DALTEX MEDICAL SCIENCES INC, 10-K, 1996-11-14

DALTEX MEDICAL SCIENCES INC
10-K, 1996-11-14
PHARMACEUTICAL PREPARATIONS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)

For the fiscal year ended July 31, 1996

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the transition period from ___________to _________

Commission File Number: 0-14026

Daltex Medical Sciences, Inc.
(Exact name of Registrant as specified in its charter)

Delaware 13-3174562
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

50 Kulick Road, Fairfield, New Jersey 07004
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (201) 227-5066

Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
None Not Applicable

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

Common Stock, $.01 par value; Class A Warrants, Class B Warrants
(Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No___

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]

As of October 18, 1996, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $269,140.

As of October 21, 1996, the Registrant had 8,632,699 shares of Common Stock
outstanding.

Documents Incorporated by Reference: See Part IV. Item 14

<PAGE>

PART I

ITEM 1. BUSINESS

GENERAL

Daltex Medical Sciences, Inc. (the "Company"), incorporated on
July 28, 1983 in the State of Delaware, is a developmental stage pharmaceutical
and medical device company. The business objectives of the Company are to
identify, develop and market certain medical device and pharmaceutical product
technologies designed to reduce the cost of specific diagnostic tests or
therapeutic treatments and to increase the accuracy, efficacy and/or safety of
these tests and treatments in hospital and home health care environments.

The Company owns or has rights to a variety of medical device
and pharmaceutical technologies, including, (i) antimicrobial materials,
compounds and processes to treat venous catheters, vascular grafts, surgical and
other implants, wound dressings and disposable gloves to prevent or reduce
infection and to inhibit the transmission of infectious diseases, (ii)
nutritional supplements for prevention of atopic diseases, (iii) skin care
pharmaceutical technologies, both ethical and over-the-counter, and (iv) a
mapping and potential screening system, based on ultrasound technology, for the
location and early diagnosis of breast cancer. See "Product Technologies." The
development and licensing of many of these products will require extensive
laboratory tests and clinical evaluation and must be cleared by various
governmental regulatory agencies before they will be available for marketing.
This process may take several years and significant financial resources to
complete, and there can be no assurance that such regulatory clearances or
approvals will be obtained or that the Company will have sufficient financial
resources to complete the developmental or approval processes. See "Governmental
Regulation." Due to the Company's financial condition, it has dramatically
reduced marketing and sales activities and is considering a possible liquidation
of the Company. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."

Of the foregoing technologies, during the fiscal year ended
July 31, 1996, the Company has concentrated its efforts on (i) extremely limited
research and development activities in the field of antimicrobial technology,
while continuing to seek suitable partners to further commercialize its
antimicrobial technologies, (ii) protecting and enhancing its intellectual
property rights in antimicrobial technology and in an invention concerning the
prevention of atopic diseases, (iii) attempts to market and sell its
antimicrobial disposable examination and surgeons' gloves outside the United
States, and (iv) attempts to obtain clearance in the United States from the
United States Food and Drug Administration ("FDA") for the sale of such gloves.
In addition, the Company is still endeavoring to find a suitable commercial
partner for its antimicrobial dentifrice for veterinary applications.

While in certain limited cases the Company may directly market
its products to end users, the Company has, in the past, entered into licensing
agreements or distribution arrangements for the marketing and distribution of
its products and manufacturing agreements with third parties. The Company
currently has definitive license agreements and cooperative development
agreements for the research, development and commercialization and/or the
production of prototypes with respect to the following technologies: (i) the
application of the antimicrobial materials to make polyurethane-based
cardiovascular catheters, related devices and wound drains and (ii) the
application of the antimicrobial materials to seven medical implant product
areas. In addition, the Company plans to pursue cooperative

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development agreements with respect to the application of antimicrobial
materials to (i) intravenous tape and external dressings; (ii) tracheal suction
catheters; (iii) urinary incontinence devices; and (iv) acne and wart treatment
devices.

The Company plans to continue to investigate and pursue joint
venture and licensing opportunities with established pharmaceutical or medical
companies, research organizations and revenue-producing companies to assist the
Company in marketing and distributing its existing technologies. However, no
assurance can be given that the Company will be able to consummate any future
transactions on terms attractive to the Company or that the Company will have
the financial resources to remain in business while such licensing and joint
venture activities are being pursued, and the Company may consider a
liquidation.

The Company's research and development activities are on hold
or are extremely limited due to the Company's limited resources and as reflected
in the Report of the Independent Auditors, there is substantial doubt concerning
the Company's ability to continue as a going concern. The Company is continuing
to actively explore a number of ways of raising additional capital, including
loans, various equity offerings, private placements, mergers with
revenue-producing entities, and a sale of the Company's Common Stock or assets.
In this respect, the Company has lowered the exercise price and extended the
exercise period for its Class A and Class B Warrants and has received advanced
licensing fees from one licensee. However, to date the Company has received no
commitments for a sale or merger of the Company and there can be no assurance
that the Company's attempts to sell or merge the Company or to raise additional
capital will be successful or that the Company will be able to continue as a
going-concern. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 2 to Notes to Financial
Statements.

TECHNOLOGY LICENSING ARRANGEMENTS

(i) Antimicrobial Products

(1) Catheters and Cardiovascular Products. Pursuant to a
definitive license agreement entered into in March 1991 (the "Arrow License")
with Arrow International, Inc. ("Arrow"), a leading manufacturer and marketer of
catheters and cardiovascular products, the Company has sublicensed to Arrow
certain applications of its antimicrobial technology that has been licensed by
the Company from Columbia University (the "University"). See "Product
Technologies - Licenses With the University." Pursuant to the Arrow License,
Arrow is obligated to pay periodic royalties, including minimum annual
royalties, to the Company based upon units sold in several product applications
which incorporate the Company's antimicrobial technology and quarterly
development phase payments for product applications not yet offered for sale.
The term of the Arrow License is the longer of the life of any issued patent
which has claims covering one or more of the product applications or ten years.
In January 1991, Arrow introduced to the market, pursuant to a 510(k)
notification filed with the FDA, its first antimicrobial product, a multi-lumen
central venous catheter with antiseptic surface, incorporating the Company's
antimicrobial technology. Clinical tests sponsored by Arrow demonstrate that the
treated catheter surface provides significant inhibition of organisms associated
with hospital-based infections without side effects, such as toxicity or
thrombogenicity. In December 1994, Arrow reported to the Company that it had
received FDA clearance to market a second antimicrobial product, the
percutaneous sheath introducer system ("PSI"), incorporating the antimicrobial
technology which the Company had licensed to Arrow. In January 1996, Arrow
introduced the PSI to the marketplace. Since that time, the Company has

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received nominal quarterly royalty payments based on limited sales of the newly
marketed PSI, instead of quarterly development fees related to this product.
However, there can be no assurance that Arrow's sales of PSI units will increase
or that the Company will receive significant royalties from the sale of this
product in the future.

In October 1995, the Company and Arrow agreed to modify the
terms of the existing Arrow License (the "Modified Arrow License") concerning
only those license fees payable to the Company by Arrow for antimicrobially
treated multi-lumen central venous catheters. Pursuant to the Modified Arrow
License, Arrow paid the Company a one-time royalty of $600,000 for the period
August 31, 1995 through September 1, 2000, of which 50% was paid in November
1995 to the University pursuant to the 1987 License Agreement (as hereinafter
defined), for a multi-lumen central venous catheter with antiseptic surface
(exclusive of silicone Hickman/Broviac type, implantable port or peripherally
inserted central venous catheters) in lieu of the periodic royalty currently
paid pursuant to the Arrow License. After September 1, 2000, the periodic
royalty payments provided for in the Arrow License for the multi-lumen central
venous catheters will resume and will be adjusted to reflect increases in the
Consumer Price Index through September 1, 2000. All other terms and conditions
of the Arrow License (including Arrow's obligation to make quarterly royalty
payments based on sales of PSI units sold, and quarterly development phase
payments to the Company for those products Arrow has developed incorporating the
Company's antimicrobial technology, once they have received regulatory clearance
and have reached the marketplace), except those terms modified by the Patent
Settlement Agreement of January 1, 1995, remain in full force and effect. In
addition, the Modified Arrow License does not modify or alter the terms of the
Patent Settlement Agreement. For a discussion of the Patent Settlement
Agreement, see " Item 3. Legal Proceedings" of the Company's Annual Report on
Form 10-K for the fiscal year ended July 31, 1995.

In fiscal 1996, the Company received periodic royalties and
development fees under the Arrow License in excess of eighty five percent (85%)
of the Company's total revenues. In addition, in November 1995, the Company
received $75,000 from Arrow to help fund the payment of legal costs incurred by
the Company in connection with the Patent Interference Proceedings and the
Patent Settlement Agreement. The loss of these funds would have a material
adverse effect on the Company's financial position and results of operations.
See "Item 7. Management's Discussion and Analysis" for a discussion of the
impact of the Modified Arrow License on the Company's results of operations.

Pursuant to the Patent Settlement Agreement, the Arrow License
has been amended to a coexclusive grant of a sublicense to Arrow and Becton
Dickinson and Company ("Becton Dickinson"), on a royalty bearing basis, with
respect to two applications of the antimicrobial technology for the manufacture,
use and sales of IV catheters and peripherally inserted central venous
catheters. As amended pursuant to the terms of the Patent Settlement Agreement,
this coexclusive sublicense entitles Becton Dickinson to receive the additional
royalties Arrow has agreed to pay to the Company based on sales of
antimicrobially treated central venous catheters. Under the Patent Settlement
Agreement, Arrow alone retains the exclusive right to manufacture and sell
antimicrobially treated central venous catheters incorporating the antimicrobial
technology already sublicensed to Arrow by the Company. Becton Dickinson has
also agreed to license to the Company, on a royalty bearing basis, one of its
patents with the right to sublicense it to others. The Patent Settlement
Agreement will allow the Company the opportunity to continue to seek
sublicensees of applications of the antimicrobial technology licensed from the
University, other than those applications governed by the terms of the Patent
Settlement Agreement.

<PAGE>

(2) Medical Implants. Pursuant to the terms of a definitive
license agreement entered into in May 1992, a leading manufacturer of medical
implants has been testing the Company's antimicrobial technology with a range of
medical implant products in seven product areas not previously licensed to
others. Pursuant to this agreement, the manufacturer is obligated to pay
royalties, including minimum annual royalties once commercialized, to the
Company based upon units sold within three market segments in product
applications incorporating the Company's antimicrobial technology. The Company
receives non-refundable annual development fees in advance for product
applications not yet offered for sale, covering products following the premarket
notification procedure or until an investigational device exemption ("IDE") is
delivered to the FDA for those products using the premarket approval ("PMA")
regulatory procedure. Development fees due for products using the PMA procedure
will resume two years after delivery of the PMA to the FDA until final FDA
approval has been obtained. The term of the license agreement is for the life of
any issued patent licensed to the manufacturer under the agreement with claims
covering one or more of the licensed product applications, unless earlier
terminated by the manufacturer in its sole discretion or by the Company due to
the manufacturer's failure to cure a default in the fulfillment of its
obligations under the agreement. In October 1994, the manufacturer informed the
Company that it had received FDA clearance to market one application of the
antimicrobial technology to an implanted medical device. The minimum annual
royalty for this market segment will be equal to the development fee. In October
1995, the manufacturer informed the Company that pursuant to the 510(k)
notification procedure, it had received FDA clearance in April 1995 to market
two additional implanted medical device products incorporating the Company's
antimicrobial technology. With the recently received FDA clearance of these two
additional products, the manufacturer has advised the Company that it has
decided to shift its market introduction efforts to these two newly approved
medical devices, and is currently working on a protocol for a clinical trial
involving six surgical centers. The manufacturer has advised the Company that it
has entered the marketplace with respect to one of these products and
anticipates that it will introduce the remaining two products to the marketplace
by the end of calendar 1996. Based upon the regulatory success to date, the
manufacturer has also begun work on some basic product performance models
involving another product application incorporating the Company's antimicrobial
technology on a limited basis, until a product specification is developed and
preliminary testing is complete. The manufacturer will continue to pay the
annual development fees to the Company on all of the applications licensed to
the manufacturer, until the products are sold; thereafter, the Company will
receive royalties based on the number of units sold of each product. The
manufacturer also has advised the Company that it intends to submit to the FDA
additional applications under the 510(k) notification procedure seeking
clearance to market additional products in other market segments; although,
there can be no assurance that any other FDA clearances or approvals for these
other applications will be obtained.

The Company is currently discussing with this manufacturer the
possibility of further licensing certain of the Company's technology to this
manufacturer or a sale of such technology to this manufacturer.

In fiscal 1996, the Company received development fees pursuant
to this license approximating fifteen percent (15%) of the Company's total
revenues. The loss of these funds would have a material adverse effect on the
Company's financial position and results of operations.

(3) Wound Dressings. In November 1991, the Company entered
into a letter of intent agreement with a new manufacturer of wound dressings,
including burn, decubiti and other ulcer dressings, under which the Company
agreed to execute by March 1992, a definitive licensing agreement

<PAGE>

granting exclusive worldwide commercial rights to the application of the
Company's antimicrobial technology to the manufacturer's product lines
("licensed products") under certain conditions. At the manufacturer's request,
the Company agreed in February 1992 to extend the end of the period for drafting
and executing the definitive license agreement from March 1 until April 1, 1992,
but no agreement was finalized. In 1993, the Company and the manufacturer
re-opened discussions to determine if the manufacturer's products are covered by
claims of any of the issued patents or proprietary information licensed by the
University to the Company; if such products are covered, the Company will
attempt to negotiate a licensing arrangement for application of the Company's
antimicrobial technology to the manufacturer's product lines. Furthermore, the
Company will also discuss and seek appropriate compensation for any unpatented
know-how transferred by the Company which the manufacturer uses in its product
line. There have been no further discussions with the manufacturer. The Company
has placed such a determination on hold in part because of the Company's
extremely limited operational resources and efforts to raise capital, and in
part due to the relatively small market, if any, that a new, small manufacturer
in the field would have.

(4) Gloves. During the fiscal year ended July 1996, the
Company has been in contact with several medical products distributors for the
sale of the Company's antimicrobial latex examination and surgeons' gloves in
Egypt and the Middle East, India, Holland, and in Japan, but there is no
assurance that such contacts will lead to distribution agreements or that any
such distribution agreements will result in actual sales of the Company's
antimicrobial gloves.

The Company received no money from sales of its antimicrobial
latex examination or surgeons' gloves in either fiscal 1996 or 1995.

(ii) Atopic Products

In August 1992, the Company signed an agreement with
Beiersdorf AG of Hamburg, Germany ("Beiersdorf") for the purchase of the
Company's patents, pending patent applications and related know-how relating to
the administration of nutritional supplements for the prevention and treatment
of atopic diseases, including bronchial asthma and atopic dermatitis. Pursuant
to such agreement, the Company received a nonrefundable cash payment of $300,000
as part of the purchase price and would have been entitled to receive varying
percentage royalties on net sales of products based on such patents and
know-how. The Company was also entitled to receive a second cash payment of
$400,000 from Beiersdorf upon the granting of additional patents under pending
European applications for the invention concerning only the prevention of atopic
diseases and the resolution of any opposition challenge raised to such patents.
See "Item 3. Legal Proceedings."

By letter dated October 17, 1995, Beiersdorf informed the
Company that it was abandoning the projects for developing products under the
two German patents Beiersdorf had acquired from the Company pursuant to the 1992
agreement. Consequently the Company is not entitled to any further payment under
the 1992 agreement. Further, under the terms of the 1992 agreement, the Company
has the right to repurchase the subject patents together with subject matter as
defined in the agreement. The repurchase price would consist of the $300,000
non-refundable cash payment received from Beiersdorf plus legal and clinical
development costs of approximately $100,000 representing Beiersdorf's
out-of-pocket expenses. The Company had six months to exercise its right to
purchase.

<PAGE>

The Company received another letter from Beiersdorf on May 8,
1996 inquiring whether the Company wished to accept the offer of repurchase. By
letter dated May 14, 1996, the Company informed Beiersdorf of the Company's
decision to decline the offer to repurchase such patents, because the Company
has been unable to find a pharmaceutical company interested in further pursuing
the technology, and the Company does not presently have the financial resources
required for such repurchase.

The Company's patent counsel was notified by letter dated May
16, 1996 from the Canadian Patent Office that the patent for "Methods and Agents
for the Prophylaxis of Atopy" would be allowed. Additionally, the Company's
patent counsel received notification dated May 29, 1996 from the U.S. Patent and
Trademark Office allowing the U.S. case for such patent with certain claims.
Subsequently, the Company and its U.S. patent counsel have contacted Beiersdorf
concerning these matters.

By letter dated May 23, 1996, the Company informed Beiersdorf
of the estimated costs associated with the filing of the patent and agreed to
cover such costs if Beiersdorf decided not to do so. Beiersdorf responded by
letter to the Company's patent counsel instructing such counsel to advise the
U.S. Patent Examiner to issue the U.S. patent, with Beiersdorf's indication that
the Company cover any related costs. Accordingly, the Company has paid the
issuance fees for the U.S. and Canadian patents.

In October 1996, the Company wrote to German patent counsel to
ask whether Nutricia, the new owner of Milupa AG, had filed an opposition
challenge to the European patent for the Prophylaxis of Atopy, and received a
response informing the Company that the opposition period ends on December 13,
1996. German patent counsel expects to be notified by the European Patent Office
within the next several months whether any opposition challenge was filed.

PRODUCT TECHNOLOGIES

The Company, until March 1, 1994, focused its extremely
limited research and development and commercialization activities on the
following medical technologies, which are in varying stages of research and/or
development or commercialization and the rights to which have been obtained.
Since March 1, 1994 and continuing to date, all research and development efforts
have been put on hold or are extremely limited due to the Company's limited
resources, unless and until the Company can develop positive cash flow from its
more fully developed technologies or raise additional financing.

Pharmaceuticals

(i) Antimicrobial (Antibacterial) Compounds, Processes and Materials
for Reduction of Infection in Vascular Grafts, Surgical and Other
Implants and Inhibiting Infectious Diseases

General. The Company has been engaged in development
activities with respect to certain antimicrobial and antiviral compounds,
processes and related materials for reducing infections associated with
artificial vascular grafts, surgical sutures, wound dressings, urinary and
percutaneous catheters, orthopaedic internal appliances and prosthetics,
surgical and other implants and disposable gloves and condoms by treating them
with certain antimicrobial compounds. The Company's antimicrobial and

<PAGE>

antiviral compounds, processes and materials are designed to reduce the current
incidence of post-operative infections harbored in grafted or implanted foreign
bodies or in the surrounding tissue, hospital-based infections associated within
dwelling catheterization and the transmission of infectious diseases borne in
body fluids.

Most of these antimicrobial compounds and their application in
these particular processes are in the developmental stage. Further research and
development, including animal and human studies, must be completed and
clearances or approvals from the FDA must be obtained for most of the
applications prior to marketing in the United States. See "Governmental
Regulation." In a few cases, however, the research and development of certain
applications of the antimicrobial processes and compounds have been completed,
and the Company has licensed or is attempting to license manufacturers to
develop and market products incorporating such compounds or using such processes
outside of the United States. See "Technology Licensing Arrangements."

From its inception, the Company had placed particular emphasis
on the development and commercialization of the AIDS-related antimicrobial
technology for treating disposable gloves. Since 1981, there has been an
increasing number of AIDS cases reported worldwide. The human immunodeficiency
virus ("HIV") is contracted primarily through sexual contact; however, a number
of cases have been contracted through transfusions of infected blood or blood
products, contact with infected blood or blood products, and from the use of
contaminated needles, typically by intravenous drug users. HIV has been isolated
from body fluids, including blood, semen, vaginal secretions, saliva, tears,
breast milk, cerebrospinal fluid, amniotic fluid and other bodily excretions,
such as urine.

Health care workers, physicians, surgeons, dentists and others
who are exposed to blood and other body fluids are at risk of contracting
blood-borne diseases such as AIDS, hepatitis B and other infections. Moreover,
as the prevalence of HIV infection increases, health care workers are subject to
an increasing potential of HIV and hepatitis B virus ("HBV") exposure, since the
epidemiology of infection of HIV is similar to that of HBV.

It has been demonstrated in many studies, that a latex
membrane such as a glove, which passes integrity testing, will withstand
bacterial and viral challenge and provide excellent barrier protection. The use
of gloves to protect health care workers from infectious diseases is, therefore,
strongly recommended, and gloves are being used regularly and widely. An
effective barrier can be provided only if the gloves are intact, i.e., do not
contain or develop holes or breaks while being used. Holes in the gloves may
result in contamination between health care workers and patients, leading to HIV
and HBV exposure.

The barrier effectiveness of the glove may be, and frequently
is, compromised by inadvertent puncture, scratching or tearing of the glove
during use, from the fingernail or an external instrument, object or source of
energy, such as a cauterization tool. Researchers also have noted that during
ordinary usage, gloves are subject to many types of chemical and mechanical
insults which can weaken the barrier effectiveness of the latex. If bodily
fluids containing viruses or other pathogens seep through the breaks in the
glove barrier or if infectious viral particles pass through latex stressed by
use which has become semi-permeable, the glove user is at increased risk of
infection, particularly if the user has a cut, nick, abrasion or other break in
his skin. Therefore, in spite of the use of gloves, health care workers and
others who are exposed to blood, blood products or bodily fluids are still at
risk of contracting infectious diseases, including AIDS and hepatitis B.

<PAGE>

The Company has developed what it believes is an inexpensive,
proprietary technique for incorporating small amounts of safe and effective,
nonirritating, topical antimicrobial compounds in a dry coating on the glove
interior. Testing has shown that the coating does not affect the physical
properties of the latex barrier but does improve the overall effectiveness of
the glove by increasing the resistance of the latex physical barrier to the
passage of pathogens. Fluids containing HIV, HBV and other infectious diseases
which come in contact with the dry interior coating through a break in the glove
would be exposed to a rapid-acting, anti-infective compound.

The Company believes this application of its antimicrobial
technology to improve the safety and effectiveness of the barrier protection
provided by disposable gloves could provide a significant product enhancement in
the examination and surgeons' gloves marketplace. The Company's antimicrobial
examination gloves have been denied 510(k) clearance by the FDA but have been
cleared by the Canadian Bureau of Radiation and Medical Devices. The Company has
not yet sought pre-market approval from the FDA with respect to its
antimicrobial examination gloves or 510(k) clearance for its antimicrobial
surgeons' gloves, pending resolution of a dispute between the Company and the
FDA concerning 510(k) clearance of the Company's antimicrobial examination
gloves. See "Governmental Regulation."

In August 1992, an article was published in the peer-reviewed
scientific journal, Infection Control and Hospital Epidemiology, presenting the
results of the Company's efficacy testing of its examination and surgeons'
antimicrobial gloves. The article was co-authored by Dr. Shanta Modak and Mr.
Lester Sampath of the Department of Surgery, the University College of
Physicians and Surgeons, Mr. Harvey S.S. Miller, then President and Chief
Operating Officer of the Company, and Dr. Irving S. Millman of Fox Chase Cancer
Center. (Dr. Millman is also the co-inventor with Dr. Baruch S. Blumberg, a
member of the Company's Scientific Advisory Board, of the original hepatitis B
vaccine and the radioimmunoassay for detection of HBV.) In May 1994, another
article was published in Infection Control and Hospital Epidemiology presenting
further results of the Company's efficacy testing using whole blood from
volunteers.

The late Dr. Charles L. Fox, Jr., a former Director of the
Company and a former member of its Scientific Advisory Board, Dr. Keith
Reemtsma, a member of the Company's Scientific Advisory Board, and Dr. Shanta
Modak are the inventors of certain antimicrobial processes and materials for
reducing infection in vascular grafts, surgical sutures, various surgical or
other implants, including heart valves, artificial joints and bones, indwelling
catheters, disposable gloves and certain contraceptive devices. The Company
holds exclusive worldwide commercial licenses, including sublicensing rights, to
the patented and patent-pending antimicrobial technology originally developed at
the University. The Company has entered into certain licensing agreements,
development agreements and letters of intent described above with respect to
these processes and materials. See "Licenses with the University" for a
discussion concerning the status of a dispute with the University over the
license to the antimicrobial glove technology.

Licenses with the University. Pursuant to an agreement
executed in January 1985 with the University (of which Dr. Fox was and Drs.
Reemtsma and Modak are affiliates), the Company: (a) agreed to fund research and
development with respect to the Company's antimicrobial processes and materials
in an amount equal to $175,000 per annum for two years; (b) granted a $50,000
fellowship to the University in connection with such research and development
program; (c) issued to the University 18,750 shares of Common Stock and (d)
agreed to pay a royalty to the University based on the net sales price of any
products resulting from the sponsored research, in an amount equal to 50% of the
royalty

<PAGE>

received from sublicensees, if any, or, if there are no sublicensees, a royalty
to be determined by an independent fairness opinion from a qualified expert who
is mutually acceptable to the University and the Company based in part upon a
marketing plan prepared by the Company, payable for the life of any patents
issued in connection with such sponsored research. If any invention resulting
from such research is not patentable, the royalty will be payable for ten years
at one-half the royalty rate for patentable inventions determined by such
opinion. The research term under the agreement was extended on a no-cost basis
by the parties until June 1987 and is now completed.

Two U.S. patents issued in January 7, 1986 and April 8, 1986,
respectively, were covered under such agreement of January 1985.

In December 1985, the University granted the Company a second
license for exclusive worldwide rights to commercially exploit the subject
matter under a third U.S. patent issued in September 1986.

Two inventions arose during the course of the
Company-sponsored research described above; an invention by the late Dr. Fox and
Dr. Modak relating to the use of silver sulfadiazine alone or in combination
with other agents in compositions or on articles, such as condoms, to inhibit
the transmission of the AIDS virus, HBV and other sexually transmitted diseases
(the "AIDS-related invention"); and anti-infective gloves and other medical
devices invented by the late Dr. Fox and Dr. Modak and later by Dr. Modak and
Dr. Lester Sampath (also affiliated with the University) (the "Device
Invention").

In December 1987, the Company was granted a third license by
the University under U.S. patent application Serial No. 018,624 filed in
February 1987, entitled "Method of Inhibiting the Transmission of the AIDS
Virus," and paid the University a total of $50,000 as an initial license fee for
the exclusive worldwide commercial exploitation of the original AIDS-related and
Device Inventions described above ("1987 License Agreement"). On May 10, 1989,
this license was amended by written amendment to include for no additional fee,
a U.S. patent application entitled "Method of Preparing an Infection Resistant
Medical Device." As amended, the 1987 License Agreement included not only the
two specifically mentioned patent applications, but further included "any
patents included thereon, and any foreign counterparts thereof, including any
continuations, continuations-in-part, divisions, additions, reissues, and
extensions thereof." The University had agreed in principle at that time to
include the newest device application on the antiviral glove under the license
agreement without requiring the payment of an additional fee.

The original AIDS-related invention was claimed under U.S.
patent application, entitled "Method of Inhibiting the Transmission of AIDS
Virus" but was later abandoned in favor of the expanded AIDS-related
continuation-in-part application filed in October 1988, which resulted in a
patent issued in August 1990. Additionally, in June 1991, another AIDS-related
continuation-in-part application Serial No. 678,260 entitled "Composition for
Inhibiting Transmission of Hepatitis B Virus" was filed, and resulted in an
issued patent in August 1994.

However, since the Company has been unsuccessful in licensing
to third parties two of the issued patents and one patent application of the
AIDS-related invention, the Company has proposed, and the University has agreed
in principle, that the Company reassign such patents and patent application to
the University; however, the Company has not received written confirmation of
this agreement in

<PAGE>

principle to date. The Company and the University are currently negotiating a
settlement of legal fees charged to the Company by the University's patent
counsel for the prosecution and maintenance of the two issued patents and the
patent application.

The original Device Invention was claimed under U.S. patent
application, Serial No. 154,920, entitled "Method of Preparing an
Infection-Resistant Medical Device" filed in February 1988, but was later
abandoned in favor of a continuation-in-part patent application filed in October
1988 entitled "Infection-Resistant Compositions, Medical Devices and Surfaces
and Methods for Preparing Same," which resulted in issued U.S. Patent No.
5,019,096 (the "Omnibus Patent"). The Omnibus Patent covered not only
infection-resistant medical gloves, but also covered other infection-resistant
medical devices, such as catheters and wound dressings. Another
continuation-in-part application to the Omnibus Patent was later filed on July
18, 1990 (Serial No. 555,093) which resulted in U.S. Patent No. 5,133,090 (the
"Glove" patent), which specifically covered antiviral gloves.

The terms of the third license agreement are the same as in
the foregoing licenses with the University, except that the Company and the
University will receive 45% and 55%, respectively, of any sublicensing revenue
after the Company has received net revenues from its sublicensees of $3 million.
In February 1989, the Company reached an agreement in principle with the
University to modify the sublicensing fee-sharing arrangement under the third
license of December 1987 to a scaled percentage arrangement, based on net
revenues received from sublicensees.

The Company believes that the issued patents and pending
applications covered by the third license agreement and the license agreement in
preparation pursuant to the agreement in principle with the University discussed
below, will have broad use in implanted as well as external anti-infective
medical devices.

As stated above, the Device Invention was claimed in U.S.
patent application Serial No. 154,920 filed in February 1988 which was later
abandoned in favor of the expanded continuation-in-part application Serial No.
258,189 filed in October 1988. The second of these applications matured into the
Omnibus Patent dated May 28, 1991 described above, claiming part of the subject
matter with the remainder of the subject matter being the subject of a further
continuation application filed in order to provoke an interference with two
issued U.S. patents. Three interference proceedings were officially declared on
March 17, 1994. The first involved the continuation application and U.S. Patent
No. 4,925,668, assigned to Becton Dickinson; the second involved the
continuation application and U.S. Patent No. 4,999,210, assigned to Becton
Dickinson; and the third involved the continuation application and U.S. Patent
No. 5,013,306, assigned to Becton Dickinson. The third interference was
dissolved at the request of the University on the grounds that the invention
defined by the interference counts was not disclosed in the continuation
application.

The Company, the University, Becton Dickinson and Arrow (a
sublicensee of the Company having rights to certain patents licensed from the
University to the Company) entered into a Patent Settlement Agreement dated as
of January 1, 1995 settling all disputes among the parties over the rights to
the patents involved in the Interference Proceedings. See "Item 3. Legal
Proceedings" of the Company's Annual Report on Form 10-K for the fiscal year
ended July 31, 1995 for a discussion of the resolution of the Interference
Proceeding and the terms and conditions of the Patent Settlement Agreement.

<PAGE>

By letter dated February 8, 1996, the Company has agreed that
it will support the research efforts directed by Dr. Shanta Modak, Department of
Surgery of the University. Accordingly, the Company has made a commitment to
make a conditional research gift in the amount of $20,000 to Dr. Modak's
laboratory in recognition of the consultation service and assistance by Dr.
Modak and her colleagues in support of the Company's efforts in continuing to
obtain clearance from the FDA to market the Company's antimicrobial gloves. This
research gift will be paid upon the first to occur of the following: (i) the
Company's receipt of clearance from the FDA to market its antimicrobial gloves;
or (ii) the Company successfully enters into a business venture with a revenue
producing company relating to the production and sales of such antimicrobial
gloves. Such gift has no bearing or effect on prior royalty or other payment
arrangements between the Company and the University.

At the request of the University in October 1991, the Company
offered to handle for accounting purposes the successor antiviral glove
application and improvements under a separate license agreement, without any
additional license fee, identical in all respects to the 1987 License Agreement,
since the inventorship of the glove differed from that of the other patents
contained in the 1987 License Agreement. This was done at the University's
request to facilitate the University's accounting department's apportioning
royalty payments among different inventors. At the University's request and by a
separate letter in October 1991, the Company also agreed to negotiate the
royalty arrangement for the glove technology directly without involving an
independent expert and a fairness opinion, a requirement under all of the
Company's other license arrangements with the University, including the 1987
License Agreement.

Accordingly, the Company and the University reached an
agreement in principle in 1991 to enter into a separate license agreement for
the glove technology and to negotiate a royalty arrangement. The agreement in
principle contains the negotiated percentage royalty schedule to be paid by the
Company to the University at rates ranging from 2% to 5% depending upon
aggregate net annual sales levels of antimicrobial surgical gloves. The
agreement in principle provides that the Company will pay a 0.5% surcharge on
such net sales of antimicrobial surgical and examination gloves, until the
University receives an additional $400,000 from the surcharge to cover past
research work performed in the Department of Surgery over the last several years
for the benefit of the Company but underwritten by the Department of Surgery.
The agreement in principle also provides that the royalty rates for
antimicrobial examination gloves shall be two thirds of the scheduled rates for
the antimicrobial surgical gloves. The agreement in principle also includes
minimum sales levels increasing if the FDA clearance to market the product is
obtained by the Company as it commercializes the product.

By letter dated December 7, 1993, the University put on hold
signing this separate written license agreement based on the agreement in
principle for the royalty rates on the antimicrobial glove technology, until the
Company and the University are able to work out an acceptable payment schedule
for legal patent-related costs and royalty and development fee payments received
by the Company from sublicensees, one half of which is owed to the University
under existing license arrangements between the University and the Company for
applications of the antimicrobial technology described above.

Effective March 1, 1993, the Company and the University
entered into a research agreement (the "Research Agreement") to the effect that
if revenues from sales of the Company's antimicrobial surgical gloves achieved
at least $2,000,000 in net sales during the research year beginning March 1,
1993, the Company would provide $100,000 in research funding to the University's
Department of Surgery, to support Dr. Modak's work on the antimicrobial latex
technology and $225,000 in research

<PAGE>

funding beginning March 1, 1994 if the Company achieves at least $4,000,000 in
net sales of such gloves during the second research year. Payments were to be
made quarterly, in advance, and on a timely basis in order for the research
effort to be continued by the University, with the first payment due March 1,
1993. The Research Agreement also provided that the Company would be entitled to
a new license agreement concerning the gloves on the same terms as the existing
license agreements. At that time, $75,000 was due to the University under the
Research Agreement for research performed since March 1, 1993 on the antiviral
glove and the successful installation of the antimicrobial surgical glove
technology in the Malaysian factory of the Company's contract manufacturer, Sime
Health Limited ("Sime Health"). $100,000 of the second year's funding represents
a recapture by the University of a portion of the funds expended by the
University for research performed on the Company's behalf by Dr. Modak in the
Department of Surgery for the preceding three years. This Research Agreement
supersedes and revokes the previously disclosed research funding agreements of
January 1990, as amended October 1991, and of October 1992. On November 29,
1993, the Company informed the University that it was suspending authorization
for further research work under the Research Agreement in order to preserve its
extremely limited capital and until the Company received confirmed letters of
credit for sales of its antimicrobial surgical gloves. To date, no such letters
of credit for glove sales have been received.

On December 16, 1993, the Company authorized the final quarter
of research to be performed by Dr. Modak on glove efficacy testing ending March
1, 1994, with the understanding that a payment of $25,000 would be due on
January 31, 1994 and the final payment of up to $25,000 for such research due by
March 1, 1994. The Company's understanding was, and continues to be, that
payment of the $50,000 to the University was conditioned upon the University's
promise to sign the written license agreement based on the agreement in
principle on royalty rates for the glove technology, as provided in the Research
Agreement. By letters received in January 1994, the University stated that it
did not understand its acceptance of the $50,000 payment under the Research
Agreement to obligate it to sign the written license agreement and that it would
wait to see a new financial plan for the Company before granting any additional
licenses. The University also proposed settling the amounts owed to the
University's patent counsel for patent work associated with technology licensed
to the Company by the University since 1991.

In April and May 1994, however, the Company received two
letters from the University. The April letter asked for details of the financial
reorganization plan and requested payment of continuing legal expenses incurred
by the University's patent counsel in various intellectual property activities
undertaken to maintain and enforce the patents licensed by the University to the
Company. The May 1994 letter claims that the Company does not have a license
covering the antimicrobial gloves and that any manufacturing, shipment or sale
of products covered by claims of the University's antiviral glove patent would
be made without benefit of a license. The University requested further
discussions to resolve the issue. The Company sent a response to the University
in June 1994 stating that it believes it has a valid license covering the
antimicrobial gloves, pursuant to the 1987 License Agreement and that all
negotiations relative to the agreement in principle pertain to the royalty rate
thereunder and the Company's willingness and the University's subsequent
agreement to redocument such license in a separate agreement. Further, the
Company believes the Research Agreement obligates the parties to enter into a
separate license agreement for such technology. In any event, the Company
believes that written correspondence, oral agreements and the University's
previous actions and representations on which the Company had relied, as well as
earlier glove sales over the past two years and research conducted by the
University to develop the antimicrobial gloves at the Company's direction and
expense, all of which were with the full knowledge, support and approval of the
University, further indicate that the Company has

<PAGE>

a valid license from the University for such technology. The University has to
date not responded to the Company's June 1994 response letter.

In November 1995, the Company paid the University a total
amount of $385,841: $300,000 (representing the University's 50% share of the
one-time royalty the Company received from Arrow pursuant to the Modified Arrow
License described above), $34,289 (representing the remaining balance due the
University pursuant to a research agreement), $48,071 (representing the
University's 50% share of sublicense and royalty fees received by the Company
from Arrow between April 30 and October 12, 1995), and $3,481 (representing
royalties owed the University, pursuant to the 1987 license agreement and the
agreement in principle, based on net sales of the Company's antimicrobial
examination gloves sold in 1991, 1992 and 1993, which the Company had been
reserving in accrued expenses).

The Company currently owes the University $168,398 for its
share of sublicensing and royalty payments the Company has received from its
sublicensees (comprised of $165,706 through December 31, 1994 and $2,692
received by the Company in October 1996). In addition, the University claims
that the Company has an outstanding balance of $5,711 pursuant to the Research
Agreement; although, as stated above, in November 1995 the Company paid the
University $34,289 representing the amount invoiced by the University for work
completed under such Agreement. The Company and the University are negotiating a
resolution of this matter.

In September 1996, the Company met with the University in an
attempt to (i) resolve certain issues concerning the Company's outstanding
financial obligations to the University and amounts billed the Company by the
University's patent counsel, as described below, and (ii) begin negotiating a
one year renewable license, including proposed royalty rates, for the improved
antiviral glove technology claimed under the U.S. patent entitled "Antimicrobial
Glove Comprising a Rapid Release Matrix System For Anti-Infective Agent
Delivery."

The Company has been billed $630,168 by the University's
patent counsel; although, the Company is disputing a substantial portion of
these fees. Included in this amount is approximately $120,820, representing
charges in connection with the Company's protection of its intellectual property
rights through domestic and foreign patent filings and related matters. Also
included in this amount is approximately $108,560, representing charges in
connection with the two AIDS-related patents and the patent application for
antimicrobially treated condoms which the Company and the University have agreed
in principle to reassign to the University, due to the fact that the Company has
been unsuccessful in licensing these technologies to third parties; however, the
Company has not received to date any written confirmation with respect to this
agreement in principle. Finally, approximately $401,000 is included in this
amount, representing charges in connection with the previously disclosed Patent
Interference Proceedings and subsequent Patent Settlement Agreement. The Company
disputes the Company's responsibility for this $401,000, and the Company and the
University are attempting to negotiate a settlement. Because the Company has
proposed to reassign the two patents and one patent application to the
University, the Company has requested that the University credit the Company for
the $108,560 outstanding amount due the University's patent counsel related to
these matters.

The Company is exploring a number of ways to pay the
outstanding amounts due the University, including loans, raising of additional
capital through various equity offerings, private placements, possible mergers
with revenue-producing entities, and the acceleration of royalty and development
fee payments from sublicensees as well as from sales of antimicrobial gloves. In
light of

<PAGE>

the payments to the University as set forth above, the University has agreed to
work with the Company, through July 1996, with respect to the Company's
financial situation and its relation to the University. However, should the
University revoke the licenses granted to the Company for any reason, the
Company would not have any immediate sources of revenue which would have a
material adverse impact on the Company's operations, cash flow and financial
condition.

The Company has continued to reserve royalties due the
University consistent with the terms of the written license agreement which had
been negotiated between the parties based upon the agreement in principle. At
this time, the Company is working with the University to resolve the matter.

(ii) Nutritional Supplements for the Prevention of Atopic Diseases and
Improved Treatment of Certain Atopic Diseases

In November 1989, the Company was granted assignments of two
patent applications and all right, title and interest to two new inventions,
including one relating to (a) the administration of nutritional supplements to
pregnant mothers and newborns with certain metabolic deficiencies, which may
prevent a broad spectrum of difficult to treat atopic diseases; the other
invention concerns (b) an improved treatment of certain atopic diseases.

(1) Nutritional Supplements for the Prevention of Atopic Diseases

The approach to the prevention of atopic diseases using
naturally occurring nutritional supplements was discovered by Drs. Bodo Melnik
and Gerd Plewig, two noted dermatologists then at the University of Dusseldorf,
Germany. (Dr. Melnik is currently engaged in private practice and is also a
senior lecturer in the Department of Dermatology at the University of
Osnabruck.) Their research identifying the possible origin and prevention of
atopy was published in the September 1989 issue of The Journal of the American
Academy of Dermatology, in the November 1989 and spring 1991 issues of Der
Hautarzt, a German medical publication, and cited in various medical journals.

The Company believes that administering the nutritional
supplement to atopic pregnant mothers before giving birth and during the nursing
period and to newborns during their first three months may prevent certain
atopic diseases, including allergic bronchial asthma, atopic dermatitis,
allergic rhinitis and allergic conjunctivitis, which afflict approximately
10%-15% of the world population and are difficult to treat. If confirmed by
further clinical data, the Company believes the invention to be a significant
scientific discovery, marking the first time the prevention (rather than the
treatment) of bronchial asthma and other atopic diseases has been identified.
Two independent Czechoslovakian researchers, B. Dvorak and R. Stepankova, at
Prague's Institute of Microbiology confirmed the premise of the discovery
regarding dietary supplements and the development of the thymus and the body's
immune system for the first time in animal studies. Their research was presented
in the July 1992 issue of the British scientific journal Prostaglandins
Leukotrienes and Essential Fatty Acids. At present, further research and
clinical investigations are continuing at a number of sites in Germany at no
cost to the Company. In 1994, Drs. Melnik and Plewig published a further paper
detailing the scientific basis of their invention in the Journal of
Dermatological Treatment, vol. 5, pp. 157-161.

<PAGE>

(2) Improved Treatment of Certain Atopic Diseases

The second patent application assigned to the Company by the
inventors in November 1989 concerns an improved topical treatment (rather than
prevention) of outbreaks of atopic dermatitis and eczema using a novel skin
cream preparation. No opposition challenge was filed to the issuance of this
patent; however, the European patent examiner requested clinical evidence that
the preparation was more efficacious than either of its two components used
alone. A clinical study was conducted at a leading private dermatological
laboratory in Germany under Beiersdorf's direction during the summer of 1994.
Beiersdorf reported to the Company in September 1994 that the results were
promising and indicated that the new preparation was better than the steroids
currently used to treat such outbreaks of atopic diseases with the side effects
associated with steroid use. The test results were submitted to the European
patent examiner. A large scale, controlled clinical study was prepared by
Beiersdorf, and these results were also submitted to the European patent
examiner.

Under the terms of the November 1989 agreement with the
inventors, in exchange for the assignment of the patent applications and the
worldwide rights to sell or license products embodying the invention, the
Company is responsible for all future legal costs and fees associated with
filing of the patent applications and taking the necessary steps to
commercialize the invention. In the event that the Company licenses the
nutritional supplement to another company to manufacture, market or sell the
products, the inventors would receive between 20%-30% of such royalty payments
paid to the Company. In the event that the Company, or a company affiliated with
the Company, manufactures, markets or sells products itself, the inventors would
receive a royalty based upon net sales to be determined by a fairness opinion
from a qualified expert, acceptable to both parties.

Sale to Beiersdorf. In August 1992, the Company entered into
a patent purchase arrangement with Beiersdorf to commercialize the invention
involving certain atopic diseases. See "Technology Licensing Arrangements -
Atopic Products."

In October 1992, the Company reached a definitive agreement
with the inventors to allow each inventor to purchase up to 75,000 shares of
Common Stock of the Company for $.01 per share and granted each of them
nonqualified options to purchase 200,000 shares of Common Stock of the Company
at an exercise price of $.01 in return for their assignment of the technology
under the 1989 agreement, together with the right to receive one third of any
revenues paid to the Company by Beiersdorf as royalties based on net sales of
products manufactured or sold under use of patents or related know-how under the
Patent Purchase Agreement between Beiersdorf and the Company. The nonqualified
options to purchase common stock of the Company were in lieu of a share of any
"up-front" cash payments from Beiersdorf for purchase of the patents and
know-how. See "Technology Licensing Arrangements."

By letter dated October 17, 1995, Beiersdorf informed the
Company that it was abandoning projects for developing products under two German
patents involving certain atopic diseases. Although the Company had the right to
repurchase these two patents, the Company decided not to do so.
See "Technology Licensing Arrangements - Atopic Products."

<PAGE>

Subsequently, the Company and its U.S. patent counsel have contacted Beiersdorf
concerning these matters. By letter dated May 23, 1996, the Company informed
Beiersdorf of the estimated costs associated with the filing of the patent and
agreed to cover such costs if Beiersdorf decided not to do so. Beiersdorf
responded by letter to the Company's patent counsel instructing such counsel to
advise the U.S. Patent Examiner to issue the U.S. patent, with Beiersdorf's
indication that the Company cover any related costs. The Company paid the
issuance fees for the U.S. and Canadian patents.

(iii)Skin Care Pharmaceutical Technologies, both Ethical and
Over-the-Counter

The Company is not intending to pursue its technology relating
to skin care pharmaceuticals at this time. For a description of the Company's
technology relating to skin care pharmaceuticals, see "Product Technologies -
Skin Care Technologies, both Ethical and Over-the- Counter" in the Company's
Annual Report on Form 10-K for the year ended July 31, 1995.

(iv) Antimicrobial Dentifrice for Oral Medication

The Company is not intending to pursue its technology relating
to antimicrobial dentifrice for oral medication at this time. For a discussion
of the Company's technology relating to antimicrobial dentifrice for oral
medication, see "Product Technologies - Antimicrobial Dentifrice for Oral
Medication" in the Company's Annual Report on Form 10-K for the year ended July
31, 1995.

Devices

The Company has not actively pursued, and has no intention of
pursuing in the foreseeable future, certain of its medical device technologies
since 1992. For a description of such device technologies and agreements
relating thereto, see the Company's Annual Report on Form 10-K for the year
ended July 31, 1996.

COMPETITION

The medical technology and pharmaceutical industries are
highly competitive, and there are many other entities, including many major
companies and large research centers, developing, manufacturing and marketing
products that are similar to those products and technologies which the Company
has licensed, sold, has developed or has rights to develop, manufacture or
market. Most of these competitors have access to significantly greater
technical, financial and marketing resources than those available to the Company
which could enable these competitors to develop, manufacture and market
competitive products more effectively than the Company. Products of competitors
might dominate their markets or be developed and receive governmental approval
prior to similar products derived from technologies developed by the Company.
Because several of the Company's product technologies are protected by patents
that have expired, will expire shortly or have been abandoned, or because
several

<PAGE>

of the Company's technologies cannot be patented, the Company's success will
depend, in part, upon its ability to market products from these technologies in
a timely manner. Thus, there can be no assurance that products that would
compete directly with the Company's technologies, including certain products of
which the Company may not be aware, will not be introduced into the market
before products derived from the Company's technologies are ready for market
entry. Given that the Company's research and development efforts are currently
on hold or are extremely limited, it is unlikely that the Company will be able
to market its products in a timely manner. In any event, the Company expects
competition to intensify in all fields in which it is involved as new products
in these fields are developed and become more widely known. Although the Company
may have some impact upon those marketing areas involving its technologies that
are developed and marketed successfully by the Company, it is unlikely, for the
reasons discussed herein, that the Company will be a significant factor in the
medical technology and pharmaceutical products industry for the foreseeable
future. The competitiveness of the Company depends on many factors such as
timely FDA clearance to market or approval for proposed products and ongoing FDA
regulations (as in the case of the oral retinoid compounds and the antimicrobial
latex gloves), protection of proprietary rights through the issuance of patents
with enforceable claims and the ability of the Company to make arrangements with
manufacturers and marketers to timely enter a given market. In addition, the
Company's current policy of directing its extremely limited research and
development efforts to technologies that may produce economic benefits for the
Company in the near future necessarily dictates that development of
opportunities of a long-term nature are being deferred.

The Company is aware that several medical products
manufacturers and marketers in the United States and possibly in Europe, are
actively developing and seeking regulatory clearance or approval for an
antimicrobial latex glove which would compete with the Company's proposed
product. There can be no assurance that the Company's product will receive
regulatory clearance enabling it to be sold in the United States, or even if
cleared for sale by the FDA, that it could compete effectively in terms of price
and national and international distribution with gloves sold by a larger, health
care company. In Canada and the United States, as well as in Europe, the
examination glove market is a commodity market-highly sensitive to price and
much less responsive to product features. The Company's examination gloves have
a disadvantage in the marketplace, since they currently bear a premium price due
to the costs of sub-contract manufacturing and the several layers of
distribution required as well as the cost of the antimicrobial compounds used in
manufacture. The Company also does not have a European marketing presence and
must work through others to promote its products.

The Company is aware of existing or developing products which
compete with certain of the Company's proposed products such as skin
moisturizers, over-the-counter retinol (Vitamin A) preparations, and acne and
wart treatments, antimicrobial processes and material to reduce infection in
implants, wound dressings, surgical sutures, urinary and vascular catheters,
special catheters, patented preparations using related products to treat atopic
diseases, and preparations to reduce plaque and related gum diseases. See
"Product Technologies."

PROPRIETARY INFORMATION

The Company owns one patent in each of Canada and Europe for
the oral retinoid for the treatment of age-related skin disorders and one patent
for the silver or zinc sulfadiazine toothpaste. The technology underlying the
patent for the silver or zinc sulfadiazine toothpaste had been the subject of
the Company's research and development efforts relating to antimicrobial
products and, combined with various enhancements, had led to several additional
patents with respect to which the Company holds

<PAGE>

exclusive licenses. See "Product Technologies." The sulfadiazine toothpaste
patent is dated December 17, 1985; the aged skin treatment Canadian and European
patents are dated February 1, 1994 and April 5, 1995, respectively. See "Product
Technologies." Each of the patents not abandoned is or was effective for 17
years, and the currently effective patents will expire between 2002 and 2011. As
a result, there can be no assurance that the Company or its licensees or
purchasers of its patents will be able to develop products from these patented
technologies in a timely manner to take advantage of these patent rights. There
can be no assurance that the Company will develop a commercially marketable
product from any of these patents or that other entities will not assert claims
with respect to any of the Company's technologies or products which are covered
by such patents.

As discussed above, the Company has been assigned patent
rights and the invention with respect to the oral retinoid compound for the
treatment of multiple skin disorders related to aging and the nutritional
supplements for the prevention and treatment of atopic diseases in other parts
of Europe, the United States and Canada. See "Product Technologies." The Company
has also been assigned inventors' rights with respect to the infrared detection
system, the skin moisturizer and the acne and wart treatment devices and has an
agreement in principle for the assignment of inventor's rights to the retinol
moisturizing cream. See "Product Technologies."

In addition, the Company has received three licenses from the
University conveying exclusive worldwide commercial rights to seven patents
concerning antimicrobial compounds, processes and materials. See "Product
Technologies - Antimicrobial Compounds" for discussion of the dispute with the
University over a license to the antimicrobial glove technology.

Assignment of rights differs greatly from an assignment of a
patent or an exclusive license to patented technologies because there is no
protection for the Company from competitors developing and marketing similar
technology. The Company believes that certain of the technologies under
development may be patentable. The Company plans to apply for patents with
respect to the acne and wart devices and an improved version of the
antimicrobial toothpaste, if it finds commercial partners, but there is no
assurance that the Company will develop any patentable technologies or processes
other than the patents which the Company presently owns or in which it currently
has rights. Further, there can be no assurance that any pending patent
application will result in issued patents. The Company's business may be
adversely affected by the cost and delays resulting from any litigation which it
may be required to institute to protect its present patents or any other patent
or rights to a patent it may obtain in the future, or otherwise to protect its
non-patentable technology, and there can be no assurance that the Company would
be successful in any such litigation or that the Company will have the financial
resources to engage in such litigation. In addition, the holders of the other
patents may assert claims of infringement with respect to any product which the
Company or its licensees or purchasers of its patents may develop.

In addition to its patents, the Company relies on certain
unpatented know-how and, subject to available funding, continuing research and
development. As a result, the Company has no protection from other parties
attempting to manufacture and sell similar products. Thus, being the first
company to market the product and to establish a market presence for that
product is important to the Company's success in some areas. Given the Company's
financial condition, it is unlikely that the Company will be able to meet this
competition in a timely manner. See "Competition."

The manufacture and sale of products derived from the
Company's technologies by the Company or its licensees may involve the use of
patented products, technologies or processes or other

<PAGE>

proprietary information, the rights to which are held by other persons or
entities. Failure to obtain needed licenses or patents or proprietary
information held by such other persons could have a material adverse effect on
the Company's ability either to complete the development of a certain technology
or to arrange for the manufacture and marketing of products derived from such
technologies.

RESEARCH AND DEVELOPMENT

The Company's primary business has been, since its inception,
research and development. However, effective March 1, 1994, due to the Company's
financial condition, the Company's research and development activities are
currently on hold. In January 1996, the Company spent $6,400 in research and
development. This amount was paid to the University for the antimicrobial
coating and evaluation of samples of tracheal suction catheters to be shown to a
leading device manufacturer who has expressed interest in a possible licensing
arrangement with the Company. The device manufacturer is currently evaluating
such coated product sampler. The Company performs no research and development
activities on its own. The Company has, in the past, used existing institutional
facilities, on a contractual basis, for the further research and development of
certain of its technologies. See "Product Technologies - Antimicrobial
Technology." Similarly, the Company has, in the past, engaged outside parties to
manufacture prototypes of experimental versions of possible products derived
from its technologies. To assist the Company in its research and development
efforts, the Company has a Scientific Advisory Board comprised of distinguished
scientists and medical practitioners in various fields of science, medicine and
health care technology, two of whom are Nobel laureates. Members of the
Scientific Advisory Board are available for consultation with the management of
the Company on an "as needed," individual basis to evaluate projects, to examine
and review the progress of the Company's research and development activities,
and to assist in submissions to regulatory agencies; although, the Company has
not consulted with any member of its Scientific Advisory Board during fiscal
1996. Due to the need for focused, detailed responses to specific problems
encountered in product development efforts and in submissions to regulatory
agencies and the significant costs involved, the Scientific Advisory Board has
not met in plenary sessions during the last several years but rather, the
Company consults with particular members thereof, from time to time, as
appropriate based on the matter in question. The Scientific Advisory Board
currently does not have a chairperson.

The names and biographies of members of the Scientific
Advisory Board are as follows:

BARUCH S. BLUMBERG, M.D., Ph.D. - Fox Chase Distinguished Scientist and Senior
Advisor to the President, Fox Chase Cancer Center. Author or coauthor of over
340 articles in medical and scientific texts, Dr. Blumberg published his
exhaustive research on the relationship of hepatitis B to cancer of the liver
and won the 1976 Nobel Prize in Physiology or Medicine. He is a fellow in
several gastroenterological associations, a member of the National Academy of
Sciences, and has received wide recognition for contributions to his field. Dr.
Blumberg is the co-inventor of the first vaccine for the prevention of hepatitis
B and the radioimmunoassay for detection of the disease.

WILLIAM N. LIPSCOMB, JR., Ph.D. - Abbott and James Lawrence Professor of
Chemistry, Emeritus, Harvard University. Dr. Lipscomb received the Nobel Prize
in Chemistry in 1976 for his original research on the structure and bonding of
boron hydrides and their derivatives. His research in the past 20 years has
included studies of the structure and function of enzymes and other proteins.
Dr. Lipscomb, a member of the National Academy of Sciences, and member of many
European societies as well, has

<PAGE>

lectured widely in the United States and abroad. He has published two books,
authored or co-authored over 600 scientific articles and edited several
scientific journals.

ALBERT M. KLIGMAN, M.D., Ph.D. - Emeritus Professor of Dermatology, University
of Pennsylvania School of Medicine. Dr. Kligman has authored or co-authored over
600 scientific publications and is the recipient of major awards for his
published works and original dermatological research. He has also served as
President of the Society of Investigative Dermatology and other professional
organizations. His original research includes disorders of the hair, acne,
fungus and bacterial infections, photobiology, dry skin and aging. Discoverer of
the use of retinoic acid in the topical treatment of acne and for photoaged
skin, the widely sold commercial product is known as Retin-A. A major work on
acne, entitled Acne: Morphogenesis and Treatment, has been co-authored with Gerd
Plewig, M.D. Dr. Kligman is co-inventor of the Company's prescription oral
retinoid drug for the treatment of multiple skin disorders associated with
aging. Dr. Kligman has developed consumer skin care products for the Company,
including acne and plantar's wart treatment systems, a non-greasy petrolatum
moisturizer, and the retinol moisturizing cream for topical use in conjunction
with the treatment of aging-related skin disorders by an oral retinoid compound.

LOUIS R.M. DEL GUERCIO, M.D. - Chairman of the Board and Member of the Executive
Committee of the Company, Director; Professor and Chairman of the Department of
Surgery, New York Medical College; Chief of Surgery, Westchester County Medical
Center. In addition to serving as Consultant in Surgery to ten hospitals in New
York and Connecticut, Dr. Del Guercio has served on national public advisory
committees concerned with health care issues, including the Surgery Study
Section of the National Institutes of Health Division of Research Grants and the
FDA's Panel for Review of General and Plastic Surgery Devices. He is also
Editor-in-Chief of Critical Care Monitor. Dr. Del Guercio has invented and
patented several medical devices and has published three books and over 300
articles relating to his work. Dr. Del Guercio is the inventor of the Company's
roentgen densitometer (sensor analyzer) and self-propelled catheter technology
and is co-inventor of its fully mechanical clockwork-driven infusion pump.

BODO MELNIK, M.D. - Dermatologist and Senior Lecturer, Department of
Dermatology, University of Osnabruck, Germany. Prior to entering private
practice, Dr. Melnik held various positions at academic institutions including,
most recently, Assistant Medical Director of the Department of Dermatology at
the University of Dusseldorf. Dr. Melnik was also previously a post-graduate
fellow in the Cardiovascular Research Institute of the University of California
and a visiting scientist at the Gladstone Foundation Laboratories for
Cardiovascular Disease in San Francisco from 1982-1984. He has published over 52
scientific papers and 14 book articles on various topics in the field and
received the Felix-Hoppe-Seyler prize awarded by the German Society for
Laboratory Medicine in 1989. Dr. Melnik is a co-inventor of the Company's
nutritional supplements for the prevention and treatment of atopic diseases,
including allergic bronchial asthma, atopic dermatitis, allergic rhinitis and
allergic conjunctivitis.

DOV JARON, Ph.D. - Professor of Electrical Engineering and Professor and
Director of the Biomedical Engineering and Science Institute of Drexel
University. Dr. Jaron has served as a member of and consultant to the FDA's
Panel on Circulatory System Devices and as a member of its Panel on Ultrasound
Devices. In addition to being the recipient of numerous research grants and
fellowships, Dr. Jaron has written over 100 articles and papers for scientific
and medical journals. He also retains a position as Adjunct Professor of
Radiology at Jefferson Medical College of Thomas Jefferson University. He is a
co-inventor of the Company's ultrasound diagnostic system for breast cancer.

<PAGE>

KEITH REEMTSMA, M.D. - Professor of Surgery and former Chairman of the
Department of Surgery, Columbia-Presbyterian Medical Center; Director of
Surgical Service at Columbia-Presbyterian Medical Center. Dr. Reemtsma has
served on various committees of the American Board of Surgery, the American
College of Surgeons and the Society of Clinical Surgery; he served as president
of the Society in 1976. Having served as series co-editor of several
publications for surgeons, he has also contributed chapters to 27 medical texts,
has published over 225 articles and is a co-inventor of the Company's
antimicrobial materials and processes, with the late Dr. Fox and Dr. Shanta
Modak, also of the University.

VINCENT J. CRISTOFALO, Ph.D. - Audrey Meyer Mars Professor and Director, Center
for Gerontological Research, Professor of Pathology and Laboratory Medicine and
Professor of Biochemistry, Allegheny University of the Health Sciences. Dr.
Cristofalo is the founding Director of the University- wide Institute on Aging,
committed to the promotion of multi-disciplinary research, education and
clinical service programs on aging throughout the Allegheny Health, Education
and Research Foundation system. A leading research scientist whose pioneering
work on growth and aging of cells has earned him wide recognition in the fields
of gerontology and cellular physiology, Dr. Cristofalo was among the first to
document the dynamics and regulation of cell replication in the aging process.
In 1986, he was elected a Fellow of the American Association for the Advancement
of Science and received a Geriatric Leadership Award from the National Institute
on Aging. He has also received both the Brookdale and Kleemeier Awards for
Scientific Research from the Gerontological Society of America. He also serves
at the University of Pennsylvania as Professor Emeritus of Physiology in the
School of Medicine and in the School of Veterinary Medicine and is a member of
the graduate faculty. In addition to his research and teaching responsibilities,
Dr. Cristofalo has served as chairman of numerous scientific, academic,
editorial and government-sponsored groups. He has served as the Gerontological
Society of America's President from 1990-1991. Most recently, he has been
elected as President of the American Federation for Aging Research. He currently
is an editorial board member on numerous scientific journals and has published
more than 180 scientific papers and journals.

DIANE O. MCGIVERN, Ph.D. - Professor and Head, Division of Nursing, New York
University. Dr. McGivern's area of specialization is medical-surgical nursing,
and she has published many articles and papers in her field. She has also served
as Associate Dean, Director of Undergraduate Studies and Director of the Kellogg
Public Health Policy Fellowship Program at the School of Nursing of University
of Pennsylvania. She was elected a Fellow of the American Academy of Nursing in
1979 and also completed a term as a Robert Wood Johnson Health Policy Fellow
working in the office of Senator David F. Durenberger (R, Minn.). Dr. McGivern
lectures widely on nursing, health care and public policy issues, serves on the
Board of Directors of the National Health Council and is Vice-Chairman of the
Council of Baccalaureate and Higher Degree Programs of the National League for
Nursing.

JOSEPH D. COHN, M.D. - Clinical Professor of Surgery, University of Medicine and
Dentistry of New Jersey. A graduate of the Massachusetts Institute of
Technology, Dr. Cohn has served on many medical and scientific committees,
including the General and Plastic Surgery Device Classification Panel of the
Food and Drug Administration and as consultant to the Gastroenterology and
Urology Section of the General Medical Devices Panel of the FDA. He is currently
a member of the Device Classification Panel of the American College of Surgeons.
In addition to numerous teaching and research appointments and fellowships, Dr.
Cohn has written over 150 articles, papers and books.

<PAGE>

MITCHELL LITT, Ph.D. - Professor, Undergraduate Curriculum Chair, Department of
Bioengineering, Professor of Chemical Engineering, University of Pennsylvania.
Dr. Litt has published over 90 papers on biological transport mechanisms,
biorheology and biophysical chemistry. He is an editor of Biorheology,
Environmental Letters and Annals of Biomedical Engineering. Dr. Litt has
received numerous research grants in various areas including cystic fibrosis,
characterization of cervical and tracheal mucus, narcotic addiction of human
newborns and ionic diffusion. He is also the recipient of several awards
including one from the American Academy of Ophthalmology and Otolaryngology.

MANUFACTURING AND MARKETING

The Company does not own any facilities for the manufacture of
any of the products that the Company has developed or may develop from its
technologies. The Company utilizes third parties to manufacture and market its
products. In certain instances, such as for its antimicrobial examination and
surgeons' gloves, the Company has arranged for the products to be manufactured
for it through specific agreements with specialty subcontractors.

As part of a settlement agreement with Safeskin Corp. of Boca
Raton, Florida in connection with the Company's proposed acquisition thereof,
Safeskin agreed to supply the Company with three million antimicrobial latex
examination gloves as ordered by the Company during the 18 months ending January
1993 at no additional cost to the Company. The Company used antimicrobial
examination gloves manufactured by Safeskin for the Company in 1991, 1992 and
1993 for distribution in Canada, Germany and Japan. To date, the Company is
still owed three million antimicrobial latex examination gloves from Safeskin.

Subject to available financing, the Company intends to enter
the market with its technologies and products derived from its technologies
generally through license or joint venture arrangements; in certain instances,
such as its antimicrobial gloves, it has made marketing arrangements with one or
more independent distributors with marketing capabilities in the field. In the
case of the atopy invention, the Company had sold the patents and related
know-how to a large international medical products company. See "Technology
Licensing Arrangements."

GOVERNMENTAL REGULATION

All of the technologies involved in the Company's projects
involve products which are subject to substantial federal and state regulation.
The products must all comply with the requirements of the Federal Food, Drug and
Cosmetic Act (the "Act") administered by the FDA, as well as similar laws in
certain foreign countries in which the Company's products are sold.

Medical Devices

Certain of the potential products will be regulated under the
Act as medical devices. All medical devices which the Company might market
itself or license others to market must be approved by the FDA for distribution
in advance of any sale. Some medical devices may be cleared through FDA using
the expedited 510(k) pre-market notification procedure, if the subject device
can be shown to be "substantially equivalent" to a device marketed prior to May
28, 1976. The kind and amount of data necessary to make such a showing varies by
device and may involve substantial expenditures and delays before the FDA will
concur in permitting marketing. If a device is not deemed "substantially
equivalent",

<PAGE>

a Pre-Market Approval Application ("PMA") must be filed for the device. Such an
application includes extensive preclinical, animal and clinical testing which
can be expensive and time-consuming. Clearance to market pursuant to a 510(k)
notice may be obtained within 90 days after filing, although a longer period of
time may often be required. Clearance of a PMA may take from one to two years
from filing, or in certain circumstances, even longer. There is no assurance
that the FDA will approve a PMA despite the significant expenditures for testing
the device and for submission of the application.

Once a medical device is cleared for marketing, it is subject
to pervasive continuing regulation, including registration and listing, possible
restrictions on distribution and compliance with the Good Manufacturing
Practices ("GMP") regulations which control receipt of materials, manufacturing,
quality assurance, packaging, labeling and distribution. Record keeping and
reporting requirements are imposed on all devices as well. Additionally, in the
future, the FDA may enact mandatory performance standards for some or all of the
Company's potential products.

Pharmaceuticals

The Company's pharmaceutical technologies are regulated as
either new drugs ("New Drugs") or over-the-counter ("OTC") drugs. OTC drugs
comply with applicable monographs regarding composition, packaging and labeling.
If they do not, and the FDA does not agree to amend the applicable monograph,
the products will be treated as New Drugs. Obtaining amendments is unlikely, and
even if secured, may take years of time and involve considerable expense. Any
product classified as a New Drug cannot be marketed until a New Drug Application
("NDA") or Abbreviated New Drug Application ("ANDA") is approved by the FDA. An
NDA consists of substantial data on composition and method of manufacture as
well as in vitro, animal and human clinical studies. Approval of an NDA may take
from two to six years or more and may involve expenditures of millions of
dollars. Similar to devices, marketed drugs are subject to listing, possible
restrictions on distribution, GMPs and record keeping and reporting
requirements. ANDAs contain substantial data on the composition and manufacture
of a drug as well as clinical or in vitro data to establish bioequivalence to a
previously approved drug having the same active ingredient(s) in the same dosage
strengths and dosage form. ANDA approval is generally swifter and less costly
than obtaining NDA approval, but nevertheless may take two or more years and may
involve substantial expenditures. Drugs approved under ANDAs are subject to the
same regulatory requirements as drugs approved under NDAs, as described above.

Certain of the Company's technologies, which are in the
various stages of product development, are subject to regulation as both drugs
and devices, because they are functioning devices with an add-on drug component.
The process for getting FDA clearance to market will vary from product to
product depending on the primary intended use of each product. Some products may
need a 510(k) notification for the device component and an NDA or ANDA for the
drug substance. Others may require both a PMA and an NDA. Some may require
clearance from only one of the two centers of the FDA. Regulation of drug-device
products is still subject to some uncertainty regarding regulatory
classification, and delays may be encountered before FDA decides which
requirements should apply to each product. The FDA has published regulations
governing regulatory review of such combination products.

Generally, 510(k) applications for clearance to market medical
devices, such as the Company's antimicrobial gloves, do not require clinical
testing. To date, all products marketed by the Company, or using technology in
which the Company has rights, are considered subject to 510(k)

<PAGE>

clearance procedures and thus have not been required to undergo clinical
testing. If future products were to be marketed subject to approved PMAs or
NDAs, they would likely require clinical testing to demonstrate safety and
effectiveness for their intended use as a prerequisite for marketing approval.
Such clinical testing would likely be pursued under an Investigational Device
Exemption Application ("IDE") or an Investigational New Drug Application ("IND")
and would necessarily comply with applicable FDA regulations governing the
Protection of Human Subjects, among others. IDE and IND applications require
submission of substantial pre-clinical testing data depending on the nature of
the device and how it is classified. If the pre-clinical data provide adequate
assurance of the likelihood for safe human testing, the FDA usually responds
promptly to approve these applications. The FDA can, however, suspend clinical
testing at any time if results demonstrate an unreasonable risk of injury to
subjects. Substantial additional time and expense may be involved if compliance
with these investigational requirements is necessary.

The FDA has the authority to inspect facilities where drugs or
devices are manufactured and usually does inspect such facilities approximately
every two years and even more often if product problems occur. In addition, the
Act gives the FDA substantial authority to take action if it determines that a
regulated product is adulterated, misbranded or otherwise not in compliance with
the Act or its implementing regulations. The FDA may seize such a product and
seek to enjoin its further distribution. It may institute a civil and/or
criminal action to recover fines and/or to impose jail terms for violations.
Often companies will recall contested products in order to attempt to avoid
enforcement action. The FDA may, however, pursue these enforcement actions even
if recalls are conducted.

Many countries other than the United States have some form of
clearance or approval process for the type of medical products being developed
by the Company. In some foreign jurisdictions, a license to manufacture or sell
must be obtained. In others, equivalents of IDEs, INDs, PMAs or NDAs must be
secured prior to testing or marketing. Many countries have GMP regulations
similar to those in the United States and have the authority to take remedial
action regarding non-conforming products. The FDA also has stringent regulations
regarding the export of unapproved products from the United States.

Status of Pending Applications

To date, the only clearances obtained from the FDA to market
a product derived from the Company's antimicrobial technologies have been via a
510(k) notification, filed by one of the Company's licensees for the marketing
of a central venous catheter with antiseptic surface and antimicrobially treated
percutaneous sheath introducer systems. Three 510(k) notifications, filed by
another licensee of the Company, for the marketing of implanted medical devices
incorporating an antimicrobial preservative have also received FDA clearance to
market.

In May 1989, the Company filed a pre-market 510(k)
notification seeking consent to market its antimicrobial latex examination
gloves.

Since this initial 510(k) submission, the Company has, from
1991 to date, amended and resubmitted the 510(k) several times and otherwise
contacted, in writing and in person, the FDA Office of Device Evaluation ("ODE")
in an effort to obtain a determination of "substantial equivalence" to
previously marketed latex examination gloves. The ODE has notified the Company,
in response to each of these submissions, that the Company's antimicrobial latex
examination gloves are not "substantially

<PAGE>

equivalent" since the gloves have a new indication for an examination glove
which may affect the prophylactic effect, thus constituting a new intended use.
On September 26, 1995, Mr. Timothy Ulatowski of the ODE informed Dr. Del Guercio
that pursuant to this most recent submission of data, the Company was invited to
make a presentation concerning the Company's gloves before the FDA's independent
General Hospital Panel.

On March 11, 1996, Dr. Shanta M. Modak of the Department of
Surgery, Columbia University, where the antimicrobial glove technology was
developed, and Dr. Louis R.M. Del Guercio, the Company's Chairman, attended the
meeting on the Company's behalf. Each made a presentation before the Advisory
Committee, General Hospital and Personal Use Devices Panel, Center for Devices
and Radiological Health. Mr. Lester Sampath, also of the Department of Surgery,
Columbia University, was there as an observer. The Panel acts in an advisory
capacity and makes recommendations to the FDA regarding whether or not certain
device submissions should receive FDA clearance to be marketed. While the Panel
did not make any recommendation to the FDA at the March 11, 1996 meeting, the
Panel voted to accept a previously distributed opinion of an independent
consultant indicating that the Company's examination gloves do not have a
positive impact on disease control. To date, the Company has not yet received
written notice from the FDA of its decision regarding the Company's
antimicrobial gloves following the March 11, 1996 meeting, nor has the Company
received a written response from the FDA concerning the Company's previously
disclosed response to Dr. Sheldon's memorandum to Mr. Ulatowski submitted on
September 13, 1995. However, Dr. Modak has been contacted by Mr. Terrell
Cunningham, Nurse Consultant of the ODE, who has informed Dr. Modak that Mr.
Ulatowski of the ODE has sent a written request to Dr. Sheldon asking for a
response to the Company's September 1995 submission. According to Mr.
Cunningham, Dr. Modak or the Company should have received a response by the end
of October 1996.

At present, the Company does not have sufficient financial
resources to fund additional clinical testing, if such clinical testing is
required. However, should the Company's financial condition improve, the Company
would spend some of these funds on additional testing that may be required.
There can be no assurance that, even with additional testing, if such testing is
required, that the Company will obtain FDA clearance to market its antimicrobial
latex gloves.

The Company has received clearance from the Canadian Bureau of
Radiation and Medical Devices of the Environmental Health Directorate, Health
Protection Branch, to market its Antimicrobial Latex Examination Gloves and its
sterile, hypoallergenic antimicrobial surgeons' gloves in Canada under the
Daltex A/M(TM) trademark.

Based upon advice of its regulatory counsel and its
independent former medical products distributor in Germany, the Company believes
it may offer its antimicrobial latex examination gloves and sterile surgical
gloves for sale in Germany, through distributors, without seeking special
regulatory clearance in the event that the Company obtains the financial
resources necessary to manufacture and market such gloves.

EMPLOYEES

Mrs. Diane E. Fritz, Vice President and Assistant Corporate
Secretary, was the Company's one full-time employee during fiscal 1996. Mrs.
Fritz performs office managerial, general operational and clerical functions.

<PAGE>

Bruce Hausman, Esquire, currently serves as President, Chief
Executive Officer and a director.

As of October 1996, the Company has 11 members of the
Scientific Advisory Board who are available for individual consultation on an
"as needed" basis with the Company's management. See "Research and Development."

ITEM 2. PROPERTIES

Since June 1989, the Company has maintained its executive
offices, which consist of approximately 1,800 square feet at 50 Kulick Road,
Fairfield, New Jersey, pursuant to a three-year written lease, which has been
extended on a year-to-year basis. The Company is obligated to pay rent of $1,687
per month for the space, plus a proportionate share of certain increases in
common charges and landlord's operating costs above the 1989 base year, adjusted
annually. Under the terms of the lease, such share of the common charges and
operating costs may not exceed $2,000 per year. In May 1996, the Company agreed
in writing to extend the existing lease for an additional year until June 14,
1997. The Company has the right to cancel the lease without penalty on 90 days
written notice. All other terms and conditions of the lease agreement remain
unchanged.

ITEM 3. LEGAL PROCEEDINGS

None

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

Not applicable.

<PAGE>

PART II

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

IDENTIFICATION OF PRINCIPAL MARKET

The Company's Common Stock and Units (consisting of three
shares of Common Stock and three Class A Warrants) are currently listed on the
National Association of Securities Dealers, Inc. ("NASD") OTC Bulletin Board.
The Common Stock and Units were traded in the over-the-counter market on the
Nasdaq Stock Market ("Nasdaq"), under the respective symbols "DLTX" and "DLTXU"
until May 22, 1992. On May 22, 1992, the Common Stock and Units were deleted
from Nasdaq, because the Company did not meet certain maintenance requirements
for continued inclusion on Nasdaq related to amounts for total assets, capital
and surplus and minimum bid price. The Company intends to list the Common Stock
and Units on the OTC Bulletin Board until such time as the Company satisfies the
requirements for listing on Nasdaq. The Class A Warrants and Class B Warrants
have not been traded on Nasdaq since October 25, 1989. On October 25, 1989, the
Class A Warrants were deleted from the Nasdaq listing due to the fact that there
were no longer any active market makers registered to trade these warrants. The
Company plans to reapply when it meets all Nasdaq listing requirements;
although, there can be no assurance that the Company will be able to meet these
listing requirements.

The following tables set forth the range of high- and low-bid
prices for the Company's Common Stock, Class A Warrants, and Units for each
quarterly period beginning August 1, 1994 as reported by the NASD OTC Bulletin
Board. The following over-the-counter market quotations reflect inter-dealer
prices, without retail markup, markdown or commission, and may not necessarily
represent actual transactions.

Fiscal 1995

Units High Low

1st Quarter Ended October 31, 1994 9/32 1/8
2nd Quarter Ended January 31, 1995 1/4 1/8
3rd Quarter Ended April 30, 1995 1/4 1/8
4th Quarter Ended July 31, 1995 1/4 1/8

Common Stock

1st Quarter Ended October 31, 1994 .10 1/32
2nd Quarter Ended January 31, 1995 .09 1/32
3rd Quarter Ended April 30, 1995 .09 .04
4th Quarter Ended July 31, 1995 .17 .05

Class A Warrants

1st Quarter Ended October 31, 1994 .01 .002
2nd Quarter Ended January 31, 1995 .002 .002
3rd Quarter Ended April 30, 1995 .002 .002
4th Quarter Ended July 31, 1995 .02 .001

<PAGE>

Fiscal 1996

Units High Low

1st Quarter Ended October 31, 1995 .25 .25
2nd Quarter Ended January 31, 1996 .25 .125
3rd Quarter Ended April 30, 1996 .25 .25
4th Quarter Ended July 31, 1996 .25 .1875

Common Stock

1st Quarter Ended October 31, 1995 .14 .125
2nd Quarter Ended January 31, 1996 .125 .08
3rd Quarter Ended April 30, 1996 .125 .07
4th Quarter Ended July 31, 1996 .09 .04

Class A Warrants

1st Quarter Ended October 31, 1996 .001 .001
2nd Quarter Ended January 31, 1996 .001 .001
3rd Quarter Ended April 30, 1996 .001 .001
4th Quarter Ended July 31, 1996 .001 .001

Fiscal 1997

October 18, 1996 .50 .125

Common Stock

October 18, 1996 .06 .04

Class A Warrants

October 18, 1996 .02 0

In April 1996, the Company extended the expiration date of its
Class A and Class B Warrants. The expiration date of the Company's Class A
Warrants was extended from April 30, 1996 to April 30, 1997; the exercise price
of the Class A Warrants remains $0.25. The expiration date of the Company's
Class B Warrants was extended from April 30, 1997 to October 31, 1997; the
exercise price of the Company's Class B Warrants remains $1.00. Under federal
securities laws, the Company is unable to accept the exercise of any Class A or
Class B Warrants until such time, if any, as the Company's independent auditors
may express an opinion on the Company's financial statements without
qualification, and the Company has an effective registration statement covering
such warrants. At such time, if any, as the Company may accept such exercise,
the Company intends to use any proceeds received from the exercise of its Class
A and Class B Warrants for working capital, general corporate purposes and, if
possible, the reinitiation of its research and development efforts.

<PAGE>

HOLDERS OF COMMON EQUITY

The approximate number of holders of record of Common Stock of
the Company, as of October 21, 1996, was as follows:

Class Number of Holders

Common Stock 492
$.01 par value

Class A Warrants 202

DIVIDEND HISTORY

The Company has not paid or declared any dividends, cash or
otherwise, since its inception in 1983. Management of the Company has no
intention of paying cash dividends in the foreseeable future.

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial information for each of the
five years ended July 31, 1996 and for the period from July 28, 1983 (the date
of incorporation of the Company) to July 31, 1996 has been derived from the
financial statements of the Company audited by KPMG Peat Marwick LLP,
Independent Certified Public Accountants. The selected data should be read in
conjunction with the financial statements, the related notes and the independent
auditors' report, which contains an explanatory paragraph that states that the
Company's recurring losses and working capital and total stockholders' deficits
raise substantial doubt about the Company's ability to continue as a going
concern and precludes the expression of an opinion on (i) the financial
statements as of and for the years ended July 31, 1996, 1995 and 1994 and, (ii)
the cumulative financial statements for the period July 28, 1983 (date of
incorporation) to July 31, 1996. The financial statements and the selected
financial data do not include any adjustments that might result from the outcome
of this uncertainty.
<TABLE>
<CAPTION>

July 28, 1983
(date of Year Ended Year Ended Year ended Year ended Year ended
incorporation) to July 31, July 31, July 31, July 31, July 31,
July 31, 1996 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Operations Data
Revenues $4,591,097 $363,455 $295,941 $179,698 $511,381 $309,484
Net loss (7,965,018) (132,244) (389,827) (534,639) (391,229)
Net loss per ($1.03) ($.02) (512,483) ($.05) ($.06) ($.05)
common share ($.06)

1996 1995 1994 1993 1992
Balance Sheet Data
Working capital
(deficiency) ($880,697) ($954,590) $(464,967) $(100,231) $(17,445)
Total assets 313,620 78,822 74,462 369,353 525,080
Total liabilities 1,375,942 1,008,900 492,057 399,521 259,764
Stockholders' equity (1,062,322) (930,078) (417,595) (30,168) 265,316
(deficiency)
</TABLE>

<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

GENERAL

The Company is in the developmental stage and has been principally
engaged in research and development activities with the objective of developing
and commercializing certain cost-reducing medical device and pharmaceutical
technologies. Since inception in July 1983, the Company has derived a total of
approximately $2,879,000 in revenues to date from initial developmental phase
fees as part of licensing or cooperative development arrangements, royalty
payments on sales of licensed antimicrobial products from sublicensees, SBIR
grant revenue related to some of its pharmaceutical or device technologies,
initial sales of its antimicrobial latex examination gloves, and the sale of two
patents and know-how relating to the prevention and treatment of atopic
diseases. In 1984, the Company successfully completed an initial public offering
to raise working capital. Since that time, management of the Company has been
working on a number of development projects which involve experimental and
unproven technologies, some of which have and may require many years and
substantial expenditures to complete, and which may be unsuccessful. Since March
1, 1994 and continuing to date, research and development efforts have been
extremely limited, or in most cases put on hold, unless and until the Company
can develop positive cash flow from its more fully developed technologies or
raise additional financing. There can be no assurance that the Company will be
able to develop or commercialize its product technologies in the future. Future
revenues of the Company may be limited. Such commercialization activities may
not result in sales of products on a profitable basis, and the Company may not
have sufficient funds available to complete its research and development program
or its applications for necessary regulatory clearances and approvals, or to
remain in business while any products which may be developed from its
technologies are marketed or are readied for the marketplace.

In an effort to commercialize its more fully developed technologies,
the Company had focused, from 1990 to March 1994, its research, development and
commercialization efforts principally on its infection-reducing, antimicrobial
technologies, including the manufacture and marketing through distributors of
the Company's antimicrobial gloves and the licensing of other applications of
the antimicrobial technology to larger companies. See "Item 1. Business" for a
discussion of the dispute with the University concerning the license for the
antimicrobial glove technology. In fiscal 1995 and 1996, the Company did not
have any sales of its technologies or its antimicrobial medical gloves. During
this period, the Company received revenues from royalty payments and development
fees pursuant to two licenses with sublicensees of applications of the Company's
antimicrobial medical technology. See "Item 1. Business - Technology Licensing
Arrangements" in the Company's Annual Report on Form 10-K for the year ended
July 31, 1996 for a discussion of the terms of the Patent Settlement Agreement
dated as of January 1, 1995 among the Company, the University, Arrow and Becton
Dickinson and the Modified Arrow License of October 1995. In fiscal 1993, the
Company sold its technology for the prevention and treatment of atopic diseases
to Beiersdorf, a German medical products company. See "Item 1. Business -
Technology Licensing Arrangements" for a discussion concerning Beiersdorf's
decision to abandon the projects for developing products under the two German
patents Beiersdorf had acquired from the Company pursuant to the Patent Purchase
Agreement between the Company and Beiersdorf of August 1992.

The report of the Company's independent auditors on the Company's
financial statements includes an explanatory paragraph which states that the
Company's recurring losses and working capital and total

<PAGE>

stockholders' deficits raise substantial doubt about the Company's ability to
continue as a going concern and precludes and has precluded the expression of an
opinion on the Company's financial statements as of and for the years ended July
31, 1996, 1995 and 1994. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty. Because of the continued
working capital deficit, management's plan in order to continue in operation for
the next year is to continue to attempt to raise additional capital, while
attempting to develop, market, license and sell its products, including its
antimicrobial latex surgical and examination gloves, to establish positive cash
flow for the Company. Furthermore, the Company will attempt to continue to
curtail expenditures such as payroll, research and development projects and
other discretionary expenditures, to the extent possible. The Company does not
have any commitments to raise additional capital in the future, and there can be
no assurance that the Company will be successful in any of its capital-raising
efforts or that the Company can avoid liquidation. See Note 2 to Notes to
Financial Statements.

In October 1995, the Company received a one-time royalty payment of
$600,000 from Arrow, of which 50% was paid in November 1995 to the University
pursuant to the 1987 License Agreement. Additionally, in November 1995, the
Company received $75,000 from Arrow to help fund the payment of legal costs
incurred by the Company in connection with the Patent Interference Proceedings
and the Patent Settlement Agreement. See "Results of Operations" and "Liquidity
and Capital Resources."

The discussion below should be reviewed together with the Company's
Financial Statements and the Notes thereto.

RESULTS OF OPERATIONS

From inception through July 31, 1996, the Company's principal sources
of revenue have consisted of interest earned on short-term investments purchased
with the proceeds from the 1984 public sale of Units, license fees, royalties,
sale of patents and grants. The Company plans to attempt to raise additional
capital while continuing to utilize cash, together with limited revenues from
license fees, royalties from sales of licensed products by sublicensees and
possible sales of antimicrobial gloves, to fund operations in fiscal 1997.

During the fiscal years ended July 31, 1996, 1995 and 1994, revenues
from license fees and royalties were $287,968, $295,829 and $178,022,
respectively. Such revenues decreased slightly in fiscal 1996 compared to fiscal
1995 due to the elimination of one development phase payment from Arrow, which
was replaced by nominal royalty payments received by the Company from Arrow
based on limited sales of PSI units sold during the third and fourth quarters of
fiscal 1996. Of the $287,968 in revenues received by the Company in fiscal 1996
from license fees and royalties, $91,549 was paid by Arrow to the Company and
remitted by the Company to Becton Dickinson pursuant to the terms of the Patent
Settlement Agreement. Revenues include the amortization of the $600,000 one-time
royalty payment, which is being recognized quarterly through September 1, 2000.
See Note 8 to Notes to Financial Statements. All of the Company's revenues in
fiscal years 1996 and 1995 were derived from license fees and royalties received
from its two sublicensees. There were no sales of the Company's antimicrobial
examination and surgical gloves in fiscal years 1996 and 1995. The Company
reduced the prices for both its examination and surgeons' gloves to more
competitive levels. The Company maintains its belief that such lack of glove
sales continues to be due to the difficulty it faces as a small company with
extremely limited resources in introducing and marketing a new product
internationally without the benefit of a domestic sales base or regulatory
clearance by the FDA. See "Liquidity and Capital

<PAGE>

Resources." It is unlikely that there will be sales of any of the Company's
antimicrobial gloves in fiscal 1997. Additionally, in November 1995, the Company
received $75,000 from Arrow to help fund the payment of legal costs incurred by
the Company in connection with the Patent Interference Proceedings and the
Patent Settlement Agreement. Interest income was $487, $112 and $1,676 during
fiscal 1996, 1995 and 1994, respectively. Interest income continues to decrease,
because the Company has continued to use its short-term investments for working
capital. At July 31, 1996, the Company had $49,926 remaining in cash. See
"Liquidity and Capital Resources" for a discussion of the Company's cash
position as a result of the one-time Arrow payment.

Operating expenses for the year ended July 31, 1996 consisted
principally of general and administrative expenses. General and administrative
expenses in the fiscal years ended July 31, 1996, 1995 and 1994 were $489,299,
$808,424 and $381,554, respectively. In fiscal 1995, the Company incurred
significant legal costs associated with the Patent Interference Proceedings and
subsequent Patent Settlement Agreement. The decrease in such operating costs in
1996 as compared to 1995 was due primarily to the significant decrease of legal
costs as a result of the Patent Settlement Agreement.

The Company had extremely limited expenses of $6,400 related to
research and development activities during the fiscal year ended July 31, 1996,
which was paid to the University for the antimicrobial coating of tracheal
suction catheters for a medical device manufacturer, who has expressed interest
in a possible licensing arrangement with the Company. In fiscal 1995, there were
no expenses related to research and development activities, although in fiscal
1994, the Company had research and development expenses of $72,923, as a result
of finalizing the Research Agreement with the University to further develop the
antimicrobial glove technology. See "Item 1. Business." The Company has
continued its decision not to take on significant new research projects and
continues to limit research efforts, if any, on its antimicrobial technology
which it believes is more fully developed and has revenue-producing potential.
However, certain research and development costs may increase due to additional
patent filings and prosecution, payment of additional license fees to the
University to obtain rights to improvements in the antimicrobial technology
developed at the University, regulatory activities and further development and
testing of applications of the antimicrobial technology to enhance
commercialization efforts.

As previously stated, the Company did not have any sales of its
antimicrobial gloves or other technologies in fiscal year 1995 or 1996. However,
in fiscal 1994, the cost of sales for antimicrobial gloves, in an amount of
$115,048, represented the reserve on the unsold inventory of antimicrobial
surgeons' gloves stored by Sime Health at its Malaysian factory and the advance
payments for inventory of antimicrobial examination gloves not yet produced by
Safeskin. In September 1995, the inventory of antimicrobial surgeons' gloves was
shipped to Centre Medical Evangelique, Nyankunde, Zaire. See "Liquidity and
Capital Resources."

The Company sustained a net loss of $132,244 for the fiscal year ended
July 31, 1996, a significant decrease from the net loss of $512,483 in the
fiscal year ended July 31, 1995. The decrease in net loss is primarily due to
the significant reduction in legal expenses as a result of the Patent Settlement
Agreement.

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

At July 31, 1996, the Company had cash and cash equivalents of
approximately $50,000, representing an increase of approximately $39,000 over
the July 31, 1995 balance of cash and cash equivalents. This increase was
principally due to the Company's receipt of the one-time $600,000 royalty
payment received from Arrow in October 1995 (of which 50% was paid to the
University in November 1995 pursuant to the terms of a 1987 license agreement).
During the year ended July 31, 1996, the Company had an increase of $39,064 in
cash flows from operations as compared to a deficit of $16,228 in cash generated
by operations in the prior year. This change in cash flows from operations was
primarily due to the receipt of the one-time advance royalty payment. In
addition, the Company had a working capital deficit of $880,697 as of July 31,
1996. The Company is still in the developmental stage, and its business
operations have only generated a nominal amount of revenues to date. The payment
received from Arrow described above has enabled the Company to satisfy certain
current and past due obligations to its creditors and to make substantial
payments to the University as required under various licenses with the
University. Although the Company has not satisfied all of its obligations to the
University or the University's patent counsel, the Company is continuing its
efforts to resolve such matters. The remaining funds have been, and will
continue to be, used for working capital. It is expected that future cash flows
will be substantially less than reported revenues due to the payment from Arrow
described above.

The Company is committed under an extension to its lease, expiring in
June 1997 with a three month cancellation provision to pay, for the use of
office space which requires monthly payments of approximately $1,850 including
utilities for the fiscal year ending July 31, 1997.

Since October 1987, all members of the Scientific Advisory Board have
been, and are expected to continue to be, compensated on an "as needed," per
diem basis. In fiscal 1996, no member of the Scientific Advisory Board received
cash compensation.

The Company has entered into agreements with third parties and research
organizations, not including members of the Scientific Advisory Board, with
respect to research and development and testing of certain of its technologies.
In particular, see the discussion of the Company's arrangements with the
University described under "Item 1. Business" and Note 10 to Notes to Financial
Statements. Under the Research Agreement with the University, the Company is
obligated to pay the University an aggregate of $100,000, of which $5,711 is
outstanding as of July 31, 1996.

The Company did not receive any revenue from product sales in fiscal
year 1995 or 1996. The Company, at July 31, 1996, had prepayments to Safeskin
Corp. in the amount of $60,613 (representing 3,000,000 antimicrobial examination
gloves) as settlement for disputes with Safeskin. The Company has reserved the
right to order the balance of the gloves due it from Safeskin when needed. As
there is no cash outflow from the Company for these 3,000,000 such gloves when
sold, other than a percentage royalty based on net sales of 1.67% payable to the
University pursuant to a license agreement in principle, proceeds from gloves
sales, if any, would be available to fund operations over the next year. There
have been no sales of antimicrobial gloves since February 1993. The Company has
reserved the advance payments for inventory owed it by Safeskin due to the
uncertainty of realizability of such assets. Reference is made in Footnote 7 in
the Financial Statements, and "Item 1. Business" regarding the dispute with the
University over the license agreement for the antimicrobial glove technology.

<PAGE>

The Company continues to attempt to market its antimicrobial
examination and surgical gloves directly or through distributors in Germany,
parts of Western Europe, Canada, the Middle and Far East and North Africa, where
it has clearances to market or where such clearances are not required. See "Item
1. Business - Governmental Regulation." In Canada and the United States, as well
as in Europe, the examination glove market is a commodity market that is highly
sensitive to price and much less responsive to product features. The Company's
examination gloves currently bear a premium price due to the costs of
subcontract manufacturing, the several layers of distribution required as well
as the cost of the antimicrobial compounds used in manufacture. In contrast to
examination gloves, surgeons' gloves command higher prices with significantly
increased profit margins, are less sensitive to price, more responsive to
product features such as antimicrobial protection and are targeted to a smaller,
more cohesive user market with purchasing clout. Accordingly, in fiscal 1996,
the Company focused its efforts on the sale of its surgeons' glove technology.
The Company reduced the prices for its examination and surgeons' gloves to be
more competitive. The Company believes the overall lack of any sales of
antimicrobial surgeons' gloves and any sales of antimicrobial examination gloves
since February 1993 is due to the difficulty it continues to face as a small
company with extremely limited resources in introducing and marketing a product
internationally without the benefit of a domestic sales base or regulatory
clearance by the FDA. Therefore, there can be no assurance that the Company will
be successful in selling its antimicrobial surgeons' or examination gloves or
that it will have the financial resources required to undertake and sustain a
manufacturing and marketing program for such gloves.
Reference is made to "Item 1. Business."

As stated above, management has continued to curtail expenditures in
many areas, including research and development projects and discretionary
expenditures, in order to stay in business and to focus the Company's extremely
limited resources in what it believes are the most promising areas of the
Company's business in the near term. However, there can be no assurance that the
Company will have sufficient funds to carry out these plans or to remain in
business. In addition, further cost saving measures may be impossible and cost
savings measures in the areas of research and development, regulatory clearances
and marketing and sales may have an adverse effect on the Company's future
operations. See "Item 1. Business." See also "Results of Operations." If the
Company is unsuccessful in raising additional capital during fiscal year 1997,
if there are no antimicrobial gloves sales, if there is no significant increase
in license fees or royalties from sales of sublicensed products or if the
University revokes licenses granted to the Company, the Company may be unable to
continue as a going concern, even with further cost-cutting measures. To meet
its long-term liquidity requirements, the Company must also generate sufficient
income through operations or obtain additional financing as required, as to
which there can be no assurance. For more information on the liquidity of the
Company, see Note 2 to Notes to Financial Statements.

If the Company raises additional capital, the Company plans to continue
to seek increased revenue-producing opportunities through the search for
additional license and patent purchase agreements involving corporate
technology, attempt to obtain regulatory clearances to market its products,
market and attempt to market certain products, such as its antimicrobial latex
gloves, directly or through distributors to end users, and investigate merger,
joint venture or acquisition possibilities with a suitable entity whose business
may be complimentary to that of the Company. However, there can be no assurance
that the Company will be successful in meeting its immediate or long-term
liquidity requirements or that the Company can continue as a going-concern.

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required to be filed pursuant to this Item 8
are appended to this Report on Form 10-K. A list of the financial statements
filed herewith is found at "Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K."

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information with
respect to each of the present directors and executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Since Position with the Company
<S> <C> <C> <C>
Louis R.M. Del Guercio, M.D. 67 1983 Chairman of Board, Director, Member
of Executive Committee

James O. Leonard 54 1988 Chairman of the Executive Committee,
Director

Herbert J. Mitschele, Jr. 67 1983 Secretary, Treasurer, Chief Financial
Officer, Director, Member of Executive
Committee

Bruce Hausman, Esq. 66 1993 President, Chief Executive Officer, Director,
Member of the Executive Committee
</TABLE>

All directors hold office until the next annual meeting of
stockholders of the Company or until their successors are elected and quality.
Due to its extremely limited financial resources, the Company has not held an
annual meeting of stockholders since July 1991. Executive officers hold office
until their successors are elected and qualified, subject to earlier removal by
the Board of Directors. See "Item 11. Executive Compensation" and "Item 12.
Security Ownership of Certain Beneficial Owners and Management."

The principal occupations and business experience of each
director and executive officer are as follows:

Louis R.M. Del Guercio, M.D. - Dr. Del Guercio is a Professor
and the Chairman of the Department of Surgery at New York Medical College and
Chief of Surgery at Westchester County Medical Center. He is also a Consultant
in Surgery to ten hospitals in New York and Connecticut. Dr. Del Guercio has
served on a number of national public advisory committees concerned with health
care issues. He is a Colonel in the U.S. Army Reserves. Dr. Del Guercio's
publications include three books and over 300 scientific articles. Dr. Del
Guercio received his B.S. in 1949 from Fordham University and his M.D. in 1953
from Yale University School of Medicine.

James O. Leonard - Mr. Leonard is currently a principal in Sea
Island Pharmaceuticals Inc., a privately owned pharmaceutical products company.
From April 1988 until September 1991, Mr. Leonard served as President and Chief
Executive Officer of the Company. Effective September 1, 1991, Mr. Leonard has
served as Chairman of the Executive Committee and a member of the Board of
Directors of the Company.

<PAGE>

Herbert J. Mitschele, Jr. - Mr. Mitschele was Chairman of the
Board of Robert J. Baer, Inc., a family-owned, ready-mix concrete company
headquartered in Roseland, New Jersey, until his retirement in August, 1993.
This company has two other divisions: Baer Enterprises, Inc., a real estate and
trucking company, and Baer Aggregates, a quarrying company. Mr. Mitschele is
owner and President of Ambassador Arabian Farms, Inc., a horse breeding company.
He is a former director of Livingston National Bank and First Jersey National
West, banking institutions, and a director of Health Full-Life, a health
maintenance organization. Mr. Mitschele graduated from Fordham University with a
B.S. degree in Political Science and Administration in 1951.

Bruce Hausman, Esq. - On May 18, 1995, the Board of Directors
of the Company appointed Bruce Hausman, Esq., a director and member of the
Executive Committee since December 1993, to serve as President and Chief
Executive Officer. Mr. Hausman served as Principal Executive Officer for Belding
Heminway Company, Inc., a textile manufacturer and distributor from May 1992 to
July 1993. He was Senior Vice President of Belding Heminway Company, Inc. from
February 1988 to May 1992. He has served as a director of Plastigone
Technologies, Inc., a biodegradable plastics manufacturing company, since August
1992, and was a director of Circa Pharmaceuticals Inc. from June 1990 until July
13, 1995, when Circa merged with Watson Pharmaceuticals, Inc. Mr. Hausman also
serves as an honorary trustee of Beth Israel Medical Center in New York and a
trustee of the Schnurmacher Nursing Home, a division of Beth Israel Medical
Center, and was formerly chairman of its quality assurance committee. Mr.
Hausman received his Bachelor of Arts in Economics from Brown University in
1951, his Master of Science from the School of Business of the University with a
major in Management and Marketing in 1952 and his Juris Doctor from New York Law
School in 1979.

COMMITTEES OF THE BOARD

All members of the Company's Board of Directors serve on the
Executive Committee. The Executive Committee, which has the plenary powers of
the full Board of Directors, held executive sessions during certain meetings of
the Board of Directors in fiscal 1996.

The Board of Directors' Audit Committee, which presently
consists solely of Dr. Del Guercio, met once during the fiscal year ended July
31, 1996. The Company has no Nominating Committee, since changes or additions to
the membership are considered by the full Board of Directors.

<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth information concerning the
compensation received by the current Chief Executive Officer of the Company and
the former President and Chief Operating Officer of the Company.
<TABLE>
<CAPTION>

Long Term Compensation
Annual Compensation Awards Payouts

Name and Other Annual All Other
Principal Position Year Salary ($) Bonus($) Compensation($) Options (#) Compensation ($)(1)
<S> <C> <C> <C> <C> <C> <C>
1996 -- -- -- 250,000(2) --
Bruce Hausman 1995 -- -- -- -- --
President, Chief Executive
Officer, Director and 1994 -- -- -- 250,000 --
Member of the Executive
Committee

1996 -- -- -- -- --
Harvey S.S. Miller, 1995 -- $60,601(3) -- -- --
President and Chief 1994 $43,384(4) -- -- -- --
Operating Officer (until
January 15, 1994)
<FN>
(1) Does not include benefits generally available to all employees.

(2) At a special meeting of the Board of Directors of the Company held on
March 6, 1996, the Board of Directors granted a non-qualified option
to Bruce Hausman to purchase an aggregate of 250,000 shares of Common
Stock of the Company at an exercise price of $0.09 per share, based on
the current market price at that time, in lieu of cash compensation
for Mr. Hausman's services as President and Chief Executive Officer of
the Company since May 1995.

(3) On December 7, 1994, Mr. Miller resigned as a Director of the Company
and from the Executive Committee and terminated his relationship as an
independent consultant to the Company. On December 14, 1994, it was
resolved by the Board of Directors that $25,601 be applied to Mr.
Miller's outstanding loans as compensation for Mr. Miller's service to
the Company from August 1, 1994 to December 31, 1994. The Board also
awarded Mr. Miller a bonus of $35,000 in recognition of Mr. Miller's
service to the Company from July 1983 through December 1994; such
amount was awarded as of January 3, 1995. This amount was also applied
to Mr. Miller's then outstanding loans owed to the Company.

(4) Mr. Miller resigned his position as President and Chief Operative
Officer on January 15, 1994. From November 5, 1993 until January 15,
1994, Mr. Miller served as President and Chief Operating Officer,
during which time Mr. Miller had $18,077 of his

<PAGE>

compensation applied against the outstanding balance of his loan from
the Company. Pursuant to a consulting arrangement with the Company
which began in January 1994, he was compensated as a consultant at the
same rate he received as President and his compensation of $31,923
from January 15, 1994 through July 31, 1994 was applied against the
balance of his outstanding loan from the Company.
</FN>
</TABLE>

The following table sets forth information concerning the
exercise of stock options granted to the former and current executive officers
named in the table.

<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
Value of
Number of Unexercised
Unexercised In-the-Money
Options Options
at at
FY/End (#) FY/End ($)

Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable(1)
<S> <C> <C> <C> <C>
Bruce Hausman -- -- 500,000(2)(3) --

Harvey S. S. Miller -- -- 275,000/100,000(4) $30,250/$11,000
<FN>
(1) Based on a market price of $0.12 as of October 20, 1995.

(2) Pursuant to a November 1993 consulting agreement, Mr. Hausman received
non-qualified stock options to purchase 250,000 shares of the
Company's Common Stock at an exercise price of $0.13 per share.

(3) At a special meeting of the Board of Directors of the Company held on
March 6, 1996, the Board of Directors granted a non-qualified option
to Bruce Hausman to purchase an aggregate of 250,000 shares of Common
Stock of the Company at an exercise price of $0.09 per share, based on
the current market price at that time, in lieu of cash compensation
for Mr. Hausman's services as President and Chief Executive Officer of
the Company since May 1995.

(4) On July 23, 1991, the Company granted Mr. Miller a non-qualified stock
option to purchase an aggregate of 100,000 shares of Common Stock at
an exercise price of $0.01 per share exercisable when the Company
receives FDA clearance or approval to market any of its antimicrobial
products through July 23, 2001. On September 2, 1992, the Company
granted Mr.Miller a non-qualified stock option to purchase an
aggregate of 275,000 shares of Common Stock at an exercise price of
$0.01 per share exercisable through September 2, 2002.
</FN>
</TABLE>

<PAGE>

OTHER ARRANGEMENTS

The Board of Directors has agreed to pay to Mr. Leonard, the
Chairman of the Board's Executive Committee, annual cash bonuses based on the
Company's profitability, but only if such payments are reasonable in light of
the Company's financial and cash flow position, and other incentives, such as
compensation in the event of termination of his involvement with the Company due
to death or due to a change in control of the Company, as long as he remains
active with the Company and serves as Chairman of the Executive Committee and a
director of the Company. Mr. Leonard did not receive any cash bonus for fiscal
1996.

In November 1993, the Company entered into a consulting
arrangement with Mr. Bruce Hausman, in connection with which Mr. Hausman agreed
to serve as a member of the Company's Board of Directors and Executive
Committee. Mr. Hausman has received compensation consisting of non-qualified
stock options to purchase an aggregate of 250,000 shares of the Company's Common
Stock at an exercise price of $0.13 per share. Mr. Hausman is also eligible to
receive a cash bonus of up to $60,000 to be granted solely within the discretion
of the Board of Directors of the Company as the Company's cash flow permits or
upon a change of control of the Company. On May 18, 1995, the Board of Directors
appointed Mr. Hausman to serve as President and Chief Executive Officer of the
Company. Mr. Hausman receives reimbursement of his reasonable expenses incurred
in the conduct of the Company's business.

At a special meeting of the Board of Directors of the Company
held on March 6, 1996, the Board of Directors granted a non-qualified option to
Bruce Hausman to purchase an aggregate of 250,000 shares of Common Stock of the
Company at an exercise price of $0.09 per share, based on the current market
price at that time, in lieu of cash compensation for Mr. Hausman's services as
President and Chief Executive Officer of the Company since May 1995.

Mr. Miller's qualified, incentive stock options to purchase an
aggregate of 50,000 shares of Common Stock at an exercise price of $0.72,
automatically terminated in accordance with their terms on March 7, 1995, three
months after Mr. Miller's resignation. Mr. Miller currently holds (i)
nonqualified stock options, due to expire in September 2002, to purchase an
aggregate of 275,000 shares of Common Stock at an exercise price of $0.01; and
(ii) nonqualified stock options, due to expire in July 2001, to purchase an
aggregate of 100,000 shares of Common Stock at an exercise price of $0.01, which
options will become exercisable upon the Company's receipt of clearance from the
FDA to market products incorporating the Company's antimicrobial technology in
the United States. Such nonqualified options were not affected by Mr. Miller's
resignation or the forgiveness of his loan owed to the Company. See Note 11 to
Notes to Financial Statements.

Compensation of Directors

Non-salaried members of the Board of Directors are normally
entitled to receive a fee of $2,000 per year. The annual fee includes
compensation for attendance in person of up to four Board of Directors meetings
in any fiscal year, plus $500 for attending in person any Board of Directors
meetings in excess of four such meetings in any one fiscal year. During the
fiscal year ended July 31, 1996, no annual fees for service on the Board of
Directors were paid to any Director, regardless of eligibility to receive such
fees. Non-salaried Directors also are entitled to receive $300 for attendance at
each meeting

<PAGE>

of a Committee of the Board of Directors. On January 25, 1989, all members of
the Executive Committee eligible to receive compensation for attendance at
Executive Committee meetings agreed to waive all fees for attendance at such
meetings. Such waiver of fees for attendance has continued to date. For a
discussion of certain compensation paid to certain Directors see "Other
Arrangements."

<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The following table sets forth certain information, as of
November 13, 1996 with respect to holdings of the Company's Common Stock by each
person known by the Company to be the beneficial owner of more than 5% of the
total number of shares of Common Stock outstanding as of such date. Each
beneficial owner has sole voting and investment power with respect to the shares
set forth opposite his name in the following table, except as otherwise
disclosed in the footnotes to the table or in the paragraph following the table:

Amount and
Nature of Percentage of
Name and Address Beneficial Outstanding
of Beneficial Owner Ownership(1) Shares

James O. Leonard
106 Woodhaven Pointe
Athens, Georgia 30606 808,300 9.36%

Louis R.M. Del Guercio, M.D.
14 Pryer Lane
Larchmont, New York 10538 734,300 8.51%

W. David and Venus Anthony
20 Kristen Court
Towaco, New Jersey 07082 1,203,500 13.94%(2)

Herbert J. Mitschele, Jr.
141 Daly Road
Far Hills, New Jersey 07931 576,800(3) 6.68%

(1) Reflects sole voting and investment power unless otherwise indicated.

(2) Includes 131,000 Class A Warrants. Exercise of a Class A Warrant
entitles the holder to one share of Common Stock and one Class B
Warrant. Exercise of a Class B Warrant entitles the holder to one share
of Common Stock. The amount and nature of beneficial ownership is based
on information contained in a Schedule 13D filed by Mr. Anthony, a copy
of which was received by the Company on September 8, 1993, and
information received orally from Mr. Anthony on November 13, 1996.

(3) Includes 114,400 shares of Common Stock beneficially owned by Robert
J. Baer, Inc., of which Mr. Mitschele is a control person, and 4,000
shares of Common Stock beneficially owned jointly

<PAGE>

by Mr. Mitschele and his wife. The 114,400 shares of Common Stock owned
by Robert J. Baer, Inc. consist of 66,400 shares of Common Stock and
24,000 Class A Warrants. Exercise of a Class A Warrant entitles the
holder to one share of Common Stock and one Class B Warrant. Exercise
of a Class B Warrant entitles the holder to one share of Common Stock.
The above table does not include: an aggregate of 18,000 shares of
Common Stock beneficially owned by trusts of which Mr. Mitschele's
daughters are the beneficiaries and his wife is the trustee. Mr.
Mitschele disclaims beneficial ownership of such shares held in trust.
The 18,000 shares of Common Stock beneficially owned by these trusts
includes 6,000 shares of Common Stock and 6,000 Class A Warrants.

SECURITY OWNERSHIP OF MANAGEMENT

The following table sets forth, as of November 13, 1996, the
number of shares of Common Stock of the Company beneficially owned by each
current director and by all current directors and officers as a group.

Number of
outstanding shares
of Common Stock Percentage of
beneficially outstanding
Name Age owned (1) Shares
Louis R.M. Del Guercio, M.D. 67 734,300 8.51%
James O. Leonard 54 808,300 9.36%
Herbert J. Mitschele, Jr. 67 576,800(2) 6.68%
Bruce Hausman, Esq. 66 505,000(3) 5.85%

All Directors and Executive 2,624,400(1)(2)(3) 30.40%
Officers as a group(3)
(4 persons)

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

1. Sole voting and investment power unless otherwise indicated.

2. Includes 114,400 shares of Common Stock beneficially owned by Robert J.
Baer, Inc. of which Mr. Mitschele is a control person, and 4,000 shares of
Common Stock, beneficially owned jointly by Mr. Mitschele and his wife. The
114,400 shares of Common Stock owned by Robert J. Baer, Inc. consist of
66,400 shares of Common Stock and 24,000 Class A Warrants. Exercise of a
Class A Warrant entitles the holder to one share of Common Stock and one
Class B Warrant. Exercise of a Class B Warrant entitles the holder to one
share of Common Stock. Does not include an aggregate of 18,000 shares of
Common Stock beneficially owned by trusts of which Mr. Mitschele's
daughters are the beneficiaries and his wife is the trustee. Mr. Mitschele
disclaims beneficial ownership of such shares held in trust. The 18,000
shares of Common Stock beneficially owned by these trusts includes 6,000
shares of Common Stock and 6,000 Class A Warrants.

<PAGE>

3. This figure includes 5,000 shares owned by Bruce Hausman through a Keough
Plan Account and options to purchase an aggregate of 500,000 shares of
Common Stock of the Company, which options are currently exercisable.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934 requires
the Company's directors and executive officers, and persons who own more than
ten percent of a registered class of the Company's equity securities, to file
with the SEC initial reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of the Company. Officers, directors and
greater than ten-percent shareholders are required by SEC regulation to furnish
the Company with copies of all Section 16 (a) forms they file.

To the Company's knowledge, based solely on review of the
copies of such reports furnished to the Company, all Section 16(a) filing
requirements applicable to Herbert Mitschele, James Leonard and Louis DelGuercio
were timely filed.

The Company has been advised that David and Venus Anthony have
purchased an additional 78,000 shares of Common Stock during fiscal year 1996;
however, the Company believes that, to date, no Schedule 13D has been filed on
behalf of David and Venus Anthony relating to these shares.

Bruce Hausman was untimely with respect to the filing of his
Form 5 on which he reported his receipt in March 1996 of options to purchase an
aggregate of 250,000 shares of Common Stock. The applicable Form 5 was filed in
October 1996. Mr. Hausman's receipt of stock options was the only reportable
event for Mr. Hausman in fiscal 1996.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

TRANSACTIONS WITH MANAGEMENT AND OTHERS

The Company has purchased a number of patents and related
know-how and rights to products from officers and directors of the Company and
may be required to make royalty payments as further described below. Since the
development of the products using such patents and rights is still uncertain,
the Company does not know the value of such agreements.

If the Company completes development of and begins to market
its sensor analyzer, or infrared detection system, the Company has agreed to pay
Dr. Del Guercio royalty payments in amounts to be negotiated based upon the sale
of such products.

The Company has been advised that none of the members of its
Board of Directors or Scientific Advisory Board who is affiliated with
universities or research institutions which may receive research funding or
fellowship grants from the Company will derive any direct payments from any such
funding or fellowship. However, certain of such persons may be deemed to derive
indirect benefits from the Company's funding of the research programs described
herein to the extent of their involvement in such research programs. Any such
indirect benefits are to be distinguished from royalties which the

<PAGE>

Company has agreed, or will in the future agree, to pay to certain of such
persons from the commercial exploitation of the products resulting from any such
research which is described above.

The Company has adopted a policy that no officer, director or
affiliate may engage in any transactions with the Company or any of its
subsidiaries unless such transactions have been approved by a majority of the
Company's directors who have no interest in the transactions. The Company
anticipates that all related party transactions will be on terms and conditions
at least as favorable to the Company as the Company could obtain in dealing with
unrelated parties.

<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

See Index to Financial Statements attached hereto.

(a) The following documents are filed as part of this report.

Exhibit No. Description

3.1(b) Certificate of Incorporation of the Company, as amended.

3.2(a) By-laws of the Company.

4.1(a) Underwriter's Option.

4.2(a) Warrant Agreement among Continental Stock Transfer and Trust
Company, the Underwriter and the Company.

4.3(b) Form of Warrant Exercise Fee Agreement among Continental Stock
Transfer and Trust Company, the Underwriter and the Company.

9.1(a) Shareholders Agreement among Herbert Mitschele, Anthony J. Crincoli,
XOIL Energy Resources, Inc., Harvey S. Shipley Miller, Eric W.
Goldman, Dr. Louis R.M. Del Guercio and Anthony W. Szabo, dated as
of March 19, 1984.

10.8(a) Restricted Stock Purchase Agreement Respecting Shares of Common
Stock with Harvey S.S. Miller and Eric W. Goldman, dated as of March
19, 1984.

10.9(a) Restricted Stock Purchase Agreement Respecting Shares of Class A
Stock with Harvey S.S. Miller and Eric W. Goldman, dated as of March
19, 1984.

10.10(a) Restated and Amended Restricted Stock Agreement of Dr. Abraham
Gelbart, dated March 19, 1984.

10.11(a) Schedule of Restricted Stock and Restated and Amended Restricted
Stock Agreements substantially identical in all material respects to
Exhibit 10.10.

10.12(a) Employee Stock Option and Stock Appreciation Plan.

10.13(a) Agreement with New York Medical College concerning development of
the Roentgen Densitometer, dated May 3, 1984.

<PAGE>

10.14(a) Amendment No. 1 to Restricted Stock Purchase Agreement respecting
shares of Common Stock with Harvey S.S. Miller and Eric W. Goldman,
dated as of July 12, 1984.

10.15(c) Research Agreement with New York Medical College, dated July 3,
1985, concerning diagnostic hit for rheumatology.

10.16(c) Research and License Agreement with the University, dated January
11, 1985, with respect to antimicrobial compounds.

10.17(c) Correspondence with Drexel University, dated August 6, 1985, with
respect to the breast cancer diagnostic system.

10.18(c) Agreement with NEA Tech, dated July 1, 1985, with respect to the
infusion pump.

10.19(d) Form of stock option agreement with Dr. Albert M. Kligman.

10.20(d) Letter Agreement with Dr. Albert M. Kligman, dated September 12,
1986, with respect to his membership on the Scientific Advisory
Board.

10.21(b) Assignment of certain proprietary rights by Dr. Albert M. Kligman,
dated February 4, 1987, regarding acne and wart medication.

10.22(b) Assignment of certain proprietary rights by Dr. Albert M. Kligman,
dated February 10, 1987, regarding skin moisturizers.

10.23(b)* Assignment of certain proprietary rights by Dr. Albert M. Kligman,
dated January 22, 1987, regarding certain compounds.

10.24(b) Letter Agreement with Dr. Vincent J. Cristofalo, dated May 20, 1987,
with respect to his membership on the Scientific Advisory Board.

10.25(b) Letter Agreement with Dr. Charles L. Fox., Jr., dated April 2, 1987.

10.26(b) Form of agreement with The Equity Group, Inc., a financial public
relations firm.

10.27(h) Employment Agreement with James O. Leonard, dated December 1, 1988.

10.28(h) Stock Option Agreement with James O. Leonard, dated December 1,
1988.

10.29(i) Letter Agreement with D.H. Blair & Co., Inc., dated July 14, 1989.

10.30(i) Form of Amendment No. 3 to Warrant Agreement with Continental Stock
Transfer and Trust Company, dated as of July 23, 1990.

10.31(i) Lease Agreement with I.C.E. Associates, dated May 24, 1989.

10.32(i) Stock Option Agreement with Dr. Baruch S. Blumberg, dated April 25,
1989.

<PAGE>

10.33(i) Stock Option Agreement with Lester Sampath, dated April 25, 1989.

10.34(i) Stock Option Agreement with Dr. Charles L. Fox, Jr., dated April 25,
1989.

10.35(i) Stock Option Agreement with Dr. Shanta Modak, dated April 25, 1989.

10.36(i) Stock Option Agreement with Dr. Shanta Modak, dated April 25, 1989.

10.37(i) Stock Option Agreement with Dr. Irving Millman, dated April 25,
1989.

10.38(i) Stock Option Agreement with Dr. Albert M. Kligman, dated April 25,
1989.

10.39(i) Stock Option Agreement with Dr. Gerd Plewig, dated April 25, 1989.

10.40(j) Arrow License Agreement, dated March 28, 1991.

10.41(k) Letter of Intent with Bio Med Sciences, Inc., dated November 13,
1991.

10.42(k) Extension to Letter of Intent with Bio Med Sciences, Inc., dated
February 6, 1992.

10.43(k)* License Agreement with Licensee dated May, 1992.

10.44(k) Lease Extension Agreement with ICE Associates, dated May, 1992.

10.45(k) Nondisclosure, Confidentiality and Non-Circumvention Agreement with
Oxymedyca, Inc., dated June 22, 1992.

10.46(k)* Patent Purchase Agreement with Beiersdorf AG, dated August 21, 1992.

10.47(k)* Option Agreement with Beiersdorf AG, dated August 24, 1992.

10.48(k) Amendment No. 3 to the Warrant Agreement with Continental Stock
Transfer and Trust Company, dated August 27, 1992.

10.49(k) Letter Agreement with Dr. Med. Bodo Melnik, dated September 23,
1992.

10.50(k) Non-qualified Stock Option Agreement with Dr. Med. Bodo Melnik,
dated September 23, 1992.

10.51(k) Agreement with Shanta Modak, Ph.D. and the University, dated October
16, 1992.

10.52(k) Letter Agreement with Dr. Med. Gerd Plewig, dated September 23,
1992.

10.53(l) Non-qualified Stock Option Agreement with Harvey S.S. Miller, dated
as of September 2, 1992.

<PAGE>

10.54(l) Amendment No. 3 to the Warrant Agreement with Continental Stock
Transfer and Trust Company, dated August 31, 1993.

10.55(m) Lease Extension Agreement with ICE Associates, dated June 1994.

10.56(l) Purchase Order and Manufacturing Agreement with Sime Health Limited,
dated November 25, 1992.

10.57(l) Agreement with Bruce Hausman, dated November 10, 1993.

10.58(m) Research Agreement dated as of March 1, 1993 between Daltex Medical
Sciences, Inc. and the University.

10.59(m) Amendment No. 5 to the Warrant Agreement with Continental Stock
Transfer and Trust Company, dated September 1, 1994.

10.60(m) Non-Qualified Stock Option Agreement with Dr. Abraham Gelbart, dated
December 10, 1993.

10.61(m) Non-Qualified Stock Option Agreement with Diane Fritz, dated
December 10, 1993.

10.62(n) Patent Settlement Agreement among Daltex Medical Sciences, Inc., The
Trustees of the University, Becton Dickinson and Company and Arrow
International, Inc. dated as of January 1, 1995.

10.63(p) Amendment No. 6 to the Warrant Agreement with Continental Stock
Transfer and Trust Company, dated as of September 5, 1995.

10.64(p) Modified License Agreement between Daltex Medical Sciences, Inc. and
Arrow International, Inc. dated as of October 27, 1995.

10.65(o) Lease Extension Agreement with ICE Associates, dated June 1995.

10.66(q) Amendment No. 7 to the Warrant Agreement with Continental Stock
Transfer and Trust Company, dated as of November 28, 1995.

10.67 Lease Extension Agreement with ICE Associates, dated June 1996.

10.68 Non-Qualified Stock Option Agreement between the Company and Bruce
Hausman dated as of March 6, 1996.

28.1(b) Incentive Stock Option Plan, as amended.

(a) Reference is made to the exhibits to Form S-1 Registration Statement
(File No. 2-90089) which became effective on September 26, 1984.

<PAGE>

(b) Reference is made to the exhibits to the Post-Effective Amendment
No. 2 to Form S-1 Registration Statements (File Nos. 2-90089 and
2-93465) which was filed on August 3, 1987.

(d) Reference is made to exhibits to the Form 10-K filed on November 11,
1986.

(e) Reference is made to the exhibits to the Post-Effective Amendment
No. 3 to Form S-1 Registration Statements (File Nos. 2-90089 and
2-93465) which became effective on September 14, 1987.

(f) Reference is made to the exhibits to the Annual Report on Form 10-K
for the fiscal year ended July 31, 1988.

(g) Reference is made to the exhibits to the Form 10-Q for the quarter
ended October 31, 1987.

(h) Reference is made to the exhibits to the Form 10-Q for the quarter
ended January 31, 1989.

(i) Reference is made to exhibits to the Annual Report on Form 10-K for
the fiscal year ended July 31, 1989.

(j) Reference is made to the exhibits to the Form 10-K for the fiscal
year ended July 31, 1991.

(k) Reference is made to the exhibits to the Form 10-K for the fiscal
year ended July 31, 1992.

(l) Reference is made to the exhibits to the Form 10-K for the fiscal
year ended July 31, 1993.

(m) Reference is made to the exhibits on Form 10-K for the fiscal year
ended July 31, 1994.

(n) Reference is made to the exhibit to the Form 8-K filed on June 30,
1995.

(o) Reference is made to the exhibit to the Form 10-Q for the quarter
ended April 30, 1995 filed on June 14, 1995.

(p) Reference is made to the exhibits to the Form 10-K for the fiscal
year ended July 31, 1995.

(q) Reference is made to the exhibits to the Form 10-Q for the quarter
ended October 31, 1995.

<PAGE>

* The Registrant has requested confidential treatment from the
Securities and Exchange Commission for this document, and,
accordingly, has filed this document with the Securities and
Exchange Commission.

Reports of the Company on Form 8-K for the fiscal quarter ended July 31, 1995

No Current Reports on Form 8-K were filed by the Company
during the fiscal year ended July 31, 1996.

<PAGE>

SIGNATURES

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

DALTEX MEDICAL SCIENCES, INC.

By: /s/ Bruce Hausman, Esq.
------------------------------------------
Bruce Hausman, Esq.
President & Chief Executive Officer

Dated: November 14, 1996

<PAGE>

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

Signature Title Date

/s/Dr. Louis R.M. Del Guercio Director, Chairman November 14, 1996
- ------------------------------ Board of Directors
Dr. Louis R.M. Del Guercio

/s/Bruce Hausman, Esq. President, Chief November 14, 1996
- ------------------------------ Executive Officer
Bruce Hausman, Esq.

/s/ James O. Leonard Director, Chairman November 14, 1996
- ------------------------------ of Executive Committee
James O. Leonard of Board of Directors

/s/Herbert J. Mitschele, Jr. Director, Secretary, November 14, 1996
- ------------------------------ Treasurer, Chief
Herbert J. Mitschele, Jr. Financial Officer

54
<PAGE>

Index to Financial Statements

Page

Independent Auditors' Report ..................................... F-1

Financial Statements:
Balance Sheets at July 31, 1996 and 1995 ..................... F-2
Statements of Operations for the Period from July 28, 1983
(Date of Inception) to July 31, 1996 and the
Years ended July 31, 1996, 1995, and 1994.................. F-3
Statements of Stockholders' Deficiency for the Period from
July 28, 1983 (Date of Inception) to July 31, 1996 and the
Years ended July 31, 1996, 1995 and 1994 .................. F-4
Statements of Cash Flows for the Period from July 28, 1983
(Date of Inception) to July 31, 1996 and the
Years ended July 31, 1996, 1995 and 1994 .................. F-7 - F-8
Notes to Financial Statements ................................ F-9

All schedules are omitted for the reason that they are not required or are not
applicable, or the required information is shown in the financial statements or
notes thereto.

<PAGE>

Independent Auditors' Report

The Board of Directors and Stockholders
Daltex Medical Sciences, Inc.:

We have audited the financial statements of Daltex Medical Sciences,
Inc. (A Development Stage Enterprise) as listed in the accompanying
index. These financial statements are the responsibility of the
Company's management. Our responsibility is to report on these financial
statements based on the results of our audits.

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

The accompanying financial statements have been prepared assuming that
Daltex Medical Sciences, Inc. will continue as a going concern. As
discussed in note 2 to the financial statements, the Company has
suffered recurring losses from operations and has working capital and
total stockholders' deficiencies at July 31, 1996 and 1995. Furthermore,
at July 31, 1996, 1995 and 1994 the Company could not demonstrate that
it had sufficient liquidity to meet its routine operating costs for the
next year. These circumstances raise substantial doubt about the
entity's ability to continue as a going concern. Management's plans in
regard to these matters are also described in note 2. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.

Because of the significance of the uncertainty discussed in the
preceding paragraph, we are unable to express, and we do not express, an
opinion on (1) the accompanying 1996, 1995 and 1994 financial
statements, or (2) the accompanying statements of operations,
stockholders' deficiency, and cash flows for the period from July 28,
1983 (date of inception) to July 31, 1996.

KPMG Peat Marwick LLP
Short Hills, New Jersey
September 19, 1996

F-1

<PAGE>

DALTEX MEDICAL SCIENCES, INC.
(A Development Stage Enterprise)

Balance Sheets

July 31, 1996 and 1995

Assets 1996 1995
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 49,926 10,862
Other receivables 15,319 43,448
Prepaid royalty 60,000 --
----------- -----------
Total current assets 125,245 54,310

Office equipment, at cost, less accumulated depreciation and
amortization -- 2,568
Patents, net of accumulated amortization of $134,246 and $115,677 in
1996 and 1995, respectively
-- 18,569
Prepaid royalty 185,000 --
Other noncurrent assets 3,375 3,375
----------- -----------
$ 313,620 78,822
=========== ===========

Liabilities and Stockholders' Deficiency

Current liabilities:
Accounts payable and accrued expenses 885,942 1,008,900
Advanced royalty payments 120,000 --
----------- -----------
Total current liabilities 1,005,942 1,008,900
----------- -----------

Advanced royalty payments 370,000 --
----------- -----------

Stockholders' deficiency:
Preferred Stock, par value $1.00 per share. Authorized
1,000,000 shares; no shares issued and outstanding in 1996
and 1995 -- --
Common Stock, par value $.01 per share. Authorized 20,000,000
shares; 8,632,699 shares issued and outstanding in 1996
and 1995
86,327 86,327
Additional paid-in capital 6,816,369 6,816,369
Deficit accumulated during the development stage
(7,965,018) (7,832,774)
Total stockholders' deficiency (1,062,322) (930,078)

Commitments and contingencies
$ 313,620 78,822
=========== ===========
</TABLE>

See accompanying notes to financial statements.

F-2

<PAGE>

DALTEX MEDICAL SCIENCES, INC.
(A Development Stage Enterprise)

Statements of Operations

For the Period from July 28, 1983 (Date
of Inception) to July 31, 1996 and the
Years ended July 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
July 28, 1983
(date of
inception)
to July 31, Year ended July 31
1996 1996 1995 1994
<S> <C> <C> <C> <C>
Revenues:
Sale of technology $ 300,000 -- -- --
Sales 208,440 -- -- --
License fees, grants and royalties 2,370,096 287,968 295,829 178,022
Interest and other income 1,712,561 75,487 112 1,676
------------ ------------ ------------ ------------
4,591,097 363,455 295,941 179,698
------------ ------------ ------------ ------------

Expenses incurred during the development stage:
Cost of sales 313,243 -- -- 115,048
Research and development 3,335,251 6,400 -- 72,923
General and administrative 8,907,621 489,299 808,424 381,554
------------ ------------ ------------ ------------
12,556,115 495,699 808,424 569,525
------------ ------------ ------------ ------------

Net loss $ (7,965,018) (132,244) (512,483) (389,827)
============ ============ ============ ============

Net loss per common share $ (1.03) (.02) (.06) (.05)
============ ============ ============ ============

Weighted average number of shares outstanding
7,729,000 8,633,000 8,633,000 8,596,000
============ ============ ============ ============
</TABLE>

See accompanying notes to financial statements.

F-3

<PAGE>

DALTEX MEDICAL SCIENCES, INC.
(A Development Stage Enterprise)

Statements of Stockholders' Deficiency

For the Period from July 28, 1983
(Date of Inception) to July 31, 1996
<TABLE>
<CAPTION>
Common Stock
Class A to be issued
Common Stock Common Stock Additional Shares
Shares Shares paid-in to be
issued Amount issued Amount capital issued Amount

<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of shares pursuant to
stock subscriptions in August 1983 2,250 $ 23 -- $ -- 455,377 -- $ --
Issuance of shares for patents
in August 1983 750 7 -- -- 5,895 -- --
1,000-for-1 stock split in March 1984 2,997,000 29,970 -- -- (29,970) -- --
Issuance of shares for cash to members
of the Scientific Advisory Board
in March 1984 452,930 4,529 -- -- -- -- --
Issuance of shares for cash to two
officers/stockholders/directors in
March 1984 300,000 3,000 -- -- 12,000 -- --
Issuance of shares for cash to two
officers/stockholders/directors in
March 1984 -- -- 600,000 6,000 -- -- --
Common Stock to be issued
upon execution of agreement -- -- -- -- -- 115,310 1,153
Common Stock to be issued
to university -- -- -- -- 37,312 18,750 188
Net loss -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at July 31, 1984 3,752,930 37,529 600,000 6,000 480,614 134,060 1,341

Net proceeds from public offering 3,450,000 34,500 -- -- 5,514,063 -- --
Issuance of Common Stock
previously held as "to be issued"
134,060 1,341 -- -- -- (134,060) (1,341)
Issuance of shares to an officer 50,000 500 -- -- 24,500 -- --
Net loss -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at July 31, 1985 7,386,990 73,870 600,000 6,000 6,019,177 -- --

Net loss -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at July 31, 1986 7,386,990 73,870 600,000 6,000 6,019,177 -- --

Net loss -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at July 31, 1987 7,386,990 73,870 600,000 6,000 6,019,177 -- --

Deficit
accumulated
Stock during the Treasury Stock
purchase development Shares
receivable stage held Amount Total

Issuance of shares pursuant to
stock subscriptions in August 1983 - -- - $ -- 455,400
Issuance of shares for patents
in August 1983 - -- - -- 5,902
1,000-for-1 stock split in March 1984 - -- - -- --
Issuance of shares for cash to members
of the Scientific Advisory Board
in March 1984 - -- - -- 4,529
Issuance of shares for cash to two
officers/stockholders/directors in
March 1984 - -- - -- 15,000
Issuance of shares for cash to two
officers/stockholders/directors in
March 1984 - -- - -- 6,000
Common Stock to be issued upon
execution of agreement - -- - -- 1,153
Common Stock to be issued
to university - -- - -- 37,500
Net loss - (171,180) - -- (171,180)
- ---------- - ---------- ----------
Balance at July 31, 1984 - (171,180) - -- 354,304

Net proceeds from public offering - -- - -- 5,548,563
Issuance of Common Stock
previously held as "to be issued"
- -- - -- --
Issuance of shares to an officer - -- - -- 25,000
Net loss - (980,486) - -- (980,486)
- ---------- - ---------- ----------
Balance at July 31, 1985 - (1,151,666) - -- 4,947,381

Net loss - (993,539) - -- (993,539)
- ---------- - ---------- ----------
Balance at July 31, 1986 - (2,145,205) - -- 3,953,842

Net loss - (753,951) - -- (753,951)
- ---------- - ---------- ----------
Balance at July 31, 1987 - (2,899,156) - -- 3,199,891

</TABLE>

F-4

<PAGE>

DALTEX MEDICAL SCIENCES, INC.
(A Development Stage Enterprise)

Statements of Stockholders' Deficiency, Continued

Common Stock
Class A to be issued
Common Stock Common Stock Additional Shares
Shares Shares paid-in to be
issued Amount issued Amount capital issued Amount
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of shares pursuant to a
public relations agreement 24,000 $240 -- $ -- 20,760 -- $ --
Issuance of shares in lieu of cash
payments to members of the
Scientific Advisory Board 240,000 2,400 -- -- 147,600 --
Issuance of shares in exchange for patents 200,000 2,000 -- -- 125,500 -- --
Issuance of shares pursuant to an
employment agreement 50,000 500 -- -- 48,000 -- --
Purchase of Treasury Stock -- -- -- -- -- -- --
Issuance of shares pursuant to
exercise of stock options 100,000 1,000 -- -- 111,500 -- --
Warrant offering costs -- -- -- -- (30,000) -- --
Net loss -- -- -- -- -- -- --
------- --------- ------ ------- ----- --------- -------
Balance at July 31, 1988 8,000,990 80,010 600,000 6,000 6,442,537 -- --

Cancellation of Treasury Stock (38,291) (383) -- -- (112,117) -- --
Issuance of shares to an officer 50,000 500 -- -- 34,500 -- --
Issuance of shares to a director
for services performed 35,000 350 -- -- 26,994 -- --
Issuance of shares to the estate
of a former officer 25,000 250 -- -- 11,000 -- --
Issuance of shares to a consultant 10,000 100 -- -- 9,400 -- --
Net loss -- -- -- -- -- -- --
--------- --------- ------ ------- ----- --------- -------
Balance at July 31, 1989 8,082,699 80,827 600,000 6,000 6,412,314 -- --

Net loss -- -- -- -- -- -- --
--------- --------- ------ ------- ----- --------- -------
Balance at July 31, 1990 8,082,699 80,827 600,000 6,000 6,412,314 -- --

Net loss -- -- -- -- -- -- --
--------- --------- ------ ------- ----- --------- -------
Balance at July 31, 1991 8,082,699 80,827 600,000 6,000 6,412,314 -- --

Issuance of shares to a
director and former officer 400,000 4,000 -- -- 158,000 -- --
Net loss -- -- -- -- -- -- --
--------- --------- ------ ------- ----- --------- -------
Balance at July 31, 1992 8,482,699 84,827 600,000 6,000 6,570,314 -- --

Issuance of options/common
stock to be issued -- -- -- -- 239,155 150,000 1,500
Net loss -- -- -- -- -- -- --
--------- --------- ------ ------- ----- --------- -------
Balance at July 31, 1993 8,482,699 84,827 600,000 6,000 6,809,469 150,000 1,500

Deficit
accumulated
Stock during the Treasury Stock
purchase development Shares
receivable stage held Amount Total

Issuance of shares pursuant to a
public relations agreement -- -- -- $ -- 21,000
Issuance of shares in lieu of cash
payments to members of the
Scientific Advisory Board -- -- -- -- 150,000
Issuance of shares in exchange for patents -- -- -- -- 127,500
Issuance of shares pursuant to an
employment agreement -- -- -- -- 48,500
Purchase of Treasury Stock -- -- 38,291 (112,500) (112,500)
Issuance of shares pursuant to
exercise of stock options -- -- -- -- 112,500
Warrant offering costs -- -- -- -- (30,000)
Net loss -- (862,215) -- -- (862,215)
------ ---------- ------ ------ ----------
Balance at July 31, 1988 -- (3,761,371) 38,291 (112,500) 2,654,676

Cancellation of Treasury Stock -- -- (38,291) 112,500 --
Issuance of shares to an officer -- -- -- -- 35,000
Issuance of shares to a director
for services performed -- -- -- -- 27,344
Issuance of shares to the estate
of a former officer -- -- -- -- 11,250
Issuance of shares to a consultant -- -- -- -- 9,500
Net loss -- (883,528) -- -- (883,528)
------ ---------- ------ ------ ----------
Balance at July 31, 1989 -- (4,644,899) -- -- 1,854,242

Net loss -- (622,172) -- -- (622,172)
------ ---------- ------ ------ ----------
Balance at July 31, 1990 -- (5,267,071) -- -- 1,232,070

Net loss -- (737,525) -- -- (737,525)
------ ---------- ------ ------ ----------
Balance at July 31, 1991 -- (6,004,596) -- -- 494,545

Issuance of shares to a
director and former officer -- -- -- -- 162,000
Net loss -- (391,229) -- -- (391,229)
------ ---------- ------ ------ ----------
Balance at July 31, 1992 -- (6,395,825) -- -- 265,316

Issuance of options/common
stock to be issued (1,500) -- -- -- 239,155
Net loss -- (534,639) -- -- (534,639)
------ ---------- ------ ------ ----------
Balance at July 31, 1993 (1,500) (6,930,464) -- -- (30,168)
</TABLE>

F-5

<PAGE>

DALTEX MEDICAL SCIENCES, INC.
(A Development Stage Enterprise)

Statements of Stockholders' Deficiency, Continued
<TABLE>
<CAPTION>
Common Stock
Class A to be issued
Common Stock Common Stock Additional Shares
Shares Shares paid-in to be
issued Amount issued Amount capital issued Amount
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of options -- $ -- -- $ -- 900 -- $ --
Issuance of common stock to be
issued/forgiveness of stock purchase
receivable 150,000 1,500 -- -- -- (150,000) (1,500)
Termination of Class A Common Stock -- -- (600,000) (6,000) 6,000 -- --
Net loss -- -- -- -- -- -- --
--------- ------ ------- ----- --------- ------- -----
Balance at July 31, 1994 8,632,699 86,327 -- -- 6,816,369 -- --

Net loss -- -- -- -- -- -- --
--------- ------ ------- ----- --------- ------- -----
Balance at July 31, 1995 8,632,699 86,327 -- -- 6,816,369 -- --
Net loss -- -- -- -- -- -- --
--------- ------ ------- ----- --------- ------- -----
Balance at July 31, 1996 8,632,699 $86,327 -- $ -- 6,816,369 -- $ --
========= ====== ======= ===== ========= ======= =====

Deficit
accumulated
Stock during the Treasury Stock
purchase development Shares
receivable stage held Amount Total
Issuance of options $ -- -- -- $ -- 900
Issuance of common stock to be
issued/forgiveness of stock purchase
receivable 1,500 -- -- -- 1,500
Termination of Class A Common Stock -- -- -- -- --
Net loss -- (389,827) -- -- (389,827)
-------- ---------- ----- ----- ----------
Balance at July 31, 1994 -- (7,320,291) -- -- (417,595)

Net loss -- (512,483) -- -- (512,483)
-------- ---------- ----- ----- ----------
Balance at July 31, 1995 -- (7,832,774) -- -- (930,078)

Net loss -- (132,244) -- -- (132,244)
-------- ---------- ----- ----- ----------
Balance at July 31, 1996 $ -- (7,965,018) -- $ -- (1,062,322)
======== ========== ===== ===== ==========

</TABLE>

See accompanying notes to financial statements.

F-6

<PAGE>

DALTEX MEDICAL SCIENCES, INC.
(A Development Stage Enterprise)

Statements of Cash Flows

For the Period from July 28, 1983 (Date
of Inception) to July 31, 1996 and the
Years ended July 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
July 28, 1983
(date of
inception)
to July 31, Year ended July 31
1996 1996 1995 1994
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(7,965,018) (132,244) (512,483) (389,827)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Noncash compensation charges 889,130 -- 60,601 50,900
Depreciation and amortization expense 310,234 21,137 22,860 22,691
Write-off of patents 105,221 -- -- --
Write-off of inventory and advance
payments for inventory 115,048 -- -- 115,048
Recovery of bad debts due from officer -- -- (60,601) (50,000)
Loss on disposal of equipment 53,386 -- -- --
Loss on sale of U.S. Government obligations and
other short-term investments 2,999 -- -- --
Forgiveness of stock subscription receivable 1,500 -- -- 1,500
Changes in operating assets and liabilities:
Decrease (increase) in grant and other
receivables, net (15,319) 28,129 (43,448) --
Increase in inventory (54,435) -- -- --
Decrease in advance payments for inventory (60,613) -- -- --
Increase in prepaid royalty (245,000) (245,000) -- --
(Decrease) increase in accounts payable
and accrued expenses 888,264 (122,958) 516,843 92,536
Increase in advanced royalty payments 490,000 490,000 -- --
----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities (5,484,603) 39,064 (16,228) (157,152)
----------- ----------- ----------- -----------
</TABLE>

F-7

<PAGE>

DALTEX MEDICAL SCIENCES, INC.
(A Development Stage Enterprise)

Statements of Cash Flows, Continued

<TABLE>
<CAPTION>
July 28, 1983
(date of
inception)
to July 31, Year ended July 31
1996 1996 1995 1994
<S> <C>
Cash flows from investing activities:
Purchases of short-term investments $(8,813,987) -- -- --
Maturities of short-term investments 8,810,988 -- -- --
Purchase of office equipment (159,370) -- -- --
Purchase of patents (171,750) -- -- --
Increase in due from officer (110,601) -- -- --
Increase in other assets (30,095) -- -- --
----------- ----------- ----------- -----------
Net cash used in investing
activities (474,815) -- -- --
----------- ----------- ----------- -----------

Cash flows from financing activities - proceeds
from sale of Common Stock and Warrants, net 6,009,344 -- -- --
----------- ----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 49,926 39,064 (16,228) (157,152)

Cash and cash equivalents at beginning of period -- 10,862 27,090 184,242
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $49,926 49,926 10,862 27,090
=========== =========== =========== ===========
</TABLE>

See accompanying notes to financial statements.

F-8

<PAGE>

DALTEX MEDICAL SCIENCES, INC.
(A Development Stage Enterprise)

Notes to Financial Statements

July 31, 1996 and 1995

(1) Summary of Significant Accounting Policies

(a) Organization

Daltex Medical Sciences, Inc. (a development stage enterprise)
(the Company) was organized under the laws of the State of
Delaware on July 28, 1983, principally to engage in research and
development activities with the objective of developing and
commercializing certain cost-reducing medical device and
pharmaceutical technologies.

Since inception, the Company has been engaged in organizational
activities, including recruitment of officers, employees and
members of its Scientific Advisory Board (SAB); research and
development of medical device and pharmaceutical products,
including the testing of prototypes; securing or attempting to
secure rights to medical device and pharmaceutical product
technologies; licensing, selling and attempting to license
certain technologies to domestic and foreign companies; and
marketing or attempting to market certain antimicrobial device
technology.

(b) Office Equipment

Office equipment was stated at cost. As of July 31, 1996, all
such equipment has been fully depreciated and amortized.
Depreciation and amortization of office equipment was computed
using the straight-line method over the estimated useful lives
of the respective assets or over the shorter of the lease term
or estimated useful life. Maintenance and repairs are charged to
operations as incurred, while renewals and improvements are
capitalized.

The Company considers securities with maturities of three months
or less, when purchased, to be cash equivalents.

(d) Financial Instruments

The carrying values of the Company's financial instruments at
July 31, 1996 approximate their estimated fair values. The
following methods and assumptions were used to estimate the fair
value of the Company's financial instruments:

Cash and Cash Equivalents

The carrying amount approximates fair value due to the
short-term nature of these instruments.

F-9

<PAGE>

DALTEX MEDICAL SCIENCES, INC.
(A Development Stage Enterprise)

Notes to Financial Statements, Continued

(1) Summary of Significant Accounting Policies, cont.

(d) Financial Instruments, cont.

Other Receivables, Prepaid Royalty and Advanced Royalty
Payments

The carrying value is comparable to the estimated fair
value.

Accounts Payable and Accrued Expenses

The carrying amount reported in the balance sheets for
accounts payable and accrued expenses approximates fair
value.

(e) Net Loss Per Common Share

Net loss per common share is based on the weighted average
number of common shares outstanding and common shares which the
Company is obligated to issue pursuant to agreements for which
no payment is required (determined to be outstanding as of the
date on which they were committed by the Company). Common shares
which are issuable upon the exercise of stock options and
warrants are excluded from the loss per share computation
because the effect of their inclusion would be antidilutive.

(f) Revenue Recognition

Product sales revenue is recognized upon shipment of goods.
Contract revenue under license agreements is recognized as
earned in accordance with the terms of the related agreements.
Payments due under research grants are recognized as revenue as
the related research expenses are incurred and in accordance
with the specific terms of the respective grants. Payments
received in advance of performance under license agreements and
research grants are deferred and recognized as revenue when
earned.

(g) Research and Development Costs

All research and development costs are expensed as incurred.

(h) Patents

Patent costs were amortized over a maximum of 17 years or the
remaining useful life, whichever was shorter. The patents are
fully amortized at July 31, 1996.

F-10

<PAGE>

DALTEX MEDICAL SCIENCES, INC.
(A Development Stage Enterprise)

Notes to Financial Statements, Continued

(1) Summary of Significant Accounting Policies, cont.

(i) Income Taxes

The Company utilizes Statement of Financial Accounting Standards
No. 109 (FAS 109), "Accounting for Income Taxes." FAS 109
requires the asset and liability method of accounting for
deferred tax assets and liabilities. Such assets and liabilities
are recognized for the estimated future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and the benefits arising from the
realization of operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted
tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. Under FAS
109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date of the tax rate change.

(j) Use of Estimates

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

(k) Reclassifications

Certain reclassifications were made to the 1995 and 1994
financial statements to conform with the 1996 presentation.

(2) Liquidity

The accompanying financial statements have been prepared on a going
concern basis which contemplates the continuation of operations,
realization of assets and liquidation of liabilities in the ordinary
course of business. The Company has accumulated a deficit as of July
31, 1996 of $7,965,018 ($7,832,774 at July 31, 1995). As of July 31,
1996 and 1995, the Company has $49,926 and $10,862, respectively, in
cash and cash equivalents, working capital deficits of $880,697 and
$954,590, respectively, and total stockholders' deficiencies of
$1,062,322 and $930,078, respectively. The limited current cash
balances and significant financial obligations raise substantial doubt
that the Company will be able to meet its routine operating costs for
all of fiscal 1997. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result should the
Company be unable to continue as a going concern.

F-11

<PAGE>

DALTEX MEDICAL SCIENCES, INC.
(A Development Stage Enterprise)

Notes to Financial Statements, Continued

(2) Liquidity, cont.

Management's plan in order to continue in operation for the next year
is to attempt to raise additional capital while still attempting to
develop, market, license and sell its products. There can be no
assurance, however, that the Company will have sufficient funds to
carry out its plans or that it will be able to develop, manufacture or
successfully market any of its products. Future revenues of the Company
may be limited; sales, if any, may not be profitable; and the Company
may not have sufficient funds available to restart its research and
development programs or to market any products which it may develop. To
meet its future liquidity requirements, the Company will be required to
generate sufficient income through operations or obtain additional
financing as required, of which there is no assurance. The Company is
also continuing to examine merger, acquisition and joint venture
possibilities.

(3) Capital Stock

At July 31, 1996 and 1995, the Company's authorized capital stock
consisted of 1,000,000 shares of Preferred Stock, par value $1.00 per
share (none of which has been issued), and 20,000,000 shares of Common
Stock, par value $.01 per share. In addition, 600,000 shares of Class A
Common Stock, par value $.01 per share, had been authorized but expired
on July 31, 1994. The holders of the Preferred Stock would have voting
rights, dividend rights and conversion rights as authorized by the
Board of Directors (the Board) upon issuance of such Preferred Stock.

In September 1984, five stockholders paid the Company an additional
$.45 per share ($342,900) for an aggregate of 762,000 shares of Common
Stock issued to them in August 1983 in response to a position taken by
the National Association of Securities Dealers, Inc. as to underwriting
compensation in connection with the Company's public offering. This
amount was recorded at July 31, 1984.

In October and November 1984, the Company issued 1,150,000 Units at a
price of $6.00 per Unit in connection with an initial public offering.
Each Unit consists of three shares of Common Stock and three Class A
Warrants. Exercise of each Class A Warrant, at a price of $3.25,
subject to adjustment under certain circumstances, entitles the holder
to receive one share of Common Stock and one Class B Warrant until
April 30, 1997 (expiration date extended in April 1996); exercise of
each Class B Warrant, at a price of $5.00, subject to adjustment under
certain circumstances, entitles the holder to receive one share of
Common Stock until October 31, 1997 (expiration date extended in April
1996). Under certain circumstances, the Company has the right to call
the Class A and Class B Warrants at $.10 per Warrant; the exercise
prices for the aforementioned Warrants were reduced in September 1995
from $3.25 to $.25 and $5.00 to $1.00, respectively.

F-12

<PAGE>

DALTEX MEDICAL SCIENCES, INC.
(A Development Stage Enterprise)

Notes to Financial Statements, Continued

(3) Capital Stock, cont.

In March 1985, in connection with a research and development agreement
(see note 6), the Company issued 115,310 shares of Common Stock to a
director of the Company, a member of its SAB and an associate, and
18,750 shares to a university involved with the research. Such shares
had been recorded as "shares to be issued" at July 31, 1984 and were
issued in 1985.

In July 1985, the Company issued 50,000 shares of Common Stock for $.01
per share to an officer. The difference between the issue price and the
fair value, which was determined by an investment banker who is a
related party, on the date of issuance was recorded as compensation
expense.

On July 15, 1986, pursuant to a one-year agreement for public relations
services, the Company agreed to pay $1,500 each month and issue 2,000
shares of Common Stock each month for the term of the agreement. In
1988, 24,000 shares were issued, as well as options for an additional
6,000 shares of Common Stock, for no consideration.

The Company entered into two agreements in 1987 pursuant to which
individuals assigned their rights to patents to the Company. One of
these agreements was entered into with a director and member of the SAB
whereby the Company has issued 150,000 shares of Common Stock at no
consideration. The fair value of such shares was capitalized as patent
cost. The Company also agreed to pay the estate of such individual one
third of any royalties received by the Company from net sales of
products by any licensee. The second agreement was entered into with a
member of the SAB and another individual for the assignment of a patent
application and certain products to the Company. In consideration, the
Company issued 50,000 shares of Common Stock, the fair value of which
was capitalized as patent costs, and granted options to purchase an
additional 80,000 shares of Common Stock to the SAB member and 25,000
shares of Common Stock to the individual. Such options were issued at
prices ranging between $.625 and $3.25, the fair value at the
respective dates of grant.

On January 1, 1987, the Company entered into an agreement with six
members of its SAB regarding future compensation for their services.
Under the terms of the arrangement, each of the members received 40,000
shares of Common Stock of the Company in lieu of an annual retainer of
$25,000. As of January 1, 1987, such shares represented an aggregate
market value of $150,000, which was recorded as research and
development expense over the period of the agreement.

On December 17, 1986, the Company agreed to establish a trust fund with
an aggregate of 25,000 shares of the Company's Common Stock for the
children of a former executive who was killed in an automobile
accident. Such shares were issued on July 31, 1989. In addition, the
Company forgave an outstanding loan of $25,000 and paid the executive's
widow a $5,000 death benefit. The fair

F-13

<PAGE>

DALTEX MEDICAL SCIENCES, INC.
(A Development Stage Enterprise)

Notes to Financial Statements, Continued

(3) Capital Stock, cont.

value of the shares on December 17, 1986, the forgiveness of the loan
and the death benefit paid were charged to general and administrative
expense for the year ended July 31, 1987. In September 1987, the
executive's widow exercised an option to acquire 100,000 shares of
Common Stock, such option having previously been granted to her late
husband, for a total consideration of $112,500. The transaction was
financed by redeeming 38,291 previously held shares of Common Stock
whose market value represented the total consideration due. Such shares
were recorded as Treasury Stock at July 31, 1988 and were cancelled
effective August 1, 1988.

Pursuant to the terms of an employment agreement with an officer, dated
February 23, 1987, the Company issued, in quarterly installments, an
aggregate of 50,000 shares of Common Stock at a purchase price of $.01
per share. At July 31, 1988, the Company had recorded approximately
$48,000 of compensation expense which represented the fair value of the
vested shares as of the date of grant. In addition, such officer was
granted options to acquire 50,000 shares of the Company's Common Stock
at $1.94 per share (fair value at date of grant). On October 17, 1988,
such officer was issued an additional 50,000 shares of Common Stock at
a purchase price of $.01 per share, resulting in $34,000 of
compensation expense being recorded during the year ended July 31,
1989.

In May 1988, the Company agreed to issue 35,000 shares of Common Stock
at a purchase price of $.01 per share to a director of the Company as
compensation for past services performed. The fair value of the shares
on such date was charged to general and administrative expense for the
year ended July 31, 1988. Such shares were issued during the year ended
July 31, 1989.

On September 1, 1988, the Company agreed to issue 10,000 shares of
Common Stock at a purchase price of $.01 to a consultant as
compensation for services performed. The fair value of the shares on
such date was charged to general and administrative expense for the
year ended July 31, 1989.

In September 1992, the Company entered into an agreement to issue
75,000 shares of Common Stock to each of the two inventors of certain
technology assigned to the Company at a price of $.01 per share (see
note 8). The Company recorded a charge in fiscal 1993 of $36,000
related to fair value of such shares. In fiscal 1994, the shares were
issued and the subscription receivable was forgiven by the Company.

F-14

<PAGE>

DALTEX MEDICAL SCIENCES, INC.
(A Development Stage Enterprise)

Notes to Financial Statements, Continued

(3) Capital Stock, cont.

On March 6, 1996, the Board agreed to issue a law firm 50,000 shares of
Common Stock in recognition of valued cooperation over the past several
years. The Company has recorded an expense of $2,250 in fiscal 1996
representing the estimated fair market value of such shares on the date
of the agreement. Such shares have not been issued as of July 31, 1996
pending certain administrative matters.

At July 31, 1996, Common Stock of the Company that is reserved as
potentially issuable under certain circumstances is summarized as
follows:

Common shares underlying Class A Warrants 3,450,000
Common shares underlying Class B Warrants 3,450,000
Common shares reserved for stock options 1,415,500
---------
Total common shares potentially issuable 8,315,500

(4) Stock Options

In March 1984, the Board adopted an Employee Stock Option and Stock
Appreciation Plan (the Plan) which provided for the issuance of options
for up to 500,000 shares of Common Stock. On June 7, 1990, the Board
approved an increase in the number of options which can be issued under
the Plan to 2,000,000 shares of Common Stock. In March 1991, the Board
revised the number of options to 750,000. The Plan provided that the
option price for incentive stock options may not be less than the fair
market value (110% of fair market value if the optionee is a 10% or
more stockholder) of the stock at the date of grant. The Plan
terminated in February 1994. For non-qualified stock options, the
option price is determined by a committee appointed by the Board. Under
the Plan, no options may be exercisable after ten years from the date
of grant. Common shares under option for the years ended July 31, 1996,
1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>

Number of shares Aggregate option price Range of $
1996 1995 1994 1996 1995 1994 share prices
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares under option at
beginning of year 1,165,500 1,215,500 935,500 $134,085 170,085 133,985 .01 to .72
Options granted 250,000 -- 280,000 22,500 -- 36,100 .01 to .15
Options expired -- 50,000 -- -- 36,000 -- .72
Options exercised -- -- -- -- -- --
--------- --------- --------- --------- ------- -------
Shares under option at
end of year 1,415,500 1,165,500 1,215,500 $156,585 134,085 170,085 .01 to .72
========= ========= ========= ========= ======= =======
Options exercisable 1,315,500 1,065,500 865,500 .01 to .72
========= ========= ========= ==========
</TABLE>

F-15

<PAGE>

DALTEX MEDICAL SCIENCES, INC.
(A Development Stage Enterprise)

Notes to Financial Statements, Continued

(4) Stock Options, cont.

The remaining options at July 31, 1996 are non-qualified stock options
issued outside of the Plan to certain officers, directors, members of
the SAB and others. On September 11, 1991, the former president and
chief executive officer exercised 400,000 non-qualified options at an
aggregate exercise price of $4,000. The difference between the fair
market value of the Company's Common Stock and the stock option price
has been recognized as compensation expense ($158,000) in the current
and preceding fiscal years. On September 2, 1992, the then current
president and chief operating officer was granted 275,000 non-qualified
options exercisable at $.01 per share through September 2002. Noncash
compensation expense of $100,375 was recorded in fiscal 1993 related to
such former officer's options.

In September 1992, the Company agreed to issue a non-qualified stock
option to purchase 200,000 shares of Common Stock at an exercise price
of $.10 per share to each of the two inventors of a certain technology
assigned to the Company (see note 8). During fiscal 1993, $60,000 of
expense was recorded for the difference between market value on the
date of grant and the exercise price.

In November 1993, the Company entered into a consulting arrangement
with an individual who has agreed to serve as a member of the Company's
Board and Executive Committee. The new director will receive
compensation consisting of non-qualified stock options to purchase
250,000 shares of Common Stock at an exercise price of $.13 per share
or the then fair market value. In accordance with the arrangement, the
options vested in November 1994, as the individual was still providing
services to the Company. The individual is also eligible to receive a
cash bonus of up to $60,000 to be granted solely at the discretion of
the Board as the Company's cash flow permits. The bonus is also payable
upon a change of control of the Company.

In December 1993, the Company issued a non-qualified stock option to
purchase 10,000 shares of Common Stock at an exercise price of $.06 per
share to a member of the SAB. During fiscal 1994, $900 of expense was
recorded for the difference between market value on the date of grant
and the exercise price.

In March 1996, the Company issued a non-qualified stock option to an
individual to purchase 250,000 shares of Common Stock at an exercise
price of $.09 per share, based on the current market price, in lieu of
cash compensation for his services as president and chief executive
officer of the Company since May 1995. No compensation was recorded
related to such grant.

F-16

<PAGE>

DALTEX MEDICAL SCIENCES, INC.
(A Development Stage Enterprise)

Notes to Financial Statements, Continued

(5) Income Taxes

The tax effects of temporary differences that give rise to significant
portions of the Company's deferred tax assets as of July 31, 1996 and
1995 are presented as follows:

1996 1995

Deferred tax assets:
Net operating loss carry-
forwards $2,574,000 2,717,000
Research and development tax credit
carryforward 65,000 65,000
Noncash compensation charges 156,000 156,000
Other 46,000 46,000
Advanced royalty payments 196,000 --
---------- ----------
Total deferred tax
assets 3,037,000 2,984,000

Less valuation allowance 3,037,000 2,984,000
---------- ----------
Net deferred tax
assets $ -- --
========== ==========

The valuation allowance above has been applied to offset the deferred
tax assets to recognize the uncertainty of realizing such tax benefits.

At July 31, 1996, the Company has available net operating loss
carryforwards of approximately $6,990,000 and $3,292,000 for Federal
and state income tax reporting purposes, respectively, which are
available to offset future Federal and state taxable income, if any.
The Company also has research and development tax credit carryforwards
of $65,000 for Federal income tax reporting purposes which are
available to reduce Federal income taxes, if any. These carryforwards
expire beginning in 1999. The Company made no payments of Federal or
state income taxes during the years ended July 31, 1996, 1995 and 1994.

(6) Office Equipment

Office equipment at July 31, 1996 and 1995 consists of the following:

1996 1995

Office and laboratory equipment $28,658 28,658
Furniture and fixtures 27,667 27,667
------- -------
56,325 56,325
Less accumulated depreciation and amortization
56,325 53,757
------- -------
$ -- 2,568
======= =======

F-17

<PAGE>

DALTEX MEDICAL SCIENCES, INC.
(A Development Stage Enterprise)

Notes to Financial Statements, Continued

(7) Advance Payments for Inventory

The Company has made certain advance payments for inventory to a
supplier as a prepayment for certain antimicrobial latex examination
gloves. The Company is attempting to sell gloves through various
distributors outside the United States. However, no orders have been
placed to date and, as such, a reserve against such amount has been
recorded at July 31, 1996 and 1995 due to the uncertainty regarding the
assets' realizability.

(8) License Agreement and Research Grants

In March 1991, the Company entered into a definitive license agreement
under which a leading manufacturer and marketer of catheters and
cardiovascular supplies is obligated to pay royalties, including
minimum annual royalties, to the Company based upon units sold in
several product applications which incorporate the Company's
antimicrobial technology. Revenues under such agreement totaled 84%,
85% and 75% of total license fee revenue in fiscal 1996, 1995 and 1994,
respectively. Furthermore, in connection with a patent dispute which
was settled in early 1995, certain additional royalties are to be
remitted to the Company which, in turn, must remit such to a third
party. On October 27, 1995, the Company modified the license agreement
and received a $600,000 payment as advanced royalties for the period
from August 31, 1995 through September 1, 2000, of which 50% is
immediately payable to a university (see note 10). Revenue, as well as
the expense for the amounts paid to the university, will be recognized
ratably over the term of the agreement; such amounts totaled $110,000
and $55,000, respectively, for the year ended July 31, 1996. In
November 1995, the Company received $75,000 from the manufacturer to
help fund the payment of legal costs incurred by the Company in
connection with certain patent interference proceedings. Such amount is
included in other income for the year ended July 31, 1996.

The Company entered into a definitive license agreement with a leading
manufacturer of medical implants in May 1992. The manufacturer had
previously been testing the Company's antimicrobial technology with a
range of medical implant products. The Company will receive
nonrefundable annual development fees for a predetermined time period
and, thereafter, royalties when products are sold using the technology.
During the years ended July 31, 1996, 1995 and 1994, 16%, 15% and 25%,
respectively, of license fee revenue related to this agreement.

In September 1992, the Company entered into patent purchase and option
agreements with a German pharmaceutical company and received a
nonrefundable payment of $325,000. In May 1993, the German company
notified the Company it would not exercise the option to acquire
certain skin-care technology. The

F-18

<PAGE>

DALTEX MEDICAL SCIENCES, INC.
(A Development Stage Enterprise)

Notes to Financial Statements, Continued

(8) License Agreement and Research Grants, cont.

consideration for the option is included in license fee revenue. The
patents were previously assigned to the Company and had no cost basis
in the accompanying financial statements. The agreement also provided
for an additional cash payment based upon obtaining additional European
patents and resolving a challenge raised to a German patent and future
challenges raised to other European patents, if any, and future
royalties of varying percentages based upon net sales of products, if
any. The purchaser was responsible for all costs of developing,
manufacturing and marketing products as well as future legal costs
associated with the technology. On October 17, 1995, the Company was
informed that the purchaser was abandoning the projects for developing
products under the two German patents it had acquired from the Company
pursuant to the 1992 agreement. Consequently, under the terms of the
1992 agreement, the Company has the right to repurchase the subject
patents and certain other technology for the $300,000 non-refundable
cash payment received plus approximately $100,000 representing the
purchaser's out-of-pocket expenses. The Company had six months to
exercise its right to purchase, which it subsequently elected not to
pursue.

The two inventors of the technology who originally assigned the rights
to the Company have each agreed to accept as a form of compensation the
right to purchase 75,000 shares of Common Stock at a price of $.01 per
share and to each receive an additional non-qualified stock option to
purchase 200,000 shares of Common Stock at an exercise price of $.10
per share exercisable through 1997. A noncash expense was recorded in
fiscal 1993 upon completion of the agreements based upon the difference
between the fair market value of the Company's Common Stock and the
aforementioned purchase and option prices. If the Company receives
future royalties on the technology, a total of 33% of the royalties
will be due and payable to the inventors.

Certain additional license agreements with varying terms and conditions
have been entered into by the Company.

(9) Lease

The lease on the Company's corporate offices expired in June 1992 but
has been extended year-to-year at the same annual rental rate of
approximately $20,000. Such extension is cancellable with 90 days'
written notice. Aggregate rent expense was $22,230 for the years ended
July 31, 1996, 1995 and 1994.

(10) Commitments and Contingencies

The Company has been granted exclusive worldwide commercial licenses to
any results of the sponsored research with a university. In connection
therewith, the Company will share gross revenue on a 50-50 basis with
such university if the Company elects to sublicense the manufacture of
products developed from

F-19

<PAGE>

DALTEX MEDICAL SCIENCES, INC.
(A Development Stage Enterprise)

Notes to Financial Statements, Continued

(10) Commitments and Contingencies, cont.

such research and development. In the event that the Company elects to
manufacture and sell the product itself, royalty payments will be made.
At July 31, 1996, $165,706 is owed to the university related to the
licenses, which is included in accounts payable and accrued expenses.

Effective March 1, 1993, the Company and the university entered into an
agreement to the effect that if revenues from sales of the Company's
antimicrobial surgical gloves achieved at least $2,000,000 in net sales
during the research year beginning March 1, 1993, the Company would
provide $100,000 in research funding to the university and $225,000 in
research funding beginning March 1, 1994 if the Company achieves at
least $4,000,000 in net sales of such gloves during the second research
year. Payments were to be made quarterly, in advance, and on a timely
basis in order for the research effort to be continued by the
university, with the first payment due March 1, 1993. In December 1993,
the university met with the Company and on December 7, 1993 sent a
letter of understanding to the Company requiring that the Company pay
$50,000 of the total of $75,000 due the university under the research
agreement by December 20, 1993 and placing all further research work
for the Company on hold. The Company received advance royalty payments
totaling $50,000 from one of its sublicensees in order to meet the
immediate research funding obligation owed to the university under the
research agreement as required under the letter of understanding and
paid the university the $50,000 due on December 16, 1993. On December
16, 1993, the Company also authorized a final quarter of research to be
performed, with the understanding that a payment of $25,000 would be
due on January 31, 1994 and the final payment of up to $25,000 for such
research would be due by March 1, 1994. In June 1995, $10,000 was paid
to the university to cover a portion of such amounts. In November 1995,
payment was made to the university of the remaining $34,289 of research
amounts and $300,000 representing its share of the advanced royalty
payment (see note 8). The Company has been billed $630,168 by the
university's patent counsel for such work as of July 31, 1996, although
the Company is currently disputing a significant portion of these legal
fees. The legal fees of $630,168 are included in accounts payable and
accrued expenses at July 31, 1996.

Pursuant to the existing license arrangements with the university for
the antimicrobial technology, an agreement in principle also contains
the negotiated percentage royalty scheduled to be paid by the Company
to the university at rates ranging from 2.5% to 5.5% depending upon
aggregate net annual sales levels of antimicrobial surgical gloves. The
agreement in principle also provides that the royalty rates for
antimicrobial examination gloves shall be two thirds of the scheduled
rates for the antimicrobial surgical gloves. The Company paid $3,481 in
November 1995 related to such royalties.

F-20

<PAGE>

DALTEX MEDICAL SCIENCES, INC.
(A Development Stage Enterprise)

Notes to Financial Statements, Continued

(10) Commitments and Contingencies, cont.

By letter dated February 8, 1996, the Company has agreed that it will
support certain research efforts directed by the Department of Surgery
of Columbia University. Accordingly, the Company has made a commitment
to make a research gift in the amount of $20,000 to the laboratory,
subject to certain conditions described below, in recognition of the
consultation service and assistance by the staff in support of the
Company's efforts in continuing to obtain clearance from the U.S. Food
and Drug Administration (FDA) to market the Company's antimicrobial
gloves. This research gift will be paid upon the first to occur of the
following: (a) the Company's receipt of clearance from the FDA to
market its antimicrobial gloves; or (b) the Company's successful
entrance into a business venture with a revenue producing company
related to production and sales of such antimicrobial gloves. Such gift
has no bearing or effect on prior royalty or other payment arrangements
between the Company and the university.

(11) Due from Officer

The Company had certain loans from an officer, originating before 1989,
totaling $65,000, plus accrued interest and other advances. The
nonrecourse loans were collateralized by 30,000 shares of Common Stock
of the Company and bore interest at rates between 8% and 11% per annum.
On September 2, 1992, the interest rate on such loans was changed to
the prime rate in effect when accrued. The loans plus accrued interest
were due to be repaid to the Company on October 21, 1994. The officer
notified the Company of his intention to forgo future cash
compensation, effective November 5, 1993, in order to preserve the
Company's remaining working capital, and ultimately to resign from his
position at the Company. On January 15, 1994, the officer resigned but
agreed to continue to serve on the Board and as a member of the
Executive Committee and to provide consulting services. The officer was
being compensated at the same rate as he received as president, and his
compensation has been applied against his outstanding loan balance. The
Company provided an allowance against the entire balance owed at July
31, 1993. Compensation earned by the former officer in fiscal 1994
totaled approximately $50,000, and, as such, the expense was charged to
operations and the aforementioned allowance was reversed accordingly.

In December 1994, at such time as the officer resigned from the Board
and Executive Committee, the Company credited $25,601 against a portion
of the loan for services from August 1, 1994 to December 7, 1994 and a
bonus was granted for the remaining $35,000 loan balance for services
rendered since 1983.

(12) Other Receivables

At July 31, 1996 and 1995, other receivables includes certain license
payments due the Company for June and July 1996 and 1995, respectively.
Such monies were received subsequent to the respective fiscal year end.

F-21

FIFTH LEASE EXTENSION AGREEMENT

THIS AGREEMENT dated this 31st day of May, 1996, by and
between ICE ASSOCIATES, having an address of 15 Green Street, Hackensack, New
Jersey (hereinafter called "Landlord"), DALTEX MEDICAL SCIENCES, INC. having
an address of 36-52 Kulick Road, Fairfield, New Jersey 07004 (hereinafter
called "Tenant").

W I T N E S S E T H T H A T:

WHEREAS, Landlord and Tenant entered into a Lease Agreement
("Lease") dated May 24, 1989 by which Landlord leased to Tenant 1,800 square
feet located at 36-52 Kulick Road, Fairfield, New Jersey 07004 (hereinafter
"Initial Lease Agreement"); and

WHEREAS, the Initial Lease Agreement was extended by a Lease
Extension Agreement dated May 27, 1992 (hereinafter "Lease Extension
Agreement"); and

WHEREAS, the Lease Extension Agreement was extended by
Second Lease Extension Agreement dated August 30, 1993
(hereinafter "Second Lease Extension Agreement"); and

WHEREAS, the Second Lease Extension Agreement was
extended by Third Lease Extension Agreement dated April 7, 1994
(hereinafter "Third Lease Extension Agreement"); and

WHEREAS, the Third Lease Extension Agreement was
extended by Fourth Lease Extension Agreement dated May 15, 1995
(hereinafter "Fourth Lease Extension Agreement"); and

WHEREAS, said Initial Lease Agreement as extended by Lease
Extension Agreement, Second Lease Extension Agreement, Third Lease Extension
Agreement and Fourth Lease Extension Agreement shall terminate on June 14,
1996; and

WHEREAS, the parties hereto wish to extend the term of the
Initial Lease Agreement/Lease Extension Agreement/Second Lease Extension
Agreement/Third Lease Extension Agreement/Fourth Lease Extension Agreement
under the same terms and conditions contained therein, with the exception of
those items enumerated
below.

NOW, THEREFORE, in consideration of the mutual promises
contained herein, the parties hereto agree as follows:

1. The Fourth Lease Extension Agreement is hereby extended
for one year term commencing June 15, 1996 and terminating June 14, 1997
(hereinafter "Fifth Lease Extension Agreement").

<PAGE>

2. Tenant has the right to cancel this Agreement any time
after September 14, 1996 by giving the Landlord ninety (90) days written
notice.

3. The Tenant acknowledges that is presently in possession
of the leased premises and agrees except as provided in the Lease as amended
and subject to provision of the Lease to retain possession of the same without
any representations, warranties, or covenants on the part of the Landlord and
in the condition commonly referred to as "As Is".

4. Except as particularly modified by the terms hereof, the
Initial Lease Agreement/Lease Extension Agreement/Second Lease Extension
Agreement/Third Lease Extension Agreement/Fourth Lease Extension Agreement
shall remain in full force and effect during the term of the Lease as
contained herein, which terms and conditions are hereby reaffirmed by the
parties hereto.

5. By execution of these present, each party acknowledges
the full and faithful performance by the other party of the obligations to be
performed by the other party under the Lease to the date hereof.

6. This Fifth Lease Extension Agreement shall bind and
benefit the parties hereto, their legal representatives, executors,
administrators, successors and assigns.

IN WITNESS WHEREOF, the parties have hereto executed this
Agreement the date and year first above written.

WITNESS: ICE ASSOCIATES,
as Landlord

/s/ John J. Horgan By:/s/ Salvature V. Frassetto
- ------------------------------ ----------------------------------
Salvatore V. Frassetto,
Partner

WITNESS: DALTEX MEDICAL SCIENCES, INC.
as Tenant

/s/ Diane E. Fritz By:/s/ Herbert J. Mitchele
- ------------------------------ ----------------------------------

NON-QUALIFIED STOCK OPTION AGREEMENT

BETWEEN

BRUCE HAUSMAN, ESQUIRE

AND

DALTEX MEDICAL SCIENCES, INC.

Agreement, made as of the 6th day of March, 1996, between
DALTEX MEDICAL SCIENCES, INC. ("Daltex"), a Delaware corporation located at 50
Kulick Road, 2nd Floor, Fairfield, New Jersey 07004, and Bruce Hausman,
Esquire (the "Optionee"), an individual residing at 4642 Bocaire Boulevard,
Boca Raton, Florida 33496.

W I T N E S S E T H:

WHEREAS, in lieu of cash compensation for the Optionee's
provision of valuable services to Daltex as President and Chief Executive
Officer of Daltex since May 1995, Daltex desires to grant to the Optionee a
non-qualified stock option (the "NQSO") to purchase up to Two Hundred Fifty
Thousand (250,000) shares of Daltex Common Stock, $.01 par value per share
("Common Stock").

NOW, THEREFORE, in consideration of the mutual promises set
forth herein, the parties hereby agree as follows:

1. Grant of Option and Exercise Period. Daltex hereby grants
to the Optionee the right and option to purchase, upon the terms and conditions
hereinafter set forth, Two Hundred Fifty Thousand (250,000) shares (the
"Shares") of the currently authorized but unissued shares of Common Stock at the
option price of nine cents ($0.09) per Share, subject to adjustment as provided
in paragraph 3 hereof.

Unless the NQSO is terminated earlier in accordance with the
terms hereof, the NQSO shall be exercisable from the date first above written
through March 6, 2001 (the "Exercise Period").

2. Nontransferability of NQSO. The NQSO shall not be sold,
pledged, hypothecated, assigned, transferred or otherwise disposed of in any
manner except to the extent that the NQSO may be exercised by an executor or
administrator as provided in this paragraph 2. The NQSO may be exercised, during
the lifetime of

<PAGE>

the Optionee and during the Exercise Period, only by the Optionee or, in the
event of his disability, by the Optionee's legal representative. The NQSO may
be exercised in the event of the Optionee's death during the Exercise Period,
by the executor or administrator, as the case may be, of the Optionee's
estate.

3. Adjustments.

(a) If the outstanding shares of Common Stock are
subdivided, consolidated, increased, decreased, changed into or exchanged for
a different number or kind of shares or securities of Daltex through
reorganization, merger, recapitalization, reclassification, capital adjustment
or otherwise, or if Daltex shall issue shares of Common Stock or another class
of securities of Daltex (now or hereinafter authorized) as a dividend on or
upon a stock split of the shares of Common Stock, then the number and kind of
shares of Common Stock subject to the unexercised portion of the NQSO and the
option price of the NQSO shall be adjusted to prevent the inequitable
enlargement or dilution of any rights hereunder, provided, however, that any
such adjustment shall be made without change in the total option price
applicable to the unexercised portion of the NQSO. Adjustments under this
paragraph shall be made by the Board of Directors, whose determination shall
be final and binding and conclusive upon Daltex and the Optionee. In computing
any adjustment under this paragraph, any fractional shares shall be
eliminated. Nothing contained in this Agreement shall be construed to affect
in any way the right or power of Daltex to make any adjustment,
reclassification, reorganization or changes to its capital or business
structure or to merge or to consolidate or to dissolve, liquidate or transfer
all or any part of its business or assets.

Upon the happening of an event requiring an adjustment to
the option price of the NQSO or the number of Shares purchasable hereunder,
Daltex shall forthwith give written notice to the Optionee stating the adjusted
option price of the NQSO and the adjusted number and kind of securities or other
property purchasable hereunder resulting from the event and setting forth in
reasonable detail the method of calculation and the facts upon which the
calculation is based.

(b) If Daltex consolidates with or merges into another
corporation, the Optionee shall thereafter be entitled on exercise to
purchase, with respect to each Share purchasable hereunder immediately prior
to the date upon which the consolidation or merger becomes effective, the
securities or other consideration to which a holder of one share of Common
Stock is entitled in such consolidation or merger, and shall also be entitled
on exercise to assurance that all the provisions of the NQSO shall thereafter
be applicable, as nearly as reasonably may be, to any securities or other
consideration so deliverable on exercise of the NQSO. Failure of the successor
corporation (if other than Daltex) to assume the obligations of this

<PAGE>

subparagraph 3(b) by written instrument executed and mailed to the registered
owner at the address of the owner on the books of Daltex prior to the record
date as of which holders of shares of Common Stock shall be entitled to
receive distributions as a result of the proposed transaction shall not give
rise to any additional rights in the Optionee. A sale or lease of all or
substantially all of the assets of Daltex for a consideration (apart from the
assumption of obligations) consisting primarily of securities shall be deemed
a consolidation or merger for the foregoing purposes.

(c) In case a voluntary or involuntary dissolution,
liquidation, or winding up of Daltex (other than in connection with a
consolidation or merger covered by subparagraph 3(b) above) is at any time
proposed, Daltex shall give at least ten (10) days' written notice to the
Optionee prior to the record date as of which holders of shares of Common
Stock shall be entitled to receive distributions as a result of the proposed
transaction. Such notice shall contain: (i) the date on which the transaction
is to take place; (ii) the record date as of which holders of shares of Common
Stock shall be entitled to receive distributions as a result of the
transaction; (iii) a brief description of the transaction; (iv) a brief
description of the distributions to be made to holders of shares of Common
Stock as a result of the transaction; and (v) an estimate of the fair value of
the distributions. On the date of the transaction as determined by the Board
of Directors of Daltex, if it actually occurs, the NQSO and all rights
hereunder shall terminate.

4. Manner of Exercise. The NQSO shall be exercised when
written notice of such exercise, signed by the person entitled to exercise the
NQSO, has been delivered in person or transmitted by registered or certified
mail, to the Treasurer of Daltex at its then principal office. Such written
notice shall specify the number of Shares purchasable under the NQSO which such
person then desires to purchase and shall be accompanied by (i) such
documentation, if any, as may be required by Daltex as provided in paragraph 5
hereof, (ii) payment of the NQSO purchase price times the number of Shares to be
purchased, and (iii) a written statement that the Optionee (or such other
person) is acquiring the Shares for investment and not with a view toward their
distribution. Such payment shall be in the form of cash or a certified check
(unless such certification is waived by Daltex) payable to the order of Daltex
in the amount of the option price of the NQSO times the number of Shares to be
purchased. Delivery of the foregoing notice and such documentation shall
constitute an irrevocable election to purchase the Shares specified in said
notice and the date on which Daltex received said notice and documentation
shall, subject to the provisions of paragraph 5 hereof, be the date as of which
the Shares so purchased shall be deemed to have been issued; provided, however,
that the person entitled to exercise the NQSO shall not have the rights,
privileges or status as a holder (in any capacity) of the Shares

<PAGE>

to which such exercise relates, prior to the date of receipt by Daltex of such
payment, notice and documentation.

5. Restrictions on Exercise. Anything in this Agreement to
the contrary notwithstanding, in no event may the NQSO be exercisable, in whole
or in part, if the Board of Directors of Daltex shall, at any time and in its
sole discretion, determine that (i) the listing, registration or qualification
of any Shares otherwise deliverable upon such exercise, upon any securities
exchange or under any state or federal law, or (ii) the consent or approval of
any regulatory body or the satisfaction of withholding tax or other withholding
liabilities, is necessary, or in the best interests of Daltex prior to the
effectiveness of the exercise of the NQSO. In any such event, such exercise
shall be held in abeyance and shall not be effective unless and until such
withholding, listing, registration, qualification or approval shall have been
effected or obtained free of any conditions not acceptable to Daltex.

6. Legend. The Shares which may be purchased pursuant to the
NQSO in accordance with this Agreement shall be issued pursuant to an exemption
from registration under Section 4(2) of the Securities Act of 1933, as amended
(the "Act"), and the certificates representing such Shares shall bear the
following legend:

"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933. SUCH SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE,
TRANSFERRED, HYPOTHECATED OR OTHERWISE ASSIGNED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT WITH RESPECT THERETO UNDER
SUCH ACT OR OF AN OPINION OF COUNSEL TO THE COMPANY THAT AN
EXEMPTION FROM REGISTRATION FOR SUCH SALE, OFFER, TRANSFER,
HYPOTHECATION OR OTHER ASSIGNMENT IS AVAILABLE UNDER SUCH ACT."

7. Compliance with Laws and Regulations. The Optionee
acknowledges that he has been advised that he may not sell, pledge, hypothecate,
assign, transfer, or otherwise dispose of any Shares acquired by him upon any
exercise of the NQSO pursuant to this Agreement unless such Shares are
registered under the Securities Act of 1933, as amended, or an opinion of
counsel is provided to the Company that an exemption from the registration
requirements of the Act is available.

8. Representation by Daltex. Shares deliverable on the
exercise of the NQSO shall, at delivery, be fully paid and non-assessable, free
from taxes, liens and charges with respect to their purchase. Daltex shall at
all times reserve and hold available a sufficient number of Shares to satisfy
the exercise of the NQSO.

<PAGE>

9. Notices. Except as otherwise expressly provided herein,
all notices or other communications to be given or delivered under or by reason
of the provisions of this Agreement shall be in writing and shall be deemed to
have been given when delivered personally to the recipient by reputable courier
service (charges prepaid) or mailed to the recipient by first class, certified
or registered mail, return receipt requested and postage prepaid. Such notices
and other communications will be sent to Daltex and the Optionee at the
addresses set forth in the first paragraph of this Agreement or to such other
address as the recipient has specified by prior written notice to the sending
party.

10. Governing Law; Successors and Assigns. This Agreement
shall be construed and enforced in accordance with the laws of the State of New
Jersey without regard to conflicts of law principles applicable in the State of
New Jersey. This Agreement shall be binding upon and shall inure to the benefit
of the parties hereto and their respective heirs, personal representatives,
successors or assigns, as the case may be.

11. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, and any party hereto
may execute any such counterpart, all of which, when taken together, shall
constitute one and the same instrument.

IN WITNESS WHEREOF, the parties have executed and delivered
this Agreement on the date first above written.

DALTEX MEDICAL SERVICES, INC.

By: /s/ Louis R.M. DelGuercio, M.D.
--------------------------------------------
Louis R.M. DelGuercio, M.D.
Chairman

/s/ Bruce Hausman, Esquire
--------------------------------------------
Bruce Hausman, Esquire

<ARTICLE> 5
<CIK> 0000742686
<NAME> DALTEX MEDICAL SCIENCES, INC.

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JUL-31-1996
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