BIOMUNE SYSTEMS INC, 10KSB40, 2001-01-16

BIOMUNE SYSTEMS INC
10KSB40, 2001-01-16
IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB

(Mark one)

[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended September 30, 2000

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

Commission File No. 0-11472

BIOMUNE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

Nevada 87-0380088
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

6502 South Archer Road
Bedford Park, Illinois 60501
(Address of principal executive offices with Zip Code)

(708) 563-9200
(Registrant's telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act: common stock
($0.0001 par value per share)

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

The aggregate market value of common stock held by non-affiliates of the
registrant was $1,324,384, based on the average of the closing bid and ask
prices of $0.77 per share on January 4, 2001. The number of shares outstanding
of the registrant's common stock as of January 4, 2001 was 42,999,500.

On October 31, 2000, the registrant declared a 1-for-5 reverse stock split of
its common stock, reducing the number of issued and outstanding shares of stock
by a factor of 5. Outstanding common stock data in this report have been
adjusted to reflect this reverse stock split.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation SB is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

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BIOMUNE SYSTEMS, INC.

2000 FORM 10-KSB ANNUAL REPORT

TABLE OF CONTENTS

Part I
Item 1. Description of Business........................................... -1-
Item 2. Description of Properties ........................................ -14-
Item 3. Legal Proceedings................................................. -14-
Item 4. Submission of Matters to a Vote of Security Holders............... -15-

Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................. -15-
Item 6. Management's Discussion and Analysis or Plan of Operation......... -17-
Item 7. Financial Statements and Supplementary Data....................... -19-
Item 8. Changes or Disagreements with Accountants......................... -19-

Part III
Item 9. Directors and Executive Officers.................................. -20-
Item 10. Executive Compensation............................................ -22-
Item 11. Security Ownership of Certain Beneficial Owners and Management.... -24-
Item 12. Certain Relationships and Related Transactions.................... -25-
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. -26-

FORWARD LOOKING STATEMENTS

This report and the documents incorporated by reference in this report contain
forward-looking statements. These forward-looking statements are based on our
current expectations, estimates and projections about our industry, management's
beliefs and certain assumptions made by us. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates" and variations
of these words or similar expressions are intended to identify forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, our actual results could differ materially from those
expressed or forecasted in any forward-looking statements as a result of a
variety of factors, including those set forth in "Description of Business -
Certain Business Considerations and Risk Factors" above and elsewhere in, or
incorporated by reference into, this report. We undertake no obligation to
update publicly any forward-looking statements for any reason, even if new
information becomes available or other events occur in the future.

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Part 1.
Item 1. Description of Business

On November 3, 2000, pursuant to an amended stock purchase agreement and an
amended asset purchase agreement between Biomune Systems Inc. and Donlar
Corporation, Biomune issued 41,279,520 million shares of common stock, par value
$0.0001 per share, representing approximately 96% of Biomune's shares
outstanding on a fully diluted basis, in a private placement to Donlar. Biomune
issued those shares in exchange for $2,413,500 in cash and the transfer to
Biomune from Donlar of the exclusive right to distribute and the exclusive
right to all future sales from Donlar's crop nutrition management and oil field
products. In addition, Donlar transferred to Biomune all technology, know how
and patents for the crop management and oil field businesses created after
November 3, 2000, as well as all technology resulting from Donlar pharmaceutical
research and development activities after November 3, 2000. At the time of these
transactions, Mr. Michael G. Acton, then President and Chief Executive Officer
of Biomune, entered into an agreement with Donlar, pursuant to which Mr. Acton
will act as a consultant to Donlar for a period of one year in exchange for a
consulting fee of $125,000 payable in equal monthly installments for the term of
the agreement. In addition, four senior executives of Donlar became employees of
Biomune. For a more complete description of the assets acquired by Biomune, see
"Historical Donlar Business" contained below.

On January 19, 2001, Donlar intends, subject to approval as specified
below, to transfer to Biomune the balance of its assets as a capital
contribution, except for Donlar's existing patent rights and all intellectual
property relating to Donlar's genetic (recombinant DNA) research activities.
Donlar intends to grant Biomune an exclusive license to Donlar's existing
patents on commercially reasonable terms. In addition, Donlar's employees will
become employees of Biomune, whose name shall be changed. On January 19, 2001,
the shareholders of Donlar will meet to vote on the transfer of assets.
Management believes that shareholder approval will be obtained.

As a result of the foregoing transactions and planned transactions, all of
Donlar's operational activities, except for its genetic research activities,
will be conducted by Biomune. Biomune's administrative, marketing, sales and
distribution operations will be conducted from Donlar's headquarters in Bedford
Park, Illinois, and its manufacturing operations will be conducted from Donlar's
Peru, Illinois facility, which will be transferred to Biomune.

Biomune's reorganized businesses will be conducted through four business
segments:

- BioPolymers, consisting of the performance chemicals business acquired
from Donlar;
- AgriSciences, consisting of the agricultural businesses acquired from
Donlar;
- Pharmaceuticals, consisting of the pharmaceutical research and
development activities of both Donlar and Biomune; and
- Optim Nutrition, consisting of Biomune's nutritional and
nutraceuticals business.

Historical Biomune and Donlar descriptions are contained below.

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Historical Biomune Business

Biomune was incorporated in Nevada in 1981. Biomune, with its wholly owned
subsidiary, Optim Nutrition, Inc., a Utah corporation, is engaged in the
distribution and sale of biologic nutraceutical supplements and sports and
nutrition bars. Certain of the nutraceutical supplements incorporate patented
natural protein technology derived from milk products (whey), exclusively
licensed to Biomune. These products are designed to provide or increase
protective immunities from and immune response to disease and to provide
nutritional supplementation. Nutraceutical products are food supplements that
are derived from a food base and marketed as a beneficial source of nutrients to
promote good health. Biomune's fiscal year ends on September 30 and all
references to years are to Biomune's fiscal years. Biomune intends to adopt a
calendar year as its fiscal year starting with 2000.

Biomune's subsidiary Optim Nutrition was organized to market and sell
nutraceutical products. Optim Nutrition's principal products are ProMune and
Optimune, nutritional dietary supplements utilizing whey protein containing high
levels of immunoglobulins and marketed primarily to people who are HIV positive
or have AIDS or other immune-compromised individuals, and Maximune, a
nutritional dietary supplement similar in composition to Optimune but
manufactured in capsule form and marketed primarily to healthy people who desire
weight maintenance or management assistance. ProMune is marketed to major
nutraceutical distributors and wholesalers. Optimune and Maximune are marketed
directly to the medical and consumer markets.

As part of its plan to increase emphasis on the nutrition market, in 1998
Biomune acquired the exclusive rights to distribute and sell a line of sports
and energy nutrition bars. These products are manufactured for Biomune by
contract manufacturers. Biomune has been granted the exclusive world-wide
marketing and distribution rights to these products in return for the payment of
royalties based on net sales of the products. The bars are sold to national and
regional wholesale and retail chains under the brand Mountain Lift(TM).
Currently, the bars are sold principally through reorders from existing
customers.

Biomune has an exclusive license from New Zealand Milk Products ("NZMP") to
market and sell the patented natural protein technology in the pharmaceutical
and nutraceutical markets, solely for human applications, in the United States,
Canada, Kenya, Ivory Coast, Zimbabwe, Ghana, Zambia, and Nigeria, and their
possessions and territories. The license includes the rights under four U.S.
patents relating to methodologies to produce large proteins containing
immunoglobulins on a mass production basis. The license runs through March 28,
2006. NZMP may terminate the license if Biomune fails to observe or perform any
of the covenants, terms, conditions or provisions of the agreement or if it
breaches any representation or warranty and fails to cure the breach within 30
days after receipt of written notice. The license may also be terminated by NZMP
if Biomune becomes bankrupt or otherwise goes out of business.

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Biomune does not own or operate any manufacturing facilities. Products are
obtained through third-party contract manufacturers. Contract manufacturers
produce and package Biomune's products in accordance with Standard Operating
Procedures for Good Manufacturing Practices by the U.S. Food and Drug
Administration ("FDA"). Raw materials are purchased from approved suppliers and
inspected by the contract manufacturer as they are received into the production
facilities. They are labeled to indicate source of supply, lot number and date
of receipt, and samples are kept for a minimum of two years from the date
received.

Biomune's products compete in the nutrition and biologic nutraceutical
markets. At present, there are several companies that compete with Biomune in
these markets. These competitors have substantially greater capital resources,
research and development capabilities, manufacturing and marketing resources and
experience than Biomune.

Biomune's biologic nutraceutical supplements are regulated by the FDA and
others. The manufacturing, packaging, labeling, advertising, distribution and
sale of Biomune's nutrition food bars are also subject to regulation by various
government agencies, principally the FDA. The FDA regulates these products and
activities pursuant to the Federal Food, Drug and Cosmetic Act ("FDCA") and the
Fair Packaging and Labeling Act ("FLPA"), and regulations under these acts. The
FDCA is intended, among other things, to ensure that foods are wholesome, safe
to eat, and produced under sanitary conditions, and that food labeling is
truthful and not deceptive. The FLPA provides requirements for the content and
placement of information on consumer packages to ensure that labeling is useful
and informative.

As of September 30, 2000, Biomune had five full-time employees, all of whom
have subsequently left Biomune. On November 3, 2000, in connection with the
transactions described above, four senior executives and one clerical employee
of Donlar became employees of Biomune.

Biomune is currently reviewing the historical Biomune business and is
considering various alternatives with respect to these operations, including
possible discontinuance or sale of the sport and energy nutrition bar product
line.

Historical Donlar Business

Donlar Corporation was organized in 1990 to develop, manufacture and market
an entirely new protein technology with the potential to replace a generation of
older, non- biodegradable and potentially toxic chemicals. This new family of
biopolymers, known as thermal polyaspartates ("TPA"), is non-hazardous,
non-toxic, hypoallergenic, environmentally friendly and biodegradable. These
proteins are used in a broad range of industrial, agricultural and consumer
markets. Donlar has 121 global patents that protect its technology, products and
marketplace. The U.S. Government recognized the environmental benefits of this
technology in 1996 when it awarded Donlar the first Presidential Green Challenge
Chemistry Award.

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TPA products are beta proteins (biopolymers) manufactured from the common
biological amino acid, L-aspartic acid. TPA is a highly active biopolymer that
is completely soluble in water. By varying the manufacturing method, different
properties can be built into the biopolymer, tailoring it to a specific use.
Products are formulated and packaged into both powder and liquid forms.

In the performance chemicals markets, Donlar offers products utilizing TPA
that are believed to be environmentally superior to non-biodegradable and
environmentally non-friendly polyacrylates, phosphonates and phosphates used in
a wide variety of industrial and consumer products. These products are used to
prevent mineral scale and metal corrosion in industrial processes using high
volumes of water, such as offshore oil and gas production and industrial cooling
water. TPA is also used as a biodegradable antiredeposition agent for
detergents. Antiredeposition agents are those detergent ingredients that prevent
dirt particles from re-attaching to the fabric in the wash cycle once the
fabric has been cleaned. The following are Donlar's main products and their uses
in the performance chemicals markets:

- Donlar's A-5D, A-3C and SCI-5C products inhibit both mineral scale and
metal corrosion in oil production worldwide.

- Donlar's A-5D product controls and prevents mineral scale and metal
corrosion due to the use of water in heating, cooling and pumping
systems in the chemical, utility, mining and process industries.

- Donlar's products are used in laundry and dishwasher detergents to
prevent already removed soil and dirt particles from re-attaching to
fabrics and surfaces.

In agriculture, Donlar products are believed to significantly increase the
effectiveness of fertilizers, while reducing ground water contamination. TPA
helps the plant absorb fertilizer more efficiently, and therefore less remains
to run-off or leach into the ground water. Donlar also holds patents under which
it is developing products that will have the effect of dramatically reducing the
use of herbicides and insecticides. Donlar believes that since herbicides and
insecticides are made more efficacious when mixed with TPA, significantly less
herbicide and insecticide needs to be applied. The products thereby benefit
growers and farmers through increased yields and reduced crop inputs. The
products also benefit the environment through a reduction in ground water
contamination by fertilizers, herbicides and insecticides. Additionally, TPA
biodegrades harmlessly in the soil after having served its function. The
following are Donlar's main products and their uses in the agricultural market:

- Donlar's AmiSorb(R), AmiSorb(R) 10G, Magnet(R), Magnet(R) 10G and
Volt(R) products are used to attract and collect nutrients for more
efficient fertilizer uptake by plants thereby increasing yields,
improving crop output traits and promoting a significant reduction in
both fertilizer use and ground water contamination.

- Donlar's products are used to reduce the levels of herbicides and
insecticides required for efficacy by concentrating their
effectiveness and, as a result, significantly reducing ground water
contamination.

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- Donlar's products are used to coat seeds and are believed to
significantly improve the growth of the resulting seedling.

Donlar Pharmaceutical Corp., a 90% owned research subsidiary of Donlar,
operates under four pharmaceutical patents covering the use of its protein
technology in arresting the allergic reactions of asthma, hay fever,
conjunctivitis and other allergic conditions. A joint development agreement has
been signed between The Mayo Medical School and Donlar to facilitate the
development of this technology.

Certain Business Considerations and Risk Factors

The short and long-term success of Biomune is subject to certain risks,
many of which are substantial in nature. Shareholders and prospective
shareholders in Biomune should consider carefully the following factors, in
addition to other information contained in this report.

History of Operating Losses; Uncertainty of Future Profitability. Biomune
has incurred significant net operating losses since formation. As of September
30, 2000, Biomune had an accumulated deficit of $45,618,990. The factors
contributing to these significant operating losses include:

- marketing expenditures;

- acquisition expenses and costs;

- expansion of its research and development programs;

- costs associated with pre-clinical studies and clinical trials;

- nutritional studies;

- regulatory compliance requirements;

- trials for other products under development; and

- implementation of programs to market products ultimately approved for
distribution, if any.

Biomune's future success and ability to achieve profitability depends
primarily upon its ability to successfully operate the Donlar businesses
transferred to it and, to a lesser extent, its ability to market and sell its
existing products. There can be no assurance that Biomune will ever achieve
significant revenues or profitable operations.

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Going Concern. The consolidated financial statements of Biomune have been
prepared on the assumption that Biomune will continue as a going concern.
Biomune's independent public accountants have issued their report dated December
18, 2000 that includes an explanatory paragraph stating that Biomune's recurring
losses and accumulated deficit, among other things, raise substantial doubt
about its ability to continue as a going concern. Biomune's historical product
line is limited and it has been necessary to rely upon financing from the sale
of its equity securities to sustain operations. Biomune has no experience in
operating the Donlar businesses transferred to it and is completely dependent on
the Donlar personnel to mange these businesses.

Sale of Equity Securities; Future Dilution. Biomune may need to sell
additional equity securities or obtain other forms of financing to fund its
operations. Absent such additional financing, Biomune may find it necessary to
postpone or cancel some or all of its planned business activities. This could
adversely affect Biomune's ability to conduct its business operations, generate
future revenues and introduce new products. There can be no assurance, however,
that additional financing will be available, or, if available, that it will be
available on acceptable terms or in required amounts. Furthermore, if additional
funds are raised by issuing shares of common stock or securities convertible
into common stock, those sales or conversion will result in further and possibly
substantial dilution of Biomune's shareholders. Substantial dilution may make it
more difficult for investors to sell their shares or may result in a lower price
of Biomune's securities.

Dependence on Licensed Technology. Biomune is dependent upon licenses
granted by third parties for its historical product line. The failure to observe
or perform a material covenant, term, condition or provision in a license
agreement or the material breach of a representation or warranty made by
Biomune, may result in a termination or restriction of its rights under these
agreements. Termination of any of the licenses or any restriction or limitation
of Biomune's rights would adversely affect its historical operations.

Volatility of Stock Price. The trading price of Biomune's common stock has
been and is likely to continue to be subject to wide fluctuations in response to
the quarter-to-quarter variations in Biomune's operating results, material
announcements by Biomune or its competitors, governmental regulatory action,
conditions in the industries in which it operates, or other events or factors,
many of which are beyond Biomune's control. Biomune's operating results in
future quarters may be below the expectations of securities analysts and
investors. In such event, the price of the common stock would likely decline,
perhaps substantially. In addition, the stock market has historically
experienced extreme price and volume fluctuations. Moreover, Biomune's common
stock may be even more prone to volatility than the securities of other
businesses in light of the relatively small number of shares held by
non-affiliates of Biomune. Given such a relatively small public float, there can
be no assurance that the prevailing market price of common stock will not be
artificially inflated or deflated by trading even of relatively small amounts of
common stock.

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Absence of Dividends. Biomune has never declared or paid cash dividends on
its common stock and it does not anticipate that any cash dividends will be
declared on its common stock in the foreseeable future.

The following business conditions and risk factors pertain to the Donlar
operations that are being transferred to Biomune.

Stages of Commercialization of Donlar's Products. Donlar was founded in
1990 and until 1996 was engaged principally in research and development
activities, and from 1996 through 2000, market development activities. While
Donlar has commenced marketing its TPA products in the crop nutrition area, it
has not achieved full commercialization, and its product applications are in
various stages of commercialization. As a result, Donlar's TPA products have
been sold only in limited quantities and there can be no assurance that a
significant market will develop for such products with respect to any of their
potential applications. Donlar's crop nutrition and performance chemical
products have been used commercially for only a short period of time. Current
and potential customers in the agricultural, performance chemicals, and other
fields in which Donlar's products have potential applications require
predictable and consistent performance. Although certain products incorporating
Donlar's TPA technology have passed product performance and reliability testing
in both laboratory and commercial use, there can be no assurance that they will
continue to do so consistently in the future, will meet future customer
performance standards or will offer sufficient price or performance advantages
required to achieve commercial success. Donlar's and Biomune's failure to
develop, manufacture and commercialize TPA products on a timely and cost
effective basis would have a material adverse effect on Biomune's, as well as
Donlar's, business, results of operations and financial condition.

Need for Acceptance by Agricultural Customers. Biomune's future success in
agriculture depends largely on acceptance of Donlar's TPA technology by
agricultural customers and the ability of Biomune and Donlar to educate those
customers about the proper methods and rates of application required to obtain
the levels of increased yield that the TPA products are capable of generating.
Traditionally, agricultural end users have been slow to adopt new technologies
until their consistent effectiveness and economic value have been evidenced over
several growing seasons. Successful introduction of Donlar's products will also
depend to a large extent on recommendations of prior users. Although Donlar's
research data has shown that its crop nutrition products result in increased
yields, the level of such increase and, thus, the economic return from use of
such products, depends on the method and rate of application and the type of
crop and prevailing weather and soil conditions. There can be no assurance that
Biomune and Donlar will be able to demonstrate that the purchase of Donlar's
crop nutrition products will be consistently cost effective for the intended
users.

Donlar's crop nutrition products have been the subject of agricultural
industry media reports and articles. While a handful of these reports and
articles have been skeptical or negative in tone, Donlar attributes this
critical comment to natural skepticism associated with new products and
technologies, competitive issues, and the limited number, and general public
unavailability, of farm field trial results. In addition, while some reported
university studies have

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suggested inconsistent performance results from Donlar's products, management
believes that these results may have been affected by nonconformity with the
recommended methods and rates of application and by such variables as weather
and soil conditions. Further, the purpose of many of these studies was to
establish recommended methods and rates of application, rather than to validate
the product's effectiveness. Biomune's future success will depend, in large
part, on Biomune's and Donlar's ability to replicate Donlar's field trial
successes on an expanding scale in each crop growing season and to publicly
disseminate the results of those trials, not only to agricultural industry
media, but also directly to potential end users. There can be no assurance that
Donlar and Biomune will be successful in overcoming user resistance resulting
from adverse publicity regarding Donlar's products.

Dependence on Patents and Protection of Proprietary Information. Biomune's
success will depend, in part, on Biomune's and Donlar's ability to obtain patent
protection for the TPA processes, materials, and methods of use, to preserve
their trade secrets, and to operate without infringing the patent or other
proprietary rights of others. Donlar has been granted 46 United States patents.
Each time that Donlar files a patent application in the United States, it files
similar applications in foreign jurisdictions that Donlar believes are important
to its future business and that afford reasonable protection to intellectual
property rights. Donlar has been granted 75 foreign patents, including patents
granted by the European Community, South Africa, Israel, Japan, Mexico, Russia
and Egypt, and currently has numerous patent applications pending in such
jurisdictions. No assurance can be given that the patent applications filed by
Donlar, will result in issued patents or that the scope and breadth of any
claims allowed in any patents issued to Donlar or Biomune will exclude
competitors or provide competitive advantages to Donlar and Biomune. In
addition, there can be no assurance that any patents issued to Donlar or Biomune
will be held valid if subsequently challenged, that others will not claim rights
in the patents and other proprietary technology owned by Donlar or Biomune, or
that others have not developed or will not develop similar products or
technologies without violating any of Donlar's or Biomune's proprietary rights.
Donlar's and Biomune's inability to obtain patent protection, preserve their
trade secrets or operate without infringing the proprietary rights of others, as
well as their loss of any rights to technology that they now have or acquire in
the future, could have a material adverse effect on Donlar's and Biomune's
business, results of operations and financial condition. Litigation, which could
result in substantial cost to, and diversion of effort by, Donlar and Biomune,
may be necessary to enforce patents issued to Donlar or Biomune, to defend
Donlar or Biomune against infringement claims made by others, or to determine
the ownership, scope or validity of the proprietary rights of Donlar, Biomune
and others. An adverse outcome in any such litigation could subject Donlar and
Biomune to significant liabilities to third parties, require them to seek
licenses from third parties, and/or require them to cease using certain
technology, any of which could have a material adverse effect on Donlar's and
Biomune's business, results of operations and financial condition. Donlar or
Biomune may also become involved in interference proceedings declared by the
United States Patent and Trademark Office ("PTO") in connection with one or more
of Donlar's or, in the future, Biomune's patents or patent applications to
determine priority of invention. Any such proceeding could result in substantial
cost to Donlar or Biomune, as well as a possible adverse decision as to priority
of invention of the patent or patent application involved. In addition, Donlar
or Biomune may become involved

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in reissue or reexamination proceedings in the PTO in connection with the scope
or validity of their patents. Any such proceeding could have a material adverse
effect on their business, results of operations and financial condition, and an
adverse outcome in such proceeding could result in a reduction of the scope of
the claims of any such patents or such patents being declared invalid. In
addition, from time to time, to protect their competitive position, Donlar and
Biomune, or either of them, may initiate reexamination proceedings in the PTO
with respect to patents owned by others. Such proceedings could result in
substantial cost to, and diversion of effort by, Donlar and Biomune, and an
adverse decision in such proceedings could have a material adverse effect on
their business, results of operations and financial condition.

Donlar relies and, in the future, Biomune will rely on trade secrets and
proprietary know- how in the conduct of the Donlar operations being transferred
to Biomune. Donlar has used and, in the future, Biomune will use employee and
third-party confidentiality and non-disclosure agreements to protect such trade
secrets and know-how. There can be no assurance that the obligation to maintain
the confidentiality of such trade secrets or proprietary information will not
wrongfully be breached by employees, consultants, advisors or others, that
Donlar and Biomune will have adequate remedies for any breach, or that the trade
secrets or proprietary know-how will not otherwise become known or be
independently developed or discovered by third parties.

Projected Future Demand for Raw Material Exceeds Current Worldwide Supply.
The primary raw material in Donlar's TPA products is L-aspartic acid. Because
L-aspartic acid accounts for approximately 67% of Donlar's finished goods costs,
any material increase in the price of this raw material could have a material
adverse effect on Biomune. There are only a limited number of suppliers of
L-aspartic acid worldwide and substantially all of the commercially available
L-aspartic acid is produced by non-domestic sources. Donlar currently purchases
primarily from sources outside the United States. While Donlar believes that the
world supply of L-aspartic acid is sufficient to meet

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Donlar's and Biomune's needs over the near term, Donlar also believes that, by
the year 2005, Biomune will require amounts of L-aspartic acid exceeding the
current annual world merchant supply. It is thus important for Biomune's
long-term growth that it secure a low cost and consistent supply of L-aspartic
acid.

Competition. While Donlar is not aware of any technology directly
competitive with Donlar's TPA products in the agricultural field, there are
numerous types of products that make claims as plant growth regulators and
stimulants that affect a plant's genetic or immune system. In the performance
chemicals field there is substantial competition, primarily from polyacrylates,
but also from other manufacturers of polyaspartates such as Bayer and Rohm &
Haas using production methods that may be outside the scope of Donlar's
production patents and in target applications that may be outside the scope of
Donlar's methods of use patents. The producers of polyacrylates, primarily BASF
and Rohm & Haas, have substantially greater financial and technical resources,
larger research and development staffs, and greater manufacturing and marketing
capabilities than Donlar and Biomune. There can be no assurance that Donlar's
performance chemicals products will compete effectively against products
produced by such competitors.

Limited Manufacturing Capacity and Experience. Biomune's success will
depend, in part, on its ability to manufacture the Donlar products in
significant quantities, with consistent quality, at acceptable costs and on a
timely basis. Donlar has limited, and Biomune has no experience in high-volume
manufacturing. With respect to Donlar's Peru, Illinois manufacturing facility
which is being transferred to Biomune, Biomune may incur significant continuous
operation costs and unforeseen expenses in bringing that facility up to
capacity. In addition, Biomune will need to add new manufacturing equipment to
the Peru facility in the near future in order to manufacture sufficient
quantities of the Donlar products. Donlar and Biomune also anticipate
constructing an L-aspartic acid manufacturing facility beginning in 2004, with
expected completion in 2005. No assurance can be given that Biomune will be able
to successfully make the transition to high volume polyaspartate production or
construct and operate an L-aspartic facility on a timely or economical basis.

Reliance on a Single Manufacturing Facility. The Peru, Illinois plant being
transferred to Biomune will be Biomune's sole manufacturing facility and the
only facility capable of producing Donlar's products in quantities sufficient to
meet Biomune's projected needs. While Donlar maintains business interruption
insurance in the amount of $15 million, any material disruption in the Peru
plant's operations, whether due to fire, natural disaster, or otherwise, and
whether or not covered by that insurance, could have a material adverse effect
on Donlar's and Biomune's business, results of operations and financial
condition.

Uncertainty of Regulatory Approvals. Donlar's crop nutrition products may
not be distributed in the various states without regulatory approval by the
applicable state agricultural agency. Obtaining such approval generally requires
that Donlar and Biomune demonstrate that the products are safe and efficacious
over a defined time period. Donlar has already obtained such approvals for its
crop nutrition products from the applicable agencies of 46 states. Because

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<PAGE> 13
it has not yet been able to provide performance data spanning a sufficient
number of years, Donlar has not received approvals from the agriculturally
significant state of Mississippi, or from California for use on crops other than
corn, sweet corn, turf, wheat and cotton. Though Donlar has no reason to believe
that such approvals will not be granted, there can be no assurance that such
approvals will be granted on a timely basis, if at all. In addition, Donlar's
products are subject to approval by foreign regulatory authorities.

Reliance on Single Technology. Although Donlar has obtained numerous
patents covering manufacturing processes, composition and methods of use, all of
Donlar's products are based on its TPA technology. The fields in which Biomune
intends to sell the Donlar products are highly competitive and intensive
research and development is always being undertaken by governmental entities,
educational institutions and private enterprises with respect to products having
practical effects such as those of certain of Donlar's products. There can be no
assurance that competitive products will not be introduced by third parties or
that competing materials based on different or new technologies may not become
commercially available. There can be no assurance that Donlar's and Biomune's
competitors will not succeed in developing or marketing materials, technologies
or products that exhibit superior performance or are more commercially desirable
or more cost effective than those developed and marketed by Donlar and Biomune.
Any of the foregoing could have a material adverse effect on Donlar's and
Biomune's business, results of operations and financial condition.

Risks Associated with Rapid Growth. Donlar's rate of growth has placed and
will place significant demands on Donlar's and Biomune's management, as well as
their administrative, operational and financial resources. Biomune's ability to
manage its future growth will require Biomune to implement new, and improve
existing, operational, financial and management information systems. Biomune's
success will depend, in large part, upon its ability to attract and retain
highly qualified research and development, management, manufacturing and
marketing and sales personnel and to continue to motivate and manage its work
force, particularly its sales force. If Biomune is unable to effectively manage
any of these factors, Biomune's business, its financial condition and results of
operations could be materially and adversely affected. No assurance can be given
that Biomune will experience growth or that it will be successful in managing
its growth, if any.

Limited Marketing Experience. While Donlar's sales force, which will be
transferred to Biomune as part of the contemplated business restructuring, has
experience in marketing products to agricultural and performance chemicals end
users, Donlar has limited and Biomune has no experience in marketing and selling
the TPA products. To market the Donlar products effectively, Biomune will be
required to develop an expanded marketing and sales force that can effectively
demonstrate the advantages of, and recommended methods and rates of application
for, the TPA product applications. The crop nutrition products will also rely
heavily on the availability of recommendations of prior users. Donlar currently
maintains arrangements with third parties for distribution of certain of its TPA
products in the performance chemicals field and Biomune expects to enter into
additional arrangements with third parties for the commercialization and
marketing of the Donlar products. Biomune's future success will depend

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<PAGE> 14
in part on the continued relationships with distributors, its ability to enter
into other similar arrangements, the continuing interest of the existing
distributors in current and potential product applications and, eventually, the
distributors' success in marketing and willingness to purchase the Donlar
products. There can be no assurance that Biomune will be successful in its
marketing efforts, that it will be able to establish adequate sales and
distribution capabilities, that it will be able to enter into or maintain
marketing or distribution arrangements with third parties on financially
acceptable terms, or that any third parties with whom it enters into such
arrangements will be successful in marketing the Donlar products.

Reliance on Key Personnel. Donlar's principal executive officers, who have
become the principal executive officers of Biomune as part of the business
reorganization described above, have an average of over 25 years of collective
experience in chemicals research, development and sales. The loss of the
services of these executive officers or other key personnel, or the failure of
Biomune to attract and retain other skilled and experienced personnel on
acceptable terms, could have a material adverse effect on Biomune's business,
results of operations and financial condition.

Customer Concentration. Donlar has only recently begun commercial sales of
its products. Donlar sells its crop nutrition products primarily to agricultural
distributors and its performance chemicals products to chemical service
companies. While Biomune expects to significantly increase its sales in these
product lines and to focus its sales efforts on a more specifically targeted
group of agriculture and chemical distributors, sales may continue to be
concentrated among a relatively small group of customers, though not necessarily
those that currently represent the largest portions of Donlar's sales. Thus, the
loss of any single customer could have a material adverse effect on Biomune, its
results of operations and its financial condition.

Markets for Crop Nutrition Products are Seasonal and Volatile. Demand for
Donlar's crop nutrition products can be expected to be significantly affected by
agricultural conditions, which can be unpredictable and volatile as a result of
a number of factors. The most important factors are weather conditions and
patterns, current and projected grain stocks and prices, and governmental
agricultural policies, including those that directly or indirectly influence the
number of acres planted, the level of grain stocks, the mix of crops planted,
and crop prices. Because of its dependence on agricultural markets, the crop
nutrition business is seasonal and Biomune's operating results may vary
significantly from quarter to quarter.

Environmental and Other Regulatory Matters. Like other manufacturers,
Donlar and Biomune are subject to a broad range of Federal, state, local and
foreign laws and requirements, including those governing discharges in the air
and water, the handling and disposal of solid and hazardous substances and
wastes, the remediation of contamination associated with the release of
hazardous substances, work place safety and equal employment opportunities.
Donlar has made, and Biomune will continue to make, expenditures to comply with
such laws and requirements. Donlar believes, based on information currently
available to management, that it is in compliance with applicable environmental
and other legal requirements and that neither it nor Biomune will

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<PAGE> 15
require material capital expenditures to maintain compliance with such
requirements in the foreseeable future.

Governmental authorities have the power to enforce compliance with such
laws and regulations, and violators may be subject to penalties, injunctions or
both. Third parties may also have the right to enforce compliance with such laws
and regulations. As Donlar and Biomune develop new formulations for TPA products
and combine the TPA with other products, such as herbicides and insecticides,
those products may become subject to additional review and approval requirements
governing the sale and use of products such as those produced by Donlar or
Biomune. Donlar's manufacturing processes do not currently result in the
generation of hazardous wastes. However, there can be no assurance that this
will always be the case, and there can be no assurance that material costs or
liabilities will not be incurred by Biomune in the future as a result of the
manufacturing operations. It is also possible that other developments, such as
additional or increasingly strict requirements of laws and regulations of these
types, or enforcement policies thereunder, could significantly increase
Biomune's costs of operations.

Liability Risk. Products sold by Biomune may expose it to potential
liability for personal injury or property damage claims relating to the use of
those products, particularly if used in a manner not in conformity with
Biomune's instructions. Although product liability claims historically have not
had a material adverse effect on Donlar, there can be no assurance that Biomune
will not be subject to or incur liability for such claims in the future.
Although Donlar has maintained and Biomune intends to maintain product liability
insurance in amounts that management deems commercially reasonable, a
significant claim that is uninsured or partially insured could result in loss or
deferral of revenues, diversion of resources, or damage to Biomune's reputation,
any of which could have a material adverse effect on Biomune's business,
operating results, and financial condition.

Special Statement Concerning Forward-looking Statements. This report, in
particular the "Business" and "Management's Discussion and Analysis or Plan of
Operation" sections, contains forward-looking statements concerning the
expectations and anticipated operating results of Biomune. All of the
forward-looking statements contained in this report are made in reliance upon
the safe harbor protection for forward-looking statements provided by the
Securities Act and the Exchange Act. Numerous factors govern whether any
forward-looking statement made by Biomune will be or can be achieved. Any one of
those factors could cause actual results to differ materially from those
projected by the forward-looking statements made in this report. These
forward-looking statements include plans and objectives of management for future
operations, including plans and objectives relating to the products and the
future economic performance of Biomune. Forward-looking statements are based on
current expectations that may be affected by a number of risks and
uncertainties. They are also based on certain assumptions.

Assumptions involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business decisions, which
are difficult or impossible to predict accurately and may be beyond the control
of Biomune. Although Biomune

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<PAGE> 16
believes that the assumptions underlying the forward-looking statements in this
report are reasonable, any of these assumptions could prove inaccurate.
Therefore, there can be no assurance that the results contemplated in any of the
forward-looking statements will be realized. Budgeting and other management
decisions are subjective in many respects and are susceptible to interpretations
and periodic revision based on actual experience and business developments, the
impact of which may cause Biomune to alter its marketing capital expenditure
plans or other budgets. This will affect Biomune's results of operations. In
light of the significant uncertainties inherent in the forward-looking
statements, any such statement should not be regarded as a representation by
Biomune or any other person that the objectives or plans of Biomune will be
achieved.

Item 2. Description of Properties

The corporate headquarters for Biomune and Optim Nutrition were located in
leased premises at 64 East Winchester, Suite 303, Salt Lake City, Utah. The
aggregate rent for both Biomune's and Optim Nutrition's space is $3,500 per
month. In addition to the corporate headquarters, Optim Nutrition leases
approximately 3,800 square feet of warehouse space in West Valley City, Utah.
Biomune is currently negotiating a termination of these two leases.

Biomune and Optim Nutrition have moved all of their marketing, sales,
distribution and administrative operations to Donlar's headquarters in Bedford
Park, Illinois and Biomune intends to conduct its manufacturing operations in
Donlar's Peru, Illinois plant.

Donlar's headquarters consist of approximately 9,000 square feet of office
and laboratory space. This property is leased by Donlar from the Illinois
Institute of Technology. Donlar is currently negotiating a new lease for this
facility.

To meet its initial projected production requirements for TPA, Donlar
constructed a TPA manufacturing facility in Peru, Illinois on a 40-acre parcel
purchased by Donlar in 1996. This 50,000 square foot facility currently contains
two chemical reactors, the larger of which is designed to produce 30 million
pounds of TPA products annually. The facility is large enough to accommodate
five such reactors and Donlar anticipates adding the other four reactors
serially over the next several years as demand for its products increases. This
expansion process is essentially modular and is not expected to involve
substantial engineering or technical expenses or delays. The Peru facility is
strategically located near barge, rail and road transportation facilities. As
part of the business reorganization described in Item 1. - "Description of
Business," this facility will be transferred to Biomune.

Item 3. Legal Proceedings

On October 12, 1995, a Proposed Class Action Complaint for Violations of
the Federal Securities Laws was filed in the United States District Court for
the District of Utah, Central

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<PAGE> 17
Division, by Roman Sterlin (Civil No. 2:95CV-0944G). The Complaint, as
subsequently amended, named as defendants, Biomune, David G. Derrick (Biomune's
former Chief Executive Officer and Chairman of the Board), Aaron Gold (a former
director), Charles J. Quantz (a former director), Jack D. Solomon (a founder of
Biomune and a former member of its Business Advisory Board), Genesis Investment
Corporation (a stockholder) and The Institute for Social & Scientific
Development, Inc. (a stockholder). The plaintiff has alleged violations by the
defendants of Sections 10(b), 20(a) and 20(A)(a) of the Securities Exchange Act
of 1934, Rule 10b-5 promulgated under such Act and general misappropriation of
material non-public information. Biomune and other defendants prevailed in a
motion to dismiss the lawsuit based, among other grounds, on the expiration of
applicable statutes of limitation. The plaintiff appealed the decision of the
District Court to the United States Court of Appeals for the Tenth Circuit (No.
95-CV-944) in Denver, Colorado. On September 2, 1998, the Court of Appeals
reversed in part the decision of the trial court and remanded the case for a
determination by the trial court of whether the complaint had been timely filed
in light of the decision of the appellate court. The trial court permitted the
parties to conduct additional discovery before a hearing on the issue. On March
3, 2000, the defendants filed a joint motion to dismiss or alternatively for
summary judgment. A hearing on these motions was held on May 23, 2000. On
September 27, 2000, the trial court granted defendant's motion for summary
judgment. On November 14, 2000, the trial court entered a judgment against the
plaintiff dismissing the action in its entirety because the applicable one year
statute of limitations barred the plaintiff's claims. Plaintiff appealed and by
order of the Court of Appeals filed on December 4, 2000, the court granted
plaintiff's motion to voluntarily dismiss the action.

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

None.

Part II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

Biomune's common stock was listed on the National Association of Securities
Dealers Automated Quotation ("Nasdaq") SmallCap Market under the primary symbol
"BIME." On November 27, 2000, Biomune's common stock was delisted from the
Nasdaq SmallCap Market. Biomune's stock is currently quoted on the NASD
over-the-counter bulletin board under the symbol "BIME." The following table
contains information about the range of high and low bid prices for the common
stock for each full quarterly period within the two most recent fiscal years,
based upon quotations on the Nasdaq SmallCap Market (and giving effect to all
stock splits occurring during such period or prior to the issuance of this
report):

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<PAGE> 18
Quarter Ended High(1) Low(1)
September 30, 2000 $ 2.35 $ 2.04
June 30, 2000 $ 4.07 $ 3.29
March 31, 2000 $ 8.60 $ 7.50
December 31, 1999 $ 7.04 $ 5.63

September 30, 1999 $ 5.00 $ 4.85
June 30, 1999 $ 10.00 $ 5.16
March 31, 1999 $ 11.57 $ 11.10
December 31, 1998 $ 12.50 $ 7.82

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

(1) The source of these high and low prices was Nasdaq. These quotations
reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions. These high and
low prices have been rounded up to the next highest two decimal places.

The market price of the common stock is subject to significant fluctuations
in response to variations in Biomune's quarterly operating results, general
trends in the market for Biomune's products and product candidates, and other
factors, over many of which Biomune has little or no control. In addition, broad
market fluctuations, as well as general economic, business and political
conditions, may adversely affect the market for Biomune's common stock,
regardless of Biomune's actual or projected performance. On January 4, 2001, the
average of the closing bid and ask prices of the common stock on the NASD
over-the-counter bulletin board was $0.77 per share.

On January 4, 2001, there were approximately 5,292 holders of record of
Biomune's common stock.

Biomune has never declared or paid cash dividends on its common stock and
does not anticipate paying any cash dividend on its common stock in the
foreseeable future.

As of January 4, 2001, Biomune had the following series of preferred stock
outstanding:

Series A 10% Cumulative Convertible Preferred Stock - 38,599 shares
outstanding, convertible into 232 shares of common stock; and

Series B 10% Cumulative Convertible Preferred Stock - 449 shares
outstanding, convertible into 3 shares of common stock.

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<PAGE> 19
Recent Sales of Unregistered Equity Securities

None during the period covered by this report that have not been previously
reported.

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

The following discussion and analysis of Biomune's financial condition and
results of operations should be read in conjunction with the consolidated
financial statements and the notes thereto appearing elsewhere in this report.
See Item 7. - "Financial Statements and Supplementary Data."

Overview

Since 1997, Biomune has been engaged primarily in the distribution and sale
of nutritional and nutraceutical products. Biomune's principal products are
biologic nutraceutical supplements and sports and nutrition bars.

As described in Part I, Item 1. "Description of Business" of this report,
as a result of the transaction that was completed in 2000 and the further
transactions expected to be completed in early 2001, all of the operational
activities of Donlar, except for Donlar's genetic research activities, will be
conducted by Biomune. Biomune's marketing, sales, distribution and
administrative operations will be conducted from Donlar's headquarters in
Bedford Park, Illinois, and its manufacturing operations will be conducted from
Donlar's Peru, Illinois facility, which will be transferred to Biomune.

Biomune's reorganized business will be conducted through four business
segments:

- BioPolymers, consisting of the performance chemicals business acquired
from Donlar;

- AgriSciences, consisting of the agricultural business acquired from
Donlar;

- Pharmaceuticals, consisting of the pharmaceutical research and
development activities of both Donlar and Biomune; and

- Optim Nutrition, consisting of Biomune's nutritional and
nutraceuticals business.

Results of Operations

During the fiscal year ended September 30, 2000 ("Fiscal 2000"), Biomune
had revenues of $654,962, compared to $1,501,406 for the fiscal year ended
September 30, 1999 ("Fiscal 1999"). The decrease in revenues was due to the sale
in the first quarter of Fiscal 2000 of Biomune's interest in the NiteBite
product line as well as a decrease in the sales of Biomune's sports and energy
bars.

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<PAGE> 20
Cost of revenues was $427,476 in Fiscal 2000, compared to cost of revenues
of $883,140 in Fiscal 1999. The overall gross margin of Fiscal 2000 was 35% of
revenues, compared to 41% for Fiscal 1999. The decrease in gross margin is due
to the lower gross margins from the Optim Nutrition product line.

Management, consulting and research fees were $2,128,469 for Fiscal 2000,
compared to $304,894 in Fiscal 1999. This increase was due to increased rates on
the Harrogate marketing and selling agreement and then the subsequent costs
associated with the termination of that agreement. General and administrative
expenses increased from $1,025,618 in Fiscal 1999 to $2,634,807 in Fiscal 2000.
The increase in these expenses was due to the legal costs associated with the
Donlar transaction and other litigation, the write-off of the Mountain Lift bar
goodwill and the exercise of variable stock options.

During Fiscal 2000, Biomune had a net loss of $5,545,476, compared to a net
loss of $1,877,596 during Fiscal 1999. This increase in the net loss was
attributable primarily to the decrease in revenue from Biomune's nutraceutical
products, its loss on disposal of investments and equity securities and an
increase in operating expenses discussed above.

During Fiscal 2000, Biomune purchased the NiteBite product line from
Amerifit Nutrition, Inc. It subsequently sold the product line to ICN
Pharmaceutical and recorded a gain of $301,775 on these transactions.

Results of Fourth Quarter Operations

In December 1999, Biomune changed the exercise price on options to purchase
84,000 shares of common stock granted to certain employees and board members
from $5.00 a share to $2.50 a share. This resulted in additional compensation
expense of $520,500, which was not recorded until the fourth quarter of fiscal
2000.

Biomune recorded a loss of $450,377 on the impairment of its investment in
and advances to Rockwood Company LLC, and its related entities.

Biomune has written off the remaining goodwill associated with its Mountain
Lift bar. This amounted to $264,603.

Liquidity and Capital Resources

Historically, Biomune has been unable to finance its operations from cash
flows from operating activities. Biomune expects it will require substantial
funds to continue operations. As of September 30, 2000, Biomune had cash of
$1,780 and no plan for its continued financing. As part of the transactions
described in Part I, Item 1. "Description of Business," Donlar transferred
$2,413,500 million in cash and certain business rights to Biomune. Biomune
intends to continue in existence by operating the Donlar businesses transferred
to it as well as some or all of Biomune's historical business.

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<PAGE> 21
The audited consolidated financial statements of Biomune have been prepared
on the assumption that it will continue as a going concern. Biomune's
independent public accountants have issued their report dated December 18, 2000,
that includes an explanatory paragraph stating that Biomune's recurring losses,
among other things, raise substantial doubt about Biomune's ability to continue
as a going concern.

On November 3, 2000, pursuant to an amended stock purchase agreement and an
amended asset purchase agreement between Biomune and Donlar, Biomune issued
41,279,520 million shares of common stock, par value $0.0001 per share,
representing approximately 96% of Biomune's shares outstanding on a fully
diluted basis, in a private placement to Donlar. Biomune issued those shares in
exchange for $2,413,500 in cash and the transfer to Biomune from Donlar of the
exclusive right to distribute, and the exclusive right to all future sales from
Donlar's crop nutrition management and oil field products. In addition, Donlar
transferred to Biomune all technology, know how and patents for the crop
management and oil field businesses created after November 3, 2000, as well as
all technology resulting from Donlar pharmaceutical research and development
activities after November 3, 2000.

Item 7. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements:

Reports of Independent Public Accountants.......................F-1

Consolidated Balance Sheet as of September 30, 2000.............F-3

Consolidated Statements of Operations for the Years Ended
September 30, 2000 and 1999.....................................F-4

Consolidated Statement of Shareholders' Equity for the Years
Ended September 30, 2000 and 1999...............................F-5

Consolidated Statements of Cash Flows for the Years Ended
September 30, 2000 and 1999.....................................F-6

Notes to Financial Statements...................................F-8

Item 8. Changes or Disagreements with Accountants

None. Reference is made to Item 4. of the Current Report on Form 8-K filed
by Biomune on December 4, 2000.

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<PAGE> 22
Part III

Item 9. Directors and Executive Officers

The following table lists the executive officers and directors of Biomune
as of January 4, 2001.

NAME AGE POSITION
---- --- --------

Larry P. Koskan 57 Chief Executive Officer, President and
Chairman of the Board

Joel H. Lurquin 34 Controller and Treasurer

Robert P. Pietrangelo 59 Vice President

Joseph F. Prochaska 54 Vice President

Robert W. Cooper (1)(2) 71 Director

Dr. Robert G. Martin (2) 58 Director

Thomas C. Dorr (1) 54 Director

Dean R. Kleckner (1)(2) 68 Director

(1) Member of Audit Committee
(2) Member of Compensation Committee

The foregoing officers and directors of Biomune were elected on November 3,
2000, replacing the former officers and directors of Biomune.

Larry P. Koskan, Donlar's founder, has served as a director, President and
Chief Executive Officer of Donlar since its inception in 1990, and as Chairman
of the Board of Donlar since 1992. Prior to founding Donlar, Mr. Koskan held
several research and development and manufacturing positions during a 23 year
career with Nalco Chemical Company. As Corporate Research Development Director
for Nalco, his duties included establishing large-volume market opportunities
for innovative, specialty polymers. He also served as Vice President of Research
and Development of Nalco's Water and Waste Treatment Division. Mr. Koskan holds
a B.S. in

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<PAGE> 23
Education and Chemistry from the University of Kansas and an M.S. in Organic
Chemistry from Loyola University of Chicago and is the inventor or co-inventor
of over 20 U.S. patents.

Joel H. Lurquin joined Donlar in 1995 as Controller. Prior to joining
Donlar, Mr. Lurquin was an accountant with Bansley and Kiener, Certified Public
Accountants. He has a B.S. in Accounting from DePaul University.

Robert P. Pietrangelo joined Donlar in April 1997 as its Vice President,
Sales and Marketing of the Performance Chemicals Division and in October 1997
was named President of that division. Prior to joining Biomune, Mr. Pietrangelo
held various management positions in the performance chemicals industry,
including marketing manager with CPS Chemical (1989 to 1996), and Strategic
Business Unit Manager with Rohm & Haas Company (1984 to 1989). Mr. Pietrangelo
has a B.A. in Chemistry and Mathematics from LaSalle University and an M.B.A. in
Marketing and Finance from Drexel University.

Joseph F. Prochaska joined Donlar in June 1997 as its Senior Vice President
of the Agricultural Products Division and, in October 1997, was named President
of that division. Prior to joining Donlar, Mr. Prochaska was President and Chief
Executive Officer of Willmar Manufacturing, a manufacturer of agricultural
application equipment from 1993 to 1997. Prior to that time, Mr. Prochaska held
various sales and marketing positions with Ciba-Geigy Corp. Mr. Prochaska has a
B.S. in Forestry/Agriculture from Michigan State University, an M.B.A. from
Capital University and an M.A. in Management from Claremont Graduate School.

Robert W. Cooper has served as a director of Donlar since June 1992. He has
been a principal of Cooper-Pruyn Architects, Ltd. since 1996 and President and
Chief Executive Officer of R.W. Cooper and Associates, a company providing
engineering and management services to the food processing, chemical and
building materials industries, since 1983. Mr. Cooper is a Registered
Professional Engineer in Illinois and is a member of ASCE and the Illinois
Society of Professional Engineers.

Dr. Robert G. Martin has served as a director of Donlar since June 1992.
Dr. Martin, a cataract surgeon, has been a principal of Carolina Eye Associates,
a 15-office ophthalmic practice, since 1977. He is Chairman of the Board of the
Society for Excellence in Eye Care and past president of the American Board of
Eye Surgery. Dr. Martin holds a B.S. in Chemistry and an M.D. from the
University of North Carolina at Chapel Hill.

Thomas C. Dorr has been a consultant to Donlar since 1991 and a director
since November 3, 2000. He is President and Chief Executive Officer of a
3,000-acre farm and agricultural business in Iowa. Mr. Dorr was a member of the
Iowa Board of Regents from May 1, 1991 to April 30, 1997. From January 1, 1992
to December 31, 1997, Mr. Dorr was a director of the Federal Reserve Bank in
Chicago.

Dean R. Kleckner has served as a director of Donlar since November 3, 2000.
He has been a President of the American Farm Bureau Federation since 1986. Mr.
Kleckner also operates a 350-acre corn, soybean and hog farm in Iowa.

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<PAGE> 24
No family relationships exist between or among any of Biomune's officers
and directors. Board of Directors Committees.

Board of Directors

The Board of Directors has established a Compensation Committee and an
Audit Committee.

Compensation Committee

The Compensation Committee makes recommendations to the Board of Directors
with respect to the compensation of management employees and administers plans
and programs relating to employee benefits, incentives and compensation. The
Compensation Committee also determines the persons to receive options under
Biomune's stock option plans and the number of options to be granted.

Audit Committee

The Audit Committee makes recommendations to the Board of Directors with
respect to the engagement of Biomune's independent public accountants and
reviews the scope and effect of the audit engagement.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the 1934 Act requires Biomune's directors and executive
officers, and persons who own more than 10% of a registered class of Biomune's
equity securities, to file with the SEC initial reports of ownership and reports
of changes in ownership of Biomune's common stock and other equity securities.
Officers, directors and greater than 10% shareholders are required by SEC
Regulations to furnish Biomune with copies of all Section 16(a) reports they
file. Based solely upon a review of the copies of such reports Biomune furnished
to Biomune and written representations that no other reports were required,
Biomune believes that there was compliance for the fiscal year ended September
30, 1999 with all Section 16(a) filing requirements applicable to Biomune's
officers, directors and greater than 10% beneficial owners.

Item 10. Executive Compensation

The following table sets forth the annual and long-term compensation in
fiscal years 2000, 1999 and 1998 for Biomune's Chief Executive officer. No other
executive officer of Biomune received salary or bonus compensation exceeding
$100,000 in 2000.

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<PAGE> 25
<TABLE>
<CAPTION>
Summary Compensation Table

Annual Compensation Long Term Compensation
Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
-----------------------------------------------------------------------------------------------------------------------------------
Securities
Restricted Underlying
Annual Stock Options/ LTIP All Other
Name and Principal position Year (1) Salary Bonus Compensation Awards SARs (#)(2) Payouts ($) Compensation ($)
--------------------------- -------- ------ ----- ------------ ---------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Michael G. Acton (3) 2000 $100,000 -0- -0- -0- -0- -0- $20,000 (4)
1999 $100,000 -0- -0- -0- 48,000 -0- -0-
1998 $100,000 -0- -0- -0- -0- -0- -0-
</TABLE>

(1) Ended September 30th of each of the fiscal years indicated.

(2) Adjusted to reflect all stock splits prior to the issuance of this report.

(3) Mr. Acton was the chief accounting officer and, later, the chief financial
officer of Biomune until June 1998. Amounts shown for Mr. Acton for periods
prior to July 1998 were paid to Mr. Acton in his position as Chief
Financial officer of Biomune.

(4) Represents fair market value of 8,000 shares of common stock of Biomune
granted to Mr. Acton on December 22, 1999.

Stock Plans

As of September 30, 2000, 49,769 shares of Biomune's common stock were
subject to options and issuable upon exercise of options granted under the 1992
Stock Incentive Plan, the 1993 Stock Incentive Plan, the 1995 Stock Incentive
Plan and the 1996 Stock Incentive Plan. No further options will be issued under
these plans. The 1992 and the 1993 Stock Incentive Plans have been terminated
and the 1995 and 1996 Stock Incentive Plans will be terminated. All new grants
will be under a new stock option plan which Biomune intends to implement in the
future.

Option Grants in Fiscal Year 2000

The following table sets forth information concerning the grant of stock
options and stock appreciation rights (SARS) made under Biomune's plans during
the fiscal year ended September 30, 2000 to the Chief Executive Officer:

None.

Aggregated Option Exercises and Fiscal Year-end Option Value

-23-

<PAGE> 26
The following table sets forth information with respect to the exercise of
stock options by Biomune's Chief Executive Officer and President during the
fiscal year ended September 30, 2000, as well as the aggregate number and value
of unexercised options held by such officer on September 30, 2000.

Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-end Option Value

<TABLE>
<CAPTION>
Number of securities
Underlying Value of Unexercised
Unexercised options In-the-Money Options
At September 30, 2000 at September 30, 2000
Shares Acquired (#) Exercisable/ ($) Exercisable/
Name On Exercises (#) Value Realized ($) Unexercisable Unexercisable
--------------------- -------------------- ---------------------- --------------------------- -------------------------
<S> <C> <C> <C> <C>
Michael G. Acton 48,000 (1) $520,500 500/-0- N/A (2)/-0-
</TABLE>

(1) All share amounts and exercise prices were adjusted to reflect all
stock splits prior to the issuance of this report.

(2) At September 30, 2000, none of the options were in the money.

Compensation of Directors

Members of the Board of Directors who are not directly or indirectly
employed by Biomune are paid $500 for each Board meeting attended, in addition
to having their expenses reimbursed in connection with attending meetings of the
Board of Directors. No stock options were granted during Fiscal 2000 to any such
Directors for their service on the board. However, during Fiscal 2000, three
board members received 2,000 shares each and one board member received 4,000
shares in director compensation.

Biomune had a Consulting Agreement with Christopher D. Illick, one of
Biomune's directors and a member of its Compensation and Audit Committees. That
Consulting Agreement provided for Mr. Illick's services as a director of Biomune
and as a member of Biomune's Compensation and Audit Committees. Pursuant to that
Consulting Agreement, Biomune issued Mr. Illick 45 shares of common stock each
month during his service as director.

Item 11. Security Ownership of Certain Beneficial Owners and Management

To Biomune's knowledge, the following table sets forth information
regarding ownership of Biomune's outstanding common stock on January 4, 2001 by
beneficial owners of more than 5% of the outstanding shares of common stock. No
director or executive officers of Biomune owns any common stock.

-24-

<PAGE> 27
Shares of Common stock
Beneficially Owned
Name and Address Percentage
of Beneficial Owner (1) Number of Class
-------------------------------------------------------------------------------

Donlar Corporation 41,279,520 96%
6502 South Archer Road
Bedford Park, IL 60501

(1) A person is deemed to be the beneficial owner of securities that can
be acquired by such person within 60 days from the date on which
beneficial ownership is calculated, upon the exercise of options or
warrants or otherwise. Each beneficial owner's percentage of ownership
is determined by assuming that options, warrants, or other rights to
acquire shares, held by such person (but not those held by any other
person) and exercisable within sixty (60) days from the date hereof
have been fully exercised. Percentages are calculated based on
42,999,500 shares of common stock outstanding as of January 4, 2001
(as adjusted for shares deemed to be beneficially owned by such
shareholder).

Item 12. Certain Relationships and Related Transactions

Donlar Corporation - Donlar acquired 96% of Biomune on November 3, 2000.

Calvin Black Trust Loan

In 1998, Biomune borrowed $600,000 from the Calvin Black Trust. The trustee
of the Trust is Phil B. Acton, the brother of Biomune's former President and
CEO, Michael G. Acton. The loan to Biomune was secured by assets, including
accounts receivable and inventory. The note was due February 28, 1999. On March
31, 1999, Biomune entered into an agreement with IMG, Ltd., a Utah limited
liability company, for the sale of 300,000 shares of Bioxide Corporation common
stock owned by Biomune. The purchase price for these securities was $3.00 per
share and was paid in cash totalling $341,000 and the assumption of the Calvin
Black

-25-

<PAGE> 28
Trust Loan note by IMG. At March 31, 1999, principal and accrued interest due
under the Note was $570,552. In connection with the assumption of the note, the
Trust and IMG entered into a separate agreement pursuant to which the Trust
released its claims against Biomune.

Christopher D. Illick - Mr. Illick was the Chairman of Biomune's Board of
Directors until he resigned in the fourth quarter of 2000.

Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) Documents filed as part of this Form 10-KSB:

1. Financial Statements (included in Part II, Item 8.)
Reports of Independent Public Accountants
Consolidated Balance Sheet as of September 30, 2000
Consolidated Statements of Operations for the Years Ended September
30, 2000 and 1999
Consolidated Statement of Shareholders' Equity for the Years Ended
September 30, 2000 and 1999
Consolidated Statements of Cash Flows for the Years Ended September
30, 2000 and 1999
Notes to Financial Statements

2. Financial Statement Schedules: Financial statement schedules have been
omitted because they are not required or are not applicable, or
because the required information is shown in the financial statements
or notes thereto.

3. Exhibits: The following Exhibits are filed with this Form 10-KSB:

Exhibit No. Description of Exhibit

2.1$$$ Stock Purchase Agreement, dated as of August 7, 2000, between
Biomune Systems, Inc. and Donlar Corporation.

2.2$$$ Asset Purchase Agreement, dated as of August 7, 2000, between
Biomune Systems, Inc. and Donlar Corporation.

3.1+ Amended and Restated Articles of Incorporation

3.2+ Amended and Restated Bylaws (adopted March 22, 1996)

-26-

<PAGE> 29
3.3+ Certificate and Statement of Determination of Rights and
Preferences of Series A 10% Cumulative Convertible Preferred
Stock

3.4+ Certificate and Statement of Determination of Rights and
Preferences of Series B 10% Cumulative Convertible Non-Voting
Preferred Stock

3.5+ Certificate and Statement of Determination of Rights and
Preferences of Series D 8% Cumulative Convertible Non-Voting
Stock

3.6+ Certificate of Amendment to the Designation of Rights and
Preferences Related to Series A 10% Cumulative Convertible
Preferred Stock

3.7+ Certificate and Statement of Determination of Rights and
Preferences of Series C 8% Cumulative Convertible Non-Voting
Preferred Stock

3.8++ Certificate and Statement of Determination of Rights and
Preferences of Series E, 8% Cumulative Convertible Preferred
Stock

3.9++ Certificate of Amendment of Determination of Rights and
Preferences of Series F, 8% Cumulative Convertible Preferred
Stock

3.10++ Amendment to Determination of Rights and Preferences of Series
F Preferred

3.11++ Certificate and Statement of Determination of Rights and
Preferences of Series G, 8% Cumulative Preferred Stock

3.12++ Amendment to Designation of Rights and Preferences of Series G
Preferred

3.13++ Certificate and Statement of Determination of Rights and
Preferences of the Series J, 8% Cumulative Convertible
Preferred Stock

4.1** Form of Common Stock Certificate

4.3** Form of Series A 10% Cumulative Convertible Preferred Stock
Certificate

-27-

<PAGE> 30

4.4* Form of Series B 10% Cumulative Convertible Preferred Stock
Certificate

4.5# Form of Series D 8% Cumulative Convertible Preferred Stock
Certificate

4.6+ Form of Series C 8% Cumulative Convertible Preferred Stock
Certificate

4.7++ Form of Series E Certificate

4.8++ Form of Series F Certificate

4.9++ Form of Series G Amendment

4.10++ Form of Series J Certificate

10.43* Office Lease Agreement

10.50* Thomas Q. Garvey, III Indemnification Agreement

10.51* St. Luke's-Roosevelt Hospital Center Statement of Agreement

10.52* Michael G. Acton Agreement

10.53* Frank A. Eldredge Agreement

10.54* James Dalton Agreement

10.60# Amended License Agreement with PTI

10.77# 1995 Stock Incentive Plan

10.80# Incentive Stock Option Agreement with Michael G. Acton
(May 4, 1995)

10.82# Amended 1995 Stock Incentive Plan

10.83# Non-Qualified Stock Option Agreement with Christopher D.
Illick

10.84# Schedule Identifying Other Non-Qualified Stock Option
Agreements

-28-

<PAGE> 31
10.85# Incentive Stock Option Agreement with Frank A. Eldredge

10.86# Schedule Identifying other Incentive Stock option Agreements

10.95+ Lease Agreement with Young Electric Sign company

10.97+ Form of Registration Rights Agreement (Series C Preferred)

10.98+ Form of Investor Questionnaire and Subscription Agreement
(Series C Preferred)

10.108+ License Agreement with Biomed Patent Development LLC

10.112+ First Amendment to Amended License Agreement with PTI

10.113++ Contract with ML Industries

10.114++ Contract with Medical Foods, Inc.

10.115++ Contract with Harrogate Marketing LLC

10.116++ Rockwood Purchase Agreement, as amended

10.117+++ Marketing and Consulting Services Agreement between Biomune
Systems, Inc., and Harrogate Marketing, L.L.C. dated as of
August 14, 1999

10.118$ Contract with Amerifit Nutrition, Inc.

10.119$ License Agreement with Amerifit Nutrition, Inc.

10.120$ Contract with ICN Pharmaceutical

10.121$ Schedules to ICN Pharmaceutical Contract

10.122$ Non-Competition Agreement with Amerifit Nutrition, Inc.

10.123$$ 1999 Stock Option and Incentive Plan of Biomune effective as
of January 1, 1999

10.124$$ Form of Incentive Stock Option Grant and Agreement between
Biomune and certain directors, officers and employees of
Biomune

10.125$$ Form of Stock Option Grant and Agreement between Biomune and
certain directors, officers and employees of Biomune

-29-

<PAGE> 32
10.126$$ Form of Stock Award Letter.

10.123$$$ Promissory Note in the principal amount of $1,115,024.80,
dated as of August 7, 2000.

23.1 Consent of Grant Thornton LLP

23.2 Consent of Tanner + Co.

27 Financial Data Schedule

------------------------
# Incorporated by reference to Biomune's Annual Report on Form 10-K/A
for the fiscal year ended September 30, 1995.

* Incorporated by reference to Biomune's Annual Report on Form 10-KSB
for the fiscal year ended September 30, 1994.

** Incorporated by reference to Biomune's Annual Report on Form 10-K for
the fiscal year ended September 30, 1993 and the two month period
ended November 30, 1993.

*** Incorporated by reference to Biomune's Annual Report on Form 10-K for
the fiscal year ended September 30, 1992.

+ Incorporated by reference to Biomune's Annual Report on Form 10-KSB
for the fiscal year ended September 30, 1996.

++ Incorporated by reference to Biomune's Annual Report on Form 10-KSB
for the fiscal year ended September 30, 1998.

+++ Incorporated by reference to Biomune's Annual Report on Form 10-KSB
for the fiscal year ended September 30, 1999.

$ Incorporated by reference to Biomune's Annual Report on Form 10-QSB
for the period ending December 31, 1999.

$$$ Incorporated by reference to Biomune's Annual Report on Form S-8 filed
on February 2, 2000.

$$$ Incorporated by reference to Biomune's Annual Report on Form 8-K filed
on August 15, 2000.

-30-
<PAGE> 33
(b) Reports on Form 8-K were filed during the last quarter of the period
covered by this report.

A Report on Form 8-K was filed on August 15, 2000 reporting that on
August 7, 2000, pursuant to a Stock Purchase Agreement between Biomune
and Donlar, Biomune issued 2,136,554 (the "Initial Common Shares")
shares of common stock, par value $0.0001 per share (the "Common
Stock"), in a private placement to Donlar. The Initial Common Shares
were issued to Donlar in exchange for a promissory note (the "Note")
in the principal amount of $1,115,024.80. Interest is payable on the
Note at a rate of ten percent (10%) beginning from the date of
issuance until maturity at December 31, 2000, or such earlier time of
prepayment at the sole election of Donlar. Donlar is restricted from
voting the Initial Common Shares until payment of the note is made in
full. In connection with the sale of the Initial Common Shares, Mr.
Michael G. Acton, the President and Chief Executive Officer of
Biomune, entered into a Consulting Agreement with Donlar, pursuant to
which Mr. Acton will act as a consultant to Donlar for a period of one
year in exchange for a consulting fee of $10,416.67 per month for the
term of the agreement. Furthermore, on August 8, 2000, Biomune and
Donlar entered into an Asset Purchase Agreement whereby Biomune has
agreed to, acquire substantially all of the assets of Donlar, and to
license Donlar's intellectual property assets on an exclusive
world-wide basis, in exchange for 859,990 shares (the "Secondary
Common Shares") of Common Stock and 8,710,015 shares of Series H
Preferred Stock of Biomune (the "Series H Shares") to be issued to
Donlar. The closing of the transactions contemplated by the Asset
Purchase Agreement are subject to numerous conditions, including
approval of both Biomune and Donlar shareholders.

-31-

<PAGE> 34
Signatures

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

BIOMUNE SYSTEMS, INC.
(Registrant)

/s/Larry P. Koskan
------------------------------------
By: Larry P. Koskan
Its: President and Chief Executive Officer
Date: January 12, 2001

In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

Signature Title Date

/s/Larry P. Koskan Director, Chairman January 12, 2001
----------------------------------
Larry P. Koskan

/s/Robert W. Cooper Director January 12, 2001
----------------------------------
Robert W. Cooper

/s/Dr. Robert G. Martin Director January 12, 2001
----------------------------------
Dr. Robert G. Martin

/s/Thomas C. Dorr Director January 12, 2001
----------------------------------
Thomas C. Dorr

/s/Dean R. Kleckner Director January 12, 2001
----------------------------------
Dean R. Kleckner

-32-

<PAGE> 35
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements

Page

Independent auditor's report of Grant Thornton LLP F-1

Independent auditor's report of Tanner + Co. F-2

Consolidated Balance Sheet as of September 30, 2000 F-3

Consolidated Statement of Operations for the
Years Ended September 30, 2000 and 1999 F-4

Consolidated Statement of Shareholders' Equity for the
Years Ended September 30, 2000 and 1999 F-5

Consolidated Cash Flows for the
Years Ended September 30, 2000 and 1999 F-6

Notes to Financial Statements F-8

-33-

<PAGE> 36
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Shareholders
of Biomune Systems, Inc.

We have audited the consolidated balance sheet of Biomune Systems, Inc. and
subsidiary as of September 30, 2000, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year ended September
30, 2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
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
audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Biomune Systems,
Inc. and subsidiary as of September 30, 2000, and the results of their
operations and their cash flows for the year ended September 30, 2000, in
conformity with accounting principles generally accepted in the United States of
America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note B to the
consolidated financial statements, the Company has had substantial recurring
losses from operations, and has relied upon financing from the sale of its
equity securities to satisfy its obligations. These conditions raise substantial
doubt about the ability of the Company to continue as a going concern.
Management's plans in regard to that matter are also described in note B. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

GRANT THORNTON LLP

Chicago, Illinois
December 18, 2000

F-1

<PAGE> 37

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Stockholders
of Biomune Systems, Inc.

We have audited the related consolidated statements of operations, shareholders'
equity, and cash flows for the year ended September 30, 1999 for Biomune
Systems, Inc. and Subsidiary. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated 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 audit provides a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Biomune Systems,
Inc. and Subsidiary as of September 30, 1999, and the results of their
operations and their cash flows for the year ended September 30, 1999 in
conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note B to the
consolidated financial statements, the Company has had substantial reoccurring
losses from operations, and has relied upon financing from the sale of its
equity securities to satisfy its obligations. These conditions raise substantial
doubt about the ability of the Company to continue as a going concern.
Management's plans in regard to that matter are also described in note B. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

TANNER + CO.

Salt Lake City, Utah
January 11, 2000

F-2
<PAGE> 38
BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30,

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

ASSETS 2000
------------
<S> <C>
Current assets
Cash $ 1,780
Receivables, net 91,214
Stock subscription receivable 500,000
Inventories, net 168,040
Prepaid expenses 25,000
------------

Total current assets 786,034

Equity securities 864,434
Property and equipment, net 70,089
Intangibles, net 6,579
Investment in and advances to affiliate --
Deposits 6,657
------------

$ 1,733,793
============

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

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
Payables and accrued expense $ 548,416
Notes payable 253,408
------------

Total current liabilities 801,824

Commitments and contingencies --

Shareholders' equity
Preferred stock, $.0001 par value, 50,000,000 shares
authorized, 39,048 shares issued and outstanding 195,172
Common stock, $.0001 par value, 500,000,000 shares
authorized, 2,846,980 shares issued and outstanding 1,423
Additional paid-in capital 46,386,350
Stock subscriptions receivable (31,986)
Accumulated deficit (45,618,990)
------------

Total shareholders' equity 931,969
------------

$ 1,733,793
============
</TABLE>

The accompanying notes are an integral part of this statement.

F-3
<PAGE> 39
BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30,

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

2000 1999
----------- -----------
<S> <C> <C>
Revenues $ 654,962 $ 1,501,406

Operating expenses
Cost of revenue 427,476 883,140
Management, consulting and research 2,128,469 304,894
Other general and administrative 2,634,807 1,025,618
----------- -----------

Total operating expenses 5,190,752 2,213,652
----------- -----------

Loss from operations (4,535,790) (712,246)

Other income (expense)
Loss on investment in affiliate (450,377) (1,506,000)
(Loss) gain on sale of equity securities (692,792) 304,053
Interest income 27,607 101,751
Interest expense (212,080) (64,329)
Other expense, net (314) (825)
Gain on sale of product line 301,775 --
Gain on sale of equipment 16,495 --
----------- -----------

Total other (expense) income, net (1,009,686) (1,165,350)
----------- -----------

Loss before income taxes (5,545,476) (1,877,596)
Provision for income taxes -- --
----------- -----------

Net loss (5,545,476) (1,877,596)

Preferred stock dividends and beneficial conversion premium (153,875) (198,497)
----------- -----------

Net loss applicable to common shares $(5,699,351) $(2,076,093)
----------- -----------

Net loss per common share - basic $ (4.21) $ (5.75)
Net loss per common share - diluted $ (4.32) $ (5.75)

Weighted average common shares - basic 1,318,378 361,200
Weighted average common shares - diluted 1,318,613 361,200
</TABLE>

The accompanying notes are an integral part of these statements.

F-4
<PAGE> 40
Biomune Systems, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
September 30, 2000 and 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

Series A Series B Series E
Common stock Preferred stock Preferred stock Preferred stock
Shares Amount Shares Amount Shares Amount Shares Amount
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Opening balance October 1, 1998 257,332 $ 128 39,774 $ 193,679 449 $6,740 323 $ 556,897

Comprehensive net income:
Net loss - - - - - - - -
Other comprehensive loss,
change in unrealized holding loss on
marketable securities - - - - - - - -

Total comprehensive loss - - - - - - - -

Issuance of common stock for:
Services 6,820 4 - - - - - -
Advances to related parties 80,680 41 - - - - - -
Conversion of preferred stock 71,250 35 (5,625) (28,125) - - (330) (569,344)
Acquisition of marketable securities 88,400 44 - - - - - -

Accretion - - - - - - - 5,227

Issuance of common stock options for services - - - - - - - -

Amortization of deferred compensation - - - - - - - -

Expiration of Series D preferred stock warrants - - - - - - - -

Preferred stock dividends - - 2,350 11,750 - - 7 7,220

Opening balance October 1, 1999 504,482 252 36,499 177,304 449 6,740 - -
--------- -------- ------ --------- --- ------ ---- ---------
Comprehensive net income:
Net loss - - - - - - - -
Other comprehensive loss,
change in unrealized holding loss on
marketable securities - - - - - - - -

Total comprehensive loss - - - - - - - -

Issuance of common stock for:
Services 192,798 97 - - - - - -
Purchase of product line 40,000 20 - - - - - -
Debt 40,000 20 - - - - - -
Conversion of preferred stock 848,700 424 - - - - - -

Exercise of options 94,000 47 - - - - - -

Variable stock options - - - - - - - -

Amortization of deferred compensation - - - - - - - -

Capital contribution 1,127,000 563 - - - - - -

Reclassification of stock subscription
satisfied subsequent to year end - - - - - - - -

Preferred stock dividends - - 2,100 11,128 - - - -
--------- -------- ------ --------- --- ------ ---- ---------
Balance at September 30, 2000 2,846,980 $ 1,423 38,599 $ 188,432 449 $6,740 - $ -
========= ======== ====== ========= === ====== ==== =========
<CAPTION>

Series F Series J Additional
Preferred stock Preferred stock paid-in Stock
Shares Amount Shares Amount capital subscription
-------- -------- -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Opening balance October 1, 1998 1,318,749 $ 680,699 1,135 $ 1,135,000 $ 39,042,910 $ (55,192)

Comprehensive net income:
Net loss - - - - - -
Other comprehensive loss,
change in unrealized holding loss on
marketable securities - - - - - -

Total comprehensive loss - - - - - -

Issuance of common stock for:
Services - - - - 63,413 -
Advances to related parties - - - - 806,857 -
Conversion of preferred stock - - - - 597,434 -
Acquisition of marketable securities - - - - 828,156 -

Accretion - - - - (5,227) -

Issuance of common stock options for services - - - - 242,300 -

Amortization of deferred compensation - - - - - -

Expiration of Series D preferred stock warrants - - - - 338,500 -

Preferred stock dividends 101,332 60,800 114 113,500 - -
---------- --------- ------ ------------ ------------ ---------
Opening balance October 1, 1999 1,420,081 741,499 1,249 1,248,500 41,914,343 (55,192)

Comprehensive net income:
Net loss - - - - - -
Other comprehensive loss,
change in unrealized holding loss on
marketable securities - - - - - -

Total comprehensive loss - - - - - -

Issuance of common stock for:
Services - - - - 631,355 -
Purchase of product line - - - - 99,980 -
Debt - - - - 174,960 -
Conversion of preferred stock (1,445,414) (756,699) (1,377) (1,376,047) 2,132,322 -

Exercise of options - - - - 349,953 -

Variable stock options - - - - 520,500 -

Amortization of deferred compensation - - - - - -

Capital contribution - - - - 562,937 -

Reclassification of stock subscription
satisfied subsequent to year end - - - - - 23,206

Preferred stock dividends 25,333 15,200 128 127,547 - -
---------- --------- ------ ------------ ------------ ---------
Balance at September 30, 2000 - $ - - $ - $ 46,386,350 $ (31,986)
========== ========= ====== ============ ============ =========
<CAPTION>
Accumulated
Deferred other
compensation comprehensive Accumulated
Warrants and consulting income deficit Total
------------ -------------- ------------- ----------- -------
<S> <C> <C> <C> <C> <C>
Opening balance October 1, 1998 $ 338,500 $ (304,862) $ - $(37,848,773) $ 3,745,726

Comprehensive net income:
Net loss - - - (1,877,596) (1,877,596)
Other comprehensive loss,
change in unrealized holding loss on
marketable securities - - (768,200) - (768,200)
--------- ------------ ------------
Total comprehensive loss - - (768,200) (1,877,596) (2,645,796)
------------
Issuance of common stock for:
Services - - - - 63,417
Advances to related parties - - - - 806,898
Conversion of preferred stock - - - - -
Acquisition of marketable securities - - - - 828,200

Accretion - - - - -

Issuance of common stock options for services - - - - 242,300

Amortization of deferred compensation - 102,376 - - 102,376

Expiration of Series D preferred stock warrants (338,500) - - - -

Preferred stock dividends - - - (193,270) -
------------ ------------ --------- ----------- ------------
Opening balance October 1, 1999 - (202,486) (768,200) (39,919,639) 3,143,121

Comprehensive net income:
Net loss - - - (5,545,476) (5,545,476)
Other comprehensive loss,
change in unrealized holding loss on
marketable securities - - 768,200 - 768,200
--------- ----------- ------------
Total comprehensive loss - - 768,200 (5,545,476) (4,777,276)

Issuance of common stock for:
Services - - - - 631,452
Purchase of product line - - - - 100,000
Debt - - - - 174,980
Conversion of preferred stock - - - -

Exercise of options - - - - 350,000

Variable stock options - - - - 520,500

Amortization of deferred compensation - 202,486 - - 202,486

Capital contribution - - - - 563,500

Reclassification of stock subscription
satisfied subsequent to year end - - - - 23,206

Preferred stock dividends - - - (153,875) -

------------ ------------ --------- ------------ ------------
Balance at September 30, 2000 $ - $ - $ - $(45,618,990) $ 931,969
============ ============ ========= ============ ============
</TABLE>

F-5
<PAGE> 41
BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SEPTEMBER 30,

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
2000 1999
----------- ------------
<S> <C> <C>
Cash flows from operating activities
Net loss $(5,545,476) $(1,877,596)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 368,930 41,320
Gain on sale of equipment (16,495) --
Variable stock options 520,500 --
Loss on investment in affiliate 450,377 1,506,000
Loss (gain) on sale of equity securities 692,792 (304,053)
Issuance of common stock, stock options and warrants for services 906,432 305,717
Amortization of deferred consulting expense 202,486 102,376
Change in assets and liabilities, net of effect of
nonmonetary asset acquisitions
Receivables 343,611 (226,881)
Inventories 87,952 (51,773)
Prepaid expenses 281,638 (306,638)
Other assets 4,689 --
Payables and accrued expenses 125,811 537,950
----------- -----------

Net cash used in operating activities (1,576,753) (273,578)

Cash flows from investing activities
Proceeds from sale of equipment 18,350 --
Proceeds from sale of equity securities 1,188,000 504,125
Purchase of property and equipment (16,192) (51,833)
Cash in unconsolidated entity -- (25,662)
Net repayments from related parties 156,669 575,151
Net change in unconsolidated entity -- (11,301)
Purchase of equity securities of related parties -- (1,179,603)
----------- -----------

Net cash provided by (used in) investing activities 1,346,827 (189,123)

Cash flows from financing activities
Repayments of notes payable (435,000) --
Proceeds from notes payables 230,000 435,000
Proceeds from issuance of common stock 63,500 --
Proceeds from exercise of stock option 350,000 --
Payments received on stock subscription receivable 23,206 --
----------- -----------

Net cash provided by financing activities 231,706 435,000
----------- -----------

Net increase (decrease) in cash and cash equivalents 1,780 (27,701)

Cash and cash equivalents at beginning of year -- 27,701
----------- -----------

Cash and cash equivalents at end of year $ 1,780 $ --
=========== ===========
</TABLE>

F-6

<PAGE> 42
BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
SEPTEMBER 30,

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
2000 1999
---------- ---------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Interest paid $ 15,101 $ 44,561
Income tax paid $ -- $ --

Supplemental disclosure of noncash investing and financing activities:

During the year ended September 30, 2000:

- The Company issued preferred stock in payment of preferred stock dividends
of $153,875.
- The Company issued 40,000 shares of common stock in exchange for a $100,000
payment on a purchase of a technology license.
- The Company issued 848,700 shares of common stock in exchange for $2,132,746
of its preferred series F and J stock.
- The Company issued 40,000 shares of common stock to pay accrued interest on
debt of $174,980.

During the year ended September 30, 1999:

- The Company issued preferred stock in payment of preferred stock dividends
of $193,270.
- The Company converted 5,625 shares of Series A preferred stock and 330
shares of Series E preferred stock (aggregating $597,469) into 71,250
shares of common stock.
- The Company's warrants for Series D preferred stock expired and $338,500
was transferred to additional paid in capital from warrants.
- The Company had an unrealized loss on its related party equity securities
of $768,200.
- The Company had accretion of $5,227 on Series E preferred stock.
- The Company reduced notes payable by $559,000 and $11,553 of interest
payable by exchanging marketable securities from parties. The Company
realized a gain of $146,660.
- The Company exchanged common stock for marketable equity securities from a
related party of $828,200.
- The Company received $1,586,594 of equity securities from a related entity
to satisfy a receivable from a related party.
- The Company issued common stock for advances of $806,898.
- The Company had its ownership interest in Rockwood reduced from 52% to 19%.
This change in ownership increased the carrying amount of its investment
in Rockwood by reclassifying the following:

Cash $ 25,662
Receivables 2,346,004
Inventories 457,024
Prepaid expenses 19,032
Property and equipment 87,031
Other assets 3,090
Intangibles 251,150
Payables (697,136)
Notes payable (515,500)
Minority interest (31,281)
----------

Investment in Rockwood $1,945,076
==========
</TABLE>

The accompanying notes are an integral part of these statements.

F-7
<PAGE> 43
BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999

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

NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Biomune Systems, Inc. ("Biomune") and its subsidiary (the "Company") are engaged
in the distribution and sale of biologic nutraceutical supplements and sports
and nutrition bars. Certain of the nutraceutical supplements incorporate a
patented whey protein technology licensed by Biomune and designed to provide or
increase protective immunities to disease and to provide nutritional
supplementation. Nutraceutical products are food supplements that are derived
from a food base and are marketed as a beneficial source of nutrients to promote
good health. The Company sells its products primarily to nutritional companies
located in the United States.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.

PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Biomune, and its
wholly-subsidiary, Optim Nutrition, Inc. All significant intercompany balances
and transactions have been eliminated.

During the year ended September 30, 1999, Biomune's ownership interest in
Rockwood Companies LC ("Rockwood") was reduced from 52% to 19%. At September 30,
1999, and for the year then ended, Rockwood is accounted for on the cost method.

EQUITY SECURITIES

The Company's equity securities are classified as "available for sale" and are
carried in the financial statements at fair market value. Realized gains and
losses, determined using the specific identification method, are included in
earnings; unrealized holding gains and losses are reported as a separate
component of stockholders' equity.

Declines in fair market value below amortized cost that are other than temporary
are included in earnings.

F-8
<PAGE> 44
BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2000 AND 1999

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

NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES -CONTINUED

CASH AND CASH EQUIVALENTS

For purposes of the statements of cash flows, cash includes all cash and
investments purchased with maturities of three months or less.

INVENTORIES

Inventories are recorded at the lower of cost or market, cost being determined
on a first-in, first-out ("FIFO") method.

INTANGIBLE ASSETS

Intangible assets consist primarily of licenses acquired to market and sell
certain products and technology. Intangibles are being amortized over a period
of 5 to 10 years.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost less accumulated depreciation.
Depreciation and amortization is determined using the straight-line method over
the estimated useful lives of the assets. Expenditures for maintenance and
repairs are expensed when incurred and betterments are capitalized. Gains and
losses on sale of property and equipment are reflected in operations.

EARNINGS PER COMMON, COMMON EQUIVALENT AND REVERSE STOCK SPLITS

The computation of basic earnings per common share is based on the weighted
average number of common shares outstanding during the year.

The computation of diluted earnings per common share is based on the weighted
average number of common shares outstanding during the year plus common stock
equivalents which would arise from the exercise of stock options and warrants
outstanding using the treasury stock method and the average market price per
share during the year. Common stock equivalents are not included in the diluted
earnings per share calculation when their effect is anti-dilutive.

Preferred stock dividends and the impact of beneficial conversion premiums
increase the net loss attributable to common stockholders for purposes of
computing the net loss per common share.

F-9
<PAGE> 45
BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2000 AND 1999

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

NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES -CONTINUED

EARNINGS PER COMMON, COMMON EQUIVALENT AND REVERSE STOCK SPLITS - CONTINUED

On October 31, 2000, Biomune recorded a 1-for-5 reverse stock split on its
common stock. All of the per share data has been adjusted to reflect this
change. Consistent with prior stock, Biomune has not adjusted the number of
preferred shares in the financial statements, however, their conversion rights
are modified in proportion to each reverse stock split. Biomune has also
recorded a 1-for-10 reverse stock split in November 1997 and December 1998.

At September 30, 2000, there were 39,048 shares of preferred stock outstanding,
convertible into 235 shares of common stock.

INVESTMENTS

The Company accounts for its investments using the lower of cost or market
method.

REVENUE RECOGNITION

Revenue is recognized upon shipment of the product.

MANAGEMENT, CONSULTING AND RESEARCH EXPENSES

Management, consulting and research expenses include amounts paid to third-party
and related-party consultants for marketing, investment banking, and other
business advisory services, as well as costs related to the Company's
nutraceutical product research and development activities. Research and
development costs totaled approximately $17,000 and $13,000 for the years ended
September 30, 2000 and 1999, respectively.

ADVERTISING

The Company expenses the cost of advertising when the advertising occurs. For
the years ended September 30, 2000 and 1999, advertising expenses totaled
approximately $202,000 and $12,000, respectively, and are included in other
general and administrative expenses in the accompanying statements of
operations.

INCOME TAXES

The Company recognizes deferred income tax assets or liabilities for the
expected future tax consequences of events that have been recognized in the
financial statements or tax returns. Under this method, deferred income tax
assets or liabilities are determined based upon the difference between the
financial statement and income tax bases of assets and liabilities using enacted
tax rates expected to apply when differences are expected to be settled or
realized.

F-10
<PAGE> 46
BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2000 AND 1999

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

NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES -CONTINUED

CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject the Company to concentration of
credit risk consist primarily of receivables. In the normal course of business,
the Company provides credit terms to its customers. Accordingly, the Company
performs ongoing credit evaluations of its customers and maintains allowances
for possible losses which, when realized, have been within the range of
management's expectations.

The Company maintains its cash in bank deposit accounts which, may at times,
exceed federally insured limits. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant credit risk on
cash and cash equivalents.

RECLASSIFICATIONS

Certain accounts in the 1999 financial statements have been reclassified to
conform with the current year presentation.

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

NOTE B - GOING CONCERN

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As of September 30, 2000, the
Company had an accumulated deficit of $45,618,990 and has had substantial
recurring losses. The consolidated operations of the Company have not had
sustained profitability and the Company has relied upon financing from the sale
of its equity securities and liquidation of other assets to satisfy its
obligations. These conditions raise substantial doubt about the ability of the
Company to continue as a going concern. The consolidated financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.

The Company's ability to continue as a going concern is subject to the
attainment of profitable operations or obtaining necessary funding from outside
sources. Management's plan with respect to this uncertainty includes raising
additional equity funding through the sale of the Company's securities,
evaluating new products and markets, and minimizing overhead and other costs.
However, there can be no assurance that management will be successful.

The Company has made substantial changes in its operations and ownership
structure subsequent to year end, see note T.

F-11

<PAGE> 47
BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2000 AND 1999

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

NOTE C - DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS

Receivables
Trade receivables $ 18,575
Notes receivable, related party (see note F) 197,422
Interest and other 65,417
Less allowance for doubtful accounts (190,200)
--------

$ 91,214
========
Inventories
Finished goods $105,024
Raw materials 93,016
Reserve for obsolescence (30,000)
--------

$168,040
========
Payables and accrued expenses
Trade payables $448,416
Accrued other 100,000
--------

$548,416
========
Preferred Stock
Series A, 10% cumulative, convertible;
38,599 shares outstanding $188,432
Series B, 10% cumulative, convertible non-voting;
449 shares outstanding 6,740
--------
$195,172
========

F-12
<PAGE> 48
BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2000 AND 1999

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

NOTE D - EQUITY SECURITIES

During the year ended 1999, the Company acquired 3,536 shares of series A
preferred stock of Volu-Sol, Inc. ("Volu-Sol"), in exchange for the issuance of
88,400 shares of Biomune's common stock. The Volu-Sol stock was valued at
$828,200, the fair value of the Biomune common stock issued. As of September 30,
1999, the Company determined that the fair value of the Volu-Sol stock had
decreased and an unrealized holding loss of $768,200 was recorded.

During the year ended September 30, 2000, the Company received proceeds of
$80,000 and recorded a realized loss of $748,200 on the sale of all of its
Volu-Sol preferred stock.

During the fiscal years ended September 30, 1998 and 1999, the Company acquired
499,859 shares of common stock in Purizer Corporation, formerly Bioxide
("Purizer"). These shares were obtained in exchange for inventory, a related
party receivable from Harrogate Marketing, cash and shares of Biomune's common
stock. The Purizer shares were recorded at their cost, $1,977,026, which
approximated fair market value at September 30, 1999.

During the year ended September 30, 2000, the Company received proceeds of
$1,108,000 and recorded a gain of $55,094 on the sale of some of its Purizer
stock. The Company owns 216,030 shares of Purizer stock, which is valued at
$864,434 at September 30, 2000. This investment is categorized as
available-for-sale. The Company uses the specific identification method to
determine the cost of securities sold.

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

NOTE E - PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

Furniture, fixtures, and equipment $170,427
Less accumulated depreciation and amortization 100,338
--------

$ 70,089
========

F-13

<PAGE> 49
BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2000 AND 1999

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

NOTE F - RELATED PARTY RECEIVABLES

Related party receivables consists of the following:

Notes receivable from entities, which are shareholders or are
controlled by an advisory board chairman, unsecured, interest
at various rates due on demand. $168,354

Note receivable from an individual who is a relative of a
shareholder of Biomune, at an interest rate of 1% over prime,
unsecured and due on demand. 29,068
--------

$197,422
========

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

NOTE G - INTANGIBLES

Intangible assets consist of the following:

ProMune Technology $ 70,000
Less accumulated amortization 63,421
--------

$ 6,579
========

During the year ended September 30, 2000, the Company determined that the
goodwill associated with the Mountain Lift bar was impaired and the Company
wrote off the goodwill. The loss of $264,603 is included in operating expenses.

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

NOTE H - INVESTMENT AND ADVANCES TO AFFILIATE

During 1999, the Company had its ownership reduced in Rockwood Company LLC
("Rockwood") from 52% to 19%, due to the Company not meeting certain financing
obligations as provided for in the purchase agreement for Rockwood. In addition,
during the fiscal year ended September 30, 1999, the Company exchanged its
interest in Rockwood for a 19% interest in Twin Eagles LLC. No gain or loss was
recorded on this transaction. Twin Eagles LLC is engaged in the business of
health and beauty products.

F-14
<PAGE> 50
BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2000 AND 1999

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

NOTE H - INVESTMENT AND ADVANCES TO AFFILIATE - CONTINUED

The Company's investment and advances include an advance made to Cypress, the
management company of Rockwood, in the amount of $500,000 to assist in capital
funding of Rockwood. This loan was collateralized by the 48% interest in
Rockwood not owned by the Company. The loan bears interest at 8% and matures on
January 15, 2006. While interest payments were due monthly, no payments have
been received to date and the Company has not recorded any interest income on
the advance. Equal principal and interest payments are due annually beginning
January 15, 2002.

The Company's investment and advances totaled $2,156,377 at September 30, 2000.
During the fiscal years ended September 30, 2000 and 1999, the Company has
recorded an impairment loss of $450,377 and $1,506,000, respectively. The
investment and advances have been written down to $0 at September 20, 2000. The
Company has recorded these losses because no distribution or interest payments
were received in the fiscal 2000 or 1999.

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

NOTE I - NOTES PAYABLE

Notes payable consist of the following:

Unsecured note payable to an individual, with 12% interest,
due on September 15, 2000. $ 41,600

Unsecured note payable to an officer of the Company, with
12% interest, due on September 15, 2000. 211,808
--------

$253,408
========

In October 2000, both of these notes were paid in full, including interest.

F-15
<PAGE> 51
BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2000 AND 1999

-------------------------------------------------------------------------------
NOTE J - INCOME TAXES

The benefit for income taxes is different than amounts which would be provided
by applying the statutory Federal income tax rate to loss before benefit for
income taxes for the following reasons:

Years ended
September 30,
-------------------------

2000 1999
------------ ---------

Federal income tax benefit at statutory rate $ 1,885,000 $ 639,000
Change in valuation allowance (1,885,000) (639,000)
------------ ---------

$ - $ -
============ =========

Deferred tax assets (liabilities) are comprised
of the following:

Net operating loss carryforwards $ 12,815,000
Write-down of assets 709,000
Allowance for bad debts 68,000
Inventory reserve 11,000
Other accounts 18,000
Valuation allowance (13,621,000)
------------

$ -
============

The Company's valuation allowance was also reduced for the expiration of both
the investment tax credit carryforward and a portion of the net operating loss
carryforward.

As of September 30, 2000, the Company had net operating loss carryforwards
("NOLs") for Federal income tax reporting purposes of approximately $35,600,000.
These NOLs will expire over time between the fiscal years ended 2001 through
2020. There can be no assurance that all of these NOLs will be available to
offset future taxable income, if any. A NOL generated in a particular year will
expire for Federal income tax purposes if not utilized within 15 to 20 years,
dependent on when the NOLs were generated. Additionally, the Internal Revenue
Code contains other provisions, which could reduce or limit the availability and
utilization of these NOLs. For example, limitations are imposed on the
utilization of NOLs if certain ownership changes have taken place. In accordance
with SFAS No. 109, a valuation allowance is provided when it is more likely than
not that some portion of the deferred income tax asset will not be realized. Due
to the uncertainty with respect to the ultimate realization of the NOLs, the
Company has established a valuation allowance for all of its deferred income tax
assets.

F-16

<PAGE> 52
BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2000 AND 1999

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

NOTE J - INCOME TAXES - CONTINUED

The Company has determined that as of December 10, 1991, ownership changes (as
that term is defined in Section 382 of the Internal Revenue Code) may have
occurred. The impact of this ownership change is to limit the use of the
Company's NOL carryforwards incurred up to December 10, 1991.

Additional limitations on the NOL's were created by the change in ownership,
subsequent to year-end, see note T.

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

NOTE K - GAIN ON SALE OF PRODUCT LINE

During the fiscal year ended 1999, the Company had exclusive worldwide
distribution rights to a time-release glucose bar. Under the agreement the
Company would pay a 12% royalty on net sales of the patented product, which was
marketed under the trade name NiteBite. In January 2000, the Company entered
into an agreement which cancelled the above mentioned distribution agreement and
allowed the Company to buy the intellectual property and license agreement
related to the NiteBite line. The Company purchased these assets for $650,000
cash and 40,000 unregistered shares of Biomune's common stock. The shares were
valued at their fair market value on the date of Board approval, or $2.50 each.
The Company then simultaneously sold these assets for $1,482,000. A retention
reserve of 10% was established and the balance of $1,333,800 was received in
cash. The Company recorded a gain of $301,775, net of closing costs during the
year ended September 30, 2000.

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

NOTE L - COMMITMENTS AND CONTINGENCIES

HARROGATE

On April 1, 2000, the Company terminated its marketing agreement with Harrogate
Marketing and entered into a settlement agreement. This agreement required the
Company to pay $400,000 in cash for full satisfaction of all payments and
commissions under the marketing agreement. In addition, Harrogate incurred
additional liabilities in connection with the distribution of Biomune's products
under the agreement. The parties agreed that Biomune would pay up to $200,000 of
these costs, however, none of these expenses have been paid as of September 30,
2000. If additional liabilities exist, Harrogate would receive up to $300,000 of
proceeds on any sale of the right to the Mountain Lift bar which exceeded
$1,000,000. The parties have agreed that Biomune is responsible for
approximately $120,000 of payables which are included in trade payables as of
September 30, 2000.

F-17
<PAGE> 53

BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2000 AND 1999

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

NOTE L - COMMITMENTS AND CONTINGENCIES - CONTINUED

TECHNOLOGY

The Company has the exclusive right and license to utilize a patented natural
protein technology for pharmaceutical and nutraceutical products, solely for
human applications, in the United States and Canada, and their possessions and
territories. This license expires in March 2006.

The license may be terminated if the Company fails to observe or perform any of
the covenants, terms, conditions or provisions of the agreement or if it
breaches any representation or warranty and fails to cure the breach within 30
days after receipt of written notice.

LITIGATION

The Company and certain of its officers and directors are currently involved in
litigation with a shareholder. On October 12, 1995, a Proposed Class Action
Complaint for violation of Federal securities laws was filed in U.S. District
Court. The complaint alleges various violations of the Securities and Exchange
At of 1934. On April 2, 1997, the trial court dismissed with prejudice all
claims of the plaintiff and assessed costs of the litigation against the
plaintiff. In May 1997, the plaintiff appealed the decision. On September 2,
1998, the Court of Appeals reversed the decision of the trial court and remanded
the case for a determination by the trial court whether the complaint had been
timely filed. On March 3, 2000, the Company filed a motion for summary judgment.
On September 28, 2000, the trial court granted defendants motion for summary
judgment and plaintiff appealed. By order of the court of appeals filed on
December 4, 2000, the appeals court grant plaintiffs motion to voluntarily
dismiss the action. The judgment is final and the litigation is closed.

-------------------------------------------------------------------------------
NOTE M - COMMON AND PREFERRED STOCK

The following is a listing of Biomune's authorized common and preferred stock
as of September 30, 2000.

Biomune has authorized 500,000,000 shares of common stock with a par value of
$0.0001.

Biomune has authorized 50,000,000 shares of preferred stock with a par value of
$0.0001. The Company has not adjusted the number of preferred shares, however,
their conversion rights are modified in proportion to each reverse stock split.
The preferred shares have been designated as follows, however the entire amount
authorized has not been allocated to specific series:

- Series A 10% cumulative, 1,075,000 shares authorized, these shares convert
on a one for one basis for common stock, subject to adjustment for stock
splits, stock dividends, and the like.

F-18
<PAGE> 54

BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2000 AND 1999

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

NOTE M - COMMON AND PREFERRED STOCK - CONTINUED

- Series B 10% cumulative, 1,000,000 non-voting shares authorized, these
shares convert on a one for one basis for common stock, subject to
adjustment for stock splits, stock dividends, and the like.

- Series E 8% cumulative, 7,000,000 non-voting shares authorized, these
shares convert to common stock by dividing the stated value of Series E by
the lessor of $1.10 or per share fair value of Company's common stock.

- Series F 8% cumulative, 7,000,000 non-voting shares authorized, these
shares convert to common stock by dividing the stated value of Series F by
the lessor of $1.10 or per share fair value of Company's common stock.

- Series J 10% cumulative, 2,000 non-voting shares authorized, these shares
are convertible by dividing the stated value of Series J by the market
price of the common stock on such date.

No shares of Series E, F or J preferred stock were outstanding as of
September 30, 2000.

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

NOTE N - STOCK OPTIONS AND WARRANTS

Biomune has established certain Stock Incentive Plans (collectively, "the
Plans"), which allowed for the granting of incentive stock options, nonqualified
stock options, stock appreciation rights and the award of common stock to
certain individuals, including employees, officers, directors, consultants, and
others as designated by the Board of Directors. Under the terms of the Plans,
the exercise prices for incentive stock options shall not be less than the fair
market value at the date of grant. The exercise price for nonqualified stock
options shall not be less than the lesser of:

1) the book value per share of common stock as of the end of the fiscal
year of Biomune immediately preceding the date of grant, or

2) 50 percent of the fair market value per share of common stock on the
date of grant.

Options are exercisable within periods determined by the Board of Directors but
may not exceed ten years from the date of grant.

F-19
<PAGE> 55
BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2000 AND 1999

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

NOTE N - STOCK OPTIONS AND WARRANTS - CONTINUED

A summary of the stock option and warrant activity is as follows:

Number of Weighted average
shares exercise price
------------ ------------------

Outstanding at October 1, 1998 84,074 $1,146.00
Granted 130,000 5.00
Exercised (60,000) 10.00
Canceled (4,905) 1,284.05
--------- ---------

Outstanding at September 30, 1999 149,169 33.80
Granted - -
Exercised (94,000) 3.70
Canceled (5,400) 569.55
--------- ---------

Exercisable at September 30, 2000 49,769 $ 28.25
======== =========

When accounting for the issuance of stock options and warrants, financial
accounting standards allow entities the choice between adopting a fair value
method or an intrinsic value method with footnote disclosures of the pro forma
effects if the fair value method had been adopted. The Company has opted for the
latter approach. Had the Company's options and warrants been determined based on
the fair value method, the results of operations would have been reduced to the
pro forma amounts indicated below:
Years ended
September 30,
--------------------------

2000 1999
------------ ------------

Net loss applicable to common shares - as reported $(5,545,476) $(2,076,093)
Net loss applicable to common shares - pro forma (5,545,476) (2,350,487)
Basic loss per common share - as reported (4.17) (5.75)
Basic loss per common share - pro forma (4.17) (6.51)

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:

September 30,
----------------------

2000 1999
-------- --------

Expected dividend yield $ - $ -
Expected stock price volatility 80% 80%
Risk-free interest rate 5.25% 5.25%
Expected life of options 2 years 2 years

F-20
<PAGE> 56

BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2000 AND 1999

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NOTE N - STOCK OPTIONS AND WARRANTS - CONTINUED

The weighted average fair value of options granted during 2000 and 1999 are $0
and $4.80, respectively. During the year ended September 30, 2000, the Board of
Directors elected to change the exercised price of the options to purchase
84,000 shares issued during 1999, from $5.00 per share to $2.50 per share. These
options are treated as variable options under Accounting Principles Board
Opinion No. 25 and related interpretations, and the Company recorded
compensation expense of $520,500 for the year ended September 30, 2000.

The following table summarizes information about stock options and warrants
outstanding at September 30, 2000:

<TABLE>
<CAPTION>
Outstanding Exercisable
----------------------------------------------------- -----------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Outstanding Life Exercise Exercisable Exercise
Prices at (Years) Price at Price
-------------------- ----------- -------------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$ 5.00 to 87.50 48,000 3.33 $ 16.70 48,000 $ 16.70
185.00 to 344.00 1,509 1.72 196.25 1,509 196.25
835.00 to 1,190.00 260 0.56 1,185.40 260 1,185.40
------------------- ------ ---- --------- ------ ---------
$ 5.00 to 1,190.00 49,769 3.27 $ 28.25 49,769 $ 28.25
=================== ====== ==== ========= ====== =========
</TABLE>

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NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS

None of the Company's financial instruments are held for trading purposes. The
Company estimates that the fair value of all financial instruments at September
30, 2000, does not differ materially from the aggregate carrying values of its
financial instruments recorded in the accompanying balance sheet. The estimated
fair value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. Considerable judgment is
necessarily required in interpreting market data to develop the estimates of
fair value and, accordingly, the estimates are not necessarily indicative of the
amounts that the Company could realize in a current market exchange.

F-21
<PAGE> 57
BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2000 AND 1999

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NOTE P - RELATED PARTY TRANSACTIONS

During the year ended September 30, 2000:

- The Company had a note payable to the president of the Company with
interest at 12% due on September 15, 2000 in the amount of $211,808. This
note was paid in full in October 2000.

During the year ended September 30, 1999:

- The Company owned equity securities in two companies with some common
ownership. The carrying value of those equity securities was $1,977,026 at
September 30, 1999.

- The Company had advances to and investments in an affiliate in the amount
of $450,377.

- The Company sold a note receivable of $402,051, including interest, to a
shareholder in exchange for equity securities.

- The Company sold equity securities of $675,000 to a shareholder in exchange
for $341,000 and transferred $570,553 of debt to a shareholder.

- The Company sold equity securities for $73,125 to a trust in which a
relative of an officer is the trustee.

- The Company exchanged $828,200 of its common shares for equity securities
from a shareholder.

- The Company advanced to an entity controlled by a shareholder $1,893,233.
The entity repaid $1,586,593 in the form of marketable securities.

In addition, the Company had the following transactions:

The Company had various notes receivable due from related parties (see Note F).
Interest income recorded under the notes was approximately, $27,000 and $92,000
during the years ended September 30, 2000 and 1999, respectively.

The Company had a management agreement with an entity owned by a shareholder and
former officer of the Company. The agreement provided that the entity provide
management and marketing services to the Company in exchange for a fee equal to
45% through March 1999, 10% for April 1999 through December 31, 1999, and 45%
after December 31, 1999 of the gross revenues of the Company's nutrition and
medical food products. On April 1, 2000, the Company terminated its agreement
and entered into a settlement agreement which required the Company to make a
cash payment of $400,000. Total payments under these agreements were
approximately $1,095,000 and $396,000 for the years ended September 30, 2000 and
1999, respectively.

F-22
<PAGE> 58

BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2000 AND 1999

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NOTE Q - OPERATING LEASES

The Company leases its facilities related to continuing operations under
noncancellable operating leases, which expire through May 2002. Lease expense
for years ended September 30, 2000 and 1999, was approximately $51,000 and
$100,000, respectively. Future minimum lease commitments are as follows:

Fiscal year Amount
----------- ------

2001 $36,000
2002 14,000
--------------------------------------------
$50,000
=======

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NOTE R - STOCK SUBSCRIPTION RECEIVABLE

On August 7, 2000, Biomune entered into an agreement with Donlar Corporation to
sell 427,311 shares of common stock, approximately 19.9%, in exchange for a
$1,115,025 10% note receivable due December 31, 2000. A partial settlement of
the note receivable was made for $563,500, for 1,127,000 shares of Biomune's
common stock. The Company has recorded a subscription receivable for $500,000 at
September 30, 2000, and the remaining $63,500 was paid during September 2000.
See subsequent event footnote for subsequent equity transactions with Donlar
Corporation.

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

NOTE S - SIGNIFICANT SOURCE OF REVENUES

The Company had revenue from one customer in 1999 of approximately $164,000.

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

NOTE T- SUBSEQUENT EVENTS

On November 3, 2000, Biomune and Donlar amended their August 7, 2000 purchase
agreement. The restructured transaction will take place in three phases. Biomune
announced a 1 for 5 reverse split of its common stock. Biomune received $563,500
($63,500 prior to fiscal year end) in cash as partial payment to the $1.1
million note and issued 1,127,000 shares of its common stock to Donlar.

F-23

<PAGE> 59
BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2000 AND 1999

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NOTE T - SUBSEQUENT EVENTS - CONTINUED

Secondly, Donlar transferred the exclusive right to distribute and the exclusive
right to all future sales from Donlar's crop nutrition management and oil field
products to Biomune. Biomune also received certain research and development
activity and $1,850,000 in cash, in exchange for issuing 40,152,520 additional
shares of common stock, so that Donlar now owns approximately 96% of Biomune's
common stock. In addition, Donlar cancelled the remaining portion of the $1.1
million note payable to Biomune. Donlar now owns 41,279,520 shares of Biomune's
common stock.

Donlar plans to transfer to Biomune the balance of its assets, except for
Donlar's existing patent rights and all intellectual property relating to
Donlar's genetic research activities.

On November 3, 2000, the current Board of Directors of Biomune resigned after
the following members were appointed to the new Board: Thomas C. Dorr, Dean R.
Kleckner, Robert W. Cooper Sr., Robert G. Martin and Larry P. Koskan.

The Company had net operating loss carryforwards of approximately $35.6 million
at September 30, 2000 for income tax purposes. Pursuant to Sections 382 and 383
of the Internal Revenue Code, the annual use of the Company's net operating loss
carryforwards are subjected to limitation when a cumulative change in ownership
(as defined by the Internal Revenue Code) of more than 50% occurs within a three
year period. In October 2000, 96% of the ownership of the Company was acquired
by Donlar Corporation, thereby, subjecting the Company to a limitation on the
annual usability of the loss carryforwards. This limitation applies only to the
carryover losses that the Company incurred prior to the change in ownership.

In December 2000, the Board of Directors elected to create a new stock option
plan. The plan reserves 2,000,000 shares of Biomune common stock.

The Company has elected to change its fiscal year end from September 30th to
December 31st.

F-24