WESTMED VENTURE PARTNERS 2 LP, 10-K, 1999-03-31

WESTMED VENTURE PARTNERS 2 LP
10-K, 1999-03-31

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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

For the Fiscal Year Ended December 31, 1998

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from to
Commission file number 33-21281

WESTMED VENTURE PARTNERS 2, L.P.
- - ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

Delaware 13-3473015
- - ------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

CIBC Oppenheimer Tower, World Financial Center
New York, New York 10281
- - ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (212) 667-7000

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

Title of each class Name of each exchange on which registered
None None

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

Units of Limited Partnership Interest
- - -------------------------------------------------------------------------------
(Title of class)

<PAGE>

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 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. [X]

On March 16, 1999, 38,727 units of limited partnership interest ("Units") were
held by non-affiliates of the registrant. There is no established public trading
market for such Units.

<PAGE>

PART I
Item 1. Business.

Formation

WestMed Venture Partners 2, L.P. (the "Partnership" or the "Registrant") is a
Delaware limited partnership organized in April 1988. In July 1988, the
Partnership elected to operate as a business development company under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Partnership's
investment objective is to achieve long-term capital appreciation from its
portfolio of venture capital investments, consisting of companies engaged in the
health-care industry. The Partnership considers this activity to constitute the
single industry segment of venture capital investing.

The general partners of the Partnership include two individuals (the
"Independent General Partners") and the managing general partner, WestMed
Venture Management 2, L.P., a Delaware limited partnership (the "Managing
General Partner" and collectively with the Independent General Partners, the
"General Partners"). The general partner of the Managing General Partner is
Medical Venture Holdings, Inc., a Delaware corporation affiliated with CIBC
Oppenheimer Corp. ("Opco") (formerly Oppenheimer & Co., Inc.). Opco is the
successor corporation to Oppenheimer & Co., Inc., following the acquisition and
subsequent merger of Oppenheimer & Co., Inc. and CIBC Wood Gundy Corp. in
November 1997. Opco is a subsidiary of Canadian Imperial Bank of Commerce. The
limited partners of the Managing General Partner are Opco, MVP Holdings, Inc.
and BSW, Inc., a Delaware corporation owned by John A. Balkoski, Philippe L.
Sommer and Howard S. Wachtler. Alsacia Venture Management, Inc. (the
"Sub-Manager"), a corporation controlled by Philippe L. Sommer, serves as the
sub-manager of the Partnership pursuant to a sub-management agreement between
the Managing General Partner and the Sub-Manager. The Sub-Manager has been
retained by the Managing General Partner to assist the Managing General Partner
in the performance of certain of its duties to the Partnership.

In 1988, the Partnership publicly offered 60,000 units of limited partnership
interest (the "Units") at $500 per Unit. The Units were registered under the
Securities Act of 1933, as amended, pursuant to a Registration Statement on Form
N-2 (File No. 33-21281) which was declared effective on August 5, 1988. The
Partnership held its initial and final closings on September 1, 1988 and October
1, 1989, respectively, and terminated the offering on February 15, 1990. As a
result of the public offering, the Partnership accepted subscriptions for a
total of 38,727 Units. Gross capital contributions to the Partnership in
connection therewith totaled $19,559,091, including $19,363,500 from the limited
partners (the "Limited Partners" and collectively with the Managing General
Partner, the "Partners") and $195,591 from the Managing General Partner.

The Venture Capital Investments

The Partnership has invested approximately 97% of the net proceeds from the
offering of Units and will not make investments in any new portfolio companies.
From its inception to December 31, 1998, the Partnership had invested
$16,842,427 in twelve portfolio companies, including venture capital fees and
other acquisition costs totaling $1,063,133. The Managing General Partner is
working toward the ultimate termination of the Partnership, with an emphasis on
liquidating the Partnership's remaining assets as soon as practical with the
goal of maximizing returns to Partners. During 1998, the Partnership made a
follow-on investment of $188,888 in an existing portfolio company. Additionally,
during 1998, the Partnership liquidated or wrote-off securities having an
aggregate cost of $5,052,210. These transactions and other events affecting the
Partnership's portfolio investments during 1998 are listed below.

o Due to a financial restructuring of VitaGen, Inc., formerly Hepatix,
Inc., completed in January 1999, the Partnership wrote-off $1,913,957 of its
$1,935,957 investment in VitaGen. In January 1998, the Partnership had completed
a $178,095 follow-on investment in VitaGen, Inc., acquiring a 9.5% promissory
note and a warrant to purchase 17,810 shares of common stock at $1.60 per share.
The Partnership paid the Managing General Partner a venture capital fee of
$10,793 in connection with this investment. In August 1998, the Partnership
converted promissory notes totaling $356,190 due from VitaGen into 356,190
shares of VitaGen's Series B preferred stock. Accrued interest on such notes was
waived by all noteholders, including the Partnership, and warrants previously
held to purchase 44,524 common shares at $1.60 per share, originally issued in
connection with such promissory notes, were canceled.

o On January 31, 1998, the Partnership's warrant to purchase 16,666 shares of
Targeted Genetics, Inc. common stock at $4.68 per share expired
unexercised. There was no gain or loss in connection with this transaction.

o In April 1998, the Partnership sold its remaining 104,210 shares of
Gliatech, Inc. common stock for $1,656,467, realizing a gain of $855,038.
There was no gain or loss associated with this transaction.

o In September 1998, the Partnership liquidated its investment in Sennes Drug
Innovations, Inc. in connection with the settlement of a lawsuit between
Sennes and certain shareholders, including the Partnership, against Baylor
College of Medicine. The Partnership received $386,107 in exchange for its
Sennes holdings and released all of its claims against Baylor. The
transaction resulted in a realized loss of $836,246.

o In September 1998, the Partnership wrote-off $707,067 of the cost of its
preferred stock investment in Abtox, Inc. Abtox filed for protection under
Chapter 11 of the federal Bankruptcy Code and is currently seeking funding
to reorganize.

o In October 1998, the Partnership sold 40,000 common shares of
Synaptic Pharmaceutical Corporation for $597,562 realizing a gain of
$267,317.

o In November 1998, Integramed America, Inc. effected a 1 for 4 reverse stock
split. As a result, the Partnership's 211,672 common shares were exchanged
for 52,918 common shares.

o In December 1998, the Partnership sold 10,000 common shares of
KeraVision, Inc. for $110,643 realizing a gain of $33,484.

From its inception through December 31, 1998, the Partnership had either fully
or partially liquidated portfolio investments with a cost of $11,648,170. These
liquidated investments returned $5,548,217 to the Partnership, for a net
realized loss of $6,099,953. Additionally, from its inception to December 31,
1998, the Partnership earned $239,574 of interest and other income from its
portfolio investments. As a result, as of December 31, 1998, the Partnership had
a cumulative net realized loss from its venture capital investments of
$5,860,379. The Partnership's remaining investment portfolio, as of December 31,
1998, consisted of investments in seven portfolio companies with an aggregate
cost of $5,194,257 and a fair value of $2,434,455. See Note 7 of Notes to
Financial Statements for investments sold subsequent to December 31, 1998.

Termination

The Managing General Partner is working toward the ultimate termination of the
Partnership, with an emphasis on liquidating the remaining assets as soon as
practical with the goal of maximizing returns to Partners. The Partnership's
originally scheduled termination date was December 31, 1998, with provision for
extension for two additional two-year periods. The Independent General Partners
determined not to extend the Partnership's termination date. However, pursuant
to the Partnership Agreement and Delaware Law, the Managing General Partner will
continue to manage the Partnership through its date of liquidation, which will
occur when it has satisfied all liabilities and obligations to creditors and has
sold, distributed or otherwise disposed of its investments in portfolio
companies.

Competition

The Partnership encounters competition from other entities having similar
investment objectives. Primary competition for venture capital investments has
been from venture capital partnerships, venture capital affiliates of large
industrial and financial companies, small business investment companies and
wealthy individuals. Competition has also been from foreign investors and from
large industrial and financial companies investing directly rather than through
venture capital affiliates. The Partnership has frequently been a co-investor
with other professional venture capital groups and these relationships have
expanded the Partnership's access to investment opportunities. As discussed
above, the Partnership will not make any new portfolio investments.

Employees

The Partnership has no employees. The Managing General Partner, subject to the
supervision of the Independent General Partners, manages and controls the
Partnership's venture capital investments. The Managing General Partner
performs, or arranges for others to perform, the management and administrative
services necessary for the operation of the Partnership and is responsible for
managing the Partnership's short-term investments.

Item 2. Properties.

The Partnership does not own or lease physical properties.

Item 3. Legal Proceedings.

On June 5, 1996, the Partnership and Philippe L. Sommer, among others, were
named in an action filed in Harris County, Texas by James Kelly and Norman L.
Sussman (the "Action"). The plaintiffs in the Action assert certain causes of
action against all defendants, including violations of the securities laws,
fraud, fraudulent inducement, civil conspiracy and wrongful sequestration. All
of the aforesaid causes of action arise out of the Partnership's investment,
with other venture capital funds, in VitaGen, Inc., formerly Hepatix, Inc., a
company founded to develop and pursue approval of an extracorporeal liver assist
device. The plaintiffs in the Action are two of the original founders of
Hepatix. The Action was subsequently removed to Federal District Court in
Houston and on October 15, 1996 a motion was made to dismiss the Action against
the Partnership and Mr.
Sommer.

On January 29, 1998, the court dismissed all but four of the plaintiffs' counts.
The Action was then remanded back to State court. The remaining claims involved
allegations of breach of fiduciary duty, fraud and fraudulent inducement. The
Partnership and Mr. Sommer filed a motion for summary judgment seeking to
dismiss all pending claims. On October 5, 1998, the Court granted the
Partnership's and Mr. Sommer's motion with respect to one of the breach of
fiduciary duty claims. There will be limited discovery with respect to the
remaining claims. The Partnership and Mr. Sommer believe the remaining
allegations are without merit and intend to continue to vigorously contest the
Action.

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

No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year covered by this report.

PART II

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

There is no established public trading market for the Partnership's Units and it
is not anticipated that any public market for the Units will develop.
Accordingly, accurate information as to the market value of a Unit at any given
date is not available. The approximate number of individual holders of Units as
of March 16, 1999 was 3,521.

There were no cash distributions approved for the years ended December 31, 1998
and 1997. In November 1996, the General Partner approved a cash distribution to
Partners totaling $3,012,100. Such distribution was paid on January 21, 1997.
Limited Partners of record on December 31, 1996 received $2,981,979, or $77 per
Unit, and the Managing General Partner received $30,121. Cumulative cash
distributions paid to Partners from inception through December 31, 1998 total
$3,289,717, including $3,256,820 to the Limited Partners, or approximately $84
per Unit, and $32,897 to the Managing General Partner.

Pursuant to the Partnership's agreement of limited partnership, as amended (the
"Partnership Agreement"), the Partnership's net income and net realized gains
from all sources are allocated to all Partners, in proportion to their capital
contributions, until all Partners have been allocated an amount equal to 6% per
annum, simple interest, on their total Adjusted Invested Capital; i.e., original
capital contributions reduced by previous distributions (the "Priority Return").
Thereafter, net income and net realized gains from venture capital investments
in excess of the amount used to cover the Priority Return are allocated 20% to
the Managing General Partner and 80% to all Partners in proportion to their
capital contributions. Any net income from non-venture capital investments in
excess of the amount used to cover the Priority Return is allocated to all
Partners in proportion to their capital contributions. Realized losses are
allocated to all Partners in proportion to their capital contributions, provided
that, if realized gains had been previously allocated in the 80-20 ratio
discussed above, then losses are allocated in the reverse order in which profits
were allocated.

<PAGE>

Item 6. Selected Financial Data.
<TABLE>

($ In Thousands, Except For Per Unit Information)
Years Ended December 31,

1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------

<S> <C> <C> <C> <C> <C>
Total assets $ 5,676 $ 7,724 $ 11,494 $ 12,324 $ 13,252

Net assets 5,590 7,611 8,324 12,192 13,145

Cost of portfolio investments purchased 189 1,249 1,202 688 1,384

Cumulative cost of portfolio investments 16,843 16,654 15,404 14,202 13,514

Cash distributions to Partners - - 3,012 - -

Cumulative cash distributions to Partners 3,290 3,290 3,290 278 278

Net investment loss (189) (264) (190) (63) (88)

Realized (loss) gain on investments (2,301) 227 (1,025) (91) -

Change in unrealized depreciation of
investments 469 (677) 359 (800) (198)

Change in net assets resulting from operations (2,021) (714) (856) (953) (286)

PER UNIT OF LIMITED PARTNERSHIP INTEREST:*

Net asset value, including net unrealized
depreciation of investments $143 $ 195 $ 213 $ 312 $ 336

Net investment loss (5) (7) (5) (2) (2)

Net realized (loss) gain on investments (59) 6 (26) (2) -

Change in unrealized depreciation of
investments 12 (17) 9 (20) (5)

Cash distributions - - 77 - -

Cumulative cash distributions 84 84 84 7 7
</TABLE>

* Limited Partners were admitted to the Partnership in 12 separate closings
from October 1, 1988 to October 1, 1989. Per Unit amounts shown above are
based on average allocations to all Limited Partners and do not reflect
specific Limited Partner allocations, which are determined by the original
closing date associated with the Units held by each Limited Partner.

<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.

Liquidity and Capital Resources
As of December 31, 1998, the Partnership had invested $16,842,427 in 12
portfolio companies, including venture capital fees and other acquisition costs
totaling $1,063,133. The Partnership has invested approximately 97% of its
original $17,332,289 of net proceeds received from the offering of Units. The
Partnership will not make investments in new portfolio companies and does not
expect to make follow-on investments in its remaining portfolio companies. The
Managing General Partner is working toward the ultimate termination of the
Partnership and will continue to manage the Partnership, with continued focus on
achieving long-term capital appreciation from the Partnership's remaining
investment portfolio through the date of termination , which will occur when all
liabilities and obligations to creditors have been satisfied and all investments
in portfolio companies have been sold, distributed or otherwise disposed.

During the year ended December 31, 1998, the Partnership invested $188,888
(including venture capital fees totaling $10,793) in an existing portfolio
company. Additionally, during 1998 the Partnership sold certain portfolio
investments for cash proceeds totaling $2,750,779, as discussed below.

As of December 31, 1998, the Partnership held $3,076,472 in cash and short-term
investments, including $2,494,500 in a short-term security with a maturity of
less than three months and $581,972 in an interest-bearing cash account. The
Partnership earned interest totaling $92,422, $49,199, and $283,323 from such
investments for the years ended December 31, 1998, 1997 and 1996, respectively.
Interest earned from short-term investments in future periods is subject to
fluctuations in short-term interest rates and changes in amounts invested in
such securities.

It is anticipated that funds needed to cover the Partnership's future operating
expenses and follow-on investments will be obtained from existing cash reserves,
interest from short-term investments and proceeds received from the sale of
portfolio investments.

Results of Operations
For the years ended December 31, 1998, 1997 and 1996, the Partnership had a net
realized loss from operations of $2,490,260, $36,438 and $1,215,247,
respectively. Net realized gain or loss from operations is comprised of (i) net
realized gain or loss from portfolio investments and (ii) net investment income
or loss (interest, dividends and other income less operating expenses).

Realized Gains and Losses from Portfolio Investments - For the year ended
December 31, 1998, the Partnership had a $2,301,431 net realized loss from its
portfolio investments. During 1998, the Partnership sold the following
publicly-traded securities: the remaining 104,210 shares of Gliatech, Inc.
common stock for $1,656,467, realizing a gain of $855,038; 40,000 common shares
of Synaptic Pharmaceutical Corporation for $597,562 realizing a gain of
$267,317; and 10,000 common shares of KeraVision, Inc. for $110,643 realizing a
gain of $33,484. Additionally, in September 1998, the Partnership liquidated its
investment in Sennes Drug Innovations, Inc. in connection with the settlement of
a lawsuit between Sennes and certain shareholders, including the Partnership,
against Baylor College of Medicine, an original investor in Sennes. The
Partnership received $386,107, which resulted in a realized loss of $836,246, in
exchange for its holdings in Sennes and release of all claims against Baylor.
Also in September 1998, the Partnership realized an additional loss of $707,067,
from the partial write-off of its $1,060,000 investment in Abtox, Inc. During
1998, Abtox filed for protection under Chapter 11 of the federal bankruptcy code
and is currently seeking funding to reorganize. Finally, on December 31, 1998,
the Partnership wrote-off $1,913,957 of its $1,935,957 investment in VitaGen,
Inc. (formerly Hepatix, Inc.) due to a financial restructuring of the company
completed in December 1998.

For the year ended December 31, 1997, the Partnership had a $227,199 net
realized gain from its portfolio investments. During 1997, the Partnership sold
20,000 common shares of Synaptic Pharmaceutical Corporation for $300,200,
realizing a gain of $130,503 and 20,000 common shares of Gliatech, Inc. for
$257,276, realizing a gain of $96,696.

For the year ended December 31, 1996, the Partnership had a $1,025,168 net
realized loss from its portfolio investments. In September 1996, Hepatix, Inc.
completed a post-bankruptcy financing and recapitalization, resulting in the
write-off of the Partnership's $1,025,168 investment in Hepatix's old common
stock.

Investment Income and Expenses - For the years ended December 31, 1998, 1997 and
1996, the Partnership had a net investment loss of $188,829, $263,637 and
$190,079, respectively.

The $74,808 favorable change in net investment loss for 1998 compared to 1997
resulted from a $46,900 reduction in operating expenses and a $27,908 increase
in investment income. The decrease in operating expenses for 1998 primarily
resulted from a $27,307 decrease in the management fee, as discussed below, and
a $22,764 decrease in insurance expense due to reduced liability insurance
premiums. The increase in investment income primarily resulted from a $43,223
increase in interest earned from short-term investments due to an increase in
the amount of funds available for investment in such securities during the 1998
period compared to the same period in 1997. Partially offsetting the increase in
interest from short-term investments was a $15,315 negative variance in interest
and dividend income from portfolio investments for the 1998 period compared to
1997, primarily due to the write-off, during 1998, of accrued interest relating
to the promissory notes due from VitaGen, Inc.

The $73,558 unfavorable change in net investment loss for 1997 compared to 1996
resulted from a $219,176 decline in investment income offset by a $145,618
reduction in operating expenses for 1997. The decrease in investment income
primarily resulted from a $234,124 decrease in interest earned from short-term
investments due to the reduced amount of funds invested in such securities
during the 1997 period compared to the same period in 1996. Amounts invested in
short-term investments declined during the 1997 period primarily due to the
$3,012,100 cash distribution paid to Partners in January 1997 and the $1,249,488
of investments made in new and follow-on portfolio companies during the year.
Partially offsetting the decrease in interest from short-term investments was a
$14,948 positive variance in interest and dividend income from portfolio
investments for the 1997 period compared to 1996, primarily due to the
write-off, during 1996, of accrued interest relating to promissory notes due
from Hepatix, Inc. The decrease in operating expenses for 1997 primarily
resulted from a $65,011 decrease in the management fee, as discussed below, and
a $49,799 decrease in professional fees, primarily due to increased legal fees
relating to the preparation of a proxy statement in connection with the Special
Meeting of Limited Partners held on June 21, 1996.

Pursuant to a management agreement between the Partnership and the Managing
General Partner, the Managing General Partner is responsible for the management,
administrative and certain investment advisory services necessary for the
operation of the Partnership. For such services, the Managing General Partner
receives a management fee at the annual rate of 2% of the lesser of the net
assets of the Partnership or the net contributed capital of the Partnership;
i.e., gross capital contributions to the Partnership, net of selling commissions
and organizational expenses, reduced by capital distributed. Such fee is
determined and paid quarterly. For the years ended December 31, 1998, 1997 and
1996 the management fee was $133,178, $160,485 and $225,496, respectively. The
steady decline in the management fee over the three year period reflects the
reduced net asset value of the Partnership, primarily resulting from the reduced
value of the Partnership's portfolio investments during the period and the cash
distribution accrued in 1996 and paid in 1997. The management fee is expected to
continue to decline in future periods as the Partnership's remaining portfolio
investments are liquidated and subsequent distributions are paid to Partners. To
the extent possible, the management fee and other operating expenses are paid
with funds provided from operations. Funds provided from operations are obtained
from interest received from short-term investments, interest and dividend income
from portfolio investments and proceeds from the sale of portfolio investments.

Unrealized Gains and Losses and Changes in Unrealized Depreciation of Portfolio
Investments - For the year ended December 31, 1998, the Partnership had a
$469,578 favorable net change in unrealized depreciation of investments. During
1998, $909,359 was transferred from unrealized loss to realized loss in
connection with the portfolio investments sold or written-off during the year,
as discussed above. Partially offsetting this favorable change was a $530,498
net downward revaluation of the Partnership's portfolio investments during 1998.

For the year ended December 31, 1997, the Partnership had a $676,802 unfavorable
net change in unrealized depreciation of investments. During 1997, the
Partnership reduced the fair value of its portfolio investments by $542,954 due
to a net downward revaluation of its publicly held securities during 1997.
Additionally, during 1997, $133,848 was transferred from unrealized gain to
realized gain in connection with the portfolio securities sold during the year,
as discussed above.

For the year ended December 31, 1996, the Partnership had a $358,875 favorable
net change in unrealized depreciation of investments primarily resulting from
the net transfer of $1,025,168 from unrealized loss to realized loss relating to
the partial write-off of the Partnership's investment in Hepatix, as discussed
above. Partially offsetting this favorable change was a $666,293 net downward
revaluation of the Partnership's publicly held securities during 1996.

Net Assets - Changes to net assets resulting from operations is comprised of (i)
net realized gains and losses from operations and (ii) changes to net unrealized
appreciation or depreciation of portfolio investments.

As of December 31, 1998, the Partnership's net assets were $5,589,899,
reflecting a decrease of $2,020,682 from net assets of $7,610,581 as of December
31, 1997. This change represents the decrease in net assets resulting from
operations for 1998, comprised of the $2,490,260 net realized loss from
operations for partially offset by the $469,578 favorable change in net
unrealized depreciation of investments for 1998.

As of December 31, 1997, the Partnership's net assets were $7,610,581,
reflecting a decrease of $713,240 from net assets of $8,323,821 as of December
31, 1996. This change represents the decrease in net assets resulting from
operations for 1997, comprised of the $36,438 net realized loss from operations
and the $676,802 unfavorable change in net unrealized depreciation of
investments for 1997.

As of December 31, 1996, the Partnership's net assets were $8,323,821,
reflecting a decrease of $3,868,472 from net assets of $12,192,293 as of
December 31, 1995. This change represents the $3,012,100 accrued cash
distribution to Partners and the $856,372 decrease in net assets resulting from
operations for 1996. The decrease in net assets resulting from operations for
1996 was comprised of the $1,215,247 net realized loss from operations partially
offset by the $358,875 favorable change in net unrealized depreciation of
investments for 1996.

The net asset value per $500 Unit, including an allocation of the net unrealized
depreciation of investments, as of December 31, 1998, 1997 and 1996 was $143,
$195 and $213, respectively. Such per Unit amounts are based on average
allocations to all Limited Partners and do not reflect specific Limited Partner
allocations, which are determined by the original closing date associated with
the Units held by each Limited Partner.

Year 2000 Issue - The Year 2000 ("Y2K") concern arose because many existing
computer programs use only the last two digits to refer to a year. Therefore,
these computer programs do not properly recognize a year that begins with "20"
instead of "19". If not corrected, many computer applications could fail or
create erroneous results. The impact of the Y2K concern on the Partnership's
operations is currently being assessed.

The Managing General Partner is responsible to provide or arrange for the
provision of administrative services necessary to support the Partnership's
operations. The Managing General Partner has arranged for Palmeri Fund
Administrators, Inc. (the "Administrator") to provide certain administrative and
accounting services for the Partnership, including maintenance of the books and
records of the Partnership, maintenance of the Limited Partner database,
issuance of financial reports and tax information to Limited Partners and
processing distribution payments to Limited Partners. Fees charged by the
Administrator are paid directly by the Managing General Partner.

The Administrator is currently assessing its computer hardware and software
systems, specifically as they relate to the operations of the Partnership. As
part of this investigation of potential Y2K problems, the Administrator has
contracted with an outside computer service provider to examine all of the
Administrator's computer hardware and software applications, to identify any Y2K
concerns. This review and evaluation is in process and is expected to be
completed by May 1999. If Y2K problems are identified, the Administrator will
purchase, install and test the necessary software patches and new computer
hardware to ensure that all of its computer systems are Y2K compliant. This
correction phase, if required, is expected to be completed by September 1999.

Additionally, the Administrator has contacted the outside service providers used
to assist the Administrator or the Managing General Partner with the
administration of the Partnership's operations to ascertain whether these
entities are addressing the Y2K issue within their own operation. There can be
no guarantee that the Administrator's systems or that systems of other companies
providing services to the Partnership will be corrected in a timely manner. The
estimated costs to the Partnership, relating to the investigation or correction
of Y2K problems affecting the Partnership's operations, are expected to be
nominal.

Finally, the Y2K issue is a global concern that may affect all business
entities, including the Partnership's portfolio companies. The Managing General
Partner is continuing to assess the impact of Y2K concerns affecting its
portfolio companies. However, the extent to which any potential Y2K problems
could affect the valuations of these companies is presently unknown.

Item 7A. Quantitative and Qualitative Disclosure about Market Risk

The Partnership is subject to market risk arising from changes in the value of
its portfolio investments and interest-bearing cash equivalents, including
short-term securities, which may result from fluctuations in interest rates and
equity prices. The Partnership has calculated its market risk related to its
holdings of these investments based on changes in interest rates and equity
prices utilizing a sensitivity analysis. The sensitivity analysis estimates the
hypothetical change in fair values, cash flows and earnings based on an assumed
10% change (increase or decrease) in interest rates and equity prices. To
perform the sensitivity analysis, the assumed 10% change is applied to market
rates and prices on investments held by the Partnership at the end of the
accounting period.

The Partnership's portfolio investments had an aggregate fair value of
$2,434,455 as of December 31, 1998. An assumed 10% decline from this December
31, 1998 fair value, including an assumed 10% decline of the per share market
prices of the Partnership's publicly-traded securities, would result in a
reduction to the fair value of such investments and an unrealized loss of
$243,446.

As of December 31, 1998, the Partnership held one short-term investment in a
discounted commercial paper instrument with a remaining maturity of 15 days.
This short-term investment was carried at an aggregate amortized cost of
$2,494,500 as of December 31, 1998. An assumed 10% increase in the market
interest rate of such short-term investment held by the Partnership as of
December 31, 1998, would result in a reduction to the fair value of such
investment and an unrealized loss which is considered to be immaterial.

Market risk relating to the Partnership's interest-bearing cash equivalents
held as of December 31, 1998 is considered to be immaterial.

<PAGE>

Item 8. Financial Statements and Supplementary Data.

WESTMED VENTURE PARTNERS 2, L.P.
INDEX

Independent Auditors' Report

Balance Sheets as of December 31, 1998 and 1997

Schedule of Portfolio Investments as of December 31, 1998

Schedule of Portfolio Investments as of December 31, 1997

Statements of Operations for the years ended December 31, 1998, 1997 and 1996

Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996

Statements of Changes in Partners' Capital for the years ended December 31,
1996, 1997 and 1998

Notes to Financial Statements

NOTE - All other schedules are omitted because of the absence of conditions
under which they are required or because the required information is included in
the financial statements or the notes thereto.

<PAGE>

INDEPENDENT AUDITORS' REPORT

WestMed Venture Partners 2, L.P.:

We have audited the accompanying balance sheets of WestMed Venture Partners 2,
L.P. (the "Partnership"), including the schedules of portfolio investments, as
of December 31, 1998 and 1997, and the related statements of operations, cash
flows, and changes in partners' capital for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned at December 31, 1998 and 1997 by correspondence
with the custodian; where confirmation was not possible, we performed other
audit procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of WestMed Venture Partners 2, L.P. at December
31, 1998 and 1997, and the results of its operations, its cash flows and the
changes in its partners' capital for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.

As explained in Note 2, the financial statements include securities valued at
$22,000 and $3,049,800 at December 31, 1998 and 1997, respectively, representing
.004% and 40% of net assets, respectively, whose values have been estimated by
the Managing General Partner in the absence of readily ascertainable market
values. We have reviewed the procedures used by the Managing General Partner in
arriving at its estimate of value of such securities and have inspected
underlying documentation, and, in the circumstances, we believe the procedures
are reasonable and the documentation appropriate. However, because of the
inherent uncertainty of valuation, those estimated values may differ
significantly from the values that would have been used had a ready market for
the securities existed, and the differences could be material.

Deloitte & Touche LLP

New York, New York
March 24, 1999

<PAGE>

WESTMED VENTURE PARTNERS 2, L.P.
BALANCE SHEETS
December 31,
<TABLE>

1998 1997
--------------- ----------------
ASSETS

Portfolio investments at fair value (cost $5,194,257 as of
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1998 and $10,057,579 as of December 31, 1997) $ 2,434,455 $ 6,828,199
Cash and cash equivalents 3,076,472 593,258
Receivable from security sold 110,643 257,276
Accrued interest receivable 1,186 8,989
Prepaid insurance 53,072 36,722
--------------- ----------------

TOTAL ASSETS $ 5,675,828 $ 7,724,444
=============== ================

LIABILITIES AND PARTNERS' CAPITAL

Liabilities:
Accounts payable and accrued expenses $ 43,337 $ 55,130
Due to Managing General Partner 32,592 48,733
Due to Independent General Partners 10,000 10,000
--------------- ----------------
Total liabilities 85,929 113,863
--------------- ----------------

Partners' Capital:
Managing General Partner 55,900 76,106
Limited Partners (38,727 Units) 5,533,999 7,534,475
--------------- ----------------
Total Partners' capital 5,589,899 7,610,581
--------------- ----------------

TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 5,675,828 $ 7,724,444
=============== ================

</TABLE>

See notes to financial statements.

<PAGE>

WESTMED VENTURE PARTNERS 2, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 1998
<TABLE>
<S> <C> <C> <C> <C> <C> <C>

Active Portfolio Investments:

Initial Investment
Company / Position Date Cost Fair Value

Abtox, Inc. (B)
<C> <C> <C> <C>
454,545 shares of Preferred Stock Mar. 1997 $ 353,533 $ 0
- - -------------------------------------------------------------------------------------------------------------------------------
Integramed America, Inc.(A) (C)
52,918 shares of Common Stock Mar. 1989 2,322,426 274,512
- - -------------------------------------------------------------------------------------------------------------------------------
KeraVision, Inc.(A) (D)
58,728 shares of Common Stock Nov. 1992 453,141 840,545
- - -------------------------------------------------------------------------------------------------------------------------------
La Jolla Pharmaceutical Company(A)
100,383 shares of Common Stock Nov. 1991 678,579 451,724
25,076 warrants to purchase 12,538 shares of Common
Stock at $6.00 per share, expiring 6/3/99 0 3,918
Warrant to purchase 5,015 shares of Common Stock
at $5.00 per share, expiring 6/3/99 0 0
--------------- ---------------
678,579 455,642
- - -------------------------------------------------------------------------------------------------------------------------------
Synaptic Pharmaceutical Corporation(A) (E)
36,395 shares of Common Stock June 1991 297,225 545,925
- - -------------------------------------------------------------------------------------------------------------------------------
Targeted Genetics, Inc.(A) (F)
225,395 shares of Common Stock June 1992 1,067,353 295,831
- - -------------------------------------------------------------------------------------------------------------------------------
VitaGen, Inc.* (G)
1,484,123 shares of Series A Preferred Stock Jan. 1992 17,706 17,706
356,190 shares of Series B Preferred Stock Oct.1997 4,294 4,294
--------------- ---------------
22,000 22,000
- - -------------------------------------------------------------------------------------------------------------------------------
Totals from Active Portfolio Investments $ 5,194,257 $ 2,434,455
=============== ===============

Supplemental Information: Liquidated Portfolio Investments (H)

Cost Realized Loss Return
Totals from Liquidated Portfolio Investments(I) $ 11,648,170 $ (6,099,953) $ 5,548,217
============== =============== ===============

Combined Combined
Unrealized and Fair Value
Cost Realized Loss and Return

Totals from Active and Liquidated Portfolio
Investments $ 16,842,427 $ (8,859,755) $ 7,982,672
============== =============== ===============

</TABLE>

<PAGE>

WESTMED VENTURE PARTNERS 2, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS - continued
December 31, 1998

(A) Public company

(B) During 1998, the Partnership wrote-off $707,067 of the cost of its
preferred stock investment in Abtox, Inc. Abtox filed for protection under
Chapter 11 of the federal Bankruptcy Code and is currently seeking funding
to reorganize.

(C) In November 1998, Integramed America, Inc. effected a 1 for 4 reverse
stock split. As a result, the Partnership's 211,672 common shares were
exchanged for 52,918 common shares.

(D) In December 1998, the Partnership sold 10,000 common shares of
KeraVision, Inc. for $110,643 realizing a gain of $33,484.

(E) In October 1998, the Partnership sold 40,000 common shares of Synaptic
Pharmaceutical Corporation for $597,562 realizing a gain of $267,317.

(F) On January 31, 1998, the Partnership's warrant to purchase 16,666
shares of Targeted Genetics, Inc. common stock at $4.68 per share
expired unexercised.

(G) During 1998, Hepatix, Inc. changed its name to VitaGen, Inc. In August
1998, the Partnership converted $356,190 of promissory notes due from
VitaGen into 356,190 shares of VitaGen's Series B preferred stock. Accrued
interest on such notes was waived by all noteholders, including the
Partnership, and warrants previously held to purchase 44,524 common shares
at $1.60 per share, originally issued in connection with such promissory
notes, were canceled. Due to a financial restructuring of the company
completed in January 1999, the Partnership wrote-off $1,913,957 of its
$1,935,957 investment in VitaGen.

(H) Amounts provided for "Supplemental Information: Liquidated Portfolio
Investments" are cumulative from inception through December 31, 1998. See
Note 7 of notes to financial statements for portfolio sales completed
subsequent to December 31, 1998.

(I) In April 1998, the Partnership sold its remaining 104,210 shares of
Gliatech, Inc. common stock for $1,656,467, realizing a gain of $855,038.
In September 1998, the Partnership liquidated its investment in Sennes Drug
Innovations, Inc. in connection with the settlement of a lawsuit between
Sennes and certain shareholders, including the partnership, against Baylor
College of Medicine. The Partnership received $386,107 in exchange for its
Sennes holdings and released all of its claims against Baylor. The
transaction resulted in a realized loss of $836,246.

* May be deemed an affiliated person of the Partnership as defined in the
Investment Company Act of 1940.

See notes to financial statements.

<PAGE>

WESTMED VENTURE PARTNERS 2, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C>

Active Portfolio Investments:

Initial Investment
Company / Position Date Cost Fair Value
Abtox, Inc.
<C> <C> <C> <C>
454,545 shares of Preferred Stock Mar. 1997 $ 1,060,600 $ 1,060,600
- - -------------------------------------------------------------------------------------------------------------------------------
Gliatech, Inc.(A)
104,210 shares of Common Stock Feb. 1992 801,429 1,068,153
- - -------------------------------------------------------------------------------------------------------------------------------
Hepatix, Inc.*
1,484,123 shares of Preferred Stock Jan. 1992 1,558,181 1,484,123
$178,095 9.5% Promissory Note 188,888 188,888
Warrant to purchase 26,714 shares of Common Stock
at $1.60 per share, expiring 10/30/00 0 0
--------------- ---------------
1,747,069 1,673,011
- - -------------------------------------------------------------------------------------------------------------------------------
Integramed America, Inc.(A)
211,672 shares of Common Stock Mar. 1989 2,322,426 383,761
- - -------------------------------------------------------------------------------------------------------------------------------
KeraVision, Inc.(A)
68,728 shares of Common Stock Nov. 1992 530,300 438,141
- - -------------------------------------------------------------------------------------------------------------------------------
La Jolla Pharmaceutical Company(A)
100,383 shares of Common Stock Nov. 1991 678,579 445,499
25,076 warrants to purchase 12,538 shares of Common
Stock at $6.00 per share, expiring 6/3/99 0 20,387
Warrant to purchase 5,015 shares of Common Stock
at $5.00 per share, expiring 6/3/99 0 0
--------------- ---------------
678,579 465,886
- - -------------------------------------------------------------------------------------------------------------------------------
Sennes Drug Innovations, Inc.*
2,750,000 shares of Preferred Stock June 1993 1,175,579 293,895
412,500 shares of Common Stock 4,375 1,094
$39,976 10% Promissory Note 42,399 21,200
--------------- ---------------
1,222,353 316,189
- - -------------------------------------------------------------------------------------------------------------------------------
Synaptic Pharmaceutical Corporation(A)
76,395 shares of Common Stock June 1991 627,470 830,796
- - -------------------------------------------------------------------------------------------------------------------------------
Targeted Genetics, Inc.(A)
225,395 shares of Common Stock June 1992 1,067,353 591,662
Warrant to purchase 16,666 shares of Common Stock
at $4.68 per share, expiring 1/31/98 0 0
--------------- ---------------
1,067,353 591,662
- - -------------------------------------------------------------------------------------------------------------------------------

Totals from Active Portfolio Investments $ 10,057,579 $ 6,828,199
=============== ===============
</TABLE>

<PAGE>

WESTMED VENTURE PARTNERS 2, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS - continued
December 31, 1997
<TABLE>

Supplemental Information: Liquidated Portfolio Investments(B)

Cost Realized Loss Return
<S> <C> <C> <C>
Totals from Liquidated Portfolio Investments $ 6,595,960 $ (3,798,522) $ 2,797,438
=============== ================= ===============

Combined Combined
Unrealized and Fair Value
Cost Realized Loss and Return

Totals from Active and Liquidated Portfolio
Investments $ 16,653,539 $ (7,027,902) $ 9,625,637
=============== ================= ===============

</TABLE>

(A) Public company

(B) Amounts provided for "Supplemental Information: Liquidated Portfolio
Investments" are cumulative from inception through December 31, 1997.

* May be deemed an affiliated person of the Partnership as defined in the
Investment Company Act of 1940.

See notes to financial statements.

<PAGE>

WESTMED VENTURE PARTNERS 2, L.P.
STATEMENTS OF OPERATIONS
For the Years Ended December 31,
<TABLE>

1998 1997 1996
------------- -------------- ---------------

INVESTMENT INCOME AND EXPENSES

Income:
<S> <C> <C> <C>
Interest from short-term investments $ 92,422 $ 49,199 $ 283,323
Interest and dividend income from portfolio investments (8,186) 7,129 (7,819)
--------------- -------------- --------------
Total investment income 84,236 56,328 275,504
--------------- -------------- --------------

Expenses:
Management fee 133,178 160,485 225,496
Professional fees 66,082 66,797 116,596
Mailing and printing 26,105 21,617 39,066
Insurance expense 35,388 58,152 64,188
Custodial fees 2,312 2,664 4,488
Independent General Partners' fees 10,000 10,000 12,377
Miscellaneous - 250 3,372
--------------- -------------- --------------
Total investment expenses 273,065 319,965 465,583
--------------- -------------- --------------

NET INVESTMENT LOSS (188,829) (263,637) (190,079)

Net realized (loss) gain from investments (2,301,431) 227,199 (1,025,168)
--------------- -------------- --------------

NET REALIZED LOSS FROM OPERATIONS (2,490,260) (36,438) (1,215,247)

Change in unrealized depreciation of investments 469,578 (676,802) 358,875
--------------- -------------- --------------

NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ (2,020,682) $ (713,240) $ (856,372)
=============== ============== ==============

</TABLE>

See notes to financial statements.

<PAGE>

WESTMED VENTURE PARTNERS 2, L.P.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
<TABLE>

1998 1997 1996
-------------- -------------- ---------------

CASH FLOWS USED FOR OPERATING ACTIVITIES

<S> <C> <C> <C>
Net investment loss $ (188,829) $ (263,637) $ (190,079)

Adjustments to reconcile net investment loss to cash used for operating
activities:

(Increase) decrease in receivables and other assets (8,547) (13,624) 16,135
(Decrease) increase in payables (27,934) (44,228) 25,894
--------------- -------------- ---------------
Cash used for operating activities (225,310) (321,489) (148,050)
-------------- -------------- ---------------

CASH FLOWS PROVIDED FROM (USED FOR )
INVESTING ACTIVITIES

Proceeds from sale of portfolio investments 2,897,412 300,200 -
Cost of portfolio investments purchased (188,888) (1,249,488) (1,201,880)
-------------- -------------- ---------------
Cash provided from (used for) investing activities 2,708,524 (949,288) (1,201,880)
-------------- -------------- ---------------

CASH FLOWS USED FOR FINANCING ACTIVITIES

Cash distribution paid to Partners - (3,012,100) -
-------------- -------------- ---------------

Increase (decrease) in cash and cash equivalents 2,483,214 (4,282,877) (1,349,930)
Cash and cash equivalents at beginning of year 593,258 4,876,135 6,226,065
-------------- -------------- ---------------

CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 3,076,472 $ 593,258 $ 4,876,135
============== ============== ===============

</TABLE>

See notes to financial statements.

<PAGE>

WESTMED VENTURE PARTNERS 2, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the Years Ended December 31, 1996, 1997 and 1998
<TABLE>

Managing
General Limited
Partner Partners Total

<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1995 $ 121,923 $ 12,070,370 $ 12,192,293

Net decrease in net assets resulting
from operations (8,564) (847,808) (856,372)

Accrued cash distribution, paid
January 31, 1997 (30,121) (2,981,979) (3,012,100)
------------- --------------- ----------------

Balance as of December 31, 1996 83,238 8,240,583(A) 8,323,821

Net decrease in net assets resulting
from operations (7,132) (706,108) (713,240)
------------- --------------- ----------------

Balance as of December 31, 1997 76,106 7,534,475(A) 7,610,581

Net decrease in net assets resulting
from operations (20,206) (2,000,476) (2,020,682)
------------- --------------- ----------------

Balance as of December 31, 1998 $ 55,900 $ 5,533,999(A) $ 5,589,899
============= =============== ================
</TABLE>

(A) The net asset value per unit of limited partnership interest, including an
allocation of net unrealized depreciation of investments, is $143, $195 and
$213 as of December 31, 1998, 1997 and 1996, respectively. Such per Unit
amounts are based on average allocations to all limited partners and do not
reflect specific limited partner allocations, which are determined by the
original closing date associated with the units of limited partnership
interest held by each limited partner.

See notes to financial statements.

<PAGE>

WESTMED VENTURE PARTNERS 2, L.P.
NOTES TO FINANCIAL STATEMENTS

1. Organization and Purpose

WestMed Venture Partners 2, L.P. (the "Partnership") was formed under Delaware
law in April 1988. The Partnership operates as a business development company
under the Investment Company Act of 1940, as amended. The Partnership is a
closed-end partnership and accordingly its units of limited partnership interest
("Units") are not redeemable by the Partnership. A total of 38,727 Units were
sold to limited partners ("Limited Partners" and together with the Managing
General Partner (as hereinafter defined), the "Partners") at $500 per Unit.

The Partnership's objective is to achieve long-term capital appreciation from
its portfolio of venture capital investments, consisting of companies engaged in
the health care industry. The Partnership's originally scheduled termination
date is December 31, 1998, with provision for extension for two additional
two-year periods. The General Partners have elected not to extend the
Partnership's termination date. However, pursuant to the Partnership Agreement
(as hereinafter defined) and Delaware Law, the Managing General Partner will
continue to manage the Partnership through its date of liquidation, which will
occur when it has satisfied all liabilities and obligations to creditors and has
sold, distributed or otherwise disposed of its investments in portfolio
companies.

2. Summary of Significant Accounting Policies

Valuation of Investments - Portfolio investments are carried at fair value as
determined quarterly by the Managing General Partner under the supervision of
the Independent General Partners. The fair value of publicly-held portfolio
securities is adjusted to the closing public market price for the last trading
day of the accounting period discounted for sales restrictions. Factors
considered in the determination of an appropriate discount include, underwriter
lock-up or Rule 144 trading restrictions, insider status where the Partnership
either has a representative serving on the board of directors of the portfolio
company under consideration or is

<PAGE>

WESTMED VENTURE PARTNERS 2, L.P.
NOTES TO FINANCIAL STATEMENTS - continued

greater than a 5% shareholder thereof, and other liquidity factors such as the
size of the Partnership's position in a given company compared to the trading
history of the public security. Privately-held portfolio securities are carried
at cost until significant developments affecting the portfolio company provide a
basis for change in valuation. The fair value of private securities is adjusted
(i) to reflect meaningful third-party transactions in the private market and
(ii) to reflect significant progress or slippage in the development of the
company's business such that cost is no longer reflective of fair value. As of
December 31, 1998, the financial statements include investments valued at
$22,000 (.004% of Partners' Capital) whose values have been estimated by the
Manager. As a venture capital investment fund, the Partnership's portfolio
investments involve a high degree of business and financial risk that can result
in substantial losses. The Managing General Partner considers such risks in
determining the fair value of the Partnership's portfolio investments.

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 contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Investment Transactions - Investment transactions are recorded on the accrual
method. For portfolio investments, transactions are recorded on the date which
the Partnership obtains an enforceable right to demand the securities or payment
thereof. Realized gains and losses on investments sold are computed on a
specific identification basis.

Statements of Cash Flows - Cash and cash equivalents include short-term
interest-bearing investments in commercial paper and other money market
investments. The Partnership considers its interest-bearing cash account to be
cash equivalents.

Income Taxes - No provision for income taxes has been made since all income and
losses are allocable to the Partners for inclusion in their respective tax
returns. The Partnership's net assets for financial reporting purposes differ
from its net assets for tax purposes. Net unrealized depreciation of $2.8
million as of December 31, 1998, which was recorded for financial statement
purposes, has not been recognized for tax purposes. Additionally, from inception
to December 31, 1998, other timing differences totaling $4.8 million, primarily
relating to original sales commissions paid and other costs of selling the
Units, have been recorded on the Partnership's financial statements but have not
yet been deducted for tax purposes.

Reclassifications - Certain reclassifications were made to the prior period
financial statements in order to conform to the current period presentation.

3. Allocations of Partnership Profits and Losses

<PAGE>

WESTMED VENTURE PARTNERS 2, L.P.
NOTES TO FINANCIAL STATEMENTS - continued

per annum, simple interest, on their total Adjusted Invested Capital; i.e.,
original capital contributions reduced by previous distributions. Thereafter,
net income and net realized gains from venture capital investments in excess of
the amount used to cover the Priority Return are allocated 20% to the Managing
General Partner and 80% to all Partners in proportion to their capital
contributions. Any net income from non-venture capital investments in excess of
the amount used to cover the Priority Return is allocated to all Partners in
proportion to their capital contributions. Realized losses are allocated to all
Partners in proportion to their capital contributions. However, if realized
gains had been previously allocated in the 80/20 ratio, then losses are
allocated in the reverse order in which profits were allocated. From its
inception to December 31, 1998, the Partnership has a $6.1 million net realized
loss from its venture capital investments, including $240,000 of interest and
other income from portfolio investments.

4. Related Party Transactions

Pursuant to the Partnership Agreement, the Managing General Partner is entitled
to receive a one-time venture capital fee equal to 5% of the gross proceeds from
the sale of Units. Such fee is incurred as portfolio investments are made in the
proportion of the cost of each portfolio investment to the net proceeds from the
sale of Units. Venture capital fees incurred are recorded as a cost of acquiring
the portfolio investment. The Partnership incurred venture capital fees of
$10,793 for the year ended December 31, 1998. Cumulative venture capital fees
incurred from inception to December 31, 1998 totaled $964,036.

For services rendered to the Partnership, each of the two Independent General
Partners receives a $5,000 annual fee and reimbursement for all out-of-pocket
expenses relating to attendance at meetings of the General Partners.

5. Litigation

<PAGE>

WESTMED VENTURE PARTNERS 2, L.P.
NOTES TO FINANCIAL STATEMENTS - continued

6. Classification of Investments

As of December 31, 1998, the Partnership's investments were categorized as
follows:
<TABLE>
Percentage of
Type of Investments Cost Fair Value Net Assets*
- - ------------------- ---------------- --------------- -----------
<S> <C> <C> <C>
Common Stock $ 4,818,724 $ 2,412,455 43.16%
Preferred Stock 375,533 22,000 0.39%
---------------- --------------- ----------
Total $ 5,194,257 $ 2,434,455 43.55%
================ =============== ==========

Country/Geographic Region
Eastern U.S. $ 2,619,651 $ 820,437 14.68%
Midwestern U.S. 353,533 0 0.00%
Western U.S. 2,221,073 1,614,018 28.87%
---------------- --------------- ----------
Total $ 5,194,257 $ 2,434,455 43.55%
================ =============== ==========

Industry
Biotechnology $ 2,396,690 $ 1,297,398 23.21%
Medical Devices 475,141 862,545 15.43%
Medical Services 2,322,426 274,512 4.91%
---------------- --------------- ----------
Total $ 5,194,257 $ 2,434,455 43.55%
================ =============== ==========
</TABLE>

* Percentage of net assets is based on fair value.

7. Cash Distributions

8. Subsequent Events

Subsequent to December 31, 1998, the Partnership sold 10,000 common shares of
KeraVision, Inc. for $113,668.

<PAGE>

Item 9. Disagreements on Accounting and Financial Disclosure.

None.

PART III

Item 10. Directors and Executive Officers.

The Independent General Partners

The Independent General Partners have full authority over the management of the
Partnership and provide overall guidance and supervision with respect to the
operations of the Partnership and perform the various duties imposed on the
general partners of business development companies under the 1940 Act. In
addition to general fiduciary duties, the Independent General Partners, among
other things, supervise the management arrangements of the Partnership, the
custody arrangement with respect to portfolio securities, the selection of
accountants, fidelity bonding and the activities of the Managing General
Partner. As required by the 1940 Act, a majority of the general partners must be
individuals who are not "interested persons" of the Partnership as defined in
the 1940 Act. In 1987, the Securities and Exchange Commission issued an
exemptive order declaring that Messrs. Elliott and White, the two Independent
General Partners of the Partnership, are not "interested persons" of the
Partnership as defined in the 1940 Act solely by reason of their being general
partners of the Partnership. Such individuals also comprise the Audit Committee
of the Partnership.

Presented below is information concerning the Independent General Partners of
the Partnership as of March 16, 1999:

Thomas E. White, Age 65, Independent General Partner since 1987
260 Barnard Road
Larchmont, New York 10538
Units of the Partnership owned as of March 16, 1999 - none.
Mr. White is an attorney in private practice in New York. He is also an
independent general partner of WestMed Venture Partners, L.P. ("WVP"). From 1974
to 1983, Mr. White was Senior Vice President and Director of Howmedica, Inc.
with responsibility for various health-care operations in the United States,
Europe and Latin America.

Robert A. Elliott, Age 59, Independent General Partner since 1987
Elliott Investment Co.
5000 Birch Street, Suite 6200
Newport Beach, California 92660
Units of the Partnership owned as of March 16, 1999 - none.
Mr. Elliott, currently a private investor, was the Chairman and Chief
Executive Officer of VLI Corporation ("VLI") from 1983 to 1987. Mr. Elliott is
also an independent general partner of WVP, a member of the Board of Trustees of
Chapman University and a member of the Board of Directors of three
privately-held medical device companies and one public company. He is a former
Director of the Health Industries Manufacturers Association. From 1979 until
1983, Mr. Elliott was Vice President and Director of Howmedica, Inc. with
responsibility for the Medical Specialty Products Division, including domestic
and international manufacturing and distribution.

The Managing General Partner

The Managing General Partner, subject to the supervision of the Independent
General Partners, has exclusive power and authority to manage and control the
Partnership's venture capital investments. Subject to the supervision of the
Independent General Partners, the Managing General Partner is authorized to make
all decisions regarding the Partnership's venture capital investment portfolio,
including, among other things, to find, evaluate, structure, monitor and
liquidate such investments and to provide, or arrange for the provision of,
managerial assistance to the portfolio companies in which the Partnership
invests.

The general partner of the Managing General Partner is Medical Venture
Holdings, Inc. ("MVH"), a Delaware corporation affiliated with CIBC Oppenheimer
Corp. ("Opco") (formerly Oppenheimer & Co., Inc.). The limited partners of the
Managing General Partner are (i) Opco, (ii) MVP Holdings, Inc. ("MVP"), a
Delaware corporation, and (iii) BSW, Inc. ("BSW"), a Delaware corporation
wholly-owned by John A. Balkoski, Philippe L. Sommer and Howard S. Wachtler, the
individuals originally responsible for the Partnership's venture capital
investments.

In June 1996, the Managing General Partner engaged Alsacia Venture
Management, Inc. (the "Sub-Manager") to assist the Managing General Partner in
the performance of its duties to the Partnership. The Sub-Manager is controlled
by Philippe L. Sommer. The compensation of the Sub-Manager is paid directly by
the Managing General Partner. No additional management fees are incurred by the
Partnership as a result of the Managing General Partner's relationship with the
Sub-Manager.

Presented below is information as of March 16, 1999 concerning the directors and
officers of MVH that are principally involved with the operations of the
Partnership. Mr. Rothstein and Ms. Fusco have been officers of MVH since April
1996 and June 1996, respectively. The address of each such person is CIBC
Oppenheimer Tower, World Financial Center, New York, New York 10281.

Gerald A. Rothstein, Age 56, President
Units of the Partnership owned as of March 16, 1999 - 0 Units
Mr. Rothstein has been a Managing Director of Opco since 1983. He is
primarily responsible for Opco's private equity efforts and focuses upon the
emerging markets of Latin America and India. Mr. Rothstein is a member and
chairperson of Opco's Commitment committee and also, a member of Opco's Due
Diligence committee.

Ann O. Fusco, Age 44, Vice President
Units of the Partnership owned as of March 16, 1999 - 0 Units
Ms. Fusco has been Director of Opco since the merger of Opco in November
1997. Prior to the merger, she was Vice President of Oppenheimer Properties,
Inc. since July 1986 and has been employed by Opco since April 1984. In June
1996 Ms. Fusco became Vice President of MVH. Ms. Fusco is a Certified Public
Accountant in the state of New York.

There are no family relationships among any of the Independent General Partners
and the officers and directors of MVH or the Sub-Manager. MVH is owned 100% by
Opco.

The Sub-Manager

The Sub-Manager is wholly-owned by Philippe L. Sommer. Presented below is
information concerning Mr. Sommer as of March 16,1999.

Philippe L. Sommer, Age 47, Sole Director, Officer and Stockholder
Units of the Partnership owned as of March 16, 1999 - 0 Units
Mr. Sommer is a Managing Director of BSW, Inc. and a member of the Board of
Directors of BSW. He has been involved in health-care industry management
for the past 20 years. From June 1990 until July 1996, Mr. Sommer served as
an Executive Vice President and a Managing Director of MVH. He was a
Managing Director of MVP Holdings, Inc. from April 1987 to June 1990. From
January 1982 to September 1986, he was a Director of Business Development
for Pfizer Hospital Products Group ("HPG") and in such capacity was
responsible for directing HPG's merger and acquisition activities for
medium to larger acquisitions, and for the financial evaluation and
valuation of all of HPG's acquisition, venture and licensing projects.

Item 11. Executive Compensation.

Each Independent General Partner receives an annual fee from the Partnership of
$5,000 together with all out-of-pocket expenses relating to attendance at
meetings of the General Partners.

The description of the allocation and distribution of the Partnership's profits
and losses to the Managing General Partner set forth in Item 5. "Market for
Registrant's Common Equity and Related Stockholder Matters" is incorporated
herein by reference.

For the years ended December 31, 1998, 1997 and 1996, the Managing General
Partner was allocated $20,206, $7,132 and $8,564 of the net decrease in the
Partnership's net assets from operations for each of the respective periods.

Pursuant to a management agreement, the Managing General Partner performs, or
arranges for others to perform, the management, administrative and certain
investment advisory services necessary for the operation of the Partnership. For
such services, the Managing General Partner receives a management fee at the
annual rate of 2% of the lesser of the net assets of the Partnership or the net
contributed capital of the Partnership; i.e., gross capital contributions to the
Partnership (net of selling commissions and organizational expenses) reduced by
capital distributed. Such fee is determined and payable quarterly. For the years
ended December 31, 1998, 1997 and 1996, the Managing General Partner received
management fees of $133,178, $160,485, and $225,496, respectively.

Pursuant to the Partnership Agreement, the Managing General Partner is entitled
to receive a one-time venture capital fee equal to 5% of the gross proceeds from
the sale of Units. Such fee is incurred as portfolio investments are made in the
proportion of the cost of each portfolio investment to the net proceeds from the
sale of Units. Venture capital fees incurred are recorded as a cost of acquiring
the portfolio investment. The Partnership incurred venture capital fees of
$10,793, 71,394 and 68,618 for the years ended December 31, 1998, 1997 and 1996.
Cumulative venture capital fees incurred from inception to December 31, 1998
totaled $964,036.

The Management Company has arranged for Palmeri Fund Administrators, Inc., an
independent administrative services company, to provide administrative services
to the Partnership. Fees for such services are paid directly by the Management
Company.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

Security Ownership

As of March 16, 1999, no person or group is known by the Partnership to be the
beneficial owner of more than 5% of the Units. The Independent General Partners
and the directors, officers and employees of MVH and the Sub-Manager do not own
any Units.

Item 13. Certain Relationships and Related Transactions.

The description of the management fee and the venture capital fee set forth in
Item 11, "Executive Compensation", is incorporated herein by reference.

<PAGE>

PART IV

Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.

(a) 1. Financial Statements.

Independent Auditors' Report

Balance Sheets as of December 31, 1998 and 1997

Schedule of Portfolio Investments as of December 31, 1998

Schedule of Portfolio Investments as of December 31, 1997

Statements of Operations for the years ended December 31, 1998,
1997 and 1996

Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996

Statements of Changes in Partners' Capital for the years ended
December 31, 1996, 1997 and 1998

Notes to Financial Statements

2. Exhibits

3.1 Amended and Restated Certificates of Limited Partnership(3)

3.2 Amendment to Amended and Restated Certificate of Limited
Partnership(3)

3.3 Partnership Agreement(1)

3.4 Amendment No. 1 to the Partnership Agreement(2)

4 Articles Five through Eleven of the Partnership Agreement(1)

10.1 Management Agreement dated as of September 30, 1997
between the Partnership and the Managing General Partner(4)

10.2 Sub-Management agreement dated as of September 30,
1997 among the Partnership, the Managing General
Partner and the Sub-Manager(5)

27 Financial Data Schedule

28.1 Custodian Agreement between the Partnership and Investors
Fiduciary Trust Company(1)

(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.

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

(1) Filed as an exhibit to the Partnership's Registration Statement on
Form N-2 (33-11926), and incorporated herein by reference.

(2) Filed as an exhibit to the Partnership's Report on Form 8-K dated July
10, 1990 and incorporated herein by reference.

(3) Filed as an exhibit to the Partnership's Report on Form 10-K for the
year ended December 31, 1990.

(4) Filed as Exhibit A to the Partnership's proxy statement dated August 29,
1997 and incorporated herein by reference.

(5) Filed as Annex I to the Partnership's proxy statement dated August 29,
1997 and incorporated herein by reference.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on the 31st day of March 1999.

WESTMED VENTURE PARTNERS 2, L.P.

By: WestMed Venture Management 2, L.P.,
Managing General Partner

By: Medical Venture Holdings, Inc.,
General Partner

By: /s/ Gerald A. Rothstein
Gerald A. Rothstein
President

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated on the 31st day of March 1999.

WESTMED VENTURE
MANAGEMENT 2, L.P. Managing General Partner of
WestMed Venture Partners 2, L.P.

By: Medical Venture Holdings, Inc. General Partner of WestMed
Venture Management 2, L.P.

By: /s/ Gerald A. Rothstein President (principal executive officer) of
Medical Venture Holdings, Inc.
Gerald A. Rothstein

By: /s/ Ann Oliveri Fusco Vice President (principal
financial and accounting officer)
of Medical
Ann Oliveri Fusco Venture Holdings, Inc.

By: /s/ Thomas E. White Independent General Partner
of WestMed Venture Partners 2, L.P.
Thomas E. White

By: /s/ Robert A. Elliott Independent General Partner
of WestMed Venture Partners 2, L.P.
Robert A. Elliott

<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM WESTMED
VENTURE PARTNERS 2, L.P.'S ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>

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