LESCARDEN INC, 10KSB, 1996-08-28

LESCARDEN INC
10KSB, 1996-08-28
PHARMACEUTICAL PREPARATIONS

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U.S. Securities and Exchange Commission
Washington, D.C. 20549

Form 10-KSB

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee required]

For the fiscal year ended May 31, 1996

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No fee required]

For the transition period from to

Commission file number 0-10035

LESCARDEN, INC.
(Exact name of small business issuer as specified in its charter)

New York 13-2538207
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

420 Lexington Avenue, New York Suite 2025 10170
(Address of principle executive offices) (Zip Code)

Issuer's telephone number (212) 687-1050

Securities registered under Section 12(b) of the Act: None

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

Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]

<PAGE>

Check if there is no disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B contained in this form, and no
disclosure will be contained, to the best of registrant's
knowledge, in definitve proxy or information statements
incorporated by refernce in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
[ ]

Issuers revenues for its most recent fiscal year were $ 485,874

The aggregate market value of the registrant's Common Stock held by
nonaffiliates of the registrant on July 26, 1996 was approximately
$ 2,421,123.

The number of shares of registrant's Common Stock outstanding as of
July 26, 1996 was 11,872,010.

DOCUMENTS INCORPORATED BY REFERENCES: None

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

<PAGE>

PART I

ITEM 1. BUSINESS

The Company's present liquidity position must be
characterized as critical. The successful conclusion of the
Company's Chapter XI proceeding could contribute significantly to
the improvement of the situation (See Item 3. Legal Proceedings).
However, sales of the Company's food supplement materials may be
sufficient to allow the Company to continue to meet its obligations
and sustain its operations for the near term. Moreover, the Company
may receive certain license fees in the near term which would also
alleviate the situation somewhat.

During the fiscal year ended May 31, 1996, the Company
continued sales of its proprietary bovine cartilage material,
BIO-CARTILAGE<F2>, to food supplement distributors for sale through
nutritional food supplement stores in the U.S. In addition the
Company intends to introduce a second product in the same
marketplace shortly. If these initial incursions into the
nutritional food supplement market are successful, it would further
provide the much needed revenue to finance continuing operations.
(See Item 6. Management's Discussion and Analysis or Plan for
Operations).

Moreover, Lescarden Inc. (the "Company") continues to
develop and seek government approval to market and sell its
proprietary Catrix material, a cartilage derived therapeutic agent
which the Company believes has demonstrated promising results in
the treatment of metastatic renal cell cancer (as well as certain
other diseases). The therapeutic effects of Catrix<F1> were discovered

<PAGE>

by one of the Company's founders in connection with the treatment
of various human malignancies, the healing of surgical wounds and
the control of tissue inflammation.

The Company has an Investigational New Drug ("IND")
exemption from the U.S. Food and Drug Administration ("FDA") and
the Canadian Health Protection Branch ("HPB") for the experimental
treatment of metastatic renal cell cancer in humans. Prior to
obtaining the IND, the Company completed all pre-clinical studies
and Phase I clinical trials relating to the safety of Catrix<F1> . It
is now conducting Phase II human clinical trials at two major
teaching hospitals, one in New York State and the other in Montreal
to establish the efficacy of Catrix<F1> in the treatment of metastatic
renal cell cancer.

On completion of Phase II and subsequent Phase III
trials, the Company intends to submit a New Drug Application
("NDA") to the FDA and New Drug Submission ("NDS") to the HPB for
approval to market and commercially ship Catrix for the treatment
of metastatic renal cell cancer. The Company anticipates that the
NDA and NDS will be filed in approximately four to five years.
Approval by the FDA and HPA may require an additional one to three
years, although the FDA and HPB can accelerate the process.

As part of the FDA and HPB approval process, the Company
may be required to do additional laboratory research into the
molecular composition of the active fractions of Catrix<F1>. Results
of this research will assist the Company in developing standardized
manufacturing and production processes. In addition, chemically
modified versions of the isolated active fractions may prove to
have additional therapeutic effects.

The Company has also licensed Orphan Medical Inc. to
seek FDA approval for the use of pure Catrix<F1> powder in treating
decubitus ulcers (the pressure sores experienced by some diabetics
and the chronically bed-ridden). Current treatment for these
lesions involves improved hygiene, nutrition and nursing care. The
Company believes that the ability to provide an active agent to
accelerate the healing process represents a clear business
opportunity in a significant market with a demonstrated need for a
more effective therapy.

In October 1989, the company granted an exclusive license
to Donell, Inc. ("Donell") to manufacture and sell topical products
formulated with Catrix<F1> . Currently Donell is marketing a Catrix<F1>
- -based topical cream product to relieve the skin redness and
irritation which frequently accompanies the use of Retin-A, a
product and registered trademark of Johnson & Johnson. Donell,
Inc. also produces a lip balm containing Catrix<F1> for use in
preventing chapped lips as well as preventing and healing cold
sores. If the FDA approves Retin-A or a related product for
treatment of facial skin wrinkling, the Company believes that the
sales of Donell's Catrix<F1> Correction Cream product will increase.

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Donell is required to pay a quarterly royalty fee to the Company on
sales of this product (and any other Catrix<F1> containing products
which it sells) and to purchase its Catrix<F1> supplies exclusively
from the Company.

The Company intends to focus a significant portion of its
resources on obtaining approval for the use of Catrix<F1> in treating
metastatic renal cell cancer and decubitus ulcers, with an ultimate
goal of marketing the product, directly or through another
organization. This particular malignancy was chosen for
experimentation because of evidence of therapeutic efficacy,
likelihood of more expeditious regulatory approval, absence of non-toxic or
efficacious alternatives, and a large enough patient base
to support commercial development by the Company. Furthermore, the
Company believes that the observed effects of Catrix<F1> (including
acceleration of wound healing, tumor inhibition and reduction,
inhibition of excessive vascularization and modulation of immune
system functions) coupled with an absence of toxicity, present
additional promising avenues of investigation.

Scientific Background.

Background of Catrix<F1> . In the early 1950's, one of the
Company's co-founders discovered that cartilage powder
significantly hastened the healing of surgical wounds in animals.
During early wound healing experiments, it was noted that the
margins of the surgical wounds treated with Catrix<F1> were less red
and swollen than those of the controls. This observation led the
discoverer to the application of Catrix<F1> to various inflammatory
diseases, systemic and topical. One inflammatory condition that
was successfully treated was psoriasis, a condition caused by an
over production of skin cells. In certain ways, psoriasis
resembles the uncontrolled growth of cancer cells. Based on the
aforementioned information as well as encouraging results from
animal cancer studies, the discoverer believed that Catrix<F1> could
be successfully applied in the treatment of human cancer.

The Company believes that Catrix<F1> acts as a biological
response modifier, regulating the activity of important components
of the immune system. Other observed effects of Catrix<F1> include:
-acceleration of wound healing;
-inhibition of excessive vascularization of certain tissues;

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-inhibition of proliferation of malignant cells; and
-(in vitro) moderation of excessive collagen synthesis by
fibroblast cells.

Metastatic Renal Cell Cancer. Metastatic renal cell
cancer (which is the spread of a primary kidney cancer to other
organs) is a particularly lethal form of cancer afflicting
approximately 10,000 individuals per year in the United States and
Canada. Only eight to twenty percent of the metastatic renal cell
cancer patients survive two years after diagnosis. The patient's
chance of overcoming the disease is dependent upon how advanced the
disease is at the time of diagnosis. The disease originates as a
tumor in the kidney. After a certain stage in tumor growth,
metastasis, or spread of cancerous cells to other body organs,
occurs. Conventional treatment generally involves removal of the
diseased kidney followed by radiation or chemotherapy to affect
reduction of the secondary tumors or metastases.

It has recently been recognized that renal cell cancers
may be responsive to treatment with some cytokines such as
interleukin-2. Cytokines are intimate components of the body's
immune system, the integrity of which system is important in
defending the body against many forms of cancer. Interleukin-2 is
somewhat effective in treating renal cell cancer but its usefulness
is limited by its significant toxicity. The Company believes that
Catrix<F1> , with its ability to modulate the body's immune system and
its non-toxic properties, is promising as a treatment for this
devastating disease.

Healing Decubitus Wounds. Decubitus ulcers, or pressure
sores, are a scourge of the infirmed elderly, diabetic and
generally immobile, wheel chair limited patient. Current therapy
includes removal of the dead tissue around the ulcer, good hygiene,
and nutrition and nursing care. Given the ever increasing elderly
population in the United States and the costs of specialized
medical treatment, a product such as Catrix<F1>, which appears to
promote wound healing, will, the Company believes, be sought after
by the medical community.

In pursuit of this therapeutic application, the Company
granted a license in October 1994, to Orphan Medical Inc. of
Minnetonka, Minn. The license entitles Orphan to use Catrix<F1>
powder in clinical trials and assessing its efficacy in the

<PAGE>

treatment of wounds. Orphan intends to file a marketing
application with the FDA and to commence Phase II/III human
clinical trials in August 1996. Under the license agreement, Orphan
is required to pay Lescarden certain license fees, and upon
securing marketing approval from the FDA, to pay a royalty on all
sales and to purchase all Catrix<F1> powder from the Company.

Pre-Clinical Studies of Catrix<F1>.

During the 1970's, the Company conducted a wide range of
pre-clinical laboratory and animal studies to assess the potential
safety and efficacy of Catrix<F1>. These studies included the
following: Acute Oral Toxicity (rats); Acute Subcutaneous Toxicity
(mice): Acute Dermal Toxicity (rabbits): 18-Month Chronic Toxicity
and Carcinogenicity Study (mice); 2-Year Chronic Toxicity and
Carcinogenicity (rats); 14 week Chronic Toxicity Study (dogs);
Percutaneous Toxicity (guinea pigs); Dental Wound Healing (rats);
Dental Wound Healing (dogs); and Irritation and Sensitization of
Human Skin by Catrix<F1>.

The results of these studies were submitted to the FDA
and HPB as part of the Company's application for an IND exemption,
approval of which is required prior to the commencement of human
clinical trials. In 1985, the FDA granted the Company's request
for an IND exemption for the application of Catrix<F1> in the
treatment of scleroderma, a rare skin disease. Shortly thereafter,
the IND exemption was expanded to include the application of
Catrix for various forms of cancer, including metastatic renal
cell cancer.

Human Clinical Trials Conducted with Catrix<F1> and Catrix<F1> -S

Since approval of the Company's IND, it has completed
Phase I clinical trials and is conducting Phase II clinical trials.
The Company's clinical trials involve the administration of
Catrix<F1> capsules to solid tumor cancer patients. (See, "Business-
Government Regulation").

Phase I Trials

The objective of the Company's Phase I trials (involving
the initial introduction of Catrix<F1> into human subjects) was to

<PAGE>

test for safety, side effects, dosage tolerance, metabolism and
clinical pharmacology. Initial testing was conducted on patients
with advanced cancers that were unresponsive to other forms of
therapy. Regulatory authorities require that new cancer therapies
be administered in patients who have failed conventional therapy
and that some indication of efficacy be shown before the drug can
be used as the "drug of choice" in earlier stage patients (i.e., in
Phase II trials).

The Company's Phase I studies were conducted in the early
1980's at Pennsylvania State University's Milton S. Hershey Medical
Center in Hershey, Pennsylvania , and at the University of Medicine
and Dentistry of New Jersey in Newark, New Jersey. The FDA
required that both Phase I studies use Catrix<F1> -S, the injectable
dosage form of Catrix<F1> only. This was in spite of the Company's
experimental data indicating strongest response when both
injectable and oral forms of Catrix<F1> were administered
sequentially.

Phase II Trials.

The Company is currently engaged in two Phase II trials.
Phase II trials involve well controlled tests in a larger (but
still limited) patient population to determine the efficacy of the
drug for specific indications, to determine optimal dosage and to
identify possible side effects and safety risks. The Company's
Phase II trials are being conducted at the Montreal General
Hospital, McGill University, Montreal, Canada (the "Montreal
Study") and at the Westchester County Medical Center, New York
Medical College, in Valhalla, New York (the "Valhalla Study").

The Montreal Study. In the Montreal study initially,
twenty-four patients with metastatic renal cell cancer were started
on a protocol regimen of two weeks of Catrix<F1> -S followed by long
term treatment with Catrix<F1> capsules. More recent patient
admissions into this study have eliminated the Catrix -S
administration and patients are treated with Catrix<F1> capsules only.
All of the patients in this study were prior clinical failures
under the original therapy (i.e. surgery, radiation and
chemotherapy) and were at various stages of serious disabilities
from their cancer. Initially, three of these patients experienced
remission (two partial and one complete) and continued to receive
Catrix<F1>. No adverse effects were noted. The other twenty one

<PAGE>

patients did not respond to Catrix<F1> and have either died or are now
being treated by conventional therapy. There is currently only one
patient on study and the disease is considered relatively stable.
There has been no evidence of any toxic side effects of Catrix<F1> in
any patient.

The Valhalla Study. The Valhalla investigation has been
using the Canadian protocol for about 60 months. Of the thirty-five
patients enrolled, twenty-two patients, who had completed more than
three months of therapy, were considered evaluable for response by
the Medical Team overseeing the study. Results to date were
reported on, by the study team, at the thirtieth annual meeting of
the American Society of Clinical Oncology, in Dallas, Texas, May,
1994, and those results were stated to be as follows:

"Ten of the 22 evaluable pts were not
previously treated with any systemic therapy;
all 3 responders (and 1 SD) occurred in the
subset of untreated pts. Lungs were the major
site of response with disappearance of lesions
(2) and >50% shrinkage (1); minor responses
noted in liver (1) and kidney (1). Duration
of response is 30+ months (mos), 12+ mos and
6+ mos in the 3 PRs. Toxicity was mild (Grade
I) and included dysgeusia (8), fatigue (3),
dyspepsia (2), nausea (2), fever (2),
dizziness (1), and scrotal edema (1). Our
results suggest that Catrix is very well
tolerated and may be active in previously
untreated pts with metastatic renal cell
carcinoma. Further accrual of patients is
warranted." [Initials mean: pts.= patients.
SD= stable disease; mos.= months; PR= partial
response].

The Valhalla study currently has six patients on the treatment
protocol and two of these patients (treated since 1992 and 1993
respectively) are showing responses to the drug. A third patient
reveals stable disease and three await evaluation.

The Company intends to expand the Montreal and Valhalla
Studies to include approximately 100 patients each over the next 3

<PAGE>

to 5 years, assuming that sufficient funding is available.

Phase III Trials

Upon completion of the Phase II trials the Company will
meet with the FDA and HPB for authorization to commence Phase III
trials to evaluate the overall risks and benefits of Catrix<F1> in
relation to the treated disease and in light of other available
therapies. Following this further evaluation of efficacy and
safety, the Company will file its NDA and NDS. (See,
"Government Regulation-Orphan Drug Status").

Trials Involving Decubitus Ulcers

Given the safety and efficacy shown in the Company's pre-
clinical and clinical trials to date, it believes that following
preparations and submissions of the appropriate application for use
of Catrix<F1> in decubitus ulcer, Orphan Medical may receive approval
from the FDA to proceed directly to Phase III trials after a small
pilot study of 15 to 20 patients which is scheduled to begin in
August 1996. Orphan Medical expects to conduct a study of
approximately 150 patients in at least two university medical
centers to complete its Phase III clinical trials for this
application.

Laboratory Studies

As part of the FDA and HPB approval process, the Company
may be required to do additional laboratory research into the
molecular composition of the active fractions of Catrix<F1>.
Significant progress has been made in this regard by consultants
working under contract with the company. Results of this research
will assist the Company in developing standardized manufacturing
and production processes. In addition, chemically modified
versions of the isolated active fractions may prove to have
additional therapeutic effects.

A large portion of the Company's laboratory related
resources were spent in the early 1980's on isolating pure
components in Catrix<F1> which have specific biological activities of
interest in the treatment of disease. Its fractionation programs in
the early 1980's at Case Western Reserve University, Batelle
Columbus Laboratories and North Texas State University have

<PAGE>

identified several fractions the Company believes have notable
effects on the immune system and that have direct anti-mitotic
activity. The Company may resume tests on these fractions in its
model assay for metastatic renal cell cancer with the goal of
reducing its search to two or three specific Catrix<F1> fractions.
The work is crucial in two ways; first it should enable the
Company to establish a relevant quality control standard for its
products and aid in obtaining approval to market Catrix<F1> in Canada
and the United States; and, second, it would be highly desirable to
develop each effective isolated fraction as a drug, taking greatest
advantage of the Company's complex cartilage product.

Many cancer investigators today believe that human
cancers escape early detection by the body's self/non-self
detection system (the immune system) and in some ways continue to
evade detection up to the time of death of the host. The Company
believes that Catrix<F1> exerts important beneficial effects on the
body's immune system. It may heighten the body's awareness of
cancer cells (through stimulation of the immune system) and allow
the body's own defenses to defeat the progression of the disease.
This effect on the immune system, combined with the direct anti-
mitotic effect of Catrix<F1>, forms the basis of the Company's
understanding of how Catrix<F1> may work in the treatment of human
cancers.

Several of the Company's specific laboratory research
projects conducted at Battelle Columbus Laboratories relating to
cancer conclude that there are low molecular weight components of
Catrix<F1> which are anti-mitotic, that is, relatively small
components in Catrix<F1> that prevent cell replication. Further
results indicate that certain higher molecular weight components of
Catrix have a significant effect on many segments of the body's
immune system. The results of these later investigations have been
published in the Journal of Biological Response Modifiers.

Another development involves the identification by
outside investigators of a pure protein found in human renal cell
cancer cells which is present in concentrations inversely
proportional to the intensity of the patient's disease. That is,
the protein diminishes as the severity of the disease increases.
This protein is found in Catrix<F1> and in abundance in many normal
cells in humans and animals, including, bovine tracheal cartilage.
The Company intends to assess the quantity of this protein in
Catrix<F1>.

<PAGE>

Government Regulation.

The production and marketing of the Company's products
and its research and development activities are subject to
comprehensive regulation by various federal, state and local
authorities in the United States and governmental authorities of
other countries. Among others, the FDA and HPB exercise regulatory
authority over the development, testing, formulation, manufacture,
labeling, storage, record keeping, quality control, advertising and
promotion of the Company's products. The Company believes that the
regulations and procedures involving the above in Canada are
essentially the same as the United States. Accordingly, the
discussion set forth below is also applicable to the Company's
efforts to obtain regulatory approval in Canada.

A New Drug may not be marketed in the United States until
it has satisfied rigorous testing procedures established and
approved by the FDA. The drug may then be marketed only for the
specific indications, uses, formulation, dosage, forms, and
strengths approved by the FDA. Similar requirements are imposed by
foreign regulators upon the marketing of a new drug in their
respective countries.

The steps required before a pharmaceutical agent may be
marketed in the United States include (a) pre-clinical laboratory
and animal tests, (b) the submission to the FDA of an application
for an IND, which must become effective before human clinical
trials may commence, (c) well controlled human clinical trials to
establish the safety and efficacy of the drug, (d) the submission
of a detailed NDA to the FDA, and (e) the FDA approval of the NDA
prior to any commercial sale or shipment of the drug. In addition
to obtaining FDA approval for each product, each domestic drug
manufacturing establishment must comply with Good Manufacturing
Practices (GMP) and are subject to biennial inspections by the FDA.
Foreign manufacturing establishments also must comply with GMP'S
and are subject to periodic inspection by the FDA or by local
authorities under agreement with the FDA.

The results of the pre-clinical studies and clinical
trials are submitted to the FDA in the form of an NDA for approval
of the marketing and commercial shipment of the drug. The NDA

<PAGE>

includes information pertaining to the chemistry, formulation,
activity and manufacture of the drug and each component of the
final product, as well as details relating to the sponsoring
company. Submission of an NDA does not assure FDA approval for
marketing. The application review process takes more than two
years on average to complete, although FDA reviews of cancer
therapies, and other life-threatening diseases may be accelerated
and average less than two years. However, the process may take
substantially longer if the FDA has questions or concerns about the
product.

In general, the FDA requires at least two adequate and
well controlled clinical studies demonstrating efficacy with
sufficient levels of statistical assurance. However, additional
support may be required. The FDA may also request additional
information, such as long term toxicity studies or other studies
relating to the product safety. Notwithstanding the submission of
such data, the FDA ultimately may decide that the application does
not satisfy its regulatory criteria for approval. Finally, the FDA
may require additional clinical tests following NDA approval to
confirm product safety and efficacy (Phase IV clinical tests).

Among the requirements for product approval is the
requirement that prospective manufacturers conform to the FDA's
current GMP standards which thereafter must be followed at all
times. In complying with GMP standards, manufacturers must
continue to expend time, money and effort in production, record
keeping and quality control to ensure technical compliance.
Failure to so comply subjects the manufacturer to possible FDA
action such as the suspension of manufacturing or seizure of the
product. The FDA may also require a voluntary recall of a product.

All of the Company's contract manufacturing facilities
will be subject to periodic inspections by the FDA and comparable
agencies. If violations of applicable regulations are discovered
during these inspections, the Company may be restrained from
continued marketing of the manufactured products. Such facilities
are also subject to regulation regarding, among other things,
occupational safety, laboratory practices, the use and handling of
radio-isotopes and hazardous chemicals, prevention of illness and
injury, environmental protection and hazardous substance control.

The product testing and approval process is likely to

<PAGE>

take a substantial number of years and involves the expenditure of
substantial resources. There can be no assurance that any approval
will be granted on a timely basis, or at all. The FDA also may
require post-marketing testing and surveillance to monitor the
record of the product and continued compliance with regulatory
requirements. Upon approval, a drug may be marketed only for the
approved indications in the approved dosage forms and at the
approved levels. Adverse experiences with the product must be
reported to the FDA. The FDA also may require the submission of
any lot of the product for inspection and may restrict the release
of any lot that does not comply with FDA standards, or otherwise
may order the suspension of manufacture, recall or seizure if non-
compliant product is delivered. Product approvals may be withdrawn
if compliance with regulatory standards is not maintained or if
problems concerning safety or efficacy of the product are
discovered following approval.

The Company also will be subject to foreign regulatory
authorities with respect to clinical trials and pharmaceutical
sales. Whether or not the FDA approval has been obtained, approval
of a product by the comparable regulatory authorities of foreign
countries must be obtained prior to commencement of marketing of
the product in those countries. The approval process varies from
country to country and the time required may be longer or shorter
than that required for FDA approval.

Orphan Drug Status

Pursuant to the Orphan Drug Act,(this discussion not to
be confused with the discussion on Orphan Medical Inc.) the FDA may
grant "orphan drug status" to certain drugs intended to treat a
"rare disease or condition", defined as a disease or condition
which effects fewer than 200,000 people in the United States, or,
which effects more than 200,000 people and for which the cost of
developing and making the drug available will not be recovered from
sales of the drug in the United States. Orphan Drug status may
provide certain benefits including exclusive marketing rights in
the United States for the drug, for the designated indication, for
seven years following marketing approval, and federal income tax
credits for certain clinical trial expenses.

The Company may receive marketing exclusivity under the
Orphan Drug Act, only if it is the sponsor of the first NDA

<PAGE>

approved for the drug for an indication for which Orphan Drug
status was designated prior to the time such NDA was submitted.
Therefore, unlike patent protection, orphan drug status does not
prevent other manufactures from attempting to develop the drug for
the designated indication or from obtaining approval of a separate
NDA prior to the approval of the Company's NDA. If another
sponsor's NDA for the same drug and the same indication is approved
first, that sponsor is entitled to the exclusive marketing rights
if that sponsor has received orphan drug designation for the drug.
In that case, the FDA will refrain for seven years from approving
the Company's application to market the product. If another
sponsor's NDA for the same drug and the same indication is approved
first, but that company has not obtained orphan drug status, the
FDA would still be permitted to approve the Company's NDA.
However, the Company would not be able to receive the seven years'
exclusivity.

Orphan Drug status does not prevent the FDA from
approving the same drug for different indication. Furthermore,
doctors are not restricted by the FDA from prescribing an approved
drug for unapproved uses. Therefore, another company's approval of
a drug for different uses could adversely affect the marketing
potential of a Company drug for which Orphan Drug Act status has
been obtained for a different indication.

The Company believes that its products, if developed, may
qualify for Orphan Drug Status. There can be no assurance,
however, that such products will receive orphan drug status. The
Company believes that it would be advantageous to obtain orphan
drug status for eligible products. However, possible amendment of
the Orphan Drug Act by the United States Congress and possible re-
interpretation by the FDA are the subject of frequent discussions.
Legislation to limit exclusivity, in some respects, was passed by
Congress, but vetoed by the President in 1991. Similar legislation
is expected to be introduced in future Congressional Sessions. The
FDA has proposed regulations embodying certain other limitations;
these regulations have not yet been adopted. Therefore, there is
no assurance as to the precise scope of protection that may be
afforded by orphan drug status in the future or that the current
level of exclusivity and tax credits will remain in effect.

Under the Drug Competition and Patent Term Restoration
Act of 1984, a product patent or method of treatment patent with a

<PAGE>

17-year period of enforceability covering a drug or biological
product may be extended for up to five years under certain
circumstances to compensate the patent holder for the time required
for FDA regulatory review of the product. The benefits are only
available to the first approved use of the active ingredient in a
drug or biological product and may only be applied to one patent
per drug per product. This law also establishes a period of time
following FDA approval of certain NDA's during which the FDA may
not accept or approve abbreviated applications for generic versions
of the drug from other sponsors. However, there can be no
assurance that the Company will be able to take advantage of either
the patent term extension of marketing exclusivity provisions of
this law.

Raw Materials and Manufacturing.

Catrix<F1> and Catrix<F1> -S are manufactured for the Company by
Intergen Biomanufacturing Corporation, located in Toronto, Canada
("Intergen"), and at the University of Iowa Department of
Pharmaceutical Services, located in Iowa City, Iowa (the
"University"), respectively. Intergen and the University are FDA-
approved pharmaceutical manufacturing facilities. At the present
time, the only FDA approved manufacturers of the Company's drugs
are, Intergen for Catrix<F1> Powder and the University for Catrix<F1> -S,
although the Company is investigating alternative sources to the
point where sample manufacturing has commenced. The Company's food
supplement cartilage material, BIO-CARTILAGE<F2>, is manufactured in
the U.S. for the Company and an additional manufacturer is being
developed in the Western Pacific Area.

Raw Materials. Catrix<F1> is prepared from animal cartilage
tissue. The most accessible and easily processed source is bovine
tracheas collected from normal healthy beef cattle, subsequent to
slaughter. Tracheas are cleaned, flash frozen and delivered to
qualified pharmaceutical manufacturing facilities.

Regulatory Review. All Catrix<F1> and Catrix<F1> -S production
procedures have been submitted in extensive detail to both the FDA
and the HPB, and accepted as part of the review of the Company's
official submissions with respect to studying Catrix<F1> in patients.

Patents and Proprietary Technology.

<PAGE>

The Company was granted and owns, by assignment, several
United States patents some of which have expired, and has assigned
certain patents to Catrix<F1> Research Limited Partnership (see,
"Certain Relationships and Related Transactions"). The most recent
patent granted was for the use of cartilage-based agents as an
anti-tumor agent and method (U.S. Patent #4,827,607).

The Company also holds several patents in various foreign
countries. While the Company believes that these patents may be
valuable, there is no assurance that any such patent will afford
the Company any material protection. Furthermore, if any of its
patents should be infringed, there is no assurance that the Company
would be financially capable of protecting its interests.

Competition.

Competition in the anti-cancer pharmaceutical industry is
based primarily on: product performance, including efficacy,
safety, ease of use and adaptability to various modes of
administration; patient compliance; price; acceptance by
physicians; marketing; and distribution. The availability of
patent protection and orphan drug status, and the ability to obtain
government approval for testing, manufacturing and marketing are
also critical factors. See "Business-Government Regulation."

Most companies, including well-known pharmaceutical and
chemical companies, are marketing anti-cancer drugs and seeking to
develop new products and technologies for the treatment of cancer.
Many of these companies have substantially greater financial and
technical resources and production and marketing capabilities than
the Company. In addition, many such companies have had
significantly greater experience both in undertaking pre-clinical
testing and human clinical trials of new or improved pharmaceutical
products, and obtaining the approval of the FDA or other regulatory
authorities to market products for health care. Accordingly, the
Company's competitors may succeed in obtaining regulatory approval
of such products before the Company obtains approval of
competitive products.

<PAGE>

Human Resources.

Employees and Consultants.

At August 1, 1996, the Company had one full time employee
and retains consultants to assist in the administration of the
Company and coordinating its ongoing research and clinical trials.

Scientific Advisory Board.

The Company benefits from consultations with prominent
scientists active in fields related to the Company's business. For
this purpose, the Company maintains a Scientific Advisory Board.
At the Company's request, these advisors review the feasibility of
product development programs under consideration, advise the
Company of research advances in areas related to the Company's
technology and aid in recruiting personnel. It is intended that
the Scientific Advisors meet individually and in small groups with
the Company's management and scientists. Because the scientific
advisors may have consulting or advisory positions with other
companies which may compete with the Company, the Company has
entered into confidentiality agreements with each member of the
Scientific Advisory Board.

The Company's Scientific Advisory Board consists of Dr.
William T. Sherman, Vice President for Science-Elect. , as Chair,
and the following persons:

Michael Bazinet M.D., co-director of the Company's Phase
II Montreal Study, is assistant Urologist, Attending Staff at The
Montreal General Hospital in Montreal, Quebec, Canada, and
Assistant Professor of Urology, McGill University. Dr. Bazinet has
completed residencies in surgery and urology at Sherbrooke
University and a residency in urology at the Royal Victoria
Hospital. He has served as a Research Fellow in Human Tumor
Immunology and as a Clinical Fellow in Urologic Oncology at
Memorial Sloan-Kettering Hospital in New York, NY. He has authored
or co-authored numerous papers and presentations.

Robert W. Gracy, Ph.D., principal advisor to the Company
for biochemistry, is professor of Chemistry and Associate Dean for
Basic Science and Research at The University of North Texas, Texas
College of Osteopathic Medicine in Fort Worth, Texas. Dr. Gracy

<PAGE>

received his Ph.D. from the University of California, in Riverside,
and performed postdoctoral work in molecular biology at the Albert
Einstein College of Medicine, where he was a postdoctoral fellow.
He became an Associate Professor of Chemistry at North Texas State
University, and subsequently a visiting professor of physiological
chemistry at the University of Wurtzburg. Dr. Gracy has published
over 130 papers in peer-reviewed scientific journals and books.

Carmelo Anthony Puccio, M.D., director of the Company's
Phase II Valhalla Study, is Assistant Professor of Medicine at New
York Medical College and an Attending Physician at Westchester
County Medical Center, both in Valhalla, New York. Dr. Puccio
received his medical degree from the Universidad Autonoma de
Guadalajara, graduating first in his class. He completed the Fifth
Pathway Program at the Albert Einstein College of Medicine in New
York City, and a residency in Internal Medicine at Maimonides
Medical Center. He was a Research Fellow at New York Medical
College prior to attaining his present position. Dr. Puccio's
papers have been published in several scientific journals.

Item 2. Properties

The Company owns no real property. Its executive offices
in New York City, occupying approximately 1,500 square feet, are
leased for a term ending on March 31, 1998. Management considers
that its leased premises are well maintained and sufficient for its
present operations and that when its current lease expires it will
be able to lease office space on acceptable terms.

Item 3. Legal Proceedings

On June 2, 1994 Dr. John F. Prudden, one of the Company's
founders and former chairman, instituted an arbitration proceeding
against the Company before the American Arbitration Association.
Dr. Prudden has instituted this arbitration proceeding, pursuant to
the terms of his Consultancy Agreement with the Company, asserting
that "Lescarden [has] breached the agreements [with him and he
seeks] an award of damages [for] consulting fees, life insurance
payments, expense reimbursement and pension payments." In
September 1995, the Arbitrator ruled in favor of Dr. Prudden on
several of his claims. Thereafter, the Company sought
reconsideration which the Arbitrator denied. Dr. Prudden then
sought confirmation of the award in the New York State Supreme

<PAGE>

Court, which the Company opposed. In April 1996 the Supreme Court
ruled in favor of confirmation but, before Judgement could be
entered on the award the Company filed for bankruptcy under Chapter
XI (Reorganization) which filing resulted in an automatic stay of
all proceeding against the Company. The Company believes that is
has adequately accrued for the potential costs of resolution of the
former chairman's claims as of May 31, 1996.

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

None

<PAGE>

PART II

Item 5. Market for Common Equity and Related Stockholder Matters

The Common Stock of the Company is traded in the over-the
counter market under the symbol "LCAR". The following table sets
forth, for the periods indicated, the high and low bid quotations
for the Common Stock as reported by the National Quotation Bureau.

Fiscal Year Ending May 31, 1996

Fourth Quarter 11/16 1/4
Third Quarter 5/8 1/8
Second Quarter 17/32 1/16
First Quarter 11/32 1/16

Fiscal Year Ending May 31, 1995 High Low

Fourth Quarter 3/8 1/16
Third Quarter 7/16 1/8
Second Quarter 7/16 1/8
First Quarter 9/32 1/8

On July 26, 1996 the closing bid price per share of
Common Stock, as reported by the National Quotation Bureau, was
1/4. As of May 31, 1996 there were 584 holders of record of the
Company's Common stock.

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

Overview
Since its inception, the Company has primarily devoted
its resources to fund research, drug discovery and development.
In addition, the Company licenses its technology for
commercialization by other companies and in the fiscal year ended
May 31, 1995, the Company began sales of its proprietary bovine
cartilage material, BIO-CARTILAGE<F2>, to a food supplement
distributor for sale through nutritional food supplement stores in
the U.S. The Company has been unprofitable to date and may

<PAGE>

continue to incur operating losses in the foreseeable future. The
Company has sustained net losses of approximately $12.8 million
from inception to May 31, 1996. The Company has primarily financed
its research and development activities through a public offering
of Common Stock, private placements of debt and equity securities,
and in recent years, revenues from licensing fees and product
sales.

On May 7, 1996 the Company filed a Chapter XI Petition for
Re-organization with the United States Bankruptcy court for the
southern District of New York. This action was precipitated by a
decision of the New York State Supreme Court, New York County,
which confirmed an arbitration award against the Company for
monetary damages in excess of the Company's liquid assets. ( See
Item 4. - Legal Proceedings).

Fiscal year ended May 31, 1996 compared to May 31, 1995

Product sales increased in the fiscal year ended May 31,
1996 from the comparative prior year primarily due to higher sales
of BIO-CARTILAGE<F2> to food supplement distributors.

Royalties received by the Company from a licensee,
Donell, Inc., (Donell) increased to $34,750 in fiscal 1996 from
$24,842 in fiscal 1995.

Total costs and expenses during the year ended May 31,
1996 were 61% higher than those of the comparative period of the
prior year. The increases were primarily due to an increase in
accrued expenses to provide for the amount of the award against the
Company in the matter of the Arbitration between John F. Prudden,
M.D., and the Company (See Item 4.-Legal Proceedings) and to the
higher costs of product sales related to the increase in revenues.
In addition, higher professional fees and consulting expenses
(which were primarily due to the arbitration proceeding with Dr.
John F. Prudden), research and development expenses and travel and
meetings contributed to the increase in costs and expenses in
fiscal 1996 as compared to the fiscal 1995.

Liquidity and Capital Resources.

Overview

<PAGE>

The Company has had losses from operations in each of the
five years ended May 31, 1996. This trend may continue in the
foreseeable future. Working capital has been provided since the
Company's inception primarily from the sale of equity securities,
from borrowings (from its officers, directors, and shareholders and
from outside investors), and in recent years, from revenues from
licensing fees and product sales.

Present Liquidity

The Company's present liquidity position is critical. As
of May 31, 1996 the Company's current and total liabilities exceed
its current assets by $2,109,137 and its total liabilities exceed
its total assets by $2,106,057. The company will require
additional product sales or funding during or, shortly after, the
fiscal quarter ending August 31, 1996, to sustain its operations.

As a result of the history of losses incurred by the
Company, the net loss during the year ended May 31, 1996 of
($419,394), and the limited amount of funds currently available to
finance the Company's operations, the report of the Company's
independent Certified Public Accountants on the Financial
Statements as of May 31, 1995 and 1996 contain an explanatory
paragraph indicating that the Company may be unable to continue in
existence.

The Company's Chapter XI proceeding is in progress and a
Creditor's Committee of seven is in place. The Company intends to
propose a fair reorganization plan during the quarter ending
November 30, 1996 and to submit the plan to all creditors and
shareholders for approval. It is reasonable to anticipate that the
Company may be discharged from bankruptcy around the end of this
calendar year 1996. Assuming acceptance of the reorganization
plan, upon discharge, the Company's balance sheet would reflect no
significant debt.

The Company plans to continue to implement plans to sell
BIO-CARTILAGE<F1> in the the over-the-counter food supplement market
and may also introduce a second product in the same marketplace in the
near future. If successful, the Company may increase cash flow in
order to allow the Company to continue to meet its obligations and
sustain its operations. In addition, the Company may receive

<PAGE>

certain license fees in the near term which would also improve its
current financial position.

In addition, the Company's licensee, ORPHAN MEDICAL INC.
of Minnetonka, MN, continues to make progress developing the
Company's proprietary bovine cartilage material, CATRIX<F1>, in powder
form only, for topical wound healing purposes.

The Company has no material commitments for capital
expenditures at May 31, 1996.

Item 7. Financial Statements and Supplementary Data

See page F-1 for Lescarden Inc. Index to Financial
Statements.

Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure

None.

<PAGE>

Part III

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

The executive officers and directors of the Company are as follows:

Name Position
Gerard A. Dupuis Chairman and
Chief executive
Officer, Director.

William T. Sherman, Ph.D. Vice President
Science Elect.

William H. Chisholm Vice Chairman
Director.

Frank E. Berglas Director.

George E. Ehrlich, M.D. Director.

Mr. Dupuis (age 58) is an attorney who practiced in New
York City for more than twenty five years. He became General
Counsel, Secretary and a Director of the Company in February 1986.
On June 19, 1990 Mr. Dupuis was elected President and Chief
Executive Officer of the Company and in 1992 was elected chairman.
Mr. Dupuis is a graduate of Syracuse University and received his
law degree from Columbus School of Law, of the Catholic University
of America in Washington, D.C.

Dr. Sherman (age 54) Executive Vice President for
Science-Elect of the Company, received his Bachelor of Science in
pharmacy from the Philadelphia College of Pharmacy and Science, and
a Ph.D. in pharmacology from Temple University. Since 1989 Dr.
Sherman has been an independent consultant to the pharmaceutical
industry. From 1987 to 1989 he served as Vice President of Martec
Pharmaceutical Company. Prior to that he was Vice President for

<PAGE>

research and development for the Company. Dr. Sherman is a
registered pharmacist in Pennsylvania and New Jersey and has
published in several scientific journals.

Mr. Chisholm (age 79) is a retired paper manufacturer and
served as a director of several publicly owned companies. He
became a Director of the Company in December 1987. Mr. Chisholm is
a graduate of Yale University.

Mr. Berglas (age 55) is President and Chief Executive
Officer of Great Lakes American Reinsurance Co., a position he has
held for more than the past five years. He became a Director of
the Company on December 1, 1993. Mr. Berglas is a graduate of City
College of New York.

Dr. Ehrlich (age 67) is the President of George E.
Ehrlich Associates, International Consultant Firm, a position he
has held for more than the past five years. He became a Director
of the Company on March 2, 1995. Dr. Ehrlich is a graduate of
Harvard University and received his medical degree from Chicago
Medical School.

Item 10. Executive Compensation

Annual Compensation Long-Term
Compensation
Awards

Name and Fiscal Year
Principal Ended
Position May 31, Salary $ Warrants (#)

Gerard A. Dupuis 1996 $132,000 500,000
1995 $112,250 140,000
President and CEO 1994 $70,500 500,000

<PAGE>

Aggregated Option and Warrant Exercises in Last Fiscal Year and FY
End Option and Warrant Values.

Shares Number of Value of
Acquired Unexercised Unexercised
on Value Options/ In-the-money
Exercise Realized Warrants Options
at FY End (#) Warrants
at FY End ($)
Name (#) ($) Exercisable Exercisable
G.A. Dupuis Options Options
80,000 0
Warrants Warrants
1,530,000 $151,062

Item 11. Security Ownership of Certain Beneficial Owners and
Management

The following table sets forth, as of May 31, 1996, the
ownership of the Company's Common Stock by (I) each person who is
known by the Company to own Shares of record or beneficially, more
that (5%) of the Company's Common Stock, (ii) each of the Company's
directors and executive officers and (iii) all directors and
executive officers as a group. Except as otherwise indicated, the
stockholders listed in the table have sole voting and investment
powers with respect to the shares indicated.

Name and Number of Shares
Title of Address of Beneficially Percent
Class Beneficial Owner Owned of Class (1)

Common Gerard A. Dupuis (2) 1,725,750 14.30%
Stock 2 Kittle Road
Chappaqua, NY

William H. Chisholm (2) 637,438 5.19%
280 Railroad Avenue
Greenwich, CT

<PAGE>

Charles T. Maxwell (2) 1,413,002 11.47%
C.J. Lawrence, Inc.
1290 Avenue of the Americas
New York, NY

Frank E. Berglas (2) 275,000 2.28%
139 Brook Farm Road East
Bedford, New York

Peter B. Ruffin (2) 1,278,311 10.33%
753 Forest Hills Drive
Wilmington, NC

George E. Ehrlich (2) 100,000 0.84%
38 Holly Drive
Loveladies, NJ

Directors and 2,738,188 19.34%
Officers as a group
(2) (4 persons)

(1) The percentages are calculated on the basis of
11,872,010 shares of Common Stock outstanding. For the purpose of
calculating the percentage of shares of the Company's Common Stock
owned by any person, the shares issuable upon the exercise of
rights to acquire, owned by such a person if exercisable within 60
days of May 31, 1996 are deemed outstanding, but such shares are
not deemed outstanding for the purpose of calculating the
percentage of Common Stock owned by any other person. All share
ownership is direct unless otherwise indicated.

(2) Includes 504,000, 1,610,000, 404,000, 175,000,
100,000 and 449,000 stock option grants and/or warrants to purchase
the Company's Common Stock held by Mr. Ruffin, Mr. Dupuis, Mr.
Chisholm, Mr. Berglas, Dr. Ehrlich and Mr. Maxwell, respectively.

Merrs. Dupuis, Chisolm, Berglas and Ehrlich were each granted
warrants to purchase shares of the Company's common stock on July 26,
1995; they plan to file repors on Form 4 reporting their changes in
beneficial ownership of shares of the Company's common stock late, by
the end of August 1996 or shortly thereafter.

<PAGE>

Item 12. Certain Relationships and Related Transactions.

Notes payable to related parties of $496,000 at May 31,
1996, with interest rates between 10% and 13.5% per annum, are due
on December 31, 1996. This amount is payable to the following:
$72,000 to William H. Chisholm, a Director of the Company; $252,000
to Peter Ruffin, a Principal Stockholder of the Company and
$172,000 to Charles T. Maxwell, a Principal Stockholder of the
Company. In lieu of payment in cash upon maturity, the holders of
certain of the notes may convert the face value of the notes into
Common Stock of the Company, any Security to be offered by the
Company at any time prior to the due date of the notes or into a
right to receive 5% of the Company's future royalties from topical
product sales by any license. In addition, the holders of the
above referenced $496,000 of notes were granted five-year and 10
year warrants to purchase an aggregate 1,681,903 shares of
restricted Common Stock at prices ranging from $.001445 to $1.50
per share.

The Company is the holder of 300,000 shares of common
stock of Donell, Inc. ("Donell") the Company's licensee for the
manufacture and sale of products for topical use which are
formulated to include Catrix<F1>. Pursuant to the terms of a license
agreement dated October 2, 1989 between the Company and Donell, so
long as the Company owns more than $15% of the outstanding common
stock of Donell, the Company has the right to appoint two members
to the Board of Directors of Donell (or one member if the Company
owns between 5% and 15% of the outstanding common stock of Donell).

<PAGE>

ruled in favor of confirmation but, before Judgement could be
entered on the award the Company filed for bankruptcy under Chapter
XI (Reorganization) which filing resulted in an automatic stay of
all proceeding against the Company. The Company believes that is
has adequately accrued for the potential costs of resolution of the
former chairman's claims as of May 31, 1996. (See Item 3. Legal
Proceedings)

Pursuant to an agreement with Donald K. Lourie a former
employee of the Company, the Company is obligated to pay Mr. Lourie
an annual pension of $25,000 provided the company meets certain
income or net worth milestones.

In June 1982, Dr. Prudden and others formed Catrix
Research Limited Partnership ( the "Catrix Partnership"), of which
Dr. Prudden is general partner. The Company has entered into two
agreements with the "Catrix Partnership," a Research Agreement and
a Licensee Agreement. See note 4 to the Notes to Financial
Statements for description of these agreements.

Item 13. Exhibits and Reports on Form 8-K

(a) (1) Exhibit

Exhibit Number

Description of Exhibit

3.1 Certificate of Incorporation of Registrant, as
amended.*

3.2 By-Laws of Registrant, as amended.*

10.1 License Agreement between the Company and Donell,
Inc., dated October 2, 1989, with amendments dated
June 18, 1990 and March 16, 1992.*

10.2 Employment Agreement with John F. Prudden dated
November 15, 1985, as amended July 14, 1992.*

10.3 Letter agreements with Donald K. Lourie dated
November 15, 1985, February 11, 1988, and September
7, 1990.*

<PAGE>

10.4 Lease for 6th floor office space at 790 Madison
Avenue, New York, NY dated August 19, 1986, as
amended on April 18, 1991.*

10.5 Licensee Agreement between Lescarden Inc. and
Catrix Research Ltd. Partnership dated June 4,
1982.*

10.6 Research Agreement between Lescarden Inc. and
Catrix Research Ltd. Partnership dated June 4,
1983.*

10.7 Lease for office space at 420 Lexington Avenue, New
York, NY dated March 9, 1993.**

22.1 Subsidiaries of the Registrant.*

23. Notice of annual meeting of shareholders and Proxy
Statement for Annual Meeting of shareholders held
October 19, 1992.**

27. Financial Data Schedule

99.1 Award of the Arbitrator in the Matter of the
Arbitration between John F. Prudden, M.D. and the
Registrant dated September 6, 1995.***

* Incorporated by reference to Registrant's Form S-1
(Registration no. 33-50743) filed August 12, 1992.

** Incorporated by reference to Registrant's Form 10-KSB for
the fiscal year ended May 31, 1993.

*** Incorporated by reference to Registrant's Form 8K
dated September 6, 1995.

(b) Reports on Form 8-K

There were no reports on Form 8-K filed by the
Company during the fourth Quarter at the year ended
May 31, 1995.

<PAGE>

SIGNATURES

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

LESCARDEN INC.

By: S/Gerard A. Dupuis
Gerard A. Dupuis, President
August 20, 1996

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

By: S/Gerard A. Dupuis President, Principal Executive
Gerard A. Dupuis Officer, Principal Financial
August 20, 1996 Officer, Principal Accounting
Officer and Director

By: S/William H. Chisholm Vice Chairman, Director
William H. Chisholm
August 20, 1996

By: S/Frank E. Berglas Director
Frank E. Berglas
August 20, 1996

By: S/George E. Ehrlich Director
George E. Ehrlich
August 20, 1996

<PAGE>

LESCARDEN INC.
(Debtor-in-Possession)

INDEX TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Independent Auditor's Report F-2
Balance Sheet as of May 31, 1996 F-3
Statement of Operations for the Years Ended May 31, 1996 and 1995 F-4
Statement of Stockholders' Deficiency for the Years
Ended May 31, 1996 and 1995 F-5
Statement of Cash Flows for the Years Ended May 31, 1996 and 1995 F-6
Notes to Financial Statements F-7 - F-12

F-1
<PAGE>

INDEPENDENT AUDITOR'S REPORT

To the Board of Directors and Stockholders of
Lescarden Inc. (Debtor-in-Possession)

We have audited the accompanying balance sheet of Lescarden Inc.
(Debtor-in-Possession) as of May 31, 1996 and the related statements
of operations, stockholders' deficiency, and cash flows for each of the
two years in the period ended May 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Lescarden Inc.
Debtor-in-Possession) as of May 31, 1996, and the results of its operations
and its cash flows for each of the two years in the period ended
May 31, 1996 in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to
the financial statements, on May 7, 1996, Lescarden Inc. filed a petition
for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The
Company has continued as Debtor-in-Possession under Chapter 11 of the
U.S. Bankruptcy Code and is subject to the jurisdiction of the Bankruptcy
Court. Continuation of the Company as a going concern and realization
of its assets and the liquidation of its liabilities are dependent upon,
among other things, the formulation of a confirmed Plan of Reorganization,
which may result in significant adjustments and reclassifications in the
amounts reflected as assets, liabilities and shareholders' deficiency in
the accompanying financial statements, and the ability of the Company
to maintain adequate financing along with the achievement of profitable
operations. The financial statements do not include any adjustments that
might result from the outcome of these uncertainties.

GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York

July 9, 1996

F-2
<PAGE>
LESCARDEN INC.
(Debtor-in-Possession)

<TABLE>
BALANCE SHEET

May 31, 1996
- -----------------------------------------------------------------------------
<CAPTION>

ASSETS
<S> <C>
Current Assets:
Cash $ 53,935
Inventory (Note 2) 13,856
Prepaid expenses 17,673
- -----------------------------------------------------------------------------
Total current assets 85,464

Security Deposit 3,080

Deferred Income Tax Asset, net of valuation allowance
of $3,835,000 (Note 7) -
- -----------------------------------------------------------------------------
Total Assets $ 88,544
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current Liabilities:
Liabilities subject to compromise:
Trade and other miscellaneous claims $ 862,092
Trade and other miscellaneous claims - related parties 319,509
Notes payable (Note 3) 517,000
Notes payable - related parties (Note 3) 496,000
- -----------------------------------------------------------------------------
Total liabilities 2,194,601
- -----------------------------------------------------------------------------
Commitments and Contingencies (Notes 3, 4 and 5)

Stockholders' Deficiency (Notes 3, 4 and 6):
Convertible preferred stock - $.02 par value; $1.50 liquidation value
(aggregating $138,000); authorized 2,000,000 shares, issued and
outstanding 92,000 shares 1,840
Common stock - $.001 par value; authorized 200,000,000 shares,
issued and outstanding 11,872,010 shares 11,872
Additional paid-in capital 10,787,627
Accumulated deficit (12,907,396)
- -----------------------------------------------------------------------------
Stockholders' deficiency (2,106,057)
- -----------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficiency $ 88,544
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>

The accompanying notes and independent auditor's report should be read in
conjunction with the financial statements.

F-3
<PAGE>
LESCARDEN INC.
(Debtor-in-Possession)

<TABLE>
STATEMENT OF OPERATIONS

Year Ended May 31, 1996 1995
- -----------------------------------------------------------------------------

<CAPTION>
<S> <C> <C>
Revenue:
Product sales $ 440,534 $ 240,273
Royalties and other (Notes 2 and 5) 45,340 32,081
- -----------------------------------------------------------------------------
Total revenue 485,874 272,354
- -----------------------------------------------------------------------------
Costs and expenses:
Cost of product sales 151,224 88,903
Salaries:
Officer 96,000 93,500
Office 9,533 4,198
Professional fees and consulting (Note 5) 97,496 55,645
Research and development (Note 2) 31,553 17,834
Rent and office expenses (Note 5) 58,401 63,232
Travel and meetings 22,247 11,342
Taxes 2,596 3,423
Insurance 625 1,517
Interest 61,850 63,149
Interest to related parties 59,775 59,776
Provision for arbitration award (Note 5) 313,612 -
Other administrative (income) expenses (4,054) 9,487
- -----------------------------------------------------------------------------
Total costs and expenses 900,858 472,006
- -----------------------------------------------------------------------------
Loss before reorganization item (414,984) (199,652)

Reorganization item (Note 1):
Professional fees 4,410 -

- ------------------------------------------------------------------------------
Net loss $ (419,394) $ (199,652)
- ------------------------------------------------------------------------------
Net loss per common share $ (.04) $ (.02)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Weighted average number of common shares
outstanding (Note 2) 11,838,677 11,734,510
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------

</TABLE>

The accompanying notes and independent auditor's report should be read in
conjunction with the financial statements.

F-4
<PAGE>
LESCARDEN INC.
(Debtor-in-Posession)

<TABLE>
STATEMENT OF STOCKHOLDERS' DEFICIENCY

<CAPTION>
Convertible
Preferred Stock Common Stock Additional
Number of Par Value Number of Par Value Pain-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Deficiency
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Balance at June 1, 1994 92,000 $1,840 11,472,010 $11,472 $10,549,527 $(12,288,350) $(1,725,511)

Issuance of common stock
for cash - - 350,000 350 34,650 - 35,000
Issuance of common stock
warrants in satisfaction of
an account payable (Note 2) - - - - 50,000 - 50,000
Net loss - - - - - (199,652) (199,652)
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------

Balance at May 31, 1995 92,000 1,840 11,822,010 11,822 10,634,177 (12,488,002) (1,840,163)

Issuance of common stock
for cash - - 50,000 50 7,450 - 7,500
Issuance of common stock
warrants in settlement of
liability to former chairman
(Note 5) - - - - 146,000 - 146,000
Net loss - - - - - (419,394) (419,394)
- ------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1996 92,000 $1,840 11,872,010 $11,872 $10,787,627 $(12,907,396) $(2,106,057)
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------

</TABLE>

The accompanying notes and independent auditor's report should be read in
conjunction with the financial statements.

F-5
<PAGE>
LESCARDEN INC.
(Debtor-in-Possession)

<TABLE>
STATEMENT OF CASH FLOWS

Year ended May 31, 1996 1995
- ------------------------------------------------------------------------------------
<CAPTION>

<S> <C> <C>
Cash flows from operating activities:
Net loss $ (419,394) $ (199,652)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Provision for arbitration award 313,612 -
Changes in operating assets and liabilities:
Decrease in accounts receivable 94,379 (94,379)
Decrease in inventory 3,490 16,962
Increase in prepaid expenses (17,673)
Increase in trade and other miscellaneous claims 18,000 72,912
Increase in trade and other miscellaneous claims
- related parties 23,775 41,026
Decrease in customer deposit - (13,750)
- --------------------------------------------------------------------------------------
Net Cash provided by (used in) operating activities 16,189 (176,881)
- --------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 7,500 35,000
Repayment of note payable (10,000) -
- --------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (2,500) 35,000
- --------------------------------------------------------------------------------------
Net increase (decrease) in cash 13,689 (141,881)

Cash at beginning of year 40,246 182,127
- --------------------------------------------------------------------------------------
Cash at the end of year $ 53,935 $ 40,246
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------

Supplemental schedule of noncash financing activities:

Conversion of accounts payable to common stock warrants $ - $ 50,000
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
Issuance of common stock warrants in settlement of liability
to former chairman $146,000 $ -
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------

Supplemental disclosure of cash flow information:

Cash paid during the year for professional fees rendered in
connection with Chapter 11 proceedings $ 16,833 $ 0
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
</TABLE>

The accompanying notes and independent auditor's report should be read in
conjunction with the financial statements.

F-6
<PAGE>
LESCARDEN INC.
(Debtor-in-Possession)
NOTES TO FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION:

On May 7, 1996, Lescarden Inc. (Debtor-in-Possession) (the "Company")
filed a petition for relief under Chapter 11 of the federal bankruptcy laws in
the United States Bankruptcy Court for the Southern District of New York.
Under Chapter 11, certain claims against the Company in existence prior to
the filing of the petition for relief under the federal bankruptcy laws are
stayed while the Company continues business operations as Debtor-in-Possession.
These claims are reflected in the May 31, 1996 balance sheet as "liabilities
subject to compromise." Additional claims (liabilities subject to compromise)
may arise subsequent to the filing date resulting from rejection of executory
contracts, including leases, and from the determination by the court (or agreed
to by parties in interest) of allowed claims for contingencies and other
disputed amounts.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Continuation of the Company as
a going concern and realization of its assets and liquidation of its
liabilities are dependent upon, among other things, the formulation of a
confirmed plan of reorganization, which may result in significant adjustments
and reclassifications in the amounts reflected as assets, liabilities and
shareholders' deficiency in the accompanying financial statements, and the
ability to maintain adequate financing along with the achievement of
profitable operations.

2. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:

The Company is engaged in research, testing and development of medications
for the control and cure of various diseases and the licensing of its
technologies for commercialization by other companies. In its research and
testing to date, the Company has discovered and is primarily investigating
Catrix<F1> , a complex of mucopolysaccharides derived from bovine cartilage.
In addition, during the year ended May 31, 1995, the Company began sales
of its proprietary bovine cartilage material, BIO-CARTILAGE<F2>, to a food
supplement distributor who in turn sold the material to nutritional food
supplement stores in the U.S.

Revenue from royalties and license fees are recorded when the funds are
received. Revenue from the product sales is recognized upon shipment of the
product.

Research and development costs, including patent costs, are charged to costs
and expenses in the year incurred.

Net loss per common share is based upon the weighted average number of
common shares outstanding during the year. Stock options, warrants and
convertible preferred stock are excluded from the computation of net loss per
common share since they would have an antidilutive effect.

Inventory, consisting principally of Catrix<F1> and BIO-CARTILAGE<F2>
supplies, is stated at the lower of cost, determined by the first-in, first-out
method, or market.

During the year ended May 31, 1995, the Company issued a five-year warrant
to purchase 50,000 shares of the Company's common stock at $.40 per share
in satisfaction of $50,000 of accounts payable, which represented an amount
due for legal services.

F-7

<PAGE>

The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates by management. Actual
results could differ from those estimates.

3. NOTES PAYABLE:

At May 31, 1996, the Company had notes payable totaling $1,013,000, with
interest at rates ranging between 10% and 13.5% per annum, of which
$260,000 is past due and $753,000 is due on December 31, 1996. Of the
amounts due on December 31, 1996, $496,000 is payable to principal
stockholders or directors. In lieu of payment in cash upon maturity, the
holder of certain of the notes may convert the face value of the notes into any
security to be offered by the Company at any time prior to the due date of the
notes or into a right to receive 5% of the Company's future royalties from
topical product sales by any licensee. The holders of these notes have been
granted five-year warrants to purchase 2,018,500 shares (763,000 during the
year ended May 31, 1995 and none during the year ended May 31, 1996) of
restricted common stock at prices ranging from $.25 to $1.50 per share.

4.STOCK OPTIONS AND WARRANTS:

Pursuant to the Company's 1981 incentive and nonqualified stock option
plans, as amended, options have been granted to officers and key employees,
and to directors, officers, consultants and key employees, respectively, at
exercise prices not less than the fair market value at date of grant. Options
are generally exercisable at the grant date or at other determinate dates
subsequent to the grant date, and expire 5 or 10 years from the date of grant
(or from other subsequent dates on which they become exercisable). The two
stock option plans expired in November 1991 without affecting any options then
outstanding. Changes in incentive and nonqualified stock options granted and
outstanding are as follows:

Exercise Price

Shares From To
- -----------------------------------------------------------------------
Balance at June 1, 1995 730,000 $.50 $1.25
Canceled during 1996 555,000 $1.25
- -----------------------------------------------------------------------
Balance at May 31, 1996 175,000 $.50 $.75
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------

All of the above options are exercisable at May 31, 1996. No options have
been exercised under either plan.

In the year ended May 31, 1993, the Company approved the "1992 Employee
Incentive Stock Plan" (the "1992 Plan"). The 1992 Plan authorized the
issuance of stock options, restricted shares of stock and stock bonus awards
to eligible participants. The 1992 Plan provides for the reservation and

F-8

<PAGE>

availability of 2,000,000 shares of common stock, subject to adjustment for
future stock splits, dividends, reorganizations and other similar events, at
exercise prices not less than the fair market value at the date of grant.
Options are exercisable from 12 months after the date of grant and expire 10
years from the date of grant. At May 31, 1996, no options were granted
under the 1992 Plan.

The Company has outstanding warrants permitting the holders to purchase
shares of its common stock at prices ranging from $.10 to $1.00 per share.
The warrants have varying expiration dates to December 21, 2005. Warrants
to purchase 5,427,429 common shares were outstanding at May 31, 1996. In
the year ended May 31, 1996, warrants to purchase 880,000 common shares
were granted, warrants to purchase 937,651 common shares at an exercise
price of $.15625 were awarded in arbitration (see Note 5), warrants to
purchase 296,200 common shares expired and warrants to purchase 50,000
common shares were exercised at a price of $.15 per share. Warrants are
granted at exercise prices not less than the fair market value at the date of
grant. The warrants contain restrictions on transfer and require that the
underlying shares be acquired solely for investment.

At May 31, 1996, shares of common stock have been reserved as follows:

Number of
Shares
- -----------------------------------------------------------------------
Stock option plans 175,000
Total warrants outstanding including those specifically
described in the notes to financial statements 5,427,429
- -----------------------------------------------------------------------

5. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS:

Rent expense charged to operations for the years ended May 31, 1996 and
1995 amounted to approximately $43,000 and $37,000, respectively.

In March 1993, the Company entered into an operating lease for its executive
offices, expiring March 31, 1998. The lease provides for minimum annual
rental payments, exclusive of real estate taxes and other operating costs, of
$37,000.

<PAGE>

At May 31, 1996, the Company was not covered by product liability
insurance.

On July 14, 1992, effective as of June 1, 1992, the Company amended a 1985
agreement with its former Chairman. As of such date, the Chairman became
a consultant to the Company and resigned as Chairman and as a Director of
the Company.

This agreement, which terminates in November 1996, provides for a
minimum annual compensation of $75,000 and certain additional forms of
compensation, including payments for life insurance premiums, and:

F-9
<PAGE>

- the issuance of 100,000 shares of the Company's unregistered
common stock;
- an annual pension of $25,000, commencing upon the termination of
services as provided under the agreement or upon death or permanent
disability. Pension payments shall be due only in years in which the
Company's net worth is in excess of $2,500,000 and pretax profits of
$500,000 are achieved. The Company's obligation shall not be satisfied until
an aggregate of $500,000 has been paid.

For the years ended May 31, 1996 and 1995, approximately 0% and 11%,
respectively, of product sales were made to this former Chairman.

On June 2, 1994, this former Chairman instituted an arbitration proceeding
against the Company, pursuant to the terms of his consultancy agreement,
asserting that the Company breached the agreement. On September 6, 1995,
the arbitrator ruled in favor of this former Chairman. Included in trade and
other miscellaneous claims in the accompanying balance sheet at May 31,
1996 is $381,250 awarded to this former Chairman. In addition, the
arbitrator ruled that this former Chairman should receive warrants to purchase
937,651 shares of common stock at an exercise price of $.15625 per share,
the market value at December 31, 1993. These warrants were awarded in
settlement of approximately $146,000 that was owed to this former Chairman
at December 31, 1993.

A revised agreement with another former Chairman, which is for a period of
20 years, provides for a minimum annual consultancy fee/pension payment
of $25,000 to be paid in any year in which the Company's net worth is in
excess of $2,500,000 or pretax profits of $500,000 are achieved. In the event
of the death of this former Chairman, any amounts due under this agreement
will be payable to his estate.

Additionally, the agreement provides for nonqualified stock options to
purchase 100,000 shares of the Company's common stock.

Under the latter two agreements, pension costs cannot be reasonably
estimated principally because the conditions required to create a pension
liability do not exist at May 31, 1996 and are not anticipated in the
foreseeable future.

In June 1982, individuals related to the Company formed the Catrix
Research Limited Partnership (the "Partnership").

The Company has entered into two agreements with the Partnership, as
follows:

A. Research Agreement:

Under the Research Agreement, the Company received $200,000
from the Partnership to perform or cause to be performed research in
connection with Catrix<F1> involving several technologies. No further
payments to the Company by the Partnership are contemplated under
the Research Agreement.

F-10
<PAGE>

B. License Agreement:

Under the License Agreement, the Company assigned to the
Partnership (for additional consideration of $25,000) three of its
United States patents and one of its United States patent applications.
In addition, the Company assigned to the Partnership all foreign
patents and patent applications corresponding thereto, together with
certain technical information pertaining to Catrix<F1> . The Partnership
granted the Company exclusive worldwide licenses to make, use and
sell products developed therefrom, subject to the Company's
obligation to pay the Partnership three-fourths of 1% of the net sales
price of any licensed products manufactured and sold by the
Company, plus percentages ranging from 3.125% to 6.25% of any
amounts received from any sublicensees of the Company.

If the Partnership is terminated, dissolved or its assets are liquidated,
the Company will have the option to purchase for $25,000 all United
States and foreign patents and patent applications transferred by the
Company to the Partnership.

At May 31, 1996, the principal asset of the Partnership consists of
the License Agreement described above.

During the year ended May 31, 1990, the Company entered into a license
agreement, which was amended, the last amendment occurring on March 16,
1992, with Donell, Inc. ("Donell"). This license agreement gives Donell the
right to license, sublicense and sell the Company's Catrix<F1> material for all
topical uses in the United States and Canada. The license agreement
provided for license fee income of $500,000 through March 1, 1991, 6%
royalty for topical Catrix<F1> product sales and an additional 6% royalty on
sales commencing on January 1, 1991 until the Company receives additional
royalties of $1,000,000 and other royalty arrangements, as defined. In
addition, the Company will receive 15% of all consideration paid to Donell
whether in the form of a sublicense fee and/or royalties, as defined, for a
period of two years from the date when and if royalty payments to Donell
actually begin. Royalties and license fee revenue from this agreement
amounted to $34,750 and $24,842 for the years ended May 31, 1996 and
1995, respectively.

The term of the license agreement is 25 years with a renewal option for an
additional period of 25 years, with the payment of a renewal fee of
$1,200,000 as adjusted for the Consumer Price Index.

Upon execution of the license agreement the Company received 300,000
shares of Donell's capital stock representing a then 30% interest in Donell.
This stock was determined to have no value and, accordingly, no investment
has been recorded in the accompanying balance sheet. In addition, audited
financial information for Donell is currently not available since Donell does
not prepare audited financial statements.

F-11

<PAGE>

For the years ended May 31, 1996 and 1995, approximately 6% and 7%,
respectively, of the Company's product sales were to Donell.

During the year ended May 31, 1995, the Company entered into a worldwide,
15-year license agreement with Orphan Medical, Inc. ("Orphan"). This
license agreement gives Orphan the right to develop Catrix<F1> , in powder form
only, for topical wound healing purposes. Orphan is required to purchase the
Catrix<F1> it may require, pursuant to the terms of the license agreement from
the Company. The license agreement provides for $50,000 to be received by
October 1999, provided a New Drug Application ("NDA") is obtained from
the FDA. In addition, the Company will receive a royalty of 6% on all of
Orphan's net annual sales, as defined, up to $1,000,000, and 5% on all of
Orphan's net annual sales over $1,000,000, once an NDA is obtained. During
the years ended May 31, 1996 and 1995, the Company received $7,500 and
$5,000, respectively, which is included in royalties and other in the
accompanying statement of operations.

6. STOCKHOLDERS' DEFICIENCY:

The convertible preferred stock has a preference upon liquidation of $1.50 per
share; is convertible, at the option of the holder, into one share of the
Company's common stock, for each share of preferred stock; and is callable,
at the option of the Company, at such time as its net worth exceeds
$3,000,000, for $1.50 per share. Additionally, holders of preferred stock are
entitled to vote for directors of the Company on a one-share/one-vote basis.

7. INCOME TAXES:

The Company has net operating loss carryforwards of approximately
$10,300,000 available to reduce future taxable income which expire in
various years through 2011.

In addition, the Company has a tax credit carryforward, from research
activities, of approximately $335,000, which expires in various years through
2000.

The utilization of the net operating loss carryforward may be limited as a
result of cumulative changes in the Company's stock ownership.

Deferred income taxes reflect the impact of "temporary differences" between
the bases of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations. In recognition of the
uncertainty regarding the ultimate amount of income tax benefits to be
derived from the Company's net operating loss and tax credit carryforwards,
the Company has recorded a valuation allowance for the entire deferred tax
asset. Estimated deferred tax assets are comprised of the following at
May 31, 1996:

Net operating loss carryforwards $ 3,500,000
Tax credits 335,000
- -----------------------------------------------------------------------------
Gross deferred tax assets 3,835,000
Valuation allowance (3,835,000)
- -----------------------------------------------------------------------------
Net deferred tax assets $ -0-
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------

F-12

<F1>
A registered trademark of Lescarden Inc.
</F1>
<F2>
A trademark of Lescarden Inc.
</F2>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM LESCARDEN
INC'S MAY 31, 1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERNCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> MAY-31-1996
<CASH> 53,935
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 13,836
<CURRENT-ASSETS> 85,464
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 88,544
<CURRENT-LIABILITIES> 2,194,601
<BONDS> 0
0
1,840
<COMMON> 11,872
<OTHER-SE> (2,119,769)
<TOTAL-LIABILITY-AND-EQUITY> 88,544
<SALES> 485,874
<TOTAL-REVENUES> 485,874
<CGS> 151,224
<TOTAL-COSTS> 905,268
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (419,394)
<INCOME-TAX> 0
<INCOME-CONTINUING> (419,394)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (419,394)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)

</TABLE>