DALTEX MEDICAL SCIENCES INC, 10-K/A, 1998-05-20

DALTEX MEDICAL SCIENCES INC
10-K/A, 1998-05-20
PHARMACEUTICAL PREPARATIONS

Previous: BANK OF AMERICA NATIONAL TRUST & SAVING ASSOCIATION, 8-K, 1998-05-20

Next: BAP ACQUISITION CORP, 10QSB, 1998-05-20

<PAGE>

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

FORM 10-K/A

[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, 1997

[ ] 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)

7777 Glades Road, Boca Raton, Florida 33434
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)

(561) 470-6005
--------------------------------------------------
Registrant's telephone number, including area code

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 No X
----- -----

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 March 16, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $172,654.

As of March 16, 1998, the Registrant had 8,632,699 shares of Common Stock
outstanding.

Documents Incorporated by Reference: None

<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, 1997, 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.

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.

<PAGE>

The Company's research and development activities have been
discontinued 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. 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.

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 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

2
<PAGE>

(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.

In fiscal 1997, the Company received periodic royalties and
development fees under the Arrow License. In addition, in June 1997 the
Company received $100,000 payment as consideration for the second modification
license agreement to the original license agreement of which 50% was paid to
the University for its share. 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.

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 allows 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.

(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

3
<PAGE>

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 had advised the Company that it
has entered the marketplace with respect to one of these products. 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.

(3) Gloves. During the fiscal year ended July 1997, 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 was unsucessful
in obtaining any distribution agreements.

The Company received no money from sales of its
antimicrobial latex examination or surgeons' gloves in either fiscal 1997 or
1996.

(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.

4
<PAGE>

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. Which it subsequently elected not to
pursue.

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 substantially discontinued due to the Company's limited
resources.

Pharmaceuticals

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

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.

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 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.

5
<PAGE>

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 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.

6
<PAGE>

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.

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.

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).

7
<PAGE>

The Company currently owes the University $176,605 for its
share of sublicensing and royalty payments the Company has received from its
sublicensees. 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.

The Company has been billed $661,005 by the University's
patent counsel; although, the Company is disputing a substantial portion of
these fees. Included in this amount is approximately $138,445, 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 $414,000 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 $414,000, 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 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.

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. Due to the Company's present financial condition it
is not actively participating in the marketplace.

8
<PAGE>

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 exclusive
licenses. 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. 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.

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.

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 have
been substaintially discontinued.

MANUFACTURING AND MARKETING

The Company does not own any facilities for the manufacture
of any of the products that the Company has developed.

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.

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.

9
<PAGE>

At present, the Company does not have sufficient financial
resources to fund any clinical testing, if such clinical testing is required.

EMPLOYEES

Mrs. Diane E. Fritz, Vice President and Assistant Corporate
Secretary, was the Company's one full-time employee during fiscal 1997. Mrs.
Fritz performed office managerial, general operational and clerical functions.

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

ITEM 2. PROPERTIES

From June 1989 to November 1997, the Company 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. In November 1997 the Company vacated its
office facilities. Its current mailing address is 7777 Glades Road #214, Boca
Raton, FL 33434.

ITEM 3. LEGAL PROCEEDINGS

None

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

Not applicable.

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.

<PAGE>

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 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

Units High Low

1st Quarter Ended October 31, 1996 .04 .03
2nd Quarter Ended January 31, 1997 .04 .03
3rd Quarter Ended April 30, 1997 .04 .02
4th Quarter Ended July 31, 1997 .03 .02

Common Stock

1st Quarter Ended October 31, 1996 .04 .03
2nd Quarter Ended January 31, 1997 .04 .03
3rd Quarter Ended April 30, 1997 .04 .02
4th Quarter Ended July 31, 1997 .03 .02

Class A Warrants

1st Quarter Ended October 31, 1996 .001 .001
2nd Quarter Ended January 31, 1997 .001 .001
3rd Quarter Ended April 30, 1997 .001 .001
4th Quarter Ended July 31, 1997 .001 .001

11
<PAGE>

In April 1997, 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 to December 31, 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 December 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.

HOLDERS OF COMMON EQUITY

The approximate number of holders of record of Common Stock
of the Company, as of March 16, 1998, was as follows:

Class Number of Holders

Common Stock 467
$.01 par value

Class A Warrants 0

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.

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial information for each of the
the year ended July 31, 1997 and for the period from July 28, 1983 (the date
of incorporation of the Company) to July 31, 1997 has been derived from the
financial statements of the Company audited by Margolies, Fink and Wichrowski,
Independent Certified Public Accountants.The following selected financial
information for each of the four 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, 1997, 1996 and
1995 and, (ii) the cumulative financial statements for the period July 28,
1983 (date of incorporation) to July 31, 1997. 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, 1997 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Operations Data
Revenues $4,959,154 $368,057 $363,455 $295,941 $179,698 $511,381
Net loss (7,967,250) (2,232) (132,244) (512,483) (389,827) (534,639)
Net loss per ($1.02) ($0.00) ($.02) ($.06) ($.05) ($.06)
common share

1997 1996 1995 1994 1993
Balance Sheet Data
Working capital
(deficiency) ($924,179) ($880,697) ($954,590) $(464,967) $(100,231)
Total assets 275,542 313,620 78,822 74,462 369,353
liabilities 1,340,096 1,375,942 1,008,900 492,057 399,521
equity (1,064,554) (1,062,322) (930,078) (417,595) (30,168)
(deficiency)
</TABLE>
12
<PAGE>

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

The following discussion contains forward looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995
relating to the Company's plans with respect to its continually deteriorating
financial condition. Actual results could differ materially from management's
plans and there can be no assurance that the Company will be successful in its
plan (i) to sell or license the rights to certain applications of its
antimicrobial technology, (ii) to sell all or substantially all of its assets,
(iii) to negotiate the forgiveness of certain debt owed to the University or
(iv) to continue as a going concern.

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 $3,197,000 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 had 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 substaintialy discontinued, 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.

<PAGE>
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. In fiscal
1995, 1996 and 1997, 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.

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
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, 1997, 1996 and 1995. 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.

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.

In May 1997, the Company entered in to a second license
modification agreement with a manufacturer and marketer of catheters and
cardiovascular supplies. In connection with the modifications the Company
received a one-time, non-refundable, non-creditable fee of $100,000 of which
$50,000 was paid to a university. Revenue, as well as the expense for the
amounts paid to the university, are being recognized ratably over the term of
the agreement. In consideration for this fee the Company waived development
fees and miminum annual royalties due on products sold by the licensee for the
specific products added to the agreement under the second license modification
for a period of three years. After three years the licensee shall pay
development fees of $2,500 per quarter payable in advance during the
development phase. After such time as a sale is made the licensee shall pay a
running royalty as defined by the agreement, and at a minimum $2,500 payable
quarterly in advance.

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

<PAGE>

RESULTS OF OPERATIONS

From inception through July 31, 1997, 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, to fund operations in fiscal 1997.

During the fiscal years ended July 31, 1997, 1996 and 1995,
revenues from license fees and royalties were $317,711, $287,968 and $295,829,
respectively. All of the Company's revenues in fiscal years 1997, 1996 and
1995 were derived from license fees and royalties received from its two
sublicensees. 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. At July 31, 1997, the Company had $23,522 remaining in cash.

Operating expenses for the year ended July 31, 1997
consisted principally of general and administrative expenses. General and
administrative expenses in the fiscal years ended July 31, 1997, 1996 and 1995
were $370,289, $489,299 and $808,424, respectively. General and administrative
expenses have decreased by $100,000 from 1996 to 1997 due to continuing
inactivity of the Company. The Company expects this trend to continue thru
1998. 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.

The Company sustained a net loss of $2,232 for the fiscal
year ended July 31, 1997, a significant decrease from the net losses of
$132,244 and $512,483 for the fiscal year ended July 31, 1996 and 1995,
respectively.

15
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

At July 31, 1997, the Company had cash and cash equivalents
of approximately $23,500, representing a decrease of approximately $26,500
over the July 31, 1996 balance of cash and cash equivalents. This decrease was
principally due to the Company's reduction of current liabilities. During the
year ended July 31, 1997, the Company used net cash for operations of $26,404
during 1997 as compared to $39,064 in cash generated by operations in 1996.
This change in cash flows from operations was primarily due to a net reduction
in advance royalty payments. In addition, the Company had a working capital
deficit of $924,179 as of July 31, 1997. 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.

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. If the Company is unsuccessful in raising additional capital
during fiscal year 1998, 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. 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.

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.

16
<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. 68 1983 Chairman of Board, Director, Member
of Executive Committee

C. Lawrence Rutstein 53 1997 Director

Herbert J. Mitschele, Jr. 68 1983 Secretary, Treasurer, Chief Financial
Officer, Director, Member of Executive
Committee

Bruce Hausman, Esq. 67 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.

C.Lawrence Rutstein - Mr. Rutstein joined the Company's
Board of Directors in December 1997. Since May 1997 Mr. Rutstein has served as
Chairman, CEO and president of Regenesis Holdings Corporation (RGNS). Since
1995 he also served as president of CapQuest Partners, Inc. a company which
has made several investments in emerging software companies. A Harvard Law
School graduate, Mr. Rutstein has practiced corporate, banking and securities
law in Philadelphia, Pennsylvania. Mr. Rutstein previously served as Chief
Counsel to the Pennsylvania Department of Banking from 1971 to 1972, and
served as Resident Counsel to a major Philadelphia bank. From 1989 to 1991 he
served as Chairman of the Board of Cedar Group, Inc., a Nasdaq listed importer
and distributor of fasteners. From 1992 until 1994 he was a General Partner of
the Memphis Chicks AA baseball club and during 1995 he was chairman of the
Rittenhouse Group, Inc., a private consulting company. Mr. Rutstein currently
serves on the board of directors of Packquistion Corp. and Future Graph, Inc.,
privately held companies.

17
<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 1997.

The Board of Directors' Audit Committee, which presently
consists solely of Dr. Del Guercio, met once during the fiscal year ended July
31, 1997. The Company has no Nominating Committee, since changes or additions
to the membership are considered by the full Board of Directors.

18
<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>
1997 -- -- -- 250,000(2) --
Bruce Hausman 1996 -- -- -- -- --
President, Chief Executive
Officer, Director and 1995 -- -- -- -- --
Member of the Executive
Committee

1996 -- -- -- -- --
Harvey S.S. Miller, 1995 -- $60,601(3) -- -- --
President and Chief
Operating Officer (until
January 15, 1994)
</TABLE>

(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 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.

19
<PAGE>

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(4) $2,750
</TABLE>

(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 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.

20
<PAGE>

TEN-YEAR OPTION/SAR REPRICINGS
<TABLE>
<CAPTION>
Length of
Original
Number of Option
Securities Market Price Exercise Term
Underlying of Stock at Price At Remaining
Options/ Time of Time of at Date of
SARs Repricing or Repricing or New Repricing
Repriced or Amendment Amendment Exercise or
Name Date Amended(#) ($)* ($) Price ($) Amendment
---- ---- ---------- ---- --- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Bruce 12/23/97 250,000 .001 .13 .03 2 years
Hausman,
President
and Chief
Executive
Officer

Bruce 12/23/97 250,000 .001 .09 .03 2 years
Hausman,
President
and Chief
Executive
Officer
</TABLE>

- -----------------------
* This price is based on over-the-counter market quotations which reflect
inter-dealer prices, without retail market, markdown or commission, and may
not represent actual transaction.

OTHER ARRANGEMENTS

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. On
December 23, 1997 the Board of Directors approved repricing of this option to
$.03 per share.

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. On December 23, 1997 the Board of Directors approved repricing
of this option to $.03 per share.

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
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.
Such nonqualified options were not affected by Mr. Miller's resignation or the
forgiveness of his loan owed to the Company. See Note 7 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, 1997, 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 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."

21
<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
18 Kings Lane
St. Simons Island, Georgia 31522 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 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.

22
<PAGE>

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. 68 734,300 8.51%
Herbert J. Mitschele, Jr. 68 576,800(2) 6.68%
Bruce Hausman, Esq. 67 505,000(3) 5.85%

All Directors and Executive 1,816,100(1)(2)(3) 21.04%
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.

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 and Louis DelGuercio were timely
filed.

23
<PAGE>
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 a Form 4 reporting
a repricing of stock options which occurred in December 1997. The Form 4 was
filed in February 1998.

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. All efforts to market
or develop has been discontinued.

The Company has been advised that none of the members of its
Board of Directors 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 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.

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.

24
<PAGE>

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.

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.

25
<PAGE>

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.

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.

26
<PAGE>

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.

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.

27
<PAGE>
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.

10.69(r) Letter of Intent dated as of April 15, 1997 between the Company
and Nalpak Industries, Inc.

10.70(r) Amendment No. 9 to Warrant Agreement dated as of April 22, 1997
between the Company and Continental Stock Transfer and Trust Company.

10.71(r) Sixth Lease Extension Agreement dated as of May 8, 1997 between the
Company and I.C.E. Associates.

10.72(r) Second Modification to License Agreement dated as of May 30, 1997
between the Company and Arrow International, Inc.

23.1 Consent of Margolies, Frank and Wichrowski

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.

(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.

28
<PAGE>

(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.

(r) Reference is made to the exhibits to the Form 10-Q for the quarter
ended April 30, 1997.

* 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, 1997.

29
<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: May 18, 1998