was on contract research and development of medical devices and systems
for larger medical product companies. During 1982, the Company successfully made
its initial public offering. The Company had designed and successfully marketed
under its own Dobbhoff(R) trademark, a small bore feeding catheter which quickly
became the enteral industry's feeding device standard.

Later, in 1983, other developments led the Company into the Enteral
Food Business with its introduction of Entri-Pak(R), the first ready-to-use
disposable feeding bag, which was pre-filled with Entrition(R), a specially
developed nutritional formula available in many caloric and fiber content
formulations. Entri-Pak was manufactured by the Company's former subsidiary,
Pouch Laboratories, Inc.

The dominance of the enteral food market by larger medical product
companies and reimbursement changes in the Federal Government Medicare System
prompted the Company's decision to reassess its business objectives. The Enteral
Food Business was then sold in June, 1991 to Clintec Nutrition Company
("Clintec") of Deerfield, Illinois (an affiliate of Baxter Healthcare
Corporation and Nestle, SA). This transaction provided the Company with needed
funds to continue pursuing its strength, which is the development of new
products for the medical device market. The Company has since expanded its
innovative medical device focus and continues to develop, manufacture and market
products designed for medical and surgical applications.

Throughout the Company's history innovative products have been
developed and marketed directly to hospitals, alternative healthcare centers and
through distributors, both domestic and international. Although, in the opinion
of the Company, its products remained superior, offering many advantages over
competitor products, the Company could not foster the strength nor demand the
recognition which the Company felt its products deserved. To this end, the
Company found themselves competing against organizations which had immense sales
and distribution networks and greater financial strength as well. Other factors
involving the FDA regulatory climate for medical devices continues to lengthen
the time necessary to have medical device approvals granted. The products are
classified by the U.S. Food and Drug Administration ("FDA") as Class II
regulated devices. FDA Class II regulated devices are required to meet
established performance standards and a pre-market notification via submission
of a 510(k) pre-market notification. See "Government Regulation".

<PAGE>

GENERAL (cont)

In order to remain a viable business, sustaining cash flow through
cost reduction and avoidance has remained a top corporate-wide priority.
Incremental spending reductions were put into effect as lower production volumes
for the older line products continued. In 1994, the Company completed
negotiations with a large medical products company and formed a strategic
alliance for the purpose of increasing sales volumes. The arrangement provided
the Company with cash which was desperately needed to maintain longer term
operations.

The strategic alliance was with Sherwood Medical Company ("Sherwood")
a leading manufacturer and marketer of medical products and a subsidiary of
American Home Products Corporation (NYSE: AHP), a New Jersey based diversified
healthcare company. See "Marketing and Customers"

The Company holds an exclusive, world-wide, license to apply
Hydromer(R), a patented coating technology, to certain medical devices pursuant
to licenses and royalty agreements entered into between the Company and
Hydromer, Inc., an affiliated company. See "Patents, Trademarks and Material
Contracts" below. The Hydromer coating ("Hydromer"), a polymer product, is
applied onto several of the Company's medical devices. When the Hydromer coated
device is subsequently moistened with water, the device's surface will become
significantly lubricous. The alternative to Hydromer is to dip or smear other
more conventional lubricating substances on the surface of the medical device.
The Company does not believe that there is any other product available which
performs in a manner comparable to Hydromer in terms of bonding and lubricity.

In the opinion of the Company there are many opportunities for the
application of Hydromer in the medical device industry and would expand its
licensing of the Hydromer coating technology for newly developed products.
Presently, the Company uses Hydromer on its contract manufacturing of enteral
feeding tubes, gastrointestinal devices and its surgical products (stents and
coagulation probes), along with its intermittent urinary catheters.

The Hydromer coating facilitates the insertion of enteral feeding
tubes into the patient and reduces their discomfort during the medical
procedure. The Hydromer also facilitates the removal of the placement stylet
which has been inserted through the tube to position it properly in the
patient's body. The Company has applied the Hydromer to its line of biliary
stents and coagulation probes. When applied to the interior wall of the stent,
Hydromer has been shown to significantly increase the life of the implanted
device. The need to regularly replace the device has been reduced and thus, may
lessen the patient's frequency of enduring the trauma of replacement procedures.
When applied to the tip of a coagulation probe the moistened Hydromer allows the
instrument's clean removal after an ulcerated area has been coagulated with the
device. Therefore the ulceration is not re-injured after the surgical procedure.

The Company received ISO 9000 certification on October 9, 1996, which
is needed to sell products in Europe. The Company feels this certification will
open the European market to its products and will also allow it to build
additional relationships with other large medical products companies, who for
whatever reason, have not received their certification and wish to sell their
products in Europe.

<PAGE>

PRODUCTS & CONTRACT SERVICES

PRODUCTS

Historically, the Company designed, manufactured and marketed Enteral
Feeding Devices and Specialty G.I. Products. However, during 1994, the company
entered into agreements with Sherwood Medical Company which formed with them a
strategic business alliance. The alliance drastically changed the structure of
the Company's business. The majority of the Company's current manufacturing is
now largely focused on its intermittent urinary catheters but current purchase
orders expired in June 1998 and its hemostatic coagulation probe line, whose
sales have increased drastically due to OEM manufacturing for two large
customers, U.S. Endoscopy and Wilson-Cook. The Company continues to explore
other business opportunities, develop new medical products and market their
remaining products, e.g., Biofeedback for anorectal dysfunction applications and
its indwelling biliary stents through direct customer and contract manufacture.

Sales of contract manufactured products during 1998 were
approximately 77% of total revenue compared to approximately 80% for the same
period of 1997. The Company considers that its products and services compete in
the business segment of the "Medical Device" industry involving research,
development, manufacturing and sales.

<PAGE>

BIOSEARCH PRODUCT HISTORY SUMMERY

PRODUCT ACTIVE STATUS OEM SELL TO SELL DEVICE FUNCTION REGULATORY
DEALERS DIRECT STATUS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Bipolar YES Active Product YES YES YES Device is used to coagulate FDA 510(k)
Coagulation bleeding in the GI Tract via an ISO CE
Probes endoscope and RF generator.
- ------------------------------------------------------------------------------------------------------------------------------------
Biliary Stents YES Active Product NO YES YES Device is used to restore bile FDA 510(k)
fluid flow into intestine. ISO CE
- ------------------------------------------------------------------------------------------------------------------------------------
Anorectal YES Active Product NO YES YES Device is used to help patients FDA 510(k)
Biofeedback perform Kegal exercises to ISO CE
assist with fecal constipation
and incontinence.
- ------------------------------------------------------------------------------------------------------------------------------------
Perineometer & NO Item requires NA NA NA Device will assist females with FDA 510(k)
Vaginal Probe production tooling. vaginal Kegal exercises to assist
with urinary incontinence.
- ------------------------------------------------------------------------------------------------------------------------------------
Enteroclysis YES Active Product YES YES YES Device is used for deep FDA 510(k)
Catheter intestinal decompression and ISO CE
radiology.
- ------------------------------------------------------------------------------------------------------------------------------------
Enteral Admin. YES Active Product NO YES YES Devices are used to administer FDA 510(k)
Sets enteral food via bags and tubing ISO CE
sets leading to patient catheters.
- ------------------------------------------------------------------------------------------------------------------------------------
Jejunostomy YES Active Product YES YES NO Devices are used to administer FDA 510(k)
Catheters enteral food via a PEG Tube. ISO CE
- ------------------------------------------------------------------------------------------------------------------------------------
Intermittent YES Sold to C.R.BARD YES NO NO Devices are used to drain urine FDA 510(k)
Urinary Tubes on Feb. 1999. We on a short term basis.. ISO CE
are Manufacturing
for BARD.
- ------------------------------------------------------------------------------------------------------------------------------------
Pee Wee Device NO Sold to C.R.BARD NA NA NA Device is used to feed into the FDA 510(k)
(1994) stomach via a stoma
- ------------------------------------------------------------------------------------------------------------------------------------
Enteral Feeding NO Sold to Nutricia- NA NA NA Device is used to pump enteral FDA 510(k)
Pump Holland (1991) formula into a patient
- ------------------------------------------------------------------------------------------------------------------------------------
Feeding NO Sold to Sherwood NA NA NA Device is used to administer FDA 510(k)
Gastrostomy Medical (1994). enteral formula into a patient
catheters Could begin via a gastric stoma.
marketing in 05/99
- ------------------------------------------------------------------------------------------------------------------------------------
Nasogastric NO Sold to Sherwood NA NA NA Device is used to administer FDA 510(k)
Feeding Medical (1994). enteral formula into a patient
Catheters Could begin via a naso-gastric route.
marketing in 05/99
- ------------------------------------------------------------------------------------------------------------------------------------
Enteral Food NO Sold to Clintec NA NA NA Special liquid food to be used FDA 510(k)
Product Line (1991) with Enteral Catheters.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

CONTRACT RESEARCH & DEVELOPMENT

The Company derived no revenue from contract research & development
arrangements during 1998 and 1997 revenue was less than 1% of total Company
revenue. From time-to-time, the Company may be contracted by larger medical
product companies to develop or assist in the development of prototype medical
devices. The Company continues to explore opportunities in this area of business
as it aligns itself with larger medical product companies for contract
manufacturing and original equipment manufactured ("OEM") products.

MARKETING AND CUSTOMERS

Through 1989, the Company marketed many of its products including a
line of dietary products to the alternate care market. However, the dominance in
this market by larger medical product companies for enteral food products and
reimbursement changes in the Federal Government Medicare System prompted the
Company's decision to reassess its business objectives. The Company subsequently
curtailed its selling activities in the alternate care market and in August
1989, laid off its dietary sales force. In late 1991, management attempted to
expand its sales distribution network by using independent manufacturer
representatives ("IMR") and focus on the G.I. Lab market with devices carrying a
higher return on investment than nutritional products. However, by mid-1992,
after experiencing disappointing marketing results using this distribution
channel, the Company began to restructure its marketing of these products by
using other sales distribution outlets including the expansion of its private
label and OEM network.

The Company had distribution arrangements, renewable on an annual
basis, in many of the countries in which its products were sold. In connection
with the Sherwood agreement many of the remaining international distribution
arrangements have been terminated. The remaining distributors operate on an
order by order basis pursuant to the Company's terms and conditions of sale
and/or past practices. Sales are made directly by the Company to its
distributors who, in turn, determine prices to customers and service customer
accounts.

By mid-1993, the Company announced it had entered into an exclusive
technology and patent license agreement with Nutricia, B.V. In connection with
the agreement the Company has sublicensed one of two Hydromer technology and
patent licenses. The agreement provides Nutricia with the right to manufacture
and sell, under their name, the Company's former line of enteral and surgical
products in Europe, Africa, Australia and Asia, with the exception of Japan,
while reserving the Company's rights to sell its products, now restricted by the
Sherwood agreement, and in connection with the Company's trademarks/tradenames.
The Company received $300,000 cash which was recorded in other income in 1993,
and will receive a 5% royalty for the life of patented products. There were no
royalties in 1998 or 1997.

The agreement with Nutricia, B.V. provides for the development of
products by both companies per a five year non-cancellable cooperative
arrangement. This European partner had been expected to retain the Company's
innovative research and development abilities for additional fees but this had
not materialized. The rights to any new products subsequently developed will be
individually negotiated. Any other similar new product developed independently
by either party will be subject to the right of first refusal by the other. The
Company sent a notice of termination by registered mail on February 3, 1997.

<PAGE>

MARKETING AND CUSTOMERS (cont'd)

In early 1994, the Company appointed C.R.Bard as a distributor of
certain specialty G.I. products, specifically, the Company's "J-Tubes" and the
related accessories. The distributor was also licensed to manufacture the
"J-Tubes". This agreement, together with the above agreements accomplished part
of the Company's business strategy of expanding its private label and OEM
product manufacturing and distribution network.

Through mid-1994, the majority of the Company's medical devices were
sold directly to customers and distributors, who in turn sell them directly to
hospitals and other medical institutions and facilities and to smaller
distributors concentrating on the home health care market. The Company also
manufactured and sold its products to larger medical product companies on a
private label and OEM basis as discussed above.

In May 1994, the Company successfully negotiated several agreements
with Sherwood Medical Company which provided the Company with much needed cash
to operate the business. In addition, the Company licensed and sub-licensed
certain patented technology. The two year supply agreement, agreed to by the
Company, expired in 1996. The Company agreed to a five year covenant not to
manufacture or sell medical devices promoted for gastrointestinal feeding or
gastric decompression. A two and one half year supply agreement was also signed
on the Company's "J-Tube" products subject to existing agreements with other
companies which expired in 1996.

Sales of the Company's products to specific customers may, at times,
be significant to the overall revenues of the Company. During 1998, Sherwood
Medical Company accounted for approximately $10,000, or less than 1% of the
Company's revenues, approximately $514,000 or 27% of the Company's revenues
during 1997 and approximately $1,951,000 or 74% in 1996. Sales to Smith
Industries Medical Systems/Portex Ltd. amounted to $596,000 or 49% versus
$700,000 or 36% in 1997 and $114,000 or 4% in 1996, and Bard Interventional
amounted to $234,000 or 19% versus sales of $225,000 or 12% in 1997 and $200,000
or 8% in 1996. No other single customer accounted for more than 10% of the
Company's revenue in 1998, 1997, or 1996. In May 1996 the agreement was
completed and the Company will continue to do OEM work for Sherwood Medical on a
purchase by purchase order basis. The company has refocused its efforts on the
manufacture and selling of the Endoscopic Product line through its developing
dealer network and with its ISO 9000 certification, the development of the line
in Europe along with the continuation of its contract manufacturing, using the
Company's extensive coating technology and its proprietary processes for coating
medical devices, for medical product companies without this certification.

COMPETITION

The market for private label, OEM and contract manufacturing of
medical devices is highly competitive and subject to rapid technological change.
Management considers the most significant competitive factors in its market to
be product innovation, quality of customer service and satisfaction, reliability
of product performance plus, competitive pricing, terms of purchase, and
dependability of product on-time delivery.

The Company believes that its products have significant
characteristics which differentiate them from available competing products in
the medical device market. As indicated under "General" above, these
characteristics are in part attributable to the application of Hydromer to
certain of the Company's products. One distinguishing feature of the Company's
line of "Biliary Stents", compared to many competitors' devices, is the
application of Hydromer to the interior wall of the stent. Hydromer has been
shown to significantly increase the life of the implanted device. The need to
regularly replace the device has been reduced and thus, may lessen the patient's
frequency of enduring the trauma of replacement procedures. Additionally, when
applied to the tip of the Company's line of "Coagulation Probes" the moistened
Hydromer allows the instrument's clean removal after an ulcerated area has been
coagulated with the device. Therefore the ulceration is not re-injured after the
surgical procedure.

<PAGE>

COMPETITION (cont'd)

There can be no assurance that, as market acceptance of Hydromer's
patented technology as applied to medical devices increases, alternatives to the
Company's products, with similar products, properties and applications, could
not be developed by other companies. The industry in which the Company competes
is characterized by rapid technological advances and includes competitors which
possess significantly greater financial resources and research and manufacturing
capabilities, larger marketing and sales staffs, and longer established
relationships with customers than does the Company. Moreover, the Company's
products and services encounter and will encounter significantly more
competition in both domestic and European markets as a consequence of the
relatively greater market presence of competing corporations. Competitors range
from small specialized firms to large diversified companies, many of which have
resources substantially greater than those of the Company. Furthermore, United
States Government health care cost containment efforts may have an adverse
affect on prices that the Company can charge for its products.

BACKLOG

The Company maintains a high degree of service for its customers by
shipping its product within the predetermined time allotments usually
established by the customer. Delivery of product may be required anywhere from a
few days to several weeks from receipt of an order. Backlog, which are orders
placed and not yet shipped, was approximately $300,000 and $675,000 as of
December 31, 1998 and 1997, respectively.

PRODUCTION AND QUALITY CONTROL

The principal raw materials utilized in the production of the
Company's products is United States Pharmacopeia ("USP") class VI grade
polyurethane. This polyurethane is manufactured to the Company's specifications
and is purchased in pellet form to be subsequently processed at the Company's
facilities via extrusion or injection molding. Considerably all materials
employed in the manufacturing process are purchased domestically and can
generally be obtained from a number of sources at competitive prices. The
Company maintains what it considers to be adequate inventories of the raw
materials used in its production processes. The Company has experienced no
substantial shortages of any raw material employed in its production processes.
In its manufacturing and other processes, the Company follows procedures
designed to maintain a high level of quality in its medical devices. Such
procedures include adherence to precise specifications which are continually
reviewed and upgraded by the Company for both product integrity and packaging
materials. A staff of quality assurance employees with technological expertise
is maintained by the Company at its manufacturing facilities.

The Company, beginning in 1995, initiated a program to ensure that
its products conform to the European Community legislation for medical devices.
Conformance is demonstrated by affixing the CE mark to the products made by the
Company. The Company has met the requirements of the ISO (international
organization for standardization) standard by certification to ISO 9001 on
October 9, 1996. The standard requires the Company to design and manufacture
products according to a rigorous quality system. In addition, the Company has
employed British Standards Institution Inc. to serve as its notified body and is
directing its efforts to BS EN ISO 9000 registration. Four of the products made
by the Company were approved for registration to carry the CE Mark on September
29, 1998.

<PAGE>

RESEARCH AND DEVELOPMENT

The Company's research and development activities have been primarily
devoted to the development and enhancement of the products described above and
to the design and development of new products. In connection with this
innovative development ability the Company, from time-to-time, may be contracted
by larger medical product companies to develop or assist in the development of
prototype medical devices. A portion of the Company's overall business objective
is to continue promoting this area of the business as it aligns itself with
larger medical product companies. Further, the Company has and continues to
utilize certain physicians and surgeons, who are recognized in their field of
expertise, for product development and evaluations. Remuneration to these
medical professionals for their efforts may be in the form of royalties
contingent on the products being subsequently marketed and revenue streams
generated. It is estimated that less than $25,000 has been spent during 1998 and
1997.

PATENTS, TRADEMARKS AND MATERIAL CONTRACTS

The Company holds an exclusive, world-wide license to use certain
Hydromer which were in existence in 1982 and any patents which are improvements
thereto in connection with "enteral feeding products". Two of the patents have
expired in March of 1998 and two current patents now in effect are considered
improvements. The Company under a covenant not to compete with Sherwood cannot
design or build these products until May 20, 1999. The Company is exploring the
feasibility of manufacturing enteral feeding products after the covenant
expires. The two current patents which are improvements to the original licensed
patents, last expire in 2005. Foreign patents based on these patents are in
effect in Belgium, Canada, France, Germany, Japan, Luxembourg, Netherlands and
England.

As to all other products made by the Company any licenses with
Hydromer were terminated with the expiration of the earlier granted Hydromer
Patents.

Until May 1994, the Company held the rights to several trademarks
(among others "Dobbhoff", "Entriflex", "Hydroflex", "Pedi-Tube" "Entrimit", and
"Entri"), in the United States and abroad. These trademarks were conveyed to
Sherwood as part of the asset purchase agreement dated May 19, 1994 between
Sherwood Medical Company and Biosearch Medical Products, Inc. See note 4,
"Disposition of Assets - Sherwood Medical Company Agreement".

The Company uses the trademark "Hydromer" pursuant to the terms of a
license. The Company regards such trademarks to be of material importance to its
business. The Company's now existing registrations in the United States have a
term of twenty (20) years, renewable for a second term of ten (10) years.
(Registrations and renewals granted after November 16, 1989 have a term of nine
years.) The initial terms of the foregoing trademark registrations will not
expire before 1998.

<PAGE>

PATENTS, TRADEMARKS AND MATERIAL CONTRACTS (cont)

The Company has a material contract with Sherwood Medical Company
which was announced on May 20, 1994. The agreement provided for the sale of all
assets, except inventories, used exclusively in the manufacture, sale and
distribution of substantially all of its enteral access device business,
including trademarks to Sherwood Medical Company. In addition, the Company
licensed and sub-licensed certain patented technology. The Company agreed to a
two year supply agreement of the same products with annual minimum purchases of
$2,500,000 at cost plus ten percent. The Company agreed to a five year covenant
not to manufacture or sell medical devices promoted for gastrointestinal feeding
or gastric decompression. A two and one half year supply agreement was also
signed on the Company's "J-Tube" products subject to existing agreements with
other companies. This two year supply agreement expired in May 1996.

In addition to the Sherwood agreement, the Company has OEM
relationships with C.R. Bard, United States, U.S. Endoscopy, United States and
Smith Industries Medical Systems, England. The Company manufactures products for
these clients under the clients' label.

The Company and the Company's President have agreed not to compete
with Sherwood Medical Company, with respect to enteral feeding and gastric
decompression devices for a period of five (5) years beginning May 19, 1994.
This agreement was negotiated in connection with the sale of assets and
resulting license and supply agreements. (See note 4, "Disposition of Assets -
Sherwood Medical Company Agreement").

GOVERNMENT REGULATION

The Company's medical products come under the jurisdiction of the
United States Federal Food and Drug Administration ("FDA"), an agency of the
Federal Department of Health and Human Services, as well as other federal, state
and local agencies, and similar agencies in other countries.

Substantially, all of the Company's medical device products have been
classified by the FDA as Class II regulated devices. In accordance with section
510(k) of the Federal Food, Drug, and Cosmetic Act and the Safe Medical Devices
Act of 1990 ("SMDA") a pre-market notification must be submitted informing the
FDA of the Company's intent to place the device into commercial distribution. A
device cannot be commercially distributed in the United States until the FDA
finds the device substantially equivalent to existing devices marketed in
interstate commerce prior to May 28, 1976, the enactment date of the medical
device amendments.

Since the Company's devices come under the jurisdiction of the FDA,
the Company and such products are subject to FDA regulations which, among other
things, allow for the conduct of detailed inspections of device manufacturing
establishments and require adherence to current good manufacturing practices
("CGMP") for the manufacture and design of medical devices. Noncompliance with
applicable regulations promulgated by such agencies can result in criminal
and/or civil penalties, voluntary recall, seizure of products, total or partial
suspension of production and refusal to process applications for product review.
The Company makes every effort to continually monitor its compliance to CGMPs
and does not believe that these regulations will have a material adverse effect
on its business.

<PAGE>

ENVIRONMENTAL MATTERS

The Company is subject to the regulatory jurisdiction of Federal,
State and local agencies regarding the protection of the environment. It is
classified as a "small hazardous waste generator" as a result of using plastic
adhesives in its process. The Company has been able to comply with the various
laws and regulations without any material adverse affect on its business.

There are no legal proceedings or claims involving environmental
issues and the Company is of the opinion that its operational methods are
adequate to prevent any such claim or proceeding from arising.

EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES

The executive officers and other significant employees of the Company are
as follows:

AGE
DECEMBER 31,
NAME 1998 POSITION WITH THE COMPANY
---- ---- -------------------------

Manfred F. Dyck 63 Chairman of the Board of
Directors, President and
Director

Robert J. Moravsik 56 Vice President - General
Counsel and Secretary

Robert C. Keller 60 Treasurer & Chief Accounting
Officer

Martin C. Dyck 37 Vice President - Operations,
New Product Development Coordinator

<PAGE>

EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES (CONT)

MANFRED F. DYCK has been the President of the Company and Chairman of
the Board since its inception. Previously, Mr. Dyck was engaged in biomedical
product development at Ethicon, Inc., a manufacturer of medical devices and a
subsidiary of Johnson & Johnson, and served as a member of the president's staff
at Cordis Corporation, a manufacturer of medical devices from 1965 to 1971. Mr.
Dyck has been the Chairman of the Board of Hydromer, Inc. ("Hydromer") a company
formed for the purpose of developing polymeric complexes for commercial use
since 1980. Prior to that time Mr. Dyck was President of Hydromer, which was,
until 1983, a subsidiary of the Company. From 1979 to 1986 Mr. Dyck was a
director of CardioSearch, Inc., a manufacturer of cardiovascular devices. He
devotes most of his business time to his responsibilities with the Company.

ROBERT J. MORAVSIK has been Vice President - General Counsel and
Secretary since January 1987. Mr. Moravsik served as Vice President - General
Counsel and Secretary of Fisher Stevens, Inc. from 1978 to 1986. He is a member
of the Bar of the State of New Jersey, the State of New York, the Federal
District Courts of New Jersey and New York and the United States Supreme Court.

ROBERT C. KELLER has been Treasurer and Chief Accounting Officer since
July 1995. Prior to this appointment, Mr. Keller was the accounting manager and
controller for Mailing Services Inc. He joined Mailing Services as an Accounting
Manager in 1985. Prior to that he held positions of increased responsibility
with Midland Ross Corp. from 1980 to 1985, Johnson & Johnson from 1976 to 1980,
Quaker Oats Co. from 1972 to 1976, and Beecham Pharmaceutical from 1966 to
1972.

MARTIN C. DYCK has been Vice President of Operations, New Product
Development Coordinator since January 1993. For the previous three years, Mr.
Dyck was the Director of Manufacturing and New Product Development Coordinator.
He joined the company in 1986 as a Junior Financial Assistant and R&D Supervisor
of the Company's second shift Pilot Plant Operations.

The executive officers of the Company serve at the discretion of the
Board of Directors (except for Manfred F. Dyck who has an employment agreement
providing for 6 months notice prior to termination) and are active in its
business on a day-to-day basis. No family relationship exists between any of the
foregoing persons except Manfred Dyck and Martin C. Dyck who are father and son.

EMPLOYEES

As of December 31, 1998 the Company had 23 employees compared to 56
employees as of December 31, 1997. Currently, the Company has no foreign
facilities or employees located abroad and it is not a party to any collective
bargaining agreements. There were no wage increases given during 1998 and 1997.

<PAGE>

ITEM 2. PROPERTIES

The Company sold its property at 35 Industrial Parkway to Hydromer
Inc., a related party, for $850,000 and a prepaid leaseback of approximately two
thirds of the building for three years with a value of approximately of
$346,500, bringing the value of the total deal to $1,196,500. With this
transaction the Company is debt free and all judgements against it have been
dismissed.

ITEM 3. LEGAL PROCEEDINGS

On August 25, 1997 Summit Bank notified the Company that it was in
default for failure to make payments when due. The bank exercised its right
under the Loan Document to declare immediately due and payable the entire
outstanding balance due pursuant to the Loan. On February, 24, 1998, Summit Bank
obtained a judgement against the Company on the docket of the Superior Court in
Bergen County, N.J. for nonpayment of notes and on March 18, 1998 they obtained
a judgement for foreclosure against the Company on the docket of the Superior
Court of Somerset County, N.J. On June 12, 1998, the Company sold its property
as discussed in Item 2, paid off its debt to Summit Bank and all judgements have
been dismissed.

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

Not applicable.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS

The Company estimates that its shares of common stock had traded
between $.10 and $.20 per share during 1998. Since it was denied an exception to
the new NASDAQ listing and maintenance standards, the Company's stock
experiences limited trading activity. The new NASDAQ standards were approved by
the S.E.C. on August 29, 1991, effective on March 2, 1992. The Company's stock
was deleted from the NASDAQ system on August 4, 1992, and is now traded on the
OTC Bulletin Board.

As of March 28, 1998, the Company had approximately 600 shareholders
of record and 2,202,878 shares of no par, common stock outstanding. At the
annual shareholders' meeting on June 21, 1995, the shareholders authorized a 5
for 1 reverse stock split which reduced the number of outstanding shares from
11,014,290 to 2,202,858.

The Company has never paid a cash dividend on its Common Stock and
does not expect to pay dividends in the foreseeable future. The payment of
dividends in the future will depend upon the Company's available earnings, the
general financial condition of the Company, its capital needs and other factors
deemed pertinent by the Board of Directors.

<PAGE>

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

YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

OPERATIONS DATA 1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues 1,295 1,936 2,649 3,268 3,574

Gross profit 24 399 410 490 664

Loss from operations (835) (493) (813) (842) (788)

(Loss)/earnings
before extraordinary item (851) (556) (884) (844) 2,897

Extraordinary item -- -- -- -- 114

Federal Income Tax -- -- -- -- (60)
------- ------- ------- ------- -------

Net(loss)/income $ (851) $ (556) $ (884) $ (844) $ 2,951
======= ======= ======= ======= =======

INCOME (LOSS) PER COMMON SHARE FROM:
Continuing operations
before extraordinary item $ ( .39) $ (.25) $ (.40) $ (.38) $ .26

Extraordinary item -- -- -- -- .01
------- ------- ------- ------- -------

Net income/(loss) $ (.39) $ (.25) $ (.40) $ (.38) $ .27
======= ======= ======= ======= =======

WEIGHTED AVERAGE NUMBER
OF COMMON SHARES 2,203 2,203 2,203 2,203 2,203

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

AS OF DECEMBER 31,
-----------------------------------------------------------------------
(IN THOUSANDS)
BALANCE SHEET DATA 1998 1997 1996 1995 1994
------- ------- ------- ------- -------

Total assets $ 897 $ 2,117 $ 2,513 $ 3,464 $ 4,452
Current maturities of
long-term debt $ -- $ 691 $ 37 $ 33 $ 29
Long-term debt $ -- $ -- $ 663 $ 699 $ 732

NOTE: THE COMPANY HAS NOT PAID A DIVIDEND DURING THE
FIVE (5) YEAR PERIOD ENDED DECEMBER 31, 1998.
</TABLE>

<PAGE>

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

RESULTS OF OPERATIONS
1998 COMPARED TO 1997

REVENUES

Revenues of $1,295,000 for 1998 were approximately $641,000, or 33%
lower than revenues of $1,936,000 for 1997. The sales of the old line disposable
products declined slightly during 1998, however the overall sales were
negatively impacted by the loss of the Sherwood business during 1998 due to
their complete internalization of all manufacturing of the medical devices
purchased from the Company and the loss of the Smith Industries Medical Systems
business after all existing purchase orders where completed in June 1998 when
they suspended all purchases due to a failed product launch and excessive
inventory estimated to last several years and no other purchase orders were
issued.

Sales to Sherwood were approximately $10,000 or 1% in 1998 compared to
$514,000 or 27% of total sales for 1997. The Company also sells other medical
devices under both private label and Original Equipment Manufacture ("OEM")
agreements. Other OEM sales for 1998 amounted to approximately $934,000, or 76%
versus 1997 sales of $1,030,000 or 53%.This was due to the loss of $104,000 from
Smith Industries Medical Systems/Portex Ltd. business versus 1997 as discussed
above.

International sales for 1998 and 1997 totaled approximately 61% and
47% respectively. Sales decreased due to the ("OEM") agreement with Smith
Industries Medical Systems (Portex Ltd.) stopping in June 1998. The Company
received its ISO 9001 certification in 1996 and its CE registration on its
products in 1998, and feels it will have a large impact on the development of
its international sales in the future.

The Company continues to develop, manufacture and sell products for
endoscopic surgery and biofeedback devices for the treatment of anorectal
dysfunctional conditions. During 1998, these products accounted for
approximately $200,000, or 15% of the Company's revenue versus $286,000, or 15%
of revenues during 1997.

GROSS PROFIT

Gross profit of $24,000 for 1998 was lower by $375,000, or 94% than
the gross profit of $399,000 for 1997. The gross profit was 2% of revenues in
1998 and 21% in 1997. The decline in gross profit was due mainly to the loss of
both the Sherwood business and the Smith Industries Medical Systems business
during 1998. Because revenues were not high enough to cover the fixed
manufacturing costs, gross profits declined significantly. Inventory reserves
were approximately $221,000 and $257,000 in 19978 and 1997 respectively.

OPERATING LOSS

Operating loss of $835,000 in 1998 was $342,000 greater than the
operating loss of $493,000 generated during 1997. The unfavorable change in
operating loss is due mainly to the significant drop in revenues during 1998 as
discussed above offset by the continued cost savings attained during the year,
which included no wage increases, CEO took substantial salary cut, vacated
positions were not filled and the Company changed from stocking product to
building to order. These savings amounted to $266,000 or 17% in manufacturing
and $34,000 or 4% in selling and general administration versus 1997.

<PAGE>

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

RESULTS OF OPERATIONS
1998 COMPARED TO 1997 (cont)

INTEREST EXPENSE

Net interest expense in 1998 of $22,000 was $62,000, or 18% lower than
$84,000 in 1997. The decrease in net interest expense in 1998 is directly
related to the sale of the property in June 1998 and the payoff to Summit Bank
of the mortgage debt.

OTHER INCOME, NET

Other income of $7,000 in 1998 was $15,000 less than the other income
of $22,000 in 1997. The other income declined due to the loss of rental income
from Hydromer.

FEDERAL INCOME TAXES

No federal income taxes were incurred in 1998 and 1997.

<PAGE>

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

RESULTS OF OPERATIONS
1997 COMPARED TO 1996

CONTINUING OPERATIONS

REVENUES

Revenues of $1,936,000 for 1997 were approximately $713,000, or 27%
lower than revenues of $2,649,000 during 1996. The sales of the old line
disposable products have steadied, however overall sales were negatively
impacted by the expiration of the Sherwood agreement in May 1996, partially
offset by the Company's sales to Smith Medical Systems, now a part of Portex
Ltd., continued in 1997.

Since the expiration of the Sherwood agreement, the Company continues
to produce products for Sherwood Medical on a purchase order basis at greater
gross margins than the agreement margin of 10%.Sales to Sherwood in 1997 were
approximately $514,000, or 27% compared to $1,951,000, or 74% of total sales in
1996.The Company also sells other medical devices under both private label and
Original Equipment Manufacture ("OEM") agreements. OEM sales for 1997 amounted
to approximately $1,030,000, or 53% versus 1996 sales of $320,000, or 12%. This
was due to sales to Smith Industries Medical Systems/Portex Ltd. amounting to
$700,000 or 36% of sales.

International sales for 1997 and 1996 totaled approximately 47% and
11%, respectively. The increase is due to the ("OEM") agreement with Smith
Industries Medical Systems (Portex Ltd.). The Company received its ISO 9001
certification in 1996, and feels it will have a large impact on the development
of its international sales in the future.

The Company continues to develop, manufacture and sell products for
endoscopic surgery and biofeedback devices for the treatment of anorectal
dysfunctional conditions. During 1997, these products accounted for
approximately $286,000, or 15% of the Company's revenue versus $253,000 or 10%
of revenues during 1996.

GROSS PROFIT

Gross profit of $399,000 for 1997 was lower by $11,000, or 3% less
than the gross profit of $410,000 for 1996. The gross profit was 21% of revenues
in 1997 and 15% in 1996. The Sherwood agreement, which carried a profit margin
of 10%, expired in 1996. The underlying products relating to the Sherwood
agreement consist of the Company's former line of Enteral Feeding Devices and
Specialty G.I. Products. These products when marketed and sold by the Company
have previously generated significantly higher profit margins. Incremental sales
of any additional or newer products could potentially improve the Company's
gross profit performance provided however, that the pricing of such products
absorb and exceed direct and incremental costs while fixed overhead spending is
not materially increased.

<PAGE>

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

RESULTS OF OPERATIONS
1997 COMPARED TO 1996 (cont)

CONTINUING OPERATIONS (cont)

OPERATING LOSS

Operating loss of $493,000 in 1997 was $320,000 less than the
operating loss of $813,000 generated during 1996. The favorable change in
operating loss is due mainly to the increase in gross profit from continued cost
savings attained during the year in manufacturing of $361,000 or 33% and in
selling and administration of $330,000 or 27% versus 1996.The cost savings
attained during the year included the following: no wage increases, a pay cut
taken by the CEO, vacated positions that were not filled and the Company changed
from stocking product to building to order.

INTEREST EXPENSE

Net interest expense in 1997 of $84,000 was $12,000, or 18% higher
than $72,000 in 1996. The increase in interest expense in 1997 is directly
related to the decreasing interest income on cash reserves offset by the
continuing mortgage debt.

OTHER INCOME, NET

Other income of $22,000 was $21,000 favorable to the other income of
$1,000 in 1996. The other income in 1997 was due to rental income received from
Hydromer.

FEDERAL INCOME TAXES

No federal income taxes were incurred in 1997 and 1996.

YEAR 2000 ISSUE

In 1998 the Company formed a Y2K committee of its CEO, President and
two Vice Presidents and members of Hydromer (a related Party) with whom they
share facility space. The committee has conducted a review of its computer
system and products to identify what could be affected by the YEAR 2000 Issue.
They do not believe there are any products, hardware nor software that will be
affected except the Company's System 36 software which may not perform the Year
2000 calculations correctly. The committee believes that by converting to new
software, the Year 2000 Issue will not pose significant operational problems for
the Company's computer system.

In addition to the Year 2000 software and equipment implementation
activities, the Company intends to contact major suppliers to assess their
compliance. The Company cannot assess the effect of Year 2000 programs
implemented by their customers and suppliers.

The Company has adopted a worse case scenario and has formulated plans
to preserve its property and business. The Company intends on delaying shipments
during January 2000 due to possible malfunctions caused by the Year 2000 Issue;
however, they anticipate being able to supply their customers with sufficient
products prior to this date to cover their needs beyond January 2000. While the
costs of planning for the Year 2000 scenario may not have a material impact on
the Company, the four week loss of operations is likely to materially impact its
business.

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

The Company's operating activities generated $97,000 of cash and cash
equivalents during 1998. Investing activities used $5,000 during the year for
capital expenditures and there were no financing activities during 1998.

Operating activities generated a positive cash flow of $97,000 during
1998 as compared to a cash drain of $310,000 in 1997. The large contributing
factors were decreases in the Company's trade receivables of $273,000; a
decrease in other current assets of $57,000; a decrease in inventories of
$74,000 and increases in customer deposits of $380,000; accounts payable of
$10,000 and an increase in accrued liabilities of $91,000 which generated cash,
offset by a loss for the year of $851,000. Depreciation and amortization, a non
cash item, amounted to $60,000.

The Company received $200,000 from C.R.Bard as part of a standstill
agreement while continuing to negotiate a contract with said company. It also
received a prepaid purchase order from C.R.Bard for 400,000 intermittent urinary
catheters at an agreed selling price of $.45 each or $180,000, to be delivered
when the final agreement is reached. The Company booked both transactions as
customer deposits, $200,000 to be applied against the final negotiated contact
amount and the prepaid purchase order to be produced and shipped until the order
is completed. The increase in other current assets is due to the sale of the
building and the rent free lease back of two thirds of the building valued at
$294,000 which was a non cash item and had a positive impact on cash flow by
$57,000. The significant decrease in accounts receivable was dur to the
concentrated efforts to increase cash flow by collecting outstanding balances
due.

Other non cash items created by the sale lease-back transaction, which
affected operating accounts were as follows: accounts payable $109,000 and
accrued liabilities $50,000.

Capital expenditures were $5,000 and $35,000 in 1998 and 1997,
respectively. Capital expenditures were cut drastically to due to fiscal
constraints.

The Company has no available line of credit established and has not
been able to obtain an asset based loan on unencumbered assets. Commercial banks
and lending institutions were not willing to provide funds to the Company due to
the history of recurring losses from operations before non-recurring items and
extraordinary gains and there is no assurance that operations will generate
sufficient cash flow to meet long-term obligations.

The Company has suffered recurring losses from continuing operations
of approximately $851,000 in 1998 and $556,000 in 1997. The Company has
continued its cost containment activities started in an effort to reduce
expenses. These activities included, no wage increases, substantial salary cut
taken by CEO, vacated positions not filled and a change from stocking product to
building to order.

Management believes that the Company's financial condition at December
31, 1998 represents an uncertain base to conduct current operations. The
Company's ability to continue as a going concern is dependent upon its success
at generating sufficient cash flow or obtaining additional financing as required
to meet its long-term obligations, support its working capital needs and
curtailing the ongoing losses by generating profitable revenue levels. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties. In February 1999 the Company signed an agreement
with C.R.Bard to sell its worldwide exclusive rights to the Company's technology
for coating intermittent urinary catheters for $400,000 and sold its machine for
coating catheters for $250,000. The parties also reached an agreement, whereby
Biosearch has offered to manufacture and coat intermittent urinary catheter
components for C.R.Bard until such time as it decides to perform these
operations themselves. Proceeds of this transaction has increased the working
capital of Biosearch, however it is not significant enough to change
management's belief as to the financial condition of the Company.

<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 (SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities". SFAS 133 establishes accounting
and reporting standards for derivatives as other assets or liabilities and
measures them at fair value. Under certain conditions, the gains or losses from
derivatives may be offset against those from the items the derivatives hedge
against. Otherwise, gains and losses from derivatives are recognized currently
in the results of operations. The Company will adopt SFAS 133 in the fiscal year
ending December 31, 1999. Adoption of this statement is not anticipated to have
a material effect on the Company's financial position or results of operations.

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

For additional information concerning this item, see "Item 13.
Exhibits and Financial Statement Schedules and Reports on Form 8-K SB".

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

Not applicable.

ITEM 9. DIRECTORS AND OFFICERS OF REGISTRANT

For information concerning this item, see "Item 1. Business-Executive
Officers and Significant Employees" and the Proxy Statement to be filed with
respect to the 1998 Annual Meeting of Shareholders (the "Proxy Statement"),
which information is incorporated herein by reference.

ITEM 10. EXECUTIVE COMPENSATION

For information concerning this item, see the Proxy Statement, of
which its information is incorporated herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

For information concerning this item, see the Proxy Statement, of
which its information is incorporated herein by reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

For information concerning this item, see the Proxy Statement, of
which its information is incorporated herein by reference.

<PAGE>

ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K SB

(A) 1. FINANCIAL STATEMENTS:

The financial statements of the Company filed in this Annual Report
on Form 10-K SB are listed in the attached Index to Financial Statements and
Schedules.

2. FINANCIAL STATEMENT SCHEDULES:

The financial statement schedule of the Company filed in this Annual
Report on Form 10-K SB is listed in the attached Index to Financial Statements
and Schedules.

3. EXHIBITS:

The exhibits required to be filed as part of this Annual Report on
Form 10-K SB are listed in the attached Index to Exhibits.

(B) 1. REPORTS ON FORM 8-K SB:

The Company filed reports on Form 8-K SB with the Commission: 1.)
dated May, 23, 1994, amended July 26, 1994 regarding "Disposition Of Assets",
and 2.) dated January 27, 1995, amended February 9, 1995 regarding "Changes In
Registrant's Certifying Accountant", and 3.) dated September 9,1997 regarding
"Default on Summit Bank Mortgage" and 4.) dated December 3, 1997 regarding
"Contract of Sale of Real Estate Holdings", and 5.) dated June 12, 1998
regarding "Disposition Of Assets" and 6.) dated March 1, 1999 regarding
"Disposition Of Assets".

<PAGE>

POWER OF ATTORNEY

The Company and each person whose signature appears below hereby
appoint Manfred F. Dyck and Robert C. Keller as attorneys-in-fact with full
power of substitution, severally, to execute in the name and on behalf of the
registrant and each such person, individually and in each capacity stated below,
one or more amendments to the annual report; which amendments may make such
changes in the report as the attorney-in-fact acting deems appropriate and to
file any such amendment to the report with the Securities and Exchange
Commission.

SIGNATURES

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

Dated: September 20, 1999

BIOSEARCH MEDICAL PRODUCTS INC.

By: /s/ Manfred F. Dyck
----------------------------------
Manfred F. Dyck
Chief Executive Officer
Chairman Board of Directors

Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.

Dated: September 20, 1999

By: /s/ Manfred F. Dyck
----------------------------------
Manfred F. Dyck
Chief Executive Officer
Chairman Board of Directors

Dated: September 20, 1999

By: /s/ Robert C. Keller
----------------------------------
Robert C. Keller
Chief Accounting Officer and
Treasurer

<PAGE>

SIGNATURES (cont)

Dated: September 20, 1999

By: /s/ Martin C. Dyck
----------------------------------
Martin C. Dyck
Director

Dated: September 20, 1999

By: /s/ David M. Schreck, M.D.
----------------------------------
David M. Schreck, M.D.
Director

Dated: September 20, 1999

By: /s/ Klaus J.H. Meckeler, M.D.
----------------------------------
Klaus J.H. Meckeler, M.D.
Director

Dated: September 20, 1999

By: /s/ Frederick L. Perl, M.D.
----------------------------------
Frederick L. Perl, M.D.
Director

<PAGE>

BIOSEARCH MEDICAL PRODUCTS INC.
FINANCIAL STATEMENTS AND SCHEDULES

INDEX

PAGE
NUMBER
FINANCIAL STATEMENTS:

Independent Auditors' Reports 25

Balance Sheets at
December 31, 1998 and 1997 26 - 27

Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996 28

Statements of Shareholders' Equity
for the Years Ended
December 31, 1998, 1997 and 1996 29

Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 30

Notes to Financial Statements 31 - 43

ALL OTHER SCHEDULES HAVE BEEN OMITTED
BECAUSE THEY ARE NOT APPLICABLE OR THE REQUIRED INFORMATION
IS INCLUDED IN THE FINANCIAL STATEMENTS OR THE NOTES THERETO.

<PAGE>

INDEPENDENT AUDITORS' REPORT

THE BOARD OF DIRECTORS AND SHAREHOLDERS
BIOSEARCH MEDICAL PRODUCTS, INC.:

We have audited the accompanying balance sheets of Biosearch Medical
Products, Inc. as of December 31, 1998 and 1997 and the related statements of
operations, shareholders' equity and cash flows for each of the three years
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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present
fairly the financial position of Biosearch Medical Products, Inc. as of December
31, 1998 and 1997, and the results of its operations and its cash flows for each
of the three years ended December 31, 1998, in conformity with generally
accepted accounting principles.

The accompanying financial statements have been prepared assuming that
Biosearch Medical Products, Inc. will continue as a going concern. As discussed
in note 1 to the financial statements, the Company has suffered recurring losses
from operations. There is no assurance that the Company's operations will
generate sufficient cash flow to meet its obligations or that the Company has
the ability to obtain additional financing as required, which raises substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

AMPER, POLITZINER & MATTIA P.A.

EDISON, NEW JERSEY
MARCH 18, 1999

<PAGE>

BIOSEARCH MEDICAL PRODUCTS, INC.

BALANCE SHEETS

ASSETS

DECEMBER 31,
-----------------------
1998 1997
---------- ----------

CURRENT ASSETS:

Cash and cash equivalents $ 105,768 $ 14,486
Trade receivables - less allowance for
doubtful accounts of $10,000 78,751 351,964
Inventories 297,613 372,012
Other assets 256,127 18,762
---------- ----------
Total current assets 738,259 757,224
---------- ----------

PROPERTY, PLANT AND EQUIPMENT 2,440,400 4,239,648
Less accumulated depreciation
and amortization 2,287,523 2,887,766
---------- ----------
Net property, plant
and equipment 152,887 1,351,882
---------- ----------

OTHER ASSETS
Other assets, net 5,862 8,123
---------- ----------

Total other assets 5,862 8,123
---------- ----------

TOTAL ASSETS $ 896,998 $2,117,229
========== ==========

(continued)

<PAGE>

BIOSEARCH MEDICAL PRODUCTS, INC.

BALANCE SHEETS
(CONTINUED)

LIABILITIES AND SHAREHOLDERS' EQUITY

DECEMBER 31,
1998 1997
------------ ------------
CURRENT LIABILITIES:

Current maturities of long-term debt $ -- $ 691,041
Accounts payable 253,498 353,712
Customer deposits 380,000 --
Accrued liabilities 174,330 132,330
------------ ------------

Total current liabilities 807,828 1,177,083

SHAREHOLDERS' EQUITY:

Common stock, no par value; 5,000,000
shares authorized; 2,210,798 issued
and 2,202,878 shares outstanding at
December 31, 1998 and 1997 11,129,954 11,129,954

Accumulated deficit (11,009,545) (10,158,569)

Treasury stock, at cost;
7,920 shares at December 31, 1998
and 1997 (31,239) (31,239)
------------ ------------

TOTAL SHAREHOLDERS' EQUITY 89,170 940,146

Commitments and contingencies -- --
------------ ------------

$ 896,998 $ 2,117,229
============ ============

SEE ACCOMPANYING NOTES TO
FINANCIAL STATEMENTS

<PAGE>

BIOSEARCH MEDICAL PRODUCTS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues $ 1,294,838 $ 1,936,171 $ 2,648,719

Cost of goods sold 1,271,216 1,536,936 2,238,606
----------- ----------- -----------

Gross profit 23,622 399,235 410,113

Selling, general and administrative expenses 859,077 892,602 1,222,901
----------- ----------- -----------

Loss from operations (835,455) (493,367) (812,788)
----------- ----------- -----------

Other income (expense):
Interest expense, net (22,427) (84,441) (72,055)
Other, net 6,906 21,598 1,275
----------- ----------- -----------
(15,521) (62,843) (70,780)
----------- ----------- -----------
(LOSS) BEFORE PROVISION FOR INCOME TAXES (850,976) (556,210) (883,568)

Provision for income taxes -- -- --
----------- ----------- -----------
NET (LOSS) $ (850,976) $ (556,210) $ (883,568)
=========== =========== ===========

BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (.39) $ (.25) $ (.40)
=========== =========== ===========

WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,202,878 2,202,878 2,202,878
=========== =========== ===========
</TABLE>

SEE ACCOMPANYING NOTES TO
FINANCIAL STATEMENTS

28
<PAGE>

BIOSEARCH MEDICAL PRODUCTS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

COMMON STOCK
-------------------------------------------
SHARES SHARES ACCUMULATED
ISSUED OUTSTANDING AMOUNT DEFICIT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 2,210,798 2,202,858 $ 11,129,948 $ (8,718,791)

Issuance of treasury shares in
connection with employee
stock awards -- 20 6 --

Net loss -- -- -- (883,568)
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 2,210,798 2,202,878 $ 11,129,954 $ (9,602,359)

Net loss -- -- -- (556,210)
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 2,210,798 2,202,878 $ 11,129,954 $(10,158,569)
------------ ------------ ------------ ------------

Net Loss -- -- -- (850,976)
------------ ------------ ------------ ------------

BALANCE, DECEMBER 31, 1998 2,210,798 2,202,878 $ 11,129,954 $(11,009,545)
============ ============ ============ ============
<CAPTION>

TREASURY STOCK
---------------------------
SHARES AMOUNT TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1996 (7,940) $ (31,315) $ 3,223,046

Issuance of treasury shares in
connection with employee
stock awards 20 76 82

Net loss -- (883,568)
------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 (7,920) $ (31,239) $ 1,496,356

Net loss -- -- (556,210)
------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 (7,920) $ (31239) $ 940,146
------------ ------------ ------------

Net Loss -- -- (850,976)
------------ ------------ ------------

BALANCE, DECEMBER 31, 1998 (7,920) $ (31,239) $ 89,170
============ ============ ============
</TABLE>

SEE ACCOMPANYING NOTES TO
FINANCIAL STATEMENTS.

<PAGE>

BIOSEARCH MEDICAL PRODUCTS, INC.
STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

Net (loss) $(850,976) $(556,210) $(883,568)

Adjustments to reconcile (loss) to net cash
(used in) operating activities:
Depreciation and amortization 60,271 91,279 90,862
Gain on sale of fixed assets -- (2,763) --

Changes in assets and liabilities:
Decrease/(increase) in trade receivables 273,213 (169,716) (19,747)
Decrease in inventories 74,398 141,538 102,540
Decrease (increase) in other current assets 56,657 11,903 (13,114)
Decrease in other assets 2,262 5,457 (23)
Increase in accounts payable 8,637 168,059 22,119
Increase/(decrease) in accrued liabilities 92,109 637 (56,553)
Increase in customer deposits 380,000 -- --
--------- --------- ---------

Net cash provided/(used) in operating activities 96,571 (309,816) (757,484)
--------- --------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES:

Capital expenditures (5,289) (34,593) (172,180)
Proceeds from sale of fixed assets -- 46,000 --
Decrease in escrow -- -- 312,811
--------- --------- ---------

Net cash provided/(used) by investing activities (5,289) 11,407 140,631
--------- --------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from surrendering whole life policy -- -- 402,785
Principal payments on long-term borrowings -- (8,481) (32,648)
--------- --------- ---------

Net cash provided by (used in)
financing activities -- (8,481) 370,137
--------- --------- ---------

Net (decrease)/ increase in cash and cash equivalents 91,282 (306,890) (246,716)
--------- --------- ---------

Cash and cash equivalents at beginning of period 14,486 321,376 568,092
--------- --------- ---------

CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 105,768 $ 14,486 $ 321,376
========= ========= =========
</TABLE>

SEE ACCOMPANYING NOTES TO
FINANCIAL STATEMENTS.

<PAGE>

BIOSEARCH MEDICAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS

1. LIQUIDITY

The Company's financial statements have been presented on the basis
that the Company is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company had recurring losses from continuing operations of $850,976 in 1998 and
$556,210 in 1997.

There is no assurance that the Company's revenue from its OEM
strategic alliances or niche surgical and biofeedback products will reach
volumes to which long-term operations can be conducted.

Management believes that the Company's financial condition at
December 31, 1998 represents an uncertain base to conduct current operations.
The Company's ability to continue as a going concern is dependent upon its
success at generating sufficient cash flow or obtaining additional financing as
required to meet its long-term obligations, support its working capital needs
and curtail the ongoing losses by generating profitable revenue levels. The
Company had no available line of credit established at December 31, 1998. On
February 25, 1999 the Company signed an agreement with C.R.Bard to sell its
worldwide exclusive rights to the Company's technology for coating intermittent
urinary catheters for $400,000 and sold its related machinery for $250,000. The
parties also reached an agreement, whereby the Company has offered to
manufacture and coat intermittent urinary catheter components for C.R.Bard until
such time as it decides to perform these operations themselves. Proceeds of this
transaction have increased the working capital of the Company, however it is not
significant enough to warrant a change in managements belief as to the financial
condition of the Company.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS- Biosearch Medical Products, Inc. (the
"Company") is a U.S. based corporation whose principal lines of business are in
contract manufacturing and distributing, under its own label of medical devices.
The Company is an OEM manufacturer for various medical product companies and
manufactures and distributes its own line of endoscopic products to hospitals,
through a network of dealers, both domestic and international. Credit is granted
to substantially all customers.

REVENUE RECOGNITION - The Company recognizes all revenues when the
product is shipped. Customers have the right to return merchandise only in the
event of product defects and then only upon approval by the Company. These
policies apply to distributors, OEM customers and direct sales customers. OEM
sales represent approximately 73% of the Company's total revenues, distributors
amount to approximately 12% and the balance are direct sales. Customer returns
were approximately $10,000 and $5,000 for the years ending December 31, 1998 and
1997 respectively.

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.

<PAGE>

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)

CASH AND CASH EQUIVALENTS - The Company considers all short-term
investments with maturities of three months or less at the date of purchase to
be cash equivalents. Cash and cash equivalents include money market funds and
short-term treasury bills. The Company, at December 31, 1998 and 1997 and
periodically throughout the years, has maintained balances in various operating
and money market accounts in excess of federally insured limits.

PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are
carried at cost less accumulated depreciation and amortization. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the related assets.

INVENTORIES - Inventories are valued at the lower of cost, determined
by the first in, first out method, or market. Cost includes materials, direct
labor and manufacturing overhead.

RESEARCH AND DEVELOPMENT CONTRACTS - The Company recognizes revenue
on research and development contracts on the completed contract method. The
related costs are capitalized at inception until the completion of the contract.
Anticipated losses on contracts are recorded in the period they become known.

ADVERTISING COSTS - Advertising costs are expensed as incurred and
totaled approximately $1,500, $1,400 and $24,000 for the years ended December
31, 1998, 1997 and 1996 respectively.

STOCK OPTION PLAN- The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB25) and related interpretations in accounting for its employee stock
options. Under this method, compensation cost is measured as the amount by which
the market price of the underlying stock exceeds the exercise price of the stock
option at the date at which both the number of options granted and the exercise
price are known.

LOSS PER COMMON SHARE - Effective for the Company's financial
statements for the year ended December 31, 1997, the Company adopted Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). SFAS
replaces the presentation of primary earnings per share ("EPS") and fully
diluted EPS with a presentation of basic EPS and diluted EPS, respectively.
Basic EPS excludes dilution and is computed by dividing earnings available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted EPS assumes conversion of dilutive options and
warrants, and the issuance of common stock for all other potentially dilutive
equivalent shares outstanding. All potentially dilutive equivalent shares
outstanding are anti-dilutive for all periods. The adoption of SFAS 128 did not
have a material effect on the Company's reported EPS amounts.

<PAGE>

BIOSEARCH MEDICAL PRODUCTS INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

3. INVENTORIES
DECEMBER 31,
-------------------------------
1998 1997
----------- -----------
Finished goods $ 96,263 $ 95,992
Work-in-process 61,915 140,271
Raw materials 139,435 135,749
----------- -----------
$ 297,613 $ 372,012
=========== ===========

4. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
-------------------------------
1998 1997
----------- -----------
ESTIMATED
USEFUL LIVES
Land $ -- $ 137,182
Buildings and improvements -- 1,667,355 40 years
Machinery and equipment 1,919,410 1,915,249 3 - 10 years
Furniture and fixtures 520,990 519,862 5 years
---------- ----------

$2,440,400 $4,239,648
========== ==========

Depreciation and amortization charged to income was $60,271, $91,279 and
$90,862 in 1998, 1997 and 1996, respectively.

The Company entered into an agreement with Hydromer Inc., a related party,
through a common non-majority stockholder for the sale and lease back of their
facility. The lease is classified as an operating lease in accordance with SFAS
No. 13 "Accounting for Leases". As of June 12, 1998, the building, land and
improvements with a net book value of $1,144,023 have been removed from the
balance sheet, and the loss realized on the sale transaction of $294,022 has
been deferred as prepaid rent and is being charged of to rent expense over the
lease term of 36 months. The lease requires no other rental payments.

In conjunction with the above transaction, the following noncash activity
took place:

Net book value of the building sold $1,144,023

Noncash consideration
Direct payoff of mortgage debt by buyer $691,041
Direct payoff of accrued mortgage interest by buyer 31,378
Additional mortgage fees paid by buyer 108,151
Reduction of amount due to buyer for royalties 18,730
850,000

Loss on sale of building (treated as prepaid rent) $294,022
==========

<PAGE>

BIOSEARCH MEDICAL PRODUCTS INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

5. LONG-TERM DEBT

DECEMBER 31,
-----------------------

1998 1997
------------ --------

Note payable originally due April 1, 2007 $ -- $691,041
Less current maturities -- 691,041
------------ --------
Long-term debt $ -- $ --
============ ========

The Company extinguished debt from the proceeds of the sale of the
property (Note 4.) The Company used the proceeds to pay the debt relating to the
building and with this transaction the Company is debt free and all judgements
have been dismissed

6. SAVINGS AND INVESTMENT PLANS

In May 1988, the Company established a contributory 401(k) plan for all
eligible employees. However, in April 1991, the Company's Board of Directors
indefinitely suspended the Company's contribution primarily due to the Company's
adverse profit performance. The Company pays the cost of administering the plan
which totaled approximately $7,000 per year for 1998, 1997 and 1996,
respectively.

<PAGE>

BIOSEARCH MEDICAL PRODUCTS INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

7. INCOME TAXES

Deferred tax attributes resulting from differences between financial
accounting amounts and tax bases of its assets and liabilities at December 31,
follow:

1998 1997
---------- ----------
Current assets and liabilities:

Allowance for doubtful accounts $ 4,000 $ 4,000
Inventory valuation reserve 88,000 103,000
Inventory overhead capitalization -- --
---------- ----------
92,000 107,000
Valuation allowance 92,000 107,000
---------- ----------
Net current deferred tax assets $ -- $ --
========== ==========

Noncurrent assets and liabilities:

Depreciation 458,000 89,000
Net operating loss carryforward 4,084,000 3,987,000
Alternative minimum tax credit carryforward 60,000 60,000
Investment tax credit carryforward 182,000 182,000
---------- ----------
4,784,000 4,318,000
Valuation allowance 4,784,000 4,318,000
---------- ----------

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

The provision for income taxes consists of the following for the years
ended December 31:

1998 1997 1996
--------- --------- ---------
Current tax expense $ -- $ -- $ --
Deferred tax benefit (481,000) (485,000) (504,000)
Net change in valuation allowance 481,000 485,000 504,000
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========

<PAGE>

BIOSEARCH MEDICAL PRODUCTS INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

7. INCOME TAXES (cont'd)

The statutory income tax rate differs from the effective tax rate used in
the financial statements for the years ended December 31, 1998, 1997 and 1996 as
a result of current year net operating losses, the benefit of which has not been
recognized in the current year.

The investment tax credit carryforward expires in various years through 2000.

As of December 31, 1998, the Company had available the following net
operating loss carryforwards for tax purposes:

Expiration Date:
Year ending December 31, Federal State
- ------------------------ ------- -----

1998 -- $1,439,000
1999 -- 1,707,000
2000 -- 295,000
2002 -- 939,000
2003 $1,374,000 1,091,000
2004 2,183,000 631,000
2005 195,000 --
2006 1,637,000 --
2007 1,739,000 --
2008 316,000 --
2010 938,000 --
2011 1,092,000 --
2012 631,000 --
2013 887,000 --
----------- ----------
$10,992,000 $6,989,000
=========== ==========

8. SUPPLEMENTAL CASH FLOW INFORMATION

Cash payments during 1998, 1997 and 1996 for interest were approximately
$22,427, $83,275 and $85,063, respectively. There were no cash payments for
income taxes during 1998, 1997 and 1996.

<PAGE>

BIOSEARCH MEDICAL PRODUCTS INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

9. STOCK OPTIONS AND STOCK AWARDS

STOCK OPTIONS

During 1994, 133,515 five-year stock options were granted to
employees in continued recognition of a wage freeze and service time. The
options reflect a market price on the date of the grant of $.50 per share which
vested in one-third portions per year over three years of continued employment
beginning April 6, 1994. Additionally, 32,000 five-year stock options were
granted to board members and 5,000 options were granted to a product development
consultant reflecting a price of $.50 per share, and 600 five year options
granted to a certain officer of the Company at $.60 per share. These shares were
also priced at the per share market value on the date of the grant. A total of
171,115 shares were granted in 1994. At December 31, 1997, 84,015 shares remain
reserved which is net of the expirations attributed to employment terminations.

During 1996, 8,000 five-year stock options were granted to a new
board member at $.30 per share. At December 31, 1998 all 8,000 shares remain
reserved.

During 1997, 200,043 five-year stock options were to key employees in
continued recognition of a wage freeze and service time. The options reflect a
market price on the date of the grant of $.19 per share. Additionally, 8,000
five-year stock options were granted to a new board member reflecting a price of
$.17 per share. A total of 208,043 were granted in 1997. At December 31, 1998
all 208,043 shares remain reserved.

During 1998, 18,000 five year stock options were to two key employees
in continued recognition of a wage freeze and service time. The options reflect
a market price on the date of the grant of $.19 per share. Additionally 33,000
five year options were granted to board members for past service and for
agreeing to accrue board member fees. These options replace all previous options
granted to these board members. At December 31, 1998 all 51,000 shares remain
reserved.

Pro forma information regarding net income and earnings per share has
been determined as if the Company had accounted for its employee stock options
under the fair value method. The fair value for these options was estimated at
the date of the grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1998 and 1997; respectively: risk
free interest rates of 5.68% and 5.53%; dividend yields of 0% and 0%; volatility
factors of the expected market price of the Company's common stock of 107% and
174%; and a weighted-average expected life of the options of 5 years.

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

<PAGE>

BIOSEARCH MEDICAL PRODUCTS INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:

1998 1997 1996
------------- ------------- ----------
Pro forma net loss $ (860,666) $ ( 593,510) $(885,868)

Pro forma loss per share
Basic $ (.39) $ (.27) $ (.40)
Diluted $ (.39) $ (.27) $ (.40)

There was no compensation expense recorded from stock options for the years
ended December 31, 1998, 1997 and 1996.

A summary of the Company's stock option activity, and related information for
the years ended December 31, follows:

Number of
Options Weighted-Average Exercisable Weighted-Average
(000) Exercise Price (000) Exercise Price
----- -------------- ----- --------------

Outstanding -
December 31,1996 148 $ .67 148 $ .67

Granted 208 .19
Exercised --- -----
Terminated (40) .19
---

Outstanding -
December 31,1997 316 $ .29 316 $ .29

Granted 51 $.19
Exercised -- --
Terminated (16) .50
---

Outstanding -
December 31,1998 351 $ .27 351 $ .27

Weighted-average fair
value of options granted
during the year December 31: 1998 1997
------ ------

Where exercise price
equals stock price $ .19 $ .18

Where exercise price
equals stock price $ --- $ ---

<PAGE>

BIOSEARCH MEDICAL PRODUCTS INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

Following is a summary of the status of stock options outstanding at December
31, 1997.
<TABLE>
<CAPTION>

Outstanding Options Exercisable Options
------------------------------------------ --------------------------------------------
Weighted
Average Weighted Weighted
Exercise Remaining Average Average
Price Range Number Contractual Life Exercise Price Number Exercise Price
----------- ------ ---------------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$.19-$.19 51,000 4.1 years $ .19 51,000 $ .19
$.17-$.19 208,043 3.8 years $ .19 208,043 $ .19
$.30-$.30 8,000 2.4 years $ .30 8,000 $ .30
$.50-$.50 84,015 0.3 years $ .50 84,015 $ .50
</TABLE>

STOCK AWARDS

During 1998, 1997 and 1996 the Company awarded shares of common stock to
certain employees for five and ten years of continued employment. The common
stock awarded was issued without any restrictions from the Company's treasury
stock. The related compensation expense is recorded in selling, general and
administrative expense.

10. RELATED PARTY TRANSACTIONS

In 1982 the Company entered into an exclusive, world-wide, royalty free
license with Hydromer, Inc. to use Hydromer coating on its enteral feeding
products. In 1991, the Company entered into a license agreement, as amended,
with Hydromer for the use of certain patents to coat products which were not
included in the royalty-free license, specifically the products are for
pancreatic and biliary stents, hemostatic coagulation probes and an introducer
catheter device. Manfred F. Dyck, President and Chief Executive Officer of the
Company, is also a major stockholder, President and Chief Executive Officer of
Hydromer, Inc.

Mr. Dyck has an employment agreement with the Company which provides a
minimum annual salary of $192,500, and a 6-month notice of termination. Mr. Dyck
was required to devote at least 90% of his business time to the affairs of the
Company. On January 1, 1993 the Company and Mr Dyck agreed that his annual
salary would be reduced to $96,500 and he would be required to work on a part
time basis of three days per week. On June 4, 1994 Mr. Dyck's salary was
increased to the full time amount of $193,000 per year. In December 1994 as a
part of a cost reduction plan, Mr Dyck voluntarily agreed to a salary reduction
to $150,000. On February 5, 1997 Mr. Dyck presented the Board with a cost
reduction program which resulted in his salary being voluntarily reduced to
$95,000 per year based on a three day work week. On May 5, 1998 by consent and
agreement, Mr. Dyck's salary was amended to $95,000 accrued not paid. He agreed
to be removed as President, but retained the title of Chairman and CEO. Mr.
Martin C. Dyck, son of Mr. Dyck was appointed President.

<PAGE>

RELATED PARTY TRANSACTIONS (cont'd)

In June of 1998 the Board passed a resolution providing that in event of
change of control to one entity or more than one entity acting in concert, key
employees are to be immediately paid a percentage of their yearly salary. Mr.
Martin C. Dyck is to be paid one years salary and Mr. Keller, a Vice President
and the Treasurer is to be paid 25% of a years salary. Four other key employees
are to be paid 25% of their salary. The total payment if made on December
31,1998 would have been $136,000. On May 12, 1999 at a special board meeting to
consider the offer made by Hydromer Inc. to exchange $0.20 for each common share
of the Company, Mr. Martin C. Dyck waived this change of control payment
($72,000) in lieu of an offer by Hydromer of the position Vice President at a
salary of $110,000 per year and an option to purchase 10,000 Hydromer shares at
a price equal to the last five day average market price on the day of closing of
the exchange transaction (see Proposal II.)

On December 30, 1998 the Company paid Martin C. Dyck $8,492 representing
salary earned but not paid and on March 4, 1999 the Company paid the Directors
as a group $70,500 representing directors' fees earned but not previously paid.
On March 11, 1999 the amount of $76,730 owed to Manfred F. Dyck. CEO for salary
accrued was paid. On March 17, 1999 the Board agreed to continue to accrue
directors' fees and Manfred F. Dyck agreed to a continued accrual of his salary.

Each director of the Company is entitled to receive compensation in the
amount of $750 for each meeting of the Board of Directors attended either in
person or telephonically, and $200 for each specially called telephonic
conference meeting. In March of 1999 and until further notice the Board has
agreed to accrue, but not pay Directors' fees.

The Company, during 1998 was a party to various transactions with
Hydromer, Inc. Hydromer provides the Company with chemicals and analytical
services. In 1998 the Company purchased approximately $35,000 worth of goods and
services from Hydromer and billed Hydromer for approximately $26,000 for
services and out of pocket expenses incurred on its behalf (the Company provides
secretarial services to Hydromer at $500 per month. The Company has served as a
subcontractor of Hydromer to provide coating services on various products using
the chemicals made by Hydromer. The prices that the Company charges to Hydromer
are equal to those prices it would charge any third party for like services. The
Company paid $38,900 to Hydromer for patent licenses that expired or were
terminated in March of 1998.

The Company, during 1997 was party to various transactions with Hydromer,
Inc. Hydromer provides the Company with chemicals and analytical services. In
1997 the Company purchased approximately $40,000 worth of goods and services
from Hydromer and billed Hydromer for approximately $77,000 for services, out of
pocket expenses incurred on its behalf, the purchase of a curing oven for
$46,000 and rented some space at Biosearch for $19,000. This arrangement for
space was terminated in late 1997 and the oven was removed and reinstalled at
Hydromer's production facility. The Company paid Hydromer $29,000 representing a
minimum royalty fee for a patent/know how license concerning the Hydromer
coatings and accrued an additional $26,875 for royalties due but not paid. In
late 1997 Hydromer and Biosearch entered into a secrecy agreement whereby the
Officers of Hydromer were granted access to the non-public records of Biosearch
to explore any possible business relationships or ventures.

On March 31, 1998 the Company and Hydromer entered into a contract of sale
whereby, Hydromer agreed to purchase the Company's building and land at a price
of $850,000 and a three year lease-back to the Company of 16,000 square feet
(approximately 2/3 rds. of the building). The parties valued the lease at
$346,500. The transaction was closed on June 12, 1998. Since then the parties
have shared various costs in accordance with the terms of the lease. The Company
believes that the terms of the foregoing arrangement are fair and equitable to
both parties.

<PAGE>

RELATED PARTY TRANSACTIONS (cont'd)

As of April 20, 1998, as a part of a cost reduction, the General
Counsel was employed by the Company on a part time basis of one day per week.
The remaining four days are spent as the General Counsel of Hydromer. In the
event of a conflict between the Company and Hydromer, outside counsel is used.

In September of 1998, Hydromer expressed interest in acquiring the
stock of the Company in a stock exchange at six shares of Biosearch stock for
each one share of Hydromer and conditioned on certain liabilities of Biosearch
being eliminated. The Board of Directors (Manfred F. Dyck, not taking part in
the decision) was of the opinion that the stated terms might not be in the best
interest of the stockholders. In March of 1999 the Directors sought the advice
of an evaluation expert to render a fairness opinion. In April 1999, Hydromer
again expressed their interest to exchange each Biosearch share for a payment of
$0.15. In addition there were other conditions which the board found to be
burdensome on certain employees. On May 10, 1999 Hydromer, Inc revised its offer
and at a special meeting of the Board of Directors, held on May 12, 1999 the
Board approved the offer and directed that it be presented to the stockholders
for a vote. A PLAN OF EXCHANGE was thereafter approved at the regular Board
meeting held on May 27, 1999 (see Proposal II)

In the latter part of 1998 the Company and Hydromer formed a Y2K
joint task force to assess the effect of the Y2K problem would have on the
facilities, jointly occupied. The companies are devising a plan that in the
opinion of the management of the Company will be less expensive to implement
than any plan implemented alone by the Company.

On February 25, 1999 the Company closed a transaction with C.R.Bard,
Inc. which transferred the Company's process coating technology and a coating
machine pertaining to intermittent urinary catheters for the sum of $650,000. On
the same date, Hydromer closed a transaction which licensed the right to use
Hydromer's coating for the same device. Biosearch's contract had a condition
whereby, the closing was conditioned on the Hydromer transaction closing at the
same time. Outside counsel was used to represent the interests of Hydromer,
because of a potential conflict.

In July 1999 Mr. Robert C. Keller, V.P. and CFO of Biosearch was
appointed as Principal Accounting Officer of Hydromer, Inc. on a part time basis
to oversee the accounting staff and to comply with Generally Accepted Accounting
Principles.

Manfred F. Dyck, CEO of the Company and his wife Ursula M. Dyck are
also directors of Hydromer. Mr. Manfred Dyck is the President and CEO of
Hydromer. In total they hold 42% (on a fully diluted basis) of the capital stock
of Hydromer. Their son, Martin C. Dyck, who is president of the Company, owns
46,152 shares or 1.1% of Hydromer stock.

11. COMMITMENTS AND CONTINGENCIES

As part of our sale to Sherwood Medical in 1994, the Company had a
supply agreement with Sherwood in which we agreed to manufacture and supply all
product purchased by Sherwood at cost plus 10% from May 1994 to the end of 1997.
There was also a covenant not to compete for five years starting with the
signing of the agreement in May 1994 and expiring in May 1999.

<PAGE>

BIOSEARCH MEDICAL PRODUCTS INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

12. SEGMENT INFORMATION AND CREDIT CONCENTRATION

The Company considers that its products and services compete in the
business segment of the "Medical Device" industry involving research,
development, manufacturing and sale.

Sales of the Company's products to specific customers may, at times,
be significant to the overall revenues of the Company. During 1998 and 1997,
Sherwood Medical Company accounted for approximately 1% and 27% of the Company's
revenues, respectively, and there is no receivable at December 31,1998 and it
was approximately 3% of accounts receivables in 1997. Smith Industries Medical
Systems/Portex Ltd. (SIMS) accounted for approximately 49% and 36% of revenues
in 1998 and 1997 and 0% and 71% of accounts receivable at December 31, 1998 and
1997. All purchase orders were completed and no additional orders were received
from SIMS after June, 1998. C.R.Bard revenues accounted for approximately 19%
and 12% of the Company's total revenues during 1998 and 1997 respectively, and
approximately 25% and 9% of accounts receivable at December 31,1998 and 1997.No
other single customer accounted for more than 10% of the Company's revenue in
1998, 1997, or 1996. International sales were $725,000 in 1998 and $916,000 in
1997, of which sales to the United Kingdom amounted to 83% and 76% respectively.
All foreign sales are conducted in United States dollars. There are no foreign
currency transactions.

13. RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred. Such
expenses were approximately $0, $2,000 and $38,000 in 1998, 1997 and 1996
respectively. The Company may, from time to time, utilize certain physicians and
surgeons, who are recognized in their field of expertise, for product
development and evaluations. Remunerations to these medical professionals for
their efforts may be in the form of royalties contingent on the products being
subsequently marketed and revenue streams generated. The cost of such royalties
is expensed as incurred in selling, general and administration expense.

14. YEAR 2000 ISSUE

In 1998 the Company formed a Y2K committee of its CEO, President and
two Vice Presidents and members of Hydromer Inc. (a related party) with whom
they share facility space. The committee has conducted a review of its computer
system and products to identify what could be affected by the Year 2000 Issue.
They do not believe there are any products, hardware nor software that will be
affected except for the Company's System 36 software which may not perform the
Year 2000 calculations correctly. The committee believes that by converting to a
new software, the Year 2000 Issue will not pose significant operational
problems for the Company's computer system.

In addition to Year 2000 software and equipment implementation
activities, the Company intends to contact major suppliers to assess their
compliance. The Company cannot assess the effect of Year 2000 programs
implemented by their customers and suppliers.

<PAGE>

BIOSEARCH MEDICAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

14. YEAR 2000 ISSUE (cont'd)

The Company has adopted a worse case scenario and has formulated
plans to preserve its property and business. The Company intends on delaying
shipments during January 2000 due to possible malfunctions caused by the Year
2000 Issue; however, they anticipate being able to supply their customers with
sufficient products prior to this date to cover their needs beyond January 2000.
While the costs of planning for the Year 2000 scenario may not have a material
impact on the Company, the four week loss of operations is likely to materially
impact its business.

15. NEW ACCOUNTING STANDARDS
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities". SFAS 133 establishes
accounting and reporting standards for derivatives as other assets or
liabilities and measures them at fair value. Under certain conditions, the gains
or losses from derivatives may be offset against those from the items the
derivatives hedge against. Otherwise, gains and losses from derivatives are
recognized currently in the results of operations. The Company will adopt SFAS
133 in the fiscal year ending December 31, 1999. Adoption of this statement is
not anticipated to have a material effect on the Company's financial position or
results of operations.

16. SUBSEQUENT EVENT

In February 1999, the Company signed an agreement to sell its
worldwide exclusive rights to the Company's intermittent urinary catheter
coating technology for $400,000 and its related machinery for $250,000 (Note 1).

<PAGE>

<TABLE>
<CAPTION>
INDEX TO EXHIBITS

<S> <C>
3 (a) - Certificate of Incorporation of the Company- Revised

3 (b) - By-Laws of the Company- Revised

THE FOLLOWING EXHIBITS ARE INCORPORATED BY THE RESPECTIVE REFERENCE SYMBOL TO
THE ANNUAL REPORT ON FORM 10-K SB FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997:

10(vvvv) Contract of sale of between Biosearch and Rebtex for sale of Company's building dated
November 24, 1997 and terminated in April, 1998.

THE FOLLOWING EXHIBITS ARE INCORPORATED BY THE RESPECTIVE REFERENCE SYMBOL TO
THE ANNUAL REPORT ON FORM 10-K SB FOR THE FISCAL YEAR ENDED DECEMBER 31,1998:

10(wwww) Contract of sale between Biosearch and Hydromer for the sale of the building dated March,
1998, closed June 12, 1998

10(xxxx) Three year lease of Company's headquarters from Hydromer on June 12, 1998, prepaid at
$346,500.

10(yyyy) Standstill Agreement between C.R.Bard and Biosearch dated August 14, 1998 preventing the
Company from offering the urinary catheter business to others, extended on October 30, 1998
at a total consideration of $200,000.

THE FOLLOWING EXHIBITS ARE INCORPORATED BY THE RESPECTIVE REFERENCE SYMBOL TO
THE ANNUAL REPORT ON FORM 10-K SB FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999:

10(zzzz) Asset sale between the Company and C.R.Bard dated February 25, 1999 selling a coating
machine and all technology to manufacture intermittent urinary catheters for $650,000
($200,000 already paid).
</TABLE>

EXHIBIT 3(a) RESTATED

Restated Certificate of Incorporation
of
Biosearch Medical Products, Inc.

This is to certify that there is hereby organized a corporation under and by
virtue of N.J.S. 14A:1-1 et seq., the New Jersey Business Corporation Act.

First: The name of the Corporation is Biosearch Medical Products, Inc.

Second: The name and address of this corporation's registered agent is Manfred
F. Dyck, 35A Industrial Parkway, Somerville, NJ 08876. (Changed in 1982 by
filing an address change with the secretary of state.)

Third: The purposes for which this corporation is organized are: To engage in
any activity within the purposes for which corporations may be organized under
the New Jersey Business Corporation Act.

Fourth: The aggregate number of shares which the corporation shall have
authority to issue is 5,000,000 shares. (see note 1 for history of changes.)

Fifth: The first Board of Directors of this corporation shall consist of one
Director and the name and address of the person who is to serve as such Director
is:

Name Address

Manfred F. Dyck 77 Tillman Street
Raritan, New Jersey 08869

Sixth: (added June 24, 1997, Note 2) A director or officer shall not be
personally liable to the corporation or its shareholders for damages for breach
of duty owed to the corporation or its shareholders, except that such provision
shall not relieve a director or officer from liability for any breach of duty
based upon an act or omission:

(a) in breach of such persons duty of loyalty to the corporation or its
shareholders;

(b) not in good faith or involving a knowing violation of law or;

<PAGE>

The name and address of the incorporator is: Leo Barrett, 123 Main Street,
Matawan, New Jersey 07747

(Original signature of incorporator signed on September 12th, 1975 ss/ Leo J.
Barrett)

Note 1.

Capitalization history:

Date Number of authorized shares Comment

Formed as a private company

9/12/75 1000 Original capitalization
12/15/78 1010
12/31/80 6,060,000 5000 to 1 split 7/11/83

Company has "gone public"

7/11/85 10,000,000
6/11/90 15,000,000
6/17/92 25,000,000
6/21/95 5,000,000 1 for 5 reverse split

Note 2. The Security and Exchange Commission is of the opinion that this
provision is not applicable to violations of the various Federal Laws pertaining
to securities.

Exhibit 3(b) REVISED and RESTATED

ADOPTED MARCH 31, 1981
BY-LAWS

BIOSEARCH MEDICAL PRODUCTS, INC.
A NEW JERSEY CORPORATION

(REVISED 3/11/92)

<PAGE>

BIOSEARCH MEDICAL PRODUCTS, INC.
BYLAWS
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BIOBLWS2.392

<PAGE>

BIOSEARCH MEDICAL PRODUCTS, INC.
BYLAWS
- ------------------------------------------------------------------------------

TABLE OF CONTENTS

ARTICLE I - OFFICES.................................................. 1
SECTION 1. REGISTERED OFFICE.................................. 1
SECTION 2. OTHER OFFICES:..................................... 1

ARTICLE II - MEETINGS OF SHAREHOLDERS................................ 1
SECTION 1. ANNUAL MEETINGS.................................... 1
SECTION 2. VOTING............................................. 1
SECTION 3. QUORUM............................................. 2
SECTION 4. SPECIAL MEETINGS................................... 2
SECTION 5. NOTICE OF MEETINGS................................. 3
SECTION 6. ACTION WITHOUT MEETING............................. 3

ARTICLE III **** - DIRECTORS......................................... 4
SECTION 1. NUMBER AND TERM.................................... 4
SECTION 2. RESIGNATIONS....................................... 4
SECTION 3. VACANCIES.......................................... 4
SECTION 4. REMOVAL............................................ 4
SECTION 5. INCREASE OF NUMBER................................. 5
SECTION 6. POWERS............................................. 5
SECTION 7. MEETINGS........................................... 5

iii

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BIOSEARCH MEDICAL PRODUCTS, INC.
BYLAWS
- ------------------------------------------------------------------------------

SECTION 8. QUORUM............................................. 5
SECTION 9. COMPENSATION....................................... 6
SECTION 10. ACTION WITHOUT MEETING............................ 6
SECTION 11. ACTION BY CONFERENCE TELEPHONE.................... 6
SECTION 12. COMMITTEES........................................ 6

ARTICLE IV - OFFICERS................................................ 7
SECTION 1. OFFICERS........................................... 7
SECTION 2. OTHER OFFICERS AND AGENTS.......................... 7
SECTION 3. CHAIRMAN........................................... 8
SECTION 4. PRESIDENT.......................................... 8
SECTION 5. VICE-PRESIDENT..................................... 8
SECTION 6. TREASURER.......................................... 9
SECTION 7. SECRETARY.......................................... 9

ARTICLE V - MISCELLANEOUS............................................ 10
SECTION 1. CERTIFICATES....................................... 10
SECTION 2. LOST CERTIFICATES.................................. 10
SECTION 3. TRANSFER OF SHARES:................................ 10
SECTION 4. SHAREHOLDERS RECORD DATE........................... 11
SECTION 5. REGISTERED SHAREHOLDERS............................ 11
SECTION 6. DIVIDENDS.......................................... 11
SECTION 7. SEAL............................................... 11

<PAGE>

BIOSEARCH MEDICAL PRODUCTS, INC.
BYLAWS
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SECTION 8. FISCAL YEAR........................................ 11
SECTION 9. CHECKS............................................. 12
SECTION 10. NOTICE AND WAIVER OF NOTICE....................... 12

ARTICLE VII - AMENDMENTS............................................. 12

<PAGE>

BIOSEARCH MEDICAL PRODUCTS, INC.
BYLAWS
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ARTICLE I - OFFICES

SECTION 1. REGISTERED OFFICE: The registered office shall be established
and maintained at 35 Industrial Parkway, P.O. Box 1700, in the City of
Somerville, in the County of Somerset, in the State of New Jersey; and Manfred
F. Dyck shall be the registered agent of this Corporation in charge thereof.

SECTION 2. OTHER OFFICES: The Corporation may have other offices, either
within or without the State of New Jersey, at such place or places as the Board
of Directors may from time to time appoint or the business of the Corporation
may require.

ARTICLE II - MEETINGS OF SHAREHOLDERS

SECTION 1. ANNUAL MEETINGS: Annual Meetings of shareholders for the
election of directors and for such other business as may be stated in the notice
of the meeting, shall be held at the principal office of the Corporation or at
such other place, either within or without the State of New Jersey as the Board
of Directors, by resolution, shall determine, on the first day in May * of each
year or on such other date as shall be specified in the notice of the meeting.

* Amended on October 27, 1981 to substitute "May" for "October".

If the date of the Annual Meeting shall fall upon a legal holiday, the
meeting shall be held on the next succeeding business day. At each Annual
Meeting, the shareholders entitled to vote shall elect a Board of Directors and
they may transact such other Corporate business as shall be stated in the notice
of the meeting.

SECTION 2. VOTING: Each shareholder entitled to vote in accordance with
the terms of the Certificate of Incorporation and in accordance with the
provisions of these By-Laws shall be entitled to one

<PAGE>

BIOSEARCH MEDICAL PRODUCTS, INC.
BYLAWS
- ------------------------------------------------------------------------------

vote, in person or by proxy, for each share entitled to vote held by such
shareholder, as of the date fixed as the record date for said meeting, but no
proxy shall be voted after eleven months from its date unless such proxy
provides for a longer period, but in no event shall a proxy be valid after three
years from the date of execution. Each proxy shall be delivered to the Secretary
prior to the holding of the meeting. The attendance at any meeting of any
stockholder who may theretofore have given a proxy shall not have the effect of
revoking the proxy unless the stockholder so attending shall, in writing, so
notify the Secretary at any time prior to the voting of the proxy. Upon the
demand of any shareholder, before the voting begins, the vote for directors
shall be by ballot. All elections for directors shall be decided by plurality
vote; all other questions shall be decided by majority vote except as otherwise
provided by the Certificate of Incorporation or in the laws of the State of New
Jersey.

A complete list of the shareholders entitled to vote at the ensuing
election, arranged in alphabetical order, with the address of each, and the
number of shares held by each, shall be produced and kept at the time and place
of the meeting, during the whole time thereof, and may be inspected by any
shareholder who is present.

SECTION 3. QUORUM: Except as otherwise required by law, by the Certificate
of Incorporation or by these By-Laws, the presence, in person or by proxy, of
shareholders holding a majority of the shares of the Corporation entitled to
vote shall constitute a quorum at all meetings of the shareholders. In case a
quorum shall not be present at any meeting, a majority in interest of the
shareholders entitled to vote thereat, present in person or by proxy, shall have
power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until the requisite amount of shares entitled to
vote shall be present. At any such adjourned meeting at which the requisite
amount of shares entitled to both shall be represented, any business may be
transacted which might have been transacted at the meeting as originally
noticed; but only those shareholders entitled to vote at any adjournment or
adjournments thereof.

<PAGE>

BIOSEARCH MEDICAL PRODUCTS, INC.
BYLAWS
- ------------------------------------------------------------------------------

SECTION 4. SPECIAL MEETINGS: Special meeting of the shareholders for any
purpose or purposes may be called by the President and shall be called by the
President or Secretary at the request in writing of a majority of the Board of
Directors, or at the request in writing of the shareholders owning a majority of
the issued and outstanding capital stock of the Corporation, and may be held at
such time and place within or without the State of New Jersey, as shall be
stated in the notice of the meeting.

SECTION 5. NOTICE OF MEETINGS: Written notice of each Annual Meeting,
stating the place, date and time of the meeting, and the purpose or purposes of
the meeting, shall be given to each shareholder entitled to vote there at his
address as it appears on the records of the Corporation, not less than ten days
nor more than sixty days before the date of the meeting.

Written notice of special meetings of shareholders, stating the place,
date, time and purpose or purposes thereof, shall be served upon or mailed to
each shareholder entitled to vote thereat, at such address as appears on the
records of the Corporation, not less than ten days nor more than sixty days
before the date of the meeting.

SECTION 6. ACTION WITHOUT MEETING: Any action required or permitted to be
taken at a meeting of shareholders by the laws of the State of New Jersey or the
Certificate of Incorporation or these By-Laws may be taken without a meeting if
all the shareholders entitled to vote thereon consent thereto in writing.

Except as otherwise provided by the laws of the State of New Jersey, the
Certificate of Incorporation or these By-Laws, any action required or permitted
to be taken at a meeting of shareholders, other than the annual election of
directors, may be taken without a meeting upon the written consent of
shareholders who would have been entitled to cast the minimum number of votes
which would be necessary to authorize such action at a meeting at which all
shareholders entitled to vote thereon were present and voting. Except as
otherwise provided by the laws of the State of New Jersey, the Certificate of
Incorporation or these By-Laws,

<PAGE>

BIOSEARCH MEDICAL PRODUCTS, INC.
BYLAWS
- ------------------------------------------------------------------------------

prompt notice of the action consented to, the proposed effective date of such
action and any conditions precedent to such action shall be given to all
non-consenting shareholders who would have been entitled to notice of a meeting
to vote upon such action, in accordance with the Business Corporation Act of the
State of New Jersey.

Whenever any action is taken pursuant to shareholder consent as set forth
herein and in the laws of the State of New Jersey, the written consents of the
shareholders consenting thereto or the written report of inspectors appointed to
tabulate such consents shall be filed with the minutes of proceedings of
shareholders.

ARTICLE III **** - DIRECTORS

SECTION 1. NUMBER AND TERM: The number of directors shall initially be
three. Thereafter, the number of directors may be determined from time to time
by the unanimous vote of the Board of Directors. The directors shall be elected
at the Annual Meeting of the shareholders and each director shall be elected to
serve until his successor shall be elected and qualify. Directors need not be
shareholders.

* Amended on October 27, 1981. The number of directors was increased
from 3 to 4.

** Amended on January 27, 1984. The number of directors increased from
4 to 5.

*** Amended on September 6, 1985 to increase number to 7.

**** Amended on April 29, 1987 to decrease number to 6.

***** Amended on February 22, 1989 to increase number to 7.

****** Amended on March 11, 1992 to decrease number to 6.

SECTION 2. RESIGNATIONS: Any director, member of a committee or other
officer may resign at any time, absent any written contractual obligations of
appointment. Such resignation shall be made in

<PAGE>

BIOSEARCH MEDICAL PRODUCTS, INC.
BYLAWS
- ------------------------------------------------------------------------------

writing, and shall take effect at the time specified therein, and if no time be
specified, at the time of its receipt by the President or Secretary. The
acceptance of a resignation shall not be necessary to make it effective.

SECTION 3. VACANCIES: If the office of any director, member of a committee
or other office becomes vacant, the remaining directors in office (or the sole
or remaining director if only one director remains in office) may fill such
vacancy by unanimous vote of the Board of Directors for the unexpired term or
until the next election of directors; or any such vacancy on the Board of
Directors may be filled by the shareholders at any duly convened meeting.

SECTION 4. REMOVAL: Any one or more of the directors may be removed for
cause, at any time, by vote of the shareholders holding a majority of the
outstanding shares of the Corporation entitled to vote, present in person or by
proxy, at any special meeting of the shareholders or, by action of the Board of
Directors at any regular or special meeting of the Board. A vacancy or vacancies
occurring from such removal may be filled at the special meeting of shareholders
or a regular or special meeting of the Board of Directors.

SECTION 5. INCREASE OF NUMBER: Except as otherwise provided by the
Certificate of Incorporation, the number of directors may be increased by
amendment of these By-Laws by the affirmative vote of a majority of the
directors, though less than a quorum, or, by the affirmative vote of a majority
in interest of the shareholders, at the Annual Meeting or at a special meeting
called for that purpose, and by like vote the additional directors may be chosen
at such meeting of directors or shareholders to hold office until the next
annual election and until their successors are elected and qualify.

SECTION 6. POWERS: The property and business of the Corporation shall be
managed by the Board of Directors who may exercise all such powers of the
Corporation and do all such lawful acts and things as are not by statute or by
the Certificate of Incorporation or by these by-Laws directed or required to be
exercised or done by the shareholders.

<PAGE>

BIOSEARCH MEDICAL PRODUCTS, INC.
BYLAWS
- ------------------------------------------------------------------------------

SECTION 7. MEETINGS: Regular meetings of the directors may be held without
notice at such places and times as shall be determined from time to time by
resolution of the directors.

Special meetings of the Board may be called by the President or by the
Secretary or on the written request of any two directors on at least two days'
notice to each director either personally or by mail or telegram and shall be
held at such place or places as may be determined by the directors, or as shall
be stated in the call of the meeting.

Notice of any special meetings of the Board of Directors may be waived by
instrument in writing signed by all the directors.

Business transacted at all special meetings of the Board of Directors
shall be confined to the objects set forth in the notice of the meeting.

SECTION 8. QUORUM: At all meetings of the Board, the presence of a
majority of the directors shall be necessary and sufficient to constitute a
quorum for the transaction of business. The act of a majority of those present
at any meeting at which a quorum is present shall be the act of the Board of
Directors except as may be otherwise specifically provided by statute, by the
Certificate of Incorporation or by these By-Laws. If at any meeting of the Board
there shall be less than a quorum present, a majority of those present may
adjourn the meeting from time to time until a quorum is obtained, and no further
notice thereof need by given other than by announcement at the meeting which
shall be so adjourned.

SECTION 9. COMPENSATION: Directors, as such, shall not receive any stated
salary for their services as directors or as members of the Executive Committee,
but by resolution of the Board a fixed fee and expenses, if any, of attendance
may be allowed for attendance at each regular or special meeting. Nothing herein
contained shall be construed to preclude any director from serving the
Corporation in any other capacity as an officer, agent or otherwise, and
receiving compensation therefor.**

* Resolution passed October 27, 1981 to provide for Directors' fees of
$450 per director per regular or special meeting.

<PAGE>

BIOSEARCH MEDICAL PRODUCTS, INC.
BYLAWS
- ------------------------------------------------------------------------------

** Resolution passed on June 5, 1985 to provide that fees be increased to
$750 for each meeting attended and $200 for telephone conference
meeting.

SECTION 10. ACTION WITHOUT MEETING: Any action required or permitted to be
taken at any meeting of the Board of Directors, or of any committee thereof, may
be taken without a meeting, if prior or subsequent to such action a written
consent thereto is signed by all members of the Board, or of such committee as
the case may be, and such written consent is filed with the minutes of
proceedings of the Board or committee.

SECTION 11. ACTION BY CONFERENCE TELEPHONE: Any or all of the directors
may participate in a meeting of the Board of Directors by means of conference
telephone or any means of communication by which all persons participating in
the meeting are able to hear each other.

SECTION 12. COMMITTEES: The Board, by resolution, may from time to time
designate one or more members of the Board to constitute committees of the Board
which shall consist of such persons and shall have such powers as the Board may
determine and specify in the respective resolutions effecting such designation.
The Board shall have the power, by resolution, at any time, with respect to any
committee created pursuant to this Section 12, to change the members of any such
committee and to discharge the members of any such committee and to discharge
any such committee. A majority of the members of each committee shall determine
its acts. Each committee may adopt such rules and regulations for the conduct of
its meetings as it deems proper and as are not inconsistent with any statute or
the Certificate of Incorporation and, further, that, pursuant to the foregoing
authority this Board of Directors hereby establishes a Pricing Committee
(hereinafter referred to as the "Pricing Committee") of the Board, initially
consisting of Manfred F. Dyck and John H. Ewing, to determine all terms and
conditions of the Placement Documents not heretofore determined, including, but
not limited to, the rate of interest on the Notes and the rate of which the
principal

<PAGE>

BIOSEARCH MEDICAL PRODUCTS, INC.
BYLAWS
- ------------------------------------------------------------------------------

amount of the Notes shall be convertible into shares of the common stock without
par value (hereinafter referred to as the "Common Stock"), of the Company;
(Added July 29, 1984).

(Executive Committee was abolished by Bylaw provision in 1986)

ARTICLE IV - OFFICERS

SECTION 1. OFFICERS: The officers of the Corporation shall be a President,
a Treasurer, and a Secretary, all of whom shall be elected by the Board of
Directors and who shall hold office until their successors are elected and
qualified. In addition, the Board of Directors may elect a Chairman and one or
more Vice-Presidents, who shall have such authority and shall perform such
duties as prescribed by the Board. None of the officers, except the President
and Chairman of the Board, need be directors. The officers shall be elected from
time to time by the Board of Directors and shall serve at the pleasure of the
Board. More than one office may be held by the same person, except the offices
of President and Vice President. The salaries of all officers and agents of the
Corporation shall be fixed by the Board of Directors. All vacancies occurring
among any of the officers shall be filled by the directors. Any officer may be
removed, with or without cause, at any time by the affirmative vote of a
majority of the directors present at a regular meeting of directors or at a
special meeting of directors called for that purpose.

SECTION 2. OTHER OFFICERS AND AGENTS: The Board of Directors may appoint
such other officers and agents as it may deem advisable, who shall hold their
offices for such terms and shall exercise such powers and perform such duties as
shall be determined from time to time by the Board of Directors.

SECTION 3. CHAIRMAN: The Chairman of the Board of Directors if one be
elected, shall be the Chief Executive Officer of the Corporation and shall
preside at all meetings of the Board of directors, appoint

<PAGE>

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BYLAWS
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one or more Vice Presidents who shall perform such duties as may be assigned to
them and he shall have and perform such other duties as from time to time may be
assigned to him by the Board of Directors. (Revised 8/12/87 to delegate Vice
President appointment authority to chairman.)

SECTION 4. PRESIDENT: The President shall be the Chief Executive Officer
of the Corporation in the absence or non-election of the Chairman of the Board
and shall have the general and active powers and duties of supervision and
management of the business of the Corporation. He shall preside at all meetings
of the shareholders, and in the absence or non-election of the Chairman of the
Board of Directors, at all meetings of the Board of Directors, and shall have
general supervision, direction and control of the business of the Corporation
and shall see that all orders and resolutions of the Board are carried into
effect. Except as the Board of Directors shall authorize the execution thereof
in some other manner, he shall execute bonds, mortgages and other contracts on
behalf of the Corporation, and shall cause the seal to be affixed to any
instrument requiring it and when so affixed the seal shall be attested by the
signature of the Secretary or the Treasurer. The President shall have all the
powers and duties usually incident to the office of the President except as
specifically limited by the Board of Directors.

The President, on behalf of the Corporation, may lend money to, guarantee
any obligations of, or otherwise assist, any officer or employee of the
Corporation or of any subsidiaries where such action may reasonably be expected
to benefit the Corporation, provided, however, that such loan, guarantee or
other assistance may be made to or for an officer or employee who is also a
director only when authorized by a majority of the entire Board.

SECTION 5. VICE-PRESIDENT: The Vice-President shall have all the powers
and duties usually incident to the office of the Vice-President except as
specifically limited by the Board of Directors. In the absence or disability of
the President and the General Manager, the Vice-President shall perform the
duties and exercise the powers of the President.

<PAGE>

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BYLAWS
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(6/24/87, GENERAL MANAGER provision deleted)

SECTION 6. TREASURER: The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate account of
receipts and disbursements in books belonging to the Corporation. He shall
deposit all moneys and other valuables in the name and to the credit of the
Corporation in such depositories as may be designated by the Board of Directors.

The Treasurer shall disburse the funds or the Corporation as may be
ordered by the Board of Directors, or the President, taking proper vouchers for
such disbursements. He shall render to the President and Board of Directors at
the regular meetings of the Board of Directors, or whenever they may request it,
an account of all his transactions as Treasurer and of the financial condition
of the Corporation. If required by the Board of Directors, he shall give the
Corporation a bond for the faithful discharge of his duties and for the
restoration to the Corporation, in case of his death, resignation, retirement or
removal from office, of all books, papers, vouchers, money and other property of
whatever kind in his possession or under his control belonging to the
Corporation.

The Treasurer shall have all the powers and duties usually incident to the
office of Treasurer except as specifically limited by the Board of Directors.

SECTION 7. SECRETARY: The Secretary shall give, or cause to be given,
notice of all meetings of shareholders and directors, and all other notices
required by law or by these By-Laws, and in case of his absence or refusal or
neglect so to do, any such notice may be given by any person thereunto directed
by the President, or by the directors, or shareholders, upon whose requisition
the meeting is called as provided in these By-Laws. He shall attend and record
all the proceedings of the meetings of the Corporation and of the directors in a
book to be kept for that purpose, and shall perform such other duties as may be
assigned to

<PAGE>

BIOSEARCH MEDICAL PRODUCTS, INC.
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him by the directors or the President. He shall have the custody of the seal of
the Corporation and shall affix the same to all instruments requiring it, when
authorized by the directors or the President, and attest the same. He shall have
all the powers and duties usually incident to the office of the Secretary except
as specifically limited by the Board of Directors and shall be sworn to the
faithful discharge of his duty.

ARTICLE V - MISCELLANEOUS

SECTION 1. CERTIFICATES: Certificates of stock of the Corporation shall be
numbered and entered in the books of the Corporation as they are issued.
Certificates signed by the President or Vice- President, and the Treasurer or
Secretary shall be issued to each shareholder certifying the number of shares
owned by him in the Corporation. In the event that the Corporation shall have a
transfer agent or registrar other than the Corporation or its employee, the
signatures of such officers may be facsimiles.

SECTION 2. LOST CERTIFICATES: At the direction of the Board of Directors,
a new certificate shall be issued in the place of any certificate theretofore
issued by the Corporation, alleged to have been lost or destroyed, upon the
making of an affidavit of that fact by the person claiming the certificate of
stock to be lost or stolen. The directors may, in their discretion, require the
owner of the lost or destroyed certificate, or his legal representatives, to
advertise same in such manner as it shall require and/or to give the Corporation
a bond, in such sum as they may direct, not exceeding double the value of the
stock, to indemnify the Corporation against any claim that may be made against
it on account of the alleged loss of any such certificate, or the issuance of
any such new certificate.

SECTION 3. TRANSFER OF SHARES: Shares of the Corporation shall be
transferable only upon its books by the holders thereof in person or by their
duly authorized attorneys or legal representatives, and upon such transfer the
old certificates shall be surrendered to the Corporation by the delivery
thereof, duly endorsed or accompanied by proper evidence of succession,
assignment or authority to transfer, to the

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person in charge of the stock and transfer books and ledgers, or to such other
person as the directors may designate, by whom they shall be cancelled, and new
certificates shall thereupon be issued. A record shall be made of each transfer
and whenever a transfer shall be made for collateral security, and not
absolutely, it shall be so expressed in the entry of the transfer.

SECTION 4. SHAREHOLDERS RECORD DATE: In order that the Corporation may
determine the shareholders entitled to notice of or to vote at any meeting of
shareholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment or any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any lawful action, the Board of Directors may close the stock
transfer books of the Corporation in its discretion for a period not exceeding
sixty days preceding the date of such meeting, or in lieu thereof, the Board may
fix, in advance, a record date, which shall not be more than sixty days prior to
any other action or the date fixed for tabulation of written consents, or, if no
date has been fixed for tabulation, more than sixty days prior to the last day
on which consents received may be counted. A determination of shareholders of
record entitled to notice of or to vote at a meeting of shareholders shall apply
to any adjournment of the meeting.

SECTION 5. REGISTERED SHAREHOLDERS: The Corporation shall be entitled to
treat the holder of record of any share or shares of stock as the holder-in-fact
thereof and accordingly shall not be bound to recognize any equitable or other
claim to or interest in such share on the part of any other person whether or
not it shall have express or other notice thereof, except as expressly provided
by the laws of the State of New Jersey.

SECTION 6. DIVIDENDS: Subject to the provisions of the Certificate of
Incorporation, the Board of Directors may, out of funds legally available
therefor at any regular or special meeting, declare dividends upon the
outstanding shares of the Corporation as and when they deem expedient. Dividends
may be

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BIOSEARCH MEDICAL PRODUCTS, INC.
BYLAWS
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declared and paid in cash or in its bonds or other property, including the bonds
or shares of other Corporations, as permitted by the laws of the State of New
Jersey, and by the Certificate of Incorporation of this Corporation.

SECTION 7. SEAL: The Corporate seal shall be circular in form and shall
contain the name of the Corporation, the year of its creation and the words
"CORPORATE SEAL, NEW JERSEY". Said seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.

SECTION 8. FISCAL YEAR: The fiscal year of the Corporation shall end on
December 31st of each year.

SECTION 9. CHECKS: All checks, drafts or other orders for the payment of
money, notes or other evidences of indebtedness issued in the name of the
Corporation shall be signed by such officer or officers, agent or agents of the
Corporation, and in such manner as shall be determined from time to time by
resolution of the Board of Directors.

SECTION 10. NOTICE AND WAIVER OF NOTICE: Whenever any notice is required
by these By-Laws to be given, such notice may be given by mail, telephone,
telegram, cable, telex or radio. In computing the period of time for the giving
of any notice, the day on which the notice is given shall be excluded, and day
on which the matter noticed is to occur shall be included. If notice is given by
mail, the notice shall be deemed to be given when deposited in the mail
addressed to the person to whom it is directed at his last address as it appears
on the records of the Corporation, with postage prepaid thereon. Shareholders
not entitled to vote shall not be entitled to receive notice of any meetings
except as otherwise provided by statute.

Whenever any notice is required to be given under the provisions of any
law, or under the provisions of the Certificate of Incorporation of the
Corporation or these By-Laws, a waiver thereof in writing, signed by the person
or person entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent thereto.

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BIOSEARCH MEDICAL PRODUCTS, INC.
BYLAWS
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ARTICLE VII - AMENDMENTS

These By-Laws may be altered, amended or repealed and By-Laws may be made
at any annual meeting of the shareholders or at any special meeting thereof, at
which a quorum is present, if notice of the proposed alternation or repeal of
By-Law or By-Laws to be made, be contained in the notice of such special
meeting, by the affirmative vote of a majority of the shares issued and
outstanding and entitled to vote thereat, or by the affirmative vote of a
majority of the members of the Board of Directors, at any regular meeting of the
Board of Directors, or at any special meeting of the Board of Directors, if
notice of the proposed alteration or repeal, of By-Law or By-Laws, to be made,
be contained in the notice of such special meeting. Provided, however, that any
By-Laws made by the Board of Directors may be altered or repealed by the
shareholders and that any By-Laws made by the shareholders may be altered or
repealed by the Board of Directors.